-----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, P8X23rMysS9WAzSBknTrFM4VyEd8oruesd+m8hiLK3Ebknc23CAl7s+HCYZxKU6W SY5WFxZz0MHArWnpbGIM8Q== 0000950149-99-000740.txt : 19990427 0000950149-99-000740.hdr.sgml : 19990427 ACCESSION NUMBER: 0000950149-99-000740 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19990426 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: POS AM SEC ACT: SEC FILE NUMBER: 333-65615 FILM NUMBER: 99600391 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 POS AM 1 POST-EFFECTIVE AMENDMENT NO. 5 TO FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 26, 1999. REGISTRATION NO. 333-65615 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ POST-EFFECTIVE AMENDMENT NO. 5 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ WASTE CONNECTIONS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 4953 94-3283464 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
2260 DOUGLAS BOULEVARD, SUITE 280 ROSEVILLE, CALIFORNIA 95661 (916) 772-2221 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) RONALD J. MITTELSTAEDT PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN WASTE CONNECTIONS, INC. 2260 DOUGLAS BOULEVARD, SUITE 280 ROSEVILLE, CALIFORNIA 95661 (916) 772-2221 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES OF ALL COMMUNICATIONS TO: CAROLYN S. REISER, ESQ. SHARTSIS, FRIESE & GINSBURG LLP ONE MARITIME PLAZA, 18TH FLOOR SAN FRANCISCO, CALIFORNIA 94111 (415) 421-6500 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to time after the effective date of this Registration Statement. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, 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, 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, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] CALCULATION OF REGISTRATION FEE(2) - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED PRICE(1) REGISTRATION FEE(3) - ---------------------------------------------------------------------------------------------------------------------------- Common Stock, $0.01 par value.............. 3,000,000 shares $52,218,750 $15,404.53 - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) and based on the average high and low sales prices of the Common Stock reported by the Nasdaq National Market on October 9, 1998. (2) The Prospectus included in this Registration Statement also relates to 2,478,857 shares registered under Registrant's Registration Statement on Form S-4 (Registration No. 333-59199), with respect to which Registrant paid a filing fee of $13,665.48, and to 644,165 shares registered under Registration Statement on Form S-4 filed under Rule 462(b) on October 13, 1998, with respect to which Registrant paid a filing fee of $3,307.69. (3) 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. Pursuant to Rule 429, the Prospectus included in this Registration Statement also relates to Registrant's Registration Statement on Form S-4 (Registration No. 333-59199) and to Registrant's Registration Statement on Form S-4 filed on October 13, 1998, under Rule 462(b) to increase the number of shares covered by the Registration Statement on Form S-4, Registration No. 333-59199. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 WASTE CONNECTIONS, INC. CROSS REFERENCE SHEET SHOWING LOCATION IN THE PROSPECTUS OF INFORMATION REQUIRED BY FORM S-4
ITEM OF FORM S-4 LOCATION IN PROSPECTUS ---------------- ---------------------- 1. Forepart of Registration Statement and Outside Front Cover Page Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages Inside Front Cover Page; Back Cover Page of Prospectus 3. Risk Factors, Ratio of Earnings to Fixed Cover Page; Prospectus Summary; Risk Charges and Other Information Factors; Selected Historical and Pro Forma Financial and Operating Data 4. Terms of the Transaction * 5. Pro Forma Financial Information * 6. Material Contracts with the Company Being * Acquired 7. Additional Information Required for Outstanding Securities Covered by this Reoffering by Persons and Parties Deemed Prospectus* Underwriters 8. Interests of Named Experts and Counsel Experts; Legal Matters 9. Disclosure of Commission Position on ** Indemnification for Securities Act Liabilities 10. Information with Respect to S-3 Registrants ** 11. Incorporation of Certain Information By ** Reference 12. Information with Respect to S-2 or S-3 ** Registrants 13. Incorporation of Certain Information By ** Reference 14. Information with Respect to Registrants Prospectus Summary; Summary Historical and Other Than S-2 or S-3 Registrants Pro Forma Financial and Operating Data; Price Range of Common Stock; Selected Historical and Pro Forma Financial and Operating Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business 15. Information with Respect to S-3 Companies ** 16. Information with Respect to S-2 or S-3 ** Companies 17. Information with Respect to Companies Other * than S-3 or S-2 Companies 18. Information if Proxies, Consents or * Authorizations are to be Solicited 19. Information if Proxies, Consents or * Authorizations are not to be Solicited or in an Exchange Offer
- --------------- * Not applicable or partially not applicable as of the filing of this Registration Statement. Information, however, may be included in subsequent amendments. ** Not applicable or the answer is negative. 3 3,000,000 SHARES [LOGO] COMMON STOCK This Prospectus relates to the offer and sale by Waste Connections, Inc. of shares of its Common Stock at various times as consideration for the Company's acquisition of solid waste collection, transportation, disposal and recycling businesses. The prices of these shares will be reasonably related to the Common Stock's market prices when the parties agree to an acquisition or when the Company delivers the shares. Each time the Company sells shares under this Prospectus, it will provide a supplement (a "Prospectus Supplement") or a post-effective amendment (a "Post-Effective Amendment") to this Prospectus, which will specify the number of shares issued and the issue price per share, and will update the information in this Prospectus. On April 19, 1999, the Company had 17,425,483 shares of Common Stock outstanding. The Company's Common Stock is traded on the Nasdaq National Market (symbol: WCNX). On April 19, 1999, the last sale price of the Common Stock on the Nasdaq National Market was $23.50 per share. The Company's executive offices are located at 2260 Douglas Boulevard, Suite 280, Roseville, California 95661, and its telephone number is (916) 772-2221. SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT PROSPECTIVE INVESTORS IN COMMON STOCK SHOULD CONSIDER. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED WHETHER THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ The date of this Prospectus is April , 1999. 4 AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-4 (the "Registration Statement"). This Prospectus, which forms a part of the Registration Statement, omits some of the information included in the Registration Statement. You should refer to the Registration Statement and its exhibits for further information. The Company files annual, quarterly and special reports, proxy statements and other information with the Commission. You may read and copy the Registration Statement and any reports, statements or other information on file at the Commission's public reference rooms in Washington, D.C., Chicago, Illinois and New York, New York. Please call the Commission at 1-800-732-0330 for further information on the public reference rooms. You can also request copies of those documents by writing to the Commission; you will be charged a duplicating fee. The Company's Commission filings are also available to the public from commercial document retrieval services and at the web site the Commission maintains at "http://www.sec.gov." The Company's Common Stock is listed on the Nasdaq National Market, and you may also inspect and copy the Company's Commission filings at the offices of the National Association of Securities Dealers, Inc., located at 1735 K Street, N.W., Washington, D.C. 20549. 2 5 PROSPECTUS SUMMARY This summary highlights some information from this Prospectus. It may not contain all of the information that is important to you. To understand this offering fully, you should read the entire Prospectus carefully, including the risk factors and the financial statements. Unless otherwise specified, all references to the "Company" or "Waste Connections" mean Waste Connections, Inc. and its subsidiaries, and all references to "solid waste" mean non-hazardous solid waste. THE COMPANY Waste Connections is a regional, integrated solid waste services company that provides solid waste collection, transfer, disposal and recycling services in secondary markets of the Western U.S. As of April 15, 1999, the Company served more than 330,000 commercial, industrial and residential customers in California, Idaho, Kansas, Minnesota, Nebraska, Oklahoma, Oregon, South Dakota, Utah, Washington and Wyoming. The Company currently owns and operates 33 collection operations, 11 transfer stations and three Subtitle D landfills, and operates an additional seven transfer stations, two Subtitle D landfills and nine recycling facilities. See "Business -- Introduction" and "-- Services." Waste Connections was founded in September 1997 to execute an acquisition-based growth strategy in secondary markets of the Western U.S. The Company has acquired 64 solid waste services related businesses since its formation. It has identified more than 300 independent operators of such businesses in the states where it currently operates and believes many of those may be suitable for the Company to acquire. The Company is also currently assessing potential acquisitions of solid waste services operations in Colorado, Montana and Texas. See "Business -- Acquisition Program." The Company has targeted secondary markets in the Western U.S. because it believes that (i) a large number of independent solid waste services companies suitable for acquisition by the Company are located in these markets; (ii) there is less competition in these markets from large, well-capitalized solid waste services companies; and (iii) these markets have strong projected economic and population growth rates. In addition, the Company's senior management team has extensive experience acquiring and operating solid waste services businesses in the Western U.S. The Company has developed a market-based operating strategy tailored to the competitive and regulatory factors that affect its markets. In certain Western U.S. markets, where waste collection services are governed by exclusive franchise agreements, municipal contracts and governmental certificates (referred to in Washington as "G certificates"), the Company generally intends to pursue a collection-based operating strategy. In these markets, the Company believes that controlling the waste stream by providing collection services under exclusive franchise agreements, municipal contracts and governmental certificates is often more important to a solid waste services company's growth and profitability than owning or operating landfills. In markets where the Company considers ownership of landfills advantageous due to competitive and regulatory factors, the Company generally intends to pursue an integrated, disposal-based strategy. See "Business -- Strategy." The Company's objective is to build a leading solid waste services company in the secondary markets of the Western U.S. by (i) acquiring collection, transfer, disposal and 3 6 recycling operations in new markets and through "tuck-in" acquisitions in existing markets; (ii) securing additional exclusive franchises, municipal contracts and governmental certificates; (iii) generating internal growth in existing markets by increasing market penetration and adding services to its existing operations; and (iv) enhancing profitability by increasing operating efficiencies of existing and acquired operations. The Company believes that the experience of the members of its senior management team and their knowledge of and reputation in the solid waste industry in the Company's targeted markets will give the Company competitive advantages as it pursues its growth strategy. See "Business -- Strategy." The Company was incorporated in Delaware in 1997. Its principal executive offices are located at 2260 Douglas Boulevard, Suite 280, Roseville, California 95661, and its telephone number is (916) 772-2221. RECENT DEVELOPMENTS RECENT ACQUISITIONS From January 1, 1999 to April 15, 1999, the Company acquired 20 solid waste services businesses, including 11 collection operations, two Subtitle D landfills, eight transfer stations and four recycling operations representing approximately $65 million in annual revenue. These acquisitions took the Company into one new state, Minnesota. The acquired businesses included "tuck in" acquisitions in pre-existing markets, new market entries and "tuck in" acquisitions in the new markets. EXPANDED CREDIT FACILITY On April 13, 1999, the Company entered into a new credit facility with a syndicate of banks led by BankBoston, N.A., which among other things, increased the Company's borrowing capacity from $125.0 million to $225.0 million, modified certain covenants and lowered the Company's overall borrowing costs. As of April 16, 1999, the aggregate outstanding principal indebtedness under the credit facility was approximately $95,700,000. 4 7 WASTE CONNECTIONS, INC. SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PRO FORMA COMBINED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1998 1998(1) ----------------- ------------ STATEMENT OF OPERATIONS DATA: Revenues............................................... $ 54,042 $ 102,064 Cost of operations..................................... 36,554 66,576 Selling, general and administrative.................... 5,317 11,064 Depreciation and amortization.......................... 4,112 8,352 Stock compensation..................................... 632 632 ---------- ----------- Income from operations................................. 7,427 15,440 Interest expense....................................... (2,257) (9,330) Other income (expense), net............................ -- 108 ---------- ----------- Income before income taxes............................. 5,170 6,218 Income tax provision................................... (2,395) (3,078) ---------- ----------- Net income before extraordinary Item................... 2,775 3,140 Extraordinary item -- early extinguishment of debt, net of income tax benefit of $264........................ (1,027) (1,027) ---------- ----------- Net income............................................. $ 1,748 $ 2,113 ========== =========== Redeemable convertible preferred stock accretion....... (917) (917) ---------- ----------- Net income applicable to common stockholders........... $ 831 $ 1,196 ========== =========== Basic earnings per common share: Income before extraordinary item..................... $ 0.29 $ 0.24 Extraordinary item................................... (0.16) (0.11) ---------- ----------- Net income per common share.......................... $ 0.13 $ 0.13 ========== =========== Diluted earnings per common share: Income before extraordinary item..................... $ 0.22 $ 0.20 Extraordinary item................................... (0.12) (0.09) ---------- ----------- Net income per common share.......................... $ 0.10 $ 0.11 ========== =========== Shares used in calculating basic earnings per share.... 6,460,293 9,349,173 Shares used in calculating diluted earnings per share................................................ 8,371,415 11,260,295
PRO FORMA COMBINED DECEMBER 31, DECEMBER 31, 1998 1998(2) ------------ ------------ BALANCE SHEET DATA: Cash and equivalents..................................... $ 2,675 $ 4,896 Working capital (deficit)................................ (8,717) (10,700) Property and equipment, net.............................. 33,043 121,028 Total assets............................................. 149,312 254,925 Long-term debt........................................... 60,106 148,349 Total stockholders' equity............................... 61,063 62,329
- --------------- (1) Assumes the Company's acquisitions of Columbia Resource Co., L.P. and Finley-Buttes Limited Partnership ("CRCFBLP") and the mergers with the Murrey Companies (accounted for as poolings-of-interests) occurred as of January 1, 1998. See "Unaudited Pro Forma Financial Statements" included elsewhere herein. (2) Assumes the Company's acquisitions of CRCFBLP and the mergers with Murrey's Disposal Company, Inc., American Disposal Company, Inc., D.M. Disposal Co., Inc. and Tacoma Recycling Company, Inc. (together, the "Murrey Companies") (accounted for as poolings-of-interests) occurred on December 31, 1998. See "Unaudited Pro Forma Financial Statements" included elsewhere herein. 5 8 RISK FACTORS You should carefully consider the following factors and other information in this Prospectus before purchasing the shares of Common Stock offered by this Prospectus. This Prospectus contains certain forward-looking statements that involve risks and uncertainties. Discussions containing such forward-looking statements are found in the material set forth under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as in the Prospectus generally. The cautionary statements contained in this Prospectus apply to all related forward-looking statements wherever they appear in this Prospectus. The Company's actual results could differ materially from those discussed here as a result of various factors, including, but not limited to, those discussed below and elsewhere in this Prospectus. Limited Operating History; Integration of Completed Acquisitions. The Company was formed in September 1997 and commenced operations on October 1, 1997. Accordingly, the Company has only a limited operating history on which you may evaluate its business and its prospects. You should consider the disclosures about the Company in this Prospectus in light of the risks, expenses and difficulties that companies frequently encounter in their early stages of development. The Company's recently assembled senior management team may not be able to manage the Company successfully or to implement the Company's operating and growth strategies effectively. The Company's growth and future financial performance depend significantly on its ability to integrate acquired businesses into its organization and operations. Part of the Company's strategy is to achieve economies of scale and operating efficiencies by increasing its size through acquisitions. The Company may not achieve these goals unless it effectively combines the operations of acquired businesses with its existing operations. The Company's recently assembled senior management team may not be able to integrate the Company's completed and future acquisitions. Any difficulties the Company encounters in the integration process could materially and adversely affect its business, financial condition and operating results. Growth Strategy Implementation; Ability to Manage Growth. The Company's growth strategy includes (i) expanding through acquisitions, (ii) acquiring additional exclusive franchise agreements and municipal contracts and (iii) generating internal growth. Whether the Company can execute its growth strategy depends on several factors, including the success of existing and emerging competition, the availability of acquisition targets, the ability to maintain profit margins in the face of competitive pressures, the ability to continue to recruit, train and retain qualified employees, the strength of demand for the Company's services and the availability of capital to support its growth. From October 1, 1997, through April 15, 1999, the Company acquired 64 solid waste services related business. The Company may grow rapidly at times, which could significantly strain its management, operational, financial and other resources. To maintain and manage its growth, the Company will need to expand its management information systems capabilities and its operational and financial systems and controls. The Company will also need to attract, train, motivate, retain and manage additional senior managers, technical professionals and other employees. Failure to do any of these things would materially and adversely affect the Company's business, financial condition and operating results. See "Business -- Strategy." 6 9 Availability of Acquisition Targets. Although the Company has identified numerous acquisition candidates that it believes are suitable, the Company may not be able to acquire them at prices or on terms and conditions favorable to the Company. The Company's failure to make acquisitions would limit its growth. See "Business -- Strategy" and "-- Acquisition Program." The Company competes for acquisition candidates with other entities, some of which have greater financial resources than the Company. Increased competition for acquisition candidates may make fewer acquisition opportunities available to the Company, and may cause acquisitions to be made on less attractive terms, such as higher purchase prices. Acquisition costs may increase to levels that are beyond the Company's financial capability or that would adversely affect the Company's operating results and financial condition. The Company's ability to make acquisitions will depend in part on the relative attractiveness of shares of the Company's Common Stock as consideration for potential acquisition candidates. This attractiveness may depend largely on the relative market price and capital appreciation prospects of the Common Stock compared to the stock of the Company's competitors. If the market price of the Company's Common Stock were to decline materially over a prolonged period of time, the Company's acquisition program could be materially adversely affected. Highly Competitive Industry. The solid waste services industry is highly competitive and fragmented and requires substantial labor and capital resources. Some of the markets in which the Company competes or will likely compete are served by one or more large, national solid waste companies, as well as by numerous regional and local solid waste companies of varying sizes and resources, some of which have accumulated substantial goodwill. The Company also competes with counties, municipalities and solid waste districts that maintain their own waste collection and disposal operations. These operators may have financial advantages over the Company, because of their access to user fees and similar charges, tax revenues and tax-exempt financing. Some of the Company's competitors may also be better capitalized, have greater name recognition or be able to provide services at a lower cost than the Company. The Company's inability to compete with governmental service providers and larger and better capitalized companies could materially and adversely affect the Company's business, financial condition and operating results. The Company derives a substantial portion of its revenue from exclusive municipal contracts and franchise agreements. Many of these will be subject to competitive bidding at some time in the future. See "Business -- Services." The Company intends to bid on additional municipal contracts and franchise agreements. However, the Company may not be the successful bidder to obtain or retain contracts that come up for competitive bidding. In addition, some of the Company's customers may terminate their contracts before the end of the contract term. Municipalities in Washington may by law annex unincorporated territory, which would remove such territory from the area covered by G certificates issued by the Washington Utilities and Transportation Commission. Such annexation could reduce the areas covered by the Company's G certificates and subject more of the Company's Washington operations to competitive bidding in the future. Moreover, legislative action could amend or repeal the laws governing G Certificates, which could materially and adversely affect the Company. See "Business -- G Certificates." If the Company were not able to replace revenues from contracts lost through competitive bidding or early termination or the renegotiation of existing contracts with other revenues 7 10 within a reasonable time period, the lost revenues could materially and adversely affect the Company's business, financial condition and operating results. Intense competition exists not only to provide services to customers but also to acquire other businesses within each market. Other companies have adopted or will probably adopt the Company's strategy of acquiring and consolidating regional and local businesses to develop a national presence. The Company expects that increased consolidation in the solid waste services industry will increase competitive pressures. See "Business -- Competition." Potential Inability to Finance the Company's Potential Growth. The Company expects to finance future acquisitions through cash from operations, borrowings under its bank line of credit, the issuance of shares of the Company's Common Stock and/or seller financing. If acquisition candidates are unwilling to accept, or the Company is unwilling to issue, shares of the Company's Common Stock as part of the consideration for such acquisitions, the Company may have to use more of its available cash resources or borrowings under its credit facility to fund acquisitions. If cash from operations and borrowings under the credit facility are insufficient to fund acquisitions, the Company will need additional equity and/or debt financing. The Company will also need to make substantial capital expenditures to fund the development or acquisition of new landfills, transfer stations and other facilities and the maintenance of such properties. The Company may not have enough capital or be able to raise enough additional capital on satisfactory terms to meet its capital requirements. The Company's credit facility requires the Company to obtain the consent of the lending banks before acquiring any other business for more than $20.0 million in cash (including all liabilities assumed). If the Company is not able to obtain such consent, it may not be able to complete certain acquisitions, which could inhibit the Company's growth. The Company's credit facility also contains financial covenants based on the Company's current and projected financial condition after completing an acquisition. If the Company cannot satisfy these financial covenants on a pro forma basis after completing an acquisition, it would not be able to complete the acquisition without a waiver from its lending banks. Whether or not a waiver is needed, if the results of the Company's future operations differ materially from what the Company expects, the Company may no longer be able to comply with the covenants in the credit facility. The Company's failure to comply with such covenants may result in a default under the credit facility, which would allow the Company's banks to accelerate the date for repayment of debt incurred under the credit facility and materially and adversely affect the Company's business, financial condition and operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 12 of Notes to the Company's Financial Statements. Dependence on Management. The Company depends significantly on the services of the members of its senior management team. The departure of any of those persons might materially and adversely affect the Company's business, financial condition and operating results. The Company currently maintains "key man" life insurance with respect to Ronald J. Mittelstaedt, its President, Chief Executive Officer and Chairman, in the amount of $3.0 million. See "Management." Key members of the Company's management have entered into employment agreements with the Company with terms ranging from three to five years. See "Management -- Employment Agreements." These agreements may not be enforceable by the Company. 8 11 Geographic Concentration. The Company's operations and customers are located in California, Idaho, Kansas, Minnesota, Nebraska, Oklahoma, Oregon, South Dakota, Utah, Washington and Wyoming. The Company expects to focus its operations on the Western U.S. for at least the foreseeable future. The Company estimates that more than 46% of its revenues for the year ended December 31, 1998, were derived from Washington, and the mergers with the Murrey Companies increased the Company's geographic concentration in Washington. Therefore, the Company's business, financial condition and operating results would be negatively affected by downturns in the general economy in the Western U.S., particularly in Washington, and other factors affecting the region, such as state regulations affecting the solid waste services industry and severe weather conditions. In addition, the costs and time involved in permitting, and the scarcity of, available landfills in the Western U.S. could make it difficult for the Company to expand vertically in those markets. The Company may not complete enough acquisitions in other markets to lessen its geographic concentration. See "Business -- Strategy." Seasonality of Business. Based on historic trends experienced by the businesses acquired by the Company, the Company expects its operating results to vary seasonally, with revenues typically lowest in the first quarter of the year, higher in the second and third quarters, and lower in the fourth quarter than in the second and third quarters. This seasonality reflects the lower volume of solid waste generated during the late fall, winter and early spring months, because of decreased construction and demolition activities during the winter months in the Western U.S. In addition, certain of the Company's operating costs should be generally higher in the winter months, because adverse winter weather conditions slow waste collection activities, resulting in higher labor costs, and greater precipitation increases the weight of collected waste, resulting in higher disposal costs, which are calculated on a per ton basis. Because the Company expects most of its operating expenses to remain fairly constant throughout the fiscal year, it expects operating income to be generally lower in the winter months. Future seasonal and quarterly fluctuations may materially and adversely affect the Company's business, financial condition and operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Government Regulation. The Company is subject to extensive and evolving environmental laws and regulations. These have been enforced more and more stringently in recent years because of greater public interest in protecting the environment. These laws and regulations impose substantial costs on the Company and affect the Company's business in many ways, including as set forth below and under "Business -- Regulation." In addition, federal, state and local governments may change the rights they grant to and the restrictions they impose on solid waste services companies, and such changes could have a material adverse effect on the Company. To own and operate landfills, the Company must obtain and maintain licenses or permits and zoning, environmental and/or other land use approvals. These licenses or permits and approvals are difficult and time-consuming to obtain and renew, and elected officials and citizens' groups frequently oppose them. See "Business -- Legal Proceedings." The Company may not be able to obtain and maintain the permits and approvals it needs to own or operate landfills (including increasing their capacity), and failing to do so could materially and adversely affect the Company's operating results and financial condition. 9 12 Extensive regulations govern the design, operation and closure of landfills. These regulations include the regulations ("Subtitle D Regulations") that establish minimum federal requirements adopted by the U.S. Environmental Protection Agency (the "EPA") in October 1991 under Subtitle D of the Resource Conservation and Recovery Act of 1976 ("RCRA"). If the Company fails to comply with these regulations, it could be required to undertake investigatory or remedial activities, curtail operations or close a landfill temporarily or permanently. Future changes to these regulations may require the Company to modify, supplement or replace equipment or facilities at substantial costs. The failure of regulatory agencies to enforce these regulations vigorously or consistently may give an advantage to competitors of the Company whose facilities do not comply with the Subtitle D Regulations or their state counterparts. The Company's financial obligations arising from any failure to comply with these regulations could materially and adversely affect the Company's business, financial condition and operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Companies in the solid waste services business are frequently subject in the normal course of business to judicial and administrative proceedings involving federal, state or local agencies or citizens' groups. Governmental agencies may seek to impose fines or penalties on the Company, to revoke or deny renewal of the Company's operating permits, franchises or licenses for violations or alleged violations of environmental laws or regulations, or to require the Company to remediate potential environmental problems relating to waste that the Company or its predecessors collected, transported, disposed of or stored. The Company may also be subject to actions brought by individuals or community groups in connection with its operations. Any adverse outcome in these proceedings could have a material adverse effect on the Company's business, financial condition and operating results and create adverse publicity about the Company. See "Potential Environmental Liability" below and "Business -- Legal Proceedings." Potential Environmental Liability. The Company is liable for any environmental damage that its solid waste facilities cause, including damage to neighboring landowners or residents, particularly as a result of the contamination of soil, groundwater or surface water, and especially drinking water. The Company may be liable for damage resulting from conditions existing before it acquired such facilities. The Company may also be liable for any off-site environmental contamination caused by pollutants or hazardous substances whose transportation, treatment or disposal the Company or its predecessors arranged. Any substantial liability of the Company for environmental damage could materially and adversely affect the Company's business, financial condition and operating results. See "Business -- Regulation." The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA" or "Superfund"), imposes strict, joint and several liability on the present owners and operators of facilities from which a release of hazardous substances into the environment has occurred, as well as any party that owned or operated the facility at the time of disposal of the hazardous substances, regardless of when the hazardous substance was first detected. CERCLA defines the term "hazardous substances" very broadly to include more than 700 substances that are specified under RCRA, have specific hazardous characteristics defined under RCRA or are regulated under any of several other statutes. 10 13 CERCLA imposes similar liability on generators of waste that contains hazardous substances and on hazardous substance transporters that select the treatment, storage or disposal site. All such persons, who are referred to as potentially responsible parties ("PRPs"), generally are jointly and severally liable for the expense of waste site investigation, waste site cleanup costs and natural resource damages, regardless of whether they exercised due care and complied with all relevant laws and regulations. These costs can be very substantial. Furthermore, liability under CERCLA can be based on the existence of even very small amounts of hazardous substances; unlike most of the other laws that regulate hazardous substances, CERCLA does not require any minimum volume or concentration of a hazardous substance to be present before imposing liability. It is likely that hazardous substances have in the past come to be located in landfills that the Company owns or operates. If any of the Company's sites or operations ever experiences environmental problems, the Company could be subject to substantial liability, which could materially and adversely affect its business, financial condition and operating results. The Company has not been named as a PRP in any action brought under CERCLA. See "Business -- Regulation." Each business that the Company acquires or has acquired may have liabilities that the Company fails or is unable to discover, including liabilities that arise from prior owners' failure to comply with environmental laws. As a successor owner, the Company may be legally responsible for these liabilities. Even if the Company obtains legally enforceable representations, warranties and indemnities from the sellers of such businesses, they may not cover fully the liabilities. Some environmental liabilities, even if the Company does not expressly assume them, may be imposed on the Company under various legal theories, particularly under CERCLA. The Company's insurance program does not cover liabilities associated with any environmental cleanup or remediation of the Company's own sites. A successful uninsured claim against the Company could materially and adversely affect the Company's business, financial condition and operating results. See "Business -- Acquisition Program." Limitations on Landfill Permitting and Expansion. The Company currently owns and operates three landfills and operates two other landfills. The Company's ability to meet its growth objectives may depend in part on its ability to acquire, lease and expand landfills and develop new landfill sites. As of March 31, 1999, the estimated total remaining permitted disposal capacity of the Fairmead Landfill in Madera County, California operated by the Company was approximately 2.86 million tons, with approximately 2.04 million additional tons of disposal capacity in various stages of permitting. As of that date, the estimated total remaining permitted disposal capacity of the Red Carpet Landfill in Major County, Oklahoma owned and operated by the Company was approximately 525,000 tons, with approximately 1.75 million additional tons of disposal capacity in various stages of permitting. As of that date, the estimated total remaining permitted disposal capacity at the Finley-Buttes Regional Landfill owned and operated by the Company was approximately 65.99 million tons, with approximately 56.88 million additional tons of disposal capacity in various stages of permitting. The estimated total remaining permitted disposal capacity of the Butler County Landfill owned and operated by the Company was approximately 2.32 million tons, with an additional 1.60 million tons of disposal capacity in various stages of permitting. The Northeast Nebraska Solid Waste Coalition landfill in Clarkson, Nebraska (the "Coalition Landfill") operated by the Company had approximately 3.68 million tons of remaining permitted disposal capacity. 11 14 The Company may not be able to obtain new landfill sites or expand the permitted capacity of these landfills when necessary. In some areas in which the Company operates, suitable land for new sites or expansion of existing landfill sites may be unavailable. Operating permits for landfills in states where the Company operates must generally be renewed at least every five years. Obtaining required permits and approvals to build, operate and expand solid waste management facilities, including landfills and transfer stations, has become increasingly difficult and expensive. It often takes several years, requires numerous hearings and compliance with zoning, environmental and other requirements and is resisted by citizen, public interest or other groups. The Company may not be able to obtain or maintain the permits it requires to expand, and such permits may contain burdensome terms and conditions. Even when granted, final permits to expand are often not approved until the remaining permitted disposal capacity of a landfill is very low. Local laws and ordinances also may affect the Company's ability to obtain permits to expand landfills. If the Company were to exhaust its permitted capacity at a landfill, its ability to expand internally would be limited, and the Company could be required to cap and close that landfill and forced to dispose of collected waste at more distant landfills or at landfills operated by its competitors. The resulting increased costs would materially and adversely affect the Company's business, financial condition and operating results. See "Business -- Services -- Landfills." Alternatives to Landfill Disposal; Waste Reduction Programs. Alternatives to landfill disposal, such as recycling, composting and incineration, are available in some areas in which the Company operates. In addition, state and local authorities increasingly require recycling and waste reduction at the source and prohibit the disposal of certain types of wastes, such as yard wastes, at landfills. These developments may reduce the volume of waste in certain areas. For example, California has adopted plans that set goals for percentages of certain solid waste items to be recycled, which are being phased in over the next several years. Increased use of alternatives to landfill disposal may materially and adversely affect the Company's business, financial condition and operating results. Potential Inadequacy of Accruals for Closure and Post-Closure Costs. The Company may be required to pay closure and post-closure costs of landfills and any disposal facilities that it owns or operates. The Company accrues for future closure and post-closure costs of its owned landfills (generally for a term of 30 years after final closure of a landfill), based on engineering estimates of consumption of permitted landfill airspace over the useful life of any such landfill. The Company's obligations to pay closing or post-closing costs may exceed the amount the Company accrued and reserved and other amounts available from funds or reserves established to pay such costs. This could materially and adversely affect the Company's business, financial condition and operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Services -- Landfills." Charges Related to Capitalized Expenditures. In accordance with generally accepted accounting principles, the Company capitalizes some expenditures and advances relating to acquisitions, pending acquisitions and landfill development projects. As of March 31, 1999, the Company had no capitalized expenditures relating to landfill development projects and $26,973 in capitalized expenditures relating to pending acquisitions. The Company expenses indirect acquisition costs such as executive salaries, general corporate overhead, public affairs and other corporate services as it incurs those costs. The Company charges 12 15 against earnings any unamortized capitalized expenditures and advances (net of any portion thereof that the Company estimates it will recover, through sale or otherwise) that relate to any operation that is permanently shut down, any pending acquisition that is not consummated and any landfill development project that the Company does not expect to complete. Therefore, the Company may incur charges against earnings in future periods, which could materially and adversely affect the Company's business, financial condition and operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Potential Inability to Obtain Performance or Surety Bonds, Letters of Credit or Insurance. Municipal solid waste services contracts and landfill closure obligations may require the Company to obtain performance or surety bonds, letters of credit, or other means of financial assurance to secure its performance. Some of the Company's existing solid waste collection and recycling contracts require the Company to obtain performance bonds, which it has obtained. If the Company in the future is not able to obtain performance or surety bonds or letters of credit in sufficient amounts or at acceptable rates, it may not be able to enter into additional municipal solid waste services contracts or obtain or retain landfill operating permits. Any future difficulty in obtaining insurance could also make it more difficult for the Company to secure future contracts conditioned on the contractor's having adequate insurance coverage. The Company's failure to obtain means of financial assurance or adequate insurance coverage could materially and adversely affect its business, financial condition and operating results. See "Business -- Risk Management, Insurance and Performance Bonds." Commodity Risk On Resale of Recyclables. The Company provides recycling services to some of its customers. The sale prices of and demand for recyclable waste products, particularly wastepaper, are frequently volatile and may affect the Company's operating results. See "Business -- Services -- Recycling and Other Services." Potential Anti-Takeover Effect of Certain Charter and By-Law Provisions and Delaware Law. Under the Company's Amended and Restated Certificate of Incorporation (the "Restated Certificate of Incorporation") and Amended and Restated By-Laws (the "Restated By-Laws"), the Company's Board of Directors is divided into three classes of directors who serve staggered three-year terms. As a result, approximately one-third of the Company's Board is elected each year. The classified Board is intended to ensure continuity and stability in the Board's composition and policies if another party attempts a hostile takeover of the Company or initiates a proxy contest. The classification of the Board extends the time required to change the control of the Board and may discourage any hostile takeover bid for the Company. The classified Board may also make it harder to remove the Company's incumbent management, even if such removal would generally benefit stockholders. Therefore, it may discourage some tender offers. The authorized capital of the Company includes 10,000,000 shares of "blank check" Preferred Stock. No shares of Preferred Stock are currently outstanding. The Company may issue Preferred Stock and determine its price, rights, preferences, privileges and restrictions, including voting and dividend rights, without stockholder approval. The rights of holders of Preferred Stock that the Company may issue in the future may adversely affect the rights of the holders of Common Stock. The issuance of Preferred Stock may make it more difficult for a third party to acquire the Company. The Company has no present plan to issue Preferred Stock. 13 16 The Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. That section generally prohibits the Company from engaging in a "business combination" with an "interested stockholder" for three years after the time that such stockholder became an interested stockholder. Section 203 also could delay or prevent a change of control of the Company. These provisions, and provisions of the Restated Certificate of Incorporation and Restated By-Laws, may deter hostile takeovers or delay or prevent changes in control or management of the Company, including transactions in which stockholders might be paid more than current market prices for their shares. These provisions may also limit stockholders' ability to approve transactions that they believe are in their best interests. See "Description of Capital Stock -- Preferred Stock" and "-- Certain Statutory, Charter and By-Law Provisions." Subsequent Share Issuances; Shares Eligible for Future Sale. The market price of the Company's Common Stock could drop if a large number of shares of Common Stock are sold in the public market, or if market participants believe that such sales could occur, or if the Company issues a large number of shares in acquisitions. Such issuances could also make it more difficult for the Company to fund acquisitions by issuing Common Stock. Shares issued under this Registration Statement may generally be sold in the public market immediately after they are issued. See "Shares Eligible for Future Sale." Fluctuations in Quarterly Results; Potential Stock Price Volatility. The Company believes that investors should not rely on period-to-period comparisons of its operating results as an indication of future performance. Many factors, including general economic conditions, government regulatory action, acquisitions, capital expenditures and other costs related to expanding operations and services, pricing changes and adverse weather conditions, may cause the Company's operating results to fall below the expectations of securities analysts and investors in future quarters. This would likely cause the price of the Company's Common Stock to drop. In addition, the stock market sometimes experiences large price and volume fluctuations generally. Although these broad market fluctuations may not relate to the operating performance of companies whose securities are publicly traded, they may cause the market price of such companies' stock, including the Company's Common Stock, to drop. After periods of volatility in the market price of a company's securities, shareholders often bring class action lawsuits against that company. The Company may be the target of such lawsuits in the future, which could be expensive and divert management's attention and resources. This could materially and adversely affect the Company's business, financial condition and operating results. In addition, any adverse determination in any such lawsuit could subject the Company to significant liabilities. No Dividends. The Company does not intend to pay cash dividends on the Common Stock. In addition, the Company's credit facility prohibits the Company from paying dividends without the consent of the lenders. See "Dividend Policy." Impact of the Year 2000. The Company will need to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 ("Year 2000") and afterwards. The Company expects to complete those modifications and upgrades during 1999, at a total cost of approximately $100,000. The Company has spent part of its Year 2000 budget on replacing its billing systems in Maltby and Vancouver. Because the Company's operations rely primarily on mechanical systems such as trucks to collect solid waste, the Company does not expect its operations to be significantly affected by Year 2000 issues. The Company's customers may need to make 14 17 Year 2000 modifications to software and hardware that they use to generate records, bills and payments relating to the Company. The Company does not rely on vendors on a routine basis except for providers of disposal services. The Company takes waste to a site and is normally billed based on tonnage received. The Company believes that if its disposal vendors encounter Year 2000 problems, they will convert to manual billing based on scale recordings until they resolve those issues. In assessing the Company's exposure to Year 2000 issues, management believes its biggest challenges lie in the following areas: Year 2000 issues at the Company's banks, large (typically municipal) customers, and acquired businesses between the time the Company acquires them and the time the Company implements its own systems. The Company is obtaining Year 2000 compliance certifications from its vendors, banks and customers. If the Company and its vendors, banks and customers do not complete the required Year 2000 modifications on time, the Year 2000 issue could materially affect the Company's operations. The Company believes, however, that in the most reasonably likely worst case, the effects of Year 2000 issues on its operations would be brief and small relative to the Company's overall operations. The Company has not made a contingency plan to minimize operational problems if the Company and its vendors, banks and customers do not timely complete all required Year 2000 modifications. DIVIDEND POLICY The Company has never paid cash dividends on its Common Stock. The Company does not currently anticipate paying any cash dividends on the Common Stock. The Company intends to retain all earnings to fund the operation and expansion of its business. In addition, the Company's credit facility restricts the payment of cash dividends. PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded on the Nasdaq National Market under the symbol "WCNX." The following table shows the high and low sale prices for the Common Stock for the period from May 22, 1998, the date of the Company's initial public offering, through April 19, 1999.
1998 HIGH LOW ---- ------ -------- Second Quarter (from May 22, 1998).......................... $20.75 $13.75 Third Quarter............................................... $23.38 $17.75 Fourth Quarter.............................................. $21.13 $15.88
1999 ---- First Quarter............................................... $16.50 $24.00 Second Quarter (through April 19, 1999)..................... $22.00 $25.31
On April 19, 1999, the last sale price of the Common Stock as reported by the Nasdaq National Market was $23.50 per share. See "Description of Capital Stock." 15 18 SELECTED HISTORICAL AND SUPPLEMENTAL FINANCIAL AND OPERATING DATA The following tables present selected historical and supplemental statements of operations and balance sheet data of Waste Connections and our predecessors for the periods indicated. The entities Waste Connections acquired in September 1997 from Browning-Ferris Industries, Inc. ("BFI") are collectively referred to as Waste Connections' predecessors. BFI acquired the predecessors during 1995 and 1996. Before being acquired by BFI, the predecessors operated as separate stand-alone businesses. The supplemental financial information gives retroactive effect to the business combinations of Waste Connections with the Murrey Companies (accounted for as poolings-of-interests) which occurred on January 19, 1999. Generally accepted accounting principles prohibit giving effect to a consummated business combination accounted for by the pooling-of-interests method in financial statements that do not include the date of consummation. The supplemental financial data does not extend through the date of consummation; however, such information will be included in the historical consolidated financial statements of Waste Connections after financial statements covering the date of consummation of the business combination are issued. This information is based on the audited supplemental financial statements included elsewhere herein. 16 19 WASTE CONNECTIONS, INC. AND PREDECESSORS SELECTED HISTORICAL AND SUPPLEMENTAL FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FIBRES INTER- THE NATIONAL, DISPOSAL INC. GROUP THE PERIOD THE COMBINED FIBRES DISPOSAL FROM DISPOSAL FROM INTERNATIONAL, GROUP JANUARY 1, PREDECESSORS GROUP JANUARY 1, PREDECESSORS INC. COMBINED 1995 ONE MONTH COMBINED 1996 COMBINED YEAR ENDED YEAR ENDED THROUGH ENDED YEAR ENDED THROUGH PERIOD ENDED DECEMBER 31, DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, JULY 31, DECEMBER 31, 1994 1994 1995 1995 1995 1996 1996 -------------- ------------ ------------ ------------ ------------ ---------- ------------ HISTORICAL STATEMENTS OF OPERATIONS DATA(1): Revenues................ $5,610 $22,004 $7,340 $595 $19,660 $8,738 $13,422 Cost of operations...... 4,432 18,298 5,653 527 16,393 6,174 11,420 Selling, general and administrative........ 552 3,320 823 72 3,312 2,126 1,649 Depreciation and amortization.......... 642 606 715 74 628 324 962 ------ ------- ------ ---- ------- ------ ------- Income (loss) from operations............ (16) (220) 149 (78) (673) 114 (609) Interest expense........ (191) (548) (162) (1) (206) (12) (225) Other income (expense), net................... (2) 871 98 5 -- 2,661 (147) ------ ------- ------ ---- ------- ------ ------- Income (loss) before income taxes.......... (209) 103 85 (74) (879) 2,763 (981) Income tax (provision) benefit............... -- -- (29) -- 298 (505) -- ------ ------- ------ ---- ------- ------ ------- Net income (loss)....... $ (209) $ 103 $ 56 $(74) $ (581) $2,258 $ (981) ====== ======= ====== ==== ======= ====== =======
(See footnotes on page 21) 17 20
WASTE CONNECTIONS, INC. ----------------------------------------------- PREDECESSORS PERIOD FROM COMBINED INCEPTION PRO FORMA NINE MONTHS (SEPTEMBER 9, COMBINED ENDED 1997) THROUGH YEAR ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1997 1998 1998(4) ------------- ----------------- ------------ ------------ HISTORICAL STATEMENTS OF OPERATIONS DATA(1): Revenues................... $18,114 $ 6,237 $ 54,042 $ 102,064 Cost of operations......... 14,753 4,703 36,554 66,576 Selling, general and administrative.......... 3,009 619 5,317 11,064 Depreciation and amortization............ 1,083 354 4,112 8,352 Start-up and integration... -- 493 -- -- Stock compensation......... -- 4,395 632 632 ------- ---------- ---------- ----------- Income (loss) from operations.............. (731) (4,327) 7,427 15,440 Interest expense........... (456) (1,035) (2,257) (9,330) Other income (expense), net..................... 14 (36) -- 108 ------- ---------- ---------- ----------- Income (loss) before income taxes................... (1,173) (5,398) 5,170 6,218 Income tax (provision) benefit................. -- 332 (2,395) (3,078) ------- ---------- ---------- ----------- Income (loss) before extraordinary item...... (1,173) (5,066) 2,775 3,140 Extraordinary item -- early extinguishment of debt, net of income tax benefit of $264......... -- -- (1,027) (1,027) ------- ---------- ---------- ----------- Net income (loss).......... $(1,173) $ (5,066) $ 1,748 $ 2,113 ======= ========== ========== =========== Redeemable convertible preferred stock accretion............... (531) (917) (917) ---------- ---------- ----------- Net income (loss) applicable to common stockholders............ $ (5,597) $ 831 $ 1,196 ========== ========== =========== Basic income (loss) per common share: Income (loss) before extraordinary item.... $ (2.99) $ 0.29 $ 0.24 Extraordinary item...... -- (0.16) (0.11) ---------- ---------- ----------- Net income (loss) per common share.......... $ (2.99) $ 0.13 $ 0.13 ========== ========== =========== Diluted income (loss) per common share: Income (loss) before extraordinary item.... $ (2.99) $ 0.22 $ 0.20 Extraordinary item...... -- (0.12) (0.09) ---------- ---------- ----------- Diluted net income (loss) per common share................. $ (2.99) $ 0.10 $ 0.11 ========== ========== =========== Shares used in calculating basic net income (loss) per share............... 1,872,567 6,460,293 9,349,173 Shares used in calculating diluted income (loss) per share............... 1,872,567 8,371,415 11,260,295
(See footnotes on page 21) 18 21
YEARS ENDED DECEMBER 31, -------------------------------------- 1994 1995 1996 ---------- ---------- ---------- SUPPLEMENTAL STATEMENTS OF OPERATIONS DATA(2): Revenues............................... $ 23,804 $ 27,786 $ 25,024 Cost of operations..................... 18,829 20,859 20,465 Selling, general and administrative.... 1,940 2,101 2,142 Depreciation and amortization.......... 818 923 1,236 ---------- ---------- ---------- Income from operations................. 2,217 3,903 1,181 Interest expense....................... (321) (198) (284) Other income (expense), net............ (347) 210 309 ---------- ---------- ---------- Income before income taxes............. 1,549 3,915 1,206 Income tax provision................... (517) (690) (543) ---------- ---------- ---------- Net income............................. $ 1,032 $ 3,225 $ 663 ========== ========== ========== Basic and diluted net income per share............................... $ 0.36 $ 1.12 $ 0.23 ========== ========== ========== Shares used in per share calculation... 2,888,880 2,888,880 2,888,880 ========== ========== ==========
(See footnotes on page 21) 19 22
YEARS ENDED DECEMBER 31, ------------------------- 1997 1998 ---------- ----------- SUPPLEMENTAL STATEMENTS OF OPERATIONS DATA(2): Revenues........................................... $ 35,111 $ 86,570 Cost of operations................................. 27,836 62,964 Selling, general and administrative................ 2,942 8,108 Depreciation and amortization...................... 1,725 6,306 Start-up and integration........................... 493 -- Stock compensation................................. 4,395 632 ---------- ----------- Income (loss) from operations...................... (2,280) 8,560 Interest expense................................... (1,415) (2,792) Other income (expense), net........................ 247 79 ---------- ----------- Income (loss) before income taxes.................. (3,448) 5,847 Income tax provision............................... (302) (2,930) ---------- ----------- Income (loss) before extraordinary item............ (3,750) 2,917 Extraordinary item -- early extinguishment of debt, net of income tax benefit of $264............... -- (1,027) ---------- ----------- Net income (loss).................................. $ (3,750) $ 1,890 ========== =========== Redeemable convertible preferred stock accretion... (531) (917) ---------- ----------- Net income (loss) applicable to common stockholders.................................... $ (4,281) $ 973 ========== =========== Basic income (loss) per common share: Income (loss) before extraordinary item......... $ (0.90) $ 0.21 ---------- ----------- Extraordinary item.............................. -- (0.11) ---------- ----------- Net income (loss) per common share.............. $ (0.90) $ 0.10 ========== =========== Diluted income (loss) per common share: Income (loss) before extraordinary item......... $ (0.90) $ 0.18 Extraordinary item.............................. -- (0.09) ---------- ----------- Net income (loss) per common share.............. $ (0.90) $ 0.09 ========== =========== Shares used in calculating basic net income (loss) per share....................................... 4,761,447 9,349,173 ========== =========== Shares used in calculating diluted net income (loss) per share................................ 4,761,447 11,260,295 ========== ===========
(See footnotes on page 21) 20 23
THE DISPOSAL DISPOSAL FIBRES INTERNATIONAL, GROUP PREDECESSORS GROUP PREDECESSORS INC. COMBINED COMBINED COMBINED COMBINED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1994 1995 1995 1996 --------------------- ------------ ------------ ------------ ------------ HISTORICAL BALANCE SHEET DATA(1): Cash and equivalents.......... $ 321 $ 203 $ 184 $ 961 $ 102 Working capital (deficit)..... 155 (4,279) 90 2,498 695 Property and equipment, net... 3,810 2,771 4,035 2,221 5,069 Total assets.................. 6,317 7,318 9,151 6,942 15,291 Long-term debt(3)............. 2,353 90 149 6,890 89 Redeemable convertible preferred stock............. -- -- -- -- -- Total stockholders' equity (deficit)................... 3,045 (1,486) -- (2,067) -- WASTE CONNECTIONS, INC. DECEMBER 31, ---------------------------------- PRO FORMA COMBINED DECEMBER 31, 1997 1998 1998(5) ------- -------- ------------ HISTORICAL BALANCE SHEET DATA(1): Cash and equivalents.......... $ 820 $ 2,675 $ 4,896 Working capital (deficit)..... 836 (8,717) (10,700) Property and equipment, net... 4,185 33,043 121,028 Total assets.................. 18,880 149,312 254,925 Long-term debt(3)............. 6,762 60,106 148,349 Redeemable convertible preferred stock............. 7,523 -- -- Total stockholders' equity (deficit)................... (551) 61,063 62,329
DECEMBER 31, --------------------------------------------------- 1994 1995 1996 1997 1998 ------ ------- ------- ------- -------- SUPPLEMENTAL BALANCE SHEET DATA(2): Cash and equivalents........................................ $ 349 $ 859 $ 81 $ 946 $ 2,848 Working capital (deficit)................................... 626 (63) (3,721) (2,820) (12,324) Property and equipment, net................................. 6,301 8,027 12,529 19,004 46,986 Total assets................................................ 9,343 12,573 15,065 38,576 168,447 Long-term debt(3)........................................... 4,663 2,359 1,851 11,669 63,985 Redeemable convertible preferred stock...................... -- -- -- 7,523 -- Total stockholders' equity.................................. 2,420 3,439 6,258 6,940 68,529
- --------------- (1) The entities Waste Connections acquired in September 1997 from BFI are collectively referred to as Waste Connections' predecessors. BFI acquired the predecessors at various times during 1995 and 1996, and prior to being acquired by BFI, the predecessors operated as separate stand-alone businesses. Various factors affect the year-to-year comparability of the amounts presented. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations" for additional information concerning Waste Connections and our predecessors. (2) Supplemental financial data gives retroactive effect to the business combinations with the Murrey Companies which occurred on January 19, 1999. Generally accepted accounting principles prohibit giving effect to a consummated business combination accounted for by the pooling-of-interests method in financial statements that do not include the date of consummation. The supplemental financial data does not extend through the date of consummation; however, such information will be included in the historical consolidated financial statements of Waste Connections after financial statements covering the date of consummation of the business combination are issued. (3) Excludes redeemable convertible preferred stock, which converted into common stock upon our May 1998 initial public offering. (4) Assumes the Company's acquisitions of Columbia Resource Co., L.P. and Finley-Buttes Limited Partnership ("CRCFBLP") and the mergers with the Murrey Companies (accounted for as poolings-of-interests) occurred as of January 1, 1998. See "Unaudited Pro Forma Financial Statements" included elsewhere herein. (5) Assumes the Company's acquisitions of CRCFBLP and the mergers with the Murrey Companies (accounted for as poolings-of-interests) occurred on December 31, 1998. See "Unaudited Pro Forma Financial Statements" included elsewhere herein. 21 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read this discussion in conjunction with the audited and unaudited financial statements and other financial information in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from those discussed in the forward-looking statements because of various factors, including, but not limited to, those listed in "Risk Factors" and the matters discussed in this Prospectus generally. OVERVIEW Waste Connections is a regional, integrated solid waste services company that provides solid waste collection, transfer, disposal and recycling services in secondary markets of the Western U.S. The Company generally intends to pursue an acquisition-based growth strategy and has acquired 64 companies since its inception in September 1997. The Company accounted for the mergers with the Murrey Companies, Roche & Sons, Inc. and Ritters Sanitary Service, Inc. as poolings-of-interests, and for the remainder of the acquisitions as purchases. Accordingly, the Company has included the operating results of these acquired businesses in the Company's financial statements only from the dates that the Company acquired them. The Company expects a substantial part of its future growth to come from acquiring additional solid waste collection, transfer and disposal businesses. Additional acquisitions could continue to affect period-to-period comparisons of its operating results. The Company also expects to invest in collection vehicles and equipment, maintenance of existing equipment, and management information systems, which should enable the Company to expand internally and through acquisitions based on its existing infrastructure. The Company expects to fund future acquisitions through cash from operations, borrowings under its bank line of credit, the issuance of shares of the Company's Common Stock and/or seller financing. As of April 15, 1999, the Company had consummated the following acquisitions: Initial Acquisitions. In September 1997, the Company joined with two other parties to bid on certain solid waste and recycling businesses offered for sale by BFI. The Company acquired the stock of Browning-Ferris Industries of Washington, Inc., a provider of solid waste services to more than 78,000 customers through three municipal contracts and one G certificate in southwestern Washington, and the stock of its subsidiary, Fibres International, Inc., a provider of solid waste services to more than 24,000 customers through eight municipal contracts and one G certificate in north central Washington. The acquired companies subsequently changed their names to Waste Connections of Washington, Inc. and Waste Connections International, Inc., respectively. The two other parties acquired selected BFI solid waste collection and transportation assets and operations in Idaho, and BFI's recycling assets and operations in Washington, Idaho and Oklahoma. California Acquisitions. Effective February 1, 1998, the Company acquired the stock of Madera, an integrated solid waste services company operating in north central California. In connection with the Madera acquisition, the Company acquired one franchise agreement and one municipal contract, pursuant to which it serves more than 9,000 commercial, industrial and residential customers, and agreements to operate two transfer 22 25 stations, one Subtitle D landfill and one recycling facility. On September 9, 1998, the Company acquired certain collection assets from Youngclaus Enterprises, which "tuck in" to its Madera operations. On September 22, 1998, Curry Transfer and Recycling, a wholly owned subsidiary of the Company, acquired certain business assets of Harrell's Septic Service, which provides portable toilet and septic services in northwestern California and southwestern Oregon (see "Oregon Acquisitions" below). On December 30, 1998, the Company acquired the stock of Amador Disposal Service, Inc. and Mother Lode Sani-Hut, Inc., which provide solid waste collection, recycling and disposal services to approximately 11,000 customers in north central California. Idaho Acquisitions. On January 30, 1998, the Company acquired the stock of Waste Connections of Idaho, Inc., which provides solid waste collection services to more than 10,000 customers in eastern Idaho through subscription agreements with residential customers and seven municipal contracts. Waste Connections of Idaho, Inc., was formed in September 1997 by affiliates of the Company for the purpose of acquiring certain assets of Browning-Ferris Industries of Idaho, Inc. Effective March 1, 1998, the Company acquired certain solid waste collection assets from Hunter Enterprises, Inc., a solid waste services company located in eastern Idaho. These assets "tuck in" to the Company's Idaho operations and serve approximately 2,800 residential and commercial customers. On October 15, 1998, the Company acquired the stock of R&N, LLC, which provides solid waste collection and transportation services to approximately 4,300 customers in southwestern Idaho. Kansas Acquisitions. On December 21, 1998, a wholly owned subsidiary of the Company acquired the assets of Heartland Waste Management, Inc., which provides solid waste collection services to approximately 2,500 customers in southern Kansas. On March 31, 1999, a wholly owned subsidiary of the Company acquired the assets of Kansas Industrial Services, Inc. and Williams Trash Service, which provide solid waste collection services to approximately 50 and 1,000 customers, respectively, in southern Kansas. These assets "tuck in" to the Company's western Oklahoma operations. Minnesota Acquisition. On March 30, 1999, a wholly owned subsidiary of the Company merged into Ritter's Sanitary Service, Inc., which provides solid waste collection and recycling services to approximately 4,900 customers in southwestern Minnesota. Nebraska Acquisitions. On July 31, 1998, a wholly owned subsidiary of the Company merged into Shrader, which provides solid waste and recyclables collection services to more than 22,500 customers in eastern Nebraska. On August 3, 1998, the Company acquired the stock of J&J Sanitation, Inc. and Big Red Roll Off, Inc. (together, "J&J"), which together serve more than 9,500 customers in eastern Nebraska. On September 18, 1998, Waste Connections of Nebraska, Inc., a wholly owned subsidiary of the Company, acquired substantially all the assets of Affiliated Waste Services, L.L.C., which provides solid waste collection and transportation services to approximately 4,700 customers in eastern Nebraska. On the same date, Waste Connections of Nebraska, Inc. acquired substantially all of the assets of Wolff's Trashmasher and Haul It All Sanitary Service, two sole proprietorships that provide solid waste collection and transportation services to approximately 1,400 customers in eastern Nebraska. On January 6, 1999, the Company purchased the stock of Butler County Landfill, Inc. and certain assets of Kobus Construction, Inc., which provide solid waste disposal and transportation services to approximately 300 customers in eastern Nebraska. 23 26 On February 24, 1999, the Company acquired from affiliates of Allied Waste Industries, Inc. the stock of CRX, Inc., Dolpheide Sanitation Service, Inc. and Better Disposal Service, Inc., three Nebraska corporations that provide solid waste collection, recycling and disposal services to approximately 8,600 customers in eastern Nebraska and operate a landfill in Clarkson, Nebraska. Concurrently, the Company sold to Allied the stock of Waste Connections International, Inc., which operated the Company's collection, recycling and disposal business in Issaquah and Maltby, Washington. On March 23, 1999, and March 26, 1999, wholly owned subsidiaries of the Company acquired certain assets of Mrsny Sanitary Service, Inc. and Columbus Sanitation Service, which provide solid waste collection services to approximately 800 and 1,300 customers, respectively, in eastern Nebraska. On March 29, 1999, the Company acquired the stock of Wahoo Sanitation, Inc. and Saunders County Disposal, Inc., two Nebraska corporations that provide solid waste collection, transfer and recycling services to approximately 2,000 customers in eastern Nebraska. On March 31, 1999, the Company acquired certain assets of OZ Dispos-All, which provides solid waste collection services to approximately 2,500 customers in eastern Nebraska. On April 5, 1999, a wholly owned subsidiary of the Company purchased certain assets of R&S Cleanup, which provides solid waste collection services to approximately 1,200 customers in eastern Nebraska. Oklahoma Acquisitions. On June 5, 1998, the Company acquired the stock of B&B Sanitation, Inc., Red Carpet Landfill, Inc. and Darlin Equipment, Inc. (together, "B&B"), which together provide solid waste and recyclables collection and transportation, landfill, and equipment leasing services to more than 2,600 customers in western Oklahoma. Oregon Acquisitions. On June 17, 1998, the Company acquired the stock of Arrow, which provides solid waste and recyclables collection, transportation and handling services to more than 2,000 customers in northwestern Oregon and southwestern Washington. On June 25, 1998, the Company acquired the stock of Curry Transfer and Recycling, Inc. ("Curry") and certain real estate located in Curry County, Oregon and used in that business. Curry provides solid waste and recyclables collection and transportation services to more than 5,400 customers in southwestern Oregon. On September 25, 1998, Curry acquired certain business assets of Westlane Disposal, which provides solid waste collection and transportation services to approximately 2,200 customers in southwestern Oregon. On November 5, 1998, the Company acquired the stock of Siuslaw Disposal, Inc., which provides solid waste collection services to approximately 1,800 customers in southwestern Oregon. On November 12, 1998, Curry acquired certain business assets of Veneta Garbage Service, which provides solid waste collection services to approximately 1,800 customers in southwestern Oregon. On November 13, 1998, Curry acquired certain assets of B&G Sanitation, which provides solid waste collection services to approximately 1,000 customers in southwestern Oregon. On November 23, 1998, the Company acquired the stock of Columbia Sanitary Services, Inc. and Moreland Sanitary Service, Inc., which provide solid waste collection services to an aggregate of approximately 4,800 customers in northwestern Oregon and southwestern Washington. On March 26, 1999, a wholly owned subsidiary of the Company acquired certain assets of Sandy's Disposal Service and Extra Mile Disposal, which provide solid waste collection services to approximately 1,000 customers in western Oregon. On March 31, 1999, a wholly owned subsidiary of the Company acquired the assets of Jack Fleming Sanitary Service, which provides solid waste collection services to approximately 400 customers in northwestern Oregon. 24 27 Utah Acquisitions. On June 1, 1998, the Company acquired substantially all of the business assets of Contractor's Waste Removal, L.C. ("Contractor's"), a provider of solid waste collection and transportation services to more than 450 customers in central Utah. On July 27, August 10 and August 21, 1998, the Company acquired certain business assets of Miller Containers, Inc., ABC Waste, Inc., and Contractors Waste, Inc., respectively, which together provide solid waste collection services to approximately 290 customers in central Utah and "tuck in" to the Company's Utah operations. On September 21, 1998, Waste Connections of Utah, Inc., a wholly owned subsidiary of the Company, acquired certain assets of Country Garbage Services, Inc., which provides solid waste collection and transportation services in central Utah. On December 30, 1998, the Company acquired the stock of City Sanitation, Inc., which provides solid waste collection services to more than 4,200 customers in central Utah. On January 8, 1999, a wholly owned subsidiary of the Company merged into Roche & Sons, Inc. As a result, Roche & Sons, Inc. became a wholly owned subsidiary of the Company that provides solid waste collection services to approximately 6,000 customers in central Utah. On March 26, 1999, a wholly owned subsidiary of the Company acquired certain assets of Waste Away, LLC, which provides solid waste collection services to approximately 2,400 customers in central Utah. Wyoming Acquisitions. On April 8, 1998, the Company acquired certain solid waste collection assets from A-1 Disposal, Inc. and Jesse's Disposal, both unrelated parties operating in northeastern Wyoming, and together serving approximately 2,300 customers. On May 11, 1998, the Company acquired T&T Disposal, Inc., a provider of solid waste and recyclables collection services to more than 500 customers in northeastern Wyoming. On May 8, 1998, the Company acquired Sowers' Sanitation, Inc. and Sunshine Sanitation Incorporated, providers of solid waste and recyclables collection services to an aggregate of more than 7,000 customers in western South Dakota. On August 3, 1998, the Company acquired certain assets of a South Dakota waste collection business owned by the shareholders of J&J, which "tucks in" to the Company's Wyoming and South Dakota operations. (See "Nebraska Acquisitions" above). On January 22, 1999, a wholly owned subsidiary of the Company acquired certain assets of Brecke Sanitation, which provides solid waste collection services to approximately 400 customers in western South Dakota. Washington Acquisitions. On September 21, 1998, a wholly owned subsidiary of the Company merged into Evergreen Waste Systems, Inc. As a result of this merger, Evergreen Waste Systems, Inc. became a wholly owned subsidiary of the Company that provides solid waste and recyclables collection and transportation services to more than 6,500 customers in southwestern Washington and northwestern Oregon. On January 19, 1999, four wholly owned subsidiaries of the Company merged into the Murrey Companies, and the Murrey Companies became wholly owned subsidiaries of the Company. The Murrey Companies provide solid waste services to more than 65,000 customers in the Seattle-Tacoma, Washington area. On March 31, 1999, the Company purchased the stock of two companies that are the sole partners of Columbia Resource Co., L.P. ("CRC") and Finley-Buttes Limited Partnership ("FBLP"). CRC provides solid waste collection services to approximately 2,700 customers in southwestern Washington. FBLP operates the Finley-Buttes Regional Landfill in northern Oregon. The Company's management does not believe that consummation of any other acquisitions is probable as of the date of this prospectus. 25 28 GENERAL The Company's revenues consist mainly of fees it charges customers for solid waste collection, transfer, disposal and recycling services. A large part of the Company's collection revenues come from commercial, industrial and residential services. The Company frequently performs these services under service agreements or franchise agreements with counties or municipal contracts. County franchise agreements and municipal contracts generally last from one to ten years. The Company's existing franchise agreement and all of its existing municipal contracts give the Company the exclusive right to provide specified waste services in the specified territory during the contract term. These exclusive arrangements are awarded, at least initially, on a competitive bid basis and subsequently on a bid or negotiated basis. The Company also provides residential collection services on a subscription basis with individual households. The Company provides a large part of its collection services in Washington under G certificates awarded by the Washington Utilities and Transportation Commission. G certificates grant the Company collection rights in certain areas, which rights are generally perpetual and exclusive. See "Business -- G Certificates." Contracts with counties and municipalities and G certificates provide relatively consistent cash flow during the term of the contracts. Because the Company bills most residential customers on a subscription basis quarterly, subscription agreements also are a stable source of revenues for the Company. The Company's collection business also generates revenues from the sale of recyclable commodities. The Company charges transfer station and landfill customers a tipping fee on a per ton basis for disposing of their solid waste at the transfer stations and disposal facilities the Company operates in Madera, California and Clarkson, Nebraska and the landfills the Company owns and operates in Major County, Oklahoma, Morrow County, Oregon and Butler County, Nebraska. Most of the Company's transfer and landfill customers are under one to ten year disposal contracts, most of which provide for annual cost of living increases. The Company typically determines the prices for its solid waste services by the collection frequency and level of service, route density, volume, weight and type of waste collected, type of equipment and containers furnished, the distance to the disposal or processing facility, the cost of disposal or processing, and prices charged by competitors for similar services. The terms of the Company's contracts sometimes limit its ability to pass on price increases. Long-term solid waste collection contracts typically contain a formula, generally based on a published price index, that automatically adjusts fees to cover increases in some, but not all, operating costs. Costs of operations include labor, fuel, equipment maintenance and tipping fees paid to third party disposal facilities, worker's compensation and vehicle insurance, the cost of materials purchased to be recycled, third party transportation expense, district and state taxes, host community fees and royalties. The Company owns and/or operates 18 transfer stations, which reduce the Company's costs by allowing it to use collection personnel and equipment more fully and by consolidating waste to gain the more favorable disposal rates that may be available for larger quantities of waste. Selling, general and administrative ("SG&A") expenses include management, clerical and administrative compensation and overhead costs associated with the Company's marketing and sales force, professional services and community relations expense. 26 29 Depreciation and amortization expense includes depreciation of fixed assets over the estimated useful life of the assets using the straight line method and amortization of goodwill and other intangible assets over the estimated period of benefit using the straight line method. The Company capitalizes some third party expenditures related to pending acquisitions or development projects, such as legal and engineering expenses. The Company expenses indirect acquisition costs, such as executive and corporate overhead, public relations and other corporate services, as they are incurred. The Company charges against net income any unamortized capitalized expenditures and advances (net of any portion that the Company believes it may recover, through sale or otherwise) that relate to any operation that is permanently shut down and any pending acquisition or landfill development project that is not completed. The Company routinely evaluates all capitalized costs, and expenses those related to projects that the Company believes are not likely to succeed. As of March 31, 1999, the Company had no capitalized expenditures relating to landfill development projects and $26,973 in capitalized expenditures relating to pending acquisitions. The Company accrues for estimated landfill closure and post-closure maintenance costs at the Red Carpet Landfill it owns in Major County, Oklahoma, the Butler County Landfill it owns in Butler County, Nebraska, and the Finley-Buttes Regional Landfill it owns in Morrow County, Oregon. Under applicable regulations, the Company and Madera County, as operator and owner, respectively, are jointly liable for closure and post-closure liabilities with respect to the Fairmead landfill. The Company has not accrued for such liabilities because Madera County, as required by state law, has established a special fund, into which it deposits a portion of tipping fee surcharges, to pay such liabilities. Consequently, management of the Company does not believe Madera has any financial obligation for closure and post-closure costs for the Fairmead Landfill as of March 31, 1999. The Company will have additional material financial obligations relating to closure and post-closure costs of any disposal facilities it may own or operate in the future. In such case, the Company will accrue for those obligations, based on engineering estimates of consumption of permitted landfill airspace over the useful life of any such landfill. 27 30 RESULTS OF OPERATIONS The following table sets forth items in Waste Connections' consolidated statement of operations as a percentage of revenues for the period indicated.
YEAR ENDED DECEMBER 31, 1998 ----------------- Revenues.............................................. 100.0% Cost of operations.................................... 67.6 Selling, general and administrative expenses.......... 9.8 Depreciation and amortization expense................. 7.6 Stock compensation.................................... 1.3 ----- Operating income...................................... 13.7 Interest expense, net................................. (4.2) Income tax expense.................................... (4.4) Extraordinary loss, net of income tax................. (1.9) ----- Net income (loss)..................................... 3.2% ===== EBITDA margin(1)...................................... 22.5%
- ------------------------- (1) EBITDA margin represents EBITDA expressed as a percentage of revenues. EBITDA represents earnings presented above before extraordinary loss, interest, (other) expense, income taxes, depreciation and amortization expense and stock compensation expense. EBITDA is not a measure of cash flow, operating results or liquidity, as determined in accordance with generally accepted accounting principles. The financial information for Waste Connections and our predecessors for the years ended December 31, 1996 and 1997 included in this section relates to the following entities for the periods indicated: YEAR ENDED DECEMBER 31, 1996: The Disposal Group Combined January 1, 1996 through July 31, 1996 (BFI acquisition date) Predecessors Combined Period ended December 31, 1996 (represents the combined results of operations of The Disposal Group subsequent to the BFI acquisition date and the operations for the year ended December 31, 1996 of Fibres International, Inc., which was acquired by BFI in 1995) YEAR ENDED DECEMBER 31, 1997: Predecessors Combined Nine months ended September 30, 1997 (represents the combined results of operations for the nine month period of the entities acquired by BFI in 1995 and 1996 described above) Waste Connections, Inc. Period from (September 9, 1997) through December 31, 1997
The Disposal Group Combined consists of three entities that were under common control before their acquisition by BFI: Diamond Fab and Welding Service, Inc., Buchmann Sanitary Service, Inc. and The Disposal Group. 28 31 1998 VS. 1997 Revenues. Revenues for 1998 increased $47.8 million, or 766% to $54.0 million from $6.2 million for 1997. Our revenues in 1997 resulted primarily from the purchase of Waste Connections' predecessors on September 30, 1997. Approximately $47.6 million of the increase resulted primarily from the acquisitions of our predecessors and the inclusion of their revenues for a full 12 months in 1998 and other acquisitions closed since the beginning of 1998. Approximately $244,000 of the increase in revenues during 1998 resulted from growth in the underlying operations of the business acquired from BFI. Revenues related to Waste Connections' Predecessors Combined for the nine months ended September 30, 1997 were $18.1 million. Cost of Operations. Cost of operations for 1998 increased $31.9 million, or 677%, to $36.6 million from $4.7 million for 1997. Our cost of operations in 1997 was attributable to the purchase of Waste Connections' predecessors on September 30, 1997. The increase resulted primarily from the acquisitions of our predecessors and the inclusion of their cost of operations for a full 12 months in 1998 and other acquisitions closed since the beginning of 1998. This increase in 1998 was offset slightly by a decline in expenses in the predecessors operations as a result of cost reduction measures. Cost of operations as a percentage of revenues declined 7.8% to 67.6% in 1998 from 75.4% in 1997. The decline in cost of operations as a percent of revenues was as a result of operating improvements implemented in the acquired businesses. Cost of operations of Waste Connections' Predecessors Combined for the nine months ended September 30, 1997 was $14.8 million, or 81.4% of revenues. SG&A. SG&A expenses increased $4.7 million, or 759.0%, to $5.3 million for 1998 from $619,000 for 1997. Our SG&A expense in 1997 was attributable to the purchase of Waste Connections' predecessors on September 30, 1997. The increase resulted primarily from the acquisitions of our predecessors and the inclusion of their SG&A expenses for a full 12 months in 1998 and other acquisitions closed since the beginning of 1998, combined with an increase in corporate overhead to accommodate our growth. SG&A as a percentage of revenues declined 0.1% to 9.8% for 1998 from 9.9% for 1997. The decline in SG&A as a percentage of revenues was a result of spreading of overhead expenses over a larger base of revenue from the acquisitions completed in 1998, offset by increases in corporate overhead and the costs associated with being a public company. Depreciation and Amortization. Depreciation and amortization expense increased $3.8 million, or 1061.5%, to $4.1 million for 1998 from $354,000 for 1997. Our depreciation and amortization expense in 1997 was attributable to the purchase of Waste Connections' predecessors on September 30, 1997. The increase resulted primarily from the acquisitions of our predecessors and the inclusion of their depreciation and amortization for a full 12 months in 1998 and other acquisitions closed since the beginning of 1998. Depreciation and amortization as a percentage of revenues increased 1.9% to 7.6% for 1998 from 5.7% for 1997. The increase in depreciation and amortization as a percentage of revenues was primarily a result of amortization of goodwill associated with acquisitions. Stock Compensation Expense. Stock compensation expense decreased $3.8 million, or 85.6%, to $632,000 for 1998 from $4.4 million for 1997. Our stock compensation expense in 1997 was attributable to the valuation of common stock issued upon the initial formation of the company. Stock compensation as a percentage of revenues decreased 29 32 69.3% to 1.2% for 1998 from 70.5% for 1997. Our stock compensation expense in 1998 was attributable to stock options granted with exercise prices less than the estimated fair value of our common stock on the date of grant. Start Up and Integration Expense. Start up and integration expenses relate to expenses incurred in connection with our formation and integration costs relating to our initial acquisitions. Operating Income. Operating income increased $11.7 million from a loss of $4.3 million in 1997 to $7.4 million in 1998. The increase was attributable to the decline in stock compensation expense combined with improved operating performance and the inclusion of a full year of our predecessors' operating results and other acquisitions closed since the beginning of 1998. Interest Expense. Interest expense increased $1.2 million, or 118%, to $2.3 million for 1998 from $1.0 million for 1997. The increase was primarily attributable to higher debt levels incurred to fund certain of our acquisitions. Provision for Income Taxes. Income taxes increased $2.7 million to $2.4 million for 1998 from a benefit of $332,000 for 1997. The effective income tax rate in 1998 was 46.3%, which is above the federal statutory rate of 34.0% as the result of state and local taxes, non-deductible goodwill associated with certain acquisitions and the non-deductibility of the stock compensation expense. Extraordinary Charges. Extraordinary charges relate to the early termination of our bank credit facility when it was replaced by a new and larger facility. We had two new credit facilities during 1998. Net Income. Net income increased by $6.8 million to $1.7 million for 1998, from a loss of $5.1 million for 1997. The increase was attributable to the decline in stock compensation expense combined with improved operating performance and the inclusion of a full year of our predecessors' operating results and other acquisitions closed since the beginning of 1998. 1997 VS. 1996 Because the predecessors existed for different periods, year-to-year comparisons are not meaningful and therefore we have not included discussions of SG&A, depreciation and amortization and interest. Revenues. Our revenues for 1997 were $6.2 million. The revenues resulted primarily from the purchase of Waste Connections' predecessors on September 30, 1997. Revenues related to Waste Connections' Predecessors Combined for the nine months ended September 30, 1997 were $18.1 million. Waste Connections' Predecessors Combined for the period ended December 31, 1996 had revenues of $13.4 million. The Disposal Group Combined had revenues of $8.7 million for the period from January 1, 1996 to July 31, 1996. The monthly revenues for Waste Connections and Waste Connections' Predecessors Combined were essentially the same in 1997 and 1996. Cost of Operations. Cost of operations in 1997 was $4.7 million, or 75.4% of revenues. The cost of operations was attributable to the purchase of Waste Connections' predecessors on September 30, 1997. Cost of operations of Waste Connections' Predecessors Combined for the nine months ended September 30, 1997 was $14.8 million, or 81.4% of revenues. 30 33 Waste Connections' Predecessors Combined for the period ended December 31, 1996 had cost of operations of $11.4 million, or 85.1% of revenues. During the period from January 1, 1996 to July 31, 1996, the Disposal Group had cost of operations of $6.2 million, or 70.7% of revenues. Our cost of operations as a percentage of revenues in 1997 declined from Waste Connections' Predecessors Combined cost of operations as a percentage of revenues in 1997 and 1996, due to price increases in the fourth quarter of 1997 and operating cost savings in lease expense, environmental accrual fee allocations from BFI, franchise fees and amortization of loss contract accrual. Waste Connections' Predecessors Combined cost of operations as a percentage of revenues for the nine months ended September 30, 1997 declined from 1996 due to the rollover effect of the acquisition of The Disposal Group in 1996, which had generally higher margins than the existing businesses. SUPPLEMENTAL WASTE CONNECTIONS, INC. AND PREDECESSORS 1998 VS. 1997 Revenues. Total revenues increased $51.5 million, or 146.6%, to $86.6 million for 1998 from $35.1 million for 1997. Substantially all of the increase resulted primarily from the acquisitions of BFI's Washington operations and acquisitions closed since the beginning of 1998. Approximately $1.8 million resulted from growth in the base business. Cost of Operations. Total cost of operations increased $35.2 million, or 126.2%, to $63.0 million for 1998 from $27.8 million for 1997. The increase resulted primarily from the acquisitions of BFI's Washington operations and acquisitions closed since the beginning of 1998. Cost of operations as a percentage of revenues declined 6.6% to 72.7% for 1998 from 79.3% for 1997. The decline in cost of operations as a percentage of revenues was a result of cost reductions at acquired businesses. SG&A. SG&A expenses increased $5.2 million, or 175.6%, to $8.1 million for 1998 from $2.9 million for 1997. The increase was primarily attributable to the inclusion of BFI's Washington operations for 12 months and acquisitions closed since the beginning of 1998 and the additional corporate costs of being a public company and supporting the rapid pace of growth. SG&A as a percentage of revenues increased 0.9% to 9.4% for 1998 from 8.4% for 1997. The increase in SG&A as a percentage of revenues was a result of the acquisitions, which had generally higher overhead expenses and the additional corporate costs of being a public company and supporting the rapid pace of growth. Depreciation and Amortization. Depreciation and amortization expense increased $4.6 million, or 265.6%, to $6.3 million for 1998 from $1.7 million for 1997. The increase was primarily attributable to depreciation from acquired assets and increased amortization of goodwill from acquisitions. Depreciation and amortization as a percentage of revenues increased 2.3% to 7.2% for 1998 from 4.9% for 1997. The increase in depreciation and amortization as a percentage of revenues was primarily a result of amortization of goodwill associated with acquisitions. Stock Compensation Expense. Stock compensation expense decreased $3.8 million, or 85.6%, to $632,000 for 1998 from $4.4 million for 1997. Our stock compensation expense in 1997 was attributable to the valuation of common stock issued upon the initial formation of the Company. Stock compensation as a percentage of revenues decreased 11.8% to 0.7% for 1998 from 12.5% for 1997. Our stock compensation expense in 1998 was 31 34 attributable to stock options granted with exercise prices less than the estimated fair value of our common stock on the date of grant. Start Up and Integration Expense. Start up and integration expenses relate to expenses incurred in connection with Waste Connections' formation and integration costs relating to our initial acquisitions. Operating Income. Operating income increased $10.8 million from a loss of $2.3 million in 1997 to $8.5 million in 1998. The increase was attributable to the decline in stock compensation expense combined with improved operating performance and the inclusion of a full year of the business acquired from BFI and other acquisitions closed since the beginning of 1998. Interest Expense. Interest expense increased $1.4 million, or 97.3%, to $2.8 million for 1998 from $1.4 million for 1997. The increase was primarily attributable to higher debt levels incurred to fund all or a portion of the purchase price of acquired businesses. Provision for Income Taxes. Income taxes increased $2.6 million to $2.9 million for 1998 from $302,000 for 1997. The increase was associated with the profitability of the operations acquired from BFI. The effective income tax rate in 1998 was 50.1%, which is above the federal statutory rate of 34.0% as the result of state and local taxes, non-deductible goodwill associated with certain acquisitions and the non-deductibility of the stock compensation expense. Extraordinary Charges. Extraordinary charges relate to the early termination of our bank credit facility when it was replaced by a new and larger facility. We had two new credit facilities during 1998. Net Income. Net income increased by $5.6 million to $1.9 million for 1998, from a loss of $3.8 million for 1997. The increase was attributable to the decline in stock compensation expense combined with improved operating performance and the inclusion of a full year of the operations acquired from BFI and other acquisitions closed since the beginning of 1998. 1997 VS. 1996 Revenues. Total revenues increased by $10.1 million, or 40.3%, to $35.1 million in 1997 from $25.0 million in 1996. This increase was primarily attributable to our acquisition of the predecessors from BFI on December 31,1997, increased volumes, price increases as a result of increased disposal fees, the acquisition of the assets of Vashon Island Disposal and additional services to existing customers. Cost of Operations. Total cost of operations increased $7.4 million, or 36.0%, to $27.8 million in 1997 from $20.5 million in 1996. The increase was principally due to our acquisition of the predecessors from BFI on December 31,1997, increased volume, increased disposal costs and the cost of operations of Vashon Island Disposal. Cost of operations as a percentage of revenues declined 2.5% to 79.3% from 81.8% in 1996. The percentage decrease was primarily due to operating leverage as a result of increased volumes. SG&A. SG&A expenses increased approximately $800,000, or 37.4%, to $2.9 million in 1997 from $2.1 million in 1996. The increase was principally due to our acquisition of the predecessors from BFI on December 31, 1997, and increased wages and contributions to 32 35 the Murrey Companies' 401(k) plan. As a percentage of revenues, SG&A decreased 0.2% to 8.4% from 8.6% in 1996 as a result of operating leverage with the increased revenues. Depreciation and Amortization. Depreciation and amortization expense increased approximately $489,000, or 39.6%, to $1.7 million in 1997 from $1.2 million in 1996. The increase resulted from our acquisition of the predecessors from BFI on December 31, 1997, and the purchase of additional collection equipment and containers. Depreciation and amortization expense remained constant as a percentage of revenues at 4.9%. Interest Expense. Interest expense increased approximately $1.1 million, or 398.2%, to $1.4 million in 1997 from approximately $284,000 in 1996. The increased interest expense was a result of higher debt levels resulting from our acquisition of the predecessors from BFI on December 31, 1997 and the purchase of additional property and equipment. LIQUIDITY AND CAPITAL RESOURCES The Company's business is capital intensive. The Company's capital requirements include acquisitions and fixed asset purchases. The Company expects that in the future it will also make capital expenditures for landfill cell construction, landfill development and landfill closure activities. The Company plans to meet its capital needs through various financing sources, including internally generated funds and debt and equity financing. As of December 31, 1998, the Company had a working capital deficit of $8.7 million, including cash and cash equivalents of $2.7 million. Approximately $8.5 million of the working capital deficit was a short-term note payable related to a business acquired in December 1998. In managing its working capital, the Company generally applies the cash generated from its operations that remains available after satisfying its working capital and capital expenditure requirements to reduce its indebtedness under its bank revolving credit facility and to minimize its cash balances. The Company finances its working capital requirements from internally generated funds and bank borrowings. At inception, the Company sold 2,300,000 shares of Common Stock at $0.01 per share to its founders and 2,499,998 shares of Series A Preferred Stock at $2.80 per share. In May and June 1998, the Company received approximately $24.0 million in net proceeds from the sale of 2,300,000 shares in its initial public offering (including exercise by the underwriters of that offering of their overallotment option). In February 1999, the Company received approximately $65.3 million in net proceeds from the sale of 3,999,307 shares in a secondary public offering (including exercise by the underwriters of their overallotment option). As of April 15, 1999, the Company had sold or issued a total of 17,425,483 shares of Common Stock at a weighted average value of $10.69 per share, and had outstanding options and warrants to purchase 2,315,399 shares of Common Stock at a weighted average exercise price of $8.51 per share. The Company has a $225.0 million revolving credit facility with a syndicate of banks for which BankBoston, N.A. acts as agent, which is secured by all assets of the Company, including the Company's interest in the equity securities of its subsidiaries. The credit facility matures in 2004 and bears interest at a rate per annum equal to, at the Company's discretion, either: (i) the BankBoston Base Rate plus applicable margin; or (ii) the Eurodollar Rate plus applicable margin. The credit facility requires the Company to maintain certain financial ratios and satisfy other predetermined requirements, such as minimum net worth, net income and limits on capital expenditures. It also requires the lenders' approval of acquisitions in certain circumstances. See "Risk Factors -- Potential 33 36 Inability to Finance the Company's Potential Growth." As of April 16, 1999, an aggregate of approximately $95,700,000 was outstanding under the Company's credit facility, and the interest rate on outstanding borrowings under the credit facility was approximately 7.0%. For the year ended December 31, 1998, net cash provided by operations was approximately $6.1 million, most of which was provided by operating results for the period, non-cash charges for stock compensation and one-time extraordinary non-cash charges for extinguishment of debt. This was offset by an approximately $3.3 million increase in working capital (net of acquisitions) in 1998. For the year ended December 31, 1998, net cash used by investing activities was $62.5 million. Of this, approximately $56.3 million was used to fund the cash portion of acquisitions, with approximately $6.2 million invested in management information systems, trucks and landfill construction activities. For the year ended December 31, 1998, net cash provided by financing activities was $58.3 million, which included net borrowings under the Company's debt arrangements and $24.0 million in proceeds from the sale of Common Stock in an initial public offering. The Company made approximately $6.2 million in capital expenditures in 1998. The Company expects to make capital expenditures in 1999 of approximately $6.0 million in connection with its existing business. The Company intends to fund its planned 1999 capital expenditures principally through existing cash, internally generated funds, and borrowings under its existing credit facility. In addition, the Company may make substantial additional capital expenditures in acquiring solid waste collection and disposal businesses. If the Company acquires additional landfill disposal facilities, the Company may also be required to make significant expenditures to bring any such newly acquired disposal facilities into compliance with applicable regulatory requirements, obtain permits for any such newly acquired disposal facilities or expand the available disposal capacity at any such newly acquired disposal facilities. The Company cannot currently determine the amount of these expenditures, because they will depend on the nature and extent of any acquired landfill disposal facilities, the condition of any facilities acquired and the permitted status of any acquired sites. The Company believes that the credit facility, and the funds expected to be generated from operations, will provide adequate cash to fund the Company's working capital and other cash needs for the foreseeable future. On January 19, 1999, the Company merged with the Murrey Companies. The transactions were accounted for as poolings-of-interest, whereby the Company issued 2,888,880 shares of Common Stock for all of the outstanding shares of the Murrey Companies. In connection with the mergers with the Murrey Companies, the Company incurred transaction related costs of approximately $6.2 million, which were charged to operations in the first quarter of 1999. Effective February 9, 1999, the Company sold approximately four million shares of Common Stock at $17.50 per share. As a result of the offering, the Company received approximately $65.3 million in net proceeds and paid down approximately $50.2 million of its outstanding debt. Effective March 1, 1999, the Company acquired the stock of two companies that are the sole partners of CRC and FBLP for total consideration of approximately $66.9 million in cash. 34 37 Goodwill represents the excess of the purchase price over the fair value of the net assets of the acquired entity and is amortized on a straight line basis over the period of expected benefit of 40 years. Accumulated amortization amounted to $64,000 and $1.4 million as of December 31, 1997 and 1998, respectively. Within the purchase price of an acquired company, the Company first assigns value to the tangible assets, followed by intangible assets, including covenants not to compete and certain contracts and customer lists that are determinable both in terms of size and life. Value of the other intangible assets is determined by considering, among other things, the present value of the cash flows associated with those assets. The Company continually evaluates the value and future benefits of its intangible assets. The Company assesses the recoverability from future operations using income from operations of the related acquired businesses as a measure. Under this approach, the carrying value would be reduced if it becomes probable that the Company's best estimate for expected future cash flows of the related business over the remaining amortization period would be less than the carrying amount of the intangible assets. As of December 31, 1998, there have been no adjustments to the carrying amounts of intangibles resulting from these evaluations. As of December 31, 1998, the Company's goodwill represented approximately 63.7% of its total assets and 155.7% of stockholder's equity. The Company derives a substantial portion of its revenues from exclusive municipal contracts and franchise agreements. Its single largest contract, with the City of Vancouver, accounted for approximately 18.1% of the Company's revenues during the period from inception (September 9, 1997) through December 31, 1997, and 8.7% during the year ended December 31, 1998. There are approximately nine years remaining under that contract. No other single contract or customer accounted for more than 7.1% of the Company's revenues during the period from inception (September 9, 1997) through December 31, 1997, or more than 5.0% during the year ended December 31, 1998. INFLATION To date, inflation has not significant affected the Company's operations. Consistent with industry practice, many of the Company's contracts allow the Company to pass through certain costs to the customers, including increases in landfill tipping fees and, in some cases, fuel costs. Therefore, the Company believes that it should be able to increase prices to offset many cost increases that result from inflation. However, competitive pressures may require the Company to absorb at least part of these cost increases, particularly during periods of high inflation. SEASONALITY Based on historic trends experienced by the businesses the Company has acquired, the Company expects its operating results to vary seasonally, with revenues typically lowest in the first quarter, higher in the second and third quarters and lower in the fourth quarter than in the second and third quarters. See "Risk Factors -- Seasonality of Business." YEAR 2000 ISSUES The Company will need to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 ("Year 2000") and afterwards. The Company expects to complete those modifications and upgrades during 35 38 1999, at a total cost of approximately $100,000. The Company has spent part of its Year 2000 budget on replacing its billing systems in Maltby and Vancouver. Because the Company's operations rely primarily on mechanical systems such as trucks to collect solid waste, the Company does not expect its operations to be significantly affected by Year 2000 issues. The Company's customers may need to make Year 2000 modifications to software and hardware that they use to generate records, bills and payments relating to the Company. The Company does not rely on vendors on a routine basis except for providers of disposal services. The Company brings waste to a site and is normally billed based on tonnage received. The Company believes that if its disposal vendors encounter Year 2000 problems, they will convert to manual billing based on scale recordings until they resolve those issues. In assessing the Company's exposure to Year 2000 issues, management believes its biggest challenges lie in the following areas: Year 2000 issues at the Company's banks, large (typically municipal) customers, and acquired businesses between the time the Company acquires them and the time the Company implements its own systems. The Company is obtaining Year 2000 compliance certifications from its vendors, banks and customers. If the Company and its vendors, banks and customers do not complete the required Year 2000 modifications on time, the Year 2000 issue could materially affect the Company's operations. The Company believes, however, that in the most reasonably likely worst case, the effects of Year 2000 issues on its operations would be brief and small relative to the Company's overall operations. The Company has not made a contingency plan to minimize operational problems if the Company and its vendors, banks and customers do not timely complete all required Year 2000 modifications. 36 39 BUSINESS INTRODUCTION Waste Connections is a regional, integrated solid waste services company that provides solid waste collection, transfer, disposal and recycling services in secondary markets of the Western U.S. As of April 15, 1999, the Company served more than 330,000 commercial, industrial and residential customers in California, Idaho, Kansas, Minnesota, Nebraska, Oklahoma, Oregon, South Dakota, Utah, Washington and Wyoming. The Company currently owns and operates 33 collection operations, 11 transfer stations and three Subtitle D landfills and operates an additional seven transfer stations, two Subtitle D landfills and nine recycling facilities. Waste Connections was founded in September 1997 to execute an acquisition-based growth strategy in secondary markets of the Western U.S. The Company has acquired 64 solid waste services related businesses since its formation and has identified more than 300 independent operators of such businesses in the states where it currently operates, many of which it believes may be suitable for acquisition by the Company. In addition, the Company is currently assessing potential acquisitions of solid waste services operations in Colorado, Montana and Texas. The Company has targeted secondary markets in the Western U.S. because it believes that: (i) a large number of independent solid waste services companies suitable for acquisition by the Company are located in these markets; (ii) there is less competition in these markets from large, well-capitalized solid waste services companies; and (iii) these markets have strong projected economic and population growth rates. In addition, the Company's senior management team has extensive experience acquiring and operating solid waste services businesses in the Western U.S. INDUSTRY OVERVIEW According to Waste Age, an industry trade publication, the U.S. solid waste services industry generated estimated revenues of $36.9 billion in 1997. The solid waste services industry has been significantly consolidated and integrated since 1990. The Company believes that, particularly in the Western U.S., this consolidation and integration have been caused primarily by: (i) stringent environmental regulation and enforcement, resulting in increased capital requirements for collection companies and landfill operators; (ii) the evolution of an industry competitive model that emphasizes integrating collection and disposal capabilities; (iii) the ability of larger integrated operators to achieve certain economies of scale; and (iv) the existence of a regulatory framework that allows the acquisition of exclusive, long-term waste collection rights through franchise agreements, municipal contracts and governmental certificates. Increased Regulatory Impact. Stringent industry regulations, such as the Subtitle D regulations, have caused operating and capital costs to rise and have accelerated consolidation and acquisition activities in the solid waste collection and disposal industry. Many smaller industry participants have found these costs difficult to bear and have decided to either close their operations or sell them to larger operators. In addition, Subtitle D requires more stringent engineering of solid waste landfills, including liners, leachate collection and monitoring and gas collection and monitoring. These ongoing costs are combined with increased financial reserve requirements for solid waste landfill operators 37 40 relating to closure and post-closure monitoring. As a result, the number of solid waste landfills is declining while the size of solid waste landfills is increasing. Integrating Collection and Disposal Operations. Competitive pressures are forcing operators to become more efficient by establishing an integrated network of solid waste collection operations and transfer stations, through which they secure solid waste streams for disposal. Operators have adopted a variety of disposal strategies, including owning landfills, establishing strategic relationships to secure access to landfills and otherwise capturing significant waste stream volumes, to gain leverage in negotiating lower landfill fees and securing long-term, most-favored-pricing contracts with high capacity landfills. Economies of Scale. Larger, integrated operators achieve economies of scale by vertically integrating their operations. These integrated companies have made more acquisitions and expanded the breadth of services and density in their market areas. Control of the waste stream in these market areas, combined with access to significant financial resources to make acquisitions, has allowed larger solid waste collection and disposal companies to be more cost-effective and competitive. Despite the considerable consolidation and integration that has occurred in the solid waste industry since 1990, the industry remains primarily regional in nature and highly fragmented. Based on published industry sources, approximately 27% of the total revenues of the U.S. solid waste industry is accounted for by more than 5,000 private, predominantly small, collection and disposal businesses, approximately 41% by publicly traded solid waste companies and approximately 32% by municipal governments that provide collection and disposal services. The Company expects the current consolidation trends in the solid waste industry to continue, because many independent landfill and collection operators lack the capital resources, management skills and technical expertise necessary to comply with stringent environmental and other governmental regulations and to compete with larger, more efficient integrated operators. The Company believes that the fragmented nature of the industry offers significant consolidation and growth opportunities for companies with disciplined acquisition programs, decentralized operating strategies and access to financial resources. Regulatory Framework. In the Western U.S., waste collection services are provided largely under three types of contractual arrangements: certificates or permits, franchise agreements and municipal contracts. Certificates or permits, such as G certificates awarded to waste collection service providers in unincorporated areas and electing municipalities of Washington by the Washington Utilities and Transportation Commission, typically grant the certificate holder the right, which is generally perpetual and exclusive, to provide specific residential, commercial and industrial waste services in a specified area. See "G Certificates" below. Franchise agreements typically provide an exclusive service period of five to ten years or longer and specify the service territory, a broad range of services to be provided, and rates for the services. They also often give the service provider a right of first refusal to extend the term of the agreement. Municipal contracts typically provide a shorter service period and a more limited scope of services than franchise agreements and generally require competitive bidding at the end of the contract term. Unless customers within the areas covered by certain permits or certificates (including G certificates), franchise agreements and municipal contracts elect not to receive any waste collection services, they are required to pay collection fees to the company providing such services in their area. 38 41 The Company operates five landfills, of which it owns three, and may acquire or operate others in the future. The Company believes, however, that in those secondary markets of the Western U.S. where waste collection services are provided under exclusive certificates, franchises or contracts, or where waste disposal is municipally funded or available from multiple sources, controlling the waste stream by providing collection services under exclusive arrangements is often more important to a waste services company's growth and profitability than owning or operating landfills. Several other characteristics of secondary markets in the Western U.S. limit the economic attractiveness of owning or operating landfills in those markets. For example, certain state and local regulations in the Western U.S. restrict the amount of waste that may be accepted from specific geographic areas. In addition, the relatively expansive geographic area of many western states increases the cost of interstate and long haul disposal, which heightens the effects of state and local regulations limiting the type and origin of waste that may be accepted at a landfill and makes it more difficult for a landfill to achieve the disposal volume necessary to operate profitably, given its capital and operating costs. The Company believes that significant opportunities exist for a well-capitalized company operating in secondary markets of the Western U.S., and that the highly fragmented nature of this industry should allow the Company to consolidate existing solid waste services businesses in this region. STRATEGY The Company's objective is to build a leading integrated solid waste services company in secondary markets of the Western U.S. The Company's strategy for achieving this objective is to: (i) acquire collection, transfer, disposal and recycling operations in new markets and through "tuck-in" acquisitions in existing markets; (ii) secure additional franchises, municipal contracts and governmental certificates; (iii) generate internal growth in existing markets by increasing market penetration and adding services to its existing operations; and (iv) enhance profitability by increasing operating efficiencies of existing and acquired operations. The Company's ability to implement this strategy is enhanced by the experience of the members of its senior management team and their knowledge of and reputation in the solid waste services industry in the Company's targeted markets. The Company intends to implement its strategy as follows: EXPANSION THROUGH ACQUISITIONS The Company intends to expand significantly the scope of its operations by: (i) acquiring solid waste collection, transfer, disposal and recycling operations in new markets; and (ii) acquiring solid waste collection, transfer, disposal and recycling operations in existing and adjacent markets through "tuck-in" acquisitions. The Company intends to follow a regional expansion strategy by entering new markets through acquisitions. An initial acquisition in a new market is used as an operating base for the Company in that area. The Company then seeks to strengthen the acquired operation's presence in that market by providing additional services, adding new customers and making tuck-in acquisitions. The Company can then broaden its regional presence by adding additional operations in markets adjacent to the new location. The Company is currently examining opportunities to expand its presence in the Western U.S. in states other than those where it currently operates and is assessing potential acquisitions of solid waste services operations in Colorado, Montana and Texas. 39 42 The Company believes that numerous "tuck-in" acquisition opportunities exist within its current and targeted market areas. For example, the Company has identified more than 300 independent entities that provide collection and disposal services in the states where it currently operates. The Company believes that throughout the Western U.S., many independent entities are suitable for acquisition by the Company and would provide the Company opportunities to increase market share and route density. FRANCHISE AGREEMENTS, MUNICIPAL CONTRACTS AND GOVERNMENTAL CERTIFICATES The Company intends to devote significant resources to securing additional franchise agreements and municipal contracts through competitive bidding and additional governmental certificates through the acquisition of other companies. In bidding for franchises and municipal contracts and evaluating the acquisition of companies holding governmental certificates, the Company's management team draws on its experience in the waste industry and its knowledge of local service areas in existing and target markets. The Company's district managers manage relationships with local governmental officials within their respective service areas, and sales representatives may be assigned to cover specific municipalities. These personnel focus on maintaining, renewing and renegotiating existing franchise agreements and municipal contracts and on securing additional agreements, contracts and governmental certificates. INTERNAL GROWTH To generate continued internal growth, the Company will focus on increasing market penetration in its current and adjacent markets, soliciting new commercial, industrial, and residential customers in markets where such customers may elect whether or not to receive waste collection services, marketing upgraded or additional services (such as compaction or automated collection) to existing customers and, where appropriate, raising prices. Where possible, the Company intends to leverage its franchise-based platforms to expand its customer base beyond its exclusive market territories. As customers are added in existing markets, the Company's revenue per routed truck increases, which generally increases the Company's collection efficiencies and profitability. In markets in which it has exclusive contracts, franchises and certificates, the Company expects internal growth to at least track population and business growth. The Company expects to use transfer stations as an important part of its internal growth strategy, by extending the direct-haul reach of the Company and linking disparate collection operations with Company-owned, operated or contracted disposal capacity. The Company currently owns and/or operates 18 transfer stations. By operating transfer stations, the Company also engages in direct communications with municipalities and private operators that deliver waste to its transfer stations. This better positions the Company to gain additional business in its markets if any municipality privatizes its solid waste operations or rebids existing contracts, and it increases the Company's opportunities to acquire private collection operations. OPERATING ENHANCEMENTS The Company has developed company-wide operating standards, which are tailored for each of its markets based on industry standards and local conditions. Using these standards, the Company tracks collection and disposal routing efficiency and equipment utilization. It also implements cost controls and employee training and safety procedures, 40 43 and establishes a sales and marketing plan for each market. The Company has installed a wide area network, implemented advanced management information systems and financial controls, and consolidated accounting, insurance and employee benefit functions, customer service, productivity reporting and dispatching systems. The Company believes that by establishing operating standards, closely monitoring performance and streamlining certain administrative functions, it can improve the profitability of existing operations. To improve an acquired business' operational productivity, administrative efficiency and profitability, the Company applies the same operating standards, information systems and financial controls to acquired businesses as the Company's existing operations employ. Moreover, if the Company is able to internalize the waste stream of acquired operations, it can further increase operating efficiencies and improve capital utilization. Where not restricted by exclusive agreements, contracts, permits or certificates, the Company also solicits new commercial, industrial and residential customers in areas within and surrounding the markets served by acquired collection operations, to further improve operating efficiencies and increase the volume of solid waste collected by the acquired operations. ACQUISITION PROGRAM The Company currently operates in California, Idaho, Kansas, Minnesota, Nebraska, Oklahoma, Oregon, South Dakota, Utah, Washington and Wyoming and believes that these and other markets in the Western U.S. with similar characteristics offer significant opportunities for achieving its objective. The Company focuses on markets that are generally characterized by: (i) a geographically dispersed population, which the Company believes deters competition from larger, established waste management companies; (ii) a potential revenue base of at least $15 million; (iii) the opportunity for the Company to acquire a significant market share; (iv) the availability of adequate disposal capacity, either through acquisition by the Company or through agreements with third parties; (v) a favorable regulatory environment; or (vi) strong projected economic or population growth rates. The Company believes that these market characteristics provide significant growth opportunities for a well-capitalized market entrant and create economic and operational barriers to entry by new competitors. The Company believes that its experienced management, decentralized operating strategy, financial strength and size make it an attractive buyer to certain solid waste collection and disposal acquisition candidates. The Company has developed a set of financial, geographic and management criteria to help management evaluate acquisition candidates. These criteria evaluate a variety of factors, including, but not limited to: (i) the candidate's historical and projected financial performance; (ii) the candidate's internal rate of return, return on assets and return on revenue; (iii) the experience and reputation of the candidate's management and customer service providers, their relationships with local communities and their willingness to continue as employees of the Company; (iv) the composition and size of the candidate's customer base and whether the customer base is served under franchise agreements, municipal contracts, governmental certificates or other exclusive arrangements; (v) whether the geographic location of the candidate will enhance or expand the Company's market area or ability to attract other acquisition candidates; (vi) whether the acquisition will increase the Company's market share or help protect the Company's existing customer base; (vii) any potential synergies that may be gained by 41 44 combining the candidate with the Company's existing operations; and (viii) the liabilities of the candidate. Before completing an acquisition, the Company performs extensive environmental, operational, engineering, legal, human resources and financial due diligence. All acquisitions must be evaluated and approved by the Company's management. Ronald J. Mittelstaedt is authorized to approve acquisitions with consideration of up to $1.0 million; the Executive Committee of the Board of Directors must approve all other acquisitions. The Company seeks to integrate each acquired business promptly and to minimize disruption to the ongoing operations of both the Company and the acquired business, and generally attempts to retain the senior management of acquired businesses. The Company believes its senior management team has a proven track record in integrating acquisitions. The following table sets forth the Company's acquisitions completed from its inception in September 1997 through April 15, 1999:
ACQUIRED BUSINESS MONTH ACQUIRED PRINCIPAL BUSINESS LOCATION MARKET AREA ----------------- -------------- ------------------ -------- ----------- R&S Cleanup April 1999 Collection Seward, NE Eastern Nebraska Columbia Resource Co., L.P. March 1999 Collection and Vancouver, WA and Southwestern Washington and Finley-Buttes Limited Landfill Heppner, OR and Northern Oregon Partnership OZ Dispos-All March 1999 Collection Eagle, NE Eastern Nebraska Jack Fleming Sanitary Service March 1999 Collection Portland, OR Northwestern Oregon Kansas Industrial Services, March 1999 Collection Arkansas City, KS Southern Kansas Inc. Williams Trash Service March 1999 Collection Douglas, KS Southern Kansas Ritters Sanitary Service, Inc. March 1999 Collection Marshall, MN Southwestern Minnesota Wahoo Sanitation, Inc. and March 1999 Collection Wahoo, NE Eastern Nebraska Saunders County Disposal, Inc. Sandy's Disposal Service and March 1999 Collection Eugene, OR Western Oregon Extra Mile Disposal Columbus Sanitation Service March 1999 Collection Columbus, NE Eastern Nebraska Waste Away, LLC March 1999 Collection Hooper, UT Central Utah Mrsny Sanitary Service, Inc. March 1999 Collection Wayne, NE Eastern Nebraska CRX, Inc., Dolpheide Sanitary February 1999 Collection and Fremont, NE Eastern Nebraska Service, Inc. and Better Landfill Disposal Service, Inc. Brecke Sanitation January 1999 Collection Wagner, SD Western South Dakota Murrey Companies January 1999 Collection Fife, WA Western Washington Roche & Sons, Inc. January 1999 Collection Layton, UT Central Utah Butler County Landfill, Inc. January 1999 Landfill David City, NE Eastern Nebraska and Kobus Construction, Inc. City Sanitation, Inc. December 1998 Collection Layton, UT Central Utah Amador Disposal Service, Inc. December 1998 Collection Ione, CA North Central California and Mother Lode Sani-Hut, Inc. Heartland Waste Management, December 1998 Collection Arkansas City, KA Southern Kansas Inc. Columbia Sanitary Service, Inc. November 1998 Collection Portland, OR Northern Oregon and and Moreland Sanitary Services, Southwestern Washington Inc. B&G Sanitation November 1998 Collection Cottage Grove, OR Southwestern Oregon Veneta Garbage Service November 1998 Collection Veneta, OR Southwestern Oregon Siuslaw Disposal, Inc. November 1998 Collection Florence, OR Southwestern Oregon R&N, LLC October 1998 Collection Mountain Home, ID Southwestern Idaho Westlane Disposal September 1998 Collection Florence, OR Southwestern Oregon
42 45
ACQUIRED BUSINESS MONTH ACQUIRED PRINCIPAL BUSINESS LOCATION MARKET AREA ----------------- -------------- ------------------ -------- ----------- Harrell's Septic Service September 1998 Septic Services Crescent City, CA Northwestern California and Southwestern Oregon Evergreen Waste Systems Inc. September 1998 Collection Washougal, WA Southwestern Washington and Northwestern Oregon Wolff's Trashmasher and Haul It September 1998 Collection Stanton, NE Eastern Nebraska All Sanitary Service Country Garbage Services, Inc. September 1998 Collection Salt Lake City, UT Central Utah Youngclaus Enterprises September 1998 Collection Madera, CA North Central California Affiliated Waste LLC September 1998 Collection Norfolk, NE Eastern Nebraska J&J Sanitation, Inc. August 1998 Collection O'Neill, NE Eastern Nebraska Contractors Waste, Inc. August 1998 Collection Salt Lake City, UT Central Utah Big Red Roll Off Inc. August 1998 Collection O'Neill, NE Eastern Nebraska ABC Waste, Inc. August 1998 Collection Salt Lake City, UT Central Utah Miller Containers, Inc. July 1998 Collection Salt Lake City, UT Central Utah Shrader Refuse and Recycling July 1998 Collection Papillion, NE Eastern Nebraska Service Company Red Carpet Landfill, Inc. June 1998 Landfill Enid, OK Western Oklahoma B&B Sanitation, Inc. June 1998 Collection Enid, OK Western Oklahoma Darlin Equipment, Inc. June 1998 Equipment leasing Enid, OK Western Oklahoma Oregon Waste Technology June 1998 Collection Brookings, OR Southwestern Oregon Curry Transfer and Recycling, June 1998 Collection Brookings, OR Southwestern Oregon Inc. Contractors' Waste Removal, L.C June 1998 Collection Orem, UT Central Utah Arrow Sanitary Service, Inc. June 1998 Collection Portland, OR Northwestern Oregon and Southwestern Washington T&T Disposal, Inc. May 1998 Collection Gillette, WY Northeastern Wyoming Sunshine Sanitation, May 1998 Collection Spearfish, SD Western South Dakota Incorporated Sowers' Sanitation, Inc. May 1998 Collection Belle Fourche, SD Western South Dakota Jesse's Disposal April 1998 Collection Gillette, WY Northeastern Wyoming A-1 Disposal, Inc. April 1998 Collection Gillette, WY Northeastern Wyoming Hunter Enterprises, Inc. March 1998 Collection Shelley, ID Eastern Idaho Madera Disposal Services Inc. February 1998 Collection and Madera, CA North Central California Landfill Waste Connections of Idaho, January 1998 Collection Idaho Falls, ID Eastern Idaho Inc. Fibres International, Inc. September 1997 Collection Issaquah, WA North Central Washington and Central Oregon Browning-Ferris Industries of September 1997 Collection Clark County, WA Southwestern Washington Washington, Inc.
SERVICES COMMERCIAL, INDUSTRIAL AND RESIDENTIAL WASTE SERVICES The Company serves more than 330,000 commercial, industrial and residential customers. Of these, the Company serves more than 94,100 under G certificates that grant the Company rights, which are generally perpetual and exclusive, to provide services within specified areas, more than 28,900 under exclusive franchise agreements with remaining terms ranging from seven to 18 years, and more than 129,100 under exclusive municipal contracts with generally shorter contract terms. 43 46 The Company's commercial and industrial services that are not performed under G certificates, franchise agreements or municipal contracts are provided under one to five year service agreements. Fees under these agreements are determined by such factors as collection frequency, level of service, route density, the type, volume and weight of the waste collected, type of equipment and containers furnished, the distance to the disposal or processing facility, the cost of disposal or processing and prices charged in its markets for similar service. Collection of larger volumes associated with commercial and industrial waste streams generally helps improve the Company's operating efficiencies, and consolidation of these volumes allows the Company to negotiate more favorable disposal prices. The Company's commercial and industrial customers use portable containers for storage, enabling the Company to service many customers with fewer collection vehicles. Commercial and industrial collection vehicles normally require one operator. The Company provides one to eight cubic yard containers to commercial customers, 10 to 50 cubic yard containers to industrial customers, and 30 to 95 gallon carts to residential customers. For an additional fee, the Company installs stationary compactors that compact waste prior to collection on the premises of a substantial number of large volume customers. The Company's residential waste services that are not performed under G certificates, franchise agreements or municipal contracts are provided under contracts with homeowners' associations, apartment owners or mobile home park operators, or on a subscription basis with individual households. Residential contract fees are based primarily on route density, the frequency and level of service, the distance to the disposal or processing facility, the cost of disposal or processing and prices charged in that market for similar services. Collection fees are paid either by the municipalities from tax revenues or directly by the residents receiving the services. TRANSFER STATION SERVICES The Company has an active program to acquire, develop, own and operate transfer stations in markets proximate to its operations. Currently, the Company operates three transfer stations in California, four transfer stations in Nebraska, six transfer stations in Washington and five transfer stations in Oregon, which receive, compact, and transfer solid waste to be transported by larger vehicles to landfills. The Company believes that the transfer stations benefit the Company by: (i) concentrating the waste stream from a wider area, which increases the volume of disposal at Company-operated landfills and gives the Company greater leverage in negotiating for more favorable disposal rates at other landfills; (ii) improving utilization of collections personnel and equipment; and (iii) building relationships with municipalities and private operators that deliver waste, which can lead to additional growth opportunities. LANDFILLS The Company operates five Subtitle D landfills: the Fairmead Landfill, the Red Carpet Landfill, the Butler County Landfill, the Finley-Buttes Regional Landfill, and the Coalition Landfill. Of these the Company owns the Red Carpet Landfill, the Butler County Landfill and the Finley-Buttes Regional Landfill. The Company operates the Fairmead Landfill under an operating agreement with Madera County. As of March 31, 1999, the Fairmead Landfill consisted of 160 total acres, of which 77 acres were permitted for disposal. As of that date, the Fairmead Landfill had approximately 2.86 million tons of unused permitted capacity 44 47 remaining, with approximately 2.04 million additional tons of capacity in various stages of permitting, and was estimated to have a remaining life of 26 years. The Fairmead Landfill is currently permitted to accept up to 395 tons per day of municipal solid waste. As of March 31, 1999, the Red Carpet Landfill consisted of 82 total acres, all of which 40 acres were permitted for disposal. As of that date, the Red Carpet Landfill had approximately 525,000 tons of unused permitted capacity remaining, with approximately 1.75 million additional tons of capacity in various stages of permitting, and was estimated to have a remaining life of 15 years. The Red Carpet Landfill is currently permitted to accept up to 350 tons per day of municipal solid waste. As of March 31, 1999, the Butler County Landfill consisted of 282 total acres, of which 84 were permitted for disposal. As of that date, the Butler County Landfill had approximately 2.32 million tons of unused permitted capacity remaining, with approximately 1.60 million additional tons of capacity in various stages of permitting, and was estimated to have a remaining life of 25 years. As of March 31, 1999, the Finley-Buttes Regional Landfill consisted of 1,800 total acres, of which 476 acres were permitted for disposal. As of that date, the Finley-Buttes Regional Landfill had approximately 65.99 million tons of unused permitted capacity remaining, with approximately 56.88 million additional tons of capacity in various stages of permitting, and was estimated to have a remaining life of 190 years. The Company operates the Coalition Landfill under an operating agreement with the Northeast Nebraska Solid Waste Coalition. As of March 31, 1999, the Coalition Landfill consisted of 160 total acres, had approximately 3.68 million tons of unused permitted capacity remaining, and was estimated to have a remaining life of 46 years. The Company monitors the available permitted in-place disposal capacity of its landfills on an ongoing basis and evaluates whether to seek to expand this capacity. In making this evaluation, the Company considers various factors, including the volume of waste projected to be disposed of at the landfill, the size of the unpermitted acreage included in the landfill, the likelihood that the Company will be successful in obtaining the necessary approvals and permits required for the expansion and the costs that would be involved in developing the additional capacity. The Company also regularly considers whether it is advisable, in light of changing market conditions and/or regulatory requirements, to seek to expand or change the permitted waste streams or to seek other permit modifications. The Company seeks to identify solid waste landfill acquisition candidates to achieve vertical integration in markets where the economic and regulatory environment makes such acquisitions attractive. The Company believes that in some markets, acquiring landfills would provide opportunities to vertically integrate its collection, transfer and disposal operations while improving operating margins. The Company evaluates landfill candidates by determining, among other things, the amount of waste that could be diverted to the landfill in question, whether access to the landfill is economically feasible from the Company's existing market areas either directly or through transfer stations, the expected life of the landfill, the potential for expanding the landfill, and current disposal costs compared to the cost of acquiring the landfill. Where the acquisition of a landfill is not attractive, the Company pursues long term disposal contracts with facilities located in proximity to its markets. 45 48 RECYCLING AND OTHER SERVICES The Company offers municipal, commercial, industrial and residential customers recycling services for a variety of recyclable materials, including cardboard, office paper, plastic containers, glass bottles and ferrous and aluminum metals. The Company operates nine recycling processing facilities and sells other collected recyclable materials to third parties for processing before resale. The profits from the Company's resale of recycled materials are often shared between the Company and the other parties to its recycling contracts. For example, certain of the Company's municipal recycling contracts in Washington and Idaho, which were negotiated before the Company acquired those businesses, specify certain benchmark resale prices for recycled commodities. To the extent the prices the Company actually receives for the processed recycled commodities collected under the contract exceed the prices specified in the contract, the Company shares the excess with the municipality, after recovering any previous shortfalls resulting from actual market prices falling below the prices specified in the contract. In an effort to reduce its exposure to commodity price risk with respect to recycled materials, the Company has adopted a pricing strategy of charging collection and processing fees for recycling volume collected from third parties. The Company believes that recycling will continue to be an important component of local and state solid waste management plans, due to the public's increasing environmental awareness and expanding regulations that mandate or encourage recycling. The Company also provides other waste management services, most of which are project-based, including transporting and disposing of non-hazardous contaminated soils and similar materials, transporting special waste products, including asbestos, and arranging for the transportation of construction and demolition waste and disposal of soil and special waste products and providing portable toilet and septic pumping services. OPERATIONS The Company is managed on a decentralized basis. This places decision-making authority close to the customer, enabling the Company to identify customers' needs quickly and to address those needs in a cost-effective manner. The Company believes that decentralization provides a low-overhead, highly efficient operational structure that allows the Company to expand into geographically contiguous markets and operate in relatively small communities that larger competitors may not find attractive. The Company believes that this structure gives the Company a strategic competitive advantage, given the relatively rural nature of much of the Western U.S., and makes the Company an attractive buyer to many potential acquisition candidates. The Company currently delivers its services from 33 operating locations serving 12 market areas, or districts. Each district has a district manager, who has autonomous service and decision-making authority for that district and is responsible for maintaining service quality, promoting safety in the district's operations, implementing marketing programs, and overseeing day-to-day operations, including contract administration. District managers also help identify acquisition candidates. Once the Company begins an acquisition, business development managers, under the supervision of district and executive managers, obtain the permits and other governmental approvals required for the Company to operate the acquired business, including those related to zoning, environmental and land use. The Company's financial management, accounting, management information systems, environmental compliance, risk management and certain personnel functions are 46 49 centralized and shared among locations to improve productivity, lower operating costs and stimulate internal growth. The Company has installed a Company-wide management information system that assists district personnel in making decisions based on centralized, real-time financial, productivity, maintenance and customer information. While district management operates with a high degree of autonomy, the Company's senior officers monitor district operations and require adherence to the Company's accounting, purchasing, marketing and internal control policies, particularly with respect to financial matters. The Company's executive officers regularly review the performance of district managers and operations. G CERTIFICATES The Company performs a substantial portion of its collection business in Washington under G certificates awarded by the Washington Utilities and Transportation Commission (the "WUTC"). G certificates apply only to unincorporated areas of Washington and municipalities that have elected to have their solid waste collection overseen by the WUTC. G certificates generally grant the holder the perpetual right to provide specified solid waste collection and transportation services in a specified territory. The WUTC has repeatedly determined that, in enacting the statute authorizing G certificates, the Washington Legislature intended to favor grants of exclusive, rather than overlapping, service rights for conventional solid waste services. Accordingly, most G certificates currently grant exclusive solid waste collection and transportation rights for conventional solid waste services in their specified territories. The WUTC and the Washington Legislature have generally construed G certificates as conferring vested property rights that may be defeated, diminished or cancelled only upon the occurrence of specified events of default, the demonstrated lack of fitness of the certificate holder, or municipalities' annexation of territory covered by a certificate. Thus, a certificate holder is entitled to due process in challenging any action that affects its rights. In addition, legislation passed in 1997 requires a municipality that annexes territory covered by a G certificate either to grant the certificate holder an exclusive franchise, generally with a minimum term of seven years, to continue to provide services in the affected area, or to negotiate with the certificate holder some other compensation for the collection rights in the affected area. The statute expressly permits the certificate holder to sue the annexing municipality for measurable damages that exceed the value of a seven-year franchise agreement to provide services in the affected area. Under one of the contracts with a municipality in Washington acquired by a predecessor of the Company, the predecessor purported to waive its rights to compensation or damages under the statute in return for the right to service any current or prospectively annexed areas formerly covered by its G certificate. In addition to awarding G certificates, the WUTC is required by statute to establish just, reasonable and compensatory rates to customers of regulated solid waste collection companies. The WUTC is charged with balancing the needs of service providers to earn fair and sufficient returns on their investments in plant and equipment against the needs of commercial and residential customers to receive adequate and reasonably priced services. Over the past decade, the WUTC has used a ratemaking methodology known as the "Lurito-Gallagher" method. This method calculates rates based on the income statements and balance sheets of each service provider, with the goal of establishing rates that reflect the costs of providing service and that motivate service providers to invest in equipment 47 50 that improves operating efficiency in a cost-effective manner. The Lurito-Gallagher rate-setting methodology was adjusted in the early 1990's to better reflect the costs of providing recycling services, by accounting for providers' increasing use of automated equipment and adjusting for the cyclicality of the secondary recyclables markets. This has often resulted in more frequent rate adjustments in response to material cost shifts. SALES AND MARKETING In most of the Company's existing markets, waste collection, transfer and disposal services are provided to municipalities and governmental authorities under exclusive franchise agreements, municipal contracts and G certificates; service providers do not contract directly with individual customers. In addition, because the Company has grown to date primarily through acquisitions, the Company has generally assumed existing franchise agreements, municipal contracts and G certificates from the acquired companies, rather than obtaining new contracts. For these reasons, the Company's sales and marketing efforts to date have been narrowly focused. The Company expects to add sales and marketing personnel as necessary to: (i) solicit new customers in markets where it is not the exclusive provider of solid waste services; (ii) expand its presence into areas adjacent to or contiguous with its existing markets; and (iii) market additional services to existing customers. COMPETITION The solid waste services industry is highly competitive and fragmented and requires substantial labor and capital resources. The industry presently includes four large national waste companies: Allied Waste Industries, Inc., (which has announced a proposed purchase of Browning-Ferris Industries, Inc.), Browning-Ferris Industries, Inc., Republic Services Inc., and Waste Management, Inc. Several other public companies have annual revenues in excess of $100 million, including Casella Waste Systems, Inc., Superior Services, Inc. and Waste Industries, Inc. Certain of the markets in which the Company competes or will likely compete are served by one or more large, national solid waste companies, as well as by numerous regional and local solid waste companies of varying sizes and resources, some of which have accumulated substantial goodwill in their markets. The Company also competes with operators of alternative disposal facilities, including incinerators, and with counties, municipalities, and solid waste districts that maintain their own waste collection and disposal operations. Public sector operations may have financial advantages over the Company, because of their access to user fees and similar charges, tax revenues and tax-exempt financing. The Company competes for collection, transfer and disposal volume based primarily on the price and quality of its services. From time to time, competitors may reduce the price of their services in an effort to expand their market shares or service areas or to win competitively bid municipal contracts. These practices may cause the Company to reduce the price of its services or, if it elects not to do so, to lose business. The Company provides a substantial portion of its residential, commercial and industrial collection services under exclusive franchise and municipal contracts and certificates, some of which are subject to periodic competitive bidding. The Company provides the balance of its services under subscription agreements with individual households and one to five year service contracts with commercial and industrial customers. 48 51 Intense competition exists not only for collection, transfer and disposal volume, but also for acquisition candidates. The Company generally competes for acquisition candidates with publicly owned regional and large national waste management companies. REGULATION INTRODUCTION The Company's landfill operations and non-landfill operations, including waste transportation, transfer stations, vehicle maintenance shops and fueling facilities, are all subject to extensive and evolving federal, state and local environmental laws and regulations, the enforcement of which has become increasingly stringent in recent years. The environmental regulations affecting the Company are administered by the EPA and other federal, state and local environmental, zoning, health and safety agencies. The WUTC regulates the portion of the Company's collection business in Washington performed under G certificates, which generally grant the Company perpetual and exclusive collection rights in certain areas. The Company is currently in substantial compliance with applicable federal, state and local environmental laws, permits, orders and regulations. The Company does not currently anticipate any material environmental costs necessary to bring its operations into compliance (although there can be no assurance in this regard). The Company anticipates that regulation, legislation and regulatory enforcement actions related to the solid waste services industry will continue to increase. The Company attempts to anticipate future regulatory requirements and to plan in advance as necessary to comply with them. The principal federal, state and local statutes and regulations that apply to the Company's operations are described below. All of the federal statutes described below contain provisions that authorize, under certain circumstances, lawsuits by private citizens to enforce the provisions of the statutes. In addition to a penalty award by the United States, some of those statutes authorize an award of attorneys' fees to parties that successfully bring such an action. Enforcement actions under these statutes may include both civil and criminal penalties, as well as injunctive relief in some instances. THE RESOURCE CONSERVATION AND RECOVERY ACT OF 1976 ("RCRA") RCRA regulates the generation, treatment, storage, handling, transportation and disposal of solid waste and requires states to develop programs to ensure the safe disposal of solid waste. RCRA divides solid waste into two groups, hazardous and nonhazardous. Wastes are generally classified as hazardous if they either (i) are specifically included on a list of hazardous wastes, or (ii) exhibit certain characteristics defined as hazardous. Household wastes are specifically designated as nonhazardous. Wastes classified as hazardous under RCRA are subject to much stricter regulation than wastes classified as nonhazardous, and businesses that deal with hazardous waste are subject to regulatory obligations in addition to those imposed on handlers of nonhazardous waste. The EPA regulations issued under Subtitle C of RCRA impose a comprehensive "cradle to grave" system for tracking the generation, transportation, treatment, storage and disposal of hazardous wastes. The Subtitle C Regulations impose obligations on generators, transporters and disposers of hazardous wastes, and require permits that are costly to obtain and maintain for sites where such material is treated, stored or disposed. Subtitle C requirements include detailed operating, inspection, training and emergency preparedness 49 52 and response standards, as well as requirements for manifesting, record keeping and reporting, corrective action, facility closure, post-closure and financial responsibility. Most states have promulgated regulations modeled on some or all of the Subtitle C provisions issued by the EPA. Some state regulations impose different, additional and more stringent obligations, and may regulate certain materials as hazardous wastes that are not so regulated under the federal Subtitle C Regulations. From the date of inception through April 19, 1999, the Company did not, to its knowledge, transport hazardous wastes under circumstances that would subject the Company to hazardous waste regulations under RCRA. Some of the Company's ancillary operations (e.g., vehicle maintenance operations) may generate hazardous wastes. The Company manages these wastes in substantial compliance with applicable laws. In October 1991, the EPA adopted the Subtitle D Regulations governing solid waste landfills. The Subtitle D Regulations, which generally became effective in October 1993, include location restrictions, facility design standards, operating criteria, closure and post-closure requirements, financial assurance requirements, groundwater monitoring requirements, groundwater remediation standards and corrective action requirements. In addition, the Subtitle D Regulations require that new landfill sites meet more stringent liner design criteria (typically, composite soil and synthetic liners or two or more synthetic liners) intended to keep leachate out of groundwater and have extensive collection systems to carry away leachate for treatment prior to disposal. Groundwater monitoring wells must also be installed at virtually all landfills to monitor groundwater quality and, indirectly, the effectiveness of the leachate collection system. The Subtitle D Regulations also require, where certain regulatory thresholds are exceeded, that facility owners or operators control emissions of methane gas generated at landfills in a manner intended to protect human health and the environment. Each state is required to revise its landfill regulations to meet these requirements or such requirements will be automatically imposed by the EPA on landfill owners and operators in that state. Each state is also required to adopt and implement a permit program or other appropriate system to ensure that landfills in the state comply with the Subtitle D Regulations. Various states in which the Company operates or in which it may operate in the future have adopted regulations or programs as stringent as, or more stringent than, the Subtitle D Regulations. RCRA also regulates underground storage of petroleum and other regulated materials. RCRA requires registration, compliance with technical standards for tanks, release detection and reporting, and corrective action, among other things. Certain of the Company's facilities and operations are subject to these requirements. THE FEDERAL WATER POLLUTION CONTROL ACT OF 1972, AS AMENDED (THE "CLEAN WATER ACT") The Clean Water Act regulates the discharge of pollutants from a variety of sources, including solid waste disposal sites and transfer stations, into waters of the United States. If run-off from the Company's transfer stations or run-off or collected leachate from the Company's owned or operated landfills is discharged into streams, rivers or other surface waters, the Clean Water Act would require the Company to apply for and obtain a discharge permit, conduct sampling and monitoring and, under certain circumstances, reduce the quantity of pollutants in such discharge. Also, virtually all landfills are required to comply with the EPA's storm water regulations issued in November 1990, which are designed to prevent contaminated landfill storm water runoff from flowing into surface 50 53 waters. The Company believes that its facilities comply in all material respects with the Clean Water Act requirements. Various states in which the Company operates or in which it may operate in the future have been delegated authority to implement the Clean Water Act permitting requirements, and some of these states have adopted regulations that are more stringent than the federal requirements. For example, states often require permits for discharges to ground water as well as surface water. THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION, AND LIABILITY ACT OF 1980 ("CERCLA") CERCLA established a regulatory and remedial program intended to provide for the investigation and cleanup of facilities where or from which a release of any hazardous substance into the environment has occurred or is threatened. CERCLA's primary mechanism for remedying such problems is to impose strict joint and several liability for cleanup of facilities on current owners and operators of the site, former owners and operators of the site at the time of the disposal of the hazardous substances, any person who arranges for the transportation, disposal or treatment of the hazardous substances, and the transporters who select the disposal and treatment facilities. CERCLA also imposes liability for the cost of evaluating and remedying any damage to natural resources. The costs of CERCLA investigation and cleanup can be very substantial. Liability under CERCLA does not depend on the existence or disposal of "hazardous waste" as defined by RCRA; it can also be based on the existence of even very small amounts of the more than 700 "hazardous substances" listed by the EPA, many of which can be found in household waste. In addition, the definition of "hazardous substances" in CERCLA incorporates substances designated as hazardous or toxic under the federal Clean Water Act, Clear Air Act and Toxic Substances Control Act. If the Company were found to be a responsible party for a CERCLA cleanup, the enforcing agency could hold the Company, or any other generator, transporter or the owner or operator of the contaminated facility, responsible for all investigative and remedial costs, even if others were also liable. CERCLA also authorizes the imposition of a lien in favor of the United States on all real property subject to, or affected by, a remedial action for all costs for which a party is liable. CERCLA gives a responsible party the right to bring a contribution action against other responsible parties for their allocable shares of investigative and remedial costs. The Company's ability to obtain reimbursement from others for their allocable shares of such costs would be limited by its ability to find other responsible parties and prove the extent of their responsibility and by the financial resources of such other parties. Various state laws also impose liability for investigation, cleanup and other damages associated with hazardous substance releases. THE CLEAN AIR ACT The Clean Air Act generally, through state implementation of federal requirements, regulates emissions of air pollutants from certain landfills based on factors such as the date of the landfill construction and volume per year of emissions of regulated pollutants. Larger landfills and landfills located in areas where the ambient air does not meet certain requirements of the Clean Air Act may be subject to even more extensive air pollution controls and emission limitations. In addition, the EPA has issued standards regulating the disposal of asbestos-containing materials. Air permits to construct may be required for gas collection and flaring systems, and operating permits may be required, depending on the potential air emissions. State air regulatory programs may implement the federal 51 54 requirements but may impose additional restrictions. For example, some state air programs uniquely regulate odor and the emission of toxic air pollutants. THE OCCUPATIONAL SAFETY AND HEALTH ACT OF 1970 (THE "OSH ACT") The OSH Act is administered by the Occupational Safety and Health Administration ("OSHA"), and in many states by state agencies whose programs have been approved by OSHA. The OSH Act establishes employer responsibilities for worker health and safety, including the obligation to maintain a workplace free of recognized hazards likely to cause death or serious injury, to comply with adopted worker protection standards, to maintain certain records, to provide workers with required disclosures and to implement certain health and safety training programs. Various OSHA standards may apply to the Company's operations, including standards concerning notices of hazards, safety in excavation and demolition work, the handling of asbestos and asbestos-containing materials, and worker training and emergency response programs. FLOW CONTROL/INTERSTATE WASTE RESTRICTIONS Certain permits and approvals, as well as certain state and local regulations, may limit a landfill or transfer station to accepting waste that originates from specified geographic areas, restrict the importation of out-of-state waste or wastes originating outside the local jurisdiction or otherwise discriminate against non-local waste. These restrictions, generally known as flow control restrictions, are controversial, and some courts have held that some flow control schemes violate constitutional limits on state or local regulation of interstate commerce. From time to time, federal legislation is proposed that would allow some local flow control restrictions. Although no such federal legislation has been enacted to date, if such federal legislation should be enacted in the future, states in which the Company operates landfills could limit or prohibit the importation of out-of-state waste or direct that wastes be handled at specified facilities. Such state actions could adversely affect the Company's landfills. These restrictions could also result in higher disposal costs for the Company's collection operations. If the Company were unable to pass such higher costs through to its customers, its business, financial condition and operating results could be adversely affected. Certain state and local jurisdictions may also seek to enforce flow control restrictions through local legislation or contractually. In certain cases, the Company may elect not to challenge such restrictions. These restrictions could reduce the volume of waste going to landfills in certain areas, which may adversely affect the Company's ability to operate its landfills at their full capacity and/or reduce the prices that the Company can charge for landfill disposal services. These restrictions may also result in higher disposal costs for the Company's collection operations. If the Company were unable to pass such higher costs through to its customers, its business, financial condition and operating results could be adversely affected. STATE AND LOCAL REGULATION Each state in which the Company now operates or may operate in the future has laws and regulations governing the generation, storage, treatment, handling, transportation and disposal of solid waste, occupational safety and health, water and air pollution and, in most cases, the siting, design, operation, maintenance, closure and post-closure maintenance of landfills and transfer stations. State and local permits and approval for these operations 52 55 may be required and may be subject to periodic renewal, modification or revocation by the issuing agencies. In addition, many states have adopted statutes comparable to, and in some cases more stringent than, CERCLA. These statutes impose requirements for investigation and cleanup of contaminated sites and liability for costs and damages associated with such sites, and some provide for the imposition of liens on property owned by responsible parties. Furthermore, many municipalities also have ordinances, local laws and regulations affecting the Company's operations. These include zoning and health measures that limit solid waste management activities to specified sites or activities, flow control provisions that direct or restrict the delivery of solid wastes to specific facilities, laws that grant the right to establish franchises for collection services and then put such franchises out for bid, and bans or other restrictions on the movement of solid wastes into a municipality. Permits or other land use approvals with respect to a landfill, as well as state or local laws and regulations, may specify the quantity of waste that may be accepted at the landfill during a given time period, and/or specify the types of waste that may be accepted at the landfill. Once an operating permit for a landfill is obtained, it must generally be renewed periodically. There has been an increasing trend at the state and local level to mandate and encourage waste reduction at the source and waste recycling, and to prohibit or restrict the disposal of certain types of solid wastes, such as yard wastes, leaves and tires, in landfills. The enactment of regulations reducing the volume and types of wastes available for transport to and disposal in landfills could prevent the Company from operating its facilities at their full capacity. Some state and local authorities enforce certain federal laws in addition to state and local laws and regulations. For example, in some states, RCRA, the OSH Act, parts of the Clean Air Act and parts of the Clean Water Act are enforced by local or state authorities instead of by the EPA, and in some states those laws are enforced jointly by state or local and federal authorities. PUBLIC UTILITY REGULATION In many states, public authorities regulate the rates that landfill operators may charge. The rates that the Company may charge at the Fairmead Landfill for the disposal of municipal solid waste are regulated by the Madera County Board of Supervisors. The adoption of rate regulation or the reduction of current rates in states in which the Company owns or operates landfills could adversely affect the Company's business, financial condition and operating results. Solid waste collection services in all unincorporated areas of Washington and in electing municipalities in Washington are provided under G certificates awarded by the Washington Utilities and Transportation Commission. The WUTC also sets rates for regulated solid waste collection services in Washington. RISK MANAGEMENT, INSURANCE AND PERFORMANCE BONDS The Company maintains an environmental and other risk management programs appropriate for its business. The Company's environmental risk management program includes evaluating existing facilities and potential acquisitions for environmental law compliance. The Company does not presently expect environmental compliance costs to 53 56 increase above current levels, but it cannot predict whether future acquisitions will cause such costs to increase. The Company also maintains a worker safety program that encourages safe practices in the workplace. Operating practices at all Company operations emphasize minimizing the possibility of environmental contamination and litigation. The Company's facilities comply in all material respects with applicable federal and state regulations. The Company carries a broad range of insurance, which its management considers adequate to protect the Company's assets and operations. The coverage includes general liability, comprehensive property damage, workers' compensation and other coverage customary in the industry. These policies generally exclude coverage for damages associated with environmental conditions. Because of the limited availability and high cost of environmental impairment liability insurance, and in light of the Company's limited landfill operations, the Company has not obtained such coverage. If the Company were to incur liability for environmental cleanups, corrective action or damage, its financial condition could be materially and adversely affected. The Company will continue to investigate the possibility of obtaining environmental impairment liability insurance, particularly if it acquires or operates additional landfills. The Company believes that most other landfill operators do not carry such insurance. Municipal solid waste collection contracts may require performance bonds or other means of financial assurance to secure contractual performance. Certain environmental regulations also require demonstrated financial assurance to meet closure and post-closure requirements for landfills. The Company has not experienced difficulty in obtaining performance bonds or letters of credit for its current operations. At April 15, 1999, the Company had provided customers and various regulatory authorities with surety bonds and letters of credit in the aggregate amount of approximately $4.7 million to secure its obligations. The Company's credit facility provides for the issuance of letters of credit in an amount up to $20 million, but any letters of credit issued reduce the availability of borrowings for acquisitions and other general corporate purposes. If the Company were unable to obtain surety bonds or letters of credit in sufficient amounts or at acceptable rates, it could be precluded from entering into additional municipal solid waste collection contracts or obtaining or retaining landfill operating permits. PROPERTY AND EQUIPMENT As of April 15, 1999, the Company owned and operated 33 collection operations, 11 transfer stations and three Subtitle D landfills and operated an additional seven transfer stations, two Subtitle D landfills and nine recycling facilities. The Company leases various offices and facilities, including its corporate offices in Roseville, California. The real estate owned by the Company is not subject to material encumbrances. The Company owns various equipment, including waste collection and transportation vehicles, related support vehicles, carts, containers, and heavy equipment used in landfill operations. The Company believes that its existing facilities and equipment are generally adequate for its current operations. However, the Company expects to make additional investments in property and equipment for expansion and replacement of assets and in connection with future acquisitions. 54 57 EMPLOYEES At April 15, 1999, the Company employed approximately 965 full-time employees, including approximately 65 persons classified as professionals or managers, approximately 775 employees involved in collection, transfer, disposal and recycling operations, and approximately 125 sales, clerical, data processing or other administrative employees. Approximately 67 drivers and mechanics at the Company's Vancouver, Washington operation are represented by the Teamsters Union, with which Browning-Ferris Industries of Washington, Inc., the Company's predecessor in Vancouver, entered a four-year collective bargaining agreement in January 1997. Approximately 11 drivers at Arrow are currently represented by the Teamsters Union, with which Arrow entered a three-year collective bargaining agreement in March 1998. Approximately 46 drivers at Murrey's Disposal Company and American Disposal Company are represented by the Teamsters Union, with which those companies entered into a three-year collective bargaining agreement in June 1996. The Company is not aware of any other organizational efforts among its employees and believes that its relations with its employees are good. LEGAL PROCEEDINGS The Company is a party to various legal proceedings in the ordinary course of business and as a result of the extensive governmental regulation of the solid waste industry. Management does not believe that these proceedings, either individually or in the aggregate, are likely to have a material adverse effect on the Company's business, financial condition, operating results or cash flows. 55 58 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information concerning the Company's executive officers and directors as of April 15, 1999:
NAME AGE POSITIONS ---- --- --------- Ronald J. President, Chief Executive Officer and Mittelstaedt(1)(2)......... 35 Chairman Steven F. Bouck.............. 42 Executive Vice President and Chief Financial Officer Eugene V. Dupreau............ 51 Vice President -- Madera; Director Charles B. Youngclaus........ 58 Vice President -- Madera; Advisory Director Darrell W. Chambliss......... 34 Vice President -- Operations; Secretary Michael R. Foos.............. 33 Vice President and Corporate Controller Eric J. Moser................ 32 Treasurer and Assistant Corporate Controller David M. Hall................ 41 Vice President -- Business Development Irmgard R. Wilcox............ 56 Vice President -- Finance -- Northern Washington; Director Michael W. Harlan(1)(2)(3)... 37 Director William J. Razzouk(1)(2)(3)........... 51 Director
- ------------------------- (1) Member of the Executive Committee. (2) Member of the Audit Committee. (3) Member of the Compensation Committee. Ronald J. Mittelstaedt has been President, Chief Executive Officer and a director of the Company since it was formed, and was elected Chairman in January 1998. He also served as a consultant to the Company in August and September 1997. Mr. Mittelstaedt has more than ten years of experience in the solid waste industry. He served as a consultant to United Waste Systems, Inc., with the title of Executive Vice President, from January 1997 to August 1997, where he was responsible for corporate development for all states west of Colorado. As Regional Vice President of USA Waste Services, Inc. (including Sanifill, Inc., which was acquired by USA Waste Services, Inc.) from November 1993 to January 1997, he was responsible for all operations in 16 states and Canada. Mr. Mittelstaedt held various positions at Browning-Ferris Industries, Inc. from August 1987 to November 1993, most recently as Division Vice President in northern California, overseeing the San Jose market. Previously he was the District Manager responsible for BFI's operations in Sacramento and the surrounding areas. He holds a B.S. in Finance from the University of California at Santa Barbara. Steven F. Bouck has been Executive Vice President and Chief Financial Officer of the Company since February 1998. Mr. Bouck held various positions with First Analysis Corporation from 1986 to 1998, including most recently as Managing Director coordinating corporate finance. In that capacity, he provided merger and acquisition advisory services to companies in the environmental industry. Mr. Bouck was also responsible for assisting in investing venture capital funds focussed on the environmental industry that were managed by First Analysis. In connection with those investments, he served on the boards of directors of several companies. While at First Analysis, Mr. Bouck also provided analytical 56 59 research coverage of a number of publicly traded environmental services companies. Mr. Bouck holds B.S. and M.S. degrees in mechanical engineering from Rensselaer Polytechnic Institute and an M.B.A. in Finance from the Wharton School. He has been a Chartered Financial Analyst since 1990. Eugene V. Dupreau has been Vice President -- Madera and a director of the Company since February 23, 1998. Mr. Dupreau served as President and a director of Madera Disposal Systems, Inc. beginning in 1981 and 1985, respectively, and held both positions until the Company acquired Madera in 1998. Mr. Dupreau holds a B.S. in Business Administration from Fresno State University and has completed advanced coursework in waste management. He serves as a director of several civic and charitable organizations in Madera County. Charles B. Youngclaus has been Vice President -- Madera and an advisory director of the Company since February 23, 1998. Mr. Youngclaus founded Madera Disposal Systems, Inc. in 1981 and was its Chief Operating Officer and Vice President before its acquisition by the Company in 1998. Mr. Youngclaus owned and operated Madera's predecessor company, Madera County Disposal, from 1965 to 1981. Mr. Youngclaus holds a B.S. from Fresno State University and has completed advanced coursework in waste management, including certification in clay liner construction by the University of Texas in 1992. Mr. Youngclaus is a Board Member of the California Refuse Removal Council and is incoming Treasurer of the Northern California chapter. Darrell W. Chambliss has been Vice President -- Operations and Secretary of the Company since October 1, 1997. Mr. Chambliss held various management positions at USA Waste Services, Inc. (including Sanifill, Inc. and United Waste, Inc., both of which were acquired by USA Waste Services, Inc.) from April 1995 to September 1997, including most recently Division Manager in Corning, California, where he was responsible for the operations of 19 operating companies as well as supervising and integrating acquisitions. From July 1989 to April 1995, he held various management positions with Browning-Ferris Industries, Inc., including serving as Assistant District Manager in San Jose, California, where he was responsible for a significant hauling operation, and serving as District Manager in Tucson, Arizona for more than three years. Mr. Chambliss holds a B.S. in Business Administration from the University of Arkansas. Michael R. Foos has been Vice President and Corporate Controller of the Company since October 1, 1997. Mr. Foos served as Division Controller of USA Waste Services, Inc. (including Sanifill, Inc., which was acquired by USA Waste Services, Inc.) from October 1996 to September 1997, where he was responsible for financial compilation and reporting and acquisition due diligence for a seven-state region. Mr. Foos served as Assistant Regional Controller at USA Waste Services, Inc. from August 1995 to September 1996, where he was responsible for internal financial reporting for operations in six states and Canada. Mr. Foos also served as District Controller for Waste Management, Inc. from February 1990 to July 1995, and was a member of the audit staff of Deloitte & Touche from 1987 to 1990. Mr. Foos holds a B.S. in Accounting from Ferris State University. David M. Hall has been Vice President -- Business Development since August 1, 1998. Mr. Hall has over twelve years experience in the solid waste industry with extensive operating and marketing experience in the Western U.S. From October, 1995 to July, 1998, Mr. Hall was the Divisional Vice President of USA Waste Services, Inc., Rocky Mountain Division (including for Sanifill, Inc. which was acquired by USA Waste 57 60 Services, Inc.). In that position, he oversaw all operations and business development in six Rocky Mountain states. Prior to Sanifill, Mr. Hall held various management positions with BFI from October, 1986 to October, 1995, including Vice President of Sales for the Western United States. Prior to the solid waste industry, Mr. Hall was employed from 1979 to 1986 in a variety of sales and marketing management positions in the high technology sector. Mr. Hall received a BS degree in Management and Marketing in 1979 from SW Missouri State University. Eric J. Moser has been the Company's Treasurer and Assistant Corporate Controller since October 1, 1997. From August 1995 to September 1997, Mr. Moser held various finance positions at USA Waste Services, Inc. (including Sanifill, Inc., which was acquired by USA Waste Services, Inc.), most recently as Controller of the Ohio Division, where he was responsible for internal financial compilation and reporting and acquisition due diligence. Previously Mr. Moser was Controller of the Michigan Division of USA Waste Services, Inc., where he was responsible for internal financial reporting. Mr. Moser served as Controller for Waste Management, Inc. from June 1993 to August 1995, where he was responsible for internal financial reporting for a hauling company, landfill and transfer station. Mr. Moser holds a B.S. in Accounting from Illinois State University. Irmgard R. Wilcox has been Vice President -- Finance -- Northern Washington of the Company since January 19, 1999, and a director of the Company since February 1999. Ms. Wilcox served as Chief Financial Officer, Secretary and Treasurer of the Murrey Companies from 1982 until they merged with the Company in 1999. Ms. Wilcox joined the Murrey Companies in 1975. She holds a B.A. in Business Administration from Pacific Lutheran University with a concentration in accounting. Michael W. Harlan has been a director of the Company since January 30, 1998. He is Senior Vice President, Chief Financial Officer and a director of U.S. Concrete, Inc., a company focused on acquiring businesses in the ready-mix concrete industry. From November 1997 to January 30, 1998, Mr. Harlan served as a consultant to the Company on various financial matters. From March 1997 to August 1998, Mr. Harlan was Vice President and Chief Financial Officer of Apple Orthodontix, Inc., a publicly traded company that provides practice management services to orthodontic practices in the U.S. and Canada. From April 1991 to December 1996, Mr. Harlan held various positions in the finance and acquisition departments of USA Waste Services, Inc. (including Sanifill, Inc., which was acquired by USA Waste Services, Inc.), including serving as Treasurer and Assistant Secretary beginning in September 1993. From May 1982 to April 1991, Mr. Harlan held various positions in the tax and corporate financial consulting services division of Arthur Andersen LLP, where he was a Manager since July 1986. Mr. Harlan is a Certified Public Accountant and holds a B.A. from the University of Mississippi. William J. Razzouk has been a director of the Company since January 30, 1998. Since September 1998, Mr. Razzouk has been Chairman and Chief Executive Officer of PlanetRx, an e-commerce start-up focused on healthcare and sales of prescription and over-the-counter medicines, health and beauty products and medical supplies. From April 1998 until September 1998, Mr. Razzouk owned a management consulting business and an investment company that focused on identifying strategic acquisitions. From September 1997 until April 1998, he was also the President, Chief Operating Officer and a director of Storage USA, Inc., a publicly traded real estate investment trust that owns and operates more than 350 mini storage warehouses. He served as the President and Chief Operating 58 61 Officer of America Online from February 1996 to June 1996. From 1983 to 1996, Mr. Razzouk held various management positions at Federal Express Corporation, most recently as Executive Vice President, World Wide Customer Operations, with full worldwide profit and loss responsibility. Mr. Razzouk previously held management positions at ROLM Corporation, Philips Electronics and Xerox Corporation. He is a member of the Board of Directors of Fritz Companies, Inc. and previously was a director of Sanifill, Inc., Cordis Corp. and La Quinta Motor Inns. He holds a Bachelor of Journalism degree from the University of Georgia. CLASSIFICATION OF BOARD OF DIRECTORS The Board of Directors is divided into three classes. The term of office of the first class (currently comprised of Eugene V. Dupreau) will expire at the annual meeting of stockholders following the fiscal year ending December 31, 1998. The term of office of the second class (currently comprised of Michael W. Harlan and William J. Razzouk) will expire at the annual meeting of stockholders following the fiscal year ending December 31, 1999. The term of office of the third class (currently comprised of Ronald J. Mittelstaedt and Irmgard R. Wilcox) will expire at the annual meeting of stockholders following the fiscal year ending December 31, 2000. At each annual meeting, stockholders will elect successors to the directors of the class whose term expires at such meeting, to serve for three-year terms and until their successors are elected and qualified. See "Description of Capital Stock -- Certain Charter and By-Law Provisions -- Classified Board of Directors." COMMITTEES OF THE BOARD The Board of Directors has established an Executive Committee and has authorized an Audit Committee and a Compensation Committee. A majority of the members of the Executive Committee are, and both members of each of the Audit and Compensation Committees are, independent directors who are not employees of the Company or one of its subsidiaries. COMPENSATION OF DIRECTORS Directors who are officers or employees of the Company do not currently receive any compensation for attending meetings of the Board of Directors. Each independent director receives a fee of $1,500 for attending each Board meeting and each committee meeting (unless held on the same day as the full Board meeting), in addition to reimbursement of reasonable expenses. Each independent director who has not been an employee of the Company at any time during the 12 months preceding his initial election and appointment to the Board is granted an option to purchase 15,000 shares of the Company's Common Stock at the time of his or her initial election or appointment. The Company has granted to each of Messrs. Harlan and Razzouk options to purchase 15,000 shares of Common Stock at $3.00 per share, exercisable on October 1, 1998. The Company grants each independent director, on February 1 of each year during which such person serves on the Board, an option to purchase 7,500 shares of the Company's Common Stock. All such options have an exercise price equal to the fair market value of the Common Stock on the grant date, vest in full on the grant date, and expire upon the earlier to occur of ten years after the grant date or one year after the director ceases to be 59 62 a member of the Board. Effective February 1, 1999, the Company granted to each of Messrs. Harlan and Razzouk immediately exercisable options to purchase 7,500 shares of Common Stock at $17.9375 per share. EXECUTIVE COMPENSATION SUMMARY COMPENSATION INFORMATION The Company was incorporated in September 1997. The following table contains information about the annual and long-term compensation earned in 1997 and 1998 by the Chief Executive Officer and the other Executive Officers who were paid or earned more than $100,000. The persons named in the table are sometimes referred to herein as the "named executive officers." No officer other than Mr. Mittelstaedt was paid or earned more than $100,000 in 1997. The Chief Executive Officer has been compensated in accordance with the terms of his Employment Agreement described below. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION SHARES ANNUAL COMPENSATION -------------------- UNDERLYING -------------------------- RESTRICTED OPTIONS/WARRANTS ALL OTHER TERM SALARY(1) BONUS(1) OTHER STOCK GRANTED(2) COMPENSATION(3) ---- --------- -------- ------- ---------- ---------------- --------------- Ronald J. Mittelstaedt....... 1997 $ 39,903 $ 25,000 -- -- 200,000 $10,000 Ronald J. Mittelstaedt....... 1998 176,577 100,000 $10,254 -- -- -- Steven F. Bouck...... 1998 92,887 115,008 -- -- 250,000 -- Darrell W. Chambliss.......... 1998 89,972 89,322 -- -- -- -- Michael R. Foos...... 1998 89,809 71,788 -- -- -- -- Eric J. Moser........ 1998 74,115 45,563 -- -- -- --
- ------------------------- (1) Mr. Mittelstaedt's salary and bonus figures for 1997 reflect employment from October 1, 1997 through December 31, 1997. His bonus figure for 1997 reflects portion earned during 1997; such bonus was paid in 1998. (2) See "Option and Warrant Grants" below. (3) Consists of consulting fees for services rendered prior to the Company's formation. STOCK OPTIONS AND WARRANTS Option and Warrant Grants. The following table contains information concerning the grant during 1998 to the named executive officers of options and warrants to purchase shares of the Company's Common Stock. No options or warrants were granted to Messrs. Mittelstaedt, Chambliss, Foos or Moser in 1998. 1998 OPTION GRANTS
POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF ANNUAL RATES OF SHARES % OF TOTAL STOCK PRICE UNDERLYING OPTIONS AND APPRECIATION FOR OPTIONS WARRANT OPTION/WARRANT AND GRANTED TO TERM(3) NAME OF WARRANT EMPLOYEES IN EXERCISE PRICE EXPIRATION ----------------------- BENEFICIAL OWNER GRANTED(1) 1998 PER SHARE(2) DATE 5% 10% ---------------- ---------- ------------ -------------- ------------- ---------- ---------- Steven F. Bouck...... 150,000 29.4 $ 2.80 Jan. 31, 2008 $3,873,956 $6,134,140 - -- 50,000 9.8 $ 9.50 Jan. 31, 2008 $ 956,319 $1,709,713 - -- 50,000 9.8 $12.50 Jan. 31, 2008 $ 806,319 $1,559,713
- ------------------------- (1) All options vested 33% on October 1, 1998 and will vest an additional 33% on October 1, 1999 and 34% on October 1, 2000. 60 63 (2) The options and warrant were granted at or above fair market value as determined by the Board of Directors on the date of grant. (3) Amounts reported in these columns represent amounts that the named executive officer could realize on exercise of options and warrant immediately before they expire, assuming that the Company's Common Stock appreciates at 5% or 10% annually. These amounts do not take into account taxes and expenses that may be payable on such exercise. The amount actually realized will depend on the price of the Common Stock when the options or warrants are exercised, which may be before the term expires. The Commission requires the table to reflect 5% and 10% annualized rates of stock price appreciation; the Company does not project those rates. The Common Stock may not appreciate at those rates. Option and Warrant Values. The following table shows the value of the named executive officers' exercises of options during 1998 and the value of their unexercised options and warrants outstanding as of December 31, 1998. AGGREGATED OPTION EXERCISES IN 1998 AND YEAR-END OPTION AND WARRANT VALUES
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AND IN-THE-MONEY OPTIONS AND WARRANT AT WARRANT AT SHARES DECEMBER 31, 1998 DECEMBER 31, 1998(1) ACQUIRED VALUE ---------------------------- ---------------------------- ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- -------- ----------- ------------- ----------- ------------- Ronald J. Mittelstaedt......... -- -- 133,000 67,000 $2,071,475 $1,043,525 Steven F. Bouck........ 92,919 $861,311 23,749 133,332 160,711 1,529,985 Darrell W. Chambliss... -- -- 50,000 100,000 650,422 1,300,828 Michael R. Foos........ -- -- 50,000 100,000 650,422 1,300,828 Eric J. Moser.......... -- -- 28,334 56,666 351,466 702,909
- ------------------------- (1) Based on the Common Stock's closing price of $18.375 on the Nasdaq National Market on December 31, 1998. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with Steven F. Bouck, Eugene V. Dupreau, Charles B. Youngclaus, Darrell W. Chambliss, Michael R. Foos, Eric J. Moser and David M. Hall. Each agreement has a three-year term. The Company entered into an employment agreement with Ronald J. Mittelstaedt, the President and the Chief Executive Officer, on October 1, 1997. The initial annual base salary is $170,000. Mr. Mittelstaedt's base salary was adjusted to $200,000 on October 1, 1998. Mr. Mittelstaedt is also entitled to a performance bonus of up to 100% of his annual base salary. The agreement has an initial five-year term, and then automatically renews for additional successive one-year terms unless terminated earlier upon written notice of either Mr. Mittelstaedt or the Company or extended further by the Board. The Company or Mr. Mittelstaedt may terminate the agreement with or without cause at any time. If the Company terminates the agreement without cause (as defined in the agreement) or if Mr. Mittelstaedt terminates the agreement for good reason (as defined in the agreement), the Company is required to make certain severance payments, and all of Mr. Mittelstaedt's unvested options, warrants and rights relating to capital stock of the Company will immediately vest. A change of control of the Company (as defined in the agreement) is generally treated as a termination of Mr. Mittelstaedt without cause. 61 64 Under the employment agreement, the Company sold Mr. Mittelstaedt 617,500 shares of the Company's Common Stock for $0.01 per share and 357,143 shares of the Company's Series A Preferred Stock for $1,000,000. Mr. Mittelstaedt may recommend nominees for election to the Company's Board of Directors. If the Board has five or fewer members, Mr. Mittelstaedt may recommend two nominees, and if it consists of more than five members, he may recommend three nominees. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The full Board of Directors served as the compensation committee of the Board during 1997. When the employment agreement with Mr. Mittelstaedt was approved by the Board of Directors, Mr. Mittelstaedt was one of three members of the Board of Directors. The Compensation Committee was appointed in 1998, and Mr. Mittelstaedt served on that committee for the remainder of the year. He is no longer a member of the Compensation Committee. No executive officer of the Company served as a director or member of the compensation committee of another entity, one of whose executive officers served as a director or member of the Compensation Committee of the Company. 1997 STOCK OPTION PLAN The 1997 Stock Option Plan (the "Stock Option Plan") was adopted by the Board of Directors effective as of October 1, 1997, and was approved by the stockholders on March 12, 1998, and amended on January 19, 1999. The Stock Option Plan is intended to provide employees, consultants and directors with additional incentives by increasing their proprietary interests in the Company. Under the Stock Option Plan, the Company may grant options with respect to a maximum of 12% of the shares of Waste Connections Common Stock outstanding at any given time. As of April 15, 1999, the Company had outstanding options to purchase 1,420,447 shares of Common Stock at a weighted average exercise price of $10.99 per share. The Compensation Committee of the Board of Directors currently administers the Stock Option Plan. The administrator of the Stock Option Plan determines the employees, consultants and directors to whom options are granted (the "Optionees"), the type, size and term of the options, the grant date, the expiration date, the vesting schedule and other terms and conditions of the options. The Stock Option Plan provides for the grant of incentive stock options ("ISOs") as defined in section 422 of the Internal Revenue Code, as amended, and nonqualified stock options. Only employees of the Company may receive ISOs. The aggregate fair market value, as of the grant date, of the Common Stock subject to ISOs that become exercisable by any employee during any calendar year may not exceed $100,000. Options generally become exercisable in installments pursuant to a vesting schedule set forth in the option agreement. No option may be granted after September 30, 2007. No option will remain exercisable later than 10 years after the grant date (or five years in the case of ISOs granted to Optionees owning more than 10% of the total combined voting power of all classes of the Company's outstanding capital stock (a "Ten Percent Stockholder")). The exercise price of ISOs granted under the Stock Option Plan must be at least the fair market value of a share of Common Stock on the grant date (or 110% of such fair market value, in the case of ISOs granted to Ten Percent Stockholders). 62 65 If an Optionee with outstanding options retires or becomes disabled and does not die within the three months after retirement or disability, the Optionee may exercise his or her options, but generally only within the period ending on the earlier of: (i) six months after retirement or disability; or (ii) the expiration of the option set forth in the option agreement. If the Optionee does not exercise his or her options within that time period, the options terminate, and the shares of Common Stock subject to the options become available for issuance under the Stock Option Plan. If the Optionee ceases to be an employee, consultant or director of the Company other than because of retirement, death or disability, his or her options generally terminate on the date such relationship terminates, and the shares of Common Stock subject to the options become available for issuance under the Stock Option Plan. Each option agreement may give the Company the right to repurchase shares acquired by an Optionee under the Stock Option Plan upon termination of the Optionee. 63 66 CERTAIN TRANSACTIONS INITIAL FUNDING In September and October 1997, the Company sold 2,300,000 shares of Common Stock at $0.01 per share and 2,499,998 shares of Series A Preferred Stock at $2.80 per share to 19 accredited investors, including certain officers and directors of the Company, in a private placement. The sales were made in accordance with Regulation D under the Securities Act of 1933, as amended (the "Securities Act"). The investors included the following officers and directors of the Company, their immediate family members, and entities controlled by them: Mittelstaedt Family Trust dated 6/18/97 (trustee is Ronald J. Mittelstaedt, President, Chief Executive Officer and Chairman): 357,143 shares of Series A Preferred for $1,000,000 and 617,500 shares of Common Stock for $6,175; J. Bradford Bishop (former director; resigned January 30, 1998): 678,750 shares of Common Stock for $6,787.50; James N. Cutler, Jr. (former director; resigned January 30, 1998): 678,750 shares of Common Stock for $6,787.50; Bishop-Cutler L.L.C. (controlled by former directors J. Bradford Bishop and James N. Cutler, Jr.): 339,285 shares of Series A Preferred Stock for $950,000; Frank W. Cutler (brother of former director James N. Cutler, Jr.): 142,857 shares of Series A Preferred Stock for $400,000 and 275,000 shares of Common Stock for $2,750; Darrell W. Chambliss (Vice President -- Operations): 20,000 shares of Common Stock for $200; Michael R. Foos (Vice President and Corporate Controller): 20,000 shares of Common Stock for $200; Eric J. Moser (Treasurer and Assistant Corporate Controller): 10,000 shares of Common Stock for $100. OPTIONS AND WARRANTS TO MANAGEMENT GROUP On October 1, 1997, Darrell W. Chambliss, Michael R. Foos and Eric J. Moser were granted options to purchase 150,000, 150,000 and 85,000 shares, respectively, of Common Stock, pursuant to their respective employment agreements with the Company. On December 15, 1997, each of then directors James N. Cutler and J. Bradford Bishop and Board consultant Frank W. Cutler was granted a warrant to purchase 247,000 shares of Common Stock at an exercise price of $2.80 per share. Messrs. Cutler and Bishop resigned as directors on January 30, 1998, and Frank W. Cutler's consulting relationship with the Board terminated on that date. On December 15, 1997, Ronald J. Mittelstaedt was granted a warrant to purchase 100,000 shares of Common Stock at an exercise price of $2.80 per share and an option to purchase 100,000 shares of Common Stock at an exercise price of $2.80 per share. All of the above warrants and options are currently exercisable, except for the option to purchase 100,000 shares granted to Mr. Mittelstaedt, one-third of which becomes exercisable on each of October 1, 1998, October 1, 1999, and October 1, 2000. 64 67 On December 15, 1997, Michael W. Harlan was granted a warrant to purchase 5,000 shares of Common Stock at an exercise price of $2.80 per share, exercisable on October 1, 1998. On January 30, 1998, Mr. Harlan and William J. Razzouk were each granted an option to purchase 15,000 shares of Common Stock at an exercise price of $3.00 per share, exercisable on October 1, 1998. On February 1, 1998, Steven F. Bouck was granted options to purchase 200,000 shares of Common Stock, pursuant to his employment agreement with the Company. These options include an option to purchase 100,000 shares at an exercise price of $2.80 per share, of which one-third is exercisable on each of October 1, 1998, October 1, 1999, and October 1, 2000. Of Mr. Bouck's remaining options, an option to purchase 50,000 shares has an exercise price of $9.50 per share, and an option to purchase 50,000 shares has an exercise price of $12.50 per share; one-third of each of these options vests on each of October 1, 1998, October 1, 1999, and October 1, 2000. On February 1, 1998, Mr. Bouck was granted an immediately exercisable warrant to purchase 50,000 shares of Common Stock at an exercise price of $2.80 per share, which he exercised in March 1998. On February 23, 1998, Eugene V. Dupreau and Charles B. Youngclaus were granted warrants in connection with the Company's acquisition of Madera. See "Purchase of Madera Disposal Systems, Inc." below. On July 7, 1998, David M. Hall was granted options to purchase 50,000 shares of Common Stock at an exercise price of $18.125 per share, one third of which become exercisable on each of October 1, 1998, October 1, 1999, and October 1, 2000. On January 19, 1999, Eugene V. Dupreau, Charles B. Youngclaus and Irmgard R. Wilcox were granted options to purchase 10,000, 7,000 and 5,000 shares of Common Stock, respectively, at an exercise price of $17.9375 per share, one-third of which become exercisable on each of January 19, 2000, January 19, 2001 and January 19, 2002. On January 19, 1999, Ronald J. Mittelstaedt, Steven F. Bouck, Darrell W. Chambliss, Michael R. Foos, Eric J. Moser and David M. Hall were granted options to purchase 100,000, 50,000, 40,000, 40,000, 40,000 and 15,000 shares of Common Stock, respectively, at an exercise price of $17.9375 per share, one-third of which become exercisable on each of January 19, 2000, January 19, 2001, and January 19, 2002. PURCHASE OF WASTE CONNECTIONS OF IDAHO, INC. On January 30, 1998, the Company purchased all of the outstanding stock of Waste Connections of Idaho, Inc. ("Waste Connections Idaho") from Ronald J. Mittelstaedt, J. Bradford Bishop and James N. Cutler, Jr., the sole shareholders of Waste Connections Idaho. The purchase price was $3,000, which was the aggregate price that Messrs. Mittelstaedt, Bishop and Cutler had paid initially for the shares. Messrs. Mittelstaedt, Bishop and Cutler formed Waste Connections Idaho in September 1997 for the purpose of acquiring certain assets from Browning-Ferris Industries of Idaho, Inc. PURCHASE OF MADERA DISPOSAL SYSTEMS, INC. Eugene V. Dupreau was President and a 16.7% shareholder of Madera Disposal Systems, Inc. before it was acquired by the Company on February 23, 1998. Charles B. Youngclaus was Chief Operating Officer and a 16.7% shareholder of Madera before it was acquired by the Company. For their shares of Madera's common stock, each of Messrs. Dupreau and Youngclaus received $630,662 in cash, 333,333 shares of the Company's Common Stock 65 68 and warrants to purchase 66,667 shares of the Company's Common Stock at an exercise price of $4.00 per share. Each of Messrs. Dupreau and Youngclaus has been engaged by the Company as Vice President -- Madera. Mr. Dupreau was appointed a director of the Company, effective February 23, 1998. Pursuant to the agreement under which the Company acquired Madera, the Company will issue additional restricted shares of the Company's Common Stock to former Madera shareholders, including Messrs. Dupreau and Youngclaus, with respect to the successful extension of a franchise agreement that was being negotiated by Madera at the time of the Company's acquisition of Madera. PURCHASE OF YOUNGCLAUS ENTERPRISES. On September 9, 1998, the Company purchased the business assets of Youngclaus Enterprises, a proprietorship, from Charles B. Youngclaus. The aggregate purchase price was $139,000, which was paid through the issuance of Common Stock. TRANSACTIONS WITH FIBRES INTERNATIONAL. The Company has entered into certain transactions with Continental Paper, LLC, an Oregon limited liability company doing business as Fibres International ("Fibres"). J. Bradford Bishop and James N. Cutler, Jr. own 60% of the membership interests in Fibres, were directors of the Company when some of these transactions occurred and may be deemed promoters of the Company. In markets where Fibres has processing facilities (which include three of the Company's current markets), the Company delivers to Fibres' processing facilities all of the Company's collected recyclable materials for which Fibres pays the market rate (adjusted to reflect the Company's costs of transporting the materials to Fibres or another processor) otherwise obtainable by the Company for such materials. The Company received approximately $222,701 in gross revenues from Fibres from the Company's inception through December 31, 1997. After deducting the fees the Company paid to Fibres for the right to collect the recyclables, the Company retained approximately $10,860. The Company made net payments of $108,000 to Fibres in 1998. MERGERS WITH THE MURREY COMPANIES. Donald J. Hawkins was the President, Chief Executive Officer and a 5% shareholder of the Murrey Companies before the Company merged with them in January 1999. Irmgard R. Wilcox was the Chief Financial Officer, Treasurer, Secretary and a 5% shareholder of the Murrey Companies until the Company merged with them. For their shares of the Murrey Companies' common stock each of Mr. Hawkins and Ms. Wilcox received 144,442 shares of the Company's Common Stock. The Company engaged Mr. Hawkins as Vice President -- Operations -- Northern Washington division and Ms. Wilcox as Vice President -- Controller -- Northern Washington division, and each of Mr. Hawkins and Ms. Wilcox received a $2,000,000 signing bonus pursuant to their employment agreements with the Company. The Company appointed Ms. Wilcox to its Board of Directors in February 1999. 66 69 PRINCIPAL STOCKHOLDERS The following table shows the amount of the Company's Common Stock beneficially owned, as of April 15, 1999, by: (i) each person or entity that the Company knows owns more than 5% of the Company's Common Stock; (ii) the "named executive officers" identified in "Executive Compensation" and each director of the Company; and (iii) all current directors and executive officers of the Company as a group.
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENTAGE --------------------------- --------- ---------- Murrey Trust UTA August 5, 1993, as amended(2)(3)....... 1,949,997 11.2% Eugene P. Polk(2)(4).................................... 1,311,574 7.5 Ronald J. Mittelstaedt(2)(5)............................ 1,058,376 6.0 Eugene V. Dupreau(2)(6)................................. 407,148 2.3 Irmgard R. Wilcox(2).................................... 144,942 0.8 Steven F. Bouck(2)(7)................................... 116,668 0.7 Darrell W. Chambliss(2)(8).............................. 77,501 0.4 Michael R. Foos(2)(8)................................... 80,430 0.5 Eric J. Moser(2)(9)..................................... 58,452 0.3 Michael W. Harlan(2)(10)................................ 27,500 0.2 William J. Razzouk(2)(11)............................... 22,500 0.1 All executive officers and directors as a group (11 persons).............................................. 2,405,844 13.5
- --------------- (1) Beneficial ownership is determined in accordance with the rules of the Commission. In general, a person who has voting power and/or investment power with respect to securities is treated as the beneficial owner of those securities. Shares of Common Stock subject to options and/or warrants currently exercisable or exercisable within 60 days of the date of this Prospectus count as outstanding for computing the percentage beneficially owned by the person holding such options. Except as otherwise indicated by footnote, the Company believes that the persons named in this table have sole voting and investment power with respect to the shares of Common Stock shown. (2) The address of the Murrey Trust is c/o US Bank, 5530 Pacific Highway, Suite A, Fife, Washington 98424. The address of Messrs. Mittelstaedt, Bouck, Chambliss, Foos and Moser is 2260 Douglas Boulevard, Suite 280, Roseville, California 95661. The address of Eugene P. Polk is P.O. Box 1151, Prescott, Arizona 86302. The address of Frank W. Cutler is 711 North Bayfront, Newport Beach, California 92662. The address of Eugene V. Dupreau is Madera Disposal Systems, Inc., 21739 Road 19, Chowchilla, California 93610. The address of Michael W. Harlan is 2777 Allen Parkway, Suite 700, Houston, Texas 77019. The address of William J. Razzouk is 5915 River Oaks Road, Memphis, Tennessee 38120. The address of Irmgard R. Wilcox is 4622 70 Avenue East, Fife, Washington 98731. (3) The trustees of the Murrey Trust are Bonnie L. Murrey, Irmgard R. Wilcox and Donald Hawkins. Under the rules of the Commission, the trustees may also be deemed beneficial owners of the shares owned by the Murrey Trust. The shares listed exclude 144,942 and 144,442 shares of Common Stock owned individually by Irmgard R. Wilcox and Donald Hawkins, respectively. 67 70 (4) Includes 297,704 shares beneficially owned through three trusts for which Eugene Polk serves as a trustee (190,562 shares -- Eugene P. Polk and Barbara J. Polk Revocable Trust U/A 11/18/68; 53,571 shares -- Margaret T. Morris Trust U/A 5/1/67; and 53,571 shares -- Margaret T. Morris Trust U/A 4/19/69); and 170,714 shares held by the Polk Investment Partnership 93-1, for which Eugene Polk serves as a Manager; and 281,052 shares held by Kieckhefer Trust Partnership, for which Eugene Polk serves as Manager; and 562,104 shares held by Kieckhefer Partnership 84-1, for which Eugene Polk serves as Managing Partner. (5) Includes 100,000 shares purchasable under currently exercisable warrants and 33,333 shares purchasable under currently exercisable options. Also includes 567,900 shares held by the Mittelstaedt Family Trust dated 6/18/97, of which Mr. Mittelstaedt is the Trustee. (6) Includes 66,667 shares purchasable under immediately exercisable warrants and 5,000 shares purchasable under immediately exercisable options. (7) Includes 23,749 shares purchasable under currently exercisable options. (8) Includes 50,000 shares purchasable under currently exercisable options. (9) Includes 36,667 shares purchasable under currently exercisable options. (10) Includes 5,000 shares purchasable under immediately exercisable warrants and 22,500 shares purchasable under immediately exercisable options (11) Includes 22,500 shares purchasable under immediately exercisable options. 68 71 DESCRIPTION OF CAPITAL STOCK GENERAL The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, par value $0.01 per share, and 10,000,000 shares of Preferred Stock, par value $0.01 per share (the "Preferred Stock"). As of April 19, 1999, there were 17,425,483 shares of Common Stock outstanding and no shares of Preferred Stock outstanding. COMMON STOCK The holders of shares of Common Stock are entitled to one vote per share held on all matters submitted to a vote at a meeting of stockholders. Cumulative voting for the election of directors is not permitted. Subject to any preferences to which holders of Preferred Stock are entitled, the holders of outstanding shares of Common Stock are entitled to receive ratably any dividends that the Board of Directors declares. If the Company liquidates, dissolves or winds up, the holders of shares of Common Stock are entitled to receive pro rata all assets of the Company that are available for distribution to stockholders. The holders of shares of Common Stock do not have any preemptive, subscription, redemption, conversion or sinking fund rights. The outstanding shares of Common Stock, and the shares of Common Stock to be issued pursuant to this Prospectus and any Prospectus Supplement, are fully paid and nonassessable. PREFERRED STOCK The Company is authorized by its Amended and Restated Certificate of Incorporation to issue a maximum of 10,000,000 shares of Preferred Stock, in one or more series. The Board determines the rights, privileges and limitations of Preferred Stock, including dividend rights, voting rights, conversion privileges, redemption rights, liquidation rights and/or sinking fund rights. Preferred Stock may be issued in the future in connection with acquisitions, financings or such other matters as the Board of Directors believes appropriate. There are no shares of Preferred Stock outstanding, and the Company has no current plans to issue Preferred Stock. One effect of having Preferred Stock authorized is that the Company's Board of Directors alone may be able to authorize the issuance of Preferred Stock in ways that render more difficult or discourage an attempt to obtain control of the Company by a tender offer, proxy contest, merger or otherwise, and thereby protect the continuity of the Company's management. The issuance of shares of Preferred Stock may adversely affect the voting and other rights of holders of Common Stock. For example, Preferred Stock may rank prior to the Common Stock as to dividend rights, liquidation preferences or both, may have full or limited voting rights and may be convertible into Common Stock. Accordingly, the issuance of Preferred Stock may discourage bids for the Common Stock or otherwise adversely affect the market price of the Common Stock. CERTAIN STATUTORY, CHARTER AND BY-LAW PROVISIONS Classified Board of Directors. The Company's Amended and Restated Certificate of Incorporation (the "Restated Certificate") provides that the Board will be divided into three classes serving staggered terms, and that the number of directors in each class will be as nearly equal as is possible based on the number of directors constituting the entire 69 72 Board. At each annual meeting of stockholders, successors to directors of the class whose term expires at such meeting will be elected to serve for three-year terms. The classification of directors makes it more difficult for stockholders to change the composition of the Board. At least two annual meetings of stockholders, instead of one, will generally be required to change the majority of the Board. This delay may help ensure that the Company's directors, if confronted by a third party attempting to force a proxy contest, a tender or exchange offer or other extraordinary corporate transaction, would have sufficient time to review the proposal and available alternatives and to act in what they believe to be the best interests of the stockholders. However, such classification could also discourage a third party from initiating a proxy contest, making a tender offer or otherwise attempting to obtain control of the Company, even though such an attempt might benefit the Company and its stockholders. The classification of the Board could thus make it more likely that incumbent directors will retain their positions. Number of Directors; Removal; Filling Vacancies. The Restated Certificate provides that the number of directors will be fixed from time to time by a majority of the directors then in office. In no event may there be less than three or more than nine directors, unless approved by at least two-thirds of the directors then in office. In addition, the Restated Certificate provides that newly created directorships resulting from an increase in the authorized number of directors, vacancies on the Board resulting from death, resignation, retirement, disqualification or removal of directors or any other cause may be filled only by the Board (and not by the stockholders unless there are no directors in office), if a quorum is then in office and present, or by a majority of the directors then in office, if less than a quorum is then in office, or by the sole remaining director. Accordingly, the Board could prevent any stockholder from enlarging the Board and filling the new directorships with such stockholder's own nominees. The Restated Certificate allows directors to be removed only for cause and only on the affirmative vote of holders of at least 66 2/3% of the voting power of all the then outstanding shares of stock entitled to vote generally in the election of directors ("Voting Stock"), voting together as a single class. The provisions of the Restated Certificate governing the number of directors, their removal and the filling of vacancies may discourage a third party from initiating a proxy contest, making a tender offer or otherwise attempting to gain control of the Company, or attempting to change the composition or policies of the Board, even though such attempts might benefit the Company or its stockholders. These provisions of the Restated Certificate could thus increase the likelihood that incumbent directors retain their positions. Limitation on Special Meetings; No Stockholder Action by Written Consent. The Restated Certificate and the Amended and Restated By-laws (the "Restated By-laws") provide that: (i) only a majority of the Board of Directors or the President or Chairman of the Board may call a special meeting of stockholders; (ii) only matters stated in the notice of meeting or properly brought before the meeting by or at the direction of the Board of Directors may be transacted at the meeting; and (iii) stockholder action may be taken only at a duly called and convened annual or special meeting of stockholders and may not be taken by written consent. These provisions, taken together, prevent stockholders from forcing consideration of stockholder proposals over the opposition of the Board, except at an annual meeting. 70 73 Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals. The Restated By-laws establish an advance notice procedure for stockholders to make nominations of candidates for election as director, or to bring other business before an annual meeting of stockholders of the Company (the "Stockholder Notice Procedure"). In general, only persons who are nominated by or at the direction of the Board, any committee appointed by the Board, or by a stockholder who has given timely written notice to the Secretary of the Company, may be elected as directors. At an annual meeting, only business that has been brought before the meeting by, or at the direction of, the Board, any committee appointed by the Board, or by a stockholder who has given timely written notice to the Secretary of the Company, may be conducted. To be timely, notice of stockholder nominations or proposals to be made at an annual or special meeting must be received by the Company not less than 60 days nor more than 90 days before the scheduled date of the meeting (or, if less than 70 days' notice or prior public disclosure of the date of the meeting is given, then the 15th day following the earlier of the day such notice was mailed or the day such public disclosure was made). By requiring advance notice of nominations by stockholders, the Stockholder Notice Procedure gives the Board an opportunity to consider the qualifications of the proposed nominees and inform stockholders about such qualifications. By requiring advance notice of other proposed business, the Stockholder Notice Procedure provides a more orderly procedure for conducting annual meetings of stockholders. It also gives the Board an opportunity to inform stockholders in advance of any business proposed to be conducted at such meetings, together with the Board's recommendations regarding action to be taken with respect to such business, so that stockholders can better decide whether to attend such a meeting or to grant a proxy regarding the disposition of any such business. Although the Restated By-laws do not give the Board any power to approve or disapprove stockholder nominations for the election of directors or proposals for action, the Stockholder Notice Procedure may preclude a contest for the election of directors or the consideration of stockholder proposals. It may also discourage or deter a third party from soliciting proxies to elect its own slate of directors or to approve its own proposal, even though consideration of such nominees or proposals might benefit the Company and its stockholders. Certain Provisions Relating to Potential Change of Control. The Restated Certificate authorizes the Board and any committee of the Board to take such action as it determines to be reasonably necessary or desirable to encourage any person or entity to enter into negotiations with the Board and management about transactions that may result in a change of control of the Company. The Board and its committees may also contest or oppose any such transaction that the Board determines to be unfair, abusive or otherwise undesirable to the Company, its business, assets, properties or stockholders. The Board or any Board committee may adopt plans or to issue securities of the Company, and to determine the terms and conditions on which such securities may be exchangeable or convertible into cash or other securities. In addition, the Board or Board committee may treat any holder or class of holders of such designated securities differently than all other security holders in respect of the terms, conditions, provisions and rights of such securities. This authority is intended to give the Board flexibility to act in the best interests of stockholders in the event of a potential change of control. Such provisions may, however, 71 74 deter potential acquirors from proposing unsolicited transactions not approved by the Board and might enable the Board to hinder or frustrate such a transaction if proposed. Limitation of Liability of Directors. The Restated Certificate provides that a director will not be personally liable to the Company or its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability: (i) for any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Section 174 of the Delaware General Corporation Law (the "Delaware Law"), which concerns unlawful payments of dividends, stock purchases or redemptions; or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware Law is subsequently amended to permit further limitation of the personal liability of directors, the liability of a director of the Company will be eliminated or limited to the fullest extent permitted by the Delaware Law as so amended. Amendment of the Certificate of Incorporation and By-laws. The Restated Certificate contains provisions requiring the affirmative vote of the holders of at least 66 2/3% of the voting power of the Voting Stock to amend certain provisions of the Restated Certificate (including the provisions discussed above relating to the size and classification of the Board, replacement and/or removal of Board members, action by written consent, special stockholder meetings, the authorization for the Board to take steps to encourage or oppose, as the case may be, transactions which may result in a change of control of the Company, and limitation of the liability of directors) or to amend any provision of the Restated By-laws by action of stockholders. These provisions make it more difficult for stockholders to make changes in the Restated Certificate and the Restated By-laws, including changes designed to facilitate the exercise of control over the Company. Business Combination Provisions of Delaware Law. The Company is a Delaware corporation and is subject to section 203 of the Delaware Law. Section 203 generally prevents a person who, together with affiliates and associates, owns, or within the past three years did own, 15% or more of the outstanding voting stock of a corporation (an "Interested Stockholder") from engaging in certain business combinations with the corporations for three years after the date such person became an Interested Stockholder, subject to certain exceptions. Business combinations covered by section 203 include a wide variety of transactions with or caused by an Interested Stockholder, including mergers, asset sales and other transactions in which the Interested Stockholder receives or could receive a benefit on other than a pro rata basis with other stockholders. TRANSFER AGENT AND REGISTRAR BankBoston, N.A., c/o Boston EquiServe, L.P., serves as transfer agent and registrar for the Common Stock. SHARES ELIGIBLE FOR FUTURE SALE As of April 19, 1999, the Company had 17,425,483 shares of Common Stock outstanding. Of those shares, the 2,300,000 sold in the Company's initial public offering, the 3,999,307 shares sold in the Company's secondary public offering, and an additional 4,355,265 shares are freely saleable in the public market, unless acquired by affiliates of the Company. An additional 5,908,483 of the currently outstanding shares are currently eligible for resale in the public market, an additional 361,732 of the currently outstanding shares will become 72 75 eligible for resale in the public market later in 1999, an additional 302,342 of the currently outstanding shares will become eligible for resale in the public market in 2000, and an additional 198,354 of the currently outstanding shares will become eligible for resale in the public market in subsequent years, in each case subject to the restrictions of Rule 144 promulgated under the Securities Act. Shares of Common Stock held by affiliates of the Company are subject to certain volume and other limitations discussed below under Rule 144. In general, under Rule 144, a person (or persons whose shares are aggregated), including persons who may be deemed affiliates of the Company, who has beneficially owned his or her shares for at least one year may sell in any three-month period a number of shares equal to the greater of 1% of the outstanding shares of the Common Stock (174,254 shares as of April 19, 1999) or the average weekly trading volume during the four calendar weeks preceding each such sale. Sales under Rule 144 also are subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. Under Rule 144(k), a person (or persons whose shares are aggregated) who is not or has not been deemed an "affiliate" of the Company for at least three months and who has beneficially owned his or her shares for at least two years may sell such shares under Rule 144 without regard to the limitations discussed above. The Common Stock has been publicly traded only since May 22, 1998, and it is possible that no active public market for the Common stock will develop or be sustained. Sales of substantial amounts of the Common Stock, or the perception that such sales could occur, could cause the market price of the Common Stock to decline and impair the Company's ability to raise capital or fund acquisitions by issuing Common Stock. In July 1998, the Company filed a registration statement on Form S-4 under the Securities Act to register up to 3,000,000 shares issuable from time to time in connection with the Company's acquisitions of solid waste services businesses. In October 1998, the Company filed an additional registration statement on Form S-4 under the Securities Act to increase by 20% the number of shares covered by the previous registration statement. Also in October 1998, the Company filed a third registration statement on Form S-4 to register up to 3,000,000 shares issuable from time to time in connection with acquisitions of solid waste services businesses. As of April 15, 1999, the Company had issued 3,768,207 shares under the original registration statement on Form S-4, and an additional 2,875,958 shares were issuable under the three Form S-4 registration statements. In September 1998, the Company filed a registration statement under the Securities Act to register 309,700 shares issuable on exercise of stock options or other awards granted or to be granted under its Stock Option Plan. In February 1999, the Company filed a registration statement under the Securities Act to register an additional 820,132 shares issuable on exercise of such options or awards. Subject to certain restrictions under Rule 144, those shares will be freely saleable in the public market immediately following exercise of such options. OUTSTANDING SECURITIES COVERED BY THIS PROSPECTUS Persons who receive shares of Common Stock covered by the Registration Statement in acquisitions of businesses by the Company, or their transferees ("Selling Stockholders"), may use this Prospectus and Post-Effective Amendments and Prospectus Supplements to sell such shares. 73 76 The Company will not receive any of the proceeds from any such sales. Any commissions paid or concessions allowed to any broker-dealer and, if any broker-dealer purchases such shares as principal, any profits received on the resale of such shares, may be deemed to be underwriting discounts and commissions under the Securities Act. The Company will pay printing, certain legal, filing and other similar expenses of this offering. Selling Stockholders will bear all other expenses of this offering, including any brokerage fees, underwriting discounts or commissions. If a Selling Stockholder notifies the Company of an arrangement with a broker-dealer to sell shares through a block trade, special offering, exchange distribution or secondary distribution, the Company will file a Prospectus Supplement pursuant to Rule 424 under the Securities Act. The Prospectus Supplement will set forth (i) the name of such Selling Stockholder and the participating broker-dealer, (ii) the number of shares involved, (iii) the price at which such shares were sold, (iv) the commissions paid or discounts or concessions allowed to such broker-dealer, where applicable, (v) that such broker-dealer did not conduct any investigation to verify the information set out in this Prospectus, and (vi) other facts material to the transaction. Selling Stockholders may sell the shares being offered through this Prospectus in transactions on the Nasdaq National Market or on a securities exchange on which the Company's Common Stock may then be listed, in negotiated transactions or otherwise, at market prices or at negotiated prices. Selling Stockholders may sell the shares in transactions involving broker-dealers, who may act as agents and/or acquire shares as principals. Broker-dealers who participate in such transactions as agents may receive commissions from Selling Stockholders (and, if they act as agents for the purchasers of such shares, from such purchasers). Participating broker-dealers may agree with Selling Stockholders to sell a specified number of shares at a stipulated price per share and, to the extent they are unable to do so acting as agents for the Selling Stockholders, to purchase as principals any unsold shares at the price required to fulfill their commitments to the Selling Stockholders. The Selling Stockholders may also sell shares by or through other broker-dealers in special offerings, exchange distributions or secondary distributions pursuant to the rules of the Nasdaq National Market or on a securities exchange on which the Company's Common Stock may then be listed. They may pay commissions in excess of the customary commission prescribed by the rules of such securities exchange to participating broker-dealers. In certain secondary distributions, a discount or concession from the offering price may be allowed to participating broker-dealers in excess of such customary commission. Broker-dealers who acquire shares as principals may subsequently resell such shares in transactions (which may involve crosses and block transactions and which may involve sales to and through other broker-dealers) on the Nasdaq National Market or on a securities exchange on which the Company's Common Stock may then be listed, in negotiated transactions or otherwise, at market prices or at negotiated prices. In connection with such resales, the broker-dealers may pay to or receive commissions from the purchasers of such shares. Each Selling Stockholder may indemnify any broker-dealer that participates in transactions involving sales of the shares against certain liabilities, including liabilities arising under the Securities Act. 74 77 LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered hereby will be passed upon for the Company by Shartsis, Friese & Ginsburg LLP, San Francisco, California. The statements pertaining to the Company's G certificates awarded by the WUTC under "Risk Factors -- Highly Competitive Industry," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General," "Business -- Industry Overview," and "Business -- G Certificates" will be passed upon for the Company by Williams, Kastner & Gibbs PLLC, Seattle, Washington. EXPERTS The following financial statements appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere in this Prospectus and Registration Statement: (a) financial statements of Waste Connections, Inc. and Predecessors as of December 31, 1997 and 1998, and for each of the three years in the period ended December 31, 1998; (b) combined financial statements of The Murrey Companies (which consist of Murrey's Disposal Company, Inc., American Disposal Company, Inc., D.M. Disposal Co., Inc. and Tacoma Recycling Company, Inc.) as of December 31, 1997 and 1998, and for each of the three years in the period ended December 31, 1998; (c) Supplemental consolidated financial statements of Waste Connections, Inc. and Predecessors as of December 31, 1997 and 1998, and for each of the three years in the period ended December 31, 1998. Such financial statements have been included in this Prospectus and Registration Statement in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. The combined financial statements of Columbia Resource Co., L.P. and Finley-Buttes Limited Partnership as of December 31, 1997 and 1998, and for each of the three years in the period ended December 31, 1998 in this Prospectus and Registration Statement have been audited by Perkins & Company, P.C., independent auditors, as set forth in their report thereon appearing elsewhere in this Prospectus and Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 75 78 INDEX TO FINANCIAL STATEMENTS
PAGE ---- WASTE CONNECTIONS, INC. UNAUDITED PRO FORMA FINANCIAL STATEMENTS Introduction to Unaudited Pro Forma Financial Statements............................................. F-3 Unaudited Pro Forma Statement of Operations for the year ended December 31, 1998................................ F-4 Notes to Unaudited Pro Forma Statement of Operations...... F-5 Unaudited Pro Forma Balance Sheet as of December 31, 1998................................................... F-7 Notes to Unaudited Pro Forma Consolidated Balance Sheet... F-8 WASTE CONNECTIONS, INC. AND PREDECESSORS Report of Ernst & Young LLP, Independent Auditors......... F-9 Consolidated Balance Sheets of Waste Connections, Inc. as of December 31, 1997 and 1998.......................... F-10 Statement of Operations of Predecessors for the nine months ended September 30, 1997........................ F-11 Consolidated Statements of Operations of Waste Connections, Inc. for the period from inception (September 9, 1997) through December 31, 1997 and the year ended December 31, 1998........................... F-11 Combined Statement of Operations of The Disposal Group for the period from January 1, 1996 through July 31, 1996................................................... F-12 Combined Statement of Operations of Predecessors for the period ended December 31, 1996......................... F-12 Consolidated Statements of Redeemable Stock and Stockholders' Equity (Deficit) of Waste Connections, Inc. for the period from inception (September 9, 1997) through December 31, 1997 and the year ended December 31, 1998............................................... F-13 Statement of Cash Flows of Predecessors for the nine months ended September 30, 1997........................ F-14 Consolidated Statements of Cash Flows of Waste Connections, Inc. for the period from inception (September 9, 1997) through December 31, 1997 and the year ended December 31, 1998........................... F-14 Combined Statement of Cash Flows of The Disposal Group for the period from January 1, 1996 through July 31, 1996................................................... F-15 Combined Statement of Cash Flows of Predecessors for the period ended December 31, 1996......................... F-15 Notes to Financial Statements............................. F-16 THE MURREY COMPANIES Report of Ernst & Young LLP, Independent Auditors......... F-37 Combined Balance Sheets as of December 31, 1997 and 1998................................................... F-38 Combined Statements of Income and Retained Earnings for each of the three years in the period ended December 31, 1998............................................... F-39 Combined Statements of Cash Flows for each of the three years in the period ended December 31, 1998............ F-40 Notes to Combined Financial Statements.................... F-42 COLUMBIA RESOURCE CO., L.P. AND FINLEY-BUTTES LIMITED PARTNERSHIP Independent Auditors' Report.............................. F-51 Combined Balance Sheets as of December 31, 1997 and 1998................................................... F-52 Combined Statements of Income for each of the three years in the period ended December 31, 1998.................. F-53 Combined Statements of Partners Capital and Comprehensive Income for each of the three years in the period ended December 31, 1998...................................... F-54 Combined Statements of Cash Flows for each of the three years in the period ended December 31, 1998............ F-55 Notes to Financial Statements............................. F-56 SUPPLEMENTAL WASTE CONNECTIONS, INC. AND PREDECESSORS Report of Ernst & Young LLP, Independent Auditors......... F-64 Supplemental Consolidated Balance Sheets of Waste Connections, Inc. as of December 31, 1997 and 1998..... F-65
F-1 79
PAGE ---- Combined Statement of Operations of Predecessors for the nine months ended September 30, 1997................... F-66 Supplemental Consolidated Statements of Operations of Waste Connections, Inc. for the years ended December 31, 1997 and 1998...................................... F-66 Combined Statement of Operations of The Disposal Group for the period from January 1, 1996 through July 31, 1996................................................... F-67 Combined Statement of Operations of Predecessors for the period ended December 31, 1996......................... F-67 Supplemental Consolidated Statement of Operations of Waste Connections, Inc. for the year ended December 31, 1996................................................... F-67 Supplemental Consolidated Statement of Redeemable Stock and Stockholders' Equity of Waste Connections, Inc. for each of the three years in the period ended December 31, 1998............................................... F-68 Combined Statement of Cash Flows of Predecessors for the nine months ended September 30, 1997................... F-69 Supplemental Consolidated Statements of Cash Flows of Waste Connections, Inc. for the years ended December 31, 1997 and 1998...................................... F-69 Combined Statement of Cash Flows of The Disposal Group for the period from January 1, 1996 through July 31, 1996................................................... F-71 Combined Statement of Cash Flows of Predecessors for the period ended December 31, 1996......................... F-71 Supplemental Consolidated Statement of Cash Flows of Waste Connections, Inc. for the year ended December 31, 1996................................................... F-71 Notes to Financial Statements............................. F-72
F-2 80 WASTE CONNECTIONS, INC. INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS The Unaudited Pro Forma Statement of Operations for the year ended December 31, 1998 gives effect to the business combination involving WCI and Columbia Resource Co., LP and Finley-Buttes Limited Partnership ("CRCFBLP") as if such business combination occurred on January 1, 1998 and was accounted for using the purchase method of accounting. In addition to reflecting the business combination involving WCI and CRCFBLP, the following Unaudited WCI and the Murrey Companies Pro Forma Combined Statement of Operations for the year ended December 31, 1998 reflects the mergers with the Murrey Companies as poolings-of-interests. The following Unaudited Pro Forma Balance Sheet as of December 31, 1998 assumes WCI's acquisition of CRCFBLP occurred on December 31, 1998. In addition to reflecting the business combinations involving WCI and CRCFBLP, the following Unaudited Pro Forma Combined Balance Sheet as of December 31, 1998 reflects the mergers with the Murrey Companies as poolings-of-interests. WCI has preliminarily analyzed the savings that it expects to be realized by consolidating certain operational and general and administrative functions. WCI has not and cannot quantify all of these savings due to the short period of time since the CRCFBLP and Murrey Companies acquisitions occurred. It is anticipated that these savings will be partially offset by the costs of being a publicly held company and the incremental increase in costs related to WCI's corporate management. However, these costs, like the savings they offset, cannot be quantified accurately. Neither the anticipated savings nor the anticipated costs have been included in the Unaudited Pro Forma Financial Statements. The Unaudited Pro Forma Financial Statements include certain adjustments to the historical financial statements, including adjusting depreciation expense to reflect purchase price allocations of the entities acquired by WCI, adjusting interest expense to reflect acquisition-related debt and the related income tax effects of these adjustments. The pro forma adjustments are based on preliminary estimates, available information and certain assumptions and may be revised as additional information becomes available. The Unaudited Pro Forma Financial Statements do not purport to represent what WCI's financial position or results of operations would actually have been if such transactions in fact had occurred on those dates or to project WCI's financial position or results of operations for any future period. Because WCI, the Murrey Companies and CRCFBLP were not under common control or management for all periods, historical combined results may not be comparable to, or indicative of, future performance. The Unaudited Pro Forma Financial Statements should be read in conjunction with the other financial statements and notes thereto included elsewhere herein, as well as information included under the headings "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" included elsewhere herein. F-3 81 WASTE CONNECTIONS, INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
WASTE THE MURREY CONNECTIONS, INC. CRCFBLP PRO FORMA COMPANIES PRO FORMA CONSOLIDATED COMBINED ADJUSTMENTS PRO FORMA COMBINED COMBINED ----------------- ------------ ----------- ------------ ---------- ----------- Revenues.................. $ 54,042 $22,511 $(7,017)(a) $ 69,536 $32,528 $ 102,064 Operating expenses: Cost of operations...... 36,554 10,675 (7,017)(a) 40,166 26,410 66,576 (46)(b) Selling, general and administrative........ 5,317 2,956 -- 8,273 2,791 11,064 Depreciation and amortization.......... 4,112 2,729 (683)(c) 6,158 2,194 8,352 Stock compensation...... 632 -- -- 632 -- 632 ---------- ------- ------- ---------- ------- ----------- Income from operations.... 7,427 6,151 729 14,307 1,133 15,440 Interest expense.......... (2,257) (1,258) (5,280)(d) (8,795) (535) (9,330) Other income (expense), net..................... -- 29 -- 29 79 108 ---------- ------- ------- ---------- ------- ----------- Income before income taxes................... 5,170 4,922 (4,551) 5,541 677 6,218 Income tax provision...... (2,395) -- (1,968)(e) (2,543) (535) (3,078) 1,820(f) ---------- ------- ------- ---------- ------- ----------- Income before extraordinary item...... 2,775 4,922 (4,699) 2,998 142 3,140 Extraordinary item -- early extinguishment of debt, net of tax benefit of $264.................... (1,027) -- -- (1,027) -- (1,027) ---------- ------- ------- ---------- ------- ----------- Net income................ $ 1,748 $ 4,922 $(4,699) $ 1,971 $ 142 $ 2,113 ========== ======= ======= ========== ======= =========== Redeemable convertible preferred stock accretion............... (917) -- -- (917) -- (917) ---------- ------- ------- ---------- ------- ----------- Net income applicable to common stockholders..... $ 831 $ 4,922 $(4,699) $ 1,054 $ 142 $ 1,196 ========== ======= ======= ========== ======= =========== Basic earnings per share: Income before extraordinary item.... $ 0.29 $ 0.32 $ 0.24 Extraordinary item...... (0.16) (0.16) (0.11) ---------- ---------- ----------- Net income per share.... $ 0.13 $ 0.16 $ 0.13 ========== ========== =========== Diluted earnings per share: Income before extraordinary item.... $ 0.22 $ 0.25 $ 0.20 Extraordinary item...... (0.12) (0.12) (0.09) ---------- ---------- ----------- Net income per share.... $ 0.10 $ 0.13 $ 0.11 ========== ========== =========== Shares used in calculating basic earnings per share................... 6,460,293 6,460,293 9,349,173 ========== ========== =========== Shares used in calculating diluted earnings per share................... 8,371,415 8,371,415 11,260,295 ========== ========== ===========
See accompanying notes. F-4 82 WASTE CONNECTIONS, INC. NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS) ASSUMPTIONS. The unaudited pro forma statement of operations for the year ended December 31, 1998 is presented as if the acquisition of CRCFBLP occurred on January 1, 1998. In addition, the unaudited pro forma combined statement of operations for the year ended December 31, 1998 combines the pro forma statements of operations for that period with the historical statement of operations for the Murrey Companies for the year ended December 31, 1998. BUSINESS COMBINATIONS. The acquisition of CRCFBLP is being accounted for under the purchase method of accounting for business combinations. Certain items affecting the purchase price and its allocation are preliminary. The preliminary purchase price consists of the following:
CRCFBLP ------- Cash paid to shareholders................................. $66,911 Liabilities assumed....................................... 18,935 Acquisition costs......................................... 316 ------- $86,162 =======
The Company has preliminarily allocated the purchase price as follows:
CRCFBLP ------- Tangible assets purchased, including landfill............. $85,962 Covenant not to compete................................... 200 ------- $86,162 =======
WCI's mergers with the Murrey Companies are accounted for under the pooling-of-interests method of accounting for business combinations. The pro forma financial statements assume the issuance of 2,888,880 shares, which represents the actual number of shares exchanged. PRO FORMA ADJUSTMENTS. The unaudited pro forma statement of operations does not reflect non-recurring costs resulting directly from the merger between the Company and the Murrey Companies. The management of the Company estimates that these costs will approximate $6,200 and will be charged to operations in the quarter that the merger is consummated. The amount includes costs to merge the companies, signing bonuses to be paid to Murrey Company officers, and professional fees. The following adjustments have been made to the unaudited pro forma statement of operations: (a) Eliminate intercompany revenue and expense between WCI and CRCFBLP. (b) To record closure and post closure amortization in accordance with the Company's policies. (c) To record site depletion expense in accordance with the Company's policies. (d) To record interest expense on the debt obligations incurred by the Company in connection with the acquisition of CRCFBLP. (e) To record income tax provision for CRCFBLP which were limited partnerships for income tax purposes for all periods prior to the acquisition by the Company. (f) To recorded estimate tax benefit for the year ended December 31, 1998 associated with the pro forma adjustments. F-5 83 WASTE CONNECTIONS, INC. NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS) PRO FORMA COMBINED PER SHARE DATA. The shares used in computing the unaudited pro forma combined net income per share for the year ended December 31, 1998 are based upon the pro forma number of common shares as summarized in the table below. See Note 11 of the Company's notes to financial statements included elsewhere herein for information concerning the computation of basic and diluted net income per share.
YEAR ENDED DECEMBER 31, 1998 ------------ Basic Share Count: Company weighted average shares outstanding............... 6,460,293 Shares issued in exchange for the Murrey Companies' stock.................................................. 2,888,880 ----------- Shares used in calculating pro forma combined basic net income (loss) per share................................ 9,349,173 =========== Diluted Share Count: ----------- Shares used in calculating the Company's diluted income (loss) per share....................................... 8,371,415 Shares issued in exchange for the Murrey Companies' stock.................................................. 2,888,880 ----------- Shares used in calculating pro forma combined diluted net income (loss) per share................................ 11,260,295 ===========
ACQUISITION COSTS. The Company incurred costs of $316 related to the CRCFBLP acquisition which have been factored into the purchase price allocation. Costs incurred by CRCFBLP were expensed as incurred. No adjustments have been made in these pro forma statements of operations to conform accounting policies of the Murrey Companies with those of the Company. The nature and extent of such adjustments, if any, are not expected to be significant. F-6 84 WASTE CONNECTIONS, INC. UNAUDITED PRO FORMA BALANCE SHEET DECEMBER 31, 1998 (IN THOUSANDS) ASSETS
WASTE THE MURREY CONNECTIONS, INC. CRCFBLP PRO FORMA COMPANIES PRO FORMA PRO FORMA CONSOLIDATED COMBINED ADJUSTMENTS PRO FORMA COMBINED ADJUSTMENTS COMBINED ----------------- -------- ----------- --------- ---------- ----------- --------- Current assets: Cash and equivalents.... $ 2,675 $ 2,048 $ --(2)(4)(5) $ 4,723 $ 173 $ -- $ 4,896 Investments in Marketable Securities............ -- 5,640 -- 5,640 -- -- 5,640 Accounts receivable, net................... 10,769 2,330 (1,276)(8) 11,823 3,007 -- 14,830 Prepaid expenses and other current assets................ 2,246 1,105 -- 3,351 27 -- 3,378 -------- ------- -------- -------- ------- ------- -------- Total current assets.......... 15,690 11,123 (1,276) 25,537 3,207 -- 28,744 Property and equipment, net..................... 33,043 19,820 54,222(3) 107,085 13,943 -- 121,028 Intangible assets, net.... 98,785 -- 200(3) 98,985 1,801 -- 100,786 Other assets.............. 1,794 2,389 -- 4,183 184 -- 4,367 -------- ------- -------- -------- ------- ------- -------- $149,312 $33,332 $ 53,146 $235,790 $19,135 $ -- $254,925 ======== ======= ======== ======== ======= ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings... $ -- $ -- $ -- $ -- $ 1,500 $ -- $ 1,500 Accounts payable........ 6,598 1,155 (1,276)(8) 6,477 1,509 -- 7,986 Advances from a related party................. -- -- -- -- 543 -- 543 Deferred revenue........ 2,052 -- -- 2,052 1,095 -- 3,147 Accrued liabilities..... 4,154 536 -- 4,690 1,330 -- 6,020 Current portion of long-term debt........ 9,516 1,779 (839)(4) 10,456 731 -- 11,187 Other current liabilities........... 2,087 668 -- 2,755 106 -- 2,861 Accrued merger related expenses.............. -- -- -- -- -- 6,200(1) 6,200 -------- ------- -------- -------- ------- ------- -------- Total current liabilities..... 24,407 4,138 (2,115) 26,430 6,814 6,200 39,444 Long-term debt............ 60,106 16,298 68,066(4)(5) 144,470 3,879 -- 148,349 Deferred income taxes..... 1,645 -- -- 1,645 623 -- 2,268 Other long-term liabilities............. 2,091 -- 91(7) 2,182 353 -- 2,535 Stockholders' equity: Common stock............ 94 -- -- 94 45 (16)(1) 123 Additional paid-in capital............... 66,163 -- -- 66,163 455 16(1) 66,634 Deferred stock compensation.......... (428) (428) -- -- (428) Retained earnings (deficit)............. (4,766) (4,766) 6,966 (6,200)(1) (4,000) Accumulated other comprehensive income................ -- 740 (740)(6) -- -- -- -- Other Partners' Capital............... -- 12,156 (12,156)(6) -- -- -- -- -------- ------- -------- -------- ------- ------- -------- Total stockholders' equity.......... 61,063 12,896 (12,896) 61,063 7,466 (6,200) 62,329 -------- ------- -------- -------- ------- ------- -------- $149,312 $33,332 $ 53,146 $235,790 $19,135 $ -- $254,925 ======== ======= ======== ======== ======= ======= ========
See accompanying notes. F-7 85 WASTE CONNECTIONS, INC. NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSUMPTIONS. The unaudited pro forma balance sheet as of December 31, 1998 combines the historical balance sheet of Waste Connections, Inc. with the historical balance sheets of CRCFBLP to be accounted for as a purchase, and the historical balance sheet of the Murrey Companies to be accounted for as poolings-of-interests as of December 31, 1998. PRO FORMA ADJUSTMENTS. The following adjustments have been made to the unaudited pro forma consolidated balance sheet. (1) To record Merger related entries consisting of estimated non-recurring costs of the Merger with the Murrey Companies and the issuance of 2,888,880 shares of the Company's common stock. The management of the Company estimates that the non-recurring costs will approximate $6,200 and will be charged to operations in the quarter the merger is consummated. This estimated expense, has been charged to retained earnings on the accompanying unaudited pro forma balance sheet. (2) Cash payments to former owners of CRCFBLP ($66,911) and payment of acquisition costs ($316). (3) To increase site costs of CRCFBLP for the excess of purchase price over net assets acquired of $54,422 and to record the fair value of the covenant not to compete ($200). (4) Pay off debt obligations of CRCFBLP ($8,512). (5) Record additional long term debt associated with the acquisition of CRCFBLP of $75,739. (6) To eliminate equity accounts of CRCFBLP. (7) To accrue closure and post closure liability in accordance with the Company's policies (8) To eliminate intercompany receivable between WCI and CRCFBLP. No adjustments have been made in the unaudited pro forma balance sheet to conform accounting policies of the Murrey Companies with those of the Company. The nature and extent of such adjustments, if any, are not expected to be significant. F-8 86 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Stockholders Waste Connections, Inc. We have audited the accompanying financial statements of Waste Connections, Inc. and Predecessors as of December 31, 1997 and 1998, and for each of the three years in the period ended December 31, 1998 which appear on pages F-10 through F-15 herein as listed in the accompanying Index to Financial Statements. Our audits also included the financial statement schedule listed in Item 21.b. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Waste Connections, Inc. and Predecessors at December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Sacramento, California February 17, 1999, except for the third and fourth paragraphs of Note 14, as to which the dates are March 31, 1999 F-9 87 WASTE CONNECTIONS, INC. AND PREDECESSORS CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS
WASTE CONNECTIONS, INC. CONSOLIDATED DECEMBER 31, ----------------------- 1997 1998 --------- ---------- Current assets: Cash and equivalents...................................... $ 820 $ 2,675 Accounts receivable, less allowance for doubtful accounts of $19 and $362 at December 31, 1997 and December 31, 1998, respectively..................................... 3,940 10,769 Prepaid expenses and other current assets................. 358 2,246 ------- -------- Total current assets.............................. 5,118 15,690 Property and equipment, net................................. 4,185 33,043 Intangible assets, net...................................... 9,550 98,785 Other assets................................................ 27 1,794 ------- -------- $18,880 $149,312 ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (Deficit) Current liabilities: Accounts payable.......................................... $ 2,609 $ 6,598 Deferred revenue.......................................... 597 2,052 Accrued liabilities....................................... 825 4,154 Current portion of long-term debt......................... -- 9,516 Other current liabilities................................. 251 2,087 ------- -------- Total current liabilities......................... 4,282 24,407 Long-term debt.............................................. 6,762 60,106 Deferred income taxes....................................... 162 1,645 Other long-term liabilities................................. 702 2,091 Commitments and contingencies (Note 7) Redeemable convertible preferred stock: $.01 par value; 2,500,000 shares authorized at December 31, 1997 (none authorized at December 31, 1998); 2,499,998 shares issued and outstanding at December 31, 1997; no shares issued and outstanding at December 31, 1998 (aggregate liquidation preference of $10,500 at December 31, 1997)............... 7,523 -- Stockholders' equity (deficit): Preferred stock: $.01 par value; 7,500,000 and 10,000,000 shares authorized at December 31, 1997 and 1998, respectively; none issued and outstanding.............. -- -- Common stock: $.01 par value; 50,000,000 shares authorized; 2,300,000 and 9,435,233 shares issued and outstanding at December 31, 1997 and 1998, respectively........................................... 23 94 Additional paid-in capital................................ 5,105 66,163 Stockholder notes receivable.............................. (82) -- Deferred stock compensation............................... -- (428) Accumulated deficit....................................... (5,597) (4,766) ------- -------- Total stockholders' equity (deficit).............. (551) 61,063 ------- -------- $18,880 $149,312 ======= ========
See accompanying notes. F-10 88 WASTE CONNECTIONS, INC. AND PREDECESSORS STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997 AND 1998 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
WASTE CONNECTIONS, INC. CONSOLIDATED PREDECESSORS --------------------------------------- COMBINED PERIOD NINE MONTHS FROM INCEPTION ENDED (SEPTEMBER 9, 1997) SEPTEMBER 30, THROUGH YEAR ENDED 1997 (NOTE 1) DECEMBER 31, 1997 DECEMBER 31, 1998 ------------- ------------------- ----------------- Revenues......................................... $18,114 $ 6,237 $ 54,042 Operating expenses: Cost of operations............................. 14,753 4,703 36,554 Selling, general and administrative............ 3,009 619 5,317 Depreciation and amortization.................. 1,083 354 4,112 Start-up and integration....................... -- 493 -- Stock compensation............................. -- 4,395 632 ------- ---------- ---------- Income (loss) from operations.................... (731) (4,327) 7,427 Interest expense................................. (456) (1,035) (2,257) Other income (expense), net...................... 14 (36) -- ------- ---------- ---------- Income (loss) before income taxes................ (1,173) (5,398) 5,170 Income tax (provision) benefit................... -- 332 (2,395) ------- ---------- ---------- Income (loss) before extraordinary item.......... (1,173) (5,066) 2,775 Extraordinary item -- early extinguishment of debt, net of tax benefit of $264............... -- -- (1,027) ------- ---------- ---------- Net income (loss)................................ $(1,173) $ (5,066) $ 1,748 ======= ========== ========== Redeemable convertible preferred stock accretion...................................... (531) (917) ---------- ---------- Net income (loss) applicable to common stockholders................................... $ (5,597) $ 831 ========== ========== Basic income (loss) per share: Income (loss) before extraordinary item........ $ (2.99) $ 0.29 Extraordinary item............................. -- (0.16) ---------- ---------- Net income (loss) per share.................... $ (2.99) $ 0.13 ========== ========== Diluted income (loss) per common share: Income (loss) before extraordinary item........ $ (2.99) $ 0.22 Extraordinary item............................. -- (0.12) ---------- ---------- Net income (loss) per common share............. $ (2.99) $ 0.10 ========== ========== Shares used in calculating basic income (loss) per share...................................... 1,872,567 6,460,293 ========== ========== Shares used in calculating diluted income (loss) per share...................................... 1,872,567 8,371,415 ========== ==========
F-11 89 WASTE CONNECTIONS, INC. AND PREDECESSORS STATEMENTS OF OPERATIONS (CONTINUED) YEARS ENDED DECEMBER 31, 1997 AND 1998 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PREDECESSORS ------------------------------------------ THE DISPOSAL GROUP COMBINED PERIOD FROM PREDECESSORS JANUARY 1, 1996 COMBINED PERIOD THROUGH ENDED 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-12 90 WASTE CONNECTIONS, INC. AND PREDECESSORS CONSOLIDATED STATEMENTS OF REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) PERIOD FROM INCEPTION (SEPTEMBER 9, 1997) THROUGH DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
WASTE CONNECTIONS, INC. CONSOLIDATED ----------------------------------------------------------------------------- STOCKHOLDERS' EQUITY (DEFICIT) REDEEMABLE ------------------------------- CONVERTIBLE REDEEMABLE PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL -------------------- -------------------- ------------------ PAID-IN SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL ---------- ------- ---------- ------- --------- ------ ---------- Balances at inception............. -- $ -- -- $ -- -- $-- $ -- Sale of redeemable convertible preferred stock................. 2,499,998 6,992 -- -- -- -- -- Sale of common stock.............. -- -- -- -- 2,300,000 23 4,395 Issuance of common stock warrants........................ -- -- -- -- -- -- 710 Issuance of stockholder notes receivable...................... -- -- -- -- -- -- -- Accretion of redeemable convertible preferred stock..... -- 531 -- -- -- -- -- Net loss.......................... -- -- -- -- -- -- -- ---------- ------- ---------- ------- --------- --- ------- Balances at December 31, 1997..... 2,499,998 7,523 -- -- 2,300,000 23 5,105 Issuance of redeemable common stock........................... -- -- 1,000,000 7,500 -- -- -- Issuance of common stock warrants........................ -- -- -- -- -- -- 2,388 Common stock sold in connection with initial public offering.... -- -- -- -- 2,300,000 23 23,963 Issuance of common stock.......... -- -- -- -- 1,054,634 10 17,783 Accretion of redeemable convertible preferred stock..... -- 917 -- -- -- -- -- Preferred stock dividend.......... -- (161) -- -- -- -- -- Conversion of redeemable preferred stock........................... (2,499,998) (8,279) -- -- 2,499,998 25 8,254 Conversion of redeemable common stock........................... -- -- (1,000,000) (7,500) 1,000,000 10 7,490 Deferred stock compensation associated with stock options... -- -- -- -- -- -- 821 Amortization of deferred stock compensation.................... -- -- -- -- -- -- -- Exercise of stock options......... -- -- -- -- 57,912 1 223 Exercise of warrants.............. -- -- -- -- 222,689 2 136 Payment of stockholder notes receivable...................... -- -- -- -- -- -- -- Net income........................ -- -- -- -- -- -- -- ---------- ------- ---------- ------- --------- --- ------- Balances at December 31, 1998..... -- $ -- -- $ -- 9,435,233 $94 $66,163 ========== ======= ========== ======= ========= === ======= WASTE CONNECTIONS, INC. CONSOLIDATED -------------------------------------------------- STOCKHOLDERS' EQUITY (DEFICIT) -------------------------------------------------- STOCKHOLDER DEFERRED NOTES STOCK ACCUMULATED RECEIVABLE 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) -- -- (82) Accretion of redeemable convertible preferred stock..... -- -- (531) (531) Net loss.......................... -- -- (5,066) (5,066) ---- ----- ------- ------- Balances at December 31, 1997..... (82) -- (5,597) (551) Issuance of redeemable common stock........................... -- -- -- -- Issuance of common stock warrants........................ -- -- -- 2,388 Common stock sold in connection with initial public offering.... -- -- -- 23,986 Issuance of common stock.......... -- -- -- 17,793 Accretion of redeemable convertible preferred stock..... -- -- (917) (917) Preferred stock dividend.......... -- -- -- -- Conversion of redeemable preferred stock........................... -- -- -- 8,279 Conversion of redeemable common stock........................... -- -- -- 7,500 Deferred stock compensation associated with stock options... -- (821) -- -- Amortization of deferred stock compensation.................... -- 393 -- 393 Exercise of stock options......... -- -- -- 224 Exercise of warrants.............. -- -- -- 138 Payment of stockholder notes receivable...................... 82 -- -- 82 Net income........................ -- -- 1,748 1,748 ---- ----- ------- ------- Balances at December 31, 1998..... $ -- $(428) $(4,766) $61,063 ==== ===== ======= =======
See accompanying notes. F-13 91 WASTE CONNECTIONS, INC. AND PREDECESSORS STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997 AND 1998 (IN THOUSANDS)
PREDECESSORS WASTE CONNECTIONS, INC. CONSOLIDATED COMBINED --------------------------------------- NINE MONTHS PERIOD FROM ENDED INCEPTION SEPTEMBER 30, (SEPTEMBER 9, 1997) 1997 THROUGH YEAR ENDED (NOTE 1) DECEMBER 31, 1997 DECEMBER 31, 1998 ------------- ------------------- ----------------- Cash Flows From Operating Activities: Net income (loss)......................................... $(1,173) $ (5,066) $ 1,748 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Gain on sale of assets.................................. (4) -- -- Depreciation and amortization........................... 1,083 354 4,112 Deferred income taxes................................... -- (369) 1,391 Amortization of debt issuance costs, debt guarantee fees and accretion of discount on long-term debt........... -- 860 192 Stock compensation...................................... -- 4,395 632 Extraordinary item -- extinguishment of debt............ -- -- 1,291 Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable, net.............................. (604) (1,021) (2,159) Prepaid expenses and other current assets............. (74) (51) (1,587) Accounts payable...................................... (221) 2,607 (566) Deferred revenue...................................... (137) 169 878 Accrued liabilities................................... (450) 801 49 Other liabilities..................................... -- (65) 85 ------- -------- -------- Net cash provided by (used in) operating activities....... (1,580) 2,614 6,066 Cash Flows From Investing Activities: Proceeds from sale of property and equipment.............. 188 -- 132 Payments for acquisitions, net of cash acquired........... -- (11,493) (56,341) Prepaid acquisition costs................................. -- (20) -- Capital expenditures for property and equipment........... (735) (264) (6,248) Decrease (increase) in other assets....................... 22 (19) (94) Proceeds from stockholder notes receivable................ -- -- 82 Issuance of stockholder notes receivable.................. -- (82) -- ------- -------- -------- Net cash used in investing activities..................... (525) (11,878) (62,469) Cash Flows From Financing Activities: Net intercompany balance.................................. 2,142 -- -- Proceeds from short-term borrowings....................... -- 600 -- Proceeds from long-term debt.............................. -- 5,500 77,402 Principal payments on notes payable....................... (38) (2,724) (3,374) Principal payments on long-term debt...................... -- (157) (39,103) Proceeds from sale of redeemable convertible preferred stock................................................... -- 6,992 -- Proceeds from sale of common stock........................ -- 23 23,986 Proceeds from option and warrant exercises................ -- -- 362 Payment of preferred stock dividend....................... -- -- (161) Debt issuance costs....................................... -- (150) (854) ------- -------- -------- Net cash provided by financing activities................. 2,104 10,084 58,258 ------- -------- -------- Net increase (decrease) in cash and equivalents............. (1) 820 1,855 Cash and equivalents at beginning of period................. 102 -- 820 ------- -------- -------- Cash and equivalents at end of period....................... $ 101 $ 820 $ 2,675 ======= ======== ======== Supplementary Disclosures of Cash Flow Information and Non-Cash Transactions: Cash paid for income taxes................................ $ -- $ -- $ 509 ======= ======== ======== Cash paid for interest.................................... $ -- $ 183 $ 1,590 ======= ======== ======== Redeemable convertible preferred stock accretion.......... $ 531 $ 917 ======== ======== In connection with the BFI related acquisitions (Note 2), the Company assumed liabilities as follows: Fair value of assets acquired........................... $ 17,040 $120,507 Cash paid for acquisitions (including acquisition costs)................................................ (11,493) (56,341) -------- -------- Liabilities assumed, stock and notes payable issued to sellers............................................... $ 5,547 $ 64,166 ======== ========
See accompanying notes. F-14 92 WASTE CONNECTIONS, INC. AND PREDECESSORS STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 1997 AND 1998 (IN THOUSANDS)
PREDECESSORS ------------------------------------------- THE DISPOSAL GROUP COMBINED PERIOD FROM PREDECESSORS COMBINED JANUARY 1, 1996 PERIOD ENDED THROUGH DECEMBER 31, 1996 JULY 31, 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 and equivalents............. 2,233 (82) Cash and equivalents at beginning of period................. 961 184 ------ ------- Cash and equivalents at end of period....................... $3,194 $ 102 ====== =======
See accompanying notes. F-15 93 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Waste Connections, Inc. ("WCI" or "the Company") was incorporated in Delaware on September 9, 1997 and commenced its operations on October 1, 1997 through the purchase of certain solid waste operations in Washington, as more fully described below and in Note 2. The Company is a regional, integrated, non- hazardous solid waste services company that provides collection, transfer, disposal and recycling services to commercial, industrial and residential customers in California, Idaho, Kansas, Nebraska, Oklahoma, Oregon, South Dakota, Utah, Washington and Wyoming. Basis of Presentation The consolidated financial statements of the Company include the accounts of WCI and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The entities the Company acquired in September 1997 from Browning-Ferris Industries, Inc. ("BFI") are collectively referred to herein as the Company's predecessors. BFI acquired the predecessor operations at various times during 1995 and 1996, and prior to being acquired by BFI, the predecessors operated as separate stand-alone businesses. During the periods in which the Company's predecessors operated as wholly owned subsidiaries of BFI, they maintained intercompany accounts with BFI for recording intercompany charges for costs and expenses, intercompany purchases of equipment and additions under capital leases and intercompany transfers of cash, among other transactions. It is not feasible to ascertain the amount of related interest expense that would have been recorded in the historical financial statements had the predecessors been operated as stand-alone entities. Charges for interest expense were allocated to the Company's predecessors by BFI as disclosed in the accompanying Statement of Operations. The interest expense allocations from BFI are based on formulas that do not necessarily correspond with the balances in the related intercompany accounts. Moreover, the financial position and results of operations of the predecessors during this period may not necessarily be indicative of the financial position or results of operations that would have been realized had the predecessors been operated as stand-alone entities. For the periods in which the predecessors operated as wholly owned subsidiaries of BFI, the statements of operations include amounts allocated by BFI to the predecessors for selling, general and administrative expenses based on certain allocation methodologies which the Company's management believes are reasonable. During the periods prior to their acquisition by BFI, the Company's predecessors operated as separate stand-alone businesses. The acquisitions of the predecessors by BFI were accounted for using the purchase method of accounting, and the respective purchase prices were allocated to the fair values of the assets acquired and liabilities assumed. Similarly, the Company's acquisitions of the predecessors from BFI in September 1997 were accounted for using the purchase method of accounting, and the purchase price was allocated to the fair value of the assets acquired and liabilities assumed. Consequently, the amounts of depreciation and amortization included in the statements of operations for the periods presented reflect the changes in basis of the underlying assets that were made as a result of the changes in ownership that occurred during the periods presented. In addition, because the predecessor companies operated independently and were not under common control or management during these periods, and because different tax strategies may have influenced their results of operations, the data may not be comparable to or indicative of their operating results after their acquisition by BFI. F-16 94 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Due to the manner in which BFI intercompany transactions were recorded as described above, it is not feasible to present a detailed analysis of transactions reflected in the net intercompany balance with BFI. The change in the predecessors' combined intercompany balance with BFI (net of income (loss) and initial investment in the acquired companies) was $642 and $2,142 during the period ended December 31, 1996 and the nine months ended September 30, 1997, respectively. The accompanying statements of operations and cash flows for the Company and its predecessors for the years ended December 31, 1996, 1997 and 1998 are comprised of the following entities for the periods indicated: YEAR ENDED DECEMBER 31, 1996: The Disposal Group Combined January 1, 1996 through July 31, 1996 (BFI acquisition date) Predecessors Combined Period ended December 31, 1996 (represents the combined results of operations of The Disposal Group subsequent to the BFI acquisition date and the operations for the year ended December 31, 1996 of Fibres International, Inc. which was acquired by BFI in 1995) YEAR ENDED DECEMBER 31, 1997: Predecessors Combined Nine months ended September 30, 1997 (represents the combined results of operations for the nine month period of the entities acquired by BFI in 1995 and 1996 described above) Waste Connections, Inc. Period from inception (September 9, 1997) through December 31, 1997 YEAR ENDED DECEMBER 31, 1998: Waste Connections, Inc. Year ended December 31, 1998
The Disposal Group Combined consists of three entities that were under common control prior to their acquisition by BFI: Diamond Fab and Welding Service, Inc., Buchmann Sanitary Service, Inc., and The Disposal Group. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Common Stock Valuation In connection with the Company's organization and initial capitalization in September 1997, the Company sold 2.3 million shares of common stock for $.01 per share to certain directors, consultants, and management. As a result, the Company recorded a non-recurring, non-cash stock compensation charge of $4,395 in the accompanying consolidated statement of operations, representing the difference between the amount paid for the shares and the estimated fair value of the shares of $1.92 per share on the date of sale. The estimated fair value of the common shares was determined by the Company based on an independent valuation of the common stock. F-17 95 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Cash equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of December 31, 1998, cash equivalents consist of demand money market accounts. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risks consist primarily of accounts receivable. Credit risk on accounts receivable is minimized as a result of the large and diverse nature of the Company's customer base. The Company maintains an allowance for losses based on the expected collectibility of accounts receivable. Credit losses have been within management's expectations. Property and Equipment Property and equipment are stated at cost. Improvements or betterments which significantly extend the life of an asset are capitalized. Expenditures for maintenance and repair costs are charged to operations as incurred. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts in the year of disposal. Gains and losses resulting from property disposals are included in other income (expense). Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are as follows: Machinery and equipment..................................... 3 - 10 years Rolling stock............................................... 10 years Containers.................................................. 5 - 15 years Furniture and fixtures...................................... 3 - 6 years
In connection with the Company's acquisitions (Note 2), the Company acquired certain used property and equipment. This used property and equipment is being depreciated using the straight-line method over the estimated remaining useful lives, which range from one to fifteen years. Capitalized landfill costs include expenditures for land and related airspace, permitting costs and preparation costs. Landfill permitting and preparation costs represent only direct costs related to those activities, including legal, engineering and construction. Interest is capitalized on landfill permitting and construction projects and other projects under development while the assets are undergoing activities to ready them for their intended use. The interest capitalization rate is based on the Company's weighted average cost of indebtedness. No interest was capitalized in 1998. Landfill permitting, acquisition and preparation costs, are amortized as permitted airspace of the landfill is consumed. Landfill preparation costs include the costs of construction associated with excavation, liners, site berms and the installation of leak detection and leachate collection systems. In determining the amortization rate for a landfill, preparation costs include the total estimated costs to complete construction of the landfills' permitted capacity. Units-of-production amortization rates are determined annually for the Company's operating landfill. The rates are based on estimates provided by the Company's outside engineers and consider the information provided by surveys which are performed at least annually. Goodwill Goodwill represents the excess of the purchase price over the fair value of the net assets of the acquired entities, and is amortized on a straight-line basis over the period of expected benefit of 40 years. Accumulated amortization amounted to $64 and $1,443 as of December 31, 1997 and 1998, respectively. The Company continually evaluates the value and future benefits of its intangible assets, including goodwill. The Company assesses recoverability from future operations using cash flows and income from F-18 96 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) operations of the related acquired business as measures. Under this approach, the carrying value would be reduced if it becomes probable that the Company's best estimate for expected future cash flows of the related business would be less than the carrying amount of the related intangible assets. There have been no adjustments to the carrying amounts of intangible assets resulting from these evaluations as of December 31, 1998. Fair Values of Financial Instruments The Company's financial instruments consist primarily of cash, trade receivables, restricted funds held in trust, trade payables and debt instruments. The carrying values of cash, trade receivables, restricted funds held in trust, and trade payables are considered to be representative of their respective fair values. The carrying values of the Company's debt instruments approximate their fair values as of December 31, 1997 and 1998, based on current incremental borrowing rates for similar types of borrowing arrangements. Interest Rate Protection Agreements Interest rate protection agreements are used to reduce interest rate risks and interest costs of the Company's debt portfolio. The Company enters into these agreements to change the fixed/variable interest rate mix of the portfolio to reduce the Company's aggregate exposure to increases in interest rates. The Company does not hold or issue derivative financial instruments for trading purposes. Hedge accounting treatment is applied to interest rate derivative contracts that are designated as hedges of specified debt positions. Amounts payable or receivable under interest rate swap agreements are recognized as adjustments to interest expense in the periods in which they accrue. Net premiums paid for derivative financial instruments are deferred and recognized ratably over the life of the instruments. Under hedge accounting treatment, current period income is not affected by the increase or decrease in the fair market value of derivative instruments as interest rates change and these instruments are not reflected in the financial statements at fair market value. Early termination of a hedging instrument does not result in recognition of immediate gain or loss except in those cases when the debt instruments to which a contract is specifically linked is terminated. Income Taxes The Company and The Disposal Group use the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. During the periods in which the predecessors were owned by BFI, their operations were included in the consolidated income tax returns of BFI, and no allocations of income taxes were reflected in the historical statements of operations. For purposes of the combined predecessor financial statements, current and deferred income taxes have been provided on a separate income tax return basis. Revenue Recognition Revenues are recognized as services are provided. Certain customers are billed in advance and, accordingly, recognition of the related revenues is deferred until the services are provided. Start-Up and Integration Expenses During the period from inception (September 9, 1997) through December 31, 1997, the Company incurred certain start-up expenses relating to the formation of the Company, primarily for legal and other F-19 97 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) professional services, and the costs associated with recruiting the Company's initial management team. In addition, the Company incurred certain integration expenses relating to its initial acquisitions. These start-up and integration expenses have been charged to operations as incurred. Stock-Based Compensation As permitted under the provisions of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation" ("SFAS 123"), the Company has elected to account for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board's Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). Under the intrinsic value method, compensation cost is the excess, if any, of the quoted market price or fair value of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. None of the predecessor entities awarded stock-based compensation to employees. Consequently, the related disclosures in the accompanying financial statements and notes relate solely to the Company. Per Share Information In 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 128, Earnings per Share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts have been presented on the basis set forth in Statement 128 (Note 11). Earnings per share data have not been presented for the predecessor operations because such data is not meaningful. Closure and Post-Closure Costs The Company does not accrue for closure and post-closure costs related to the Fairmead Landfill it operates in Madera County, California. Madera County as required by state law, has established a special fund to pay such liabilities. In 1998, the Company acquired the stock of Red Carpet Landfill ("Red Carpet") in Oklahoma and Butler County Landfill ("Butler") in Nebraska. Both Red Carpet and Butler are engaged in landfilling of municipal solid waste and other acceptable waste streams. Accrued closure and post-closure costs include the current and non-current portion of accruals associated with obligations for closure and post-closure of the landfill. The Company, based as input from its outside engineers, estimates its future closure and post-closure monitoring and maintenance costs for solid waste landfills based on its interpretation of the technical standards of the U.S. Environmental Protection Agency's Subtitle D regulations and the air emissions standards under the Clean Air Act as they are being applied on a state-by-state basis. Closure and post-closure monitoring and maintenance costs represent the costs related to cash expenditures yet to be incurred when a landfill facility ceases to accept waste and closes. Accruals for closure and post-closure monitoring and maintenance requirements in the U.S. consider final capping of the site, site inspection, groundwater monitoring, leachate management, methane gas control and recovery, and operating and maintenance costs to be incurred during the period after the facility closes. Certain of these environmental costs, principally capping and methane gas control costs, are also incurred during the operating life of the site in accordance with the landfill operation requirements of Subtitle D and the air emissions standards. Reviews of the future requirements for closure and post-closure monitoring and maintenance costs for the Company's operating landfills are performed by the Company's consulting engineers at least annually and are the basis upon which the Company's estimates of these future costs and the related accrual rates are revised. The Company provides accruals for these estimated costs as the remaining permitted airspace of such facilities is F-20 98 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) consumed. The states in which the Company operates its landfills require a specified portion of these accrued closure and post-closure obligations to be funded at any point in time. As of December 31, 1998, the Company estimates that total closure and post closure costs relating to its landfills will be approximately $5,474, of which approximately $1,233 has been accrued as of December 31, 1998 and included in other long-term liabilities in the accompanying balance sheet. Segment Information The Company adopted FASB Statement No. 131, Disclosure About Segments of an Enterprise and Related Information in 1998. Statement 131 established standards for the way that public business enterprises report information about operating segments. It also established standards for related disclosures about products and services, geographic areas and major customers. Implementation of the provisions of Statement 131 did not have a significant impact on the Company's disclosures. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. The statement, which is to be applied prospectively, is effective for the Company's year ended December 31, 2000. The Company is currently evaluating the impact of SFAS No. 133 on its future results of operations and financial position. In April 1998, Statement of Position ("SOP") No. 98-5 -- "Reporting on the Costs of Start-Up Activities" was issued by the American Institute of Certified Public Accountants. The statement requires costs of start-up activities and organization costs to be expensed as incurred. Initial application of the statement, which is effective for the Company's year ended December 31, 1999, is to be reported as a cumulative effect of a change in accounting principle. The Company believes that the future adoption of SOP No. 98-5 will not have a material effect on its results of operations or financial position. Reclassifications Certain amounts reported in the Company's prior year's financial statements have been reclassified to conform with the 1998 presentation. 2. ACQUISITIONS 1998 Acquisitions During 1998, the Company acquired 42 businesses, including 2 operational landfills, which were accounted for as purchases. Aggregate consideration for these acquisitions consisted of $56,341 in cash (net of cash acquired), $12,488 in notes payable to sellers, 2,054,634 shares of common stock valued at $25,293, and warrants to purchase 267,925 shares of common stock valued at $1,293. The results of operations of the acquired businesses have been included in the Company's consolidated financial statements from their respective acquisition dates. F-21 99 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Certain items affecting the purchase price allocations are preliminary. A summary of the preliminary purchase price allocations as of December 31, 1998 for the acquisitions consummated in 1998 is as follows: Acquired assets: Accounts receivable....................................... $ 4,670 Prepaid expenses and other current assets................. 301 Property and equipment.................................... 25,853 Goodwill.................................................. 86,358 Long-term franchise agreements and other.................. 2,390 Non-competition agreement................................. 540 Other assets.............................................. 395 Assumed liabilities: Deferred revenue.......................................... (577) Accounts payable and accrued liabilities.................. (9,210) Other accrued liabilities................................. (1,575) Long-term liabilities assumed............................. (13,638) Deferred income taxes..................................... (92) -------- $ 95,415 ========
In connection with certain of the acquisitions in 1998, the Company is required to pay contingent consideration to certain former shareholders of the respective companies, subject to the occurrence of specified events. As of December 31, 1998, contingent payments relating to these acquisitions total approximately $4,400, including 51,746 shares placed into escrow, are payable primarily in cash and stock, and are earned based upon the achievement of certain milestones. No amounts related to these contingent payments have been included in the Company's financial statements as the events which would give rise to such payments have not yet occurred nor are probable. Browning-Ferris Industries Related On September 29, 1997, the Company purchased all of the outstanding stock of Browning-Ferris Industries of Washington, Inc. and Fibres International, Inc. from BFI (collectively the "BFI Acquisitions"). The total purchase price for the BFI Acquisitions was approximately $15,036, comprised principally of $11,493 in cash and promissory notes payable to BFI totaling $3,543. Of the combined $15,036 purchase price, $9,869 was recorded as goodwill and $150 was assigned to a non-competition agreement. The BFI Acquisitions were accounted for in accordance with the purchase method of accounting and, accordingly, the net assets acquired were included in the Company's consolidated balance sheet based upon their estimated fair values on the date of the BFI Acquisitions. The Company's consolidated statement of operations includes the revenues and expenses of the acquired businesses after the effective date of the transaction. F-22 100 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) A summary of the purchase price allocation for the BFI Acquisitions is as follows: Acquired assets: Accounts receivable....................................... $ 2,919 Prepaid expenses and other current assets................. 287 Property and equipment.................................... 4,106 Goodwill.................................................. 9,869 Non-competition agreement................................. 150 Assumed liabilities: Deferred revenue.......................................... (428) Accounts payable and accrued liabilities.................. (26) Accrued losses on acquired contracts...................... (1,309) Deferred income taxes..................................... (532) ------- $15,036 =======
Predecessor Acquisitions As described in Note 1, BFI acquired for cash and debt The Disposal Group Combined on July 31, 1996 in a transaction accounted for as a purchase. Accordingly, the respective purchase price was allocated to the fair values of the assets acquired and liabilities assumed. The following presents purchase price information for this acquisition: Tangible assets acquired.................................... $2,076 Goodwill.................................................... 2,671 Assumed liabilities......................................... (33) ------ $4,714 ======
The following unaudited pro forma results of operations assume that the Company's significant acquisitions included above had occurred at the beginning of each period presented:
YEAR ENDED DECEMBER 31, ------------------------ 1997 1998 --------- --------- (UNAUDITED) Total revenue.......................................... $61,347 $70,360 Net income (loss)...................................... (5,187) 2,678 Basic income (loss) per share.......................... (2.12) 0.26 Diluted income (loss) per share........................ (2.12) 0.20
The unaudited pro forma results do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred on January 1, 1997, nor are they necessarily indicative of future operating results. F-23 101 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 3. INTANGIBLE ASSETS Intangible assets consist of the following as of December 31, 1997 and 1998:
DECEMBER 31, ------------------ 1997 1998 ------ -------- Goodwill................................................. $9,472 $ 96,545 Long-term franchise agreements and contracts............. -- 2,390 Non-competition agreement................................ 150 690 Other.................................................... -- 777 ------ -------- 9,622 100,402 Less accumulated amortization............................ (72) (1,617) ------ -------- $9,550 $ 98,785 ====== ========
The Company acquired certain long-term franchise agreements, contracts and non-competition agreements in connection with certain of its acquisitions. The estimated fair value of the acquired long-term franchise agreements and contracts was determined by management based on the discounted net cash flows associated with the agreements and contracts. The estimated fair value of the non-competition agreements was determined by management based on the discounted adjusted operating income stream that would have otherwise been subject to competition. The amounts assigned to the franchise agreements, contracts, and non-competition agreements is being amortized on a straight-line basis over the lesser of 40 years or the remaining term of the related agreements (ranging from 17 to 40 years). 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following as of December 31, 1997 and 1998:
DECEMBER 31, ----------------- 1997 1998 ------ ------- Land, buildings and improvements.......................... $ -- $13,287 Rolling stock............................................. 2,353 11,325 Containers................................................ 1,995 7,410 Machinery and equipment................................... 60 3,866 Furniture and fixtures.................................... 67 86 ------ ------- 4,475 35,974 Less accumulated depreciation............................. (290) (2,931) ------ ------- $4,185 $33,043 ====== =======
Landfill costs of approximately $9,044 are included in land, buildings and improvements at December 31, 1998. No landfills were owned as of December 31, 1997. Combined depreciation expense for the predecessor operations was $1,101 and $789 for the year ended December 31, 1996 and the nine months ended September 30, 1997, respectively. The Company's depreciation expense for the period from inception (September 9, 1997) through December 31, 1997 and for the year ended December 31, 1998 was $290 and $2,556, respectively. F-24 102 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 5. OTHER ASSETS Other assets consist of the following as of December 31, 1997 and 1998:
DECEMBER 31, -------------- 1997 1998 ---- ------ Restricted funds held in trust.............................. $-- $1,521 Other....................................................... 27 273 --- ------ $27 $1,794 === ======
Restricted funds held in trust are included as part of other assets and consist of amounts on deposit with various banks that support the Company's financial assurance obligations for its landfill facilities' closure and postclosure costs and amounts outstanding under the Madera Bond (Note 6). 6. LONG-TERM DEBT On January 30, 1998, the Company obtained a revolving credit facility from BankBoston N.A. (the "January Credit Facility"). The maximum amount available under the January Credit Facility was $25,000 including stand-by letters-of-credit, and the borrowings bore interest at various fixed and/or variable rates at the Company's option. The January Credit Facility allowed for the Company to issue up to $5,000 in stand-by letters-of-credit. The January Credit Facility required quarterly payments of interest and required the Company to pay an annual commitment fee equal to 0.5% of the unused portion of the January Credit Facility. In connection with the January Credit Facility the Company granted to an affiliate of BankBoston a warrant to purchase 140,000 shares of the Company's common stock with an exercise price of $2.80 per share and an expiration date of January 29, 2008 (Note 9). On May 28, 1998, the Company entered into a new revolving credit facility with a syndicate of banks for which BankBoston N.A. acted as agent (the "May Credit Facility"). The maximum amount available under the May Credit Facility was $60,000 (including stand-by letters of credit) and the borrowings bore interest at various fixed and/or variable rates at the Company's option. The May Credit Facility replaced the January Credit Facility. The May Credit Facility allowed for the Company to issue up to $5,000 in stand-by letters-of-credit. The May Credit Facility required quarterly payments of interest and borrowings were secured by virtually all of the Company's assets. The May Credit Facility required the Company to pay an annual commitment fee equal to 0.375% of the unused portion of the facility. On November 20, 1998, the Company entered into a new revolving credit facility with a syndicate of banks for which BankBoston N.A. acted as agent (the "November Credit Facility"). As of December 31, 1998, the maximum amount available under the November Credit Facility is $115,000 (including stand-by letters of credit) and the borrowings bear interest at various fixed and/or variable rates at the Company's option (approximately 7.0% as of December 31, 1998). The maximum amount available was increased to $125,000 in January 1999. The November Credit Facility replaced the May Credit Facility. The November Credit Facility allows for the Company to issue up to $15,000 in stand-by letters-of-credit, of which $1,829 were issued as of December 31, 1998. The November Credit Facility requires quarterly payments of interest and it matures in November 2003. Borrowings are secured by substantially all of the Company's assets and the Company is required to pay an annual commitment fee equal to 0.375% of the unused portion of the facility. The November Credit Facility places certain business, financial and operating restrictions on the Company relating to, among other things, the incurrence of additional indebtedness, investments, acquisitions, asset sales, mergers, dividends, distributions and repurchase and redemption of capital stock. The November Credit F-25 103 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Facility also contains covenants that require specified financial ratios and balances be maintained. As of December 31, 1998, the Company was in compliance with these covenants. On June 16, 1998, the Company completed a $1,800 tax-exempt bond financing for its Madera subsidiary (the "Madera Bond"). These funds will be used for specified capital expenditures and improvements, including installation of a landfill gas recovery system. The bonds mature on May 1, 2016 and bear interest at variable rates based on market conditions for California tax exempt bonds (approximately 3.8% at December 31, 1998). The bonds are backed by a letter of credit issued by BankBoston N.A. under the November Credit Facility for $1,800. Funds from the bond offering are held by a trustee until the capital expenditures are completed. The unused funds are classified as restricted cash and included in other assets in the accompanying consolidated balance sheet. Long-term debt consists of the following as of December 31, 1997 and 1998:
DECEMBER 31, ------------------- 1997 1998 ------ ------- November Credit Facility.................................... $ -- $57,281 Madera Bond................................................. -- 1,800 Term loan payable to a bank bearing interest at the bank's prime rate plus 2.0% (aggregating 10.5% as of December 31, 1997); monthly principal payments of $76 plus interest beginning October 1997 through August 2002; all outstanding principal and interest are due September 2002; secured by substantially all of the Company's assets; subordinate to the notes payable to BFI with respect to certain specified assets.................................. 5,343 -- Note payable to sellers in connection with acquisition, non-interest bearing, due January 1999.................... -- 8,546 Revolving line of credit from a bank bearing interest at the bank's prime rate plus 1.5% (aggregating 10% at December 31, 1997); interest was payable monthly and the line was to expire on September 29, 1998; secured by substantially all of the Company's assets............................... 600 -- Note payable to BFI bearing interest at 6.0%; all outstanding principal and interest are due December 1997; secured by substantially all of the Company's accounts receivable................................................ 319 -- Note payable to BFI bearing interest at 10%; quarterly payments of interest beginning December 1997; all outstanding principal and interest are due March 1998; secured by substantially all of WCII's assets............. 500 -- Other....................................................... -- 1,995 ------ ------- 6,762 69,622 Less: current portion....................................... -- (9,516) ------ ------- $6,762 $60,106 ====== =======
The term loan payable to the Bank and the notes payable to BFI were personally guaranteed by certain officers and stockholders of the Company (Note 9). F-26 104 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) As of December 31, 1998, aggregate contractual future principal payments by calendar year on long-term debt are due as follows: 1999............................................... $ 9,516 2000............................................... 561 2001............................................... 251 2002............................................... 84 2003............................................... 57,367 Thereafter......................................... 1,843 ------- $69,622 =======
Management used borrowings from the January Credit Facility to pay off all amounts outstanding under the term loan payable to the bank and all notes payable to BFI, and as such, these amounts have been classified as long-term debt as of December 31, 1997. The Company has entered into an interest rate protection agreement (the "Interest Agreement"), with its primary banking institution to reduce its exposure to fluctuations in variable interest rates. The Interest Agreement, which is effective November 2, 1998 through November 2, 2000, effectively changes the Company's interest rate paid on a notional amount of $27,700 of its floating rate long-term debt to a weighted average fixed rate (approximately 6.43% at December 31, 1998). The fair value of the Interest Agreement as of December 31, 1998 was approximately $188, which reflects the estimated amounts that the Company would receive to terminate the Interest Agreement based on quoted market prices of comparable contracts as of December 31, 1998. In the event of nonperformance by the counterparty, the Company would be exposed to interest rate risk if the variable interest rate received were to exceed the fixed rate paid by the Company under the terms of the Interest Agreement. 7. COMMITMENTS AND CONTINGENCIES COMMITMENTS Leases The Company leases its facilities and certain equipment under non-cancelable operating leases for periods ranging from one to five years. Combined rent expense for the predecessor operations was $412 and $441 for the year ended December 31, 1996 and the nine months ended September 30, 1997, respectively. The Company's rent expense under operating leases during the period from inception (September 9, 1997) through December 31, 1997 and for the year ended December 31, 1998 amounted to $52 and $500, respectively. As of December 31, 1998, future minimum lease payments under these leases, by calendar year, are as follows: 1999................................................ $ 521 2000................................................ 539 2001................................................ 490 2002................................................ 418 2003................................................ 413 Thereafter.......................................... 1,774 ------ $4,155 ======
F-27 105 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Performance Bonds and Letters of Credit Municipal solid waste collection contracts may require performance bonds or other means of financial assurance to secure contractual performance. As of December 31, 1998, the Company had provided customers and various regulatory authorities with bonds and letters of credit of approximately $3,692 to secure its obligations. The Company's November Credit Facility provides for the issuance of letters of credit in an amount up to $15,000, but any letters of credit issued reduce the availability of borrowings for acquisitions or other general corporate purposes. If the Company were unable to obtain surety bonds or letters of credit in sufficient amounts or at acceptable rates, it could be precluded from entering into additional municipal solid waste collection contracts or obtaining or retaining landfill operating permits. CONTINGENCIES Environmental Risks The Company is subject to liability for any environmental damage that its solid waste facilities may cause to neighboring landowners or residents, particularly as a result of the contamination of soil, groundwater or surface water, and especially drinking water, including damage resulting from conditions existing prior to the acquisition of such facilities by the Company. The Company may also be subject to liability for any off-site environmental contamination caused by pollutants or hazardous substances whose transportation, treatment or disposal was arranged by the Company or its predecessors. Any substantial liability for environmental damage incurred by the Company could have a material adverse effect on the Company's financial condition, results of operations or cash flows. As of December 31, 1998, the Company is not aware of any such environmental liabilities. Legal Proceedings In the normal course of its business and as a result of the extensive governmental regulation of the solid waste industry, the Company is subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines on the Company or to revoke or deny renewal of an operating permit held by the Company. From time to time the Company may also be subject to actions brought by citizens' groups or adjacent landowners or residents in connection with the permitting and licensing of landfills and transfer stations, or alleging environmental damage or violations of the permits and licenses pursuant to which the Company operates. In addition, the Company may become party to various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of the waste management business. However, as of December 31, 1998 there is no current proceeding or litigation involving the Company that the Company believes will have a material adverse impact on its business, financial condition, results of operations or cash flows. During the period from January 1, 1996 through July 31, 1996, The Disposal Group won a lawsuit against the city of Vancouver, Washington relating to the city's annexation of certain territories served by The Disposal Group. The Disposal Group received approximately $2,600 from the lawsuit, which is included in other income in the accompanying statement of operations. Employees Approximately 67 drivers and mechanics at the Company's Vancouver, Washington operation are represented by the Teamsters Union, with which Browning-Ferris Industries of Washington, Inc., the F-28 106 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Company's predecessor in Vancouver, entered a four-year collective bargaining agreement in January 1997. Approximately 11 drivers at Arrow Sanitary Services, Inc. ("Arrow"), a wholly owned subsidiary of the Company, are represented by the Teamsters Union, with which Arrow entered into a three-year collective bargaining agreement in March 1998. In addition, in July 1997, the employees at the Company's facility in Issaquah, Washington, adopted a measure to select a union to represent them in labor negotiations with management. The union and management operated under a one-year negotiating agreement, that ended July 27, 1998. Since July 27, 1998, negotiations have continued between the union and the Company, although the union is permitted to call a strike or call for arbitration of the outstanding issues. The employees at Issaquah have filed to decertify the union, and the union has filed a claim with the National Labor Relation Board to attempt to block the decertification. The Company is not aware of any other organizational efforts among its employees and believes that its relations with its employees are good. 8. REDEEMABLE CONVERTIBLE PREFERRED STOCK In September 1997, the Company received net proceeds of $6,992 from the sale of 2,499,998 shares of redeemable convertible preferred stock (the "Preferred Stock"). The Preferred Stock accrued cumulative dividends at the rate of $.098 per share annually. Accumulated and unpaid dividends on Preferred Stock amounted to $61 as of December 31, 1997. Each share of Preferred Stock was redeemable, at the holder's option, during the period from April 1, 1999 through October 1, 1999 for $4.20 per share plus any accumulated and unpaid dividends. The Preferred Stock and any accumulated and unpaid dividends were convertible at the holder's option into shares of the Company's common stock at the calculated rate of $2.80 per share divided by the "Conversion Price" subject to certain anti-dilution adjustments. Each share was automatically converted into common stock immediately upon the closing of the Company's initial public offering of common stock at a Conversion Price of $2.80 per share. 9. STOCKHOLDERS' EQUITY (DEFICIT) Common Stock Of the 40,564,767 shares of common stock authorized but unissued as of December 31, 1998, the following shares were reserved for issuance: Stock option plan........................................... 1,139,214 Stock purchase warrants..................................... 1,291,135 Shares held in escrow....................................... 51,746 --------- 2,482,095 =========
Stockholder Notes Receivable In December 1997, the Company provided loans in the aggregate amount of $82 to certain employees, who are also common stockholders, for the purchase of shares of the Company's Preferred Stock. The notes bore interest at 8%, were secured by the Preferred Stock purchased and common stock owned by the employees, and were paid in full during 1998. F-29 107 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Stock Options In November 1997, the Company's Board of Directors adopted a stock option plan in which all officers, employees, directors and consultants may participate (the "Option Plan"). Options granted under the Option Plan may either be incentive stock options or nonqualified stock options (the "Options"), generally have a term of 10 years from the date of grant, and will vest over periods determined at the date of grant. The exercise prices of the options are determined by the Company's Board of Directors and will be at least 100% or 110% of the fair market value of the Company's common stock on the date of grant as provided for in the Option Plan. In connection with the Option Plan, the Company's Board of Directors approved the reservation of 1,200,000 shares of common stock for issuance thereunder. As of December 31, 1997 and 1998, 35,000 and 333,121 options to purchase common stock were exercisable under the Option Plan, respectively. In addition, as of December 31, 1997 and 1998, options for 671,500 and 160,450 shares, respectively of common stock were available for future grants under the Option Plan. A summary of the Company's stock option activity and related information during the period from inception (September 9, 1997) through December 31, 1997 and the year ended December 31, 1998 is presented below:
NUMBER OF WEIGHTED AVERAGE SHARES (OPTIONS) EXERCISE PRICE ---------------- ---------------- Outstanding at inception....................... -- $ -- Granted........................................ 528,500 4.92 ------- ----- Outstanding as of December 31, 1997............ 528,500 4.92 Granted........................................ 511,050 9.58 Forfeited...................................... 2,874 5.00 Exercised...................................... 57,912 4.69 ------- Outstanding as of December 31, 1998............ 978,764 7.38 =======
The following table summarizes information about stock options outstanding as of December 31, 1998:
OPTIONS OUTSTANDING -------------------------------- WEIGHTED OPTIONS EXERCISABLE AVERAGE -------------------- WEIGHTED REMAINING WEIGHTED AVERAGE CONTRACTUAL AVERAGE EXERCISE LIFE EXERCISE EXERCISE RANGE SHARES PRICE (IN YEARS) SHARES PRICE -------------- ------- -------- ----------- -------- --------- $2.80 to 5.00................... 544,099 $ 2.92 8.9 190,869 $ 2.97 $6.00 to 9.50................... 62,415 8.42 8.9 14,582 8.01 $10.50 to 12.50................. 240,000 11.06 9.2 80,003 11.05 $15.19 to 19.00................. 95,750 17.25 9.5 47,667 16.23 $21.00 to 22.13................. 36,500 21.90 9.6 -- -- ------- ------- 978,764 7.38 8.9 333,121 7.04 ======= =======
F-30 108 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The weighted average grant date fair values for options granted during 1997 and 1998 are as follows:
YEAR ENDED DECEMBER 31, -------------- 1997 1998 ----- ----- Exercise prices equal to market price of stock.............. $ -- $5.28 Exercise prices less than market price of stock............. -- 6.52 Exercise prices greater than market price of stock.......... 0.30 3.09
Pro Forma information regarding net income (loss) and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the period from inception (September 9, 1997) through December 31, 1997 and the year ended December 31, 1998: risk-free interest rate of 6% and 5%, respectively; dividend yield of zero; volatility factor of the expected market price of the Company's common stock of .40 and .55, respectively; and a weighted-average expected life of the option of 4 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The following table summarizes the Company's pro forma net loss and pro forma basic net loss per share for the period from inception (September 9, 1997) through December 31, 1997 and for the year ended December 31, 1998:
YEAR ENDED DECEMBER 31, ----------------- 1997 1998 ------- ------ Pro forma net income (loss)............................... $(5,070) $ 425 Pro forma net loss applicable to common stockholders...... (5,601) (492) Pro forma basic net loss per share........................ (2.99) (0.08)
During the year ended December 31, 1998, the Company recorded deferred stock compensation of $821 relating to stock options granted with exercise prices less than the estimated fair value of the Company's common stock on the date of grant. The deferred stock compensation is being amortized into expense over the vesting periods of the stock options which generally range from 1 to 3 years. Compensation expense of $393 was recorded during the year ended December 31, 1998 relating to these options, and the remaining $428 will be amortized into expense in future periods. Stock Purchase Warrants At December 31, 1998, the Company had outstanding warrants to purchase 1,291,135 shares of the Company's common stock at exercise prices between $0.01 and $22.13 per share. The warrants are exercisable upon vesting and notification and expire between 2000 and 2008. F-31 109 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) In September 1997, the Company issued a warrant to purchase 200,000 shares of the Company's common stock to the bank that provided the line of credit and term loan payable. The exercise price of the warrant is $.01 per share and contains provisions for a cashless exercise at the bank's option. The warrant was valued at $382 on its date of issuance using the Black-Scholes pricing model with an assumed stock price volatility of .40, risk-free interest rate of 6.0%, estimated fair value of the common stock of $1.92 per share and an expected life of 7 years. The value assigned to the warrant was reflected as a discount on long-term debt. The discount was fully accreted to interest expense using the straight-line method over the expected term of the debt agreements (approximately three months). In 1998, the bank received 172,578 shares of common stock through the exercise of 172,689 warrants. In connection with their guarantee of certain of the Company's debt obligations, the Company issued in December, 1997, warrants to purchase 841,000 shares of the Company's common stock to certain directors and stockholders of the Company. The exercise price of the warrants is $2.80 per share. The warrants were valued at $328 on their date of issuance using the Black-Scholes pricing model with an assumed stock price volatility of .40, risk-free interest rate of 6.0%, estimated fair value of the common stock of $1.92 per share and expected lives of 3 years. The value assigned to these warrants was fully amortized to interest expense over the expected term of the debt agreements (approximately three months). In December 1997, the Company issued to consultants warrants to purchase 15,000 shares of the Company's common stock. Warrants to purchase 10,000 and 5,000 shares of common stock had exercise prices of $5.00 per share and $2.80 per share, respectively. In January 1998, the Company issued a warrant to purchase 140,000 shares of its common stock to BankBoston N.A. in connection with the January Credit Facility. The exercise price of the warrant is $2.80 per share. The warrant was valued at $855 on its date of issuance using the Black-Scholes pricing model with an assumed stock price volatility of .40, risk-free interest rate of 6%, estimated fair value of the common stock of $7.50 per share and an expected life of 10 years. The value assigned to the warrant was reflected as a discount on long-term debt and accreted to interest expense using the interest method over the expected term of the January Credit Facility. The January Credit Facility was extinguished in May, 1998 and the unamortized discount on the debt was expensed as an extraordinary loss on early extinguishment of debt. In February 1998, the Company issued warrants to purchase 200,000 shares of its common stock with an exercise price of $4.00 per share in connection with an acquisition. The warrants were valued at $954 using the Black-Scholes pricing model and recorded as an element of purchase price for the acquisition. In February 1998, the Company granted warrants to an employee to purchase 50,000 shares of the Company's common stock at $2.80 per share. The Company recorded stock compensation expense of approximately $240 relating to these warrants. All such warrants were exercised in 1998. During 1998, the Company issued warrants to certain third party market development consultants to purchase 67,935 shares of the Company's common stock with exercise prices ranging from $12.00 to $22.13 per share. The warrants were valued at $339 using the Black-Scholes pricing model and recorded as an element of purchase price of the related acquisitions. F-32 110 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 10. INCOME TAXES The provision (benefit) for income taxes for the periods ended December 31, 1996, the nine months ended September 30, 1997, the period from inception (September 9, 1997) through December 31, 1997 and the year ended December 31, 1998 consists of the following:
PREDECESSORS ------------------ THE DISPOSAL GROUP WASTE CONNECTIONS, INC. COMBINED ----------------------------------------- PERIOD FROM PERIOD FROM INCEPTION JANUARY 1, 1996 (SEPTEMBER 9, 1997) THROUGH THROUGH YEAR ENDED JULY 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998 ------------------ --------------------- ----------------- Current: Federal.................. $207 $ 38 $ 862 State.................... -- -- 142 Deferred: Federal.................. 298 (370) 1,252 State.................... -- -- 139 ---- ----- ------ $505 $(332) $2,395 ==== ===== ======
Significant components of the Company's deferred income tax assets and liability were as follows as of December 31, 1997 and 1998:
WASTE CONNECTIONS, INC. DECEMBER 31, ------------------ 1997 1998 ------ -------- Deferred income tax assets: Accounts receivable reserves......................... $ 8 $ 152 Amortization......................................... 290 -- Accrued expenses..................................... -- 8 Vacation accrual..................................... 15 6 State taxes.......................................... -- 22 Other................................................ -- 49 Net operating losses................................. 54 -- ----- ------- Total deferred income tax assets................ 367 237 Deferred income tax liabilities: Amortization......................................... -- (757) Depreciation......................................... (529) (745) Other liabilities.................................... -- (146) Prepaid expenses..................................... -- (234) ----- ------- Total deferred income tax liabilities........... (529) (1,882) ----- ------- Net deferred income tax liability....................... $(162) $(1,645) ===== =======
F-33 111 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The differences between the Company's provision (benefit) for income taxes as presented in the accompanying statements of operations and benefit for income taxes computed at the federal statutory rate is comprised of the items shown in the following table as a percentage of pre-tax income (loss):
PREDECESSORS ---------------------------------------------------- THE DISPOSAL GROUP COMBINED PREDECESSORS PREDECESSORS PERIOD FROM COMBINED COMBINED JANUARY 1, 1996 PERIOD ENDED NINE MONTHS ENDED THROUGH DECEMBER 31, SEPTEMBER 30, JULY 31, 1996 1996 1997 --------------- ------------ ----------------- Income tax provision (benefit) at the statutory rate........................................... 34.0% (34.0)% (34.0)% Effect of valuation allowance.................... (16.0)% 34.0% 34.0% ----- ----- ----- 18.0% -- -- ===== ===== =====
WASTE CONNECTIONS, INC. ------------------------------------------- PERIOD FROM INCEPTION (SEPTEMBER 9, 1997) THROUGH YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1998 --------------------- ----------------- Income tax provision/(benefit) at the statutory rate..... (34.0)% 34.0% State taxes, net of federal benefit...................... -- 4.0% Goodwill amortization.................................... -- 3.0% Stock compensation expense............................... 28.0% 4.0% Other.................................................... -- 1.0% ----- ---- (6.0)% 46.0% ===== ====
F-34 112 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 11. NET INCOME (LOSS) PER SHARE INFORMATION The following table sets forth the calculation of the numerator and denominator used in the computation of basic and diluted net income (loss) per share for the period from inception (September 9, 1997) through December 31, 1997 and the year ended December 31, 1998:
PERIOD FROM INCEPTION (SEPTEMBER 9, 1997) THROUGH YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------------------- BASIC AND DILUTED BASIC NET DILUTED NET NET LOSS INCOME (LOSS) INCOME (LOSS) PER SHARE PER SHARE PER SHARE -------------------- ------------- ------------- Numerator: Income (loss) before extraordinary item........ $ (5,066) $ 2,775 $ 2,775 Redeemable convertible preferred stock accretion................................... (531) (917) (917) ---------- ---------- ---------- Income (loss) applicable to common stockholders before extraordinary item................... $ (5,597) $ 1,858 $ 1,858 ========== ========== ========== Extraordinary item............................. -- (1,027) (1,027) ---------- ---------- ---------- Net income (loss) applicable to common stockholders................................ $ (5,597) $ 831 $ 831 ========== ========== ========== Denominator: Weighted average common shares outstanding..... 1,872,567 6,460,293 6,460,293 Dilutive effect of stock options and warrants outstanding................................. -- -- 1,628,930 Incremental common shares issuable upon redemption of redeemable common stock....... -- -- 282,192 ---------- ---------- ---------- 1,872,567 6,460,293 8,371,415 ========== ========== ==========
As of December 31, 1998, outstanding options and warrants to purchase 87,832 shares of common stock (with exercise prices from $18.62 to $22.13) could potentially dilute basic net income per share in the future and have not been included in the computation of diluted net income per share because to do so would have been antidilutive for the period presented. 12. RELATED PARTY TRANSACTIONS The Company has entered into certain transactions with Continental Paper, LLC ("Continental"), in which the Company delivers to Continental all of the Company's collected recyclable materials in areas in which Continental has processing facilities and Continental pays the Company market rates for the recyclable materials. Certain of the Company's stockholders are the majority owners of Continental. During the period from inception (September 9, 1997) through December 31, 1997 and the year ended December 31, 1998, the Company received, after deducting amounts paid to Continental, approximately $10 and paid approximately $108, respectively, to/from Continental in these transactions. 13. EMPLOYEE BENEFIT PLAN The Company has a voluntary savings and investment plan (the "401(k) Plan"). The 401(k) Plan is available to all eligible, non-union employees of the Company. Under the 401(k) Plan, the Company's contributions are 40% of the first 5% of the employee's contributions. During the period from inception F-35 113 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (September 9, 1997) through December 31, 1997 and the year ended December 31, 1998, the Company's 401(k) Plan expense was approximately $2 and $58, respectively. 14. SUBSEQUENT EVENTS Murrey Companies Merger On January 19, 1999, the Company merged with Murreys Disposal Company, Inc., DM Disposal Co., Inc., American Disposal Company, Inc., and Tacoma Recycling, Inc. (Collectively, the "Murrey Companies"). The transactions were accounted for as poolings-of-interests, whereby the Company issued 2,888,880 shares of its common stock for all of the outstanding shares of the Murrey Companies. In Connection with the merger with the Murrey Companies, the Company incurred transaction related costs of approximately $6,200, which will be charged to operations in the first quarter of 1999. Secondary Public Offering Effective February 9, 1999, the Company sold approximately 4,000,000 shares of its common stock at $17.50 per share. As a result of the offering, the Company received approximately $65,300 in net proceeds and used the proceeds to pay down approximately $50,200 of its then outstanding debt. Acquisition of Columbia Resource Co. L.P. and Finley-Buttes Limited Partnership (CRCFBLP) On March 31, 1999, the Company acquired the stock of two companies that are the sole partners of CRCFBLP. Total consideration paid for CRCFBLP was approximately $66,900 in cash. New Credit Facility On March 30, 1999, the Company obtained commitments from a syndicate of banks led by BankBoston, N.A., which increased the Company's borrowing capacity from $125,000 to $225,000 and modified certain covenants. The revised credit facility matures in 2004. F-36 114 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Shareholders Murrey's Disposal Company, Inc. American Disposal Company, Inc. D.M. Disposal Co., Inc. Tacoma Recycling Company, Inc. We have audited the accompanying combined balance sheets of Murrey's Disposal Company, Inc., American Disposal Company, Inc., D.M. Disposal Co., Inc., and Tacoma Recycling Company, Inc. (collectively the "Murrey Companies") as of December 31, 1997 and 1998, and the related combined statements of income and retained earnings, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Murrey Companies' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Murrey Companies at December 31, 1997 and 1998, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Sacramento, California February 4, 1999 F-37 115 THE MURREY COMPANIES COMBINED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS
DECEMBER 31, ----------------- 1997 1998 ------- ------- Current assets: Cash and equivalents...................................... $ 126 $ 173 Accounts receivable, less allowance for doubtful accounts of $74 in 1997 and $149 in 1998........................ 2,779 3,007 Prepaid expenses and other current assets................. 79 27 ------- ------- Total current assets........................................ 2,984 3,207 Property, plant and equipment, net.......................... 14,819 13,943 Intangible assets, net...................................... 1,862 1,801 Other assets................................................ 31 184 ------- ------- $19,696 $19,135 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings..................................... $ 1,628 $ 1,500 Accounts payable.......................................... 1,617 1,509 Advances from a related party............................. 543 543 Deferred revenue.......................................... 919 1,095 Other current liabilities................................. -- 106 Accrued liabilities....................................... 832 993 Income taxes payable...................................... 228 337 Current portion of long-term debt......................... 873 731 ------- ------- Total current liabilities................................... 6,640 6,814 Long-term debt.............................................. 4,907 3,879 Deferred income taxes....................................... 658 623 Other long-term liabilities................................. -- 353 Commitments and contingencies (Note 7) Shareholders' equity: Common stock at par value; 60,500 shares authorized; 1,470 shares issued and outstanding.......................... 45 45 Additional paid-in capital................................ 455 455 Retained earnings......................................... 6,991 6,966 ------- ------- Total shareholders' equity.................................. 7,491 7,466 ------- ------- $19,696 $19,135 ======= =======
See accompanying notes. F-38 116 THE MURREY COMPANIES COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ----------------------------- 1996 1997 1998 ------- ------- ------- Revenues.................................................. $25,024 $28,874 $32,528 Operating expenses: Cost of operations...................................... 20,465 23,133 26,410 Selling, general and administrative..................... 2,142 2,323 2,791 Depreciation and amortization........................... 1,236 1,371 2,194 ------- ------- ------- Income from operations.................................... 1,181 2,047 1,133 Interest expense.......................................... (284) (380) (535) Other income (expense), net............................... 309 283 79 ------- ------- ------- Income before income taxes................................ 1,206 1,950 677 Income tax provision...................................... (543) (634) (535) ------- ------- ------- Net income................................................ 663 1,316 142 Retained earnings, beginning of period.................... 5,095 5,758 6,991 Dividends................................................. -- (83) (167) ------- ------- ------- Retained earnings, end of period.......................... $ 5,758 $ 6,991 $ 6,966 ======= ======= ======= Pro forma income taxes (unaudited -- Note 11)............. $ (432) $ (697) $ (238) ------- ------- ------- Pro forma net income (unaudited -- Note 11)............... $ 774 $ 1,253 $ 439 ======= ======= =======
See accompanying notes. F-39 117 THE MURREY COMPANIES COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1997 1998 ------- ------ ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 663 $1,316 $ 142 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 1,236 1,371 2,194 Deferred income taxes.................................. (19) (44) (35) Gain on sale of land................................... -- -- (8) Changes in operating assets and liabilities: Accounts receivable, net............................. 63 (446) (228) Prepaid expenses and other assets.................... (36) 40 52 Accounts payable..................................... 932 509 (108) Deferred revenue..................................... 42 154 176 Accrued liabilities.................................. 129 127 161 Other liabilities.................................... -- -- 459 Income taxes payable................................. (232) (93) 109 ------- ------ ------- Net cash provided by operating activities................... 2,778 2,934 2,914 CASH FLOWS FROM INVESTING ACTIVITIES: Payments for acquisitions................................. -- (2,900) -- Capital expenditures for property and equipment........... (4,790) (2,108) (1,874) Proceeds from sale of land................................ -- -- 625 Net change in other assets................................ 31 (28) (153) ------- ------ ------- Net cash used in investing activities....................... (4,759) (5,036) (1,402) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt.............................. 1,418 3,414 -- Principal payments on long-term debt...................... (615) (928) (1,170) Net change in short-term borrowings....................... 659 19 (128) Net change in advances from a related party............... (259) (275) -- Payment of dividends...................................... -- (83) (167) ------- ------ ------- Net cash provided by (used in) financing activities......... 1,203 2,147 (1,465) ------- ------ ------- Net increase (decrease) in cash and equivalents............. (778) 45 47 Cash and equivalents: Beginning of year......................................... 859 81 126 ------- ------ ------- End of year............................................... $ 81 $ 126 $ 173 ======= ====== =======
F-40 118
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1997 1998 ------- ------ ------- SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH TRANSACTIONS: Cash paid for interest.................................... $ 284 $ 358 $ 540 ======= ====== ======= Cash paid for income taxes................................ $ 792 $ 744 $ 461 ======= ====== ======= Issuance of notes payable for land and buildings.......... $ 260 $ 315 $ -- ======= ====== ======= In connection with acquisitions (Note 3) the Murrey Companies acquired assets and issued notes payable to sellers as follows: Fair value of assets acquired.......................... $ -- $3,100 $ -- Notes payable to sellers............................... -- (200) -- ------- ------ ------- Cash paid for acquisitions............................. $ -- $2,900 $ -- ======= ====== =======
See accompanying notes. F-41 119 THE MURREY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. BUSINESS, ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS AND ORGANIZATION Murrey's Disposal Company, Inc. ("Murrey's"), American Disposal Company, Inc. ("American"), D.M. Disposal Co., Inc. ("DM"), and Tacoma Recycling Company, Inc. ("Tacoma") (collectively the "Murrey Companies") are regional, integrated, non-hazardous solid waste services companies that provide collection, transfer, and disposal of solid waste and recyclables to residential and commercial customers in and around the Tacoma, Washington area. Murrey's, American, DM and Tacoma were incorporated in Washington on March 13, 1963, October 27, 1966, July 12, 1979 and January 30, 1990, respectively. Each of the Murrey Companies' Common Stock is owned 90% by one or both of two trusts. The beneficiary of both trusts is also an officer and director of the Murrey Companies. The remaining stock is owned by two individuals (5% each) who are also officers and directors of the Murrey Companies. BASIS OF COMBINATION The combined financial statements of the Murrey Companies include the accounts of Murrey's, American, DM and Tacoma as a result of their common management which exercises significant influence over their operations. Significant intercompany balances and transactions between the Murrey Companies have been eliminated in combination. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS The Murrey Companies consider all highly liquid investments with a maturity of three months or less to be cash equivalents. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Murrey Companies to concentrations of credit risks consist primarily of accounts receivable. Credit risk on accounts receivable is minimized as a result of the large and diverse nature of the Murrey Companies' customer base. The Murrey Companies maintain allowances for losses based on the expected collectibility of accounts receivable. Credit losses have been within management's expectations. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Improvements or betterments which significantly extend the life of an asset are capitalized. Expenditures for maintenance and repair costs are charged to F-42 120 THE MURREY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) operations as incurred. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts in the year of disposal. Gains and losses resulting from property disposals are included in other income (expense). Depreciation is computed using the straight- line method over the estimated useful lives of the assets. The estimated useful lives are as follows: Buildings.................................................. 20 years Machinery and equipment.................................... 5 - 15 years Rolling stock.............................................. 10 years Containers................................................. 5 - 15 years Furniture and fixtures..................................... 3 - 5 years
In connection with the Acquisitions (Note 3) the Murrey Companies acquired certain used property and equipment. This used property and equipment is being depreciated using the straight-line method over its estimated remaining useful lives, which range from one to twelve years. GOODWILL Goodwill represents the excess of the purchase price over the fair value of the net assets acquired (Notes 3 and 4), and is amortized on a straight-line basis over the period of expected benefit of 40 years. The Murrey Companies continually evaluate the value and future benefits of its intangible assets, including goodwill. The Murrey Companies assess recoverability from future operations using cash flows and income from operations of the related acquired business as measures. Under this approach, the carrying value would be reduced if it becomes probable that the Murrey Companies' best estimate for expected future cash flows of the related business would be less than the carrying amount of the related intangible assets. There have been no adjustments to the carrying amounts of intangible assets resulting from these evaluations as of December 31, 1998. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of cash and cash equivalents approximate their fair values as of December 31, 1997 and 1998. The carrying values of short-term borrowings (Note 5) and long-term debt (Note 6) approximate their fair values as of December 31, 1997 and 1998, based on current incremental borrowing rates for similar types of borrowing arrangements. REVENUE RECOGNITION The Murrey Companies recognize revenues as services are provided. Certain customers are billed in advance and, accordingly, recognition of the related revenues is deferred until the services are provided. INCOME TAXES DM uses the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and F-43 121 THE MURREY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Murrey's, American and Tacoma operate under Subchapter S of the Internal Revenue Code for federal and state income tax reporting purposes. Consequently all of the income tax attributes and liabilities of these companies' operations flow through to the individual shareholders. 2. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment as of December 31, 1997 and 1998 consists of the following:
DECEMBER 31, ------------------ 1997 1998 ------- ------- Land and buildings.......................................... $ 6,668 $ 6,174 Machinery and equipment..................................... 3,780 3,772 Rolling stock............................................... 7,570 8,388 Containers.................................................. 4,380 5,234 Furniture and fixtures...................................... 255 249 ------- ------- 22,653 23,817 Less accumulated depreciation............................... (7,834) (9,874) ------- ------- $14,819 $13,943 ======= =======
3. ACQUISITIONS During 1997, the Murrey Companies purchased substantially all of the assets of Island Disposal (effective May 2, 1997) and Environmental Waste Systems and Olympic Disposal (both effective December 1, 1997) (collectively the "Acquisitions"). The total purchase price for the Acquisitions was approximately $3,100, comprised of $2,900 in cash and promissory notes payable to the sellers totaling $200. Of the combined $3,100 purchase price, $1,791 was recorded as goodwill and $80 was assigned to non-competition agreements. The Acquisitions were accounted for in accordance with the purchase method of accounting and, accordingly, the net assets acquired were included in the Murrey Companies' combined balance sheet based upon their estimated fair values on the date of the Acquisitions. The Murrey Companies' combined statement of operations includes the revenues and expenses of the acquired businesses after the effective date of the transactions. A summary of the purchase price allocation for the Acquisitions is as follows: Acquired assets: Property and equipment.................................... $1,229 Goodwill.................................................. 1,791 Non-competition agreements................................ 80 ------ $3,100 ======
F-44 122 THE MURREY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The following unaudited pro forma information shows the results of the Murrey Companies' operations as though the Acquisitions had occurred as of January 1, 1996:
YEARS ENDED DECEMBER 31, ------------------ 1996 1997 ------- ------- (UNAUDITED) Revenue..................................................... $27,485 $31,106 ======= ======= Net income.................................................. $ 706 $ 1,094 ======= =======
The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the Acquisitions occurred on January 1, 1996, or the results of future operations of the Murrey Companies. Furthermore, the pro forma results do not give effect to all cost savings or incremental costs that may occur as a result of the integration and consolidation of the Acquisitions. 4. INTANGIBLE ASSETS Intangible assets consist of the following as of December 31, 1997 and 1998:
DECEMBER 31, ---------------- 1997 1998 ------ ------ Goodwill.................................................... $1,791 $1,791 Non-competition agreement................................... 80 80 ------ ------ 1,871 1,871 Less accumulated amortization............................... (9) (70) ------ ------ $1,862 $1,801 ====== ======
5. SHORT-TERM BORROWINGS Short-term borrowings consist of various revolving and non-revolving lines-of-credit with a bank, bearing interest at 8.50% as of December 31, 1998 and which mature at various dates through February 28, 1999. The lines of credit are secured by all accounts receivable and inventory accounts, which totaled $3,176 as of December 31, 1998. The lines-of-credit were fully utilized as of December 31, 1998. F-45 123 THE MURREY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 6. LONG-TERM DEBT Long-term debt consists of the following as of December 31, 1997 and 1998:
DECEMBER 31, ---------------- 1997 1998 ------ ------ Note payable to a bank bearing interest at a variable rate (approximately 8.4% as of December 31, 1998); monthly payments of principal and interest of $25; maturing in November 2007; secured by certain cash accounts and a pledge of one of the Murrey Companies' exclusive franchise agreements................................................ $2,000 $1,866 Note payable to a bank bearing interest at 8.6%; monthly payments of principal and interest aggregating $13; maturing in October 2001; secured by equipment with a net book value of approximately $400 as of December 31, 1998 and certain cash accounts................................. 632 514 Notes payable to a bank bearing interest at various fixed rates (ranging from 9.1% to 9.2% as of December 31, 1998); monthly payments of principal and interest aggregating $25 and one-time payments of $470 and $751 in September 2000 and May 2001, respectively; maturing at various dates between September 2000 and May 2001; secured by land and buildings with a net book value of approximately $2,463 as of December 31, 1998...................................... 1,544 1,350 Equipment financing notes payable bearing interest at various rates (ranging from 8.6% to 8.8% as of December 31, 1998); monthly payments of principal and interest aggregating $21; maturing at various dates through September 2001; secured by equipment with an aggregate net book value of approximately $660 as of December 31, 1998...................................................... 822 423 Notes payable to sellers bearing interest at 9.0% as of December 31, 1998; monthly principal and interest payments of $3; maturing October, 2007; secured by land and buildings with a net book value of approximately $901 as of December 31, 1998...................................... 471 291 Unsecured notes payable to seller bearing interest at 8.0% as of December 31, 1998; monthly principal and interest payments of $4; maturing in June 2002..................... 189 90 Other....................................................... 122 76 ------ ------ 5,780 4,610 Less: current portion....................................... 873 731 ------ ------ Long-term debt.............................................. $4,907 $3,879 ====== ======
As of December 31, 1998, aggregate contractual future principal payments by calendar year on long-term debt are due as follows: 1999........................................................ $ 731 2000........................................................ 936 2001........................................................ 1,182 2002........................................................ 336 2003........................................................ 226 Thereafter.................................................. 1,199 ------ $4,610 ======
F-46 124 THE MURREY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 7. COMMITMENTS AND CONTINGENCIES COMMITMENTS Operating Leases The Murrey Companies lease certain equipment and facilities under non-cancelable operating leases. Rent expense under all operating leases during the years ended December 31, 1996, 1997 and 1998 amounted to $170, $183, and $230, respectively. As of December 31, 1998, future minimum lease payments under these operating leases, by calendar year, are as follows: 1999........................................................ $194 2000........................................................ 174 2001........................................................ 109 2002........................................................ 86 2003........................................................ 72 Thereafter.................................................. 285 ---- $920 ====
CONTINGENCIES Environmental Risks The Murrey Companies are subject to liability for any environmental damage that the solid waste facilities they operate may cause to neighboring landowners, particularly as a result of the contamination of drinking water sources or soil, including damage resulting from conditions existing prior to the operation of such facilities by the Murrey Companies. The Murrey Companies may also be subject to liability for any off-site environmental contamination caused by pollutants or hazardous substances whose transportation, treatment or disposal was arranged by the Murrey Companies. Any substantial liability for environmental damage incurred by the Murrey Companies could have a material adverse effect on the Murrey Companies' combined financial condition, results of operations or cash flows. As of December 31, 1998, the Murrey Companies are not aware of any such environmental liabilities. Legal Proceedings In the normal course of their business and as a result of the extensive governmental regulation of the solid waste industry, the Murrey Companies may periodically become subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines or to revoke or deny renewal of an operating permit held by the Murrey Companies. From time to time the Murrey Companies may also become parties to various claims or suits for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal course of operating a waste management business. However, as of December 31, 1998, there is no current proceeding or litigation involving the Murrey Companies that the Murrey Companies believe will have a material adverse impact on their business, financial condition, results of operations or cash flows. F-47 125 THE MURREY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Disposal Site The Murrey Companies have been informed that the Hidden Valley Landfill, which is currently utilized by them for disposal of waste collected in Pierce County, is currently operating under a Consent Decree with the Washington State Department of Ecology and the Environmental Protection Agency. Under the terms of the Consent Decree, the Hidden Valley Landfill was closed on December 31, 1998; and subsequent to that date, all of the waste collected by the Murrey Companies in Pierce County was long hauled to an alternate disposal site pending completion of a new solid waste landfill in Pierce County. Management of the Murrey Companies does not believe that the closure of the Hidden Valley Landfill will have a material adverse impact on the Murrey Companies' business, combined financial position, results of operations or cash flows. Employees Approximately 46 of the Murrey Companies' route drivers are represented by the Teamsters Union. The Murrey Companies have a collective bargaining agreement that expires in June 1999. The Murrey Companies are not aware of any other organizational efforts among their employees and believes that their relations with their employees are good. 8. RELATED PARTY TRANSACTIONS OPERATING LEASE The Murrey Companies lease land on which certain of their facilities are located from a shareholder of the Murrey Companies. This lease is pursuant to an informal arrangement whereby the Murrey Companies pay all of the property taxes and other expenses associated with the leased land in lieu of monthly rent. These payments totaled approximately $10 during each of the years ended December 31, 1996, 1997, and 1998. ADVANCES As of December 31, 1997 and 1998, the Murrey Companies had non-interest bearing advances payable to one of their shareholders totaling $543. DISPOSAL FEES During the years ended December 31, 1996, 1997 and 1998, the Murrey Companies paid $7,730, $8,592, and $8,816, respectively, in disposal fees to a landfill that is owned and operated by a company in which one of the Murrey Companies shareholders has an approximate 33% ownership interest. 9. 401(K) PLAN The Murrey Companies have a voluntary savings and investment plan (the "401(k) Plan"). The 401(k) Plan is available to all eligible, non-union employees of the Murrey Companies. Under the 401(k) Plan the Murrey Companies' contributions are at the discretion of management of the Murrey Companies. During the years ended December 31, 1996, 1997 and 1998, the Murrey Companies' 401(k) Plan expense was approximately $267, $316, and $336, respectively. F-48 126 THE MURREY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 10. INCOME TAXES The provision (benefit) for income taxes for the Murrey Companies pertains solely to DM and consists of the following:
YEARS ENDED DECEMBER 31, ------------------ 1996 1997 1998 ---- ---- ---- Federal: Current................................................... $562 $678 $570 Deferred.................................................. (19) (44) (35) ---- ---- ---- $543 $634 $535 ==== ==== ====
Deferred taxes result from temporary differences in the recognition of certain expense items for income tax and financial reporting purposes. The Murrey Companies' deferred taxes as of December 31, 1997 and 1998 are substantially comprised of depreciation deducted for tax purposes that will be recorded in future periods for financial reporting purposes. The principal reasons for the difference between the federal statutory income tax rate and the effective income tax rate are as follows:
YEARS ENDED DECEMBER 31, -------------------------- 1996 1997 1998 ------ ------ ------ Federal expense expected at statutory rates on combined income before income taxes............................. $410 $663 $230 Tax effect of companies reporting under Subchapter S..... 124 (42) 302 Other.................................................... 9 13 3 ---- ---- ---- $543 $634 $535 ==== ==== ====
11. PRO FORM INCOME TAX INFORMATION (UNAUDITED) As described in Note 1, Murrey's, American, and Tacoma (the "S Corporations") operate under Subchapter S of the Internal Revenue Code and are not subject to federal income taxes. In connection with the Murrey Companies' proposed merger with Waste Connections, Inc. ("WCI") (Note 12), the Subchapter S election will be terminated. As a result, the S Corporations (as wholly-owned subsidiaries of WCI) will be subject to corporate income taxes subsequent to the termination of S corporation status. The Murrey Companies had combined income for income tax purposes of $2,135, $1,941 and $1,924 for 1996, 1997 and 1998, respectively. Had the Murrey Companies filed federal income tax returns as regular corporations for 1996, 1997 and 1998, income tax expense under the provisions of Financial Accounting Standards No. 109 would have been $432, $697 and $238, respectively. F-49 127 THE MURREY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The following unaudited pro forma information reflects income tax expense (benefit) for the Murrey Companies as if the S Corporations had also been subject to federal income taxes:
YEARS ENDED DECEMBER 31, -------------------------- 1996 1997 1998 ------ ------ ------ Federal: Current................................................ $726 $660 $654 Deferred............................................... (294) 37 (416) ---- ---- ---- Pro forma income taxes................................... $432 $697 $238 ==== ==== ====
The pro forma provisions for income taxes for the years ended December 31, 1996, 1997, and 1998 differ from the amounts computed by applying the applicable statutory federal income tax rate (34%) to income before income taxes due to certain non-deductible expenses. The Murrey Companies pro forma deferred income tax asset of approximately $71 and $301 as of December 31, 1997 and 1998, respectively, relates principally to differences in the recognition of bad debt expenses, vacation accruals, accruals for contract losses and certain other temporary differences. The Murrey Companies also had pro forma deferred tax liabilities as of December 31, 1997 and 1998 of approximately $1,332 and $1,147 which relate to differences between tax and financial methods of depreciation and the use of the cash method of accounting for tax purposes by certain of the S Corporations. 12. SUBSEQUENT EVENT MERGER OF THE MURREY COMPANIES On January 19, 1999, the Murrey Companies merged with wholly-owned subsidiaries of Waste Connections, Inc. ("WCI") whereby all shares of common stock of the Murrey Companies were exchanged for 2,888,880 shares of WCI common stock. The transactions were accounted for as poolings-of-interests. 13. YEAR 2000 (UNAUDITED) The Murrey Companies will need to modify or replace portions of their software so that their computer systems will function properly with respect to dates in the year 2000 ("Year 2000") and thereafter. To date, the Murrey Companies have not incurred any costs related to the Year 2000 project. The Murrey Companies do not believe that their expenditures relating to the Year 2000 project will be material. However, if the required Year 2000 modifications and conversions are not made or are not completed in a timely manner, the Year 2000 issue could materially affect their operations. F-50 128 INDEPENDENT AUDITORS' REPORT The Partners Columbia Resource Co., L.P. and Finley-Buttes Limited Partnership Vancouver, Washington We have audited the accompanying combined balance sheets of Columbia Resource Co., L.P. and Finley-Buttes Limited Partnership as of December 31, 1997 and 1998, and the related combined statements of income, partners' capital and comprehensive income, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Columbia Resource Co., L.P. and Finley-Buttes Limited Partnership at December 31, 1997 and 1998, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. PERKINS & COMPANY, P.C. Portland, Oregon March 9, 1999, except for the second paragraph of Note 12, as to which the date is March 31, 1999 F-51 129 COLUMBIA RESOURCE CO., L.P. AND FINLEY-BUTTES LIMITED PARTNERSHIP COMBINED BALANCE SHEETS (IN THOUSANDS) ASSETS
DECEMBER 31, ------------------ 1997 1998 ------- ------- Current assets: Cash and cash equivalents................................. $ 1,579 $ 2,048 Investments in marketable securities...................... -- 5,640 Accounts receivable: Trade, less allowance for doubtful accounts of $64 in 1998.................................................. 2,343 2,330 Related parties........................................ 39 137 Prepaid expenses.......................................... 225 300 Other assets.............................................. -- 668 ------- ------- Total current assets.............................. 4,186 11,123 Property and equipment, net................................. 21,177 19,820 Investment in marketable securities......................... 3,900 -- Other assets................................................ 2,688 2,389 ------- ------- $31,951 $33,332 ======= ======= LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable: Trade.................................................. $ 678 $ 821 Related parties........................................ 315 334 Accrued expenses.......................................... 403 536 Other liability........................................... -- 668 Current portion of long-term debt......................... 2,039 1,779 ------- ------- Total current liabilities......................... 3,435 4,138 Long-term debt.............................................. 18,908 16,298 Other liability............................................. 533 -- Commitments and contingencies (Notes 4, 6 and 9) Partners' capital: Accumulated other comprehensive income.................... -- 740 Other partners' capital................................... 9,075 12,156 ------- ------- 9,075 12,896 ------- ------- $31,951 $33,332 ======= =======
See accompanying notes. F-52 130 COLUMBIA RESOURCE CO., L.P. AND FINLEY-BUTTES LIMITED PARTNERSHIP COMBINED STATEMENTS OF INCOME (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ----------------------------- 1996 1997 1998 ------- ------- ------- Revenues.................................................... $21,492 $22,940 $22,511 Operating expenses: Cost of operations........................................ 10,986 11,975 10,675 Selling, general and administrative....................... 2,876 3,145 2,956 Depreciation and amortization............................. 2,745 2,846 2,729 ------- ------- ------- Income from operations...................................... 4,885 4,974 6,151 Other income (expense): Interest expense, net..................................... (1,675) (1,519) (1,258) Other income, net......................................... 16 19 29 Gain on disposal of subsidiary............................ -- 2,544 -- ------- ------- ------- (1,659) 1,044 (1,229) ------- ------- ------- Net income.................................................. $ 3,226 $ 6,018 $ 4,922 ======= ======= ======= Pro forma income taxes (unaudited -- Note 11)............... $(1,255) $(1,935) $(1,785) ------- ------- ------- Pro forma net income (unaudited -- Note 11)................. $ 1,971 $ 4,083 $ 3,137 ======= ======= =======
See accompanying notes. F-53 131 COLUMBIA RESOURCE CO., L.P. AND FINLEY-BUTTES LIMITED PARTNERSHIP COMBINED STATEMENTS OF PARTNERS' CAPITAL AND COMPREHENSIVE INCOME (IN THOUSANDS)
ACCUMULATED OTHER OTHER TOTAL COMPREHENSIVE COMPREHENSIVE PARTNERS' PARTNERS' INCOME INCOME CAPITAL CAPITAL ------------- ------------- --------- --------- Balances at December 31, 1995............... $ -- $ 3,045 $ 3,045 Net income.................................. $3,226 -- 3,226 3,226 ====== Capital contributions....................... -- 475 475 Distributions............................... -- (2,080) (2,080) ---- ------- ------- Balances at December 31, 1996............... -- 4,666 4,666 Net income.................................. $6,018 -- 6,018 6,018 ====== Distributions............................... -- (1,609) (1,609) ---- ------- ------- Balances at December 31, 1997............... -- 9,075 9,075 Comprehensive income: Net income................................ $4,922 -- 4,922 4,922 Other comprehensive income: Unrealized gains on marketable securities............................. 740 740 -- 740 ------ $5,662 ====== Distributions............................... -- (1,841) (1,841) ---- ------- ------- Balances at December 31, 1998............... $740 $12,156 $12,896 ==== ======= =======
See accompanying notes. F-54 132 COLUMBIA RESOURCE CO., L.P. AND FINLEY-BUTTES LIMITED PARTNERSHIP COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ----------------------------- 1996 1997 1998 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 3,226 $ 6,018 $ 4,922 Adjustments to reconcile net income to net cash provided by operating activities: Gain on disposal of subsidiary......................... -- (2,544) -- Depreciation and amortization.......................... 2,745 2,846 2,729 Loss on disposition of property and equipment.......... 2 1 1 Changes in operating assets and liabilities: Accounts receivable.................................. 3,641 (184) (85) Prepaid expenses..................................... (65) (7) (73) Inventories.......................................... 13 (37) -- Accounts payable..................................... (224) (318) 163 Accrued expenses..................................... (740) (3) 133 Other liability...................................... 106 117 134 ------- ------- ------- Net cash provided by operating activities................. 8,704 5,890 7,924 CASH FLOWS FROM INVESTING ACTIVITIES: Investment in commercial paper............................ -- -- (1,000) Proceeds from (investment in) municipal bonds............. (1,200) 1,200 -- Purchases of property and equipment....................... (848) (1,330) (227) Investment in cell development............................ (855) (1,590) (1,069) Investment in other assets................................ (353) (393) (448) ------- ------- ------- Net cash used in investing activities..................... (3,256) (2,113) (2,744) CASH FLOWS FROM FINANCING ACTIVITIES: Net payments on short-term borrowings..................... (1,000) -- -- Proceeds from long-term debt.............................. 1,000 -- -- Principal payments on long-term debt...................... (3,142) (1,989) (2,870) Capital contributions..................................... 400 -- -- Distributions paid to partners............................ (2,080) (1,609) (1,841) ------- ------- ------- Net cash used in financing activities..................... (4,822) (3,598) (4,711) ------- ------- ------- Net increase in cash and cash equivalents................. 626 179 469 Cash and cash equivalents, beginning of period.............. 774 1,400 1,579 ------- ------- ------- Cash and cash equivalents, end of period.................... $ 1,400 $ 1,579 $ 2,048 ======= ======= ======= SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH TRANSACTIONS: Cash paid for interest................................. $ 1,872 $ 1,657 $ 1,501 Advance due to partner contributed to Columbia......... $ 75 $ -- $ -- Marketable securities received for sale of subsidiary........................................... $ -- $ 3,900 $ --
See accompanying notes. F-55 133 COLUMBIA RESOURCE CO., L.P. AND FINLEY-BUTTES LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS) 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Columbia Resource Co., L.P. (Columbia) is a Washington limited partnership which was formed in December 1989. On January 1, 1992, Columbia began significant operations. Columbia has a long-term contract with a county in Washington (the County) to receive and dispose of all municipal waste generated within its geographical boundaries. Columbia's headquarters are located in Vancouver, Washington. Finley-Buttes Limited Partnership (Finley) is an Oregon limited partnership which was formed in December 1989. On November 1, 1990, Finley began significant operations. Finley has a long-term contract with a governmental subdivision of Oregon to operate a regional landfill for solid waste. A substantial portion of Finley's operations involves providing landfill services to Columbia. The general partner of both partnerships is Management Environmental National of Washington, Inc. (MENWI). The limited partner of both partnerships is RH Financial Corporation (RHFC). Both partners are Washington corporations and are owned by the same individual. MENWI and RHFC have no operations or activity other than those of Columbia and Finley, as reflected in the accompanying financial statements. PRINCIPLES OF COMBINATION The combined financial statements include the accounts of Columbia and Finley (the Partnerships) as a result of their common ownership and management. Significant intercompany balances and transactions have been eliminated in combination. For periods prior to the sale of Columbia's subsidiary on December 31, 1997, the combined financial statements also include the accounts of Wastech, Inc. (Note 10). CASH AND CASH EQUIVALENTS The Partnerships consider all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. CONCENTRATIONS OF CREDIT RISK The Partnerships grant credit to customers with a large portion of revenue generated from business with large regional and national commercial waste hauling companies. The Partnership maintains allowances for losses based on the expected collectibility of accounts receivable. Credit losses have been within management's expectations. The Partnerships limit their credit exposure for cash and cash equivalents by investing in what they believe to be only high quality investments. The Partnerships maintain cash in bank deposit accounts which may exceed federally insured limits. The Partnerships have not experienced any losses in such accounts. INVESTMENT IN COMMERCIAL PAPER Investments in commercial paper of $1,000 at December 31, 1998 maturing on February 17, 1999 are considered available for sale and are recorded at cost which approximates fair value. F-56 134 COLUMBIA RESOURCE CO., L.P. AND FINLEY-BUTTES LIMITED PARTNERSHIP (CONTINUED) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS) INVESTMENT IN EQUITY SECURITIES Equity securities (Note 10) are accounted for at fair value. Unrealized holding gains and losses on securities classified as available for sale are excluded from earnings and reported as a separate component of other comprehensive income until realized. Realized gains and losses are determined on the basis of historical cost. The fair value of such securities was $3,900 and $4,640 at December 31, 1997 and 1998, respectively. Unrealized holding gains, added to other comprehensive income during 1998 was $740. There have been no realized gains or losses on these securities. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation. Capitalized landfill costs include expenditures for land and related airspace, permitting costs and preparation costs. Landfill permitting and preparation costs represent only direct costs related to these activities, including legal, engineering, construction of landfill improvements, cell development costs and direct costs of personnel dedicated for these purposes. Certain landfill costs related to the entire landfill are depreciated on the straight-line method over the estimated useful life of the landfill. Landfill preparation costs related specifically to cell development are depreciated as airspace of the related cell is consumed. Finley estimates the rate used to depreciate cell development costs by estimating costs in developing cells which have been designed and the additional airspace which will be gained upon completion of development. These estimates are updated on an annual basis. Depreciation of other property and equipment is provided on the straight-line method based upon the estimated useful lives of the assets. The estimated useful lives are as follows: Land improvements........................................... 15 - 20 years Landfill, excluding cell development costs.................. 50 years Buildings................................................... 20 - 31 years Machinery and equipment..................................... 3 - 15 years Furniture and fixtures...................................... 3 - 7 years
DEFERRED COSTS The Partnerships use the straight-line method for amortization of deferred costs. Bid costs are amortized over 20 years, the life of the related contract. Loan fees are amortized over the lives of the related loans. Bond issuance costs are amortized over 15 years, the term of the related bond. INCOME TAXES Columbia and Finley are not taxpaying entities for federal or state income tax purposes. Activity from the partnerships is taxable to each partner and is reportable in the partners' tax returns. COMPREHENSIVE INCOME Effective January 1, 1998, the Partnerships adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes new rules for the reporting F-57 135 COLUMBIA RESOURCE CO., L.P. AND FINLEY-BUTTES LIMITED PARTNERSHIP (CONTINUED) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS) and display of comprehensive income and its components; however, the adoption had no impact on the Partnership's net income or partners' capital. SFAS 130 requires unrealized gains or losses on the Partnership's available for sale securities, which prior to adoption would have been reported separately in partners' capital, to be included in other comprehensive income. There was no effect on prior year financial statements to conform to the requirements of SFAS 130. ENVIRONMENTAL RISKS -- The Partnerships are subject to liability for any environmental damage that the solid waste facilities they operate may cause to neighboring landowners, particularly as a result of the contamination of drinking water sources or soil. Any substantial liability for environmental damage incurred by the Partnerships could have a material adverse effect on the Partnership's financial condition, results of operations or cash flows. LEGAL PROCEEDINGS -- In the normal course of its business and as a result of the extensive governmental regulation of the solid waste industry, the Partnerships may periodically become subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines or to revoke or deny renewal of an operating permit held by the Partnerships. From time to time the Partnerships may also become parties to various claims or suits for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal course of operating a waste management business. However, as of December 31, 1998, there are no current proceedings or litigation involving the Partnerships that they believe will have a material adverse impact on the Partnerships' business, financial condition, results of operations or cash flows. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, -------------------- 1997 1998 -------- -------- Land and land improvements.................................. $ 6,137 $ 6,137 Landfill, including cell development costs.................. 15,330 16,399 Buildings................................................... 7,193 7,231 Machinery and equipment..................................... 6,622 6,793 Furniture and fixtures...................................... 303 249 -------- -------- 35,585 36,809 Less accumulated depreciation............................... (14,408) (16,989) -------- -------- $ 21,177 $ 19,820 ======== ========
F-58 136 COLUMBIA RESOURCE CO., L.P. AND FINLEY-BUTTES LIMITED PARTNERSHIP (CONTINUED) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS) 3. OTHER ASSETS Other assets consist of the following:
DECEMBER 31, ---------------- 1997 1998 ------ ------ Pollution liability self-insurance fund (Note 9)............ $1,778 $2,226 Deferred bid costs, net of accumulated amortization of $234 in 1997 and $273 in 1998.................................. 546 507 Deferred bond issuance costs, net of accumulated amortization of $227 in 1997 and $265 in 1998............. 340 302 Other....................................................... 24 22 ------ ------ 2,688 3,057 Less current portion (Note 9)............................... -- (668) ------ ------ $2,688 $2,389 ====== ======
The pollution liability self-insurance fund is invested primarily in short-term government bonds which are being held to maturity and recorded at amortized cost which approximates fair value. 4. LINE OF CREDIT Columbia has available a revolving line of credit of $1,000 with U.S. Bank (the bank) which is subject to periodic review. Interest on the revolving line of credit is payable monthly at the bank's prime rate plus a margin based on the combined net worth of the Partnerships (7.75% at December 31, 1998). The outstanding principal balance of this note is required to be paid in full for 30 consecutive days each year. This credit agreement also provides for a term loan to Finley, which is supported by the same collateral base (Note 5). Amounts due the bank are collateralized by essentially all assets of the Partnerships. Also, the agreement contains provisions, among others, requiring the maintenance of certain levels of net worth and operating income and limits the amount of capital expenditures. As of December 31, 1998, the Partnerships were in compliance with the covenants. The note payable due to a related party totaling $5,575 at December 31, 1998 is subordinated to the bank to secure the Partnerships' obligations to the bank (Note 5). F-59 137 COLUMBIA RESOURCE CO., L.P. AND FINLEY-BUTTES LIMITED PARTNERSHIP (CONTINUED) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS) 5. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, ------------------ 1997 1998 ------- ------- Industrial revenue bonds, collateralized by essentially all assets of the Partnerships and by an irrevocable letter of credit totaling $13,599 at December 31, 1998, interest at 6% to 7.5% paid semi-annually, principal payments due periodically through 2006................................. $10,450 $ 9,565 Note payable to a related party, collateralized by essentially all assets of the Partnerships, interest payable monthly at 6.18% through January 2003, monthly payments of $66 including interest from January 2003 through May 2012 (Notes 4 and 12)......................... 5,575 5,575 Note payable to bank, collateralized by essentially all assets of the Partnerships, payable in monthly installments of $70, plus interest at the prime rate plus a margin based on debt to worth ratio (7.75% at December 31, 1998), through June 2002 (Notes 4 and 12)............. 3,776 2,937 Other notes payable......................................... 1,146 -- ------- ------- 20,947 18,077 Less current portion........................................ (2,039) (1,779) ------- ------- $18,908 $16,298 ======= =======
At December 31, 1998, annual maturities of long-term debt are as follows:
INDUSTRIAL NOTE PAYABLE REVENUE TO A RELATED OTHER NOTES BONDS PARTY PAYABLE TOTAL ---------- ------------ ----------- ------- Year ending December 31, 1999................................................. $ 940 $ -- $ 839 $ 1,779 2000................................................. 1,000 -- 839 1,839 2001................................................. 1,065 -- 839 1,904 2002................................................. 1,135 -- 420 1,555 2003................................................. 1,215 418 -- 1,633 Thereafter........................................... 4,210 5,157 -- 9,367 ------ ------ ------ ------- $9,565 $5,575 $2,937 $18,077 ====== ====== ====== =======
The industrial revenue bond agreement requires Columbia to maintain a certain level of partnership capital and restricts distributions from Columbia. The note payable of $5,575 contains provisions, among others, requiring the maintenance of certain levels of net worth and operating income and limits the amount of capital expenditures. As of December 31, 1998 the Partnerships were in compliance with the covenants. 6. RELATED PARTY TRANSACTIONS The following is a summary of significant related party transactions: - Disposal fees and freight charges paid to a related entity totaled $3,118 in 1996, $2,979 in 1997 and $3,234 in 1998. F-60 138 COLUMBIA RESOURCE CO., L.P. AND FINLEY-BUTTES LIMITED PARTNERSHIP (CONTINUED) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS) - Interest paid to related parties totaled $366 in 1996, $349 in 1997 and $344 in 1998. - Revenues for landfill and disposal services provided to affiliated companies totaled $635 in 1996 and $12 in 1997. A substantial amount of the accounts payable due to related parties represents balances due for regular disposal fees and freight charges. 7. MAJOR CUSTOMERS In 1996, one customer represented approximately 22% and two customers represented approximately 17% each of the revenue of the Partnerships. In 1997, two customers represented approximately 20% each and Waste Connections, Inc. (WCI) represented approximately 10% of the revenue of the Partnerships. In 1998, WCI represented approximately 29% and Waste Management, Inc. represented 19% of the revenues of the Partnerships. 8. RETIREMENT PLAN The Partnerships sponsor a 401(k) retirement plan. Substantially all employees are covered under the plan. Contributions are made to the plan at the discretion of management and totaled approximately $62 in 1996, $66 in 1997 and $69 in 1998. Included in the contributions were approximately $4 in 1996 and $3 in 1997 for Wastech, Inc., a former subsidiary (Note 10). 9. COMMITMENTS AND CONTINGENCIES A pollution liability self-insurance fund was created pursuant to the requirements of the contract with the County. Monthly deposits are made to the fund by Columbia based on tonnage of waste received under the contract. Amounts held in the fund are to be used for potential pollution claims made against Columbia in its performance of the terms of the contract. Columbia's contract with the County was amended effective January 1, 1999, resulting in changes in tipping fees, administrative fees and the pollution liability self-insurance fund. The liability representing the fund balance of future disbursements to the County (30% of the fund balance) at the effective date is to be distributed to that county and the obligation of Columbia to make monthly deposits to this fund has ceased. The remaining 70% of the fund balance is to be held for a period of ten years after the last date waste is received under the contract. Provided there are no claims against the fund, Columbia may take distributions from the fund. The balance in the fund as of December 31, 1997 and 1998 totaled $1,970 and $2,409, respectively. At December 31, 1997 and 1998, $192 and $183, respectively, is included in cash and cash equivalents because Columbia has received reimbursement of these amounts for income taxes paid as a result of taxability of the fund. The remaining balance is included in other assets. Columbia has expensed 30% of each monthly deposit (net of related income taxes to be paid) to the fund with a corresponding increase to other liability to reflect the portion of future disbursements from the fund due to the County. There have been no claims to date, and it is not possible to determine the amount of future liability, if any. Performance under the terms of the contract with the County is secured by a $2,000 letter of credit. F-61 139 COLUMBIA RESOURCE CO., L.P. AND FINLEY-BUTTES LIMITED PARTNERSHIP (CONTINUED) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS) Finley has a royalty agreement with the previous owner of the property which requires payments of $200 per year through the life of the landfill. Payments are expensed and totaled $200, in each of 1996, 1997 and 1998. Performance under terms of a permit issued to Finley by the State of Oregon is secured by a $1,000 letter of credit. A contract with a governmental subdivision of Oregon requires Finley to pay an annual license fee based upon the total number of tons of solid waste generated from certain geographic boundaries. The minimum annual license fee is $50, as adjusted from time to time. Finley is responsible for all closure and post-closure costs relating to the disposal site owned and operated by Finley. Pursuant to a contract with a governmental subdivision of Oregon, Finley has established a fund to provide for closure and post-closure costs (the Closure Fund) and a fund to provide for the maintenance of roads giving access to the landfill (a Road Fund). The funds are held by the governmental subdivision in interest-bearing accounts. Finley deposits amounts into the funds monthly based upon tonnage of solid waste delivered to the landfill. Payments are expensed as they are paid. Finley's obligation to make deposits to the Closure Fund terminates at such time as the total amounts deposited, including interest, total $1,000. Amounts deposited to date in the Closure Fund, including interest, total approximately $362 at December 31, 1998. 10. SALE OF WASTECH, INC. On December 31, 1997, Columbia sold its wholly owned subsidiary, Wastech, Inc. (the Subsidiary) to Waste Management, Inc. (the Company) for 99,506 shares of stock of the Company (fair value of $3,900 at December 31, 1997). The stock is considered available for sale. 11. PRO FORMA INCOME TAX INFORMATION (UNAUDITED) As described in Note 1, the Partnerships are not subject to federal income taxes. In connection with the proposed stock purchase agreement with Waste Connections, Inc. (WCI) (Note 12), the Partnerships (as wholly-owned subsidiaries of WCI) will be subject to corporate income taxes. The Partnerships had combined income for income tax purposes of $2,706, $3,455 and $4,973 for 1996, 1997 and 1998, respectively. Had the Partnerships filed income tax returns as regular corporations for 1996, 1997 and 1998, income tax expense under the provisions of Financial Accounting Standards No. 109 would have been $1,255, $1,935 and $1,785, respectively. F-62 140 COLUMBIA RESOURCE CO., L.P. AND FINLEY-BUTTES LIMITED PARTNERSHIP (CONTINUED) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS) The following unaudited pro forma information reflects income tax expense (benefit) for the Partnerships as if the Partnerships had been subject to income taxes:
YEARS ENDED DECEMBER 31, ------------------------ 1996 1997 1998 ------ ------ ------ Current: Federal............................................ $ 920 $1,175 $1,691 State.............................................. 126 158 198 ------ ------ ------ 1,046 1,333 1,889 Deferred............................................. 209 602 (104) ------ ------ ------ Pro forma income taxes............................... $1,255 $1,935 $1,785 ====== ====== ======
The pro forma provisions for income taxes for the years ended December 31, 1996, 1997 and 1998 differ from the amounts computed by applying the applicable statutory federal income tax rate of (34%) to income before income taxes due to certain non-deductible expenses, state income taxes and differences in the book and tax gains on the sale of Wastech, Inc. in 1997. The Partnership's pro forma deferred income tax asset of approximately $193 and $265 as of December 31, 1997 and 1998, respectively, relates principally to differences in the recognition of vacation accruals, liability reserves and certain other temporary differences. The Partnerships also had pro forma deferred tax liabilities as of December 31, 1997 and 1998 of approximately $1,168 and $1,131 which relate to differences between tax and financial methods of depreciation, the unrealized gain on the investment in marketable securities, and differences between the book and tax basis of accounts receivable and accrued liabilities. 12. SUBSEQUENT EVENTS On January 15, 1999, Finley distributed $365 to Partners for income tax payments. On February 12, 1999, MENWI, RHFC, the sole stockholder of MENWI and RHFC, and Waste Connections, Inc. (WCI) announced they had signed a definitive agreement under which all of the outstanding shares of MENWI and RHFC would be sold to WCI for cash. The transaction closed on March 31, 1999. Prior to closing, Columbia distributed to the partners the marketable securities discussed in Note 10. At the time the transaction closed, the notes payable of $5,575 and $2,937 (Note 5) became due and payable. 13. YEAR 2000 ISSUE (UNAUDITED) Like other companies, the Partnerships could be adversely affected if the computer systems we, our suppliers or customers use do not properly process and calculate date-related information and data from the period surrounding and including January 1, 2000. This is commonly known as the "Year 2000" issue. Additionally, this issue could impact non-computer systems and devices such as production equipment, elevators, etc. At this time, because of the complexities involved in the issue, management cannot provide assurances that the Year 2000 issue will not have an impact on the Partnerships' operations, however, management does not expect operations to be significantly affected by Year 2000 issues. F-63 141 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Stockholders Waste Connections, Inc. We have audited the supplemental consolidated balance sheets of Waste Connections, Inc., and Predecessors (resulting from the consolidation of Waste Connections, Inc. and Murrey's Disposal Company, Inc., American Disposal Company, Inc., D.M. Disposal Co., Inc. and Tacoma Recycling Company, Inc., collectively the "Murrey Companies") as of December 31, 1997 and 1998 and the related supplemental consolidated statements of operations, redeemable stock and stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998 which appear on pages F-65 through F-71 herein as listed in the accompanying Index to Financial Statements. The supplemental consolidated financial statements give retroactive effect to the mergers of Waste Connections, Inc. and the Murrey Companies on January 19, 1999, which have been accounted for using the pooling-of-interests method as described in the notes to the supplemental consolidated financial statements. These supplemental financial statements are the responsibility of the management of Waste Connections, Inc. Our responsibility is to express an opinion on these supplemental financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits, the supplemental consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Waste Connections, Inc. and Predecessors at December 31, 1997 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, after giving retroactive effect to the mergers of Waste Connections, Inc. and the Murrey Companies, as described in the notes to the supplemental consolidated financial statements, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Sacramento, California February 17, 1999, except for the third and fourth paragraphs of Note 15, as to which the dates are March 31, 1999 F-64 142 WASTE CONNECTIONS, INC. AND PREDECESSORS SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS
WASTE CONNECTIONS, INC. SUPPLEMENTAL CONSOLIDATED DECEMBER 31, 1997 1998 --------- ---------- Current assets: Cash and equivalents...................................... $ 946 $ 2,848 Accounts receivable, less allowance for doubtful accounts $93 and $511 at December 31, 1997 and 1998, respectively........................................... 6,719 13,776 Prepaid expenses and other current assets................. 437 2,273 ------- -------- Total current assets.............................. 8,102 18,897 Property and equipment, net................................. 19,004 46,986 Intangible assets, net...................................... 11,412 100,586 Other assets................................................ 58 1,978 ------- -------- $38,576 $168,447 ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings..................................... $ 1,628 $ 1,500 Accounts payable.......................................... 4,226 8,107 Advances from a related party............................. 543 543 Deferred revenue.......................................... 1,516 3,147 Accrued liabilities....................................... 1,885 5,484 Current portion of long-term debt......................... 873 10,247 Other current liabilities................................. 251 2,193 ------- -------- Total current liabilities......................... 10,922 31,221 Long-term debt.............................................. 11,669 63,985 Deferred income taxes....................................... 820 2,268 Other long term liabilities................................. 702 2,444 Commitments and contingencies (Note 8) Redeemable convertible preferred stock: $.01 par value; 2,500,000 shares authorized at December 31, 1997; 2,499,998 shares issued and outstanding at December 31, 1997 (none authorized at December 31, 1998)............... 7,523 -- Stockholders' equity: Preferred stock: $.01 par value; 7,500,000 and 10,000,000 shares authorized at December 31, 1997 and December 31, 1998, respectively; none issued and outstanding........ -- -- Common stock: $.01 par value; 50,000,000 shares authorized; 5,188,880, and 12,324,113 shares issued and outstanding at December 31, 1997 and 1998, respectively........................................... 52 123 Additional paid-in capital.................................. 5,576 66,634 Stockholder notes receivable................................ (82) -- Deferred stock compensation................................. -- (428) Retained earnings........................................... 1,394 2,200 ------- -------- Total stockholders' equity........................ 6,940 68,529 ------- -------- $38,576 $168,447 ======= ========
See accompanying notes. F-65 143 WASTE CONNECTIONS, INC. AND PREDECESSORS SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 AND 1998 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PREDECESSORS COMBINED NINE WASTE CONNECTIONS, INC. MONTHS ENDED SUPPLEMENTAL CONSOLIDATED SEPTEMBER 30, YEAR ENDED DECEMBER 31, 1997 (NOTE 1) 1997 1998 ------------- ---------- ----------- Revenues............................................ $18,114 $ 35,111 $ 86,570 Operating expenses: Cost of operations................................ 14,753 27,836 62,964 Selling, general and administrative............... 3,009 2,942 8,108 Depreciation and amortization..................... 1,083 1,725 6,306 Start-up and integration.......................... -- 493 -- Stock compensation................................ -- 4,395 632 ------- ---------- ----------- Income (loss) from operations....................... (731) (2,280) 8,560 Interest expense.................................... (456) (1,415) (2,792) Other income (expense), net......................... 14 247 79 ------- ---------- ----------- Income (loss) before income taxes................... (1,173) (3,448) 5,847 Income tax provision................................ -- (302) (2,930) ------- ---------- ----------- Income (loss) before extraordinary item............. (1,173) (3,750) 2,917 Extraordinary item -- early extinguishment of debt, net of tax benefit of $264........................ -- -- (1,027) ------- ---------- ----------- Net income (loss)................................... $(1,173) $ (3,750) $ 1,890 ======= ========== =========== Redeemable convertible preferred stock accretion.... (531) (917) ---------- ----------- Net income (loss) applicable to common stockholders...................................... $ (4,281) $ 973 ========== =========== Basic income (loss) per common share: Income (loss) before extraordinary item........... $ (0.90) $ 0.21 Extraordinary item................................ -- (0.11) ---------- ----------- Net income (loss) per share....................... $ (0.90) $ 0.10 ========== =========== Diluted income (loss) per share: Income (loss) before extraordinary item........... $ (0.90) $ 0.18 Extraordinary item................................ -- (0.09) ---------- ----------- Net income (loss) per common share................ $ (0.90) $ 0.09 ========== =========== Shares used in calculating basic net income (loss) per share......................................... 4,761,447 9,349,173 ========== =========== Shares used in calculating diluted net income (loss) per share......................................... 4,761,447 11,260,295 ========== ===========
See accompanying notes. F-66 144 WASTE CONNECTIONS, INC. AND PREDECESSORS SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PREDECESSORS ----------------------------------- THE DISPOSAL GROUP COMBINED PREDECESSORS WASTE CONNECTIONS, INC. PERIOD FROM COMBINED PERIOD SUPPLEMENTAL JANUARY 1, 1996 ENDED CONSOLIDATED THROUGH DECEMBER 31, 1996 YEAR ENDED JULY 31, 1996 (NOTE 1) DECEMBER 31, 1996 --------------- ----------------- ----------------------- Revenues...................................... $8,738 $13,422 $ 25,024 Operating expenses: Cost of operations.......................... 6,174 11,420 20,465 Selling, general and administrative......... 2,126 1,649 2,142 Depreciation and amortization............... 324 962 1,236 ------ ------- ---------- Income (loss) from operations................. 114 (609) 1,181 Interest expense.............................. (12) (225) (284) Other income (expense), net................... 2,661 (147) 309 ------ ------- ---------- Income (loss) before income taxes............. 2,763 (981) 1,206 Income tax (provision) benefit................ (505) -- (543) ------ ------- ---------- Net income (loss)............................. $2,258 $ (981) $ 663 ====== ======= ========== Basic and diluted net income per share........ $ 0.23 ========== Shares used in per share calculation.......... 2,888,880 ==========
See accompanying notes. F-67 145 WASTE CONNECTIONS, INC. AND PREDECESSORS SUPPLEMENTAL CONSOLIDATED STATEMENT OF REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
WASTE CONNECTIONS, INC. SUPPLEMENTAL CONSOLIDATED ----------------------------------------------------------------- REDEEMABLE STOCKHOLDERS' EQUITY CONVERTIBLE REDEEMABLE ------------------- PREFERRED STOCK COMMON STOCK COMMON STOCK -------------------- -------------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ------- ---------- ------- ---------- ------ Balances at December 31, 1995......... -- $ -- -- $ -- 2,888,880 $ 29 Net income............................ -- -- -- -- -- -- ---------- ------- ---------- ------- ---------- ---- Balances at December 31, 1996......... -- -- -- -- 2,888,880 29 Sale of redeemable convertible preferred stock..................... 2,499,998 6,992 -- -- -- -- Sale of common stock.................. -- -- -- -- 2,300,000 23 Issuance of common stock warrants..... -- -- -- -- -- -- Issuance of stockholder notes receivable.......................... -- -- -- -- -- -- Accretion of redeemable convertible preferred stock..................... -- 531 -- -- -- -- Dividends paid........................ -- -- -- -- -- -- Net loss.............................. -- -- -- -- -- -- ---------- ------- ---------- ------- ---------- ---- Balances at December 31, 1997......... 2,499,998 7,523 -- -- 5,188,880 52 Issuance of redeemable common stock... -- -- 1,000,000 7,500 -- -- Issuance of common stock warrants..... -- -- -- -- -- -- Common stock sold in connection with initial public offering............. -- -- -- -- 2,300,000 23 Issuance of common stock.............. -- -- -- -- 1,054,634 10 Accretion of redeemable convertible preferred stock..................... -- 917 -- -- -- -- Preferred stock dividend.............. -- (161) -- -- -- -- Conversion of redeemable preferred stock............................... (2,499,998) (8,279) -- -- 2,499,998 25 Conversion of redeemable common stock............................... -- -- (1,000,000) (7,500) 1,000,000 10 Deferred stock compensation associated with stock options.................. -- -- -- -- -- -- Amortization of deferred stock compensation........................ -- -- -- -- -- -- Exercise of stock options............. -- -- -- -- 57,912 1 Exercise of warrants.................. -- -- -- -- 222,689 2 Payment of stockholder notes receivable.......................... -- -- -- -- -- -- Dividends paid........................ -- -- -- -- -- -- Net income............................ -- -- -- -- -- -- ---------- ------- ---------- ------- ---------- ---- Balances at December 31, 1998......... -- $ -- -- $ -- 12,324,113 $123 ========== ======= ========== ======= ========== ==== WASTE CONNECTIONS, INC. SUPPLEMENTAL CONSOLIDATED ------------------------------------------------------------ STOCKHOLDERS' EQUITY ------------------------------------------------------------ ADDITIONAL STOCKHOLDER DEFERRED PAID-IN NOTES STOCK RETAINED CAPITAL RECEIVABLE COMPENSATION EARNINGS TOTAL ---------- ----------- ------------ -------- ------- Balances at December 31, 1995......... $ 471 $ -- $ -- $5,095 $ 5,595 Net income............................ -- -- -- 663 663 ------- ---- ----- ------ ------- Balances at December 31, 1996......... 471 -- -- 5,758 6,258 Sale of redeemable convertible preferred stock..................... -- -- -- -- -- Sale of common stock.................. 4,395 -- -- -- 4,418 Issuance of common stock warrants..... 710 -- -- -- 710 Issuance of stockholder notes receivable.......................... -- (82) -- -- (82) Accretion of redeemable convertible preferred stock..................... -- -- -- (531) (531) Dividends paid........................ -- -- -- (83) (83) Net loss.............................. -- -- -- (3,750) (3,750) ------- ---- ----- ------ ------- Balances at December 31, 1997......... 5,576 (82) -- 1,394 6,940 Issuance of redeemable common stock... -- -- -- -- -- Issuance of common stock warrants..... 2,388 -- -- -- 2,388 Common stock sold in connection with initial public offering............. 23,963 -- -- -- 23,986 Issuance of common stock.............. 17,783 -- -- -- 17,793 Accretion of redeemable convertible preferred stock..................... -- -- -- (917) (917) Preferred stock dividend.............. -- -- -- -- -- Conversion of redeemable preferred stock............................... 8,254 -- -- -- 8,279 Conversion of redeemable common stock............................... 7,490 -- -- -- 7,500 Deferred stock compensation associated with stock options.................. 821 -- (821) -- -- Amortization of deferred stock compensation........................ -- -- 393 -- 393 Exercise of stock options............. 223 -- -- -- 224 Exercise of warrants.................. 136 -- -- -- 138 Payment of stockholder notes receivable.......................... -- 82 -- -- 82 Dividends paid........................ -- -- -- (167) (167) Net income............................ -- -- -- 1,890 1,890 ------- ---- ----- ------ ------- Balances at December 31, 1998......... $66,634 $ -- $(428) $2,200 $68,529 ======= ==== ===== ====== =======
See accompanying notes. F-68 146 WASTE CONNECTIONS, INC. AND PREDECESSORS SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 1997 AND 1998 (IN THOUSANDS)
PREDECESSORS COMBINED NINE MONTHS ENDED WASTE CONNECTIONS, INC. SEPTEMBER 30, SUPPLEMENTAL CONSOLIDATED 1997 YEAR ENDED DECEMBER 31, (NOTE 1) 1997 1998 ------------- ----------- ----------- Cash Flows From Operating Activities: Net income (loss)....................................... $(1,173) $ (3,750) $ 1,890 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Gain on sale of assets............................... (4) -- -- Depreciation and amortization........................ 1,083 1,725 6,306 Deferred income taxes................................ -- (413) 1,356 Amortization of debt issuance costs, debt guarantee fees and accretion of discount on long-term debt... -- 860 192 Stock compensation................................... -- 4,395 632 Gain on sale of land................................. -- -- (8) Extraordinary item -- extinguishment of debt......... -- -- 1,291 Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable, net........................... (604) (1,467) (2,387) Prepaid expenses and other current assets.......... (74) (11) (1,535) Accounts payable................................... (221) 3,116 (674) Deferred revenue................................... (137) 323 1,054 Accrued liabilities................................ (450) 835 319 Other liabilities.................................. -- (65) 544 ------- -------- -------- Net cash provided by (used in) operating activities..... (1,580) 5,548 8,980 Cash Flows From Investing Activities: Proceeds from sale of property and equipment............ 188 -- 132 Payments for acquisitions, net of cash acquired......... -- (14,393) (56,341) Prepaid acquisition costs............................... -- (20) -- Capital expenditures for property and equipment......... (735) (2,372) (8,122) Proceeds from sale of land.............................. -- -- 625 Net change in other assets.............................. 22 (47) (247) Proceeds from stockholder notes receivable.............. -- -- 82 Issuance of stockholder notes receivable................ -- (82) -- ------- -------- -------- Net cash used in investing activities................... (525) (16,914) (63,871)
F-69 147
PREDECESSORS COMBINED NINE MONTHS ENDED WASTE CONNECTIONS, INC. SEPTEMBER 30, SUPPLEMENTAL CONSOLIDATED 1997 YEAR ENDED DECEMBER 31, (NOTE 1) 1997 1998 ------------- ----------- ----------- Cash Flows From Financing Activities: Net intercompany balance................................ $ 2,142 $ -- $ -- Proceeds from short-term borrowings..................... -- 600 -- Proceeds from long-term debt............................ -- 8,914 77,402 Principal payments on notes payable..................... (38) (2,724) (3,374) Principal payments on long-term debt.................... -- (1,085) (40,273) Proceeds from sale of redeemable convertible preferred stock................................................ -- 6,992 -- Proceeds from sale of common stock...................... -- 23 23,986 Proceeds from option and warrant exercises.............. -- -- 362 Net change in short term borrowings..................... -- 19 (128) Net change in advances from a related party............. -- (275) -- Payment of dividends.................................... -- (83) (328) Debt issuance costs..................................... -- (150) (854) ------- -------- -------- Net cash provided by financing activities................. 2,104 12,231 56,793 ------- -------- -------- Net increase (decrease) in cash and equivalents........... (1) 865 1,902 Cash and equivalents at beginning of period............... 102 81 946 ------- -------- -------- Cash and equivalents at end of period..................... $ 101 $ 946 $ 2,848 ======= ======== ======== Supplementary Disclosures of Cash Flow Information and Non-Cash Transactions: Cash paid for interest.................................. $ -- $ 541 $ 2,130 ======= ======== ======== Cash paid for income taxes.............................. $ -- $ 744 $ 970 ======= ======== ======== Redeemable convertible preferred stock accretion........ $ 531 $ 917 ======== ======== Issuance of notes payable for land and buildings........ $ 315 $ -- ======== ======== In connection with acquisitions, the Company assumed liabilities as follows: Fair value of assets acquired........................... $ 20,140 $120,507 Cash paid for acquisitions (including acquisition costs)............................................... (11,693) (56,341) -------- -------- Liabilities assumed, stock and notes payable issued to sellers.............................................. $ 8,447 $ 64,166 ======== ========
See accompanying notes. F-70 148 WASTE CONNECTIONS, INC. AND PREDECESSORS SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
PREDECESSORS ------------------------------- WASTE THE DISPOSAL CONNECTIONS, INC. GROUP COMBINED PREDECESSORS SUPPLEMENTAL PERIOD FROM COMBINED CONSOLIDATED JANUARY 1, PERIOD ENDED YEAR ENDED 1996 THROUGH DECEMBER 31, DECEMBER 31, JULY 31, 1996 1996 (NOTE 1) 1996 -------------- ------------- ----------------- Cash Flows From Operating Activities: Net income (loss)............................. $2,258 $ (981) $ 663 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.............. 324 962 1,236 Deferred income taxes...................... 298 -- (19) Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable, net................. 1,201 (1,992) 63 Prepaid expenses and other current assets................................ (2) (104) (36) Accounts payable......................... (45) 713 932 Deferred revenue......................... (522) 421 42 Accrued liabilities...................... (987) 428 129 Income taxes payable..................... -- -- (232) ------ ------- ------- Net cash provided by (used in) operating activities................................. 2,525 (553) 2,778 Cash Flows From Investing Activities: Proceeds from sale of property and equipment.................................. -- 117 -- Capital expenditures for property and equipment.................................. (7) (282) (4,790) Net change in other assets.................... -- 33 31 ------ ------- ------- Net cash used in investing activities......... (7) (132) (4,759) Cash Flows From Financing Activities: Net intercompany balance...................... -- 642 -- Proceeds from long-term debt.................. 142 -- 1,418 Principal payments on long-term debt.......... (427) -- (615) Principal payments on notes payable........... -- (39) -- Net change in short-term borrowings........... -- -- 659 Net change in advances to related party....... -- -- (259) ------ ------- ------- Net cash provided by (used in) financing activities.................................... (285) 603 1,203 ------ ------- ------- Net increase (decrease) in cash................. 2,233 (82) (778) Cash and equivalents beginning of period........ 961 184 859 ------ ------- ------- Cash and equivalents at end of period........... $3,194 $ 102 $ 81 ====== ======= ======= Supplementary Disclosures of Cash Flow Information and Non-Cash Transactions: Cash paid for interest........................ $ -- $ -- $ 284 ====== ======= ======= Cash paid for income taxes.................... $ -- $ -- $ 792 ====== ======= ======= Issuance of notes payable for land and buildings.................................. $ -- $ -- $ 260 ====== ======= =======
See accompanying notes. F-71 149 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS Waste Connections, Inc. ("WCI" or "the Company") was incorporated in Delaware on September 9, 1997 and commenced its operations on October 1, 1997 through the purchase of certain solid waste operations in Washington, as more fully described below and in Note 2. The Company is a regional, integrated, non- hazardous solid waste services company that provides collection, transfer, disposal and recycling services to commercial, industrial and residential customers in California, Idaho, Kansas, Nebraska, Oklahoma, Oregon, South Dakota, Utah, Washington and Wyoming. BASIS OF PRESENTATION These supplemental consolidated financial statements include the accounts of WCI and its wholly-owned subsidiaries. The consolidated entity is referred to herein as the Company. All intercompany accounts and transactions have been eliminated in consolidation. As more fully described in Note 2, on January 19, 1999, the Company entered into a business combination with the Murrey Companies. The business combination has been accounted for as pooling-of-interests and the historical consolidated financial statements of the Company and its predecessors for all years prior to the business combination have been restated in the accompanying supplemental consolidated financial statements to include the financial positions, results of operations and cash flows of the Murrey Companies. The supplemental financial statements will become the historical financial statements of the Company upon issuance of financial statements for a subsequent period that includes the date of the merger. The supplemental consolidated financial statements of the Company include reclassifications made to conform financial statement presentation of the Murrey Companies to that of Waste Connections, Inc. The entities the Company acquired in September 1997 from Browning-Ferris Industries, Inc. ("BFI") are collectively referred to herein as the Company's predecessors. BFI acquired the predecessor operations at various times during 1995 and 1996, and prior to being acquired by BFI, the predecessors operated as separate stand-alone businesses. During the periods in which the Company's predecessors operated as wholly owned subsidiaries of BFI, they maintained intercompany accounts with BFI for recording intercompany charges for costs and expenses, intercompany purchases of equipment and additions under capital leases and intercompany transfers of cash, among other transactions. It is not feasible to ascertain the amount of related interest expense that would have been recorded in the historical financial statements had the predecessors been operated as stand-alone entities. Charges for interest expense were allocated to the Company's predecessors by BFI as disclosed in the accompanying Statement of Operations. The interest expense allocations from BFI are based on formulas that do not necessarily correspond with the balances in the related intercompany accounts. Moreover, the financial position and results of operations of the predecessors during this period may not necessarily be indicative of the financial position or results of operations that would have been realized had the predecessors been operated as stand-alone entities. For the periods in which the predecessors operated as wholly owned subsidiaries of BFI, the statements of operations include amounts allocated by BFI to the predecessors for selling, general and administrative expenses based on certain allocation methodologies which management of the Company believes are reasonable. During the periods prior to their acquisition by BFI, the Company's predecessors operated as separate stand-alone businesses. The acquisitions of the predecessors by BFI were accounted for using the purchase F-72 150 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) method of accounting, and the respective purchase prices were allocated to the fair values of the assets acquired and liabilities assumed. Similarly, the Company's acquisitions of the predecessors from BFI in September 1997 were accounted for using the purchase method of accounting, and the purchase price was allocated to the fair value of the assets acquired and liabilities assumed. Consequently, the amounts of depreciation and amortization included in the statements of operations for the periods presented reflect the changes in basis of the underlying assets that were made as a result of the changes in ownership that occurred during the periods presented. In addition, because the predecessor companies operated independently and were not under common control or management during these periods, and because different tax strategies may have influenced their results of operations, the data may not be comparable to or indicative of their operating results after their acquisition by BFI. Due to the manner in which BFI intercompany transactions were recorded as described above, it is not feasible to present a detailed analysis of transactions reflected in the net intercompany balance with BFI. The change in the predecessors' combined intercompany balance with BFI (net of income (loss) and initial investment in the acquired companies) was $642 and $2,142 during the period ended December 31, 1996 and the nine months ended September 30, 1997, respectively. The accompanying statements of operations and cash flows for the Company's predecessors for the years ended December 31, 1996 and 1997 are comprised of the following entities for the periods indicated: YEAR ENDED DECEMBER 31, 1996: The Disposal Group Combined... January 1, 1996 through July 31, 1996 (BFI acquisition date) Predecessors Combined......... Period ended December 31, 1996 (represents the combined results of operations of The Disposal Group subsequent to the BFI acquisition date and the operations for the year ended December 31, 1996 of Fibres International, Inc. which was acquired by BFI in 1995) YEAR ENDED DECEMBER 31, 1997: Predecessors Combined......... Nine months ended September 30, 1997 (represents the combined results of operations for the twelve month period of the entities acquired by BFI in 1995 and 1996 described above) The Disposal Group Combined consists of three entities that were under common control prior to their acquisition by BFI: Diamond Fab and Welding Service, Inc., Buchmann Sanitary Service, Inc., and The Disposal Group. For periods prior to WCI's incorporation on September 9, 1997, the supplemental consolidated financial statements of the Company consist solely of the Murrey Companies. The financial statements of the Murrey Companies include the combined accounts of Murrey's Disposal Company, Inc. ("Murrey's"), American Disposal Company, Inc. ("American"), D.M. Disposal Co., Inc. ("DM"), and Tacoma Recycling Company, Inc. ("Tacoma") as a result of their common management which exercises significant influence over their operations. Significant intercompany balances and transactions between the Murrey Companies have been eliminated in combination. F-73 151 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. COMMON STOCK VALUATION In connection with the Company's organization and initial capitalization in September 1997, the Company sold 2.3 million shares of common stock for $.01 per share to certain directors, consultants, and management. As a result, the Company recorded a non-recurring, non-cash stock compensation charge of $4,395 in the accompanying statement of operations, representing the difference between the amount paid for the shares and the estimated fair value of the shares of $1.92 per share on the date of sale. The estimated fair value of the common shares was determined by the Company based on an independent valuation of the common stock. CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less at purchase to be cash equivalents. As of December 31, 1998, cash equivalents consist of demand money market accounts. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risks consist primarily of accounts receivable. Credit risk on accounts receivable is minimized as a result of the large and diverse nature of the Company's customer base. The Company maintains allowances for losses based on the expected collectibility of accounts receivable. Credit losses have been within management's expectations. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Improvements or betterments which significantly extend the life of an asset are capitalized. Expenditures for maintenance and repair costs are charged to operations as incurred. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts in the year of disposal. Gains and losses resulting from property disposals are included in other income (expense). Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are as follows: Buildings................................................... 20 years Machinery and equipment..................................... 3 - 15 years Rolling stock............................................... 10 years Containers.................................................. 5 - 15 years Furniture and fixtures...................................... 3 - 6 years
In connection with acquisitions (Note 2), the Company acquired certain used property and equipment. This used property and equipment is being depreciated using the straight-line method over its estimated remaining useful lives, which range from one to fifteen years. Capitalized landfill costs include expenditures for land and related airspace, permitting costs and preparation costs. Landfill permitting and preparation costs represent only direct costs related to those F-74 152 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) activities, including legal, engineering and construction. Interest is capitalized on landfill permitting and construction projects and other projects under development while the assets are undergoing activities to ready them for their intended use. The interest capitalization rate is based on the Company's weighted average cost of indebtedness. No interest was capitalized in 1998. Landfill permitting, acquisition and preparation costs are amortized as permitted airspace of the landfill is consumed. Landfill preparation costs include the costs of construction associated with excavation, liners, site berms and the installation of leak detection and leachate collection systems. In determining the amortization rate for a landfill, preparation costs include the total estimated costs to complete construction of the landfills' permitted capacity. Units-of-production amortization rates are determined annually for the Company's operating landfill. The rates are based on estimates provided by the Company's outside engineers and consider the information provided by surveys which are performed at least annually. GOODWILL Goodwill represents the excess of the purchase price over the fair value of the net assets of the acquired entities, and is amortized on a straight-line basis over the period of expected benefit of 40 years. Accumulated amortization amounted to $81 and $1,687 as of December 31, 1997 and 1998, respectively. The Company continually evaluates the value and future benefits of its intangible assets, including goodwill. The Company assesses recoverability from future operations using cash flows and income from operations of the related acquired business as measures. Under this approach, the carrying value would be reduced if it becomes probable that the Company's best estimate for expected future cash flows of the related business would be less than the carrying amount of the related intangible assets. There have been no adjustments to the carrying amount of intangible assets resulting from these evaluations as of December 31, 1998. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist primarily of cash, trade receivables, restricted funds held in trust, trade payables and debt instruments. The carrying values of cash, trade receivables, restricted funds held in trust, and trade payables are considered to be representative of their respective fair values. The carrying values of the Company's debt instruments approximate their fair values as of December 31, 1997 and 1998, based on current incremental borrowing rates for similar types of borrowing arrangements. INTEREST RATE PROTECTION AGREEMENTS Interest rate protection agreements are used to reduce interest rate risks and interest costs of the Company's debt portfolio. The Company enters into these agreements to change the fixed/variable interest rate mix of the portfolio to reduce the Company's aggregate exposure to increases in interest rates. The Company does not hold or issue derivative financial instruments for trading purposes. Hedge accounting treatment is applied to interest rate derivative contracts that are designated as hedges of specified debt positions. Amounts payable or receivable under interest rate swap agreements are recognized as adjustments to interest expense in the periods in which they accrue. Net premiums paid for derivative financial instruments are deferred and recognized ratably over the life of the instruments. Under hedge accounting treatment, current period income is not affected by the increase or decrease in the fair market value of derivative instruments as interest rates change and these instruments are not reflected in the financial statements at fair market value. Early termination of a hedging instrument does not result in recognition of immediate gain or loss except in those cases when the debt instruments to which a contract is specifically linked is terminated. F-75 153 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) INCOME TAXES The Company, The Disposal Group, and DM use the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. During the periods in which the predecessors were owned by BFI, their operations were included in the consolidated income tax returns of BFI, and no allocations of income taxes were reflected in the historical statements of operations. For purposes of the combined predecessor financial statements, current and deferred income taxes have been provided on a separate income tax return basis. Murrey's, American and Tacoma operate under Subchapter S of the Internal Revenue Code for federal and state income tax reporting purposes. Consequently all of the income tax attributes and liabilities of these companies' operations flow through to the individual shareholders. REVENUE RECOGNITION Revenues are recognized as services are provided. Certain customers are billed in advance and, accordingly, recognition of the related revenues is deferred until the services are provided. START-UP AND INTEGRATION EXPENSES During the period from inception (September 9, 1997) through December 31, 1997, the Company incurred certain start-up expenses relating to the formation of the Company, primarily for legal and other professional services, and the costs associated with recruiting the Company's initial management team. In addition, the Company incurred certain integration expenses relating to its initial acquisitions. These start-up and integration expenses have been charged to operations as incurred. STOCK-BASED COMPENSATION As permitted under the provisions of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation" ("SFAS 123"), the Company has elected to account for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board's Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). Under the intrinsic value method, compensation cost is the excess, if any, of the quoted market price or fair value of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. None of the predecessor entities awarded stock-based compensation to employees. Consequently, the related disclosures in the accompanying financial statements and notes relate solely to the Company. PER SHARE INFORMATION In 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 128, Earnings per Share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts have been presented on the basis set forth in Statement 128 (Note 12). Earnings per share data have not been presented for the predecessor operations because such data is not meaningful. F-76 154 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) CLOSURE AND POST-CLOSURE COSTS The Company does not accrue for closure and post-closure costs related to the Fairmead Landfill it operates in Madera County, California. Madera County as required by state law, has established a special fund to pay such liabilities. In 1998, the Company acquired the stock of Red Carpet Landfill ("Red Carpet") in Oklahoma and Butler County Landfill ("Butler") in Nebraska. Both Red Carpet and Butler are engaged in landfilling of municipal solid waste and other acceptable waste streams. Accrued closure and post-closure costs include the current and non-current portion of accruals associated with obligations for closure and post-closure of the landfill. The Company, based as input from its outside engineers, estimates its future closure and post-closure monitoring and maintenance costs for solid waste landfills based on its interpretation of the technical standards of the U.S. Environmental Protection Agency's Subtitle D regulations and the air emissions standards under the Clean Air Act as they are being applied on a state-by-state basis. Closure and post-closure monitoring and maintenance costs represent the costs related to cash expenditures yet to be incurred when a landfill facility ceases to accept waste and closes. Accruals for closure and post-closure monitoring and maintenance requirements in the U.S. consider final capping of the site, site inspection, groundwater monitoring, leachate management, methane gas control and recovery, and operating and maintenance costs to be incurred during the period after the facility closes. Certain of these environmental costs, principally capping and methane gas control costs, are also incurred during the operating life of the site in accordance with the landfill operation requirements of Subtitle D and the air emissions standards. Reviews of the future requirements for closure and post-closure monitoring and maintenance costs for the Company's operating landfills are performed by the Company's consulting engineers at least annually and are the basis upon which the Company's estimates of these future costs and the related accrual rates are revised. The Company provides accruals for these estimated costs as the remaining permitted airspace of such facilities is consumed. The states in which the Company operates its landfills require a specified portion of these accrued closure and post-closure obligations to be funded at any point in time. As of December 31, 1998, the Company estimates that total closure and post-closure costs relating to its landfills will be approximately $5,474, of which approximately $1,233 has been accrued as of December 31, 1998 and included in other long-term liabilities in the accompanying balance sheet. SEGMENT INFORMATION The Company adopted FASB Statement No. 131, Disclosure About Segments of an Enterprise and Related Information in 1998. Statement 131 established standards for the way that public business enterprises report information about operating segments. It also established standards for related disclosures about products and services, geographic areas and major customers. Implementation of the provisions of Statement 131 did not have a significant impact on the Company's disclosures. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. The statement, which is to be applied prospectively, is effective for the Company's year ended December 31, 2000. The Company is currently evaluating the impact of SFAS No. 133 on its future results of operations and financial position. In April 1998, Statement of Position ("SOP") No. 98-5 -- "Reporting on the Costs of Start-Up Activities" was issued by the American Institute of Certified Public Accountants. The statement requires costs of start-up activities and organization costs to be expensed as incurred. Initial application of the F-77 155 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) statement, which is effective for the Company's year ended December 31, 1999, is to be reported as a cumulative effect of a change in accounting principle. The Company believes that the future adoption of SOP No. 98-5 will not have a material effect on its results of operations or financial position. RECLASSIFICATIONS Certain amounts reported in the Company's prior year's financial statements have been reclassified to conform with the 1998 presentation. 2. ACQUISITIONS THE MURREY COMPANIES On January 19, 1999, Waste Connections, Inc. consummated a business combination with the Murrey Companies which included the exchange of 2,888,880 shares of Waste Connections, Inc. common stock for all outstanding shares of the Murrey Companies. This business combination will be accounted for as poolings-of-interests, and accordingly, the historical financial statements of the Company have been restated on a supplemental basis to include the consolidated financial statements of Waste Connections, Inc. and the Murrey Companies for all periods presented. The supplemental consolidated financial statements have been prepared to give retroactive effect to the business combination with the Murrey Companies. Generally accepted accounting principles prohibit giving effect to a consummated business combination accounted for by the pooling-of-interests method in financial statements that do not include the date of consummation. The accompanying supplemental consolidated financial statements do not extend through the date of consummation, however, they will become the historical consolidated financial statements of the Company after financial statements covering the date of consummation of the business combinations are issued. In connection with the business combination with the Murrey Companies, Waste Connections, Inc. incurred transaction related costs of approximately $6,200 which will be to charged to operations in the period during which the merger is consummated. The table below sets forth the combined revenues and net income (loss) for the years ended December 31, 1996, 1997 and 1998 (in thousands):
WASTE THE MURREY SUPPLEMENTAL CONNECTIONS, INC. COMPANIES CONSOLIDATED ----------------- ---------- ------------ YEAR ENDED DECEMBER 31, 1996: Revenues.............................................. $ -- $25,024 $25,024 Net income............................................ -- 663 663 YEAR ENDED DECEMBER 31, 1997: Revenues.............................................. $ 6,237 $28,874 $35,111 Net income (loss)..................................... (5,066) 1,316 (3,750) YEAR ENDED DECEMBER 31, 1998: Revenues.............................................. $54,042 $32,528 $86,570 Net income............................................ 1,748 142 1,890
F-78 156 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1998 ACQUISITIONS During 1998, the Company acquired 42 businesses, including 2 operational landfills, which were accounted for as purchases. Aggregate consideration for these acquisitions consisted of $56,341 in cash (net of cash acquired), $12,488 in notes payable to sellers, 2,054,634 shares of common stock valued at $25,293, and warrants to purchase 267,925 shares of common stock valued at $1,293. The results of operations of the acquired businesses have been included in the Company's consolidated financial statements from their respective acquisition dates. Certain items affecting the purchase price allocations are preliminary. A summary of the preliminary purchase price allocations as of December 31, 1998 for the acquisitions consummated in 1998 is as follows: Acquired assets: Accounts receivable....................................... $ 4,670 Prepaid expenses and other current assets................. 301 Property and equipment.................................... 25,853 Goodwill.................................................. 86,358 Long-term franchise agreements and other.................. 2,390 Non-competition agreement................................. 540 Other assets.............................................. 395 Assumed liabilities: Deferred revenue.......................................... (577) Accounts payable and accrued liabilities.................. (9,210) Other accrued liabilities................................. (1,575) Long-term liabilities assumed............................. (13,638) Deferred income taxes..................................... (92) -------- $ 95,415 ========
In connection with certain of the acquisitions in 1998, the Company is required to pay contingent consideration to certain former shareholders of the respective companies, subject to the occurrence of specified events. As of December 31, 1998, contingent payments relating to these acquisitions total approximately $4,400, including 51,746 shares placed into escrow, are payable primarily in cash and stock, and are earned based upon the achievement of certain milestones. No amounts related to these contingent payments have been included in the Company's financial statements as the events which would give rise to such payments have not yet occurred nor are probable. BROWNING-FERRIS INDUSTRIES RELATED On September 29, 1997, the Company purchased all of the outstanding stock of Browning-Ferris Industries of Washington, Inc. and Fibres International, Inc. from BFI (collectively the "Acquisitions"). The total purchase price for the Acquisitions was approximately $15,036, comprised principally of $11,493 in cash and promissory notes payable to BFI totaling $3,543. Of the combined $15,036 purchase price, $9,869 was recorded as goodwill and $150 was assigned to a non-competition agreement. The Acquisitions were accounted for in accordance with the purchase method of accounting and, accordingly, the net assets acquired were included in the Company's consolidated balance sheet based upon their estimated fair values on the date of the Acquisitions. The Company's consolidated statement of operations includes the revenues and expenses of the acquired businesses after the effective date of the transaction. F-79 157 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) A summary of the purchase price allocation for the BFI Acquisitions is as follows: Acquired assets: Accounts receivable....................................... $ 2,919 Prepaid expenses and other current assets................. 287 Property and equipment.................................... 4,106 Goodwill.................................................. 9,869 Non-competition agreement................................. 150 Assumed liabilities: Deferred revenue.......................................... (428) Accounts payable and accrued liabilities.................. (26) Accrued losses on acquired contracts...................... (1,309) Deferred income taxes..................................... (532) ------- $15,036 =======
ISLAND DISPOSAL During 1997, the Murrey Companies purchased substantially all of the assets of Island Disposal (effective May 2, 1997) and Environmental Waste Systems and Olympic Disposal (both effective December 1, 1997) (collectively the "Murrey Acquisitions"). The total purchase price for the Murrey Acquisitions was approximately $3,100, comprised of $2,900 in cash and promissory notes payable to the sellers totaling $200. Of the combined $3,100 purchase price, $1,791 was recorded as goodwill and $80 was assigned to non-competition agreements. The Murrey Acquisitions were accounted for in accordance with the purchase method of accounting and, accordingly, the net assets acquired were included in the Murrey Companies' combined balance sheet based upon their estimated fair values on the date of the Acquisitions. The Murrey Companies' combined statement of operations includes the revenues and expenses of the acquired businesses after the effective date of the transactions. A summary of the purchase price allocation is as follows: Acquired assets: Property and equipment.................................... $1,229 Goodwill.................................................. 1,791 Non-competition agreements................................ 80 ------ $3,100 ======
PREDECESSOR ACQUISITIONS As described in Note 1, BFI acquired for cash and debt The Disposal Group Combined on July 31, 1996 in a transaction accounted for as a purchase. Accordingly, the respective purchase price was allocated to the fair values of the assets acquired and liabilities assumed. The following presents purchase price information for this acquisition: Tangible assets acquired.................................... $2,076 Goodwill.................................................... 2,671 Assumed liabilities......................................... (33) ------ $4,714 ======
F-80 158 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The following unaudited pro forma results of operations assume that the Company's significant acquisitions included above had occurred at the beginning of each period presented.
YEAR ENDED DECEMBER 31, ----------------------- 1997 1998 --------- ---------- (UNAUDITED) Total revenue........................................... $90,221 $102,888 Net income (loss)....................................... (3,871) 2,820 Basic income (loss) per share........................... (0.79) 0.19 Diluted income (loss) per share......................... (0.79) 0.17
The unaudited pro forma results do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred on January 1, 1997, nor are they necessarily indicative of future operating results. 3. INTANGIBLE ASSETS Intangible assets consist of the following as of December 31, 1997 and 1998:
DECEMBER 31, ------------------- 1997 1998 ------- -------- Goodwill................................................ $11,263 $ 98,336 Long-term franchise agreements and contracts............ -- 2,390 Non-competition agreement............................... 230 770 Other, net.............................................. -- 777 ------- -------- 11,493 102,273 Less accumulated amortization........................... (81) (1,687) ------- -------- $11,412 $100,586 ======= ========
The Company acquired certain long-term franchise agreements, contracts and non-competition agreements in connection with certain of its acquisitions. The estimated fair value of the acquired long-term franchise agreements and contracts was determined by management based on the discounted net cash flows associated with the agreements and contracts. The estimated fair value of the non-competition agreements was determined by management based on the discounted adjusted operating income stream that would have otherwise been subject to competition. The amounts assigned to the franchise agreements, contracts, and non-competition agreements is being amortized on a straight-line basis over the lesser of 40 years or the remaining term of the related agreements (ranging from 17 to 40 years). F-81 159 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following as of December 31, 1997 and 1998:
DECEMBER 31, ------------------- 1997 1998 ------- -------- Land and buildings...................................... $ 6,668 $ 19,461 Rolling stock........................................... 9,923 19,713 Containers.............................................. 6,375 12,644 Machinery and equipment................................. 3,840 7,638 Furniture and fixtures.................................. 322 335 ------- -------- 27,128 59,791 Less accumulated depreciation........................... (8,124) (12,805) ------- -------- $19,004 $ 46,986 ======= ========
Landfill costs of approximately $9,044 are included in land, buildings and improvements at December 31, 1998. No landfills were owned as of December 31, 1997. Combined depreciation expense for the predecessor operations was $1,101 and $789 for the year ended December 31, 1996, and the nine months ended September 30, 1997, respectively. The Company's depreciation expense for the period from inception (September 9, 1997) through December 31, 1997 and for the year ended December 31, 1998 was $1,652 and $4,689, respectively. 5. OTHER ASSETS Other assets consist of the following as of December 31, 1997 and 1998:
DECEMBER 31, -------------- 1997 1998 ---- ------ Restricted cash............................................. $-- $1,521 Other....................................................... 58 457 --- ------ $58 $1,978 === ======
Restricted funds held in trust are included as part of other assets and consist of amounts on deposit with various banks that support the Company's financial assurance obligations for its landfill facilities' closure and postclosure costs and amounts outstanding under the Madera Bond (Note 7). 6. SHORT-TERM BORROWINGS Short-term borrowings consist of various revolving and non-revolving lines-of-credit with a bank, bearing interest at 8.50% as of December 31, 1998 and which mature at various dates through February 28, 1999. The lines of credit are secured by all accounts receivable and inventory accounts, which totaled $3,176 as of December 31, 1998. The lines-of-credit were fully utilized as of December 31, 1998. 7. LONG-TERM DEBT On January 30, 1998, the Company obtained a revolving credit facility from BankBoston N.A. (the "January Credit Facility"). The maximum amount available under the January Credit Facility was $25,000, including stand-by letters-of-credit, and the borrowings bore interest at various fixed and/or variable rates at the Company's option. The January Credit Facility allowed for the Company to issue up to $5,000 in stand-by F-82 160 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) letters-of-credit. The January Credit Facility required quarterly payments of interest and required the Company to pay an annual commitment fee equal to 0.5% of the unused portion of the January Credit Facility. In connection with the January Credit Facility the Company granted to an affiliate of BankBoston a warrant to purchase 140,000 shares of the Company's common stock with an exercise price of $2.80 per share and an expiration date of January 29, 2008 (Note 10). On May 28, 1998, the Company entered into a new revolving credit facility with a syndicate of banks for which BankBoston N.A. acted as agent (the "May Credit Facility"). The maximum amount available under the May Credit Facility was $60,000 (including stand-by letters of credit) and the borrowings bore interest at various fixed and/or variable rates at the Company's option. The May Credit Facility replaced the January Credit Facility. The May Credit Facility allowed for the Company to issue up to $5,000 in stand-by letters-of-credit. The May Credit Facility required quarterly payments of interest and borrowings were secured by virtually all of the Company's assets. The May Credit Facility required the Company to pay an annual commitment fee equal to 0.375% of the unused portion of the facility. On November 20, 1998, the Company entered into a new revolving credit facility with a syndicate of banks for which BankBoston N.A. acted as agent (the "November Credit Facility"). As of December 31, 1998, the maximum amount available under the November Credit Facility is $115,000 (including stand-by letters of credit) and the borrowings bear interest at various fixed and/or variable rates at the Company's option (approximately 7.0% as of December 31, 1998). The maximum amount available was increased to $125,000 in January 1999. The November Credit Facility replaced the May Credit Facility. The November Credit Facility allows for the Company to issue up to $15,000 in stand-by letters-of-credit, of which $1,829 were issued as of December 31, 1998. The November Credit Facility requires quarterly payments of interest and it matures in November 2003. Borrowings are secured by substantially all of the Company's assets and the Company is required to pay an annual commitment fee equal to 0.375% of the unused portion of the facility. The November Credit Facility places certain business, financial and operating restrictions on the Company relating to, among other things, the incurrence of additional indebtedness, investments, acquisitions, asset sales, mergers, dividends, distributions and repurchase and redemption of capital stock. The November Credit Facility also contains covenants that require specified financial ratios and balances be maintained. As of December 31, 1998, the Company was in compliance with these covenants. On June 16, 1998, the Company completed a $1,800 tax-exempt bond financing for its Madera subsidiary (the "Madera Bond"). These funds will be used for specified capital expenditures and improvements, including installation of a landfill gas recovery system. The bonds mature on May 1, 2016 and bear interest at variable rates based on market conditions for California tax exempt bonds (approximately 3.8% at December 31, 1998). The bonds are backed by a letter of credit issued by BankBoston N.A. under the November Credit Facility for $1,800. Funds from the bond offering are held by a trustee until the capital expenditures are completed. The unused funds are classified as restricted cash and included in other assets in the accompanying consolidated balance sheet. F-83 161 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Long-term debt consists of the following as of December 31, 1997 and 1998:
1997 1998 ------- -------- November Credit Facility.................................... $ -- $ 57,281 Madera Bond................................................. -- 1,800 Term loan payable to the Bank bearing interest at the Bank's prime rate plus 2.0% (aggregating 10.5% as of December 31, 1998); monthly principal payments of $76 plus interest beginning October 1997 through August 2002; all outstanding principal and interest are due September 2002; secured by substantially all of WCI's assets; subordinate to the notes payable to BFI with respect to certain specified assets.......................................... 5,343 -- Note payable to sellers in connection with acquisition, non-interest bearing, due January 1999.................... -- 8,546 Note payable to a bank bearing interest at a variable rate (approximately 8.4% as of December 31, 1998); monthly payments of principal and interest of $25; maturing in November 2007; secured by certain cash accounts and a pledge of one of the Murrey Companies exclusive franchise agreements................................................ 2,000 1,866 Notes payable to a bank bearing interest at various fixed rates (ranging from 9.1% to 9.2% as of December 31, 1998); monthly payments of principal and interest aggregating $25 and one-time payments of $470 and $751 in September 2000 and May 2001, respectively; maturing at various dates between September 2000 and May 2001; secured by land and buildings with a net book value of approximately $2,463 as of December 31, 1998...................................... 1,544 1,350 Equipment financing notes payable bearing interest at various rates (ranging from 8.6% to 8.8% as of December 31, 1998); monthly payments of principal and interest aggregating $21; maturing at various dates through September 2001; secured by equipment with an aggregate net book value of approximately $660 as of December 31, 1998...................................................... 822 423 Note payable to a bank bearing interest at 8.6%; monthly payments of principal and interest aggregating $13; maturing in October 2001; secured by equipment with a net book value of approximately $400 as of December 31, 1998 and certain cash accounts................................. 632 514 Notes payable to sellers bearing interest at 9.0% as of December 31, 1998; monthly principal and interest payments of $3; maturing October 2007; secured by land and buildings with a net book value of approximately $901 as of December 31, 1998...................................... 471 291 Note payable to BFI bearing interest at 6.0%; all outstanding principal and interest are due December 1997; secured by substantially all of WCI's accounts receivable................................................ 319 -- Note payable to BFI bearing interest at 10.0%; quarterly payments of interest beginning December 1997; all outstanding principal and interest are due March 1998; secured by substantially all of WCI's assets.............. 500 -- Unsecured notes payable to seller bearing interest at 8.0% as of December 31, 1998; monthly principal and interest payments of $4; maturing in June 2002..................... 189 90 Revolving line of credit from a bank bearing interest at the bank's prime rate plus 1.5% (aggregating 10% at December 31, 1997); interest was payable monthly and the line was to expire on September 29, 1998; secured by substantially all of the Company's assets............................... 600 -- Other....................................................... 122 2,071 ------- -------- 12,542 74,232 Less: current portion....................................... (873) (10,247) ------- -------- $11,669 $ 63,985 ======= ========
F-84 162 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The term loan payable to the Bank and the notes payable to BFI were personally guaranteed by certain officers and stockholders of the Company (Note 10). As of December 31, 1998, aggregate contractual future principal payments by calendar year on long-term debt are due as follows: 1999....................................... $10,247 2000....................................... 1,497 2001....................................... 1,433 2002....................................... 420 2003....................................... 57,593 Thereafter................................. 3,042 ------- $74,232 =======
Management used borrowings from the January Credit Facility to pay off all amounts outstanding under the term loan payable to the Bank and all notes payable to BFI, and as such, these amounts have been classified as long-term debt as of December 31, 1997. The Company has entered into an interest rate protection agreement (the "Interest Agreement"), with its primary banking institution to reduce its exposure to fluctuations in variable interest rates. The Interest Agreement, which is effective November 2, 1998 through November 2, 2000, effectively changes the Company's interest rate paid on a notional amount of $27,700 of its floating rate long-term debt to a weighted average fixed rate (approximately 6.43% at December 31, 1998). The fair value of the Interest Agreement as of December 31, 1998 was approximately $188, which reflects the estimated amounts that the Company would receive to terminate the Interest Agreement based on quoted market prices of comparable contracts as of December 31, 1998. In the event of nonperformance by the counterparty, the Company would be exposed to interest rate risk if the variable interest rate received were to exceed the fixed rate paid by the Company under the terms of the Interest Agreement. 8. COMMITMENTS AND CONTINGENCIES COMMITMENTS Leases The Company leases its facilities and certain equipment under non-cancelable operating leases for periods ranging from one to five years. The Company's supplemental consolidated rent expense under operating leases during the years ended December 31, 1996, 1997 and 1998 was $170, $235 and $730, respectively. F-85 163 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) As of December 31, 1998, future minimum lease payments under these leases, by calendar year, are as follows: 1999........................................ $ 715 2000........................................ 713 2001........................................ 599 2002........................................ 504 2003........................................ 485 Thereafter.................................. 2,059 ------ $5,075 ======
Performance Bonds and Letters of Credit Municipal solid waste collection contracts may require performance bonds or other means of financial assurance to secure contractual performance. As of December 31, 1998, WCI had provided customers and various regulatory authorities with bonds and letters of credit of approximately $3,692 to secure its obligations. The Company's November Credit Facility provides for the issuance of letters of credit in an amount up to $15,000, but any letters of credit issued reduce the availability of borrowings for acquisitions or other general corporate purposes. If the Company were unable to obtain surety bonds or letters of credit in sufficient amounts or at acceptable rates, it could be precluded from entering into additional municipal solid waste collection contracts or obtaining or retaining landfill operating permits. CONTINGENCIES Environmental Risks The Company is subject to liability for any environmental damage that its solid waste facilities may cause to neighboring landowners or residents, particularly as a result of the contamination of soil, groundwater or surface water, and especially drinking water, including damage resulting from conditions existing prior to the acquisition of such facilities by the Company. The Company may also be subject to liability for any off-site environmental contamination caused by pollutants or hazardous substances whose transportation, treatment or disposal was arranged by the Company or its predecessors. Any substantial liability for environmental damage incurred by the Company could have a material adverse effect on the Company's financial condition, results of operations or cash flows. As of December 31, 1998, the Company is not aware of any such environmental liabilities. Legal Proceedings In the normal course of its business and as a result of the extensive governmental regulation of the solid waste industry, the Company is subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines on the Company or to revoke or deny renewal of an operating permit held by the Company. From time to time the Company may also be subject to actions brought by citizens' groups or adjacent landowners or residents in connection with the permitting and licensing of landfills and transfer stations, or alleging environmental damage or violations of the permits and licenses pursuant to which the Company operates. In addition, the Company may become party to various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of the waste management business. However, as of December 31, 1998 there is no F-86 164 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) current proceeding or litigation involving the Company that the Company believes will have a material adverse impact on its business, financial condition, results of operations or cash flows. During the period from January 1, 1996 through July 31, 1996, The Disposal Group won a lawsuit against the city of Vancouver, Washington relating to the city's annexation of certain territories served by The Disposal Group. The Disposal Group received approximately $2,600 from the lawsuit, which is included in other income in the accompanying statement of operations. Disposal Site The Murrey Companies have been informed that the Hidden Valley Landfill, which is currently utilized by them for disposal of waste collected in Pierce County, is currently operating under a Consent Decree with the Washington State Department of Ecology and the Environmental Protection Agency. Under the terms of the Consent Decree, the Hidden Valley Landfill was closed on December 31, 1998; and subsequent to that date, all of the waste collected by the Murrey Companies in Pierce County was long hauled to an alternate disposal site pending completion of a new solid waste landfill in Pierce County. Management of the Company does not believe that the closure of the Hidden Valley Landfill will have a material adverse impact on it's business, financial position, results of operations or cash flows. Employees Approximately 67 drivers and mechanics at WCI's Vancouver, Washington operation are represented by the Teamsters Union, with which Browning-Ferris Industries of Washington, Inc., the Company's predecessor in Vancouver, entered a four-year collective bargaining agreement in January 1997. Approximately 11 drivers at Arrow Sanitary Services, Inc. ("Arrow"), a wholly owned subsidiary of the Company, are represented by the Teamsters Union, with which Arrow entered into a three-year collective bargaining agreement in March 1998. In addition, in July 1997, the employees at the Company's facility in Issaquah, Washington, adopted a measure to select a union to represent them in labor negotiations with management. The union and management operated under a one-year negotiating agreement, that ended July 27, 1998. Since July 27, 1998, negotiations have continued between the union and the Company, although the union is permitted to call a strike or call for arbitration of the outstanding issues. The employees at Issaquah have filed to decertify the union, and the union has filed a claim with the National Labor Relation Board to attempt to block the decertification. The Company is not aware of any other organizational efforts among its employees and believes that its relations with its employees are good. Approximately 46 of the Murrey Companies' route drivers are represented by the Teamsters Union. The Murrey Companies have a collective bargaining agreement that expires in June 1999. The Murrey Companies are not aware of any other organizational efforts among their employees and believes that their relations with their employees are good. 9. REDEEMABLE CONVERTIBLE PREFERRED STOCK In September 1997, the Company received net proceeds of $6,992 from the sale of 2,499,998 shares of redeemable convertible preferred stock (the "Preferred Stock"). The Preferred Stock accrued cumulative dividends at the rate of $.098 per share annually. Accumulated and unpaid dividends on Preferred Stock amounted to $61 as of December 31, 1997. Each share of Preferred Stock was redeemable, at the holder's option, during the period from April 1, 1999 through October 1, 1999 for $4.20 per share plus any accumulated and unpaid dividends. The Preferred Stock and any accumulated and unpaid dividends were convertible at the holder's option into shares of the Company's common stock at the calculated rate of $2.80 F-87 165 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) per share divided by the "Conversion Price" subject to certain anti-dilution adjustments. Each share was automatically converted into common stock immediately upon the closing of the Company's initial public offering of common stock at a Conversion Price of $2.80 per share. 10. STOCKHOLDERS' EQUITY (DEFICIT) Common Stock Of the 37,675,887 shares of common stock authorized but unissued as of December 31, 1998, the following shares were reserved for issuance: Stock option plan........................................... 1,139,214 Stock purchase warrants..................................... 1,291,135 Shares held in escrow....................................... 51,746 --------- 2,482,095 =========
STOCKHOLDER NOTES RECEIVABLE In December 1997, the Company provided loans in the aggregate amount of $82 to certain employees, who are also common stockholders, for the purchase of shares of the Company's Preferred Stock. The notes bore interest at 8%, were secured by the Preferred Stock purchased and common stock owned by the employees, and were paid in full during 1998. STOCK OPTIONS In November 1997, WCI's Board of Directors adopted a stock option plan in which all officers, employees, directors and consultants may participate (the "Option Plan"). Options granted under the Option Plan may either be incentive stock options or nonqualified stock options (the "Options"), generally have a term of 10 years from the date of grant, and will vest over periods determined at the date of grant. The exercise prices of the options are determined by the Company's Board of Directors and will be at least 100% or 110% of the fair market value of the Company's common stock on the date of grant as provided for in the Option Plan. In connection with the Option Plan, WCI's Board of Directors approved the reservation of 1,200,000 shares of common stock for issuance thereunder. As of December 31, 1997 and 1998, 35,000 and 333,121 options to purchase common stock were exercisable under the Option Plan, respectively. In addition, as of December 31, 1997 and 1998, options for 671,500 and 160,450 shares, respectively of common stock were available for future grants under the Option Plan. A summary of WCI's stock option activity and related information during the period from inception (September 9, 1997) through December 31, 1997 and the year ended December 31, 1998 is presented below:
NUMBER OF WEIGHTED AVERAGE SHARES (OPTIONS) EXERCISE PRICE ---------------- ---------------- Outstanding at inception....................... -- $ -- Granted........................................ 528,500 4.92 ------- Outstanding as of December 31, 1997............ 528,500 4.92 Granted (unaudited)............................ 511,050 9.58 Forfeited (unaudited).......................... 2,874 5.00 Exercised (unaudited).......................... 57,912 4.69 ------- Outstanding as of December 31, 1998............ 978,764 7.38 =======
F-88 166 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The following table summarizes information about stock options outstanding as of December 31, 1998:
OPTIONS OUTSTANDING -------------------------------- WEIGHTED OPTIONS EXERCISABLE AVERAGE -------------------- WEIGHTED REMAINING WEIGHTED AVERAGE CONTRACTUAL AVERAGE EXERCISE LIFE EXERCISE EXERCISE RANGE SHARES PRICE (IN YEARS) SHARES PRICE -------------- ------- -------- ----------- -------- --------- $ 2.80 to 5.00................. 544,099 $ 2.92 8.9 190,869 $ 2.97 $ 6.00 to 9.50................. 62,415 8.42 8.9 14,582 8.01 $10.50 to 12.50................. 240,000 11.06 9.2 80,003 11.05 $15.19 to 19.00................. 95,750 17.25 9.5 47,667 16.23 $21.00 to 22.13................. 36,500 21.90 9.6 -- -- ------- ------- 978,764 7.38 8.9 333,121 7.04 ======= =======
The weighted average grant date fair values for options granted during 1997 and 1998 are as follows:
YEAR ENDED DECEMBER 31, -------------- 1997 1998 ----- ----- Exercise prices equal to market price of stock.............. $ -- $5.28 Exercise prices less than market price of stock............. -- 6.52 Exercise prices greater than market price of stock.......... 0.30 3.09
Pro Forma information regarding net income (loss) and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the period from inception (September 9, 1997) through December 31, 1997 and the year ended December 31, 1998: risk-free interest rate of 6%; and 5%, respectively; dividend yield of zero; volatility factor of the expected market price of the Company's common stock of .40 and .55, respectively; and a weighted-average expected life of the option of 4 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The following table summarizes the Company's pro forma net loss and pro forma F-89 167 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) basic net loss per share for the period from inception (September 9, 1997) through December 31, 1997 and for the year ended December 31, 1998:
YEAR ENDED DECEMBER 31, ----------------- 1997 1998 ------- ------ Pro forma net income (loss)............................... $(3,754) $ 567 Pro forma net loss applicable to common stockholders...... (4,285) (350) Pro forma basic net loss per share........................ (.90) (0.04)
During the year ended December 31, 1998, the Company recorded deferred stock compensation of $821 relating to stock options granted during the period with exercise prices less than the estimated fair value of the Company's common stock on the date of grant. The deferred stock compensation is being amortized into expense over the vesting periods of the stock options which generally range from 1 to 3 years. Compensation expense of $393 was recorded during the year ended December 31, 1998 relating to these options, and the remaining $428 will be amortized into expense in future periods. Stock Purchase Warrants At December 31, 1998, the Company had outstanding warrants to purchase 1,291,135 shares of the Company's common stock at exercise prices between $0.01 and $22.13 per share. The warrants are exercisable upon vesting and notification and expire between 2000 and 2008. In September 1997, the Company issued a warrant to purchase 200,000 shares of the Company's common stock to the Bank that provided the line of credit and term loan payable. The exercise price of the warrant is $.01 per share and contains provisions for a cashless exercise at the bank's option. The warrant was valued at $382 on its date of issuance using the Black-Scholes pricing model with an assumed stock price volatility of .40, risk-free interest rate of 6.0%, estimated fair value of the common stock of $1.92 per share and an expected life of 7 years. The value assigned to the warrant was reflected as a discount on long-term debt. The discount was fully accreted to interest expense using the straight-line method over the expected term of the debt agreements (approximately three months). In 1998, the bank received 172,578 shares of common stock through the exercise of 172,689 warrants. In connection with their guarantee of certain of the Company's debt obligations, the Company issued in December 1997 warrants to purchase 841,000 shares of the Company's common stock to certain directors and stockholders of the Company. The exercise price of the warrants is $2.80 per share. The warrants were valued at $328 on their date of issuance using the Black-Scholes pricing model with an assumed stock price volatility of .40, risk-free interest rate of 6.0%, estimated fair value of the common stock of $1.92 per share and expected lives of 3 years. The value assigned to these warrants was fully amortized to interest expense over the expected term of the debt agreements (approximately three months). In December 1997, the Company issued to consultants warrants to purchase 15,000 shares of the Company's common stock. Warrants to purchase 10,000 and 5,000 shares of common stock had exercise prices of $5.00 per share and $2.80 per share, respectively. In January 1998, the Company issued a warrant to purchase 140,000 shares of its common stock to BankBoston N.A. in connection with the January Credit Facility. The exercise price of the warrant is $2.80 per share. The warrant was valued at $855 on its date of issuance using the Black-Scholes pricing model with an assumed stock price volatility of .40, risk-free interest rate of 6%, estimated fair value of the common stock of $7.50 per share and an expected life of 10 years. The value assigned to the warrant was reflected as a discount on long-term debt and accreted to interest expense using the interest method over the expected term F-90 168 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) of the January Credit Facility. The January Credit Facility was extinguished in May 1998 and the unamortized discount on the debt was expensed as an extraordinary loss on early extinguishment of debt. In February 1998, the Company issued warrants to purchase 200,000 shares of its common stock with an exercise price of $4.00 per share in connection with an acquisition. The warrants were valued at $954 using the Black-Scholes pricing model and recorded as an element of purchase price for the acquisition. In February 1998, the Company granted warrants to an employee to purchase 50,000 shares of the Company's common stock at $2.80 per share. The Company recorded stock compensation expense of approximately $240 relating to these warrants. All such warrants were exercised in 1998. During 1998, the Company issued warrants to certain market development consultants to purchase 67,935 shares of the Company's common stock with exercise prices ranging from $12.00 to $22.13 per share. The warrants were valued at $339 using the Black-Scholes pricing model and recorded as an element of purchase price of the related acquisitions. 11. INCOME TAXES The provision (benefit) for income taxes for the years ended December 31, 1996, 1997 and 1998 consists of the following:
PREDECESSOR WCI THE DISPOSAL GROUP SUPPLEMENTAL COMBINED CONSOLIDATED PERIOD FROM YEAR ENDED JANUARY 1, 1996 DECEMBER 31, THROUGH ----------------------- JULY 31, 1996 1996 1997 1998 ------------------ ---- ----- ------ Current: Federal.......................................... $207 $562 $ 716 $1,432 State............................................ -- -- -- 142 Deferred: Federal.......................................... 298 (19) (414) 1,217 State............................................ -- -- -- 139 ---- ---- ----- ------ $505 $543 $ 302 $2,930 ==== ==== ===== ======
F-91 169 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Significant components of deferred income tax assets and liabilities are as follows as of December 31, 1997 and 1998:
WCI SUPPLEMENTAL CONSOLIDATED ------------------ 1997 1998 ------- ------- Deferred income tax assets: Accounts receivable reserves........................... $ 8 $ 152 Amortization........................................... 290 -- Accrued expenses....................................... -- 8 Vacation accrual....................................... 15 6 State taxes............................................ -- 22 Other.................................................. -- 49 Net operating losses................................... 54 -- ------- ------- Total deferred income tax assets.................. 367 237 Deferred income tax liabilities: Amortization........................................... -- (757) Depreciation........................................... (1,187) (1,368) Other liabilities...................................... -- (146) Prepaid expenses....................................... -- (234) ------- ------- Total deferred income tax liabilities............. (1,187) (2,505) ------- ------- Net deferred income tax liability......................... $ (820) $(2,268) ======= =======
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 GROUP COMBINED PREDECESSORS PERIOD FROM PREDECESSORS COMBINED JANUARY 1, 1996 COMBINED NINE MONTHS THROUGH PERIOD ENDED ENDED JULY 31, 1996 DECEMBER 31, 1996 SEPTEMBER 30, 1997 --------------- ----------------- ------------------ Income tax provision (benefit) at the statutory rate...................... 34.0% (34.0)% (34.0)% Effect of allowance......... (16.0) 34.0 34.0 ----- ----- ----- 18.0% --% --% ===== ===== =====
F-92 170 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
WCI SUPPLEMENTAL CONSOLIDATED YEARS ENDED DECEMBER 31, ------------------------ 1996 1997 1998 ----- ------ ----- Income tax provision (benefit) at the statutory rate................................................ 34.0% (34.0)% 34.0% State taxes, net of federal benefit................... -- -- 4.0 Goodwill amortization................................. -- -- 3.0 Tax effect of companies reporting under Subchapter S................................................... 10.0 (1.0) 5.0 Stock compensation expense............................ -- 44.0 3.0 Other................................................. 1.0 -- 1.0 ---- ----- ---- 45.0% 9.0% 50.0% ==== ===== ====
12. NET INCOME (LOSS) PER SHARE INFORMATION The following table sets forth the calculation of the numerator and denominator used in the computation of basic and diluted net loss per share for the years ended December 31, 1996, 1997 and 1998:
DECEMBER 31, DECEMBER 31, 1996 1997 DECEMBER 31, 1998 BASIC AND BASIC AND ------------------------ DILUTED DILUTED BASIC DILUTED NET INCOME NET LOSS NET INCOME NET INCOME PER SHARE PER SHARE PER SHARE PER SHARE ------------ ------------ ---------- ----------- Numerator: Income (loss) before extraordinary item..... $ 663 $ (3,750) $ 2,917 $ 2,917 Redeemable convertible preferred stock accretion................................ -- (531) (917) (917) ---------- ---------- ---------- ----------- Income (loss) applicable to common stockholders before extraordinary item... $ 663 $ (4,281) $ 2,000 $ 2,000 ========== ========== ========== =========== Extraordinary item.......................... -- -- (1,027) (1,027) ---------- ---------- ---------- ----------- Net income (loss) applicable to common stockholders............................. $ 663 $ (4,281) $ 973 $ 973 ========== ========== ========== =========== Denominator: Weighted average common shares outstanding.............................. 2,888,880 4,761,447 9,349,173 9,349,173 Dilutive effect of stock options and warrants outstanding..................... -- -- -- 1,628,930 Incremental common shares issuable upon redemption of redeemable common stock.... -- -- -- 282,192 ---------- ---------- ---------- ----------- 2,888,880 4,761,447 9,349,173 11,260,295 ========== ========== ========== ===========
As of December 31, 1998, outstanding options to purchase 87,832 shares of common stock (with exercise prices ranging from $18.62 to $22.13) could potentially dilute basic net income per share in the future and have not been included in the computation of diluted net loss per share because to do so would have been antidilutive for the period presented. F-93 171 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 13. RELATED PARTY TRANSACTIONS Recycling Agreement WCI has entered into certain transactions with Continental Paper, LLC ("Continental"), in which WCI delivers to Continental all of it's collected recyclable materials in areas in which Continental has processing facilities and Continental pays WCI market rates for the recyclable materials. Certain of WCI's stockholders are the majority owners of Continental. During the period from inception (September 9, 1997) through December 31, 1997 and the year ended December 31, 1998, the Company received, after deducting amounts paid to Continental, approximately $10 and paid approximately $108, respectively, to/from Continental in these transactions. Operating Lease The Murrey Companies lease land (on which certain of their facilities are located) from a shareholder of the Murrey Companies. This lease is pursuant to an informal arrangement whereby the Murrey Companies pay all of the property taxes and other expenses associated with the leased land in lieu of monthly rent. These payments totaled approximately $10 during each of the years ended December 31, 1996, 1997 and 1998. Advances As of December 31, 1997 and 1998, the Murrey Companies had non-interest bearing advances payable to one of their shareholders totaling $543. Disposal Fees During the years ended December 31, 1996, 1997 and 1998, the Murrey Companies paid $7,730, $8,592 and $8,816, respectively, in disposal fees to a landfill that is owned and operated by a company in which one of the Murrey Companies' shareholders has an approximate 33% ownership interest. 14. EMPLOYEE BENEFIT PLAN WCI has a voluntary savings and investment plan (the "401(k) Plan"). The 401(k) Plan is available to all eligible, non-union employees of WCI. Under the 401(k) Plan, WCI's contributions are 40% of the first 5% of the employee's contributions. During the period from inception (September 9, 1997) through December 31, 1997 and the year ended December 31, 1998, WCI's 401(k) Plan expense was approximately $2 and $58, respectively. The Murrey Companies have a voluntary savings and investment plan (the "401(k) Plan"). The 401(k) Plan is available to all eligible, non-union employees of the Murrey Companies. Under the 401(k) Plan, the Murrey Companies' contributions are at the discretion of management. During the years ended December 31, 1996, 1997 and 1998, the Murrey Companies' 401(k) Plan expense was approximately $267, $316 and $336, respectively. 15. SUBSEQUENT EVENTS Murrey Companies Merger On January 19, 1999, WCI merged with Murreys Disposal Company, Inc., DM Disposal Co., Inc., American Disposal Company, Inc., and Tacoma Recycling, Inc. (Collectively, the "Murrey Companies"). The transaction was accounted for as poolings-of-interests, whereby the Company issued 2,888,880 shares of its common stock for all of the outstanding shares of the Murrey Companies. In Connection with the merger F-94 172 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) with the Murrey Companies, the Company incurred transaction related costs of approximately $6,200, which will be charged to operations in the first quarter of 1999. Secondary Public Offering Effective February 9, 1999, the Company sold approximately 4,000,000 shares of common stock at $17.50 per share. As a result of the offering, the Company received approximately $65,300 in net proceeds and used the proceeds to pay down approximately $50,200 of its then outstanding debt. Acquisition of Columbia Resource Co. L.P. and Finley-Buttes Limited Partnership (CRCFBLP) On March 31, 1999, the Company acquired the stock of two companies that are the sole partners of CRCFBLP. Total consideration paid for CRCFBLP was approximately $66,900 in cash. New Credit Facility On March 30, 1999, the Company obtained commitments from a syndicate of banks led by BankBoston, N.A., which increased the Company's borrowing capacity from $125,000 to $225,000 and modified certain covenants. The revised credit facility matures in 2004. F-95 173 ------------------------------------------------------ ------------------------------------------------------ PROSPECTIVE INVESTORS MAY RELY ONLY ON THE INFORMATION IN THIS PROSPECTUS. NEITHER THE COMPANY NOR ANY SELLING STOCKHOLDER HAS AUTHORIZED ANYONE TO PROVIDE PROSPECTIVE INVESTORS WITH INFORMATION DIFFERENT FROM THAT IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL, AND IT DOES NOT SEEK AN OFFER TO BUY, THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. THE INFORMATION IN THIS PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF WHEN THIS PROSPECTUS IS DELIVERED OR THESE SECURITIES ARE SOLD. ------------------------ TABLE OF CONTENTS
PAGE ---- Available Information............... 2 Prospectus Summary.................. 3 Risk Factors........................ 6 Dividend Policy..................... 15 Price Range of Common Stock......... 15 Selected Historical and Pro Forma Financial and Operating Data...... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 22 Business............................ 37 Management.......................... 56 Certain Transactions................ 64 Principal Stockholders.............. 67 Description of Capital Stock........ 69 Shares Eligible for Future Sale..... 72 Outstanding Securities Covered by This Prospectus................... 73 Legal Matters....................... 75 Experts............................. 75 Index to Financial Statements....... F-1
------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ 3,000,000 SHARES [LOGO] COMMON STOCK -------------------- PROSPECTUS -------------------- APRIL , 1999 ------------------------------------------------------ ------------------------------------------------------ 174 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. 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 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 II-1 175 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-2 176 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 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE a. EXHIBITS.
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - --------- ----------------------- 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+ Second Amended and Restated Revolving Credit Agreement, dated as of March 30, 1999, between the Company and various banks represented by BankBoston, N.A 10.2### First Amended and Restated 1997 Stock Option Plan 10.3* Form of Option Agreement(1) 10.4* Form of Warrant Agreement(2) 10.5* Warrant Agreement and related Anti-Dilution Agreement issued to Imperial Bank 10.6* Warrant Agreement and related Anti-Dilution Agreement issued to BankBoston, N.A 10.7* Form of Stock Purchase Agreement dated as of September 30, 1997(3) 10.8## Form of Third Amended and Restated Investors' Rights Agreement dated as of December 31, 1998(3) 10.9* Employment Agreement among the Company, J. Bradford Bishop, Frank W. Cutler, James N. Cutler, Jr. and Ronald J. Mittelstaedt, dated as of October 1, 1997 10.10* First Amended Employment Agreement between the Company and Darrell Chambliss, dated as of October 1, 1997 10.11* First Amended Employment Agreement between the Company and Michael Foos, dated as of October 1, 1997 10.12* First Amended Employment Agreement between the Company and Eric Moser, dated as of October 1, 1997 10.13* Employment Agreement between the Company and Steven Bouck, dated as of February 1, 1998 10.14* Employment Agreement between the Company and Eugene V. Dupreau, dated as of February 23, 1998
II-3 177
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - --------- ----------------------- 10.15* Employment Agreement between the Company and Charles B. Youngclaus, dated as of February 23, 1998 10.16+* Purchase and Sale Agreement, dated as of September 29, 1997, between Browning-Ferris Industries, Inc., Browning-Ferris, Inc. and Browning-Ferris Industries of Idaho, Inc., as Sellers, and the Company, Waste Connections of Idaho, Inc. and Continental Paper Recycling, L.L.C. as Buyers 10.17+* Stock Purchase Agreement, dated as of January 26, 1998, among the Company, Waste Connections of Idaho, Inc. and the shareholders of Waste Connections of Idaho, Inc. 10.18+* Stock Purchase Agreement, dated as of February 4, 1998, among the Company and the shareholders of Madera Disposal Company, Inc. 10.19+* 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. 10.20* Form of Indemnification Agreement entered into by the Company and each of its directors and officers 10.21+* Asset Purchase Agreement, dated as of April 8, 1998, between the Company, Waste Connections of Wyoming, Inc., A-1 Disposal, Inc., David Jones and Thomas Fries 10.22+* Asset Purchase Agreement, dated as of April 8, 1998, between the Company, Waste Connections of Wyoming, Inc. and Gwendolyn L. Sullivan 10.23+* Stock Purchase Agreement, dated as of May 8, 1998, by and among the Company, Sunshine Sanitation, Incorporated, Robert E. Ewing and Sherry D. Ewing 10.24+* Stock Purchase Agreement, dated as of May 8, 1998, by and among the Company, Sowers' Sanitation, Inc., James C. Sowers and Mildred A. Sowers 10.25+* Stock Purchase Agreement, dated as of May 11, 1998, by and among the Company, T&T Disposal, Inc. and Timothy Thomas 10.26+** Asset Purchase Agreement, dated as of June 1, 1998, by and among the Company, Waste Connections of Utah, Inc., Contractor's Waste, L.C., and Brad Kitchen, Heath Johnston and R. Scott McQuarrie 10.27+# Stock Purchase Agreement, dated as of June 5, 1998, by and among the Company, B&B Sanitation, Inc., Red Carpet Landfill, Inc., Darlin Equipment, Inc., Lyle J. Buller, Larue A. Buller, the Lyle J. Buller Revocable Trust dated 10/11/96 and Larue A. Buller, Trustee of the Larue A. Buller Revocable Trust dated 10/11/96 10.28++ Stock Purchase Agreement dated as of June 17, 1998, by and among the Company, Arrow Sanitary Service, Inc., Steven Giusto, Dennis Giusto, John Giusto, Michael Giusto and Kenneth Giusto 10.29++ Stock Purchase Agreement dated as of June 25, 1998, by and among the Company, Curry Transfer and Recycling, Oregon Waste Technology, Petty H. Smart and A. Lewis Rucker
II-4 178
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - --------- ----------------------- 10.30*** + Purchase and Sale Agreement dated as of June 25, 1998, by and between Petty H. Smart and the Company 10.31*** + Loan Agreement dated as of June 1, 1998, between Madera Disposal Systems, Inc. and the California Pollution Control Financing Authority 10.32*** Employment Agreement between the Company and David M. Hall, dated as of July 8, 1998 10.33*** + Asset Purchase Agreement, dated as of July 27, 1998, by and among the Company, Waste Connections of Utah, Inc., Miller Containers, Inc., and Douglas L. Miller 10.34+++ + Agreement and Plan of Merger, dated as of July 30, 1998, by and among the Company, WCI Acquisition Corporation, Shrader Refuse and Recycling Service Company, Duane E. Shrader, Myrlen A. Shrader, Daniel L. Shrader, Mark S. Shrader, Michael D. Shrader and Daren L. Shrader 10.35+++ + Purchase and Sale Agreement dated as of July 31, 1998, by and between Ambler Vincent Development Company and Shrader Refuse and Recycling Service Company 10.36*** + Asset Purchase Agreement dated as of August 21, 1998, among the Company, Waste Connection of Utah, Inc. and Joseph E. Cunningham and Scott L. Helm 10.37*** + Asset Purchase Agreement, dated as of August 10, 1998, by and among the Company, Waste Connections of Utah, Inc., ABC Waste Inc., and David Boren 10.38*** Form of Investors' Rights Agreement, dated as of July 31, 1998(4) 10.39*** + Purchase Agreement, dated as of July 31, 1998, by and among the Company, Waste Connections of Nebraska, Inc., J & J Sanitation Inc., Big Red Roll Off Inc., Garry L. Jeffords, Darin R. Mueller, Leslie J. Jeffords, Leland J. Jeffords, Bradley Rowan, Great Plains Recycling, Inc., Roma L. Jeffords, Kristie K. Mueller, Sheri L. Jeffords and Betty L. Hargis 10.40## Asset Purchase Agreement, dated as of September 18, 1998, by and among the Company, Waste Connections of Nebraska, Inc., Affiliated Waste Services, L.L.C., Leroy's Sanitary Service, Inc., Elden's Sanitary Service, Inc., Dennis' Sanitary Service, Inc., LeRoy Hintz and Janice Hintz, Dennis J. Mrsny and Mary Mrsny, and Elden W. Mrsny and Doris Mrsny 10.41## Asset Purchase Agreement, dated as of September 9, 1998, by and among the Company, Madera Disposal Systems, Inc. and Charles B. Youngclaus 10.42## Asset Purchase Agreement, dated as of September 21, 1998, by and among the Company, Waste Connections of Utah, Inc., Country Garbage Service Inc., Jay Mecham, Karl Bankowski, and Robert Lopez 10.43## Asset Purchase Agreement, dated as of September 18, 1998, by and among the Company, Waste Connections of Nebraska, Inc., Gary D. Wolff and Elizabeth L. Wolff
II-5 179
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - --------- ----------------------- 10.44## Agreement and Plan of Merger, dated as of September 21, 1998, by and among the Company, WCI Acquisition Corporation, Evergreen Waste Systems Inc., Keith H. Alexander and Todd D. Alexander 10.45## Asset Purchase Agreement, dated as of September 22, 1998, by and among the Company, Curry Transfer & Recycling, Inc., Harrell's Septic, Ralph Hirt and Renate Hirt 10.46## Asset Purchase Agreement, dated as of September 25, 1998, by and among the Company, Curry Transfer & Recycling, Inc., Westlane Disposal, Loren Parker and Roberta Parker 10.47## Asset Purchase Agreement, dated as of October 15, 1998, by and among the Company, Waste Connections of Idaho, Inc., R&N LLC, Rumsey Sanitation, Inc., NADL Sanitation Inc., Bradley D. Rumsey, Emil Nejdl, and Kathy K. Rumsey 10.48## Purchase and Sale Agreement, dated as of October 15, 1998, by and between R&N LLC and Waste Connections of Idaho, Inc. 10.49## Agreement and Plan of Merger dated as of October 22, 1998, by and among Waste Connections, WCI Acquisition Corporation I, WCI Acquisition Corporation II, WCI Acquisition Corporation III, WCI Acquisition Corporation IV, Murrey's Disposal Company, Inc., American Disposal Company, Inc., D.M. Disposal Co., Inc., Tacoma Recycling Company, Inc., the Murrey Trust UTA August 5, 1993, as amended, the Bonnie L. Murrey Revocable Trust UTA August 5, 1993, as amended, Donald J. Hawkins and Irmgard R. Wilcox 10.50**** Purchase Agreement dated as of December 11, 1998, by and among Waste Connections, Butler County Landfill, Inc., Kobus Construction, Inc., Tom Kobus and Debbie Kobus 10.51+ Amended and Restated Stock Purchase Agreement dated as of March 31, 1999, by and among Waste Connections, Management Environmental National, Inc., RH Financial Corporation and the Shareholder listed on Schedule A thereto 21.1 Subsidiaries of the Registrant 23.1## Consent of Shartsis, Friese & Ginsburg LLP (included in Exhibit 5.1) 23.2 Consent of Ernst & Young LLP, Independent Auditors 23.3 Consent of Perkins & Company, P.C., Independent Auditors 23.5## Consent of Williams, Kastner & Gibbs PLLC 24.1## Power of Attorney (included in Part II of the Registration Statement under the caption "Signatures")
- --------------- * Incorporated by reference to the exhibits filed with the Registrant's Registration Statement on Form S-1, Registration No. 333-48029. ** Incorporated by reference to the exhibit filed with the Registrant's Form 8-K filed on June 15, 1998. II-6 180 # Incorporated by reference to the exhibit filed with the Registrant's Form 8-K filed on June 22, 1998. ++ Incorporated by reference to the exhibit filed with the Registrant's Form 8-K filed on July 1, 1998. +++ Incorporated by reference to the exhibit filed with the Registrant's Form 8-K filed on August 11, 1998. + Filed without exhibits and schedules (to be provided supplementally on request of the Commission). *** Incorporated by reference to the exhibits filed with the Registrant's Registration Statement on Form S-4, Registration No. 333-59199. **** Incorporated by reference to the exhibits filed with the Registrant's Registration Statement on Form S-1, Registration No. 333-70253. ### Incorporated by reference to the exhibits filed with the Registrant's Registration Statement on Form S-8, Registration No. 333-72113. ## Previously filed. (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 (190,000); Michael R. Foos (190,000); Ronald J. Mittelstaedt (200,000); Eric J. Moser (125,000); Steven F. Bouck (250,000); Eugene V. Dupreau (20,000); Charles B. Youngclaus (17,000); and Irmgard R. Wilcox (5,000). The Company also issued options in this form to the following directors of the Company: Michael W. Harlan (22,500); and William J. Razzouk (22,500). (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 66,794 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 and an Investors' Rights 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 Agreement. (4) Each of the selling shareholders of Shrader Refuse and Recycling Service Company is a party to this Investors' Rights Agreement. b. FINANCIAL STATEMENT SCHEDULE. The following Financial Statement Schedule is filed herewith and made a part hereof: Schedule II -- Valuation and Quantifying Accounts. II-7 181 All other schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. ITEM 22. UNDERTAKINGS The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment 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. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the Registration Statement 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. The undersigned Registrant hereby undertakes that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. The undersigned Registrant undertakes that every prospectus that (i) is filed pursuant to the immediately preceding paragraph, or (ii) purports to meet the requirements of section 10(a)(3) of the Securities Act of 1933 and is used in connection with an offering of securities subject to Rule 415, will be filed as part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective II-8 182 amendment 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. Insofar as indemnification for liabilities arising under the Securities Act of 1933 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 Securities Act of 1993 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 Securities Act of 1993 and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective, except where the transaction in which the securities being offered pursuant to this Registration Statement would be exempt from registration (but for the possibility of integration) and which have an immaterial effect on the Registrant. II-9 183 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Roseville, State of California, on April 26, 1999. WASTE CONNECTIONS, INC. By: /s/ RONALD J. MITTELSTAEDT* ------------------------------------------ Ronald J. Mittelstaedt President, Chief Executive Officer and Chairman Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on April 26, 1999.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RONALD J. MITTELSTAEDT* President, Chief Executive April 26, 1999 - --------------------------------------------- Officer and Chairman Ronald J. Mittelstaedt /s/ EUGENE V. DUPREAU* Director and Vice April 26, 1999 - --------------------------------------------- President -- Madera Eugene V. Dupreau /s/ MICHAEL W. HARLAN* Director April 26, 1999 - --------------------------------------------- Michael W. Harlan /s/ WILLIAM J. RAZZOUK* Director April 26, 1999 - --------------------------------------------- William J. Razzouk /s/ STEVEN F. BOUCK* Executive Vice President and April 26, 1999 - --------------------------------------------- Chief Financial Officer Steven F. Bouck /s/ MICHAEL R. FOOS* Vice President and Corporate April 26, 1999 - --------------------------------------------- Controller Michael R. Foos /s/ IRMGARD R. WILCOX Director April 26, 1999 - --------------------------------------------- Irmgard R. Wilcox * /s/ STEVEN F. BOUCK April 26, 1999 - --------------------------------------------- Steven F. Bouck Attorney-in-Fact
II-10 184 WASTE CONNECTIONS, INC. AND PREDECESSORS SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (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: Period from January 1, 1996 through July 1, 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 Waste Connections, Inc.: Year ended December 31, 1998...................... 19 343 -- -- 362
185 EXHIBIT INDEX
EXHIBIT PAGE NUMBER DESCRIPTION OF EXHIBITS NUMBER - --------- ----------------------- ------ 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+ Second Amended and Restated Revolving Credit Agreement, dated as of March 30, 1999, between the Company and various banks represented by BankBoston, N.A............. 10.2### First Amended and Restated 1997 Stock Option Plan........ 10.3* Form of Option Agreement(1).............................. 10.4* Form of Warrant Agreement(2)............................. 10.5* Warrant Agreement and related Anti-Dilution Agreement issued to Imperial Bank.................................. 10.6* Warrant Agreement and related Anti-Dilution Agreement issued to BankBoston, N.A................................ 10.7* Form of Stock Purchase Agreement dated as of September 30, 1997(3).............................................. 10.8## Form of Third Amended and Restated Investors' Rights Agreement dated as of December 31, 1998(3)............... 10.9* Employment Agreement among the Company, J. Bradford Bishop, Frank W. Cutler, James N. Cutler, Jr. and Ronald J. Mittelstaedt, dated as of October 1, 1997............. 10.10* First Amended Employment Agreement between the Company and Darrell Chambliss, dated as of October 1, 1997....... 10.11* First Amended Employment Agreement between the Company and Michael Foos, dated as of October 1, 1997............ 10.12* First Amended Employment Agreement between the Company and Eric Moser, dated as of October 1, 1997.............. 10.13* Employment Agreement between the Company and Steven Bouck, dated as of February 1, 1998...................... 10.14* Employment Agreement between the Company and Eugene V. Dupreau, dated as of February 23, 1998................... 10.15* Employment Agreement between the Company and Charles B. Youngclaus, dated as of February 23, 1998................ 10.16+* Purchase and Sale Agreement, dated as of September 29, 1997, between Browning-Ferris Industries, Inc., Browning-Ferris, Inc. and Browning-Ferris Industries of Idaho, Inc., as Sellers, and the Company, Waste Connections of Idaho, Inc. and Continental Paper Recycling, L.L.C. as Buyers..............................
186
EXHIBIT PAGE NUMBER DESCRIPTION OF EXHIBITS NUMBER - --------- ----------------------- ------ 10.17+* 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...... 10.18+* Stock Purchase Agreement, dated as of February 4, 1998, among the Company and the shareholders of Madera Disposal Company, Inc............................................. 10.19+* 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......................................... 10.20* Form of Indemnification Agreement entered into by the Company and each of its directors and officers........... 10.21+* Asset Purchase Agreement, dated as of April 8, 1998, between the Company, Waste Connections of Wyoming, Inc., A-1 Disposal, Inc., David Jones and Thomas Fries......... 10.22+* Asset Purchase Agreement, dated as of April 8, 1998, between the Company, Waste Connections of Wyoming, Inc. and Gwendolyn L. Sullivan................................ 10.23+* Stock Purchase Agreement, dated as of May 8, 1998, by and among the Company, Sunshine Sanitation, Incorporated, Robert E. Ewing and Sherry D. Ewing...................... 10.24+* Stock Purchase Agreement, dated as of May 8, 1998, by and among the Company, Sowers' Sanitation, Inc., James C. Sowers and Mildred A. Sowers............................. 10.25+* Stock Purchase Agreement, dated as of May 11, 1998, by and among the Company, T&T Disposal, Inc. and Timothy Thomas................................................... 10.26+** Asset Purchase Agreement, dated as of June 1, 1998, by and among the Company, Waste Connections of Utah, Inc., Contractor's Waste, L.C., and Brad Kitchen, Heath Johnston and R. Scott McQuarrie.......................... 10.27+# Stock Purchase Agreement, dated as of June 5, 1998, by and among the Company, B&B Sanitation, Inc., Red Carpet Landfill, Inc., Darlin Equipment, Inc., Lyle J. Buller, Larue A. Buller, the Lyle J. Buller Revocable Trust dated 10/11/96 and Larue A. Buller, Trustee of the Larue A. Buller Revocable Trust dated 10/11/96.................... 10.28++ Stock Purchase Agreement dated as of June 17, 1998, by and among the Company, Arrow Sanitary Service, Inc., Steven Giusto, Dennis Giusto, John Giusto, Michael Giusto and Kenneth Giusto....................................... 10.29++ Stock Purchase Agreement dated as of June 25, 1998, by and among the Company, Curry Transfer and Recycling, Oregon Waste Technology, Petty H. Smart and A. Lewis Rucker................................................... 10.30*** + Purchase and Sale Agreement dated as of June 25, 1998, by and between Petty H. Smart and the Company...............
187
EXHIBIT PAGE NUMBER DESCRIPTION OF EXHIBITS NUMBER - --------- ----------------------- ------ 10.31*** + Loan Agreement dated as of June 1, 1998, between Madera Disposal Systems, Inc. and the California Pollution Control Financing Authority.............................. 10.32*** Employment Agreement between the Company and David M. Hall, dated as of July 8, 1998........................... 10.33*** + Asset Purchase Agreement, dated as of July 27, 1998, by and among the Company, Waste Connections of Utah, Inc., Miller Containers, Inc., and Douglas L. Miller........... 10.34+++ + Agreement and Plan of Merger, dated as of July 30, 1998, by and among the Company, WCI Acquisition Corporation, Shrader Refuse and Recycling Service Company, Duane E. Shrader, Myrlen A. Shrader, Daniel L. Shrader, Mark S. Shrader, Michael D. Shrader and Daren L. Shrader......... 10.35+++ + Purchase and Sale Agreement dated as of July 31, 1998, by and between Ambler Vincent Development Company and Shrader Refuse and Recycling Service Company............. 10.36*** + Asset Purchase Agreement dated as of August 21, 1998, among the Company, Waste Connection of Utah, Inc. and Joseph E. Cunningham and Scott L. Helm................... 10.37*** + Asset Purchase Agreement, dated as of August 10, 1998, by and among the Company, Waste Connections of Utah, Inc., ABC Waste Inc., and David Boren.......................... 10.38*** Form of Investors' Rights Agreement, dated as of July 31, 1998(4).................................................. 10.39*** + Purchase Agreement, dated as of July 31, 1998, by and among the Company, Waste Connections of Nebraska, Inc., J & J Sanitation Inc., Big Red Roll Off Inc., Garry L. Jeffords, Darin R. Mueller, Leslie J. Jeffords, Leland J. Jeffords, Bradley Rowan, Great Plains Recycling, Inc., Roma L. Jeffords, Kristie K. Mueller, Sheri L. Jeffords and Betty L. Hargis...................................... 10.40## Asset Purchase Agreement, dated as of September 18, 1998, by and among the Company, Waste Connections of Nebraska, Inc., Affiliated Waste Services, L.L.C., Leroy's Sanitary Service, Inc., Elden's Sanitary Service, Inc., Dennis' Sanitary Service, Inc., LeRoy Hintz and Janice Hintz, Dennis J. Mrsny and Mary Mrsny, and Elden W. Mrsny and Doris Mrsny.............................................. 10.41## Asset Purchase Agreement, dated as of September 9, 1998, by and among the Company, Madera Disposal Systems, Inc. and Charles B. Youngclaus................................ 10.42## Asset Purchase Agreement, dated as of September 21, 1998, by and among the Company, Waste Connections of Utah, Inc., Country Garbage Service Inc., Jay Mecham, Karl Bankowski, and Robert Lopez.............................. 10.43## Asset Purchase Agreement, dated as of September 18, 1998, by and among the Company, Waste Connections of Nebraska, Inc., Gary D. Wolff and Elizabeth L. Wolff...............
188
EXHIBIT PAGE NUMBER DESCRIPTION OF EXHIBITS NUMBER - --------- ----------------------- ------ 10.44## Agreement and Plan of Merger, dated as of September 21, 1998, by and among the Company, WCI Acquisition Corporation, Evergreen Waste Systems Inc., Keith H. Alexander and Todd D. Alexander.......................... 10.45## Asset Purchase Agreement, dated as of September 22, 1998, by and among the Company, Curry Transfer & Recycling, Inc., Harrell's Septic, Ralph Hirt and Renate Hirt....... 10.46## Asset Purchase Agreement, dated as of September 25, 1998, by and among the Company, Curry Transfer & Recycling, Inc., Westlane Disposal, Loren Parker and Roberta Parker................................................... 10.47## Asset Purchase Agreement, dated as of October 15, 1998, by and among the Company, Waste Connections of Idaho, Inc., R&N LLC, Rumsey Sanitation, Inc., NADL Sanitation Inc., Bradley D. Rumsey, Emil Nejdl, and Kathy K. Rumsey................................................... 10.48## Purchase and Sale Agreement, dated as of October 15, 1998, by and between R&N LLC and Waste Connections of Idaho, Inc............................................... 10.49## Agreement and Plan of Merger dated as of October 22, 1998, by and among Waste Connections, WCI Acquisition Corporation I, WCI Acquisition Corporation II, WCI Acquisition Corporation III, WCI Acquisition Corporation IV, Murrey's Disposal Company, Inc., American Disposal Company, Inc., D.M. Disposal Co., Inc., Tacoma Recycling Company, Inc., the Murrey Trust UTA August 5, 1993, as amended, the Bonnie L. Murrey Revocable Trust UTA August 5, 1993, as amended, Donald J. Hawkins and Irmgard R. Wilcox................................................... 10.50**** Purchase Agreement dated as of December 11, 1998, by and among Waste Connections, Butler County Landfill, Inc., Kobus Construction, Inc., Tom Kobus and Debbie Kobus..... 10.51+ Amended and Restated Stock Purchase Agreement dated as of March 31, 1999, by and among Waste Connections, Management Environmental National, Inc., RH Financial Corporation and the Shareholder Listed on Schedule A thereto.................................................. 21.1 Subsidiaries of the Registrant........................... 23.1## Consent of Shartsis, Friese & Ginsburg LLP (included in Exhibit 5.1)............................................. 23.2 Consent of Ernst & Young LLP, Independent Auditors....... 23.3 Consent of Perkins & Company, P.C., Independent Auditors................................................. 23.5## Consent of Williams, Kastner & Gibbs PLLC................ 24.1## Power of Attorney (included in Part II of the Registration Statement under the caption "Signatures")...
- --------------- * Incorporated by reference to the exhibits filed with the Registrant's Registration Statement on Form S-1, Registration No. 333-48029. ** Incorporated by reference to the exhibit filed with the Registrant's Form 8-K filed on June 15, 1998. 189 # Incorporated by reference to the exhibit filed with the Registrant's Form 8-K filed on June 22, 1998. ++ Incorporated by reference to the exhibit filed with the Registrant's Form 8-K filed on July 1, 1998. +++ Incorporated by reference to the exhibit filed with the Registrant's Form 8-K filed on August 11, 1998. + Filed without exhibits and schedules (to be provided supplementally on request of the Commission). *** Incorporated by reference to the exhibits filed with the Registrant's Registration Statement on Form S-4, Registration No. 333-59199. ## Previously filed. **** Incorporated by reference to the exhibits filed with Registrant's Registration Statement on Form S-1, Registration No. 333-70253. ### Incorporated by reference to the exhibits filed with Registrant's Registration Statement on Form S-8, Registration No. 333-72113. (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 (190,000); Michael R. Foos (190,000); Ronald J. Mittelstaedt (200,000); Eric J. Moser (125,000); Steven F. Bouck (250,000); Eugene V. Dupreau (20,000) and Charles B. Youngclaus (17,000). The Company also issued options in this form to the following directors of the Company: Michael W. Harlan (22,500); and William J. Razzouk (22,500). (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 66,794 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 and an Investors' Rights 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 Agreement. (4) Each of the selling shareholders of Shrader Refuse and Recycling Service Company is a party to this Investors' Rights Agreement. EX-10.1 2 SECOND AMENDED AND RESTATED CREDIT AGREEMENT 1 EXHIBIT 10.1 SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT Dated as of March 30, 1999 by and among WASTE CONNECTIONS, INC. AND ITS SUBSIDIARIES (the "Borrowers") THE LENDING INSTITUTIONS PARTY HERETO (the "Banks") and BANKBOSTON, N.A., AS AGENT AND UNION BANK OF CALIFORNIA, N.A., BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, COMERICA BANK - CALIFORNIA, LASALLE NATIONAL BANK, each as Co-Agent With BANCBOSTON ROBERTSON STEPHENS INC., as Arranger 2 TABLE OF CONTENTS Section 1. DEFINITIONS AND RULES OF INTERPRETATION.................................1 Section 1.1. Definitions.................................................1 Section 1.2. Rules of Interpretation....................................16 Section 2. THE REVOLVING CREDIT FACILITY..........................................17 Section 2.1. Commitment to Lend.........................................17 Section 2.2. Reduction and Increase of Total Commitment.................17 Section 2.2.2. Increase of Total Commitment...............................17 Section 2.3. The Revolving Credit Notes.................................18 Section 2.4. Interest on Loans..........................................18 Section 2.5. Election of Eurodollar Rate; Notice of Election; Interest Periods; Minimum Amounts..........................18 Section 2.6. Requests for Revolving Credit Loans........................19 Section 2.7. Funds for Revolving Credit Loans...........................20 Section 2.8. Maturity of the Loans......................................21 Section 2.9. Mandatory Repayments of the Loans..........................21 Section 2.10. Optional Prepayments or Repayments of Loans................21 Section 2.11. Swing Line Loans; Settlements..............................21 Section 3. LETTERS OF CREDIT......................................................23 Section 3.1. Letter of Credit Commitments...............................23 Section 3.2. Reimbursement Obligation of the Borrowers..................24 Section 3.3. Letter of Credit Payments..................................25 Section 3.4. Obligations Absolute.......................................25 Section 3.5. Reliance by Agent..........................................26 Section 4 FEES, PAYMENTS, AND COMPUTATIONS; JOINT AND SEVERAL LIABILITY..........26 Section 4.1. Fees.......................................................26 Section 4.2. Payments...................................................27 Section 4.3. Computations...............................................28 Section 4.4. Capital Adequacy...........................................28 Section 4.5. Certificate................................................28 Section 4.6. Interest on Overdue Amounts................................29 Section 4.7. Interest Limitation........................................29 Section 4.8. Eurodollar Indemnity.......................................29 Section 4.9. Illegality; Inability to Determine Eurodollar Rate.........29 Section 4.10. Additional Costs, Etc......................................30 Section 4.11. Replacement of Banks.......................................31 Section 4.12. Concerning Joint and Several Liability of the Borrowers....31 Section 5. REPRESENTATIONS AND WARRANTIES.........................................33 Section 5.1. Corporate Authority........................................33 Section 5.2. Governmental Approvals.....................................34 Section 5.3. Title to Properties; Leases................................34 Section 5.4. Financial Statements; Solvency.............................34 Section 5.5. No Material Changes, Etc...................................34 Section 5.6. Permits, Franchises, Patents, Copyrights, Etc..............35 Section 5.7. Litigation.................................................35 Section 5.8. No Materially Adverse Contracts, Etc.......................35 Section 5.9. Compliance With Other Instruments, Laws, Etc...............35
3 -ii- Section 5.10. Tax Status.................................................36 Section 5.11. No Event of Default........................................36 Section 5.12. Holding Company and Investment Company Acts................36 Section 5.13. Absence of Financing Statements, Etc.......................36 Section 5.14. Employee Benefit Plans.....................................36 Section 5.15. Use of Proceeds............................................37 Section 5.15.1. General....................................................37 Section 5.15.2. Regulations U and X........................................38 Section 5.15.3. Ineligible Securities......................................38 Section 5.16. Environmental Compliance...................................38 Section 5.17. Perfection of Security Interests...........................39 Section 5.18. Transactions with Affiliates...............................39 Section 5.19. Subsidiaries...............................................40 Section 5.20. True Copies of Charter and Other Documents.................40 Section 5.21. Disclosure.................................................40 Section 5.22. Capitalization.............................................40 Section 5.23. Year 2000 Issue............................................41 Section 6. AFFIRMATIVE COVENANTS OF THE BORROWERS.................................41 Section 6.1. Punctual Payment...........................................41 Section 6.2. Maintenance of Offices.....................................41 Section 6.3. Records and Accounts.......................................41 Section 6.4. Financial Statements, Certificates and Information.........41 Section 6.5. Corporate Existence and Conduct of Business................43 Section 6.6. Maintenance of Properties..................................43 Section 6.7. Insurance..................................................43 Section 6.8. Taxes......................................................44 Section 6.9. Inspection of Properties, Books, and Contracts.............44 Section 6.10. Compliance with Laws, Contracts, Licenses and Permits; Maintenance of Material Licenses and Permits............44 Section 6.11. Environmental Indemnification..............................45 Section 6.12. Further Assurances.........................................45 Section 6.13. Notice of Potential Claims or Litigation...................45 Section 6.14. Notice of Certain Events Concerning Insurance and Environmental Claims................................45 Section 6.15. Response Actions...........................................46 Section 6.16. Notice of Default..........................................46 Section 6.17. New Subsidiaries...........................................46 Section 6.18. Employee Benefit Plans.....................................47 Section 6.19. Notice of Loss of Material Contracts.......................47 Section 7. CERTAIN NEGATIVE COVENANTS OF THE BORROWERS...........................47 Section 7.1. Restrictions on Indebtedness...............................47 Section 7.2. Restrictions on Liens......................................48 Section 7.3. Restrictions on Investments................................49 Section 7.4. Merger, Consolidation and Disposition of Assets............50 Section 7.4.1. Mergers and Acquisitions...................................50 Section 7.4.2. Disposition of Assets......................................52 Section 7.5. Sale and Leaseback.........................................52 Section 7.6. Restricted Distributions and Redemptions...................52 Section 7.7. Employee Benefit Plans.....................................52
4 -iii- Section 7.8. Negative Pledges...........................................53 Section 7.9. Business Activities........................................53 Section 7.10. Transactions with Affiliates...............................53 Section 7.11. Subordinated Debt..........................................53 Section 8. FINANCIAL COVENANTS....................................................53 Section 8.1. Leverage Ratio.............................................54 Section 8.2. Funded Debt to Capitalization Ratio........................54 Section 8.3. Interest Coverage Ratio....................................54 Section 8.4. Profitable Operations......................................54 Section 8.5. Capital Expenditures.......................................54 Section 9. CLOSING CONDITIONS.....................................................54 Section 9.1. Corporate Action...........................................55 Section 9.2. Loan Documents, Etc........................................55 Section 9.3. Certificate of Secretary; Good Standing Certificates.......55 Section 9.4. Validity of Liens..........................................55 Section 9.5. Perfection Certificates and UCC Search Results.............55 Section 9.6. Certificates of Insurance..................................56 Section 9.7. Legal Opinions.............................................56 Section 9.8. Environmental Permit Certificate...........................56 Section 9.9. Payment of Fees............................................56 Section 9.10. Closing Certificate........................................56 Section 10. CONDITIONS OF ALL LOANS...............................................56 Section 10.1. Representations True; No Event of Default..................56 Section 10.2. Performance; No Event of Default...........................57 Section 10.3. No Legal Impediment........................................57 Section 10.4. Governmental Regulation....................................57 Section 10.5. Proceedings and Documents..................................57 Section 11. COLLATERAL SECURITY...................................................57 Section 12. EVENTS OF DEFAULT; ACCELERATION; TERMINATION OF COMMITMENT............58 Section 12.1. Events of Default and Acceleration.........................58 Section 12.2. Termination of Commitments.................................61 Section 12.3. Remedies...................................................61 Section 13. SETOFF................................................................61 Section 14. THE AGENT.............................................................62 Section 14.1. Appointment of Agent, Powers and Immunities................62 Section 14.2. Actions By Agent...........................................63 Section 14.3. INDEMNIFICATION............................................63 Section 14.4. Reimbursement..............................................63 Section 14.5. Documents..................................................64 Section 14.5.1. Closing Documentation.....................................64 Section 14.5.2. Other Documents...........................................64 Section 14.6. Non-Reliance on Agent and Other Banks......................64 Section 14.7. Resignation or Removal of Agent............................65 Section 14.8. Consents, Amendments, Waivers, Etc.........................65 Section 14.9. Delinquent Banks...........................................66 Section 14.10. Co-Agents..................................................66 Section 15. EXPENSES AND INDEMNIFICATION..........................................67 Section 15.1. Expenses...................................................67
5 -iv- Section 15.2. Indemnification....................................................67 Section 15.3. Survival...........................................................68 Section 16. SURVIVAL OF COVENANTS, ETC............................................68 Section 17. ASSIGNMENT AND PARTICIPATION..........................................68 Section 18. PARTIES IN INTEREST...................................................69 Section 19. NOTICES, ETC..........................................................69 Section 20. TREATMENT OF CERTAIN CONFIDENTIAL INFORMATION.........................70 Section 20.1. Sharing of Information with Section 20 Subsidiary..................70 Section 20.2. Confidentiality....................................................70 Section 20.3. Prior Notification.................................................71 Section 20.4. Other..............................................................71 Section 21. MISCELLANEOUS.........................................................71 Section 22. ENTIRE AGREEMENT, ETC.................................................71 Section 23. WAIVER OF JURY TRIAL..................................................72 Section 24. GOVERNING LAW.........................................................72 Section 25. SEVERABILITY..........................................................72
SCHEDULES & EXHIBITS Exhibit A Form of Revolving Credit Note Exhibit B Form of Loan and Letter of Credit Request Exhibit C Form of Swing Line Note Exhibit D Form of Compliance Certificate Exhibit E Form of Environmental Compliance Certificate Exhibit F Form of Assignment and Acceptance Schedule 1 Banks; Addresses; Commitment Percentages Schedule 2 Subsidiaries Schedule 5.7 Litigation Schedule 5.9 Material Contracts Schedule 5.16 Environmental Matters Schedule 5.18 Transactions with Affiliates Schedule 7.2(i) Scheduled Contracts Schedule 7.3 Existing Investments
6 SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT This SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT is made as of March 30, 1999 (the "Credit Agreement"), by and among (a) WASTE CONNECTIONS, INC., a Delaware corporation (the "Parent"), the subsidiaries of the Parent identified on Schedule 2 hereto (the "Subsidiaries," and collectively with the Parent, the "Borrowers"), (b) BANKBOSTON, N.A., a national banking association having its principal place of business at 100 Federal Street, Boston, Massachusetts 02110 (acting in its individual capacity, "BKB") and the other banks and lending institutions which are identified on Schedule 1 attached hereto (collectively, the "Banks"), (c) BANKBOSTON, N.A., as administrative agent for the Banks (the "Agent"), and (d) UNION BANK OF CALIFORNIA, N.A., BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, COMERICA BANK - CALIFORNIA, N.A., and LASALLE NATIONAL BANK, each as a co-agent for the Banks (each a "Co-Agent" and, collectively, the "Co-Agents"). W I T N E S S E T H: WHEREAS, the Borrowers and the Agent are party to that certain Amended and Restated Revolving Credit Agreement dated as of November 20, 1998, (as amended and in effect as of the date hereof, the "Prior Credit Agreement"); and WHEREAS, the Borrowers have requested, among other things, additional financing and the Banks are willing to provide such financing on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements set forth herein below, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that on the Closing Date, the Prior Credit Agreement shall be amended and restated in its entirety by this Credit Agreement, the terms of which are as follows: SECTION 1. DEFINITIONS AND RULES OF INTERPRETATION. SECTION 1.1. DEFINITIONS. The following terms shall have the meanings set forth in this Section 1 or elsewhere in the provisions of this Credit Agreement referred to below: Accountants. An independent accounting firm of national standing reasonably acceptable to the Banks and the Agent. Affected Bank. See Section 4.11. Agent. See Preamble. Agent's Head Office. The Agent's head office located at 100 Federal Street, Boston, Massachusetts 02110, or such other location as the Agent may designate from time to time. 7 -2- Applicable Base Rate Margin. The applicable margin with respect to Base Rate Loans as set forth in the Pricing Table. Applicable Commitment Rate. The applicable rate with respect to the Commitment Fee as set forth in the Pricing Table. Applicable Eurodollar Margin. The applicable margin with respect to Eurodollar Loans as set forth in the Pricing Table. Applicable Laws. See Section 6.10. Applicable L/C Margin. The applicable margin with respect to the Letter of Credit Fee as set forth in the Pricing Table. Arranger. BancBoston Robertson Stephens Inc. Assignment and Acceptance. See Section 17. Balance Sheet Date. December 31, 1998. Banks. See Preamble. Base Rate. The higher of (a) the annual rate of interest announced from time to time by the Agent at the Agent's Head Office as its "base rate" (it being understood that such rate is a reference rate and not necessarily the lowest rate of interest charged by the Agent) or (b) one-half of one percent (1/2%) above the overnight federal funds effective rate, as published by the Board of Governors of the Federal Reserve System, as in effect from time to time. Base Rate Loans. Loans bearing interest calculated by reference to the Base Rate. BKB. See Preamble. Borrowers. See Preamble. Business Day. Any day on which banking institutions in Boston, Massachusetts, New York, New York; Chicago, Illinois; and Los Angeles, California are open for the transaction of banking business. Capital Assets. Fixed assets, both tangible (such as land, buildings, fixtures, machinery and equipment) and intangible (such as patents, copyrights, trademarks, franchises and goodwill); provided that Capital Assets shall not include (a) any item customarily charged directly to expense or depreciated over a useful life of twelve (12) months or less in accordance with generally accepted accounting principles, or (b) any item obtained through an acquisition permitted by Section 7.4 hereof. Capital Expenditures. Amounts paid or indebtedness incurred by the Borrowers and their Subsidiaries in connection with (i) the purchase or lease of Capital Assets that would be required to be capitalized and shown on the balance sheet of such Person in 8 -3- accordance with GAAP or (ii) the lease of any assets by the Borrowers or any Subsidiary as lessee under any Synthetic Lease to the extent that such assets would have been Capital Assets had the Synthetic Lease been treated for accounting purposes as a Capitalized Lease. Capitalized Leases. Leases under which any Borrower is the lessee or obligor, the discounted future rental payment obligations under which are required to be capitalized on the balance sheet of the lessee or obligor in accordance with GAAP. CERCLA. See definition of Release. Certified. With respect to the financial statements of any Person, such statements as audited by a firm of independent auditors, whose report expresses the opinion, without qualification, that such financial statements present fairly the financial position of such Person. CFO. See Section 6.4(b). Closing Date. The date on which the conditions precedent set forth in Section 9 are satisfied. Co-Agent(s). See preamble. Code. The Internal Revenue Code of 1986, as amended and in effect from time to time. Collateral. All of the property, rights and interests of the Borrowers that are or are intended to be subject to the security interests created by the Security Documents. Columbia Bond. The $13,000,000 Solid Waste Transfer Station Revenue Bonds, Columbia Resource Company Project, Series 1991, issued by the Industrial Revenue Bond Public Corporation of Clark County, Washington. Columbia Bond Documents. The documentation executed in connection with the Columbia Bond. Columbia Issuing Bank. U.S. Bank National Association, a national banking association and a Bank hereunder. Columbia Letter of Credit. The direct pay letter of credit issued by the Columbia Issuing Bank to support the Columbia Bond in the original stated amount of $13,598,805.32, as such face amount is reduced pursuant to the terms of such letter of credit from time to time. Commitment. With respect to each Bank, the amount determined by multiplying such Bank's Commitment Percentage by the Total Commitment specified in Section 2.1 hereof, as the same may be reduced from time to time. Commitment Fee. See Section 4.1. 9 -4- Commitment Percentage. With respect to each Bank, the percentage initially set forth beside its name on Schedule 1 (subject to adjustment in accordance with Sections 2.2.2 and 17). Compliance Certificate. See Section 6.4(c). Consolidated or consolidated. With reference to any term defined herein, shall mean that term as applied to the accounts of the Borrowers and their Subsidiaries consolidated in accordance with GAAP. Consolidated Earnings Before Interest and Taxes or EBIT. For any period, the Consolidated Net Income (or Deficit) of the Borrowers determined in accordance with GAAP, plus (a) interest expense, (b) income taxes, (c) non-cash stock compensation charges of up to $388,000 in the aggregate taken during the four (4) fiscal quarters ending March 31, 1999 and no more than $360,000 in the aggregate thereafter, to the extent that each was deducted in determining Consolidated Net Income (or Deficit), all as determined in accordance with GAAP, (d) non-cash special charge for interest expense attributable to loan fees paid to BKB in connection with the refinancing of the then existing credit facilities of up to $815,000 (after tax) in the aggregate taken during the fiscal quarter ending June 30, 1998, up to $212,000 (after tax) in the aggregate taken during the fiscal quarter ending December 31, 1998 and up to $180,000 in the aggregate taken during the fiscal quarter ending March 31, 1999, (e) pooling charges taken in connection with any acquisition permitted under Section 7.4.1 hereof to the extent such pooling charges were deducted in determining Consolidated Net Income (or deficit), and (f) EBIT (plus nonrecurring company expenses that are (i) discontinued or adjusted upon acquisition by any of the Borrowers, such as owner compensation and adjustments to depreciation to conform to the Parent's accounting treatment, and (ii) approved by the Agent) for the prior twelve (12) months of any company acquired (either through an acquisition of such company's stock or through an acquisition of all or substantially all of such company's assets) during the period reported in a Compliance Certificate and other appropriate documentation (including, without limitation, historical financial results and balance sheets of the acquired companies), in form and substance satisfactory to the Agent, delivered to the Agent and the Banks pursuant to Sections 6.4 or 7.4.1(a) shall be included in the calculation of EBIT if (x) the financial statements of such acquired Subsidiaries have been audited, or (y) the Agent consents to such inclusion after being furnished with other acceptable financial statements and (z) the Compliance Certificate delivered to the Agent and the Banks for the period in which such acquisition was made shall report such acquisition. Consolidated Earnings Before Interest, Taxes, Depreciation, and Amortization or EBITDA. For any period (without duplication), EBIT plus the depreciation expense and amortization expense, to the extent that each was deducted in determining Consolidated Net Income (or Deficit), determined in accordance with GAAP, plus the depreciation expense and amortization expense (without duplication) of any company whose EBIT was included as an adjustment as set forth in the definition of EBIT. Consolidated Net Income (or Deficit). The consolidated net income (or deficit) of the Borrowers after deduction of all expenses, taxes, and other proper charges (including, 10 -5- without limitation, pooling charges taken in connection with acquisitions permitted under Section 7.4.1), determined in accordance with GAAP. Consolidated Net Worth. The excess of Consolidated Total Assets over Consolidated Total Liabilities, less, to the extent otherwise includable in the computation of Consolidated Net Worth, any subscriptions receivable. Consolidated Total Assets. All assets of the Borrowers and their Subsidiaries determined on a consolidated basis in accordance with GAAP, plus (i) without duplication, all assets leased by the Borrowers or any Subsidiary as lessee under any Synthetic Lease to the extent that such assets would have been consolidated balance sheet assets had the Synthetic Lease been treated for accounting purposes as a Capitalized Lease, plus (ii) without duplication, all sold receivables referred to in clause (vii) of the definition of the term "Indebtedness" to the extent that such receivables would have been consolidated balance sheet assets had they not been sold. Consolidated Total Interest Expense. For any period, the aggregate amount of interest required to be paid or accrued by the Borrowers and their Subsidiaries during such period on all Indebtedness of the Borrowers and their Subsidiaries outstanding during all or any part of such period, whether such interest was or is required to be reflected as an item of expense or capitalized, including payments consisting of interest in respect of any Capitalized Lease or any Synthetic Lease and including commitment fees, agency fees, facility fees, balance deficiency fees and similar fees or expenses in connection with the borrowing of money. Consolidated Total Liabilities. All liabilities of the Borrowers determined on a consolidated basis in accordance with GAAP and classified as such on the consolidated balance sheet of the Borrowers. Credit Agreement. See Preamble. Curry. Curry Transfer & Recycling, Inc., an Oregon corporation and a wholly-owned Subsidiary of the Parent. Default. See Section 12. Delinquent Bank. See Section 14.9. Disposal (or Disposed). See definition of Release. Distribution. The declaration or payment of any dividend or distribution on or in respect of any shares of any class of capital stock, any partnership interests or any membership interests of any Person (other than dividends or other distributions payable solely in shares of common stock, partnership interests or membership units of such Person, as the case may be); the purchase, redemption, or other retirement of any shares of any class of capital stock, partnership interests or membership units of such Person, directly or indirectly through a Subsidiary or otherwise; the return of equity capital by any Person to its shareholders, partners or members as such; or any other distribution on 11 -6- or in respect of any shares of any class of capital stock, partnership interest or membership unit of such Person. Dollars or $. Dollars in lawful currency of the United States of America. Drawdown Date. The date on which any Revolving Credit Loan or Swing Line Loan is made or is to be made, and the date on which any Revolving Credit Loan is converted or continued in accordance with Section 2.5. Eligible Assignee. Any of (a) a commercial bank organized under the laws of the United States, or any State thereof or the District of Columbia, and having total assets in excess of $1,000,000,000; (b) a savings and loan association or savings bank organized under the laws of the United States, or any State thereof or the District of Columbia, and having a net worth of at least $100,000,000, calculated in accordance with generally accepted accounting principles; (c) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, and having total assets in excess of $1,000,000,000, provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the OECD; (d) the central bank of any country which is a member of the OECD; and (e) if, but only if, any Event of Default has occurred and is continuing, any other bank, insurance company, commercial finance company or other financial institution approved by the Agent, such approval not to be unreasonably withheld. Eligible Foreign Bank. (a) Any commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the OECD; or (b) the central bank of any country which is a member of the OECD. Employee Benefit Plan. Any employee benefit plan within the meaning of Section 3(3) of ERISA maintained or contributed to by the Borrowers or any ERISA Affiliate, other than a Guaranteed Pension Plan or a Multiemployer Plan. Environmental Laws. See Section 5.16(a). EPA. See Section 5.16(b). Equipment Financing. Indebtedness of the Borrowers with respect to equipment leases or equipment chattel mortgages, including any such Indebtedness assumed in connection with an acquisition permitted under Section 7.4. ERISA. The Employee Retirement Income Security Act of 1974, as amended and in effect from time to time. ERISA Affiliate. Any Person which is treated as a single employer with the Borrowers under Section 414 of the Code. 12 -7- ERISA Reportable Event. A reportable event with respect to a Guaranteed Pension Plan within the meaning of Section 4043 of ERISA and the regulations promulgated thereunder. Eurodollar Business Day. Any Business Day on which dealings in foreign currency and exchange are carried on among banks in London, England. Eurodollar Interest Determination Date. For any Interest Period, the date two Eurodollar Business Days prior to the first day of such Interest Period. Eurodollar Loans. Revolving Credit Loans bearing interest calculated by reference to the Eurodollar Rate. Eurodollar Offered Rate. The rate per annum at which deposits of dollars are offered to the Agent by prime banks in whatever Eurodollar interbank market may be selected by the Agent, in its sole discretion, acting in good faith, at or about 11:00 a.m. local time in such interbank market, on the Eurodollar Interest Determination Date, for a period equal to the requested Interest Period in an amount substantially equal to the principal amount requested to be loaned at or converted to a rate based on the Eurodollar Rate. Eurodollar Rate. The rate per annum, rounded upwards to the nearest 1/16 of 1%, determined by the Agent with respect to an Interest Period in accordance with the following formula: Eurodollar Rate = Eurodollar Offered Rate ----------------------- 1 - Reserve Rate
Event of Default. See Section 12. Excluded Assets. The containers, vehicles, equipment and inventory in which the Banks are precluded from taking a security interest pursuant to any Scheduled Contract during the term of such Scheduled Contract. Excluded Contracts. The Single Family Recyclables Collection Contract between City of Vancouver and Browning Ferris Industries of Washington, Inc., dated as of December 2, 1996, as amended and in effect from time to time. Financial Letter of Credit. A Letter of Credit where the event which triggers payment is financial, such as the failure to pay money, and not performance-related, such as failure to ship a product or provide a service, as set forth in greater detail in the letter dated March 30, 1995 from the Board of Governors of the Federal Reserve System or in any applicable directive or letter ruling of the Board of Governors of the Federal Reserve System issued subsequent thereto. Funded Debt. Consolidated Indebtedness of the Borrowers for borrowed money, the net present value (using the Base Rate as the discount rate) of every obligation of such Person issued or assumed as the deferred purchase price of property or services 13 -8- (including securities repurchase agreements but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business which are not overdue or which are being contested in good faith), and guarantees of such Indebtedness, recorded on the Consolidated balance sheet of the Borrowers, including reimbursement obligations of the Borrowers with respect to letters of credit and the amount of any Indebtedness of such Persons for Capitalized Leases which corresponds to principal. generally accepted accounting principles or GAAP. When used in general, generally accepted accounting principles means (a) principles that are consistent with the principles promulgated or adopted by the Financial Accounting Standards Board and its predecessors, in effect for the fiscal year ended on the Balance Sheet Date, as shall be concurred in by independent certified public accountants of recognized standing whose report expresses an unqualified opinion (other than a qualification regarding changes in generally accepted accounting principles) as to financial statements in which such principles have been applied; and (b) when used with reference to the Borrowers, such principles shall include (to the extent consistent with such principles) the accounting practices reflected in the consolidated financial statements for the year ended on the Balance Sheet Date. Guaranteed Pension Plan. Any employee pension benefit plan within the meaning of Section 3(2) of ERISA maintained or contributed to by the Borrowers or any ERISA Affiliate, the benefits of which are guaranteed on termination in full or in part by the PBGC pursuant to Title IV of ERISA, other than a Multiemployer Plan. Hazardous Substances. See Section 5.16(b). Indebtedness. As to any Person and whether recourse is secured by or is otherwise available against all or only a portion of the assets of such Person and whether or not contingent, but without duplication: (i) every obligation of such Person for money borrowed, (ii) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses, (iii) every reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person, (iv) the net present value (using the Base Rate as the discount rate) of every obligation of such Person issued or assumed as the deferred purchase price of property or services (including securities repurchase agreements but excluding (A) trade accounts payable or accrued liabilities arising in the ordinary course of business which are not overdue or which are being contested in good faith and (B) contingent purchase price obligations solely to the extent that the contingency upon which such obligation is conditioned has not yet occurred), (v) every obligation of such Person under any Capitalized Lease, 14 -9- (vi) every obligation of such Person under any Synthetic Lease, (vii) all sales by such Person of (A) accounts or general intangibles for money due or to become due, (B) chattel paper, instruments or documents creating or evidencing a right to payment of money or (C) other receivables (collectively, "receivables"), whether pursuant to a purchase facility or otherwise, other than in connection with the disposition of the business operations of such Person relating thereto or a disposition of defaulted receivables for collection and not as a financing arrangement, and together with any obligation of such Person to pay any discount, interest, fees, indemnities, penalties, recourse, expenses or other amounts in connection therewith, provided, however, that sales referred to in clauses (B) and (C) shall not constitute Indebtedness to the extent that such sales are non-recourse to such Person; (viii) every obligation of such Person (an "equity related purchase obligation") to purchase, redeem, retire or otherwise acquire for value any shares of capital stock of any class issued by such Person, any warrants, options or other rights to acquire any such shares, or any rights measured by the value of such shares, warrants, options or other rights, (ix) every obligation of such Person under any forward contract, futures contract, swap, option or other financing agreement or arrangement (including, without limitation, caps, floors, collars and similar agreements), the value of which is dependent upon interest rates, currency exchange rates, commodities or other indices, (x) every obligation in respect of Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent that such Person is liable therefor as a result of such Person's ownership interest in or other relationship with such entity, except to the extent that the terms of such Indebtedness provide that such Person is not liable therefor and such terms are enforceable under applicable law, (xi) every obligation, contingent or otherwise, of such Person guaranteeing, or having the economic effect of guarantying or otherwise acting as surety for, any obligation of a type described in any of clauses (i) through (x) (the "primary obligation") of another Person (the "primary obligor"), in any manner, whether directly or indirectly, and including, without limitation, any obligation of such Person (A) to purchase or pay (or advance or supply funds for the purchase of) any security for the payment of such primary obligation, (B) to purchase property, securities or services for the purpose of assuring the payment of such primary obligation, or (C) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such primary obligation. The "amount" or "principal amount" of any Indebtedness at any time of determination represented by (v) any Indebtedness, issued at a price that is less than the principal amount at maturity thereof, shall be the amount of the liability in respect thereof determined in accordance with generally accepted accounting principles, (w) any 15 -10- Capitalized Lease shall be the principal component of the aggregate of the rentals obligation under such Capitalized Lease payable over the term thereof that is not subject to termination by the lessee, (x) any sale of receivables shall be the amount of unrecovered capital or principal investment of the purchaser (other than the Borrowers) thereof, excluding amounts representative of yield or interest earned on such investment, (y) any Synthetic Lease shall be the stipulated loss value, termination value or other equivalent amount and (z) any equity related purchase obligation shall be the maximum fixed redemption or purchase price thereof inclusive of any accrued and unpaid dividends to be comprised in such redemption or purchase price. Ineligible Securities. Securities which may not be underwritten or dealt in by member banks of the Federal Reserve System under Section 16 of the Banking Act of 1993 (12 U.S.C. Section 24, Seventh), as amended. Interest Period. With respect to each Eurodollar Loan: (a) initially, the period commencing on the date of the making of a Eurodollar Loan or the conversion from a Base Rate Loan into a Eurodollar Loan and ending one (1), two (2), three (3), or six (6) months thereafter, as selected by the Borrowers in a Loan and Letter of Credit Request; and (b) thereafter, each subsequent Interest Period shall begin on the last day of the preceding Interest Period and shall end one (1), two (2), three (3), or six (6) months thereafter, as selected by the Borrowers in a Loan and Letter of Credit Request; provided, however, that whenever the first day of any Interest Period occurs on a day of an initial calendar month for which there is no numerically corresponding day in the calendar month that succeeds such initial calendar month by the number of months equal to the number of months in such Interest Period, such Interest Period shall end on the last Business Day of such succeeding calendar month. Letter of Credit Applications. Letter of Credit Applications in such form as may be agreed upon by the Borrowers and the Agent from time to time which are entered into pursuant to Section 3 hereof, as such Letter of Credit Applications are amended, varied or supplemented from time to time. Letter of Credit Fee. See Section 4.1(b). Letter of Credit Participation. See Section 3.1(b). Letters of Credit. Standby Letters of Credit, the Madera Letter of Credit and the Columbia Letter of Credit issued or to be issued by the Agent or, with respect to the Columbia Letter of Credit, the Columbia Issuing Bank under Section 3 hereof for the account of the Borrowers Leverage Ratio. See Section 8.1. Loan and Letter of Credit Request. See Section 2.6. 16 -11- Loan Documents. This Credit Agreement, the Notes, the Letter of Credit Applications, the Letters of Credit, and the Security Documents, each as amended and in effect from time to time. Loans. Collectively, the Revolving Credit Loans and Swing Line Loans. Madera. Madera Disposal Systems, Inc., a California corporation and a wholly-owned Subsidiary of the Parent. Madera Bond. The $1,800,000 Variable Rate Demand Solid Waste Disposal Revenue Bonds, Madera Disposal Systems, Inc. Project, Series 1998A, issued by the California Pollution Control Financing Authority. Madera Bond Documents. The documentation executed in connection with the Madera Bond. Madera Letter of Credit. The direct pay letter of credit to support the Madera Bond. Majority Banks. As of any date, the Banks holding fifty-one percent (51%) of the outstanding principal amount of the Revolving Credit Loans on such date; and if no such principal is outstanding, the Banks whose aggregate Commitments constitute fifty-one percent (51%) of the Total Commitment. Material Acquisition. See Section 7.4.1. Material Contract. Any contract, franchise agreement or G Permit from which the Borrowers derived more than five percent (5%) of their consolidated revenues for the fiscal year most recently ending. Maturity Date. March 30, 2004. Maximum Drawing Amount. The maximum aggregate amount from time to time that the beneficiaries may draw under outstanding Letters of Credit. Maximum Rate. With respect to each Bank, the maximum lawful nonusurious rate of interest (if any) which under Applicable Law such Bank may charge the Borrowers on the Loans and other Obligations from time to time. Multiemployer Plan. Any multiemployer plan within the meaning of Section 3(37) of ERISA maintained or contributed to by the Borrowers or any ERISA Affiliate. Notes. Collectively, the Revolving Credit Notes and Swing Line Notes. Obligations. All indebtedness, obligations and liabilities of the Borrowers to any of the Banks or the Agent, individually or collectively, existing on the date of this Credit Agreement or arising thereafter, direct or indirect, joint or several, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured, arising by contract, operation of law or otherwise, arising or incurred under this Credit Agreement 17 -12- or any of the other Loan Documents, or under any Swap Contract between the Borrowers and any Bank, or in respect of any of the Loans made or Reimbursement Obligations incurred or the Letters of Credit, the Notes or any other instrument at any time evidencing any thereof. Oregon Waste. Oregon Waste Technology, Inc., an Oregon corporation and a wholly-owned Subsidiary of Curry. Parent Stock Pledge Agreement. The Second Amended and Restated Stock Pledge Agreement, to be dated as of the Closing Date, as amended and in effect from time to time, between the Parent and the Agent, pursuant to which 100% of the capital stock of the Subsidiaries (other than Oregon Waste) is pledged to the Agent for the benefit of the Banks. PBGC. The Pension Benefit Guaranty Corporation created by Section 4002 of ERISA and any successor entity or entities having similar responsibilities. Performance Letter of Credit. A Letter of Credit which is not a Financial Letter of Credit. Permitted Liens. See Section 7.2. Person. Any individual, corporation, partnership, trust, unincorporated association, business, or other legal entity, and any government or any governmental agency or political subdivision thereof. 18 -13- Pricing Table:
APPLICABLE APPLICABLE EURODOLLAR BASE RATE APPLICABLE APPLICABLE MARGIN MARGIN L/C MARGIN COMMITMENT RATE LEVERAGE RATIO (PER ANNUM) (PER ANNUM) (PER ANNUM) (PER ANNUM) -------------- ----------- ----------- ----------- --------------- Less than 2.00:1 1.25% 0.00% 1.25% 0.250% Greater than or 1.50% 0.00% 1.50% 0.375% equal to 2.00:1 but less than 2.50:1 Greater than or 1.75% 0.00% 1.75% 0.375% equal to 2.50:1 but less than 3.00:1 Greater than or 2.00% 0.00% 2.00% 0.50% equal to 3.00:1 but less than 3.50:1 Greater than or 2.25% 0.25% 2.25% 0.50% equal to 3.50:1 Initial Pricing 1.75% 0.00% 1.75% 0.375%
Any change in the applicable margin shall become effective on the first day after receipt by the Banks of financial statements delivered pursuant to Section 6.4(a) or (b) which indicate a change in the Leverage Ratio. If at any time such financial statements are not delivered within the time periods specified in Section 6.4(a) or (b), the applicable margin shall be the highest rate set forth in the respective column of the Pricing Table, subject to adjustment upon actual receipt of such financial statements. The initial pricing set forth in the table above shall be effective until the Borrowers deliver to the Agent a calculation of the Leverage Ratio for the fiscal quarter ending March 31, 1999. Pro Forma Interest Expense (as used in a Compliance Certificate delivered in connection with a Material Acquisition). The annual interest obligations at the current rates of interest on existing Indebtedness of the Borrowers and the Indebtedness to be assumed or incurred in connection with an acquisition. Prior Credit Agreement. See preamble. RCRA. See definition of Release. Real Property. All real property heretofore, now, or hereafter owned or leased by the Borrowers. Reimbursement Obligation. The Borrowers' obligation to reimburse the Agent and the Banks on account of any drawing under any Letter of Credit as provided in Section 3.2. 19 -14- Release. Shall have the meaning specified in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Sections 9601 et seq. ("CERCLA") and the term "Disposal" (or "Disposed") shall have the meaning specified in the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Sections 6901 et seq. ("RCRA") and regulations promulgated thereunder; provided that in the event either CERCLA or RCRA is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply as of the effective date of such amendment and provided further, to the extent that the laws of a state wherein the property lies establishes a meaning for "Release" or "Disposal" which is broader than specified in either CERCLA or RCRA, such broader meaning shall apply. Replacement Bank. See Section 4.11. Replacement Notice. See Section 4.11. Reserve Rate. The rate, expressed as a decimal, at which the Banks would be required to maintain reserves under Regulation D of the Board of Governors of the Federal Reserve System (or any subsequent or similar regulation relating to such reserve requirements) against "Eurocurrency Liabilities" (as such term is defined in Regulation D), or against any other category of liabilities which might be incurred by the Banks to fund Eurodollar Loans, if such liabilities were outstanding. Revolving Credit Loans. Revolving credit loans made or to be made by the Banks to the Borrowers pursuant to Section 2. Revolving Credit Notes. The promissory notes of the Borrowers evidencing the Revolving Credit Loans hereunder, dated as of the date hereof and in substantially the form of Exhibit A hereto. Scheduled Contracts. The certain contracts referenced in Schedule 7.2(i) to this Credit Agreement, on terms and conditions and as in effect on the date hereof. Section 20 Subsidiary. A subsidiary of the bank holding company controlling any Bank, which subsidiary has been granted authority by the Federal Reserve Board to underwrite and deal in certain Ineligible Securities. Security Agreement. The Second Amended and Restated Security Agreement among the Borrowers and the Agent, to be dated as of the Closing Date, as amended and in effect from time to time. Security Documents. The Security Agreement, Stock Pledge Agreements, and any other instruments or documents evidencing or perfecting the Agent's lien on the assets of the Borrowers for the benefit of the Banks. Seller Debt. Indebtedness of the Borrowers, including assumed obligations, incurred in connection with acquisitions of any stocks of, partnership or joint venture interests in, or assets of any Person and owing to the seller(s) of such stocks, partnership or joint venture interests, or assets (excluding Indebtedness of acquired companies which 20 -15- is discharged within 30 days of such acquisition); provided that such acquisitions are otherwise permitted pursuant to Section 7.4. Settlement. The making or receiving of payments, in immediately available funds, by the Banks to or from the Agent in accordance with Section 2.11 hereof to the extent necessary to cause each such Bank's actual share of the outstanding amount of the Revolving Credit Loans to be equal to such Bank's Commitment Percentage of the outstanding amount of such Revolving Credit Loans, in any case when, prior to such action, the actual share is not so equal. Settlement Amount. See Section 2.11(b). Settlement Date. See Section 2.11(b). Settling Bank. See Section 2.11(b). Stock Pledge Agreements. Collectively, (a) the Parent Stock Pledge Agreement, and (b) the Amended and Restated Stock Pledge Agreement between Curry and the Agent, pursuant to which 100% of the stock of Oregon Waste is pledged to the Agent for the benefit of the Banks, each to be dated as of the Closing Date, as amended and in effect from time to time. Subordinated Debt. Unsecured Indebtedness of the Borrowers that is expressly subordinated and made junior to the payment and performance in full of the Obligations, and evidenced as such by a written instrument containing subordination provisions on terms and in form and substance acceptable to the Agent and Majority Banks. Subsidiary. Any corporation, association, trust, or other business entity of which any Borrower shall at any time own directly, or indirectly through a Subsidiary or Subsidiaries, at least a majority of the outstanding capital stock or other interest entitled to vote generally. Sunshine. Sunshine Sanitation, Incorporated, a South Dakota corporation and a wholly-owned Subsidiary of the Parent. Swap Contracts. Any agreement (including any master agreement and any agreement, whether or not in writing, relating to any single transaction) that is an interest rate swap agreement, basis swap, forward rate agreement, commodity swap, commodity option, equity or equity index swap or option, bond option, interest rate option, forward foreign exchange agreement, rate cap, collar or floor agreement, currency swap agreement, cross-currency rate swap agreement, swaption, currency option or other similar agreement (including any option to enter into any of the foregoing). Swing Line Loan(s). See Section 2.11(a). Swing Line Note. See Section 2.11(b). Synthetic Lease. Any lease treated as an operating lease under generally accepted accounting principles and as a loan or financing for U.S. income tax purposes. 21 -16- Total Commitment. See Section 2.1. Washington Merger. The pooling-of-interests merger among Murrey's Disposal Company, Inc., American Disposal Company, Inc., D.M. Disposal Co., Inc., Tacoma Recycling Company, Inc. and certain Subsidiaries of Parent pursuant to that certain Agreement and Plan of Merger, dated as of October 22, 1998. Year 2000 Issue. The risk that computer applications used by the Borrowers may be unable to recognize and properly perform date-sensitive functions involving certain dates prior to, and any date after, December 31, 1999. SECTION 1.2. RULES OF INTERPRETATION. (a) A reference to any document or agreement shall include such document or agreement as amended, modified or supplemented from time to time in accordance with its terms and the terms of this Credit Agreement. (b) The singular includes the plural and the plural includes the singular. (c) A reference to any law includes any amendment or modification to such law. (d) A reference to any Person includes its permitted successors and permitted assigns. (e) Accounting terms capitalized but not otherwise defined herein have the meanings assigned to them by generally accepted accounting principles applied on a consistent basis by the accounting entity to which they refer. (f) The words "include," "includes" and "including" are not limiting. (g) All terms not specifically defined herein or by generally accepted accounting principles, which terms are defined in the Uniform Commercial Code as in effect in the Commonwealth of Massachusetts, have the meanings assigned to them therein. (h) Reference to a particular "Section " refers to that section of this Credit Agreement unless otherwise indicated. (i) The words "herein," "hereof," "hereunder" and words of like import shall refer to this Credit Agreement as a whole and not to any particular section or subdivision of this Credit Agreement. (j) Unless otherwise expressly indicated, in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including," the words "to" and "until" each mean "to but excluding," and the word "through" means "to and including." 22 -17- SECTION 2. THE REVOLVING CREDIT FACILITY. SECTION 2.1. COMMITMENT TO LEND. Subject to the terms and conditions set forth in this Credit Agreement, each of the Banks severally, but not jointly, agrees to lend to the Borrowers, and the Borrowers may borrow, repay, and reborrow from time to time from the Closing Date to the Maturity Date, upon notice by the Borrowers to the Agent given in accordance with Section 2.6, its Commitment Percentage of the Revolving Credit Loans as are requested by the Borrowers, provided that the outstanding amount of Revolving Credit Loans, Swing Line Loans, unpaid Reimbursement Obligations, and the Maximum Drawing Amount shall not exceed a maximum aggregate amount outstanding of $210,000,000 at any time, as such amount may be reduced or increased, as the case may be, pursuant to Section 2.2 hereof (the "Total Commitment"). The Revolving Credit Loans shall be made pro rata in accordance with each Bank's Commitment Percentage. Each request for a Loan hereunder shall constitute a representation and warranty by the Borrowers that the conditions set forth in Section 9 and Section 10, as the case may be, have been satisfied on the date of such request. SECTION 2.2. REDUCTION AND INCREASE OF TOTAL COMMITMENT. SECTION 2.2.1. REDUCTION OF TOTAL COMMITMENT. (a) The Borrowers shall have the right at any time and from time to time upon five (5) Business Days' prior written notice to the Agent to reduce by $1,000,000 or integral multiples of $500,000 in excess thereof, or terminate entirely, the Total Commitment, whereupon the Commitments of the Banks shall be reduced pro rata in accordance with their respective Commitment Percentages of the amount specified in such notice or, as the case may be, terminated. The Agent will notify the Banks promptly after receiving any notice of the Borrowers delivered pursuant to this Section 2.2.1. (b) No reduction or termination of the Commitments once made may be revoked; the portion of the Commitments reduced or terminated may not be reinstated; and amounts in respect of such reduced or terminated portion may not be reborrowed. SECTION 2.2.2. INCREASE OF TOTAL COMMITMENT. Unless a Default or Event of Default has occurred and is continuing, the Borrowers may request that the Total Commitment be increased by an aggregate amount of up to $15,000,000 provided that the Total Commitment shall not in any event exceed $225,000,000 hereunder, subject to the approval of the Agent, provided, however, that (i) any Bank which is a party to this Credit Agreement prior to such increase shall have the first option, and may elect, to fund its pro rata share of the increase, thereby increasing its Commitment hereunder, but no Bank shall have any obligation to do so, (ii) in the event that it becomes necessary to include a new Bank to provide additional funding under this Section 2.2.2, such new Bank must be reasonably acceptable to the Agent and the Borrowers, and (iii) the Banks' Commitment Percentages shall be correspondingly adjusted, as necessary, to reflect any increase in the total commitment and Schedule 1 shall be amended to reflect such adjustments. SECTION 2.3. THE REVOLVING CREDIT NOTES. The Revolving Credit Loans shall be evidenced by separate promissory notes of the Borrowers in substantially the form of 23 -18- Exhibit A hereto (each a "Revolving Credit Note"), dated as of the Closing Date and completed with appropriate insertions. One Revolving Credit Note shall be payable to the order of each Bank in a principal amount equal to such Bank's Commitment or, if less, the outstanding amount of all Revolving Credit Loans made by such Bank, plus interest accrued thereon, as set forth below. The Borrowers irrevocably authorize each Bank to make or cause to be made, in connection with a Drawdown Date of any Revolving Credit Loan or at the time of receipt of any payment of principal on such Bank's Revolving Credit Note, an appropriate notation on such Bank's records reflecting the making of such Loan or the receipt of such payment (as the case may be). The outstanding amount of the Loans set forth on such Bank's record shall be prima facie evidence of the principal amount thereof owing and unpaid to such Bank, but the failure to record, or any error in so recording, any such amount shall not limit or otherwise affect the obligation of the Borrowers hereunder or under any Revolving Credit Note to make payments of principal of or interest on any Revolving Credit Note when due. SECTION 2.4. INTEREST ON LOANS. The outstanding principal amount of the Loans shall bear interest at the rate per annum equal to (a) the Base Rate plus the Applicable Base Rate Margin on Base Rate Loans or (b) the Eurodollar Rate plus the Applicable Eurodollar Margin on Eurodollar Loans. Interest shall be payable (i) quarterly in arrears on the first Business Day of each calendar quarter, commencing April 1, 1999, on Base Rate Loans, (ii) on the last day of the applicable Interest Period, and if such Interest Period is longer than three (3) months, also on the day which is three (3) months after the commencement of such Interest Period, on Eurodollar Loans, and (iii) on the Maturity Date for all Revolving Credit Loans and Swing Line Loans. SECTION 2.5. ELECTION OF EURODOLLAR RATE; NOTICE OF ELECTION; INTEREST PERIODS; MINIMUM AMOUNTS. (a) At the Borrowers' option, so long as no Default or Event of Default has occurred and is then continuing, the Borrowers may (i) elect to convert any Revolving Credit Loan which is a Base Rate Loan or a portion thereof to a Eurodollar Loan, (ii) at the time of any Loan and Letter of Credit Request, specify that a requested Revolving Credit Loan shall be a Eurodollar Loan, or (iii) upon expiration of the applicable Interest Period, elect to maintain an existing Eurodollar Loan as such, provided that the Borrowers give notice to the Agent pursuant to Section 2.5(b) hereof. Upon determining any Eurodollar Rate, the Agent shall forthwith provide notice thereof to the Borrowers and the Banks, and each such notice to the Borrowers and the Banks shall be considered prima facie correct and binding, absent manifest error. (b) Three (3) Eurodollar Business Days prior to the making of any Eurodollar Loan or the conversion of any Base Rate Loan to a Eurodollar Loan, or, in the case of an outstanding Eurodollar Loan, the expiration date of the applicable Interest Period, the Borrowers shall give telephonic notice (confirmed by telecopy on the same Eurodollar Business Day) to the Agent not later than 11:00 a.m. (Boston time) of their election pursuant to Section 2.5(a). Each such notice delivered to the Agent shall specify the aggregate principal amount of the Loans to be borrowed or maintained as or converted to Eurodollar Loans and the requested duration of the Interest Period that will be applicable to such Eurodollar Loan, and shall be irrevocable and binding upon the Borrowers. If the 24 -19- Borrowers shall fail to give the Agent notice of their election hereunder together with all of the other information required by this Section 2.5(b) with respect to any Revolving Credit Loan, such Loan shall be deemed a Base Rate Loan. In the event that the Borrowers fail to provide any such notice with respect to the continuation of any Eurodollar Loan as such, then such Eurodollar Loan shall be automatically converted to a Base Rate Loan at the end of the then expiring Interest Period relating thereto. (c) Notwithstanding anything herein to the contrary, the Borrowers may not specify an Interest Period that would extend beyond the Maturity Date. (d) All Revolving Credit Loans shall be in a minimum amount of $1,000,000 or integral multiples of $500,000 in excess thereof. In no event shall the Borrowers have more than six (6) different maturities of Eurodollar Loans outstanding at any time. SECTION 2.6. REQUESTS FOR REVOLVING CREDIT LOANS. The Borrowers shall give to the Agent written notice in the form of Exhibit B hereto (or telephonic notice confirmed by telecopy on the same Business Day in the form of Exhibit B hereto) of each Revolving Credit Loan requested hereunder (a "Loan and Letter of Credit Request") not later than (a) 11:00 a.m. Boston time one (1) Business Day prior to the proposed Drawdown Date of any Base Rate Loan, or (b) 11:00 a.m. Boston time three (3) Eurodollar Business Days prior to the proposed Drawdown Date of any Eurodollar Loan. Each such notice shall be given by the Borrowers and shall specify the principal amount of the Revolving Credit Loan requested and shall include a current Loan and Letter of Credit Request reflecting the aggregate amount of Revolving Credit Loans and Swing Line Loans outstanding and the Maximum Drawing Amount. Each Loan and Letter of Credit Request shall be irrevocable and binding on the Borrowers and shall obligate the Borrowers to accept the Revolving Credit Loan requested from the Banks on the proposed Drawdown Date. Each of the representations and warranties made by or on behalf of the Borrowers to the Banks or the Agent in this Credit Agreement or any other Loan Document shall be true and correct in all material respects when made and shall, for all purposes of this Credit Agreement, be deemed to be repeated on and as of the date of the submission of any Loan and Letter of Credit Request and on and as of the Drawdown Date of such Loan, or the date of issuance of such Letter of Credit (except to the extent of changes resulting from transactions contemplated or permitted by this Credit Agreement and the other Loan Documents and changes occurring in the ordinary course of business that singly or in the aggregate are not materially adverse, or to the extent that such representations and warranties expressly relate solely to an earlier date). The Agent shall promptly notify each Bank of each Loan and Letter of Credit Request received by the Agent. SECTION 2.7. FUNDS FOR REVOLVING CREDIT LOANS. (a) Not later than 1:00 p.m. (Boston time) on the proposed Drawdown Date of any Revolving Credit Loan, each of the Banks will make available to the Agent, at the Agent's Head Office, in immediately available funds, the amount of such Bank's Commitment Percentage of the amount of the requested Revolving Credit Loans. Upon receipt from each Bank of such amount, and upon receipt of the documents required by Sections 9 and 10 and the satisfaction of the other conditions set forth therein, to the extent 25 -20- applicable, the Agent will make available to the Borrowers in immediately available funds the aggregate amount of such Revolving Credit Loans made available to the Agent by the Banks. The failure or refusal of any Bank to make available to the Agent at the aforesaid time and place on any Drawdown Date the amount of its Commitment Percentage of the requested Revolving Credit Loans shall not relieve any other Bank from its several obligation hereunder to make available to the Agent the amount of such other Bank's Commitment Percentage of any requested Revolving Credit Loans. (b) The Agent may, unless notified to the contrary by any Bank prior to a Drawdown Date, assume that such Bank has made available to the Agent on such Drawdown Date the amount of such Bank's Commitment Percentage of the Revolving Credit Loans to be made on such Drawdown Date, and the Agent may (but shall not be required to), in reliance upon such assumption, make available to the Borrowers a corresponding amount. If any Bank makes available to the Agent such amount on a date after such Drawdown Date, such Bank shall pay to the Agent on demand an amount equal to the product of (i) the average computed for the period referred to in clause (iii) below, of the weighted average interest rate paid by the Agent for federal funds acquired by the Agent during each day included in such period, times (ii) the amount of such Bank's Commitment Percentage of such Revolving Credit Loans, times (iii) a fraction, the numerator of which is the number of days that elapse from and including such Drawdown Date to the date on which the amount of such Bank's Commitment Percentage of such Revolving Credit Loans shall become immediately available to the Agent, and the denominator of which is 365. A statement of the Agent submitted to such Bank with respect to any amounts owing under this paragraph shall be prima facie evidence, absent manifest error, of the amount due and owing to the Agent by such Bank. If the amount of such Bank's Commitment Percentage of such Revolving Credit Loans is not made available to the Agent by such Bank within three (3) Business Days following such Drawdown Date, the Agent shall be entitled to recover such amount from the Borrowers on demand, with interest thereon at the rate per annum applicable to the Revolving Credit Loans made on such Drawdown Date. SECTION 2.8. MATURITY OF THE LOANS. The Loans shall be due and payable on the Maturity Date. The Borrowers jointly and severally promise to pay on the Maturity Date all Loans outstanding on such date, together with any and all accrued and unpaid interest thereon. SECTION 2.9. MANDATORY REPAYMENTS OF THE LOANS. If at any time the outstanding amount of the Revolving Credit Loans plus Swing Line Loans plus the Maximum Drawing Amount plus unpaid Reimbursement Obligations exceeds the Total Commitment, whether by reduction of the Total Commitment or otherwise, then the Borrowers shall immediately pay the amount of such excess to the Agent for application to the Revolving Credit Loans, or if no Revolving Credit Loans shall be outstanding, to the Swing Line Loans, or if no Swing Line Loans shall be outstanding, to be held by the Agent as collateral security for the Reimbursement Obligations, provided, however, that if the amount of cash collateral held by the Agent pursuant to this Section 2.9 exceeds the amount of the Obligations, the Agent shall return such excess to the Borrowers. 26 -21- SECTION 2.10. OPTIONAL PREPAYMENTS OR REPAYMENTS OF LOANS. The Borrowers shall have the right, at their election, to repay or prepay the outstanding amount of the Loans, as a whole or in part, at any time without penalty or premium (other than the obligation to reimburse the Banks and the Agent pursuant to Section 4.8 hereof). The Borrowers shall give written notice to the Agent (or telephonic notice confirmed in writing) no later than (a) 1:00 p.m. (Boston time) on the Business Day of the proposed prepayment or repayment of any Base Rate Loan or (b) 1:00 p.m. (Boston time) three (3) Eurodollar Business Days prior to the proposed prepayment or repayment of any Eurodollar Loan, in each case specifying the proposed date of prepayment or repayment of Loans and the principal amount to be paid. Each such partial repayment of the Loans shall be $500,000 or integral multiples of $500,000 in excess thereof, and shall be accompanied by the payment of accrued interest on the principal prepaid to the date of repayment and shall be applied, in the absence of instruction by the Borrowers, first to the principal of Base Rate Loans and then to the principal of Eurodollar Loans. Each partial prepayment shall be allocated among the Banks, in proportion, as nearly as practicable, to the respective unpaid principal amount of each Bank's Revolving Credit Loans, with adjustments to the extent practicable to equalize any prior repayments not exactly in proportion. SECTION 2.11. SWING LINE LOANS; SETTLEMENTS. (a) So long as BKB has not received written notice from the Borrowers of an Event of Default and otherwise made in accordance with the provisions of this Credit Agreement, solely for ease of administration of the Revolving Credit Loans, BKB may, upon receipt of a Loan and Letter of Credit Request no later than 2:00 p.m. (Boston time) on the proposed date of funding, but shall not be required to, fund Base Rate Loans ("Swing Line Loans") for periods not to exceed seven (7) days in any one case, bearing interest as set forth for Base Rate Loans in Section 2.4. The Swing Line Loans shall be evidenced by a promissory note of the Borrowers in substantially the form of Exhibit C hereto (the "Swing Line Note") dated as of the Closing Date, and shall each be in a minimum amount of $500,000 or integral multiples of $100,000 in excess thereof, provided that the outstanding amount of Swing Line Loans advanced by BKB hereunder shall not exceed $15,000,000 at any time. Each Bank shall remain severally, but not jointly, and unconditionally liable to fund its pro rata share (based upon each Bank's Commitment Percentage) of such Swing Line Loans on each Settlement Date and, in the event BKB chooses not to fund all Base Rate Loans requested on any date, to fund its Commitment Percentage of the Base Rate Loans requested, subject to satisfaction of the provisions hereof relating to the making of Base Rate Loans. Prior to each Settlement, all payments or repayments of the principal of, and interest on, Swing Line Loans shall be credited to the account of BKB. (b) The Banks shall effect Settlements on (i) the Business Day immediately following any day which the Agent gives written notice to the Banks to effect a Settlement, (ii) the Business Day immediately following the Agent's becoming aware of the existence of any Default or Event of Default, (iii) the Maturity Date, (iv) any date on which the Borrowers wish to convert a Swing Line Loan into a Base Rate Loan, and (v) in any event, the seventh day on which any Swing Line Loan remains outstanding (each such date, a "Settlement Date"). One (1) Business Day prior to each such Settlement 27 -22- Date, the Agent shall give telephonic notice to the Banks of (A) the respective outstanding amount of Revolving Credit Loans made by each Bank as at the close of business on the prior day, (B) the amount that any Bank, as applicable (a "Settling Bank"), shall pay to effect a Settlement (a "Settlement Amount"). A statement of the Agent submitted to the Banks with respect to any amounts owing hereunder shall be prima facie evidence of the amount due and owing. Each Settling Bank shall, not later than 1:00 p.m. (Boston time) on each Settlement Date, effect a wire transfer of immediately available funds to the Agent at the Agent's Head Office in the amount of such Bank's Settlement Amount. All funds advanced by any Bank as a Settling Bank pursuant to this Section 2.11 shall for all purposes be treated as a Base Rate Loan to the Borrowers. (c) The Agent may (unless notified to the contrary by any Settling Bank by 12:00 noon (Boston time) one (1) Business Day prior to the Settlement Date) assume that each Settling Bank has made available (or will make available by the time specified in Section 2.8(b)) to the Agent its Settlement Amount, and the Agent may (but shall not be required to), in reliance upon such assumption, effect Settlements. If the Settlement Amount of such Settling Bank is made available to the Agent on a date after such Settlement Date, such Settling Bank shall pay the Agent on demand an amount equal to the product of (i) the average, computed for the period referred to in clause (iii) below, of the weighted average annual interest rate paid by the Agent for federal funds acquired by the Agent during each day included in such period times (ii) such Settlement Amount times (iii) a fraction, the numerator of which is the number of days that elapse from and including such Settlement Date to but not including the date on which such Settlement Amount shall become immediately available to the Agent, and the denominator of which is 365. Upon payment of such amount such Settling Bank shall be deemed to have delivered its Settlement Amount on the Settlement Date and shall become entitled to interest payable by the Domestic Borrowers with respect to such Settling Bank's Settlement Amount as if such share were delivered on the Settlement Date. If such Settlement Amount is not in fact made available to the Agent by such Settling Bank within five (5) Business Days of such Settlement Date, the Agent shall be entitled to recover such amount from the Borrowers, with interest thereon at the Base Rate. (d) After any Settlement Date, any payment by the Borrowers of Swing Line Loans hereunder shall be allocated pro rata among the Banks, in accordance with such Bank's Commitment Percentage. (e) If, prior to the making of a Revolving Credit Loan pursuant to paragraph (b) of this Section 2.11, a Default or Event of Default has occurred and is continuing, each Bank will, on the date such Revolving Credit Loan was to have been made, purchase an undivided participating interest in the outstanding Swing Line Loans in an amount equal to its Commitment Percentage of such Swing Line Loans. Each Bank will immediately transfer to the Agent, in immediately available funds, the amount of its participation and upon receipt thereof the Agent will deliver to such Bank a Swing Line participation certificate dated the date of receipt of such funds and in such amount. (f) Whenever, at any time after the Agent has received from any Bank such Bank's participating interest in the Swing Line Loans pursuant to clause (e) above, the 28 -23- Agent receives any payment on account thereof, the Agent will distribute to such Bank its participating interest in such amount (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Bank's participating interest was outstanding and funded) in like funds as received; provided, however, that in the event that such payment received by the Agent is required to be returned, such Bank will return to the Agent any portion thereof previously distributed by the Agent to it in like funds as such payment is required to be returned by the Agent. (h) Each Bank's obligation to purchase participating interests pursuant to clause (e) above shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (i) any set-off, counterclaim, recoupment, defense or other right which such Bank may have against the Agent, the Borrowers or any other Person for any reason whatsoever; (ii) the occurrence or continuance of a Default or Event of Default; (iii) any adverse change in the condition (financial or otherwise) of the Borrowers or any other Person; (iv) any breach of this Credit Agreement by the Borrowers or any other Bank or Agent; or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. SECTION 3. LETTERS OF CREDIT. SECTION 3.1. LETTER OF CREDIT COMMITMENTS. (a) Subject to the terms and conditions hereof and the execution and receipt of a Loan and Letter of Credit Request reflecting the Maximum Drawing Amount of all Letters of Credit (including the requested Letter of Credit) and a Letter of Credit Application, the Agent on behalf of the Banks and in reliance upon the agreement of the Banks set forth in Section 3.1(b) and upon the representations and warranties of the Borrowers contained herein, agrees to issue standby letters of credit in such form as may be requested from time to time by the Borrowers and agreed to by the Agent; provided, however, that, after giving effect to such request, the Maximum Drawing Amount shall not exceed the lesser of (i) $20,000,000 or (ii) the Total Commitment minus the aggregate outstanding amount of the Revolving Credit Loans and Swing Line Loans. No Letter of Credit shall have an expiration date later than thirty (30) days prior to the Maturity Date and in addition no Letter of Credit (other than the Madera Letter of Credit or the Columbia Letter of Credit) shall have an expiration date later than one (1) year after the date of issuance of such Letter of Credit (which may incorporate automatic renewals for periods of up to one (1) year, provided that the Agent may, upon 30 days' notice to the beneficiary, cancel such Letter of Credit which has been renewed beyond its initial one (1) year term). (b) Each Bank severally agrees that it shall be absolutely liable, without regard to the occurrence of any Default or Event of Default or any other condition precedent whatsoever, to the extent of such Bank's Commitment Percentage thereof, to reimburse the Agent or, with respect to the Columbia Letter of Credit, the Columbia Issuing Bank on demand for the amount of each draft paid by the Agent or the Columbia Issuing Bank (as the case may be) under each Letter of Credit issued in accordance with the terms hereof to the extent that such amount is not reimbursed by the 29 -24- Borrowers pursuant to Section 3.2 (such agreement for a Bank being called herein the "Letter of Credit Participation" of such Bank). (c) Each such payment made by a Bank shall be treated as the purchase by such Bank of a participating interest in the Borrowers' Reimbursement Obligation under Section 3.2 in an amount equal to such payment. Each Bank shall share in accordance with its participating interest in any interest which accrues pursuant to Section 3.2. (d) The parties hereby agree that the Letters of Credit issued under the Prior Credit Agreement shall be Letters of Credit under this Credit Agreement. In addition, this Credit Agreement shall constitute the Reimbursement Agreement referred to in the Madera Bond Documents and the Columbia Bond Documents. SECTION 3.2. REIMBURSEMENT OBLIGATION OF THE BORROWERS. In order to induce the Agent or the Columbia Issuing Bank (as the case may be) to issue, extend and renew each Letter of Credit and the Banks to participate therein, the Borrowers hereby agree to reimburse or pay to the Agent or the Columbia Issuing Bank (as the case may be) with respect to each Letter of Credit issued, extended or renewed by the Agent or the Columbia Issuing Bank hereunder as follows: (a) on each date that any draft presented under any Letter of Credit is honored by the Agent or the Columbia Issuing Bank or the Agent or the Columbia Issuing Bank otherwise makes payment with respect thereto, (i) the amount paid by the Agent or the Columbia Issuing Bank under or with respect to such Letter of Credit, and (ii) the amount of any taxes, fees, charges or other costs and expenses whatsoever incurred by the Agent, the Columbia Issuing Bank or any Bank in connection with any payment made by the Agent, the Columbia Issuing Bank or any Bank under, or with respect to, such Letter of Credit; provided however, if the Borrowers do not reimburse the Agent or the Columbia Issuing Bank (as the case may be) on the Drawdown Date, such amount shall, provided that no Event of Default under Sections 12.1(h) or 12.1(i) has occurred, become automatically a Revolving Credit Loan which is a Base Rate Loan advanced hereunder in an amount equal to such sum; and (b) upon the Maturity Date, or the termination of the Total Commitment, or the acceleration of the Reimbursement Obligations in accordance with Section 12, an amount equal to the Maximum Drawing Amount, which amount shall be held by the Agent for the benefit of the Columbia Issuing Bank, the Banks and the Agent as cash collateral for all Reimbursement Obligations. SECTION 3.3. LETTER OF CREDIT PAYMENTS. If any draft shall be presented or other demand for payment shall be made under any Letter of Credit, the Agent or the Columbia Issuing Bank (as the case may be) shall notify the Borrowers of the date and amount of the draft presented or demand for payment and of the date and time when it expects to pay such draft or honor such demand for payment. On the date that such draft is paid or other payment is made by the Agent or the Columbia Issuing Bank, the Agent shall promptly notify the Banks of the amount of any unpaid Reimbursement Obligation. No later than 3:00 p.m. (Boston time) on the Business Day next following the receipt of such notice, each Bank shall make available to the Agent, at the Agent's Head Office, in 30 -25- immediately available funds, such Bank's Commitment Percentage of such Reimbursement Obligation, together with an amount equal to the product of (a) the weighted average, computed for the period referred to in clause (c) below, of the interest rate paid by the Agent or the Columbia Issuing Bank (as the case may be) for federal funds acquired by the Agent or the Columbia Issuing Bank during each day included in such period, times (b) the amount equal to such Bank's Commitment Percentage of such unpaid Reimbursement Obligation, times (c) a fraction, the numerator of which is the number of days that have elapsed from and including the date the Agent or the Columbia Issuing Bank paid the draft presented for honor or otherwise made payment until the date on which such Bank's Commitment Percentage of such unpaid Reimbursement Obligation shall become immediately available to the Agent or the Columbia Issuing Bank, and the denominator of which is 365. The responsibility of the Agent or the Columbia Issuing Bank to the Borrowers and the Banks shall be only to determine that the documents (including each draft) delivered under each Letter of Credit in connection with such presentment shall be in conformity in all material respects with such Letter of Credit. SECTION 3.4. OBLIGATIONS ABSOLUTE. The Borrowers' obligations under this Section 3 shall be absolute and unconditional under any and all circumstances and irrespective of the occurrence of any Default or Event of Default or any condition precedent whatsoever or any setoff, counterclaim or defense to payment which the Borrowers may have or have had against the Agent, the Columbia Issuing Bank or any Bank or any beneficiary of a Letter of Credit. Subject to the obligations of the Banks pursuant to Article V of the Uniform Commercial Code and the obligations of the Agent and the Columbia Issuing Bank pursuant to the last sentence of Section 3.3, the Borrowers further agree with the Agent, the Columbia Issuing Bank and the Banks that the Agent, the Columbia Issuing Bank and the Banks shall not be responsible for, and the Borrowers' Reimbursement Obligations under Section 3.2 shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, fraudulent or forged, or any dispute between or among the Borrowers, the beneficiary of any Letter of Credit or any financing institution or other party to which any Letter of Credit may be transferred or any claims or defenses whatsoever of the Borrowers against the beneficiary of any Letter of Credit or any such transferee. The Agent, the Columbia Issuing Bank and the Banks shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit. The Borrowers agree that any action taken or omitted by the Agent, the Columbia Issuing Bank or any Bank under or in connection with each Letter of Credit and the related drafts and documents, if done in good faith, shall be binding upon the Borrowers and shall not result in any liability on the part of the Agent, the Columbia Issuing Bank or any Bank to the Borrowers. SECTION 3.5. RELIANCE BY AGENT. To the extent not inconsistent with Section 3.4, the Agent and the Columbia Issuing Bank shall be entitled to rely, and shall be fully protected in relying upon, any Letter of Credit, draft, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document believed by it to be genuine and correct and to have been signed, sent or made 31 -26- by the proper Person or Persons and upon advice and statements of legal counsel, independent accountants or other experts selected by the Agent. SECTION 4. FEES, PAYMENTS, AND COMPUTATIONS; JOINT AND SEVERAL LIABILITY. SECTION 4.1. FEES. (a) CLOSING. The Borrowers jointly and severally agree to pay to the Agent, for the respective accounts of each Bank, a fee as set forth in the Closing Fee Letter, dated March 30, 1999, among the Borrowers and the Agent. (b) AGENT'S FEE AND ARRANGEMENT FEES. The Borrowers jointly and severally agree to pay to the Agent and the Arranger those fees set forth in the Agent's Fee and Arrangement Fee Letter, dated March 30, 1999, among the Borrowers and the Agent. (c) COMMITMENT FEE. The Borrowers jointly and severally agree to pay to the Agent, for the respective account of each Bank, a fee (the "Commitment Fee") equal to the Applicable Commitment Rate multiplied by the average daily amount of the unused portion of such Bank's Commitment during each calendar quarter or portion thereof from the Closing Date to the Maturity Date (or to the date of termination in full of the Total Commitment, if earlier). The Commitment Fee shall be payable quarterly in arrears on the first day of each calendar quarter for the immediately preceding calendar quarter commencing on April 1, 1999, with a final payment on the Maturity Date. (d) LETTER OF CREDIT FEES. The Borrowers shall pay a fee (the "Letter of Credit Fee") equal to (i) the Applicable L/C Margin multiplied by the Maximum Drawing Amount of each Financial Letter of Credit plus (ii) 50% of the Applicable L/C Margin multiplied by the Maximum Drawing Amount of each Performance Letter of Credit. Such Letter of Credit Fee shall be payable to the Agent for the account of the Banks, to be shared pro rata by the Banks in accordance with their respective Commitment Percentages. The Borrowers shall also pay a fee (the "Issuance Fee") to the Agent or the Columbia Issuing Bank (as the case may be), for its own account, equal to 0.125% per annum on the Maximum Drawing Amount of all Letters of Credit issued by such Bank, plus its customary administrative charges. The Letter of Credit Fee and the Issuance Fee shall be payable for the number of days each Letter of Credit is outstanding, and shall be payable quarterly in arrears on the first day of each calendar quarter for the immediately preceding calendar quarter, and on the Maturity Date. SECTION 4.2. PAYMENTS. (a) All payments of principal, interest, Reimbursement Obligations, fees and any other amounts due hereunder or under any of the other Loan Documents shall be made to the Agent, for the respective accounts of the Banks and the Agent, to be received at the Agent's Head Office in immediately available funds by 12:00 p.m. (Boston time) on any due date. 32 -27- (b) All payments by the Borrowers hereunder and under any of the other Loan Documents shall be made without setoff or counterclaim and free and clear of and without deduction for any taxes, levies, imposts, duties, charges, fees, deductions, withholdings, compulsory loans, restrictions or conditions of any nature now or hereafter imposed or levied by any jurisdiction or any political subdivision thereof or taxing or other authority therein unless the Borrowers are compelled by law to make such deduction or withholding. If any such obligation is imposed upon the Borrowers with respect to any amount payable by them hereunder or under any of the other Loan Documents, the Borrowers will pay to the Agent, for the account of the Banks or (as the case may be) the Agent, on the date on which such amount is due and payable hereunder or under such other Loan Document, such additional amount in Dollars as shall be necessary to enable the Banks or the Agent to receive the same net amount which the Banks or the Agent would have received on such due date had no such obligation been imposed upon the Borrowers. In the event that the Borrowers are required to make such deduction or withholding as a result of the fact that a Bank is organized outside of the United States, such Bank shall use its reasonable best efforts to transfer its Loans to an affiliate organized within the United States if such transfer would have no adverse effect on such Bank or the Loans. The Borrowers will deliver promptly to the Bank certificates or other valid vouchers for all taxes or other charges deducted from or paid with respect to payments made by the Borrowers hereunder or under such other Loan Document. (c) Whenever a payment hereunder or under any of the other Loan Documents becomes due on a day that is not a Business Day, the due date for such payment shall be extended to the next succeeding Business Day, and interest shall accrue during such extension; provided that any Interest Period for any Eurodollar Loan which ends on a day that is not a Eurodollar Business Day shall end on the next succeeding Eurodollar Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Eurodollar Business Day. SECTION 4.3. COMPUTATIONS. All computations of interest on Base Rate Loans and of Commitment Fees, Letter of Credit Fees or other fees shall, unless otherwise expressly provided herein, be based on a 365-day year (or 366-day year, as applicable) and paid for the actual number of days elapsed. All computations of interest on Eurodollar Loans shall, unless otherwise expressly provided herein, be based on a 360-day year and paid for the actual number of days elapsed. SECTION 4.4. CAPITAL ADEQUACY. If any present or future law, governmental rule, regulation, policy, guideline or directive (whether or not having the force of law) or the interpretation thereof by a court or governmental authority with appropriate jurisdiction affects the amount of capital required or expected to be maintained by any Bank or the Agent or any corporation controlling such Bank or the Agent, and such Bank or the Agent determines that the amount of capital required to be maintained by it is increased by or based upon the existence of such Bank's or the Agent's Loans, Letter of Credit Participations or Letters of Credit, or commitment with respect thereto, then such Bank or the Agent may notify the Borrowers of such fact. To the extent that the costs of such increased capital requirements are not reflected in the Base Rate (if relating to Base Rate 33 -28- Loans), the Borrowers and such Bank or (as the case may be) the Agent shall thereafter attempt to negotiate in good faith, within thirty (30) days of the day on which the Borrowers receive such notice, an adjustment payable hereunder that will adequately compensate such Bank or the Agent in light of these circumstances. If the Borrowers and such Bank or the Agent are unable to agree to such adjustment within thirty (30) days of the date on which the Borrowers receive such notice, then commencing on the date of such notice (but not earlier than the effective date of any such increased capital requirement), the fees payable hereunder shall increase by an amount that will, in such Bank's or the Agent's reasonable determination, provide adequate compensation. Each Bank and the Agent shall allocate such cost increases among its customers in good faith and on an equitable basis. SECTION 4.5. CERTIFICATE. A certificate setting forth any additional amounts payable pursuant to Section 4.4 and a reasonable explanation of such amounts which are due, submitted by any Bank or the Agent to the Borrowers, shall be conclusive, absent manifest error, that such amounts are due and owing. SECTION 4.6. INTEREST ON OVERDUE AMOUNTS. Overdue principal and (to the extent permitted by applicable law) interest on the Loans and all other overdue amounts payable hereunder or under any of the other Loan Documents shall bear interest compounded monthly and payable on demand at a rate per annum equal to the Base Rate plus the Applicable Base Rate Margin plus two (2) percentage points (2.00%) until such amount shall be paid in full (after, as well as before, judgment). SECTION 4.7. INTEREST LIMITATION. Notwithstanding any other term of this Credit Agreement or any Note or any other document referred to herein or therein, the maximum amount of interest which may be charged to or collected from any person liable hereunder or under any Note by any Bank shall be absolutely limited to, and shall in no event exceed, the maximum amount of interest which could lawfully be charged or collected under applicable law (including, to the extent applicable, the provisions of Section 5197 of the Revised Statutes of the United States of America, as amended, 12 U.S.C. Section 85, as amended), so that the maximum of all amounts constituting interest under applicable law, howsoever computed, shall never exceed as to any Person liable therefor such lawful maximum, and any term of this Credit Agreement, the Notes, the Letter of Credit Applications, or any other document referred to herein or therein which could be construed as providing for interest in excess of such lawful maximum shall be and hereby is made expressly subject to and modified by the provisions of this paragraph. SECTION 4.8. EURODOLLAR INDEMNITY. The Borrowers agree to indemnify the Banks and the Agent and to hold them harmless from and against any loss, cost or expenses (including loss of anticipated profits) that the Banks and the Agent may sustain or incur as a consequence of (a) default by the Borrowers in payment of the principal amount of or any interest on any Eurodollar Loans as and when due and payable, including any such loss or expense arising from interest or fees payable by any Bank or the Agent to lenders of funds obtained by it in order to maintain its Eurodollar Loans, (b) a prepayment of principal on any Eurodollar Loan, including prepayments which are the result of acceleration by the Banks, or (c) default by the Borrowers in making a borrowing or conversion after the Borrowers have given (or are deemed to have given) notice pursuant 34 -29- to Section 2.5 or Section 2.6, the making of any payment of a Eurodollar Loan or the making of any conversion of any such Eurodollar Loan to a Base Rate Loan on a day that is not the last day of the applicable Interest Period with respect thereto, including interest or fees payable by any Bank to lenders of funds obtained by it in order to maintain any such Loans. SECTION 4.9. ILLEGALITY; INABILITY TO DETERMINE EURODOLLAR RATE. Notwithstanding any other provision of this Credit Agreement, if (a) the introduction of, any change in, or any change in the interpretation of, any law or regulation applicable to the Agent or any Bank shall make it unlawful, or any central bank or other governmental authority having jurisdiction thereof shall assert that it is unlawful, for any Bank or the Agent to perform its obligations in respect of any Eurodollar Loans, or (b) if any Bank or the Agent shall reasonably determine with respect to Eurodollar Loans that (i) by reason of circumstances affecting any Eurodollar interbank market, adequate and reasonable methods do not exist for ascertaining the Eurodollar Rate which would otherwise be applicable during any Interest Period, or (ii) deposits of Dollars in the relevant amount for the relevant Interest Period are not available to such Bank or the Agent in any Eurodollar interbank market, or (iii) the Eurodollar Rate does not or will not accurately reflect the cost to such Bank or the Agent of obtaining or maintaining the applicable Eurodollar Loans during any Interest Period, then such Bank or the Agent shall promptly give telephonic, telex or cable notice of such determination to the Borrowers (which notice shall be conclusive and binding upon the Borrowers). Upon such notification by such Bank or the Agent, the obligation of such Bank or the Agent to make Eurodollar Loans shall be suspended until such Bank or the Agent determines that such circumstances no longer exist, and the outstanding Eurodollar Loans shall continue to bear interest at the applicable rate based on the Eurodollar Rate until the end of the applicable Interest Period, and thereafter shall be deemed converted to Base Rate Loans in equal principal amounts. SECTION 4.10. ADDITIONAL COSTS, ETC. If any present or future applicable law, which expression, as used herein, includes statutes, rules and regulations thereunder and interpretations thereof by any competent court or by any governmental or other regulatory body or official charged with the administration or the interpretation thereof and requests, directives, instructions and notices at any time or from time to time hereafter made upon or otherwise issued to any Bank by any central bank or other fiscal, monetary or other authority (whether or not having the force of law), shall impose on any Bank any tax, levy, impost, duty, charge fees, deduction or withholdings of any nature or requirements with respect to this Credit Agreement, the other Loan Documents, the Loans, such Bank's Commitment, the Letters of Credit or any class of loans or commitments or letters of credit of which any of the Loans, the Commitments or the Letters of Credit forms a part, and the result of any of the foregoing is: (i) to increase the cost to such Bank of making, funding, issuing, renewing, extending or maintaining the Loans, such Bank's Commitment, or the Letters of Credit; or (ii) to reduce the amount of principal, interest or other amount payable to such Bank hereunder on account of such Bank's Commitment, the Loans, or drawings under the Letters of Credit, or 35 -30- (iii) to require such Bank to make any payment or to forego any interest or other sum payable hereunder, the amount of which payment or foregone interest or other sum is calculated by reference to the gross amount of any sum receivable or deemed received by such Bank from the Borrowers hereunder, then, and in each such case, the Borrowers will, upon demand made by such Bank at any time and from time to time and as often as the occasion therefor may arise, pay to such Bank such additional amounts as will be sufficient to compensate such Bank for such additional cost, reduction, payment or foregone interest or other sum (after such Bank shall have allocated the same fairly and equitably among all customers of any class generally affected thereby). SECTION 4.11. REPLACEMENT OF BANKS. If any Bank (an "Affected Bank") (i) makes demand upon the Borrowers for (or if the Borrowers are otherwise required to pay) amounts pursuant to Sections 4.4 or 4.10 or (ii) is unable to make or maintain Eurodollar Loans as a result of a condition described in Section 4.9, the Borrowers may, within 90 days of receipt of such demand or notice (or the occurrence of such other event causing the Borrowers to be required to pay such compensation or causing Section 4.9 to be applicable), by notice in writing to the Agent and such Affected Bank (a "Replacement Notice") (A) request the Affected Bank to cooperate with the Borrowers in obtaining a replacement bank satisfactory to the Agent and the Borrowers (the "Replacement Bank"); (B) request the non-Affected Banks to acquire and assume all of the Affected Bank's Loans and Commitment, as provided herein, but none of such Banks shall be under an obligation to do so; or (C) designate a Replacement Bank reasonably satisfactory to the Agent. If any satisfactory Replacement Bank shall be obtained, and/or any of the non-Affected Banks shall agree to acquire and assume all of the Affected Bank's Loans and Commitment, then such Affected Bank shall, so long as no Event of Default shall have occurred and be continuing, assign, in accordance with Section 17, all of its Commitment, Loans, Notes and other rights and obligations under this Credit Agreement and all other Loan Documents to such Replacement Bank or non-Affected Banks, as the case may be, in exchange for payment of the principal amount so assigned and all interest and fees accrued on the amount so assigned, plus all other Obligations then due and payable to the Affected Bank; provided, however, that (i) such assignment shall be without recourse, representation or warranty and shall be on terms and conditions reasonably satisfactory to such Affected Bank and such Replacement Bank and/or non-Affected Banks, as the case may be, and (ii) prior to any such assignment, the Borrowers shall have paid to such Affected Bank all amounts properly demanded and unreimbursed under Sections 4.4, 4.8, 4.9 and 4.10. Upon the effective date of such assignment, the Borrowers shall issue replacement Notes to such Replacement Bank and/or non-Affected Banks, as the case may be, and such institution shall become a "Bank" for all purposes under this Credit Agreement and the other Loan Documents. SECTION 4.12. CONCERNING JOINT AND SEVERAL LIABILITY OF THE BORROWERS. (a) Each of the Borrowers is accepting joint and several liability hereunder and under the other Loan Documents in consideration of the financial accommodations to be provided by the Banks under this Credit Agreement, for the mutual benefit, directly and 36 -31- indirectly, of each of the Borrowers and in consideration of the undertakings of each other Borrower to accept joint and several liability for the Obligations. (b) Each of the Borrowers, jointly and severally, hereby irrevocably and unconditionally accepts, not merely as a surety but also as a co-debtor, joint and several liability with the other Borrowers with respect to the payment and performance of all of the Obligations (including, without limitation, any Obligations arising under this Section 4.12), it being the intention of the parties hereto that all of the Obligations shall be the joint and several Obligations of each of the Borrowers without preferences or distinction among them. (c) If and to the extent that any of the Borrowers shall fail to make any payment with respect to any of the Obligations as and when due or to perform any of the Obligations in accordance with the terms thereof, then in each such event the other Borrowers will make such payment with respect to, or perform, such Obligation. (d) The Obligations of each of the Borrowers under the provisions of this Section 4.12 constitute full recourse Obligations of each of the Borrowers enforceable against each such corporation to the full extent of its properties and assets, irrespective of the validity, regularity or enforceability of this Credit Agreement or any other circumstance whatsoever. (e) Except as otherwise expressly provided in this Credit Agreement, each of the Borrowers hereby waives notice of acceptance of its joint and several liability, notice of any Loans made under this Credit Agreement, notice of any action at any time taken or omitted by the Banks under or in respect of any of the Obligations, and, generally, to the extent permitted by applicable law, all demands, notices and other formalities of every kind in connection with this Credit Agreement. Each of the Borrowers hereby assents to, and waives notice of, any extension or postponement of the time for the payment of any of the Obligations, the acceptance of any payment of any of the Obligations, the acceptance of any partial payment thereon, any waiver, consent or other action or acquiescence by the Banks at any time or times in respect of any default by any of the Borrowers in the performance or satisfaction of any term, covenant, condition or provision of this Credit Agreement, any and all other indulgences whatsoever by the Banks in respect of any of the Obligations, and the taking, addition, substitution or release, in whole or in part, at any time or times, of any security for any of the Obligations or the addition, substitution or release, in whole or in part, of any of the Borrowers. Without limiting the generality of the foregoing, each of the Borrowers assents to any other action or delay in acting or failure to act on the part of the Banks with respect to the failure by any of the Borrowers to comply with any of its respective Obligations, including, without limitation, any failure strictly or diligently to assert any right or to pursue any remedy or to comply fully with applicable laws or regulations thereunder, which might, but for the provisions of this Section 4.12, afford grounds for terminating, discharging or relieving any of the Borrowers, in whole or in part, from any of its Obligations under this Section 4.12, it being the intention of each of the Borrowers that, so long as any of the Obligations hereunder remain unsatisfied, the Obligations of such Borrowers under this Section 4.12 shall not be discharged except by performance and then only 37 -32- to the extent of such performance. The Obligations of each of the Borrowers under this Section 4.12 shall not be diminished or rendered unenforceable by any winding up, reorganization, arrangement, liquidation, re-construction or similar proceeding with respect to any of the Borrowers or the Banks. The joint and several liability of the Borrowers hereunder shall continue in full force and effect notwithstanding any absorption, merger, amalgamation or any other change whatsoever in the name, membership, constitution or place of formation of any of the Borrowers or the Banks. (f) The provisions of this Section 4.12 are made for the benefit of the Banks and their successors and assigns, and may be enforced in good faith by them from time to time against any or all of the Borrowers as often as the occasion therefor may arise and without requirement on the part of the Banks first to marshal any of their claims or to exercise any of their rights against any other Borrower or to exhaust any remedies available to them against any other Borrower or to resort to any other source or means of obtaining payment of any of the Obligations hereunder or to elect any other remedy. The provisions of this Section 4.12 shall remain in effect until all of the Obligations shall have been paid in full or otherwise fully satisfied. If at any time, any payment, or any part thereof, made in respect of any of the Obligations, is rescinded or must otherwise be restored or returned by the Banks upon the insolvency, bankruptcy or reorganization of any of the Borrowers, or otherwise, the provisions of this Section 4.12 will forthwith be reinstated in effect, as though such payment had not been made. SECTION 5. REPRESENTATIONS AND WARRANTIES. The Borrowers jointly and severally represent and warrant to the Banks that on and as of the date of this Credit Agreement, each Drawdown Date, and the date of issuance of any Letter of Credit (with any disclosure on a schedule pursuant to this Section 5 applying to all relevant representations and warranties, regardless of whether such schedule is referenced in each relevant representation): SECTION 5.1. CORPORATE AUTHORITY. (a) INCORPORATION; GOOD STANDING. Each Borrower (i) is a corporation duly organized, validly existing and in good standing or in current status under the laws of its respective state of incorporation, (ii) has all requisite corporate power to own its property and conduct its business as now conducted and as presently contemplated, and (iii) is in good standing as a foreign corporation and is duly authorized to do business in each jurisdiction in which its property or business as presently conducted or contemplated makes such qualification necessary except where a failure to be so qualified would not have a material adverse effect on the business, assets or financial condition of such Borrower. (b) AUTHORIZATION. The execution, delivery and performance of the Loan Documents and the transactions contemplated hereby and thereby (i) are within the corporate authority of each Borrower, (ii) have been duly authorized by all necessary corporate proceedings, (iii) do not conflict with or result in any material breach or contravention of any provision of law, statute, rule or regulation to which any Borrower is subject or any judgment, order, writ, injunction, license or permit applicable to any Borrower so as to materially adversely affect the assets, business or any activity of the 38 -33- Borrowers, and (iv) do not conflict with any provision of the corporate charter or bylaws of any Borrower or any agreement or other instrument binding upon them. (c) ENFORCEABILITY. The execution, delivery and performance of the Loan Documents will result in valid and legally binding obligations of the Borrowers enforceable against each in accordance with the respective terms and provisions hereof and thereof, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors' rights and except to the extent that availability of the remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought. SECTION 5.2. GOVERNMENTAL APPROVALS. The execution, delivery and performance by the Borrowers of the Loan Documents and the transactions contemplated hereby and thereby do not require any approval or consent of, or filing with, any governmental agency or authority other than those already obtained. SECTION 5.3. TITLE TO PROPERTIES; LEASES. The Borrowers own all of the assets reflected in the consolidated balance sheets as at the Balance Sheet Date or acquired since that date (except property and assets sold or otherwise disposed of in the ordinary course of business since that date), subject to no mortgages, capitalized leases, conditional sales agreements, title retention agreements, liens or other encumbrances except Permitted Liens. SECTION 5.4. FINANCIAL STATEMENTS; SOLVENCY. (a) There has been furnished to the Banks audited consolidated financial statements of the Borrowers dated the Balance Sheet Date. Said financial statements have been prepared in accordance with GAAP and fairly present in all material respects the financial condition of the Borrowers on a consolidated basis, as at the close of business on the date thereof and the results of operations for the period then ended. There are no contingent liabilities of the Borrowers involving material amounts, known to the officers of the Borrowers, which have not been disclosed in said balance sheets and the related notes thereto or otherwise in writing to the Banks. (b) The Borrowers on a consolidated basis (both before and after giving effect to the transactions contemplated by this Credit Agreement) are and will be solvent (i.e., they have assets having a fair value in excess of the amount required to pay their probable liabilities on their existing debts as they become absolute and matured) and have, and expect to have, the ability to pay their debts from time to time incurred in connection therewith as such debts mature. SECTION 5.5. NO MATERIAL CHANGES, ETC. Since the Balance Sheet Date, there have occurred no material adverse changes in the financial condition or businesses of the Borrowers, taken as a whole, as shown on or reflected in the consolidated balance sheet of the Borrowers as of the Balance Sheet Date, or the consolidated statement of income for the fiscal year then ended. Since the Balance Sheet Date, there have not been any Distributions other than as permitted by Section 7.6 hereof. 39 -34- SECTION 5.6. PERMITS, FRANCHISES, PATENTS, COPYRIGHTS, ETC. Each Borrower possess all franchises, patents, copyrights, trademarks, trade names, licenses and permits, and rights in respect of the foregoing, adequate for the conduct of their businesses substantially as now conducted without known conflict with any rights of others. SECTION 5.7. LITIGATION. Except as shown on Schedules 5.7 and 5.16 hereto, there are no actions, suits, proceedings or investigations of any kind pending or, to the knowledge of any Borrower, threatened against any Borrower before any court, tribunal or administrative agency or board which, if adversely determined, might, either in any individual case or in the aggregate, materially adversely affect the properties, assets, financial condition or business of the Borrowers, taken as a whole, or materially impair the right of the Borrowers, taken as a whole, to carry on business substantially as now conducted, or result in any substantial liability not adequately covered by insurance, or for which adequate reserves are not maintained on the consolidated balance sheet or which question the validity of any of the Loan Documents or any action taken or to be taken pursuant hereto or thereto. SECTION 5.8. NO MATERIALLY ADVERSE CONTRACTS, ETC. No Borrower is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Borrowers' officers has or is expected in the future to have a materially adverse effect on the business, assets or financial condition of the Borrowers, taken as a whole. No Borrower is a party to any contract or agreement which in the judgment of the Borrowers' officers has or is expected to have any materially adverse effect on the business of the Borrowers, taken as a whole, except as otherwise reflected in adequate reserves. SECTION 5.9. COMPLIANCE WITH OTHER INSTRUMENTS, LAWS, ETC. No Borrower is violating any provision of its charter documents or by-laws or any agreement or instrument by which any of them may be subject or by which any of them or any of their properties may be bound or any decree, order, judgment, or any statute, license, rule or regulation, in a manner which could result in the imposition of substantial penalties or materially and adversely affect the financial condition, properties or business of any Borrower. All Material Contracts (a complete and accurate list of which is attached hereto as Schedule 5.9) are in full force and effect, and no default or event of default has occurred and is continuing under any Material Contract. SECTION 5.10. TAX STATUS. Each Borrower has made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which any of them is subject (unless and only to the extent that such Borrower has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes); and have paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith; and have set aside on their books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Borrowers know of no basis for any such claim. 40 -35- SECTION 5.11. NO EVENT OF DEFAULT. No Default or Event of Default has occurred and is continuing as of the date of this Credit Agreement. SECTION 5.12. HOLDING COMPANY AND INVESTMENT COMPANY ACTS. No Borrower is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935; nor is any of them a "registered investment company," or an "affiliated company" or a "principal underwriter" of a "registered investment company," as such terms are defined in the Investment Company Act of 1940, as amended. SECTION 5.13. ABSENCE OF FINANCING STATEMENTS, ETC. Other than Permitted Liens, there is no financing statement, security agreement, chattel mortgage, real estate mortgage or other document filed or recorded with any filing records, registry, or other public office, which purports to cover, affect or give notice of any present or possible future lien on, or security interest in, any assets or property of any Borrower, or any rights relating thereto. SECTION 5.14. EMPLOYEE BENEFIT PLANS. (a) Each Employee Benefit Plan and each Guaranteed Pension Plan has been maintained and operated in compliance in all material respects with the provisions of ERISA and, to the extent applicable, the Code, including but not limited to the provisions thereunder respecting prohibited transactions and the bonding of fiduciaries and other persons handling plan funds as required by Section 412 of ERISA. Each Borrower has heretofore delivered to the Agent the most recently completed annual report, Form 5500, with all required attachments, and actuarial statement required to be submitted under Section 103(d) of ERISA, with respect to each Guaranteed Pension Plan. (b) No Employee Benefit Plan, which is an employee welfare benefit plan within the meaning of Section 3(1) or Section 3(2)(B) of ERISA, provides benefit coverage subsequent to termination of employment, except as required by Title I, Part 6 of ERISA or the applicable state insurance laws. A Borrower may terminate each such Plan at any time (or at any time subsequent to the expiration of any applicable bargaining agreement) in the discretion of such Borrower without liability to any Person other than for claims arising prior to termination. (c) Each contribution required to be made to a Guaranteed Pension Plan, whether required to be made to avoid the incurrence of an accumulated funding deficiency, the notice or lien provisions of Section 302(f) of ERISA, or otherwise, has been timely made. No waiver of an accumulated funding deficiency or extension of amortization periods has been received with respect to any Guaranteed Pension Plan, and no Borrower nor any ERISA Affiliate is obligated to or has posted security in connection with an amendment to a Guaranteed Pension Plan pursuant to Section 307 of ERISA or Section 401(a)(29) of the Code. No liability to the PBGC (other than required insurance premiums, all of which have been paid) has been incurred by any Borrower or any ERISA Affiliate with respect to any Guaranteed Pension Plan and there has not been any ERISA Reportable Event (other than an ERISA Reportable Event as to which the requirement of 30 days notice has been waived), or any other event or condition which 41 -36- presents a material risk of termination of any Guaranteed Pension Plan by the PBGC. Based on the latest valuation of each Guaranteed Pension Plan (which in each case occurred within twelve months of the date of this representation), and on the actuarial methods and assumptions employed for that valuation, the aggregate benefit liabilities of all such Guaranteed Pension Plans within the meaning of Section 4001 of ERISA did not exceed the aggregate value of the assets of all such Guaranteed Pension Plans, disregarding for this purpose the benefit liabilities and assets of any Guaranteed Pension Plan with assets in excess of benefit liabilities. (d) No Borrower nor any ERISA Affiliate has incurred any material liability (including secondary liability) to any Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan under Section 4201 of ERISA or as a result of a sale of assets described in Section 4204 of ERISA. No Borrower nor any ERISA Affiliate has been notified that any Multiemployer Plan is in reorganization or insolvent under and within the meaning of Section 4241 or Section 4245 of ERISA or is at risk of entering reorganization or becoming insolvent, or that any Multiemployer Plan intends to terminate or has been terminated under Section 4041A of ERISA. SECTION 5.15. USE OF PROCEEDS. SECTION 5.15.1. GENERAL. The proceeds of the Loans shall be used solely as follows: (a) to refinance existing Indebtedness of the Borrowers under the Prior Credit Agreement, (b) to finance acquisitions permitted pursuant to Section 7.4; and (c) for capital expenditures, working capital, and general corporate purposes. SECTION 5.15.2. REGULATIONS U AND X. No portion of any Loan is to be used, and no portion of any Letter of Credit is to be obtained, for the purpose of purchasing or carrying any "margin security" or "margin stock" as such terms are used in Regulations U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and 224. SECTION 5.15.3. INELIGIBLE SECURITIES. No portion of the proceeds of any Loans is to be used, and no portion of any Letter of Credit is to be obtained, for the purpose of (a) knowingly purchasing, or providing credit support for the purchase of, Ineligible Securities from a Section 20 Subsidiary during any period in which such Section 20 Subsidiary makes a market in such Ineligible Securities, (b) knowingly purchasing, or providing credit support for the purchase of, during the underwriting or placement period, any Ineligible Securities being underwritten or privately placed by a Section 20 Subsidiary, or (c) making, or providing credit support for the making of, payments of principal or interest on Ineligible Securities underwritten or privately placed by a Section 20 Subsidiary and issued by or for the benefit of the Borrowers or other Affiliate of the Borrowers. SECTION 5.16. ENVIRONMENTAL COMPLIANCE. Each Borrower has investigated the past and present condition and usage of the Real Property and the operations conducted thereon and, based upon such diligent investigation, has determined that, except as shown on Schedule 5.16: 42 -37- (a) No Borrower, nor any operator of the Borrowers' properties, is in violation, or alleged violation, of any judgment, decree, order, law, permit, license, rule or regulation pertaining to environmental matters, including without limitation, those arising under RCRA, CERCLA, the Superfund Amendments and Reauthorization Act of 1986, the Federal Clean Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, or any state or local statute, regulation, ordinance, order or decree relating to health, safety or the environment (the "Environmental Laws"), which violation would have a material adverse effect on the business, assets or financial condition of the Borrowers on a consolidated basis. (b) No Borrower has received notice from any third party, including, without limitation: any federal, state or local governmental authority, (i) that any of the Borrowers has been identified by the United States Environmental Protection Agency ("EPA") as a potentially responsible party under CERCLA with respect to a site listed on the National Priorities List, 40 C.F.R. Part 300 Appendix B; (ii) that any hazardous waste, as defined by 42 U.S.C. Section 6903(5), any hazardous substances as defined by 42 U.S.C. Section 9601(14), any pollutant or contaminant as defined by 42 U.S.C. Section 9601(33) or any toxic substance, oil or hazardous materials or other chemicals or substances regulated by any Environmental Laws ("Hazardous Substances") which any of the Borrowers has generated, transported or disposed of has been found at any site at which a federal, state or local agency or other third party has conducted or has ordered that any Borrower conduct a remedial investigation, removal or other response action pursuant to any Environmental Law; or (iii) that it is or shall be a named party to any claim, action, cause of action, complaint, legal or administrative proceeding arising out of any third party's incurrence of costs, expenses, losses or damages of any kind whatsoever in connection with the release of Hazardous Substances. (c) Except where it would not have a material adverse effect on the value of the Real Property, (i) no portion of the Real Property has been used for the handling, processing, storage or disposal of Hazardous Substances; and no underground tank or other underground storage receptacle for Hazardous Substances is located on such properties; (ii) in the course of any activities conducted by the Borrowers, or operators of the Real Property, no Hazardous Substances have been generated or are being used on such properties; (iii) there have been no unpermitted Releases or threatened Releases of Hazardous Substances on, upon, into or from the Real Property; (iv) to the best of the Borrowers' knowledge, there have been no Releases on, upon, from or into any real property in the vicinity of the Real Property which, through soil or groundwater contamination, may have come to be located on such properties; and (v) in addition, when required under applicable Environmental Laws, any Hazardous Substances that have been generated on the Real Property have been transported offsite only by carriers having an identification number issued by the EPA, treated or disposed of only by treatment or disposal facilities maintaining valid permits as required under applicable Environmental Laws, which transporters and facilities, to the best of the Borrowers' knowledge, have been and are operating in material compliance with such permits and applicable Environmental Laws. 43 -38- (d) None of the Real Property is or shall be subject to any applicable environmental clean-up responsibility law or environmental restrictive transfer law or regulation, by virtue of the transactions set forth herein and contemplated hereby. SECTION 5.17. PERFECTION OF SECURITY INTERESTS. All filings, assignments, pledges and deposits of documents or instruments have been made and all other actions have been taken that are necessary or advisable under applicable law to establish and perfect the Agent's security interest in the Collateral. The Collateral and the Agent's rights with respect to the Collateral are not subject to any setoff, claims, withholdings or other defenses. SECTION 5.18. TRANSACTIONS WITH AFFILIATES. Except as disclosed in Schedule 5.18 or filings made by the Borrowers under the Securities Exchange Act of 1934 prior to the Closing Date, and except for arm's length transactions pursuant to which a Borrower makes payments in the ordinary course of business upon terms no less favorable than such Borrower could obtain from third parties, none of the officers, directors, or employees of any Borrower is presently a party to any transaction with another Borrower (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of any Borrower, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. SECTION 5.19. SUBSIDIARIES. Schedule 2 sets forth a complete and accurate list of the Subsidiaries of the Parent, including the name of each Subsidiary, the location of its chief executive office, and its jurisdiction of incorporation, together with the number of authorized and outstanding shares of each Subsidiary. Each Subsidiary listed on Schedule 2 is (a) wholly owned by the Parent (except as noted in such Schedule) and (b) is a Borrower hereunder, 100% of the assets and stock of which have been pledged to the Agent on behalf of the Banks (subject to Section 7.2(h)) pursuant to the Security Documents. The Parent has good and marketable title to all of the shares it purports to own of the stock of each such Subsidiary, and each other Borrower has good and marketable title to all of the shares it purports to own of the stock of such Subsidiary, free and clear in each case of any lien. All such shares have been duly issued and are fully paid and non-assessable. SECTION 5.20. TRUE COPIES OF CHARTER AND OTHER DOCUMENTS. Each Borrower has furnished the Agent copies, in each case true and complete as of the Closing Date, of its (a) charter and other incorporation documents and (b) by-laws, each including any amendments thereto. SECTION 5.21. DISCLOSURE. Neither this Credit Agreement, nor any of the other Loan Documents, nor any document or information furnished by the Borrowers in connection therewith contains any untrue statement of a material fact or omits to state a material fact (known to any Borrower in the case of any document or information not furnished by the Borrowers) necessary in order to make the statements herein or therein not misleading. 44 -39- There is no fact known to any Borrower which materially adversely affects, or which is reasonably likely in the future to materially adversely affect, the business, assets, or financial condition of any Borrower, exclusive of effects resulting from changes in general economic conditions, legal standards or regulatory conditions. SECTION 5.22. CAPITALIZATION. (a) As of March 26, 1999, the authorized capital stock of the Parent consists of 50,000,000 shares of common stock (par value $0.01 per share) of which 16,985,539 shares were outstanding as of such date. All of such outstanding shares are fully paid and non-assessable. In addition, as of March 26, 1999, the Board of Directors of the Parent has duly reserved 1,141,952 shares of the Parent's common stock for issuance pursuant to outstanding warrants, and has reserved twelve percent (12%) of shares of the Parent's common stock outstanding at any given time for issuance upon the exercise of employee stock options granted pursuant to the Parent's stock option plan. (b) The shares of the capital stock of the Subsidiaries pledged to the Agent pursuant to the Stock Pledge Agreements are held of record as set forth on the respective Annex A to each Stock Pledge Agreement. Such capital stock constitutes, of record, 100% of the outstanding capital stock of each such Subsidiary, and, to our knowledge, on a fully-diluted basis, 100% of such outstanding capital stock. SECTION 5.23. YEAR 2000 ISSUE. The Borrowers have reviewed the areas within their business and operations which could be adversely affected by, and have developed or are developing a program to address on a timely basis, the Year 2000 Issue. Based on such review and program, the Year 2000 Issue will not have a material adverse effect on their business and operations. SECTION 6. AFFIRMATIVE COVENANTS OF THE BORROWERS. The Borrowers jointly and severally covenant and agree that, so long as any Loan or Note is outstanding or the Banks have any obligation to make Loans or the Agent has any obligation to issue, extend, or renew any Letters of Credit hereunder: SECTION 6.1. PUNCTUAL PAYMENT. The Borrowers will duly and punctually pay or cause to be paid the principal and interest on the Loans, all Reimbursement Obligations, fees and other amounts provided for in this Credit Agreement and the other Loan Documents, all in accordance with the terms of this Credit Agreement and such other Loan Documents. SECTION 6.2. MAINTENANCE OF OFFICES. The Parent will maintain its chief executive offices at 2260 Douglas Boulevard, Suite 280, Roseville, California 95661, and each Subsidiary will maintain its chief executive offices at the location set forth on Schedule 2, or at such other place in the United States as the Borrowers shall designate upon 30 days' prior written notice to the Agent. SECTION 6.3. RECORDS AND ACCOUNTS. Each Borrower will (i) keep true and accurate records and books of account in which full, true and correct entries will be made in accordance with generally accepted accounting principles, (ii) maintain adequate accounts and reserves for all taxes (including income taxes), depreciation, depletion, obsolescence and amortization of its properties, contingencies, and other reserves, and 45 -40- (iii) at all times engage the Accountants as the independent certified public accountants of the Borrowers. SECTION 6.4. FINANCIAL STATEMENTS, CERTIFICATES AND INFORMATION. The Borrowers will deliver to the Banks: (a) as soon as practicable, but, in any event not later than 90 days after the end of each fiscal year of the Borrowers, the consolidated and consolidating balance sheets of the Borrowers as at the end of such year, statements of cash flows, and the related consolidated and consolidating statements of operations, each setting forth in comparative form the figures for the previous fiscal year, all such consolidated and consolidating financial statements to be in reasonable detail, prepared in accordance with GAAP and, with respect to the consolidated financial statements, certified by the Accountants. In addition, simultaneously therewith, the Borrowers shall use reasonable efforts to provide the Banks with a written statement from the Accountants to the effect that the Borrowers are in compliance with the covenants set forth in Section 8 hereof, and that, in making the examination necessary to said certification, nothing has come to the attention of the Accountants that would indicate that any Default or Event of Default exists, or, if the Accountants shall have obtained knowledge of any then existing Default or Event of Default they shall disclose in such statement any such Default or Event of Default; provided that the Accountants shall not be liable to the Banks for failure to obtain knowledge of any Default or Event of Default; (b) as soon as practicable, but in any event not later than 45 days after the end of each fiscal quarter of the Borrowers, copies of the consolidated and consolidating balance sheets and statement of operations of the Borrowers as at the end of such quarter, subject to year end adjustments, and the related statement of cash flows, all in reasonable detail and prepared in accordance with GAAP, with a certification by the principal financial or accounting officer of the Borrowers (the "CFO") that the consolidated financial statements are prepared in accordance with GAAP and fairly present the consolidated financial condition of the Borrowers as at the close of business on the date thereof and the results of operations for the period then ended; (c) simultaneously with the delivery of the financial statements referred to in (a) and (b) above, a statement in the form of Exhibit D hereto (the "Compliance Certificate") certified by the CFO that the Borrowers are in compliance with the covenants contained in Sections 6, 7 and 8 hereof as of the end of the applicable period setting forth in reasonable detail computations evidencing such compliance, provided that if the Borrowers shall at the time of issuance of such certificate or at any other time obtain knowledge of any Default or Event of Default, the Borrowers shall include in such certificate or otherwise deliver forthwith to the Banks a certificate specifying the nature and period of existence thereof and what action the Borrowers propose to take with respect thereto and a certificate of the Borrowers' Chief Operating Officer in the form attached hereto as Exhibit E with respect to environmental matters; (d) contemporaneously with or promptly following the delivery thereof to the boards of directors of the Borrowers, copies of the financial statements, financial 46 -41- projections and annual budget concerning the Borrowers in substantially the same form in which such information is supplied to the boards of directors of the Borrowers; (e) contemporaneously with, or promptly following, the filing or mailing thereof, copies of all material of a financial nature filed with the Securities and Exchange Commission or sent to the stockholders of the Borrowers; and (f) from time to time, such other financial data and other information (including accountants' management letters) as the Banks may reasonably request. The Borrowers hereby authorize the Banks to disclose any information obtained pursuant to this Credit Agreement to all appropriate governmental regulatory authorities where required by law; provided, however, that this authorization shall not be deemed to be a waiver of any rights to object to the disclosure by the Banks of any such information which the Borrowers have or may have under the federal Right to Financial Privacy Act of 1978, as in effect from time to time. SECTION 6.5. CORPORATE EXISTENCE AND CONDUCT OF BUSINESS. Each Borrower will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, corporate rights and franchises; effect and maintain its foreign qualifications, licensing, domestication or authorization except as terminated by such Borrower's Board of Directors in the exercise of its reasonable judgment and except where the failure of a Borrower to remain so qualified would not materially adversely impair the financial condition of the Borrowers on a consolidated basis; use its best efforts to comply with all applicable laws; and shall not become obligated under any contract or binding arrangement which, at the time it was entered into would materially adversely impair the financial condition of the Borrowers on a consolidated basis. Each Borrower will continue to engage primarily in the businesses now conducted by it and in related businesses. SECTION 6.6. MAINTENANCE OF PROPERTIES. The Borrowers will cause all material properties used or useful in the conduct of their businesses to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Borrowers may be necessary so that the businesses carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this section shall prevent the Borrowers from discontinuing the operation and maintenance of any of their properties if such discontinuance is, in the judgment of the Borrowers, desirable in the conduct of their business and which does not in the aggregate materially adversely affect the businesses of the Borrowers on a consolidated basis. SECTION 6.7. INSURANCE. The Borrowers will maintain with financially sound and reputable insurance companies, funds or underwriters' insurance of the kinds, covering the risks (other than risks arising out of or in any way connected with personal liability of any officers and directors thereof) and in the relative proportionate amounts usually carried by reasonable and prudent companies conducting businesses similar to that of the Borrowers, but in no event less than that required under Section 7 of the Security Agreement. In 47 -42- addition, the Borrowers will furnish from time to time, upon the Agent's request, a summary of the insurance coverage of each of the Borrowers, which summary shall be in form and substance satisfactory to the Agent and, if requested by the Agent, will furnish to the Agent copies of the applicable policies. SECTION 6.8. TAXES. The Borrowers will duly pay and discharge, or cause to be paid and discharged, before the same shall become overdue, all taxes, assessments and other governmental charges (other than taxes, assessments and other governmental charges imposed by foreign jurisdictions which in the aggregate are not material to the business or assets of any Borrower on an individual basis or of the Borrowers on a consolidated basis) imposed upon it and its real properties, sales and activities, or any material part thereof, or upon the income or profits therefrom, as well as all claims for labor, materials, or supplies, which if unpaid might by law become a lien or charge upon any material portion of its property, unless such lien is a Permitted Lien; provided, however, that any such tax, assessment, charge, levy or claim need not be paid if the validity or amount thereof shall currently be contested in good faith by appropriate proceedings and if such Borrower shall have set aside on its books adequate reserves with respect thereto; and provided, further, that the Borrowers will pay all such taxes, assessments, charges, levies or claims forthwith upon the commencement of proceedings to foreclose any lien which may have attached as security therefor. SECTION 6.9. INSPECTION OF PROPERTIES, BOOKS, AND CONTRACTS. The Borrowers will permit the Banks, the Agent or any of their designated representatives, upon reasonable notice and during normal business hours, to visit and inspect any of their properties, to examine their books of account (including the making of periodic accounts receivable reviews), or contracts (and to make copies thereof and extracts therefrom), and to discuss their affairs, finances and accounts with, and to be advised as to the same by, their officers, all at such times and intervals as the Banks may reasonably request. SECTION 6.10. COMPLIANCE WITH LAWS, CONTRACTS, LICENSES AND PERMITS; MAINTENANCE OF MATERIAL LICENSES AND PERMITS. The Borrowers will (i) comply with the provisions of their charter documents and by-laws and all agreements and instruments by which they or any of their properties may be bound; and (ii) comply with all applicable laws and regulations (including Environmental Laws), decrees, orders, judgments, licenses and permits, including, without limitation, all environmental permits hereto ("Applicable Laws"), except where noncompliance with such Applicable Laws would not have a material adverse effect in the aggregate on the consolidated financial condition, properties or businesses of the Borrowers. If at any time while the Notes, or any Loan or Letter of Credit is outstanding or any Bank or the Agent has any obligation to make Loans or issue Letters of Credit hereunder, any authorization, consent, approval, permit or license from any officer, agency or instrumentality of any government shall become necessary or required in order that the Borrowers may fulfill any of their obligations hereunder, the Borrowers will immediately take or cause to be taken all reasonable steps within the power of the Borrowers to obtain such authorization, consent, approval, permit or license and furnish the Banks with evidence thereof. SECTION 6.11. ENVIRONMENTAL INDEMNIFICATION. Each Borrower covenants and agrees that it will indemnify and hold the Banks harmless from and against any and all claims, 48 -43- expense, damage, loss or liability incurred by the Banks (including all costs of legal representation incurred by the Banks) relating to (a) any release or threatened release of hazardous substances on the Real Property; (b) any violation of any Environmental Laws with respect to conditions at the Real Property or the operations conducted thereon; or (c) the investigation or remediation of offsite locations at which any Borrower or its predecessors are alleged to have directly or indirectly disposed of hazardous substances. It is expressly acknowledged by each Borrower that this covenant of indemnification shall include claims, expense, damage, loss or liability incurred by the Banks based upon the Banks' negligence, and this covenant shall survive any foreclosure or any modification, release or discharge of the Loan Documents or the payment of the Loans and shall inure to the benefit of the Banks, their successors and assigns. SECTION 6.12. FURTHER ASSURANCES. The Borrowers will cooperate with the Banks and execute such further instruments and documents as the Banks shall reasonably request to carry out to the Banks' satisfaction the transactions contemplated by this Credit Agreement and the Loan Documents. SECTION 6.13. NOTICE OF POTENTIAL CLAIMS OR LITIGATION. The Borrowers will deliver to the Banks, within 30 days of receipt thereof, written notice of the initiation of any action, claim, complaint, or any other notice of dispute or potential litigation (including without limitation any alleged violation of any Environmental Law), wherein the potential liability is in excess of $250,000, together with a copy of each such notice received by any Borrower. SECTION 6.14. NOTICE OF CERTAIN EVENTS CONCERNING INSURANCE AND ENVIRONMENTAL CLAIMS. (a) The Borrowers will provide the Banks with written notice as to any material cancellation or material change in any insurance of the Borrowers within ten (10) Business Days after the Borrowers' receipt of any notice (whether formal or informal) of such cancellation or change by any of their insurers. (b) The Borrowers will promptly notify the Banks in writing of any of the following events: (i) upon any Borrower obtaining knowledge of any violation of any Environmental Law regarding the Real Property or any Borrower's operations, which violation could have a material adverse effect on the Real Property or on such Borrower's operations; (ii) upon any Borrower obtaining knowledge of any potential or known Release or threat of Release of any Hazardous Substance at, from, or into the Real Property which any Borrower reports in writing or is reportable by it in writing to any governmental authority and which is material in amount or nature or which could materially affect the value of the Real Property; (iii) upon any Borrower's receipt of any notice of violation of any Environmental Laws or of any Release or threatened Release of Hazardous Substances, including a notice or claim of liability or potential responsibility from any third party (including without limitation any federal, state or local governmental officials) and including notice of any formal inquiry, proceeding, demand, investigation or other action with regard to (A) any Borrower's or any Person's operation of the Real 49 -44- Property, (B) contamination on, from or into the Real Property, or (C) investigation or remediation of offsite locations at which any Borrower or any of its predecessors is alleged to have directly or indirectly Disposed of Hazardous Substances, which violation or Release in any such case could have a material adverse effect on the Real Property or on any Borrower's operations; or (iv) upon any Borrower obtaining knowledge that any material expense or loss has been incurred by such governmental authority in connection with the assessment, containment, removal or remediation of any Hazardous Substances with respect to which any Borrower may be liable or for which a lien may be imposed on the Real Property. SECTION 6.15. RESPONSE ACTIONS. The Borrowers covenant and agree that if any Release or Disposal of Hazardous Substances shall occur or shall have occurred on the Real Property, the Borrowers will cause the prompt containment and removal of such Hazardous Substances and remediation of the Real Property as necessary to comply with all Environmental Laws or to preserve the value of the Real Property. SECTION 6.16. NOTICE OF DEFAULT. The Borrowers will promptly notify the Banks in writing of the occurrence of any Default or Event of Default. If any Person shall give any notice or take any other action in respect of a claimed default (whether or not constituting an Event of Default) under this Credit Agreement or any other note, evidence of Indebtedness, indenture or other obligation evidencing Indebtedness in excess of $250,000 as to which any Borrower is a party or obligor, whether as principal or surety, the Borrowers shall forthwith give written notice thereof to the Banks, describing the notice of action and the nature of the claimed default. SECTION 6.17. NEW SUBSIDIARIES. (a) Any newly-created or acquired Subsidiaries permitted under Section 7.4 shall become Borrowers hereunder by (i) signing a joinder agreement or entering into an amendment to this Credit Agreement and the Security Documents, as applicable, with the other parties hereto and thereto, in form and substance satisfactory to the Agent, providing that such Subsidiary shall become a Borrower hereunder, 100% of the stock and assets of which shall be pledged to the Agent for the benefit of the Banks (subject to Section 7.2(h)), and (ii) providing such other documentation as the Banks or the Agent may reasonably request, including, without limitation, documentation with respect to the conditions specified in Section 9 hereof. In such event, the Agent is hereby authorized by the parties to amend Schedule 2 to include such new Subsidiary. (b) The Parent shall at all times directly or indirectly through a Subsidiary own all of the shares of capital stock of each of the Subsidiaries which are corporations, and such shares shall at all times be pledged to the Agent pursuant to the Stock Pledge Agreements. The Parent shall at all times directly or indirectly through a Subsidiary own all of the partnership or joint venture interests in each of the Subsidiaries which are partnerships or joint ventures, and such interests shall at all times be pledged to the Agent pursuant to a partnership pledge agreement in form and substance satisfactory to the Agent. 50 -45- SECTION 6.18. EMPLOYEE BENEFIT PLANS. The Borrowers will (i) promptly upon filing the same with the Department of Labor or Internal Revenue Service, upon request of the Agent, furnish to the Agent a copy of the most recent actuarial statement required to be submitted under Section 103(d) of ERISA and Annual Report, Form 5500, with all required attachments, in respect of each Guaranteed Pension Plan and (ii) promptly upon receipt or dispatch, furnish to the Agent any notice, report or demand sent or received in respect of a Guaranteed Pension Plan under Sections 302, 4041, 4042, 4043, 4063, 4065, 4066 and 4068 of ERISA, or in respect of a Multiemployer Plan, under Sections 4041A, 4202, 4219, 4242, or 4245 of ERISA. SECTION 6.19. NOTICE OF LOSS OF MATERIAL CONTRACTS. The Borrowers will promptly (and in any event within fifteen (15) Business Days after the occurrence thereof) notify the Banks in writing of the termination, or (if earlier) the receipt of a notice of termination of, or any default by any Borrower under, any Material Contract. SECTION 7. CERTAIN NEGATIVE COVENANTS OF THE BORROWERS. Each Borrower agrees that, so long as any Loan or any Note or other Obligation is outstanding or the Banks have any obligation to make Loans or the Agent has any obligation to issue, extend or renew any Letters of Credit hereunder: SECTION 7.1. RESTRICTIONS ON INDEBTEDNESS. No Borrower shall become or be a guarantor or surety of, or otherwise create, incur, assume, or be or remain liable, contingently or otherwise, with respect to any Indebtedness, or become or be responsible in any manner (whether by agreement to purchase any obligations, stock, assets, goods or services, or to supply or advance any funds, assets, goods or services or otherwise) with respect to any undertaking or Indebtedness of any other Person, or incur any Indebtedness other than: (a) Indebtedness to the Banks and the Agent arising under this Credit Agreement or the Loan Documents; (b) incurrence of guaranty, suretyship or indemnification obligations in connection with the Borrowers' performance of services for their respective customers in the ordinary course of their businesses; (c) Indebtedness of one Borrower to another Borrower; (d) Equipment Financing (subject to Section 8.5), Seller Debt, and other Indebtedness, in an aggregate amount not to exceed $25,000,000 at any time; (e) Indebtedness of the Borrowers with respect to performance bonds existing as of the Closing Date, including extensions and renewals thereof, in an aggregate amount not to exceed $5,000,000; and (f) Indebtedness represented by the Madera Bond and the Columbia Bond. SECTION 7.2. RESTRICTIONS ON LIENS. No Borrower shall create or incur or suffer to be created or incurred or to exist any lien, encumbrance, mortgage, pledge, charge, 51 -46- restriction or other security interest of any kind upon any property or assets of any character, whether now owned or hereafter acquired, or upon the income or profits therefrom; or transfer any of such property or assets or the income or profits therefrom for the purpose of subjecting the same to the payment of Indebtedness or performance of any other obligation in priority to payment of its general creditors; or acquire, or agree or have an option to acquire, any property or assets upon conditional sale or other title retention or purchase money security agreement, device or arrangement; or suffer to exist for a period of more than 30 days after the same shall have been incurred any Indebtedness or claim or demand against it which if unpaid might by law or upon bankruptcy or insolvency, or otherwise, be given any priority whatsoever over its general creditors; or sell, assign, pledge or otherwise transfer any accounts, contract rights, general intangibles or chattel paper, with or without recourse, except as follows (the "Permitted Liens"): (a) Liens to secure taxes, assessments and other government charges in respect of obligations not overdue or liens on properties to secure claims for labor, material or supplies in respect of obligations not overdue; (b) Deposits or pledges made in connection with, or to secure payment of, workmen's compensation, unemployment insurance, old age pensions or other social security obligations; (c) Liens in respect of judgments or awards which have been in force for less than the applicable period for taking an appeal so long as execution is not levied thereunder or in respect of which the applicable Borrower shall at the time in good faith be prosecuting an appeal or proceedings for review and in respect of which a stay of execution shall have been obtained pending such appeal or review and in respect of which such Borrower maintains adequate reserves; (d) Liens of carriers, warehousemen, mechanics and materialmen, and other like liens, in existence less than 120 days from the date of creation thereof in respect of obligations not overdue, provided that such liens may continue to exist for a period of more than 120 days if the validity or amount thereof shall currently be contested by the applicable Borrower in good faith by appropriate proceedings and if such Borrower shall have set aside on its books adequate reserves with respect thereto as required by GAAP and provided further that such Borrower will pay any such claim forthwith upon commencement of proceedings to foreclose any such lien; (e) Encumbrances on Real Property consisting of easements, rights of way, zoning restrictions, restrictions on the use of real property and defects and irregularities in the title thereto, landlord's or lessor's liens under leases to which any Borrower is a party, and other minor liens or encumbrances none of which in the opinion of such Borrower interferes materially with the use of the property affected in the ordinary conduct of the business of such Borrower, which defects do not individually or in the aggregate have a material adverse effect on the business of such Borrower individually or of the Borrowers on a consolidated basis; 52 -47- (f) Liens securing Equipment Financing permitted under Section 7.1(d) incurred in connection with the lease or acquisition of property or fixed assets useful or intended to be used in carrying on the business of the Borrowers, provided that such Liens shall encumber only the property or assets so acquired and shall not exceed the fair market value thereof; (g) First-priority liens securing Seller Debt and other Indebtedness permitted by Section 7.1(d), provided that liens securing Seller Debt shall encumber only the property or assets so acquired or the property or assets of any Subsidiary whose stock is so acquired and shall not exceed the fair market value thereof; (h) Liens in favor of the Agent for the benefit of the Banks and the Agent under the Loan Documents; and (i) Liens granted in favor of certain governmental entities pursuant to any Scheduled Contract listed on Schedule 7.2(i); provided, that such liens (i) encumber only the containers, bins, carts and vehicles used in connection with such Scheduled Contract and (ii) are promptly released as soon as such release is not prohibited under the terms of such Scheduled Contract. SECTION 7.3. RESTRICTIONS ON INVESTMENTS. No Borrower shall purchase or acquire, or make any commitment therefor, any capital stock, equity interest, or other obligations or securities of, or any interest in, any other Person, or make or commit to make any acquisition under Section 7.4, or make or commit to make any advance, loan, extension of credit or capital contribution to or any other investment in, any other Person, other than: (a) marketable direct or guaranteed obligations of the United States of America that mature within one (1) year from the date of purchase; (b) demand deposits, certificates of deposit, bankers acceptances and time deposits of United States banks or Eligible Foreign Banks having unimpaired capital and surplus in excess of $250,000,000; (c) securities commonly known as "commercial paper" issued by a corporation organized and existing under the laws of the United States of America or any state thereof that at the time of purchase have been rated and the ratings for which are not less than "P 1" if rated by Moody's Investors Service, Inc., and not less than "A 1" if rated by Standard and Poor's Rating Group; (d) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business; (e) investments existing on the date hereof and listed on Schedule 7.3; (f) loans and advances by any Borrower to another Borrower; (g) investments with respect to Seller Debt permitted under Section 7.1(d); 53 -48- (h) investments permitted under Section 7.4; (i) loans to employees of the Parent for the purpose of financing such employees' acquisition of equity of the Parent (through the exercise of stock options or otherwise) or for relocation costs and expenses in an aggregate principal amount not to exceed $200,000 at any time outstanding. SECTION 7.4. MERGER, CONSOLIDATION AND DISPOSITION OF ASSETS. SECTION 7.4.1. MERGERS AND ACQUISITIONS. The Borrowers will not become a party to any merger or consolidation, or agree to or effect any asset acquisition or stock acquisition (other than the acquisition of assets in the ordinary course of business consistent with past practices) except the merger or consolidation of, or asset or stock acquisitions between existing Borrowers and except as otherwise provided in this Section 7.4.1. The Borrowers may purchase or otherwise acquire all or substantially all of the assets or stock or other equity interests of any other Person provided that: (a) the Borrowers are in current compliance with and, giving effect to the proposed acquisition (including any borrowings made or to be made in connection therewith), will continue to be in compliance with all of the covenants in Section 8 hereof on a pro forma historical combined basis as if the transaction occurred on the first day of the period of measurement; provided, that, in the case of transactions involving cash consideration to be paid by the Borrowers (including cash deferred payments, contingent or otherwise, and the aggregate amount of all Funded Debt assumed) in excess of $15,000,000, the Agent and the Banks shall have received a Compliance Certificate demonstrating compliance with Sections 8.1-8.3 on a pro forma historical combined basis as if the transaction occurred on the first day of the period of measurement; (b) at the time of such acquisition, no Default or Event of Default has occurred and is continuing, and such acquisition will not otherwise create a Default or an Event of Default hereunder; (c) the business to be acquired is predominantly in the same lines of business as the Borrowers, or businesses reasonably related or incidental thereto (e.g., non-hazardous solid waste collection, transfer, hauling, recycling, or disposal); (d) the business to be acquired operates predominantly in the continental United States; (e) all of the assets to be acquired shall be owned by an existing or newly created Subsidiary of the Parent which Subsidiary shall be a Borrower, 100% of the assets and stock or other equity interests of which have been or, simultaneously with such acquisition, will be pledged to the Agent on behalf of the Banks (subject to Section 7.2(h)) or, in the case of a stock or other equity interest acquisition, the acquired company, simultaneously with such acquisition, shall become a Borrower or shall be merged with and into a wholly owned Subsidiary that is a Borrower and such newly acquired or created Subsidiary shall otherwise comply with the provisions of Section 6.17 hereof; 54 -49- (f) not later than seven (7) days prior to the proposed acquisition date, a copy of the purchase agreement and financial projections, together with audited (if available, or otherwise unaudited) financial statements for any Subsidiary to be acquired or created, for the preceding two (2) fiscal years or such shorter period of time as such Subsidiary has been in existence shall have been furnished to the Agent, only in cases of Material Acquisitions or upon request by the Agent; (g) not later than seven (7) days prior to the proposed acquisition date, (1) a summary of the Borrowers' results of their standard due diligence review, and (2) in the case of a landfill acquisition, a review by a Consulting Engineer and a copy of the Consulting Engineer's report shall have been furnished to the Agent, only in cases of Material Acquisitions or upon request by the Agent; (h) the board of directors and (if required by applicable law) the shareholders, or the equivalent thereof, of the business to be acquired has approved such acquisition; (i) if such acquisition is made by a merger, a Borrower, or a wholly-owned Subsidiary of the Parent which shall become a Borrower in connection with such merger, shall be the surviving entity; and (j) cash consideration to be paid by such Borrower in connection with any such acquisition or series of related acquisitions (including cash deferred payments, contingent or otherwise, and the aggregate amount of all Funded Debt assumed), shall not exceed $20,000,000 without the consent of the Agent and the Majority Banks (any acquisition requiring cash consideration in excess of $20,000,000 being referred to as a "Material Acquisition"). SECTION 7.4.2. DISPOSITION OF ASSETS. No Borrower will become a party to or agree to or effect any disposition of assets in excess of $250,000 in the aggregate (the "Basket"), provided that the proceeds of any such disposition shall be applied toward repayment of the Revolving Credit Loans. Notwithstanding the foregoing, the sale of inventory, the licensing of intellectual property and the disposition of obsolete assets, in each case in the ordinary course of business consistent with past practices, are permitted hereunder without being charged against the Basket. SECTION 7.5. SALE AND LEASEBACK. The Borrowers shall not enter into any arrangement, directly or indirectly, whereby any Borrower shall sell or transfer any property owned by it in order then or thereafter to lease such property or lease other property which such Borrower intends to use for substantially the same purpose as the property being sold or transferred, without the prior written consent of the Majority Banks. SECTION 7.6. RESTRICTED DISTRIBUTIONS AND REDEMPTIONS. The Borrowers shall not redeem, convert, retire or otherwise acquire shares of any class of its capital stock, or make any Distributions, except that any Borrower may make Distributions to another Borrower. In addition, the Borrowers shall not effect or permit any change in or amendment to any document or instrument pertaining to the terms of any Borrower's capital stock. Notwithstanding the foregoing, no Borrower shall make any Distribution 55 -50- under this Section 7.6 if a Default or Event of Default exists or would be created by the making of such Distribution. SECTION 7.7. EMPLOYEE BENEFIT PLANS. No Borrower nor any ERISA Affiliate will: (a) engage in any "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975 of the Code which could result in a material liability for any Borrower; or (b) permit any Guaranteed Pension Plan to incur an "accumulated funding deficiency", as such term is defined in Section 302 of ERISA, whether or not such deficiency is or may be waived; or (c) fail to contribute to any Guaranteed Pension Plan to an extent which, or terminate any Guaranteed Pension Plan in a manner which, could result in the imposition of a lien or encumbrance on the assets of any Borrower pursuant to Section 302(f) or Section 4068 of ERISA; or (d) amend any Guaranteed Pension Plan in circumstances requiring the posting of security pursuant to Section 307 of ERISA or Section 401(a)(29) of the Code; or (e) permit or take any action which would result in the aggregate benefit liabilities (within the meaning of Section 4001 of ERISA) of all Guaranteed Pension Plans exceeding the value of the aggregate assets of such Plans, disregarding for this purpose the benefit liabilities and assets of any such Plan with assets in excess of benefit liabilities. SECTION 7.8. NEGATIVE PLEDGES. Except as required by any Scheduled Contract in effect on the date hereof, no Borrower shall enter into or permit to exist any arrangement or agreement, enforceable under applicable law, which directly or indirectly prohibits such Borrower from creating or incurring any lien, encumbrance, mortgage, pledge, charge, restriction or other security interest in favor of the Agent for the benefit of the Banks and the Agent under the Loan Documents other than customary anti-assignment provisions in leases and licensing agreements entered into by such Borrower in the ordinary course of its business. SECTION 7.9. BUSINESS ACTIVITIES. No Borrower will engage directly or indirectly (whether through Subsidiaries or otherwise) in any type of business other than the businesses conducted by such Borrower on the Closing Date and in related businesses. SECTION 7.10. TRANSACTIONS WITH AFFILIATES. No Borrower will engage in any transaction with any Affiliate (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any such Affiliate or, to the knowledge of the Borrowers, any corporation, partnership, trust or other entity in which any such Affiliate has a substantial interest or is an officer, director, trustee or partner, on terms 56 -51- more favorable to such Person than would have been obtainable on an arm's-length basis in the ordinary course of business. SECTION 7.11. SUBORDINATED DEBT. No Borrower will amend, supplement or otherwise modify the terms of any of the Subordinated Debt or any of the documents evidencing such Subordinated Debt or prepay, redeem or repurchase any of the Subordinated Debt; provided, however, so long as no Default or Event of Default has occurred and is continuing, the Borrowers shall be permitted to make regularly scheduled payments of interest and principal on the Subordinated Debt. SECTION 8. FINANCIAL COVENANTS. The Borrowers covenant and agree that, so long as any Loan, any Note, or any Reimbursement Obligation is outstanding or the Banks have any obligation to make Loans or the Agent has any obligation to issue, extend or renew any Letters of Credit hereunder: SECTION 8.1. LEVERAGE RATIO. As of the end of any fiscal quarter of the Borrowers commencing with the fiscal quarter ending March 31, 1999, the ratio of Funded Debt to EBITDA (the "Leverage Ratio") shall not exceed 4.00:1. For the purposes of this Section 8.1, EBITDA shall be calculated for the four fiscal quarters ending on such date. SECTION 8.2. FUNDED DEBT TO CAPITALIZATION RATIO. The Borrowers shall not at any time permit the ratio of (a) Funded Debt to (b) the sum of Funded Debt plus Consolidated Net Worth to exceed 65%. SECTION 8.3. INTEREST COVERAGE RATIO. As of the end of any fiscal quarter of the Borrowers commencing with the fiscal quarter ending March 31, 1999, the ratio of (a) EBIT to (b) Consolidated Total Interest Expense shall not be less than 2.00:1; provided, that, any adjustments made pursuant to clause (f) of the definition of EBIT shall not be included in the calculation of this Section 8.3. The Interest Coverage Ratio shall be calculated for the four fiscal quarters ending on such date. SECTION 8.4. PROFITABLE OPERATIONS. The Borrowers will not permit Consolidated Net Income to be less than $1.00 for any fiscal quarter, provided that Consolidated Net Income may exclude (a) non-cash charges for interest expense attributable to loan fees paid to BKB in connection with the Prior Credit Agreement of up to $180,000 (after tax) in the aggregate taken in the fiscal quarter ending March 31, 1999, (b) non-cash stock compensation charges of up to $360,000 in the aggregate (to the extent deducted in determining Consolidated Net Income), and (c) pooling charges taken in connection with any acquisition permitted under Section 7.4.1 hereof to the extent such pooling charges were deducted in determining Consolidated Net Income (or deficit). SECTION 8.5. CAPITAL EXPENDITURES. The Borrowers will not make Capital Expenditures in fiscal year 1998 in excess of $6,250,000 in the aggregate, and in any fiscal year thereafter, in excess of, in the aggregate, 2.0 times the actual depreciation expenses for such fiscal year. SECTION 9. CLOSING CONDITIONS. The obligations of the Banks to make the Loans and the Agent to issue Letters of Credit on the Closing Date and otherwise be bound by 57 -52- the terms of this Credit Agreement shall be subject to the satisfaction of each of the following conditions precedent: SECTION 9.1. CORPORATE ACTION. All corporate action necessary for the valid execution, delivery and performance by the Borrowers of the Loan Documents shall have been duly and effectively taken, and satisfactory evidence thereof shall have been provided to the Agent. SECTION 9.2. LOAN DOCUMENTS, ETC. Each of the Loan Documents shall have been duly and properly authorized, executed and delivered by the respective parties thereto and shall be in full force and effect in a form satisfactory to the Banks. SECTION 9.3. CERTIFICATE OF SECRETARY; GOOD STANDING CERTIFICATES. The Agent shall have received from each Borrower a certificate as to the good standing of each from the Secretary of State or other appropriate official of the state of its organization, dated no earlier than March 1, 1999. The Agent shall also have received from each Borrower a certificate of its Secretary certifying the following attachments thereto: (a) a copy of its certificate or articles of incorporation or constitutive documents, in each case as amended to date, certified by the Secretary of State or other appropriate official of the state of its organization, (b) a true and correct copy of its by-laws, including all amendments thereto, (c) a true and correct copy of the resolutions of its board of directors authorizing the transactions contemplated hereunder and under the other Loan Documents. Such Secretary's Certificate shall also give the name and bear a specimen signature of each individual who shall be authorized (i) to sign the Loan Documents on behalf of the Borrowers; (ii) to make Loan and Letter of Credit Requests; and (iii) to give notices and to take other action on the Borrowers' behalf under the Loan Documents. SECTION 9.4. VALIDITY OF LIENS. The Security Documents shall be effective to create in favor of the Agent a legal, valid and enforceable first (except for Permitted Liens entitled to priority under applicable law) security interest in and lien upon the Collateral. All filings, recordings, deliveries of instruments and other actions necessary or desirable in the opinion of the Agent to protect and preserve such security interests shall have been duly effected. The Agent shall have received evidence thereof in form and substance satisfactory to the Agent. SECTION 9.5. PERFECTION CERTIFICATES AND UCC SEARCH RESULTS. The Agent shall have received from each Borrower a completed and fully executed Perfection Certificate and the results of UCC searches with respect to the Collateral, indicating no liens other than Permitted Liens and otherwise in form and substance satisfactory to the Agent. SECTION 9.6. CERTIFICATES OF INSURANCE. The Agent shall have received a certificate of insurance signed by the insurer or an agent authorized to bind the insurer dated as of the Closing Date, or within 15 days prior thereto, identifying insurers, types of insurance, insurance limits, and policy terms, and otherwise describing the Borrowers' insurance coverage obtained in accordance with the provisions of the Security Agreement. 58 -53- SECTION 9.7. LEGAL OPINIONS. The Agent shall have received a favorable legal opinion from counsel to the Borrowers, addressed to the Agent and the Banks, dated as of the Closing Date, in form and substance satisfactory to the Agent. SECTION 9.8. ENVIRONMENTAL PERMIT CERTIFICATE. The Banks shall have received an environmental permit certificate in substantially the form of Exhibit E from the Borrowers satisfactory to the Agent concerning principal operating permits at the Borrowers' principal operating facilities. SECTION 9.9. PAYMENT OF FEES. The Borrowers shall have paid any fees (including, without limitation, those fees set forth in Section 4.1) owing to any of the Banks, the Agent or the Arranger. SECTION 9.10. CLOSING CERTIFICATE. The Borrowers shall have delivered to the Agent a certificate, dated as of the Closing Date, stating that, as of such date (a) the representations and warranties set forth herein or in any other Loan Document are true and correct (b) no Default or Event of Default has occurred and is continuing, and (c) each Material Contract is in full force and effect, and no default or event of default has occurred and is continuing under any Material Contract. SECTION 10. CONDITIONS OF ALL LOANS. The obligations of the Banks to make any Loan (including without limitation the obligation of the Agent to issue, extend or renew any Letter of Credit) on and subsequent to the Closing Date is subject to the following conditions precedent: SECTION 10.1. REPRESENTATIONS TRUE; NO EVENT OF DEFAULT. Each of the representations and warranties of the Borrowers contained in this Credit Agreement or in any document or instrument delivered pursuant to or in connection with this Credit Agreement shall be true as of the date as of which they were made and shall also be true at and as of the time of any Drawdown Date or the issuance of any Letter of Credit with the same effect as if made at and as of that time (except to the extent of changes resulting from transactions contemplated or permitted by this Credit Agreement and changes occurring in the ordinary course of business which singly or in the aggregate are not materially adverse, or to the extent that such representations and warranties relate solely and expressly to an earlier date) and no Default or Event of Default shall have occurred and be continuing. SECTION 10.2. PERFORMANCE; NO EVENT OF DEFAULT. The Borrowers shall have performed and complied with all terms and conditions herein required to be performed or complied with by the Borrowers prior to or at the time of any Loan, and at the time of any Loan, there shall exist no Event of Default or condition which would result in an Event of Default upon consummation of such Loan (including without limitation any amounts to be drawn under a Letter of Credit). Each request by the Borrowers for a Loan (including without limitation each request for issuance of a Letter of Credit) subsequent to the first Loan shall constitute certification by the Borrowers that the conditions specified in Sections 10.1 and 10.2 will be duly satisfied on the date of such Loan or Letter of Credit issuance. 59 -54- SECTION 10.3. NO LEGAL IMPEDIMENT. No change shall have occurred in any law or regulations thereunder or interpretations thereof which in the reasonable opinion of the Banks would make it illegal for the Banks to make Loans hereunder. SECTION 10.4. GOVERNMENTAL REGULATION. The Banks shall have received such statements in form and substance reasonably satisfactory to the Banks as they shall require for the purpose of compliance with any applicable regulations of the Comptroller of the Currency or the Board of Governors of the Federal Reserve System. SECTION 10.5. PROCEEDINGS AND DOCUMENTS. All proceedings in connection with the transactions contemplated by this Credit Agreement and all documents incident thereto shall have been delivered to the Banks as of the date hereof in form and substance satisfactory to the Banks, including without limitation a Loan and Letter of Credit Request in the form attached hereto as Exhibit B, and the Banks shall have received all information and such counterpart originals or certified or other copies of such documents as the Banks may reasonably request. SECTION 11. COLLATERAL SECURITY. (a) The Obligations shall be secured by a (i) perfected first priority security interest (subject only to Permitted Liens entitled to priority under applicable law or under Section 7.2(h)) in all of the assets of the Borrowers, whether now owned or hereafter acquired, pursuant to the terms of the Security Documents to which the Borrowers are a party, and (ii) a pledge of all of the stock of each Subsidiary pursuant to the terms of the Stock Pledge Agreements. (b) The Borrowers hereby acknowledge that (i) any and all Uniform Commercial Code financing statements filed in connection with the Prior Credit Agreement naming BankBoston, N.A., as Agent, as secured party, and such Borrower, as debtor, shall be effective to perfect the Agent's security interest granted by such Borrower pursuant to this Credit Agreement to the extent that such security interest may be perfected by the filing of Uniform Commercial Code financing statements and (ii) such prior filings represent pre-filings of Uniform Commercial Code financing statements for purposes of so perfecting the security interest granted by the Borrowers hereunder. Until all of the Obligations have been finally paid and satisfied in full, the provisions of this Section 11(b) shall continue to apply, and such pre-filings shall continue to be effective and not subject to any right of termination in respect of the security interests granted herein, whether any obligations under the Prior Credit Agreement are to be discharged with the proceeds of any of the Loans or are to continue independently or otherwise. SECTION 12. EVENTS OF DEFAULT; ACCELERATION; TERMINATION OF COMMITMENT. SECTION 12.1. EVENTS OF DEFAULT AND ACCELERATION. If any of the following events ("Events of Default" or, if the giving of notice or the lapse of time or both is required, then, prior to such notice and/or lapse of time, "Defaults") shall occur: 60 -55- (a) if the Borrowers shall fail to pay any principal of the Loans or any Reimbursement Obligation when the same shall become due and payable, whether at the Maturity Date or any accelerated date of maturity or at any other date fixed for payment; (b) if the Borrowers shall fail to pay any interest or fees or other amounts owing hereunder within five (5) Business Days after the same shall become due and payable whether at the Maturity Date or any accelerated date of maturity or at any other date fixed for payment; (c) if the Borrowers shall fail to comply with the covenants contained in Sections 6.1, 6.7, 6.8, 6.10, 6.13, 6.14, 6.16, 6.17, 6.19, 7 or 8; (d) if the Borrowers shall fail to comply with the covenants contained in (i) Sections 6.2, 6.3, 6.5, 6.6, 6.9, 6.11, 6.12, 6.15, or 6.18 within thirty (30) days of the Borrowers' knowledge of a violation of such covenants or (ii) Section 6.4 within five (5) days of the Borrowers' knowledge of a violation of such covenant; (e) if the Borrowers shall fail to perform any term, covenant or agreement contained herein or in any of the other Loan Documents (other than those specified in subsections (a), (b), (c) and (d) above) within 30 days after written notice of such failure has been given to the Borrowers by the Agent or any Bank; (f) if any representation or warranty contained in this Credit Agreement or in any document or instrument delivered pursuant to or in connection with this Credit Agreement shall prove to have been false in any material respect upon the date when made or repeated; (g) if any Borrower shall fail to pay at maturity, or within any applicable period of grace, any and all obligations for borrowed money (other than the Obligations) or any guaranty with respect thereto in an aggregate amount greater than $250,000 or fail to observe or perform any material term, covenant or agreement contained in any agreement by which it is bound, evidencing or securing borrowed money in an aggregate amount greater than $250,000 for such period of time as would, or would have permitted (assuming the giving of appropriate notice if required) the holder or holders thereof or of any obligations issued thereunder to accelerate the maturity thereof, unless the same shall have been waived by the holder(s) thereof; or (h) if any Borrower makes an assignment for the benefit of creditors, or admits in writing its inability to pay or generally fails to pay its debts as they mature or become due, or petitions or applies for the appointment of a trustee or other custodian, liquidator or receiver of any Borrower or of any substantial part of the assets of any Borrower or commences any case or other proceeding relating to any Borrower under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law of any jurisdiction, now or hereafter in effect, or takes any action to authorize or in furtherance of any of the foregoing, or if any such petition or application is filed or any such case or other proceeding is commenced against any Borrower or such Borrower indicates its approval thereof, consent thereto or 61 -56- acquiescence therein, or such petition or application shall not have been dismissed within sixty (60) days following the filing thereof; (i) a decree or order is entered appointing any such trustee, custodian, liquidator or receiver or adjudicating any Borrower bankrupt or insolvent, or approving a petition in any such case or other proceeding, or a decree or order for relief is entered in respect of any Borrower in an involuntary case under federal bankruptcy laws as now or hereafter constituted; (j) if there shall remain in force, undischarged, unsatisfied and unstayed, for more than thirty (30) days, whether or not consecutive, any final judgment against any Borrower which, with other outstanding final judgments against the Borrowers, exceeds in the aggregate $250,000 after taking into account any undisputed insurance coverage; (k) any Borrower or any ERISA Affiliate incurs any liability to the PBGC or a Guaranteed Pension Plan pursuant to Title IV of ERISA in an aggregate amount exceeding $250,000, or any Borrower or any ERISA Affiliate is assessed withdrawal liability pursuant to Title IV of ERISA by a Multiemployer Plan requiring aggregate annual payments exceeding $250,000, or any of the following occurs with respect to a Guaranteed Pension Plan: (i) an ERISA Reportable Event, or a failure to make a required installment or other payment (within the meaning of Section 302(f)(1) of ERISA), provided that the Agent determines in its reasonable discretion that such event (A) could be expected to result in liability of any Borrower to the PBGC or such Guaranteed Pension Plan in an aggregate amount exceeding $250,000 and (B) could constitute grounds for the termination of such Guaranteed Pension Plan by the PBGC, for the appointment by the appropriate United States District Court of a trustee to administer such Guaranteed Pension Plan or for the imposition of a lien in favor of such Guaranteed Pension Plan; or (ii) the appointment by a United States District Court of a trustee to administer such Guaranteed Pension Plan; or (iii) the institution by the PBGC of proceedings to terminate such Guaranteed Pension Plan; (l) if any of the Loan Documents shall be cancelled, terminated, revoked or rescinded or the Agent's security interests or liens in a substantial portion of the Collateral shall cease to be perfected, or shall cease to have the priority contemplated by the Security Documents, in each case otherwise than in accordance with the terms thereof or with the express prior written agreement, consent or approval of the Banks, or any action at law, suit or in equity or other legal proceeding to cancel, revoke or rescind any of the Loan Documents shall be commenced by or on behalf of any Borrower or any stockholder of any Borrower who is an officer or director of such Borrower, or any court or any other governmental or regulatory authority or agency of competent jurisdiction shall make a determination that, or issue a judgment, order, decree or ruling to the effect that, any one or more of the Loan Documents is illegal, invalid or unenforceable in accordance with the terms thereof; (m) (i) the Parent shall at any time, legally or beneficially own less than one hundred percent (100%) of the shares of the capital stock of each other Borrower (directly or indirectly in accordance with Section 6.17), or (ii) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as 62 -57- amended) other than existing shareholders of the Parent as of the Closing Date shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 20% or more of the outstanding shares of common stock of the Parent; or, during any period of twelve consecutive calendar months, individuals who were directors of the Parent on the first day of such period shall cease to constitute a majority of the board of directors; provided, however, that any such change of control resulting from an acquisition permitted under Section 7.4 shall not constitute a Default or an Event of Default hereunder; or (n) the early termination or cancellation of, or any material default by a Borrower under, any Material Contract; then, and in any such event, so long as the same may be continuing, the Agent may, and at the request of the Majority Banks shall, by notice in writing to the Borrowers, declare all amounts owing with respect to this Credit Agreement, the Notes and the other Loan Documents and all Reimbursement Obligations to be, and they shall thereupon forthwith become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrowers; provided that in the event of any Event of Default specified in Sections 12.1(h) or 12.1(i), all such amounts shall become immediately due and payable automatically and without any requirement of notice from the Agent or any Bank. Upon demand by the Banks after the occurrence of any Event of Default, the Borrowers shall immediately provide to the Agent cash in an amount equal to the Maximum Drawing Amount, to be held by the Agent as collateral security for the Obligations, provided that in the event of any Event of Default specified in Sections 12.1(h) or 12.1(i), all such amounts shall become immediately due and payable automatically and without any requirement of notice from the Agent or any Bank. SECTION 12.2. TERMINATION OF COMMITMENTS. If any Event of Default shall occur, the Agent may, and at the request of the Majority Banks shall, by notice to the Borrowers, terminate the unused portion of the Total Commitment hereunder, and upon such notice being given, such unused portion of the Total Commitment hereunder shall terminate immediately and the Banks shall be relieved of all further obligations to make Loans to or issue Letters of Credit for the account of the Borrowers hereunder, provided that in the event of any Event of Default specified in Sections 12.1(h) or 12.1(i), all such amounts shall become immediately due and payable automatically and without any requirement of notice from the Agent or any Bank. No termination of any portion of the Total Commitment hereunder shall relieve the Borrowers of any of their existing Obligations to the Banks hereunder or elsewhere. SECTION 12.3. REMEDIES. Subject to Section 13, in case any one or more Events of Default shall have occurred and be continuing, and whether or not the Banks shall have accelerated the maturity of the Loans pursuant to Section 12.1, each Bank, if owed any amount with respect to the Loans or the Reimbursement Obligations, may, with the consent of the Majority Banks but not otherwise, and if the Agent shall have received opinions of nationally recognized law firms specializing in California law, Louisiana law, and the law of any other state, as applicable, having a one form of action rule to the effect that actions by such Bank under such circumstances shall not constitute an action for purposes of 63 -58- such state's one form of action rule or in any other way impair the Collateral or the other Banks' rights hereunder or under the other Loan Documents, proceed to protect and enforce its rights by suit in equity, action at law or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Credit Agreement and the other Loan Documents or any instrument pursuant to which the Obligations to such Bank are evidenced, including, without limitation, as permitted by applicable law the obtaining of the ex parte appointment of a receiver, and, if such amount shall have become due, by declaration or otherwise, proceed to enforce the payment thereof or any legal or equitable right of such Bank. No remedy herein conferred upon any Bank or the Agent or the holder of any Note or purchaser of any Letter of Credit Participation is intended to be exclusive of any other remedy and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or any other provision of law. SECTION 13. SETOFF. Regardless of the adequacy of any collateral, during the continuance of an Event of Default, any deposits or other sums credited by or due from any Bank to the Borrowers and any securities or other property of the Borrowers in the possession of such Bank may be applied to or set off against the payment of the Obligations and any and all other liabilities, direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, of the Borrowers to the Banks. The Banks agree among themselves that, if a Bank shall obtain payment on any Obligation outstanding under this Credit Agreement through the exercise of a right of offset, banker's lien or counterclaim, or from any other source including under Section 12.3 (other than by way of a pro rata payment under this Credit Agreement), it shall promptly make such adjustments with the other Banks as shall be equitable to the end that all the Banks shall share the benefits of such payments pro rata in accordance with the aggregate unpaid amount of the Revolving Credit Notes held by each Bank immediately prior to the payment obtained by such Bank as aforesaid. The Banks further agree among themselves that if any payment to a Bank obtained by such Bank through the exercise of a right of offset, banker's lien or counterclaim, or from any other source (other than by way of a pro rata payment) as aforesaid shall be rescinded or must otherwise be restored, the Banks who shall have shared the benefit of such payment shall return their share of that benefit to the Bank whose payment shall have been rescinded or otherwise restored. SECTION 14. THE AGENT. SECTION 14.1. APPOINTMENT OF AGENT, POWERS AND IMMUNITIES. Each Bank hereby irrevocably appoints and authorizes the Agent to act as its agent hereunder and under the other Loan Documents, provided, however, the Agent is hereby authorized to serve only as an administrative and collateral agent for the Banks and to exercise such powers as are reasonably incidental thereto and as are set forth in this Credit Agreement and the other Loan Documents. The Agent hereby acknowledges that it does not have the authority to negotiate any agreement which would bind the Banks or agree to any amendment, waiver or modification of any of the Loan Documents or bind the Banks except as set forth in this Credit Agreement or the Loan Documents. Except as provided in this Section 14 and in the other Loan Documents, the Agent shall take action or refrain from acting only upon 64 -59- instructions of the Banks and no action taken or failure to act without the consent of the Banks shall be binding on any Bank which has not consented. Each Bank irrevocably authorizes the Agent to execute the Security Documents and all other instruments relating thereto and to take such action on behalf of each of the Banks and to exercise all such powers as are expressly delegated to the Agent under the Loan Documents and all related documents, together with such other powers as are reasonably incidental thereto. It is agreed that the duties, rights, privileges and immunities of BKB, in its capacity as issuer of Letters of Credit hereunder, shall be identical to its duties, rights, privileges and immunities as a Bank as provided in this Section 14. The Agent shall not have any duties or responsibilities or any fiduciary relationship with any Bank except those expressly set forth in this Credit Agreement. Neither the Agent nor any of its affiliates shall be responsible to the Banks for any recitals, statements, representations or warranties made by the Borrowers or any other Person whether contained herein or otherwise or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Credit Agreement, the other Loan Documents or any other document referred to or provided for herein or therein or for any failure by the Borrowers or any other Person to perform its obligations hereunder or thereunder or in respect of the Notes. The Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The Agent shall exercise the same care in administering the Loans as it exercises with respect to similar transactions entered into solely for its own account; however, neither the Agent nor any of its directors, officers, employees or agents shall be responsible for any action taken or omitted to be taken in good faith by it or them hereunder or in connection herewith, except for its or their own gross negligence or willful misconduct. The Bank in its separate capacity as a Bank shall have the same rights and powers hereunder as any other Bank. SECTION 14.2. ACTIONS BY AGENT. The Agent shall be fully justified in failing or refusing to take any action under this Credit Agreement as it reasonably deems appropriate unless it shall first have received such advice or concurrence of the Banks and shall be indemnified to its reasonable satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Credit Agreement or any of the Loan Documents in accordance with a request of the Majority Banks, and such request and any action taken or failure to act pursuant thereto shall be binding upon the Banks and all future holders of the Notes or any Letter of Credit Participation. SECTION 14.3. INDEMNIFICATION. Without limiting the obligations of the Borrowers under this Credit Agreement or any other Loan Document, the Banks ratably agree hereby to indemnify and hold harmless the Agent, the Arranger, and their affiliates from and against any and all claims, actions and suits (whether groundless or otherwise), losses, damages, costs, expenses (including any expenses for which the Agent, the Arranger or such affiliate has not been reimbursed by the Borrowers as required by Section 15), and liabilities of every nature and character arising out of or related to this Credit Agreement, the Notes, or any of the other Loan Documents or the transactions contemplated or evidenced hereby or thereby, or the Agent's actions taken hereunder 65 -60- or thereunder, except to the extent that any of the same shall be directly caused by the Agent's willful misconduct or gross negligence, it being the intent of the parties hereto that all such indemnified parties shall be indemnified for their ordinary sole or contributory negligence. SECTION 14.4. REIMBURSEMENT. Without limiting the provisions of Section 14.3, the Banks and the Agent hereby agree that the Agent shall not be obliged to make available to any Person any sum which the Agent is expecting to receive for the account of that Person until the Agent has determined that it has received that sum. The Agent may, however, disburse funds prior to determining that the sums which the Agent expects to receive have been finally and unconditionally paid to the Agent, if the Agent wishes to do so. If and to the extent that the Agent does disburse funds and it later becomes known that the Agent did not then receive a payment in an amount equal to the sum paid out, then any Person to whom the Agent made the funds available shall, on demand from the Agent, refund to the Agent the sum paid to that Person. If, in the opinion of the Agent, the distribution of any amount received by it in such capacity hereunder or under the Loan Documents might involve it in liability, it may refrain from making distribution until its right to make distribution shall have been adjudicated by a court of competent jurisdiction. If a court of competent jurisdiction shall adjudge that any amount received and distributed by the Agent is to be repaid, each Person to whom any such distribution shall have been made shall either repay to the Agent its proportionate share of the amount so adjudged to be repaid or shall pay over the same in such manner and to such Persons as shall be determined by such court. SECTION 14.5. DOCUMENTS. SECTION 14.5.1. CLOSING DOCUMENTATION. For purposes of determining compliance with the conditions set forth in Section 9, each Bank that has executed this Credit Agreement shall be deemed to have consented to, approved or accepted, or to be satisfied with, each document and matter either sent, or made available, by the Agent or the Arranger to such Bank for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to such Bank, unless the Agent shall have received notice from such Bank prior to the Closing Date specifying such Bank's objection thereto and such objection shall not have been withdrawn by notice to the Agent to such effect on or prior to the Closing Date. SECTION 14.5.2. OTHER DOCUMENTS. The Agent will forward to each Bank, promptly after the Agent's receipt thereof, a copy of each notice or other document furnished to the Agent for such Bank hereunder; provided, however, that notwithstanding the foregoing, the Agent may furnish to the Banks a monthly summary with respect to Letters of Credit issued hereunder in lieu of copies of the related Letter of Credit Applications. SECTION 14.6. NON-RELIANCE ON AGENT AND OTHER BANKS. Each Bank represents that it has, independently and without reliance on the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own appraisal of the financial condition and affairs of the Borrowers and decision to enter into this Credit Agreement and the other Loan Documents and agrees that it will, independently and 66 -61- without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own appraisals and decisions in taking or not taking action under this Credit Agreement or any other Loan Document. The Agent shall not be required to keep informed as to the performance or observance by the Borrowers of this Credit Agreement, the other Loan Documents or any other document referred to or provided for herein or therein or by any other Person of any other agreement or to make inquiry of, or to inspect the properties or books of, any Person. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning any person which may come into the possession of the Agent or any of its affiliates. Each Bank shall have access to all documents relating to the Agent's performance of its duties hereunder at such Bank's request. Unless any Bank shall promptly object to any action taken by the Agent hereunder (other than actions to which the provisions of Section 14.8 are applicable and other than actions which constitute gross negligence or willful misconduct by the Agent), such Bank shall conclusively be presumed to have approved the same. SECTION 14.7. RESIGNATION OR REMOVAL OF AGENT. The Agent may resign at any time by giving 60 days' prior written notice thereof to the Banks and the Borrowers. Upon any such resignation, the Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Banks (and, provided that no Default or Event of Default shall have occurred and be continuing, approved by the Borrowers, such approval not to be unreasonably withheld) and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a financial institution having a combined capital and surplus in excess of $150,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation, the provisions of this Credit Agreement shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent. Any new Agent appointed pursuant to this Section 14.7 shall immediately issue new Letters of Credit in place of Letters of Credit previously issued by the Agent (to the extent such Letters of Credit are returned by the beneficiaries for purposes of such exchange). SECTION 14.8. CONSENTS, AMENDMENTS, WAIVERS, ETC. Any consent or approval required or permitted by this Credit Agreement to be given by the Banks may be given, and any term of this Credit Agreement, the other Loan Documents or any other instrument related hereto or mentioned herein may be amended, and the performance or observance by the Borrowers of any terms of this Credit Agreement, the other Loan Documents or such other instrument or the continuance of any Default or Event of Default may be waived (either generally or in a particular instance and either retroactively or prospectively) with, but only with, the written consent of the Borrowers and the written consent of the Majority Banks, provided however, that the Agent may, in its reasonable discretion, release Collateral with an aggregate value of $500,000 or less in 67 -62- any calendar year. Notwithstanding the foregoing, no amendment, waiver or consent shall do any of the following unless in writing and signed by the Borrowers and each of the Banks affected thereby: (a) increase the Commitments of the Banks or subject any Bank to any additional obligations (other than in accordance with Section 2.2.2 hereof), or (b) reduce the principal of or the rate of interest on the Notes (including, without limitation, interest on overdue amounts) or any fees payable hereunder; and FURTHER, no amendment, waiver or consent shall do any of the following unless in writing and signed by ALL of the Banks: (c) postpone the Maturity Date or any date fixed for any payment in respect of principal or interest (including, without limitation, interest on overdue amounts) on the Notes, (d) change the definition of "Majority Banks" or the number of Banks which shall be required for the Banks or any of them to take any action under the Loan Documents; (e) amend Section 2.2.2, this Section 14.8 or Section 18; (f) release any Collateral with an aggregate value exceeding $500,000 in any calendar year or (g) release any Borrower from its obligations hereunder. No waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon. No course of dealing or delay or omission on the part of the Agent or any Bank in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto. No notice to or demand upon the Borrowers shall entitle the Borrowers to other or further notice or demand in similar or other circumstances. SECTION 14.9. DELINQUENT BANKS. Notwithstanding anything to the contrary contained in this Credit Agreement or any of the other Loan Documents, any Bank that fails (i) to make available to the Agent its pro rata share of any Loan or to purchase any Letter of Credit Participation or (ii) to comply with the provisions of Section 13 with respect to making dispositions and arrangements with the other Banks, where such Bank's share of any payment received, whether by setoff or otherwise, is in excess of its pro rata share of such payments due and payable to all of the Banks, in each case as, when and to the full extent required by the provisions of this Credit Agreement, shall be deemed delinquent (a "Delinquent Bank") and shall be deemed a Delinquent Bank until such time as such delinquency is satisfied. A Delinquent Bank shall be deemed to have assigned any and all payments due to it from the Borrowers, whether on account of outstanding Loans, Reimbursement Obligations, interest, fees or otherwise, to the remaining nondelinquent Banks for application to, and reduction of, their respective pro rata shares of all outstanding Loans and Reimbursement Obligations. The Delinquent Bank hereby authorizes the Agent to distribute such payments to the nondelinquent Banks in proportion to their respective pro rata shares of all outstanding Loans and Reimbursement Obligations. A Delinquent Bank shall be deemed to have satisfied in full a delinquency when and if, as a result of application of the assigned payments to all outstanding Loans and Reimbursement Obligations of the nondelinquent Banks, the Banks' respective pro rata shares of all outstanding Loans and Reimbursement Obligations have returned to those in effect immediately prior to such delinquency and without giving effect to the nonpayment causing such delinquency. SECTION 14.10. CO-AGENTS. None of the Co-Agents shall have any right, power, obligation, liability, responsibility or duty under this Credit Agreement other than those applicable to all Banks as such. Without limiting the foregoing, none of the Co-Agents 68 -63- shall have or be deemed to have any fiduciary relationship with any Bank. Each Bank acknowledges that it has not relied, and will not rely, on any Co-Agent in deciding to enter into this Credit Agreement or not taking any action hereunder. SECTION 15. EXPENSES AND INDEMNIFICATION. SECTION 15.1. EXPENSES. Whether or not the transactions contemplated herein shall be consummated, the Borrowers agree to pay (a) the reasonable costs of producing and reproducing this Credit Agreement, the other Loan Documents and the other agreements and instruments mentioned herein, (b) any taxes (including any interest and penalties in respect thereto) payable by the Agent or any of the Banks (other than taxes based upon the Agent's or any Bank's net income) on or with respect to the transactions contemplated by this Credit Agreement (the Borrowers hereby agreeing to indemnify the Agent and each Bank with respect thereto), (c) the reasonable fees, expenses and disbursements of counsel to the Agent incurred in connection with the preparation, syndication, administration or interpretation of the Loan Documents and other instruments mentioned herein, each closing hereunder, any amendments, modifications, approvals, consents or waivers hereto or hereunder, or the cancellation of any Loan Document upon payment in full in cash of all of the Obligations or pursuant to any terms of such Loan Document providing for such cancellation, (d) the reasonable fees, expenses and disbursements of the Agent, the Arranger, or any of their affiliates incurred by the Agent, the Arranger, or such affiliate in connection with the preparation, syndication, administration or interpretation of the Loan Documents and other instruments mentioned herein, including all title insurance premiums and surveyor, engineering and appraisal charges, (e) all reasonable out-of-pocket expenses (including without limitation reasonable attorneys' fees and costs, which attorneys may be employees of any Bank or the Agent, and reasonable consulting, accounting, appraisal, investment banking and similar professional fees and charges) incurred by any Bank or the Agent in connection with (i) the enforcement of or preservation of rights under any of the Loan Documents against the Borrowers or the administration thereof after the occurrence of a Default or Event of Default and (ii) any litigation, proceeding or dispute whether arising hereunder or under any of the other Loan Documents, in any way related to any Bank's or the Agent's relationship with the Borrowers and (f) all reasonable fees, expenses and disbursements of the Agent incurred in connection with UCC searches and UCC filings. SECTION 15.2. INDEMNIFICATION. The Borrowers agree to indemnify and hold harmless the Agent, the Arranger, the Banks and each of their respective affiliates, shareholders, officers, directors, employees and agents from and against any and all claims, actions and suits whether groundless or otherwise, and from and against any and all liabilities, losses, damages and expenses of every nature and character arising out of this Credit Agreement or any of the other Loan Documents or the transactions contemplated hereby including, without limitation, (a) any actual or proposed use by the Borrowers of the proceeds of any of the Loans or Letters of Credit, (b) the Borrowers entering into or performing this Credit Agreement or any of the other Loan Documents or (c) with respect to the Borrowers and their respective properties and assets, the violation of any Environmental Law, the presence, disposal, escape, seepage, leakage, spillage, discharge, emission, release or threatened release of any Hazardous Substances or any action, suit, proceeding 69 -64- or investigation brought or threatened with respect to any Hazardous Substances (including, but not limited to, claims with respect to wrongful death, personal injury or damage to property), in each case including, without limitation, the reasonable fees and disbursements of counsel and allocated costs of internal counsel incurred in connection with any such investigation, litigation or other proceeding. In litigation, or the preparation therefor, the Banks and the Agent, the Arranger, and their affiliates shall be entitled to select their own counsel and, in addition to the foregoing indemnity, the Borrowers agree to pay promptly the reasonable fees and expenses of such counsel. If, and to the extent that the obligations of the Borrowers under this Section 15.2 are unenforceable for any reason, the Borrowers hereby agree to make the maximum contribution to the payment in satisfaction of such obligations which is permissible under applicable law. SECTION 15.3. SURVIVAL. The covenants contained in this Section 15 shall survive payment or satisfaction in full of all other Obligations. SECTION 16. SURVIVAL OF COVENANTS, ETC. Unless otherwise stated herein, all covenants, agreements, representations and warranties made herein, in the other Loan Documents or in any documents or other papers delivered by or on behalf of the Borrowers pursuant hereto shall be deemed to have been relied upon by the Banks and the Agent, notwithstanding any investigation heretofore or hereafter made by any of them, and shall survive the making by the Banks of the Loans and the issuance, extension or renewal of any Letters of Credit, as herein contemplated, and shall continue in full force and effect so long as any amount due under this Credit Agreement, any Letter of Credit or the Notes remains outstanding and unpaid or any Bank has any obligation to make any Loans or issue any Letters of Credit hereunder. All statements contained in any certificate or other paper delivered by or on behalf of the Borrowers pursuant hereto or in connection with the transactions contemplated hereby shall constitute representations and warranties by the Borrowers hereunder. SECTION 17. ASSIGNMENT AND PARTICIPATION. It is understood and agreed that each Bank shall have the right to assign or participate at any time all or a portion of its Commitment and interests in the risk relating to any Loans and outstanding Letters of Credit hereunder in an amount equal to or greater than $5,000,000 (which assignment shall be of an equal percentage of such Bank's Commitment, the Revolving Credit Loans and outstanding Letters of Credit) to Eligible Assignees with the prior written consent of the Agent and, unless a Default or an Event of Default shall have occurred and be continuing, the Borrowers, which approvals shall not be unreasonably withheld. It is further agreed that each Eligible Assignee which executes and delivers to the Banks and the Borrowers an Assignment and Acceptance in substantially the form of Exhibit F (an "Assignment and Acceptance") shall, on the date specified in such Assignment and Acceptance, become a party to this Credit Agreement and the other Loan Documents for all purposes of this Credit Agreement and the other Loan Documents, and its Commitment shall be as set forth in such Assignment and Acceptance. Upon the execution and delivery of such Assignment and Acceptance and payment by the assigning bank of an assignment fee in the amount of $3,500 to the Agent, (a) the Borrowers shall issue to such Eligible Assignee a Revolving Credit Note in the amount of such Eligible Assignee's Commitment dated the Closing Date or such other date as may 70 -65- be specified by the Agent and otherwise completed in substantially the form of Exhibit A hereto and, to the extent any assigning Bank has retained a portion of its obligations hereunder, a replacement Revolving Credit Note to the assigning Bank; (b) the Agent shall distribute to the Borrowers, the Banks and such Eligible Assignee a schedule reflecting such changes; (c) this Credit Agreement shall be appropriately amended to reflect (i) the status of such Eligible Assignee as a party hereto and (ii) the status and rights of the Banks and Agent hereunder; and (d) the Borrowers shall take such action as the Agent may reasonably request to perfect any security interests in favor of the Banks, including any Eligible Assignee which becomes a party to this Credit Agreement. The documents evidencing any such participation may provide that, except with the consent of the bank or financial institution that is a party thereto, such Bank will not consent to (A) the reduction in or forgiveness of the stated principal of or rate of interest on or Commitment Fee with respect to the portion of any Loan subject to such participation or assignment, (B) the extension or postponement of any stated date fixed for payment of principal or interest or Commitment Fee with respect to the portion of any Loan subject to such participation or assignment, or (C) the waiver or reduction of any right to indemnification of such Bank hereunder. Notwithstanding the foregoing, no syndication or participation shall operate to increase the Total Commitment hereunder or otherwise alter the substantive terms of this Credit Agreement, except as contemplated under Section 2.2.2. Anything contained in this Section 17 to the contrary notwithstanding, any Bank may at any time pledge all or any portion of its interest and rights under this Credit Agreement (including all or any portion of its Notes) to any of the twelve Federal Reserve Banks organized under Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341. No such pledge or the enforcement thereof shall release the pledgor Bank from its obligations hereunder or under any of the other Loan Documents. SECTION 18. PARTIES IN INTEREST. All the terms of this Credit Agreement and the other Loan Documents shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto and thereto; provided that the Borrowers shall not assign or transfer their rights hereunder without the prior written consent of each Bank. SECTION 19. NOTICES, ETC. Except as otherwise expressly provided in this Credit Agreement, all notices and other communications made or required to be given pursuant to this Credit Agreement or the other Loan Documents shall be in writing and shall be delivered in hand, mailed by United States first-class mail, postage prepaid, or sent by telex or facsimile and confirmed by letter, addressed as follows: (a) if to the Borrowers, at Waste Connections, Inc., 2260 Douglas Boulevard, Suite 280, Roseville, California 95661, Attention: Steven F. Bouck, Executive Vice President and Chief Financial Officer, telephone number 916-772-2221, fax number 916-772-2920; (b) if to the Agent or BKB, at 100 Federal Street, Boston, Massachusetts 02110, Attention: Timothy M. Laurion, Director, telephone number 617-434-9689, telecopy number 617-434-2160; 71 -66- or such other address for notice as shall have last been furnished in writing to the Person giving the notice. Any such notice or demand shall be deemed to have been duly given or made and to have become effective (a) if delivered by hand to a responsible officer of the party to which it is directed, at the time of the receipt thereof by such officer, (b) if sent by registered or certified first-class mail, postage prepaid, five Business Days after the posting thereof, (c) if sent by telex or cable, at the time of the dispatch thereof, if in normal business hours in the country of receipt, or otherwise at the opening of business on the following Business Day, and (d) if sent by facsimile, when transmitted, confirmation received. -73- SECTION 20. TREATMENT OF CERTAIN CONFIDENTIAL INFORMATION. SECTION 20.1. SHARING OF INFORMATION WITH SECTION 20 SUBSIDIARY. The Borrowers acknowledge that from time to time financial advisory, investment banking and other services may be offered or provided to the Borrowers, in connection with this Credit Agreement or otherwise, by a Section 20 Subsidiary. The Borrowers hereby authorize (a) such Section 20 Subsidiary to share with the Agent and each Bank any information delivered to such Section 20 Subsidiary by the Borrowers, and (b) the Agent and each Bank to share with such Section 20 Subsidiary any information delivered to the Agent or such Bank by the Borrowers pursuant to this Credit Agreement, or in connection with the decision of such Bank to enter into this Credit Agreement; it being understood, in each case, that any such Section 20 Subsidiary receiving such information shall be bound by the confidentiality provisions of this Credit Agreement. Such authorization shall survive the payment and satisfaction in full of all of the Obligations. SECTION 20.2. CONFIDENTIALITY. Each of the Banks and the Agent agrees, on behalf of itself and each of their affiliates, directors, officers, employees and representatives, to use reasonable precautions to keep confidential, in accordance with their customary procedures for handling confidential information of the same nature and in accordance with safe and sound banking practices, any non-public information supplied to it by the Borrowers pursuant to this Credit Agreement that is identified by such Person as being confidential at the time the same is delivered to the Banks or the Agent, provided that nothing herein shall limit the disclosure of any such information (a) after such information shall have become public other than through a violation of this Section 20, (b) to the extent required by statute, rule, regulation or judicial process, (c) to counsel for any of the Banks or the Agent, (d) to bank examiners or any other regulatory authority having jurisdiction over any Bank or the Agent, or to auditors or accountants, (e) to the Agent, any Bank or any Section 20 Subsidiary, (f) in connection with any litigation to which any one or more of the Banks, the Agent or any Section 20 Subsidiary is a party, or in connection with the enforcement of rights or remedies hereunder or under any other Loan Document, (g) to a subsidiary or affiliate of such Bank as provided in Section 20.1 or (h) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant agrees to be bound by the provisions of this Section 20. SECTION 20.3. PRIOR NOTIFICATION. Unless specifically prohibited by applicable law or court order, each of the Banks and the Agent shall, prior to disclosure thereof, 72 -67- notify the Borrowers of any request for disclosure of any such non-public information by any governmental agency or representative thereof (other than any such request in connection with an examination of the financial condition of such Bank by such governmental agency) or pursuant to legal process. SECTION 20.4. OTHER. In no event shall any Bank or the Agent be obligated or required to return any materials furnished to it or any Section 20 Subsidiary by the Borrowers. The obligations of each Bank under this Section 20 shall supersede and replace the obligations of such Bank under any confidentiality letter in respect of this financing signed and delivered by such Bank to the Borrowers prior to the date hereof and shall be binding upon any assignee of, or purchaser of any participation in, any interest in any of the Loans or Reimbursement Obligations from any Bank. SECTION 21. MISCELLANEOUS. The rights and remedies herein expressed are cumulative and not exclusive of any other rights which the Banks or Agent would otherwise have. The captions in this Credit Agreement are for convenience of reference only and shall not define or limit the provisions hereof. This Credit Agreement and any amendment hereof may be executed in several counterparts and by each party on a separate counterpart, each of which when so executed and delivered shall be an original, but all of which together shall constitute one instrument. In proving this Credit Agreement it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought. SECTION 22. ENTIRE AGREEMENT, ETC. The Loan Documents and any other documents executed in connection herewith or therewith express the entire understanding of the parties with respect to the transactions contemplated hereby. Neither this Credit Agreement nor any term hereof may be changed, waived, discharged or terminated, except as provided in Section 14.8. No waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon. No course of dealing or omission on the part of the Agent or any Bank in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto. No notice to or demand upon the Borrowers shall entitle the Borrowers to other or further notice or demand in similar or other circumstances. SECTION 23. WAIVER OF JURY TRIAL. EACH BORROWER HEREBY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS CREDIT AGREEMENT, THE NOTES OR ANY OF THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. EXCEPT AS PROHIBITED BY LAW, EACH BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THE PRECEDING SENTENCE ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. THE BORROWERS (a) CERTIFY THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY BANK OR THE AGENT HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH BANK OR THE AGENT WOULD 73 -68- NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (b) ACKNOWLEDGE THAT THE AGENT AND THE BANKS HAVE BEEN INDUCED TO ENTER INTO THIS CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS TO WHICH THEY ARE A PARTY BECAUSE OF, AMONG OTHER THINGS, THE BORROWERS' WAIVERS AND CERTIFICATIONS CONTAINED HEREIN. SECTION 24. GOVERNING LAW. This Credit Agreement and each of the other Loan Documents are contracts under the laws of the Commonwealth of Massachusetts and shall for all purposes be construed in accordance with and governed by the laws of said commonwealth (excluding the laws applicable to conflicts or choice of law). The Borrowers consent to the jurisdiction of any of the federal or state courts located in the Commonwealth of Massachusetts in connection with any suit to enforce the rights of any Bank or the Agent under this Credit Agreement or any of the other Loan Documents. SECTION 25. SEVERABILITY. The provisions of this Credit Agreement are severable and if any one clause or provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Credit Agreement in any jurisdiction. [Signature Pages Follow] 74 IN WITNESS WHEREOF, the undersigned have duly executed this Credit Agreement under seal as of the date first set forth above. THE BORROWERS: WASTE CONNECTIONS, INC. WASTE CONNECTIONS OF WASHINGTON, INC. WASTE CONNECTIONS OF IDAHO, INC. MADERA DISPOSAL SYSTEMS, INC. WASTE CONNECTIONS OF WYOMING, INC. SUNSHINE SANITATION, INCORPORATED SOWERS' SANITATION, INC. T & T DISPOSAL, INC. WASTE CONNECTIONS OF UTAH, INC. B & B SANITATION, INC. RED CARPET LANDFILL, INC. DARLIN EQUIPMENT, INC. ARROW SANITARY SERVICE, INC. CURRY TRANSFER & RECYCLING, INC. OREGON WASTE TECHNOLOGY, INC. SHRADER REFUSE AND RECYCLING SERVICE COMPANY WASTE CONNECTIONS OF NEBRASKA, INC. J & J SANITATION INC. BIG RED ROLL OFF INC. EVERGREEN WASTE SYSTEMS INC. SIUSLAW DISPOSAL, INC. COLUMBIA SANITARY SERVICE, INC. MORELAND SANITARY SERVICE, INC. MOTHER LODE SANI-HUT, INC. AMADOR DISPOSAL SERVICE, INC. CITY SANITATION, INC. BUTLER COUNTY LANDFILL, INC. ROCHE & SONS, INC. MURREY'S DISPOSAL COMPANY, INC. AMERICAN DISPOSAL COMPANY, INC. D.M. DISPOSAL CO., INC. TACOMA RECYCLING COMPANY, INC. CRX, INC. DOPHEIDE SANITARY SERVICE, INC. BETTER DISPOSAL SERVICE, INC. By: --------------------------------- Ronald J. Mittelstaedt President 75 THE LENDERS: BANKBOSTON, N.A., individually and as Agent By: --------------------------------- Timothy M. Laurion, Director UNION BANK OF CALIFORNIA, N.A. By: --------------------------------- Name: Title: COMERICA BANK - CALIFORNIA By: --------------------------------- Name: Title: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: --------------------------------- Name: Title: LASALLE NATIONAL BANK By: --------------------------------- Name: Title: FLEET BANK, N.A. By: --------------------------------- Name: Title: CITY NATIONAL BANK By: --------------------------------- Name: Title: FIRST BANK OF CALIFORNIA By: --------------------------------- Name: Title: 76 U.S. BANK NATIONAL ASSOCIATION By: --------------------------------- Name: Title: EX-10.51 3 AMENDED AND RESTATED STOCK PURCHASE AGREEMENT 1 Exhibit 10.51 AMENDED AND RESTATED STOCK PURCHASE AGREEMENT Dated as of March 31, 1999, by and among Waste Connections, Inc., Management Environmental National, Inc., RH Financial Corporation and The Shareholder listed on Schedule A hereto 2 AMENDED AND RESTATED STOCK PURCHASE AGREEMENT AMENDED AND RESTATED STOCK PURCHASE AGREEMENT, dated as of March 31, 1999, is entered into by and among Waste Connections, Inc., a Delaware corporation ("WCI"), Management Environmental National, Inc., a Washington corporation ("MENI"), RH Financial Corporation, a Washington corporation ("RHFC" and collectively with MENI, the "CORPORATIONS" and individually without designation a "CORPORATION"), and the Shareholder listed on Schedule A hereto (the "SHAREHOLDER"). WHEREAS, MENI is the sole general partner and RHFC is the sole limited partner of Columbia Resource Co., L.P., a Washington limited partnership ("CRC") and Finley-Buttes Limited Partnership, an Oregon limited partnership ("FBLP"); WHEREAS, FBLP owns and operates the Finley-Buttes Regional Landfill (the "LANDFILL") located in Morrow County, Oregon and engages in other related activities; WHEREAS, CRC is engaged in the handling and transportation of solid waste and other related activities in the City of Vancouver and Clark County, Washington; WHEREAS, FBLP owns all of the real estate used in connection with the business and operation of the Landfill and CRC owns all of the real estate used in connection with the business and operation of the two transfer stations located in Vancouver, Washington, and descriptions of such real estate are set forth on Schedule 3.12(b); WHEREAS, the Shareholder owns all of the issued and outstanding capital stock of each of the Corporations (the "CORPORATIONS' STOCK"); and WHEREAS, WCI wishes to acquire from the Shareholder all of the Corporations' Stock. WHEREAS, WCI, MENI, RHFC and the Shareholder entered into a Stock Purchase Agreement dated as of February 12, 1999 ("SIGNING DATE"), and Amendment No. 1 thereto dated as of March 31, 1999 (as amended, the "STOCK PURCHASE AGREEMENT"), and they wish hereby to amend and restate the Stock Purchase Agreement as herein provided. 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 that the Stock Purchase Agreement is hereby amended and restated as herein provided and further agree as follows: 1. PURCHASE OF CORPORATIONS' 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 Corporations' Stock, being the number of shares of the Corporations set forth on Schedule 3.2 opposite the Shareholder's name. At the Closing, WCI shall purchase the Corporations' Stock 1 3 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 Eighty-one Million Two Hundred Fifty Thousand dollars ($81,250,000) cash, (i) minus the Closing Date Debt (as defined in Section 3.22(a)), (ii) minus the outstanding balance of CRC's debt under that certain Loan Agreement dated December 1, 1991, between Industrial Revenue Bond Public Corporation of Clark County, Washington and CRC (the "BOND DEBT"), (iii) plus or minus, as the case may be, the amount by which the Balance Sheet Date Current Assets (as defined in Section 3.22(b)) are greater or less than the Balance Sheet Date Current Liabilities (as defined in Section 3.22(b)), (iv) plus or minus, as the case may be, the amount of the Net Profit or Net Loss (as hereinafter defined) of the Corporations for the period from the Effective Date through the Closing Date, as reflected on Schedule 1.2, (v) plus the present value of CRC's pollution liability self-insurance fund maintained under agreement with Clark County, as determined by Perkins & Company, P.C. and reflected on Schedule 1.2, and (vi) minus all bonuses accrued to employees of CRC, FBLP or the Corporations prior to the Effective Date and payable after the Effective Date, as set forth on Schedule 1.2. As used herein, the term "NET PROFIT" or "NET LOSS" shall mean the net profit or net loss of the Corporations calculated in substantially the same manner that net profit and net loss were calculated for the Corporations for the periods prior to the Effective Date, and which net profits or losses shall be incurred in compliance with Section 5 herein. The adjustment to the Purchase Price payable on the Closing Date based on the Closing Date Debt, the Balance Sheet Date Current Assets and the Balance Sheet Date Current Liabilities shall be based on estimates of such amounts, but no adjustment will be made on the Closing Date to reflect Net Profit or Net Loss. Within 90 days after the Closing, WCI and the Shareholders shall determine the actual Closing Date Debt, Effective Date Current Assets, Effective Date Current Liabilities, Net Profit or Net Loss. If the difference between the actual amounts of such items and the estimated amounts provided at the Closing, when combined with the Net Profit or the Net Loss, as the case may be, 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. 1.3 ALLOCATION OF THE PURCHASE PRICE. Two hundred thousand dollars ($200,000) of the Purchase Price shall be allocated to the covenant not to compete as described in Section 11.1(a) hereof, and the balance of the Purchase Price shall be allocated to the Corporations' Stock. 1.4 EXCLUDED ASSETS. The Assets of the Corporations 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 provided that, if the Corporations are legally unable to distribute the real estate described on Schedule 1.4 prior to the Closing Date, the Corporations will, at the election of the Shareholder, either agree to distribute such real estate to the Shareholder after the Closing Date at such time as they are legally able to do so or retain ownership of such real estate and agree to such recordable restrictions on the use of such real estate as the Shareholder shall request. 2 4 2. CLOSING TIME AND PLACE 2.1 Subject to the terms and conditions of this Agreement, the closing of the transactions contemplated herein (the "CLOSING") shall take place as promptly as practicable (but in any event within five business days) following the date on which the last of the conditions set forth in Sections 6 and 7 is fulfilled or waived, or on such other date as WCI and the Shareholder 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. At the Closing, WCI, the Corporations and the Shareholder shall deliver to each other the documents, instruments and other items described in Section 8 of this Agreement. The Purchase Price shall be paid to the Shareholder at Closing in cash by wire transfer. At the election of WCI and the Shareholder, the Closing of this transaction may take place through an exchange of consideration and documents using overnight courier service or facsimile. For financial reporting purposes, the Closing shall be deemed effective as of March 1, 1999 (the "EFFECTIVE DATE"). 2.2 TERMINATION. (a) If the Closing Date has not occurred by March 31, 1999, either WCI or the Corporations and the Shareholder may terminate this Agreement by notice to the other parties on that date or thereafter (the "TERMINATION DATE"), unless the Corporations have not then obtained all of the consents required by Section 6.7, in which event this Agreement shall terminate 10 days after written notice from WCI to the Shareholder or 10 days after the later of (i) if any such consent is denied, the latest time for filing any appeal or further appeal of such denial has lapsed; and (ii) if any such consent is denied and such denial is appealed, the day the last appeal of such denial has been dismissed, refused or decided adversely to the Corporation seeking the appeal. (b) The Corporations and the Shareholder shall have the right to terminate this Agreement: (i) Upon a breach of a representation or warranty of WCI contained in this Agreement which has not been cured in all material respects and which has had or is likely to have a material adverse effect on the business or financial condition of WCI and is incapable of being satisfied by the Termination Date; (ii) If one or more of the transactions contemplated by this Agreement are enjoined by a final, unappealable court order not entered at the request or with the support of either Corporation and if the Corporation against which such order is entered shall have used reasonable efforts to prevent the entry of such order; or (iii) If WCI (A) fails to perform in any material respect any of its covenants in this Agreement and (B) does not cure such default in all material respects within 30 days after written notice of such default specifying such default in reasonable detail is given to WCI by the Corporations or the Shareholder. (c) WCI shall have the right to terminate this Agreement: 3 5 (i) Upon a breach of a representation or warranty of the Corporations or the Shareholder contained in this Agreement which has not been cured in all material respects and which has had or is likely to have a material adverse effect on the business or financial condition of either of the Corporations and is incapable of being satisfied by the Termination Date; (ii) If the transactions contemplated by this Agreement are enjoined by a final, unappealable court order not entered at the request or with the support of WCI and if WCI shall have used reasonable efforts to prevent the entry of such order; or (iii) If either of the Corporations or the Shareholder (A) fails to perform in any material respect any of its or his covenants in this Agreement and (B) does not cure such default in all material respects within 30 days after written notice of such default specifying such default in reasonable detail is given to such person by WCI. (d) WCI, the Corporations and the Shareholder shall have the right to terminate the Agreement by mutual consent. 2.3 NOTICE AND EFFECT OF TERMINATION. On termination of this Agreement, the transactions contemplated herein shall forthwith be abandoned and all continuing obligations of the parties under or in connection with this Agreement shall be terminated and of no further force or effect; provided, however, that nothing herein shall relieve any party from liability for any misrepresentation, breach of warranty or breach of covenant contained in this Agreement prior to such termination. Notwithstanding the foregoing, Sections 2.4, 3.33, 4.6, 9.5 and 12.8 and the confidentiality obligations set forth in Sections 5.4 and 9.4 shall survive the termination of this Agreement for any reason. If this Agreement has terminated due to the breach of any party, such party shall remain liable for any damages arising from such breach. 2.4 EXCLUSIVE NEGOTIATIONS. Following execution of this Agreement until the Closing Date or termination of this Agreement pursuant to Section 2.2, the Corporations and the Shareholder shall not, and the Shareholder shall not permit the Corporations' officers, directors, employees or agents to, and the Corporations will not permit CRC or FBLP's partners, employees or agents to, initiate, negotiate or discuss with any other person or entity the possible sale of all or substantially all of the assets, business or stock of the Corporations, or to effect the merger of the Corporations with any party other than WCI or one of its Affiliates. The Shareholder hereby confirms that no person or entity presently has or may acquire any rights to purchase or otherwise acquire the assets or the stock of the Corporations. 3. REPRESENTATIONS AND WARRANTIES OF THE CORPORATIONS AND THE SHAREHOLDER The Corporations and the Shareholder, jointly and severally, represent and warrant that each of the following representations and warranties is true as of the Signing Date and will be true as of the Closing Date. 3.1 ORGANIZATION, STANDING AND QUALIFICATION. Each of the Corporations, CRC and FBLP is duly organized, validly existing and in good standing under the laws of the State of Oregon or Washington, as the case may be. Each of the Corporations, CRC and FBLP 4 6 has full corporate or other power and authority to own and lease its properties and to carry on its business as now conducted. Except as set forth on Schedule 3.1, none of the Corporations, CRC or FBLP is required to be qualified or licensed to conduct business as a foreign corporation in any other jurisdiction. 3.2 CAPITALIZATION. Schedule 3.2 sets forth, as of the Signing Date, the authorized and outstanding capital of the Corporations, the names, addresses and social security numbers or taxpayer identification numbers of the record and beneficial owners thereof, the number of shares so owned, the allocation of the cash, and wire transfer instructions for the Shareholder relating to the bank account to which the Purchase Price should be sent. All of the issued and outstanding shares of the capital stock of the Corporations are owned of record and beneficially by the Shareholder, as set forth in Schedule 3.2, and are and as of the Closing Date will be 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 Corporations is duly and validly authorized and issued, fully paid and nonassessable, and was not issued in violation of any preemptive rights of any past or present shareholder of the Corporations. MENI is the sole general partner and RHFC is the sole limited partner of CRC and FBLP. No option, warrant, call, conversion right or commitment of any kind (including any of the foregoing created in connection with any indebtedness of the Corporations, CRC or FBLP) exists which obligates the Corporations to issue any of its authorized but unissued capital stock or other equity interest, which obligates the Shareholder to transfer any Corporations' Stock to any person, which obligates either CRC or FBLP to issue any partnership interest to any person, or which obligates MENI or RHFC to transfer any partnership in CRC or FBLP to any person 3.3 ALL STOCK BEING ACQUIRED. The Corporations' Stock being acquired by WCI hereunder constitutes all of the outstanding capital stock of the Corporations. 3.4 AUTHORITY FOR AGREEMENT. The Corporations and the Shareholder have full right, power and authority to enter into this Agreement and to perform their or his obligations hereunder. The execution and delivery of this Agreement by the Corporations and the consummation of the transactions contemplated hereby by the Corporations have been duly authorized by each of the Corporations' Board of Directors. This Agreement has been duly and validly executed and delivered by the Corporations and the Shareholder and, subject to the due authorization, execution and delivery by WCI, constitutes the legal, valid and binding obligation of the Corporations and the Shareholder enforceable against the Corporations and the Shareholder in accordance with its terms. 3.5 NO BREACH OR DEFAULT. Except as disclosed on Schedule 3.5, the execution and delivery by the Corporations and the Shareholder of this Agreement, and the consummation by the 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 any of the Corporations, CRC, FBLP or the Shareholder is a party, or by which the 5 7 Corporations, CRC, FBLP or the Shareholder, or any of 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 or Bylaws of either of the Corporations or the agreement of limited partnership of either CRC or FBLP. 3.6 SUBSIDIARIES. Schedule 3.6 lists as of the Signing Date any and all subsidiaries of the Corporations and any securities of any other corporation or any securities or other interest in any other business entity (other than CRC or FBLP) owned by the Corporations or any of the Corporations' subsidiaries. 3.7 FINANCIAL STATEMENTS. The Corporations have delivered to WCI, as Schedule 3.7, copies of financial statements ("FINANCIAL STATEMENTS") for each of the Corporations', CRC's and FBLP's three most recent fiscal years ending December 31, 1998 (the "BALANCE SHEET DATE"). Such Financial Statements for CRC and FBLP are presented on both an individual and combined basis. Such Financial Statements for the Corporations have been internally prepared. Such Financial Statements of CRC and FBLP for the fiscal years ending December 31, 1996 and 1997 have been audited by Perkins & Company, P.C. The Financial Statements for the three most recent fiscal years present fairly, in all material respects, the financial positions of the respective Corporations and CRC and FBLP as of the end of such fiscal years and the results of their operations and their cash flows for the years then ended, and in the case of CRC and FBLP, conform with generally accepted accounting principles except, in the case of the unaudited Financial Statements for the fiscal year ending December 31, 1998, for the lack of explanatory footnote disclosures. Such footnote disclosures, if included with the unaudited Financial Statements, would be substantially similar in description and content to the footnote disclosure in the audited Financial Statements for the year ended December 31, 1997. Except to the extent reflected or reserved against in any of the Corporations', CRC's or FBLP's balance sheets as of the Balance Sheet Date, or as disclosed on Schedule 3.7 or Schedule 3.8, none of the Corporations, CRC or FBLP had as of the Balance Sheet Date, nor will any of the Corporations, CRC or FBLP have as of the Closing Date, any liabilities of any nature, whether accrued, absolute, contingent or otherwise, including, without limitation, tax liabilities due or to become due, other than liabilities incurred in the ordinary course of business since the Balance Sheet Date. 3.8 LIABILITIES. Parts I, II, III and IV of Schedule 3.8 are accurate lists and descriptions of all liabilities of the Corporations, CRC and FBLP required to be described below in the format set forth below. (a) Part I of Schedule 3.8 lists, as of the Signing 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 6 8 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 end of the month prior to the Closing Date through the Closing Date, trade payables have been incurred only in the ordinary course of business consistent with comparable prior periods. (b) Part II of Schedule 3.8 lists, as of the Signing Date, all claims, suits and proceedings which are pending against any of the Corporations, CRC or FBLP and, to the knowledge of the Corporations and the Shareholder, all contingent liabilities and all claims, suits and proceedings threatened or anticipated against any of the Corporations, CRC or FBLP. 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 Corporations' or the Shareholder's possession or control. (c) Part III of Schedule 3.8 lists, as of the Signing Date and to the extent not otherwise included in Part I of Schedule 3.8, all liens, claims and encumbrances secured by or otherwise affecting any asset of any of the Corporations, CRC or FBLP (including any Facility Property, as hereafter defined), including a description of the nature of such lien, claim or encumbrance, the amount secured if it secures a liability, the nature of the obligation secured, and the party holding such lien, claim or encumbrance. (d) Part IV of Schedule 3.8 lists, as of the Signing Date and to the extent not otherwise included in Part I or Part III of Schedule 3.8, all real and personal property leasehold interests to which any of the Corporations, CRC or FBLP is a party as lessor or lessee or, to the knowledge of the Corporations or the Shareholder, affecting or relating to any Facility 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, the Corporations, CRC, FBLP and the Shareholder have not 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. 3.9 ACCURATE AND COMPLETE RECORDS. The corporate minute books, stock ledgers, books, ledgers, financial records and other records of the Corporations, CRC and FBLP: (a) have been made available to WCI and its agents at the Corporations' offices or at the offices of the Corporations' attorneys; 7 9 (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 each of the Corporation's Board of Directors and/or shareholder of the Corporations, whether on behalf of the Corporations, CRC or FBLP, or any other appropriate person or entity, and do not contain or reflect any material discrepancies. 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 CRC or FBLP are 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 each of the Corporations, CRC and FBLP (collectively the "GOVERNMENTAL PERMITS") owned by, issued to, held by or otherwise benefiting the Corporations, CRC, FBLP or the Shareholder as of the Closing Date. The status of the Governmental Permits related to the disposal areas owned or used by CRC or FBLP, 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, CRC, FBLP and the Corporations or WCI must obtain consent (the "REQUIRED GOVERNMENTAL CONSENTS") in order to effect a direct or indirect transfer of the Collection Franchises or other Governmental Permits required as a result of the consummation of the transactions contemplated by this Agreement. Except for any filings by the Corporations required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR ACT"), no declaration, filing or registration with, or notice to, or authorization, consent or approval or permit of, any governmental or regulatory body or authority is, to the knowledge of the Corporations and the Shareholder, necessary for the execution and delivery of this Agreement by the Corporations or the consummation by the Corporations of the transactions contemplated hereby. 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, to the knowledge of the Corporations and the Shareholder, adequate for the operation of the business of each of the Corporations, CRC and FBLP and of each Facility 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 Corporations or the Shareholder, threatened which may result in the revocation, cancellation, suspension or adverse modification of any of the same. Neither the Corporations nor the Shareholder has any knowledge of any reason why all such Governmental Permits and agreements will not remain in effect for the period or term stated therein, subject to WCI's full compliance therewith, after consummation of the transactions contemplated hereby. (b) The Corporation, CRC and FBLP have made available to WCI and its agents and representatives (i) all records, notifications, reports, permit and license 8 10 applications, engineering and geologic studies, and environmental impact reports, tests or assessments (collectively, "RECORDS, NOTIFICATIONS AND REPORTS") that, to the knowledge of the Corporations and the Shareholder, (A) are material to the operation of the business of each of the Corporations, CRC and FBLP, 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 Corporations, CRC, FBLP or the Shareholder or their or his agents with respect to the business of the Corporations, CRC and FBLP, and (ii) all material notifications from such governmental agencies to the Corporations, CRC, FBLP, the Shareholder or their agents in response to or relating to any of such Records, Notifications and Reports. (c) Schedule 3.10(c) lists each facility owned, leased, operated or otherwise used by the Corporations, CRC and FBLP, the ownership, lease, operation or use of which is being transferred to, assumed by or otherwise acquired directly or indirectly by WCI pursuant to this Agreement (each, a "FACILITY" and collectively, the "FACILITIES"). Except as otherwise disclosed on Schedule 3.10(c): (i) Each Facility owned by the Corporations, CRC, FBLP or owned by the Shareholder or an Affiliate (as hereinafter defined) of the Shareholder and leased to the Corporations, CRC or FBLP is, to the knowledge of the Corporations and the Shareholder, fully licensed, permitted and authorized to carry on its current business under all applicable federal, state and local statutes, orders, approvals, zoning or land use requirements, rules and regulations, and, none of such Facilities or the current use thereof constitutes a non-conforming use or is otherwise subject to any restrictions regarding the operation, renovation or reconstruction thereof. To the knowledge of the Corporations and the Shareholder, no Facility that is leased by the Corporations, CRC or FBLP from a non-Affiliate or the current use thereof constitutes a material non-conforming use or is otherwise subject to any material restrictions regarding the operation, renovation or reconstruction thereof. (ii) To the knowledge of the Corporations and the Shareholder, there are no circumstances, conditions or reasons that 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 Corporations, CRC, FBLP or the Shareholder or an Affiliate of the Shareholder and leased to the Corporations, CRC or FBLP, and to the knowledge of the Corporations 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 leased by the Corporations, CRC or FBLP from a third party who is not an Affiliate (as hereinafter defined) of the Shareholder. 3.11 CERTAIN RECEIVABLES. Schedule 3.11 is an accurate list as of the Signing Date of the accounts and notes receivable of the Corporations, CRC and FBLP from and advances to employees, former employees, officers, directors, the Shareholder 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 9 11 part by, or is under common control or ownership in whole or in part with such person, in the case of WCI, the Corporations, CRC and FBLP includes directors, officers and partners, 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 substantially all the fixed assets (other than real estate) of the Corporations, CRC and FBLP, 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 containers, vehicles, machinery and equipment necessary for the operation of the businesses of the Corporation, CRC and FBLP are in operable condition, and all of the motor vehicles and other rolling stock of the Corporations, CRC and FBLP are in 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 Corporations nor, to the knowledge of the Corporations 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, being purchased, operated, or otherwise used by the Corporations, CRC or FBLP as of the Closing Date (the "FACILITY PROPERTY"), including the street address and, in the case of Facility Property owned or being purchased, the legal description thereof, is listed on Schedule 3.12(b), and attached to said Schedule 3.12(b), are copies of all leases, deeds, outstanding mortgages, other encumbrances and any existing title insurance policies or lawyer's title opinions relating to each Facility Property, as well as a current commitment for title insurance issued by a title insurance company satisfactory to WCI with respect to each Facility Property owned or being purchased by the Corporations, CRC or FBLP, together with copies of all of the title exceptions referred to in each such commitment. All leases listed on Schedule 3.12(b) are in full force and effect and binding on the parties thereto; none of the Corporations, CRC or FBLP nor any other party to any such lease is in breach of any of the material provisions thereof; to the knowledge of the Corporations and the Shareholder, the landlord's interest in each such lease has not been assigned to any third party nor has any such interest been mortgaged, pledged or hypothecated; and the Corporations, CRC or FBLP have not assigned any such lease or sublet all or any part of the Facility Property which is the subject of any such lease. Except as described on Schedule 3.12(b), there are no material physical or mechanical defects in any Facility located on any Facility Property and each such Facility is in good condition and repair. (c) The Corporations, CRC and FBLP have 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 Corporations, CRC or FBLP, and have arisen only in the ordinary course of business and 10 12 consistent with past practice; and (iii) the liens identified on Parts I and III of Schedule 3.8 (collectively, the "PERMITTED LIENS"), provided that insofar as this representation and warranty relates to title to any Facility Property owned by a Corporation, CRC or FBLP for which title insurance is obtained as contemplated by Section 6.9, such representation and warranty shall be limited to the knowledge of the Corporation and the Shareholder. Except as described on Schedule 3.12(b), there are no leases, occupancy agreements, options, rights of first refusal or any other agreements or arrangements, either oral or written, that create or confer in any person or entity the right to acquire, occupy or possess, now or in the future, any Facility, any Facility Property owned or being purchased, or any portion thereof, or create in or confer on any person or entity any right, title or interest therein or in any portion thereof. 3.13 RELATED PARTY TRANSACTIONS. Neither the Shareholder nor the Shareholder's Affiliates has entered into any transaction with or is a party to any agreement, lease or other instrument, or as of the date of this Agreement is indebted to or is owed money by, any of the Corporations, CRC or FBLP not disclosed on the Financial Statements. Except as disclosed in the Financial Statements, neither the Shareholder nor the Shareholder's Affiliates owns any direct or indirect interest of any kind in, or controls or is a director, officer, employee, shareholder or partner of, or consultant or lender to or borrower from or has the right to participate in the profits of, any Person which is a competitor, supplier, customer, landlord, tenant, creditor or debtor of the Corporations, CRC or FBLP. 3.14 CONTRACTS AND AGREEMENTS; ADVERSE RESTRICTIONS. (a) Schedule 3.14(a) lists, as of the Signing Date, and includes copies of, all material contracts and agreements (other than leases and documents included with Schedule 3.12(b)) to which any of the Corporations, CRC or FBLP 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), none of the Corporations, CRC or FBLP nor, to the Corporations' or any 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 Corporations, CRC, FBLP 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 Corporations, CRC or FBLP, the result of which could materially adversely affect the Corporations, CRC or FBLP or any of their businesses or any of the Corporate Properties, nor has any of the Corporations, CRC or FBLP 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 Signing Date, of all insurance policies in effect on the Signing Date or, with respect to "OCCURRENCE" policies that were in effect, carried by the Corporations, CRC or FBLP in respect of the Corporate Properties or any other property used by the Corporations, CRC or FBLP 11 13 specifying, for each policy, the name of the insurer, the type of risks insured, the deductible and limits of coverage, and the annual premium therefor. During the last five years, there has been no lapse in any material insurance coverage of the Corporations, CRC or FBLP. 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 Corporations, CRC or FBLP 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 Signing Date, of all officers, directors and employees (by type or classification) of the Corporations, CRC and FBLP 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 motor vehicles of the Corporations, CRC and FBLP. 3.17 BENEFIT PLANS AND UNION CONTRACTS. (a) Schedule 3.17(a) is a complete list as of the Signing 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 Corporations, CRC and FBLP, 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 Signing Date. Except for the employee benefit plans described on Schedule 3.17(a), the Corporations have 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 of 1986, as amended (the "CODE"), have been determined by the Internal Revenue Service to be so qualified, and copies of such determination letters are included as part of Schedule 3.17(a). Except as disclosed on Schedule 3.17(a), all reports and other documents required to be filed with any governmental agency or distributed to plan participants or beneficiaries (including, but not limited to, actuarial reports, audits or tax returns) 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. Neither the Corporations, CRC or FBLP has incurred any liability for excise tax or penalty due to the Internal Revenue Service or U.S. Department of Labor nor any liability to the Pension Benefit Guaranty Corporation for any employee benefit plan, and none of the Corporations, CRC or FBLP, nor a party-in-interest or disqualified person, has engaged in any transaction or other activity which would give rise to such liability. None of the Corporations, CRC or FBLP have participated in or made contributions to any "MULTI-EMPLOYER PLAN" as defined in the Employee 12 14 Retirement Income Security Act of 1974 ("ERISA"), nor would the Corporations, CRC or FBLP 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) There are now no union contracts or agreements between any of the Corporations, CRC or FBLP and any collective bargaining group, nor have there ever been any such contracts in effect. The Corporations, CRC and FBLP are 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 Corporations' or any Shareholder's knowledge, threatened, against the Corporations, CRC or FBLP 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 Corporations, CRC or FBLP; no union organizational activity exists respecting employees of the Corporations, CRC or FBLP, and Schedule 3.17(b) contains 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 Corporations, CRC or FBLP. None of the Corporations, CRC or FBLP have 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 Corporations, CRC or FBLP (the "RECIPIENT") pursuant to any employment contract, severance agreement or other arrangement (the "GOLDEN PARACHUTE PAYMENT") will be nondeductible by any of the Corporations, CRC or FBLP because of the application of Sections 280G and 4999 of the Code to the Golden Parachute Payment, nor will the Corporations be required to compensate any Recipient because of the imposition of an excise tax (including any interest or penalties related thereto) on the Recipient by reason of Sections 280G and 4999 of the Code. 3.18 TAXES. (a) The Corporations, CRC and FBLP have timely filed or will timely file all requisite federal, state, local and other tax and information returns due for all fiscal periods ended on or before the Closing Date. All such returns are accurate and complete. Except as set forth on Schedule 3.18(a), there are no open years (other than those within the statute of limitations), examinations in progress, extensions of any statute of limitations or claims against any of the Corporations, CRC or FBLP 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 Corporations, CRC and FBLP for each of their last three fiscal years are attached as part of Schedule 3.18(a). Copies of all other federal, state, local and other tax and information returns for all prior years of existence have been made available to WCI and are among the records of the Corporations, CRC and FBLP that will accrue to WCI at the Closing. 13 15 None of the Corporations, CRC or FBLP has been contacted by any federal, state or local taxing authority regarding a prospective examination. (b) Except as set forth on Schedule 3.18(b) (which schedule also includes the amount due with respect to the Corporations, CRC and FBLP) the Corporations, CRC and FBLP have duly paid all taxes and other related charges required to be paid prior to the date of this Agreement. The reserves for taxes contained in the Financial Statements are adequate to cover any tax liability as of the Signing Date. (c) The Corporations, CRC and FBLP have withheld all required amounts from their employees for all pay periods in full and complete compliance with the withholding provisions of applicable federal, state and local laws. All required federal, state and local and other returns with respect to income tax withholding, social security, and unemployment taxes have been duly filed by the Corporations, CRC and FBLP for all periods for which returns are due, and the amounts shown on all such returns to be due and payable have been paid in full. 3.19 COPIES COMPLETE; REQUIRED CONSENTS. Except as disclosed on Schedule 3.19, the certified copies of the Articles of Incorporation and Bylaws of the Corporations, and the agreements of limited partnership of CRC and FBLP, in each case as amended to the Signing Date, and the copies of all leases, instruments, agreements, licenses, permits, certificates or other documents that have been delivered to WCI in connection with the transactions contemplated hereby are complete and accurate as of the Signing Date and are true and correct copies of the originals thereof. Except as specifically disclosed on Schedule 3.19, the rights and benefits of the Corporations, CRC and FBLP 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 have been given or obtained. 3.20 CUSTOMERS, BILLINGS, CURRENT RECEIPTS AND RECEIVABLES. Schedule 3.20 is a current, accurate and complete list of, and includes: (a) the customers that CRC and FBLP serve 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, , CRC's and FBLP's accounts and notes receivable are collectible in the amounts shown on Schedules 3.11 and 3.20; and 14 16 (c) the average monthly revenues of CRC and FBLP derived from billings to its customers for each of the twelve months preceding the Closing Date. Except as set forth on Schedule 3.20, neither the Corporations nor any Shareholder has any knowledge of any reason why any of such average monthly revenues after the Closing Date should not continue at approximately the same rate as before the Closing Date. 3.21 NO CHANGE WITH RESPECT TO THE CORPORATIONS. Except as set forth on Schedule 3.21, since the Balance Sheet Date, the business of each of the Corporations, CRC and FBLP have been conducted only in the ordinary course and there has been no change in the condition (financial or otherwise) of the assets, liabilities or operations of the Corporations, CRC or FBLP 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 Corporations, CRC and FBLP, since the Balance Sheet Date, there has not been: (a) any material change any of their 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, taken as a whole; (b) any material damage, destruction or loss (whether or not covered by insurance) adversely affecting any material portion of any of their properties or business; (c) any change in or agreement to change (i) either of the Corporations' shareholders, (ii) ownership of either of the Corporations' authorized capital or outstanding securities, (iii) either of the Corporations' securities, or (iv) the identity or interest of any of the general or limited partners of CRC or FBLP. (d) any declaration or payment of, or any agreement to declare or pay, any dividend or distribution in respect of either of the Corporations' capital stock or any direct or indirect redemption, purchase or other acquisition of any of a Corporation's capital stock; (e) any increase or bonus or promised increase or bonus in the compensation payable or to become payable, in excess of usual and customary practices, to any of their directors, officers, partners, 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 their present or former officers or other key employees; (f) any labor dispute or any other event or condition of any character with respect to any of their employees, materially adversely affecting any of their business or future prospects; (g) any sale or transfer, or any agreement to sell or transfer, any of their material assets, property or rights to any other person, including, without limitation, the Shareholder and the Shareholder's Affiliates, other than in the ordinary course of business; 15 17 (h) any cancellation, or agreement to cancel, any material indebtedness or other material obligation owing to any of them, including, without limitation, any indebtedness or obligation of the Shareholder or any Affiliate thereof; (i) any plan, agreement or arrangement granting any preferential rights to purchase or acquire any interest in any of their 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 their property, rights or assets outside the ordinary course of business; (k) any waiver of any of their 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 any of them is a party; or (m) any other material transaction outside the ordinary course of business. 3.22 CLOSING DATE DEBT; EFFECTIVE DATE CURRENT ASSETS AND EFFECTIVE DATE CURRENT LIABILITIES. (a) When delivered at the Closing, Schedule 3.22(a) will list (i) the amount of the aggregate debt (excluding trade payables and the Bond Debt) of the Corporations, CRC and FBLP outstanding on the Closing Date required to be repaid by WCI or the Corporations, CRC or FBLP at or immediately after the Closing Date and all prepayment penalties incurred or to be incurred by WCI or the Corporations, CRC or FBLP in connection with the repayment of any such debt, (ii) the amount of the aggregate debt (excluding trade payables and the Bond Debt) of the Corporations, CRC and FBLP outstanding on the Closing Date which will remain outstanding obligations 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 as of the Closing Date, discounted at the lease rate factor, if known, inherent in the lease or, if the lease rate factor is not known, at the rate charged to the Corporations, CRC or FBLP by a third party lender in connection with its most recent borrowing to finance equipment, of all lease obligations of the Corporations, CRC or FBLP that are not capitalized lease obligations, and (iv) the aggregate amount of the present value as of the Closing Date of all capitalized lease obligations (determined in accordance with generally accepted accounting principles) of the Corporations, CRC and FBLP (the "CLOSING DATE DEBT"). When delivered at the Closing, Schedule 3.22(a) will separately list the aggregate principal amount and all accrued but unpaid interest on the Bond Debt. Schedule 3.22(a) will include 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 or acceptable to WCI. (b) Schedule 3.22(b) is an estimate as of the Signing Date of the amount of the aggregate current liabilities (including any reserve for unpaid taxes and any 16 18 accrued vacation benefits 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 each of CRC and FBLP as of the Balance Sheet Date (the "BALANCE SHEET DATE CURRENT LIABILITIES") and the amount of the aggregate cash and other current assets of each of CRC and FBLP as of the Balance Sheet Date, including prepaid expenses the benefit of which survives the Closing Date and the accounts receivable of each of CRC and FBLP earned prior to the Balance Sheet Date, and collectible (less an allowance for doubtful accounts) on or after the Balance Sheet Date (the "BALANCE SHEET DATE CURRENT ASSETS"). 3.23 BANK ACCOUNTS. (a) Schedule 3.23(a) is a complete and accurate list, as of the Signing Date, of: (i) the name of each bank in which the Corporations, CRC and FBLP have accounts or safe deposit boxes; (ii) the name(s) in which the accounts or boxes are held; (iii) the type of account; and (iv) the name of each person authorized to draw thereon or have access thereto. (b) Schedule 3.23(b) is a complete and accurate list, as of the Signing Date, of: (i) each credit card or other charge account issued to each of the Corporations, CRC and FBLP; 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 Corporations, CRC and FBLP have, to the knowledge of the Corporations and the Shareholder, complied with, and are 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, to the knowledge of the Corporations and the Shareholder, there has been no assertion by any party that any of the Corporations, CRC or FBLP 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"), none of the Corporations, CRC or FBLP has accepted, processed, handled, 17 19 transferred, generated, treated, stored or disposed of any Hazardous Material (as defined in Section 3.24(e) below) nor has any of them accepted, processed, handled, transferred, generated, treated, stored or disposed of asbestos, medical waste, radioactive waste or municipal waste, except in compliance with Environmental Laws. Notwithstanding the foregoing, the Shareholder shall not be liable for any indemnification claim pursuant to Section 10.1 for breach of the representation set forth in this Section 3.24(a) to the extent the Corporations, CRC or FBLP accepted, processed, handled, transferred, treated, stored or disposed of Hazardous Material, asbestos, medical waste, radioactive waste or municipal waste without their knowledge based on misrepresentations or omissions by third parties to the Corporations, CRC or FBLP as to the content of waste accepted, processed, handled, transferred, treated, stored or disposed of. (b) During the Corporations', CRC's or FBLP's ownership or leasing of the Facility Property owned or leased by it and, to the knowledge of the Corporations and the Shareholder, prior to such ownership or leasing of such Facility Property, no Hazardous Material, other than that allowed under Environmental Laws, including, without limitation, RCRA, has been disposed of, or otherwise released on any Facility Property. Notwithstanding the foregoing, the Shareholder shall not be liable for any indemnification claim pursuant to Section 10.1 for breach of the representation set forth in this Section 3.24(b) to the extent the Corporations, CRC or FBLP disposed of such Hazardous Material at any Facility Property without their knowledge based on misrepresentations or omissions by third parties to the Corporations, CRC or FBLP as to the content of waste accepted for disposal. (c) During the Corporations', CRC's or FBLP's ownership or leasing of the Facility Property owned or leased by it and, to the knowledge of the Corporations and the Shareholder, prior to such ownership or leasing of such Facility Property, no Facility 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 Facility Property or any real property now or previously owned or leased by any of the Corporations, CRC or FBLP. There are no pending and, to the Corporations' and Shareholder's knowledge, no threatened actions or proceedings from any governmental agency or any other entity involving remediation of any condition of the Facility Property, including, without limitation, petroleum contamination, pursuant to Environmental Laws. (d) Except as allowed under Environmental Laws, the Corporations, CRC and FBLP have 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 Washington or Oregon statute or regulation; (ii) any substance the presence of which requires remediation pursuant to any Environmental Laws; and (iii) any substance required to be disposed of in a manner expressly prescribed by Environmental Laws. 3.25 POWERS OF ATTORNEY. None of the Corporations, CRC or FBLP has granted any power of attorney (except routine powers of attorney relating to representation 18 20 before governmental agencies) or entered into any agency or similar agreement whereby a third party may bind or commit any of the Corporations, CRC or FBLP 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 Facility Property. Except as set forth on Schedule 3.26, none of the Corporations, CRC or FBLP have owned or leased any real property not included in the Facility 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 Corporations have provided to WCI, on Schedule 3.26: (a) the location of the UST, information and material, including any available drawings and photographs, showing the location, and whether any of the Corporations, CRC or FBLP currently owns or leases the property on which the UST is located (and if none of the Corporations, CRC or FBLP 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 Corporations', 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 Corporations, CRC and FBLP have 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 Corporations, CRC or FBLP or which any of them 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 Corporations, CRC or FBLP in any of their businesses infringe on any patents, trademarks, or copyrights, or 19 21 any other rights of any person. Neither the Corporations 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. 3.28 ASSETS, ETC., NECESSARY TO BUSINESS. Each of the Corporations, CRC and FBLP 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 Corporations nor the Shareholder has any knowledge of any reason why all such Collection Franchises and Governmental Permits and agreements will not remain in effect in accordance with their terms after consummation of the transactions contemplated hereby. 3.29 CONDEMNATION. No Facility Property owned or leased by any of the Corporations, CRC or FBLP are the subject of, or would be affected by, any pending condemnation or eminent domain proceedings, and, to the knowledge of the Corporations and the Shareholder, no such proceedings are threatened. 3.30 SUPPLIERS AND CUSTOMERS. To the knowledge of the Corporations and the Shareholder, the relations between CRC and FBLP and each of their customers are good. Neither the Corporations 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 CRC or FBLP intends to cease providing such items to either of them, nor do either of the Corporations or the Shareholder has knowledge of any fact (other than general economic and industry conditions) which indicates that any of the customers of CRC or FBLP intends to terminate, limit or reduce its business relations with CRC or FBLP. 3.31 ABSENCE OF CERTAIN BUSINESS PRACTICES. None of the Corporations, CRC, FBLP, or 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 CRC or FBLP in connection with any actual or proposed transaction which (a) might subject the Corporation, CRC or FBLP 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 Corporations, CRC or FBLP, or (c) if not continued in the future, might adversely affect the financial condition, business or operations of the Corporations, CRC or FBLP or which might subject the Corporations, CRC or FBLP to suit or penalty in any private or governmental litigation or proceeding. 3.32 NO MISLEADING STATEMENTS. The representations and warranties of the Corporations and the Shareholder contained in this Agreement, the Exhibits and Schedules 20 22 hereto and all other documents and information furnished to WCI and its representatives pursuant hereto are complete and accurate in all material respects and do not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements made not misleading. 3.33 BROKERS; FINDERS. No person has acted directly or indirectly as a broker, finder or financial advisor for either of the Corporations 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 either of the Corporations or the Shareholder. 3.34 S CORPORATION MATTERS. Each of the Corporations has elected to be treated as an S Corporation within the meaning of the Code for the years listed on Schedule 3.34. 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 Closing Date: 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 Corporations 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 GOVERNMENTAL AUTHORITIES; CONSENTS. Except for any filings by WCI required by the HSR Act and any required filings with applicable state regulatory authorities, WCI is not required to submit any notice, report or other filing with any governmental authority 21 23 in connection with the execution or delivery by it of this Agreement or the consummation of the transactions contemplated hereby, and no consent, approval or authorization of any governmental or regulatory authority or any other party or person is required to be obtained by WCI in connection with its execution, delivery and performance of this Agreement or the transactions contemplated hereby, except such as shall have been obtained by the Closing Date. 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 Shareholder pursuant hereto are accurate and complete in all material respects, and do not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements made not misleading. 4.6 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. 5. COVENANTS FROM SIGNING TO CLOSING DATE 5.1 OPERATIONS. Between the Signing Date and the Closing Date, the Corporations will, and will cause CRC and FBLP to, and the Shareholder will cause the Corporations to: (a) carry on each respective business in substantially the same manner as heretofore and not introduce any material new method, or discontinue any existing material method, of operation or accounting; (b) maintain their properties and facilities, including those held under leases, in as good working order and condition as at present, ordinary wear and tear excepted; (c) perform all material obligations under agreements relating to or affecting their assets, properties, business operations and rights; (d) keep in full force and effect present insurance policies or other comparable insurance coverage; (e) use reasonable efforts to maintain and preserve each of their business organizations intact, retain present employees and maintain relationships with suppliers, customers and others having business relations with any of them on a basis consistent with past practice; (f) file on a timely basis all notices, reports or other filings required to be filed with or reported to any federal, state, municipal or other governmental department, commission, board, bureau, agency or any instrumentality of any of the foregoing wherever located with respect to each of their continuing operations; 22 24 (g) maintain compliance with all Collection Franchises and Governmental Permits and all laws, rules, regulations and consent orders consistent with past practice; (h) file on a timely basis all complete and correct applications or other documents necessary to maintain, renew or extend any permit, license, variance or any other approval required by any governmental authority necessary and/or required for the continuing operation of each of their business operations, whether or not such approval would expire before or after the Closing; and (i) advise WCI promptly in writing of any material change in any document, Schedule, Exhibit, or other information delivered pursuant to this Agreement. 5.2 NO CHANGE. Between the Signing Date and the Closing Date, the Corporations will not, and will not permit CRC and FBLP to, and the Shareholder will not permit the Corporations to, take any action described below without the prior written consent of WCI: (a) make any change in the Articles of Incorporation or Bylaws of either of the Corporations or the agreement of limited partnership of either CRC or FBLP; (b) authorize, issue, transfer, pledge, distribute or sell any of the Corporations' Stock or any other securities of the Corporations; (c) except as set forth on Schedule 1.4 with respect to Excluded Assets, declare or pay any dividend or make any distribution in respect of the capital stock of the Corporations whether now or hereafter outstanding, or purchase, redeem or otherwise acquire or retire for value any shares of the capital stock or the Corporations; (d) enter into any contract or commitment or incur or agree to incur any liability other than in the ordinary course of business other than the transactions contemplated by this Agreement or make any single capital expenditure in excess of $10,000 or in excess of $25,000 in the aggregate during any consecutive thirty (30) day period without regard to whether such capital expenditure is in the ordinary course of business; (e) except as set forth on Schedules 3.16 and 3.21, change or promise to change the compensation payable or to become payable to any director, officer, employee or agent, or make or promise to make any bonus payment to any such person; (f) create, assume or otherwise permit the imposition of any mortgage, pledge or other lien or encumbrance upon or grant any option or right of first refusal with respect to any assets or properties whether now owned or hereafter acquired; (g) except as set forth on Schedule 1.4 with respect to Excluded Assets, sell, assign, lease or otherwise transfer or dispose of any property or equipment other than in the ordinary course of business; (h) merge or consolidate or agree to merge or consolidate with or into any firm, corporation or other entity; 23 25 (i) waive any material rights or claims; (j) amend, terminate or enter into any material agreement or any site assessment, permit, license or other right, without the prior written consent of WCI other than in the ordinary course of business; (k) enter into any other transaction outside the ordinary course of business or prohibited hereunder; or (l) take any action or suffer or permit any event to occur that would cause any representation or warranty of the Corporations or the Shareholder to become untrue as of the Closing Date. 5.3 OBTAIN CONSENTS. Promptly after the Signing Date, the Corporations, CRC and FBLP will, and the Shareholder shall cause them to, make all filings and take all steps reasonably necessary to obtain all consents and approvals, if any, of each other party whose consent or approval is necessary to permit the consummation of the transactions contemplated in this Agreement pursuant to, or required to prevent the breach of or permit the assignment of, any material Collection Franchises, Governmental Permits, or Required Governmental Consents (the "NECESSARY CONSENTS"), and shall take all steps necessary to obtain all other non-material approvals and non-material consents required to be obtained by them or the Shareholder to consummate the transactions contemplated by this Agreement. 5.4 ACCESS; CONFIDENTIAL INFORMATION. Between the Signing Date and the Closing Date, the Shareholder and the Corporations will, and the Shareholder will cause the Corporations to, afford to the officers and authorized representatives of WCI, including, without limitation, its engineers, counsel, independent auditors and investment bankers, reasonable access to the Facilities, plants, Facility Property and other properties, books and records of the Corporations, CRC and FBLP, and will furnish WCI with such additional financial and operating data and other information as to the business and properties of the Corporations, CRC and FBLP as WCI may from time to time reasonably request. The Shareholder will and will cause the Corporations to cooperate with WCI, its representatives and counsel in the preparation of any documents or other material which may be required by any governmental agency. The Shareholder and the Corporations shall provide to WCI such information and materials regarding each of the Corporations', CRC's and FBLP's business as WCI may reasonably request. WCI will cause all information obtained from the Shareholder, the Corporations, CRC and FBLP, in connection with WCI's due diligence review and the negotiation and performance of this Agreement to be treated as confidential (except such information which is in the public domain or which WCI may be required to disclose to any governmental agency, or pursuant to any court or regulatory agency order) and will not use, and will not knowingly permit others to use, any such confidential information in a manner detrimental to the Corporations, CRC, FBLP or the Shareholder. Each party hereto shall not disclose to any third person other than their accountants, bankers or legal counsel any of the terms or provisions of this Agreement prior to or after the Closing Date without prior written consent of WCI. 5.5 CONTROL OF THE CORPORATIONS' OPERATIONS. Nothing contained in this Agreement shall give to WCI, directly or indirectly, rights to control or direct any Corporation's 24 26 operations prior to the Closing Date. Prior to the Closing Date, each Corporation shall exercise, consistent with the terms and conditions of this Agreement, complete control and supervision of its operations. 5.6 ACQUISITION TRANSACTIONS. From the Signing Date to the Closing Date, or earlier termination of this Agreement, no Corporation nor the Shareholder shall initiate, solicit, negotiate, encourage or provide information to facilitate, and each of the Corporations and the Shareholder shall not, and shall use its or his reasonable efforts to cause any officer, director or employee of each Corporation, or any attorney, accountant, investment banker, financial advisor or other agent retained by it or him not to, initiate, solicit, negotiate, encourage or provide information to facilitate, any proposal or offer to acquire all or any substantial part of the business or properties of any Corporation or any capital stock (including without limitation the Corporations' Stock) of any Corporation, whether by merger, purchase of assets or otherwise, whether for cash, securities or any other consideration or combination thereof (any such transactions being referred to herein as an "ACQUISITION TRANSACTION"). Each Corporation and the Shareholder shall immediately notify WCI after receipt of any proposal for an Acquisition Transaction, indication of interest or request for information relating to any Corporation in connection with an Acquisition Transaction or for access to the properties, books or records of any Corporation by any person or entity that informs the Board of Directors of any Corporation that it is considering making, or has made, a proposal for an Acquisition Transaction. Such notice to WCI shall be made orally and in writing. 6. CONDITIONS PRECEDENT TO OBLIGATION OF WCI TO CLOSE The obligations of WCI under this Agreement are subject to the satisfaction, at or before Closing, of all of the following conditions precedent, unless waived in writing by WCI: 6.1 REPRESENTATIONS AND WARRANTIES. All representations and warranties of the Corporations and the Shareholder contained in this Agreement or in any Exhibit, Schedule, certificate or document delivered by the Corporations or the Shareholder under this Agreement shall be true, correct and complete on and as of the date when made in all material respects, and (except to the extent that such representations and warranties speak of an earlier date) shall be deemed to be made again on the Closing Date, and shall then be true, correct and complete in all material respects as of the Closing Date. 6.2 CONDITIONS. The Corporations and the Shareholder shall have performed, satisfied and complied with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by them on or before the Closing Date. 6.3 NO MATERIAL ADVERSE CHANGE. Since the Signing Date, there shall not have been any material adverse change in the condition (financial or otherwise) of the business, properties or assets of the Corporations, CRC or FBLP. 6.4 CERTIFICATES. The President of each of the Corporations shall have delivered to WCI a certificate, dated as of the Closing Date, in form and substance satisfactory to WCI and the Shareholder, certifying to the fulfillment of the conditions set forth in Sections 6.1, 6.2 and 6.3, and the Shareholder shall have delivered to WCI a certificate dated as of the Closing 25 27 Date, in form and substance satisfactory to WCI and the Shareholder, certifying to the fulfillment of the conditions set forth in Section 6.1, 6.2 and 6.3 applicable to the Shareholder. 6.5 NO LITIGATION. None of the transactions contemplated hereby shall have been enjoined by any court or by any federal or state governmental branch, agency, commission or regulatory authority and no suit or other proceeding challenging the transactions contemplated hereby shall have been threatened or instituted and no investigative or other demand shall have been made by any federal or state governmental branch, agency, commission or regulatory authority. 6.6 OTHER DELIVERIES. The Shareholder shall have delivered the items which he is required to deliver under Section 8 of this Agreement. 6.7 NECESSARY CONSENTS. All Necessary Consents shall have been obtained. 6.8 HSR WAITING PERIOD. The waiting period applicable to the consummation of this transaction under the HSR Act shall have expired or been terminated. 6.9 TITLE INSURANCE. The Corporations shall obtain, at WCI's cost and expense, an ALTA Owner's Standard Policy of title insurance for each Facility Property owned by any of the Corporations, CRC or FBLP insuring fee simple title to such Facility Property in one of the Corporations, subject only to current real property taxes and assessments, standard printed conditions and exceptions, and such title exceptions as shall have been accepted in writing by WCI, containing such endorsements as WCI may reasonably require. 7. CONDITIONS PRECEDENT TO OBLIGATION OF THE SHAREHOLDER AND THE CORPORATION TO CLOSE The obligations of the Corporations and Shareholder under this Agreement are subject to the satisfaction, at or before Closing, of all of the following conditions precedent, unless waived in writing by the Shareholder: 7.1 REPRESENTATIONS AND WARRANTIES. All representations and warranties of WCI contained in this Agreement or in any statement, Exhibit, Schedule, certificate or document delivered by WCI under this Agreement shall be true, correct and complete on and as of the date when made in all material respects, and (except to the extent that such representations and warranties speak of an earlier date) shall be deemed to be made again on the Closing Date, and shall then be true, correct and complete in all material respects as of the Closing Date. 7.2 CONDITIONS. WCI shall have performed, satisfied and complied with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by it on or before the Closing Date. 7.3 CERTIFICATE. WCI shall have delivered to the Shareholder a certificate, dated as of the Closing Date, in form and substance satisfactory to the Shareholder, certifying to the fulfillment of the conditions set forth in Sections 8.1 and 8.2. 26 28 7.4 NO LITIGATION. None of the transactions contemplated hereby shall have been enjoined by any court or by any federal or state governmental branch, agency, commission or regulatory authority and no suit or other proceeding challenging the transactions contemplated hereby shall have been threatened or instituted and no investigative or other demand shall have been made by any federal or state governmental branch, agency, commission or regulatory authority. 7.5 OTHER DELIVERIES. WCI shall have delivered the items which it is required to deliver under Section 8 of this Agreement. 7.6 NECESSARY CONSENTS . All Necessary Consents shall have been obtained. 7.7 HSR WAITING PERIOD. The waiting period applicable to the consummation of this transaction under the HSR Act shall have expired or been terminated 8. CLOSING DELIVERIES At the Closing, the respective parties shall make the deliveries indicated: 8.1 WCI DELIVERIES. (a) WCI shall deliver the Purchase Price required to be delivered on the Closing Date pursuant to Section 1.2(a). (b) WCI shall execute and deliver to the Shareholder the certificate set forth in Section 7.3. 8.2 SHAREHOLDER DELIVERIES. (a) The Shareholder shall deliver to WCI the certificates representing the outstanding Corporations' Stock free and clear of all liens, security interests, claims and encumbrances, accompanied by stock powers duly executed in blank. (b) 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, were obtained and the Shareholder shall deliver an estoppel certificate from the landlords under all real estate leases to which the Corporations, CRC or FBLP 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 lessee is not in default under any of the terms or conditions thereof, that there have been no amendments or modifications to any such lease (or specifying the same), and otherwise containing such statements and certifications as WCI may require. (c) The Shareholder shall deliver Schedule 3.22(a) to this Agreement. (d) The Corporations 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 27 29 benefits approved by WCI) or other benefits with non-union employees of the Corporations, CRC and FBLP (including, without limitation, stock options or other rights to obtain equity in the Corporations, CRC and FBLP) have been terminated, effective on or before the Closing Date. (e) The Shareholder shall cause each officer and director of each of the Corporations to deliver a resignation as an officer and/or director of that Corporations together with a general release releasing the Corporations from all obligations under any indemnification agreements, the charter documents of the Corporations, 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. (f) The Corporations and the Shareholder shall execute and deliver to WCI the certificates set forth in Section 6.4. (g) FBLP shall execute and deliver to WCI a Transportation Agreement (the "TRANSPORTATION AGREEMENT") with Tidewater Barge Lines, Inc. ("TIDEWATER") substantially in the form of Exhibit 8.2(g). (h) At the Closing, the Shareholder shall deliver to WCI an opinion of counsel for the Shareholder, the Corporations, CRC and FBLP dated as of the Closing Date, covering in substance the matters described in Exhibit 8.2(h). (i) At the Closing, the Shareholder shall deliver to WCI, the Corporations, CRC and/or FBLP such releases, assignments, conveyances and other instruments executed by Tidewater as WCI shall reasonably request pursuant to which Tidewater will acknowledge and confirm that to the extent it previously had an interest in any contracts, assets, operations and lines of business of the Corporations, CRC or FBLP, as of the Closing Date it no longer has such interest. 9. ADDITIONAL COVENANTS OF WCI, THE CORPORATION AND THE SHAREHOLDER 9.1 NO DELAY. The Corporations, the Shareholder and WCI covenant and agree from and after the date hereof not to hinder in any way or unreasonably delay the Closing Date and to use their respective reasonable efforts to obtain Necessary Consents and otherwise to cause the Closing Date to occur as soon as reasonably practicable after the date of this Agreement, provided, however, that in using its reasonable efforts WCI shall not be required to take any action or to agree to any condition, including without limitation any condition imposed by any government authority with respect to the transfer of any Governmental Permit, that, in WCI's reasonable judgment, imposes a materially adverse financial burden or operating condition on WCI. 9.2 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 and Tidewater listed on Schedule 9.2, all of which relate to indebtedness of the Corporations, CRC or FBLP included in the Financial Statements as of the Balance Sheet Date or WCI shall indemnify the Shareholder and Tidewater and hold them harmless from and against 28 30 all losses, expenses or claims by third parties to enforce or collect indebtedness owed by the Corporations, CRC or FBLP as of the Closing Date which is personally guaranteed by the Shareholder or Tidewater pursuant to such guaranties. The Shareholder and Tidewater may notify the obligees under such guaranties that they have terminated their obligations under such guaranties. The Shareholder shall, and shall use reasonable efforts to cause Tidewater to, cooperate with WCI in obtaining such releases. 9.3 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 Corporations, CRC or FBLP that have been created in favor of financial institutions or other lenders to secure indebtedness (other than indebtedness of the Corporations, CRC or FBLP) of the Shareholder or his respective Affiliates to be released in a manner reasonably satisfactory to WCI, and shall cause all guaranties by the Corporations, CRC and FBLP relating to the indebtedness of the Shareholder to be released to the reasonable satisfaction of WCI. 9.4 CONFIDENTIALITY. Neither the Corporations nor the Shareholder shall, nor shall they permit CRC or FBLP to, disclose or make any public announcements of the transactions contemplated by this Agreement, except as required by the HSR Act, 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. 9.5 BROKERS AND FINDERS FEES. Each party shall pay and be responsible for any broker's, finder's or financial advisory fee incurred by such party in connection with the transactions contemplated by this Agreement. 9.6 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 Corporations and the Corporations' interest in CRC and FBLP prior to the Closing, including matters relating to tax returns and refunds 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 Shareholder such files, documents, books and records of the Corporations, CRC and FBLP 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 that relate to such matters. 9.7 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 Corporations' 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 substantially in the manner and in accordance with elections used in prior periods by the Corporations and shall be delivered to WCI together with all necessary supporting schedules within the earlier of 120 days following the Closing Date or 60 days before the date such returns are due 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 29 31 Date in excess of the amount of any reserve for taxes included in Effective Date Current Liabilities and shall be responsible for all taxes incurred on the Net Profits. At the time of the delivery of the returns, the Shareholder 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 or attributable to prior periods and any such refunds received by the Corporations or WCI shall be remitted to the Shareholder at the Shareholder's request. WCI shall cause the Corporation, CRC and/or FBLP to file amended returns and refund requests for periods prior to the Closing Date as reasonably requested by the Shareholder. 9.8 GENERAL RELEASE BY THE SHAREHOLDER. Effective as of the Closing Date, the Shareholder hereby fully releases and discharges each of the Corporations, CRC and FBLP and their directors, officers, partners, 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 Corporations, CRC and FBLP and their directors, officers, partners, 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 9.8 and expressly described and specifically excepted from this release in Schedule 9.8, (b) compensation as an employee of the Corporations for current periods expressly described and excepted from such release on Schedule 9.8, (c) for the obligations of the Corporations arising after the Closing Date under this Agreement and (d) any right of indemnification, contribution or other recourse against the Corporations, CRC and FBLP which he now has or may hereafter have against the Corporations, CRC and FBLP provided that the Shareholder shall not be entitled to indemnification, contribution or other recovery with respect to any Claim (as hereinafter defined) based on breach of the representations, warranties or covenants made in this Agreement, but only to the extent the Shareholder is liable to any WCI Indemnitee with respect to such breach (or would be so liable but for any of the limitations set forth in Section 10.2). Notwithstanding the foregoing, this release shall not be deemed a release of any rights that the Shareholder may have against any insurance carrier of the Corporations, CRC or FBLP. 9.9 CERTAIN TAX MATTERS. The Shareholder acknowledges that WCI may make an election under Section 338(h)(10) of the Code with respect to one or both of the Corporations, and that after the Closing Date the Corporations may cause either CRC or FBLP to make an election under Section 754 of the Code. The Shareholder agrees that WCI, in its discretion, may make such elections; 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; (b) The Shareholder shall sign such completed Form 8023 at WCI's request; (c) WCI and the Shareholder shall agree upon the allocation of the Purchase Price among the assets (including intangible assets) of the Corporation; and 30 32 (d) WCI shall indemnify the Shareholder with respect to all federal, state, county and local taxes required to be paid by him in connection with such election by increasing the Purchase Price by the amount of such taxes plus any amount necessary to pay taxes on the increased amount so that after such payment the effects of such election by WCI will be effectively "tax neutral" to the Shareholder. 9.10 AGREEMENT TO COOPERATE. (a) Subject to the terms and conditions herein provided and subject to the fiduciary duties of the respective boards of directors of the Corporations and WCI, each of the parties hereto shall use all reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including using its reasonable efforts to obtain all necessary or appropriate waivers, consents or approvals of third parties required in order to preserve material contractual relationships of WCI, the Corporations, CRC and FBLP, all necessary or appropriate waivers, consents and approvals to effect all necessary registrations, filings and submissions and to lift any injunctive or other legal bar to this transaction (and, in such case, to proceed with the transaction as expeditiously as possible). (b) Without limitation of the foregoing, if required by applicable law, each of WCI and the Corporations undertakes and agrees to file as soon as practicable, and in any event prior to 15 days after the Signing Date, a Notification and Report Form under the HSR Act with the Federal Trade Commission ("FTC") and the Antitrust Division of the Department of Justice (the "ANTITRUST DIVISION"). Each of WCI and the Corporations shall (i) respond as promptly as practicable to any inquiries received from the FTC or the Antitrust Division for additional information or documentation and to all inquiries and requests received from any State Attorney General or other governmental authority in connection with antitrust matters and (ii) not extend any waiting period under the HSR Act or enter into any agreement with the FTC or the Antitrust Division not to consummate the transactions contemplated by this Agreement, except with the prior consent of the other parties hereto. Each party shall promptly notify the other party of any communication to that party from the FTC, the Antitrust Division, any State Attorney General or any other governmental entity and permit the other party to review in advance any proposed communication to any of the foregoing. (c) In the event any litigation is commenced by any person or entity relating to the transactions contemplated by this Agreement, WCI shall have the right, at its own expense, to participate therein, and the Corporations will not settle any such litigation without the consent of WCI, which consent will not be unreasonably withheld. 9.11 NOTIFICATION OF CERTAIN MATTERS. Each of the Corporations, WCI and the Shareholder agrees to give prompt notice to each other of, and to use commercially reasonable efforts to remedy, (i) the occurrence or failure to occur of any event which occurrence or failure to occur would be likely to cause any of its representations or warranties in this Agreement to be untrue or inaccurate in any material respect at the Closing Date and (ii) any material failure on its or his part to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it or him hereunder; provided, however, that the delivery of any notice pursuant to 31 33 this Section 9.11 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice. 9.12 EMPLOYEES. After the Closing Date, WCI shall cause CRC's and FBLP's main office employees (all of whom are listed on Schedule 9.12(a) (the "OFFICE EMPLOYEES")) and facility employees (all of whom are listed on Schedule 9.12(b) (the "FACILITY EMPLOYEES")) to either continue to be employed by CRC or FBLP in his or her current position or to be offered a similar position with a WCI Affiliate located in Clark County at his or her current compensation for a period of two years after the Closing Date for each Office Employee and one year after the Closing Date for each Facility Employee. In the event an Office Employee or Facility Employee is terminated by WCI without cause (as hereinafter defined), WCI will continue to pay such employee's compensation and will reimburse his or her costs under COBRA for the remainder of the applicable employment term (the second anniversary of the Closing Date in the case of Office Employees and the first anniversary of the Closing Date in the case of Facility Employees), provided that any Office Employee or Facility Employee whose employment by CRC or FBLP is terminated without cause and who declines an offer for a similar position at a WCI Affiliate located in Clark County shall not be entitled to such compensation and reimbursement of COBRA benefits. "CAUSE" means insobriety on the job, conviction of a misdemeanor involving moral turpitude or a felony, illegal business practices in connection with WCI's or its Affiliate's business, misappropriation of WCI's or its Affiliate's assets, excessive absence of the employee from his or her duties during usual working hours for reasons other than vacation, disability or sickness, any material breach by the employee of any material condition of employment or failure of the employee to perform competently and efficiently his or her duties, as determined by WCI in its reasonable discretion. 9.13 NONCOMPETITION AGREEMENT. WCI acknowledges the existence of that certain Noncompetition Agreement dated as of December 31, 1997, by and between CRC and USA Waste Services, Inc. and agrees to indemnify the Shareholder and hold him harmless against any and all claims, liabilities, damages and expenses suffered or incurred by him, directly or indirectly, in connection with any breach by WCI or its Affiliate of such agreement occurring after the Closing Date. 10. INDEMNIFICATION 10.1 INDEMNITY BY THE SHAREHOLDER. The Shareholder, subject to the limitations set forth in Section 10.2, covenants and agrees that he will indemnify and hold harmless WCI, the Corporations and their respective directors, officers and agents and their respective successors and assigns (collectively the "WCI INDEMNITEES"), from and after the date of this Agreement and until the expiration of the applicable period described in Section 10.2(e), 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 10.3(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 period 32 34 described in Section 10.2(e) (irrespective of the date of discovery), with respect to each of the following contingencies (all, the "10.1 INDEMNITY EVENTS"): (a) Any misrepresentation, breach of warranty, or nonfulfillment of any agreement or covenant on the part of the Shareholder or the Corporations 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) Any Environmental Site Losses in excess of the amount of liability with respect thereto, if any, set forth on Part II of Schedule 3.8 arising from the design, development, construction, installation or operation of any "ENVIRONMENTAL SITE" (as hereinafter defined) during any period on or prior to the Closing Date but only to the extent the Environmental Site Loss resulted from a failure to comply with applicable laws, rules, regulations, ordinances, building codes, permits, licenses, franchises, municipal service contracts, judgments, orders, injunctions or decrees. As used in this Agreement, "ENVIRONMENTAL SITE" shall mean any Facility, any UST and any other waste storage, processing, treatment or disposal facility, and any other business site or any other real property owned, leased, controlled or operated by a Corporation, CRC or FBLP 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 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 for 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 Environmental Site resulting from activities thereat on or prior to the Closing Date, 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 "ENVIRONMENTAL SITE Losses" shall not include any losses or deficiencies relating to the inefficiency or lack of optimal use, design or function of any Environmental Site. 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 waste lawfully disposed of in a landfill during the time a Corporation, CRC or FBLP owned and/or operated such landfill does not constitute an Environmental Site Loss. 33 35 (c) All matters on Schedule 3.8, Part II, or required to be described on Schedule 3.8, Part II, of which the Corporations or the Shareholder has knowledge on the Closing Date and which are not so described. (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. 10.2 LIMITATIONS ON THE SHAREHOLDER'S INDEMNITIES. (a) The obligations of the Shareholder to indemnify the WCI Indemnitees as provided in Section 10.1 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 10.1 Indemnity Events exceed two hundred fifty thousand dollars ($250,000) (the "GENERAL DEDUCTIBLE AMOUNT"); provided, that the amount of any obligation of indemnity arising pursuant to Section 10.1(a) with respect to any representation, warranty or covenant contained in Sections 3.1 through 3.5; 3.12(c), 3.18, 3.22, 9.7 and 9.10 hereof and pursuant to Section 10.1(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 10.1 Indemnity Events pursuant to the provisions hereof for Claims shall not exceed: (i) Sixty percent (60%) of the Purchase Price (as adjusted pursuant to Section 1.2) if the Claims Notice for the 10.1 Indemnity Event is delivered to the Shareholder during the time period from the Closing Date to and including the first anniversary of the Closing Date; (ii) Forty-five percent (45%) of the Purchase Price (as adjusted pursuant to Section 1.2) if the Claims Notice for the 10.1 Indemnity Event is delivered to the Shareholder during the time period from the first anniversary of the Closing Date to and including the second anniversary of the Closing Date; and (iii) Thirty percent (30%) of the Purchase Price (as adjusted pursuant to Section 1.2) if the Claims Notice for the 10.1 Indemnity Event is delivered to the Shareholder during the time period from the second anniversary of the Closing Date to and including the third anniversary of the Closing Date. (c) Except to the extent the same shall directly result in a material increase in insurance premiums on a prospective basis, the Shareholder shall not be required to indemnify any WCI Indemnitee for any Claim to the extent that such Claim has been reimbursed or is reimbursable through insurance proceeds received or receivable by the WCI Indemnitee. Notwithstanding the foregoing, the WCI Indemnitee shall not be obligated to pursue reimbursement of any Claim through insurance proceeds but rather may be indemnified by the Shareholder and may allow the Shareholder to pursue such insurance proceeds directly, in which event the WCI Indemnitee shall reasonably cooperate with the Shareholder in connection therewith. In the event the WCI Indemnitee obtains insurance proceeds but the amount of such insurance does not cover the full amount of the Claim, or in the event the Claim shall directly 34 36 result in an increase in insurance premiums on a prospective basis, the Shareholder shall remain liable for the difference in the insurance proceeds and the amount of the Claim, or in the case of an increase in insurance premiums, the amount of such increase directly attributable to the Claim, subject to the other limitations set forth herein. At the request of Shareholder, WCI will maintain or obtain liability insurance to cover losses of the type described in Section 10.1(b) to the extent available for the period set forth in Section 10.2(e). Shareholder shall promptly pay or reimburse WCI for the cost of such insurance upon presentation of satisfactory evidence of the cost thereof. (d) The indemnification provisions of this Section 10 shall be the exclusive remedy for any Claim for monetary damages arising under this Agreement or from the transactions contemplated hereby or otherwise, including claims under statute or common law, except for Fraud (as defined below), provided that nothing in this Section 10 shall be deemed to be the exclusive remedy or shall limit the remedies of any party with respect to the breach or nonfulfillment by any party of any obligation or covenant in this Agreement or any of the agreements contemplated hereby or entered into pursuant hereto required to be satisfied or fulfilled after the Closing Date. In addition, the parties shall be entitled to pursue any claims for non-monetary relief to which they may be entitled at law or in equity. For the purposes of this Section 10, "FRAUD" shall mean criminal activity, fraud, fraudulent inducement, intentional misrepresentation or concealment. (e) The obligations of the Shareholder under Section 10.1 shall expire, unless a Claims Notice is given or litigation is commenced on or prior to the third anniversary of the Closing Date or, with respect to Claims based on Section 3.18, 90 days after the expiration of the applicable statute of limitations. 10.3 NOTICE OF INDEMNITY CLAIM. (a) In the event that any claim ("CLAIM") is hereafter asserted against or arises with respect to any WCI Indemnitee as to which such Indemnitee may be entitled to indemnification hereunder, the WCI Indemnitee shall notify the Shareholder (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 10.2 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 35 37 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 twenty (20) days of the Indemnifying Party's receipt of a Claims Notice, the Indemnifying Party shall not have provided the written agreement required by Section 10.3(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 ten (10) 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 deliver a Claims Notice or otherwise notify the Indemnifying Party of the commencement of such actions in accordance with this Section 10.3 shall not relieve the Indemnifying Party from the obligation to indemnify hereunder 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. 10.4 LIABILITY FOR BREACHES OF REPRESENTATIONS AND WARRANTIES. The liability of a party making the representations and warranties 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") for a breach thereof shall survive the consummation of the transactions contemplated hereby until the later of the expiration of the period set forth in Section 10.2(e), or the final resolution of all Claims for which a Claims Notice is given prior to the expiration of the obligations of the Indemnifying Party under Section 10.2(e) but only as to the representations and warranties relevant to such Claims. 10.5 NO EXHAUSTION OF REMEDIES; SUBROGATION; RIGHT OF SET OFF. The Shareholder waives any right to require any WCI Indemnitee to (i) proceed against the 36 38 Corporations; (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 10.1 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 the Shareholder or his successors. To the extent of any payment made by Shareholder to any WCI Indemnitee on account of any Claim pursuant to this Section 10, the Shareholder shall be subrogated to all of the rights of recovery of such WCI Indemnitee, and such WCI Indemnitee shall, at the expense of the Shareholder, execute all documents reasonably required and shall do all things reasonably necessary to secure such rights and to enable the Shareholder effectively to bring suit to enforce such rights. 11. OTHER POST-CLOSING COVENANTS OF THE SHAREHOLDER AND WCI 11.1 RESTRICTIVE COVENANTS. As to the Corporations, the Shareholder and his Affiliates acknowledge that (i) WCI, as the purchaser of the Corporations' Stock, is and will be engaged in the same business as CRC and FBLP (the "BUSINESS"); (ii) the Shareholder and his Affiliates are intimately familiar with the Business; (iii) the Business is currently conducted in the States of Oregon and Washington and WCI intends to continue the Business in Oregon and Washington and intends, by acquisition or otherwise, to expand the Business into other geographic areas of Oregon and Washington 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 11.1 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 WCI, CRC and FBLP: (a) NON-COMPETE. For a period commencing on the Closing Date and terminating ten (10) years thereafter (the "RESTRICTED PERIOD"), neither the Shareholder nor any of his Affiliates shall, anywhere within the State of Washington or Oregon, or in any county in Washington or Oregon where CRC, FBLP or WCI or one of its subsidiaries owns or operates the Business or a business similar to the Business (the "RESTRICTED AREA"), directly or indirectly, acting individually or as the owner, shareholder, partner, or employee of any entity other than WCI or one of its subsidiaries, (i) engage in the operation of a solid waste collection, transportation, disposal, tire processing and/or composting business, transfer facility, recycling facility, materials recovery facility or solid waste landfill, except that the Shareholder may engage in any such capacity in the operation of a tire processing business using a method not used by CRC or FBLP if the Shareholder does not solicit any tire processing customers of either CRC or FBLP in violation of clause (ii); (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 or lease any facility, equipment or other assets to any business engaged in the same business as CRC or FBLP; (iv) receive or purchase a financial interest in, make a loan to, or make a gift in support 37 39 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 [x] the Shareholder may own, directly or indirectly, solely as an investment, securities of any business traded on any national securities exchange or NASDAQ, if the Shareholder is not 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; [y] to the extent Tidewater is engaged in such activities on or after the Closing Date, Shareholder shall not be deemed to be in breach of this Section 11.1(a) so long as his ownership of equity securities of Tidewater does not exceed the amount owned on the Closing Date and so long as Shareholder does not participate in such activities on behalf of Tidewater; and [z] the Shareholder may engage in any of the above activities as a direct or indirect majority shareholder of Tidewater insofar as they relate to the transportation of solid waste by Tidewater. (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, 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. Notwithstanding the foregoing, Shareholder may disclose and discuss confidential information with his legal and tax advisors, and as is required in connection with any legal proceedings, and the Shareholder shall give WCI prior written notice of such disclosure at least forty-eight (48) hours before such disclosure is made, if possible. (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, the Corporations, CRC or FBLP, or made available to them relating to the Business, but excluding any materials (other than the minute books of the Corporations) maintained by any attorneys for the Corporations or the 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. Neither Shareholder nor counsel to Shareholder or the Corporations shall have any obligation to furnish materials excluded under the foregoing to WCI. All material that has been delivered or will be delivered to WCI under the foregoing provisions will be made available to the Shareholder upon reasonable request in connection with tax or other legal compliance matters or in connection any dispute under this Agreement. (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 Corporations, CRC or FBLP to leave the employ of the Corporations, CRC or FBLP and join the Shareholder or any Affiliate in any business endeavor owned or pursued by the Shareholder. 38 40 (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, nor does it apply to any statements made in connection with any judicial proceeding, arbitration or mediation to which WCI or one of its Affiliates and the Shareholder or one of his Affiliates (including Tidewater) are parties seeking to resolve any dispute relating to the interpretation or enforcement of this Agreement or the Transportation Agreement. 11.2 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 11.1 herein (the "RESTRICTIVE COVENANTS"), WCI shall have the following rights and remedies, each of which rights and remedies shall be independent of the others and severally enforceable, and each of which is in addition to, and not in lieu of, any other rights and remedies available to WCI at law or in equity: (a) SPECIFIC PERFORMANCE. The right and remedy to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to WCI and that money damages would not provide an adequate remedy to WCI. Accordingly, in addition to any other rights or remedies, WCI shall be entitled to injunctive relief to enforce the terms of the Restrictive Covenants and to restrain the 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. 39 41 (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. 12. GENERAL 12.1 ADDITIONAL CONVEYANCES. Following the Closing, the Shareholder 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 Shareholder may reasonably request for the purpose of carrying out this Agreement. The Shareholder will cooperate with WCI and/or the Corporations on and after the Closing Date in furnishing information, evidence, testimony and other assistance in connection with any actions, proceedings or disputes of any nature with respect to matters pertaining to all periods prior to the date of this Agreement. 12.2 ASSIGNMENT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, the successors or assigns of WCI and the 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. 12.3 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. The Shareholder, the Corporations, CRC and FBLP acknowledge that WCI will issue a press release following execution and delivery of this Agreement. WCI will deliver a copy of the press release to the Shareholder prior to its release. WCI agrees that prior to the Closing Date, it will not file a post-effective amendment to its registration statement on Form S-4 filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, to include the financial statements of the Corporations, CRC or FBLP without Shareholder's consent. 12.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. 40 42 12.5 NOTICES. All notices, requests, demands and other communications hereunder shall be deemed to have been duly given if in writing and either delivered personally, sent by facsimile transmission or by air courier service, or mailed by postage 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 respective address set forth on Schedule 3.2 With a copy to: Henry C. Breithaupt, Esq. Stoel Rives LLP 900 S.W. Fifth Avenue, Suite 2600 Portland, OR 97204-1268 Fax: (503) 220-2480 If to WCI: Waste Connections, Inc. 2260 Douglas Boulevard, Suite 280 Roseville, California 95661 Attention: Ronald J. Mittelstaedt Fax: (916) 772-2920 With a copy to: Robert D. Evans, Esq. Shartsis, Friese & Ginsburg LLP One Maritime Plaza, 18th Floor San Francisco, California 94111 Fax: (415) 421-2922 12.6 ATTORNEYS' FEES. In the event of any dispute or controversy between WCI on the one hand and the Corporations 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, as awarded by the court. Such award shall include post-judgment attorney's fees and costs. 12.7 APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington without regard to its conflict of laws provisions. 12.8 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 Corporations), provided that WCI shall pay all filing fees under the HSR Act. 41 43 12.9 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. 12.10 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. 12.11 NUMBER AND GENDER OF WORDS; CORPORATIONS. Whenever the singular number is used herein, the same shall include the plural where appropriate, and shall apply to all of such number, and to each of them, jointly and severally, and words of any gender shall include each other gender where appropriate. 12.12 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 Corporations, 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 Corporations, the Shareholder and WCI acting through its officers, thereunto duly authorized by its Board of Directors. 12.13 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. 12.14 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 Washington or California. Unless expressly stated otherwise, cross-references herein refer to provisions within this Agreement and are not references to the overall transaction or to any other document. 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. 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 Corporations, such term means the actual knowledge of any management employee, officer or director of the Corporations or any knowledge which should have been obtained by any such person upon reasonable inquiry by a reasonable business person. 12.15 DISCLOSURE SCHEDULES. The language in all parts of this Agreement must be 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 42 44 nature of the matter disclosed is obvious from a fair reading of the Schedule on which the matter is disclosed. 13. GLOSSARY The definitions of the terms used below can be found at the Section indicated:
Term Section ---- ------- Acquisition Transaction Section 5.6 Affiliate Section 3.11 Antitrust Division Section 9.10(b) at will Section 8.2(d) Balance Sheet Date Section 3.7 Bond Debt Section 1.2 business day Section 12.14 Business Section 11.1 Cause Section 9.12 Claim Section 10.3(a) Claims Notice Section 10.3(a) Closing Section 2.1 Closing Date Section 2.1 Closing Date Debt Section 3.22(a) Code Section 3.17(a) Collection Franchises Section 3.10(a) Confidential Information Section 11.1(b) Corporations Parties Corporations' Stock Recitals CRC Parties day Section 12.14 Effective Date Section 2.1 Effective Date Current Assets Section 3.22(b) Effective Date Current Liabilities Section 3.22(b) Environmental Site Section 10.1(b) Environmental Site Losses Section 10.1 Environmental Laws Section 3.24 ERISA Section 3.17(a) Excluded Assets Section 1.4 Facility Section 3.10(c) Facilities Section 3.10(c) Facility Employees Section 9.12 Facility Property Section 3.12(b) FBLP Recitals Financial Statements Section 3.7 Fraud Section 10.2(d) FTC Section 9.10(b) General Deductible Amount Section 10.2(a) golden parachute Section 3.17(a)
43 45 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) HSR Act Section 3.10(a) Indemnifying Party Section 10.3(a) Indemnity Events Section 10.1 knowledge Section 12.14 Landfill Recitals Laws Section 3.24 MENI Recitals multi-employer plan Section 3.17(a) Necessary Consents Section 5.3 Net Loss Section 1.2 Net Profit Section 1.2 occurrence Section 3.15 Office Employees Section 9.12 Permitted Liens Section 3.12(c) Purchase Price Section 1.1 RCRA Section 3.24(e) Real Property Recitals Recipient Section 3.17(c) Records, Notifications and Reports Section 3.10(b) Release Section 10.1(b) Representations and Warranties Section 10.4 Required Governmental Consents Section 3.10(a) Restricted Area Section 11.1(a) Restricted Period Section 11.1(a) Restrictive Covenants Section 11.2 RHFC Recitals Shareholder Recitals Signing Date Recitals Termination Date Section 2.2(a) Tidewater Section 8.2(g) Transportation Agreement Section 8.2(g) UST Section 3.26 WCI Parties WCI Indemnitees Section 10.1
44 46 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 CORPORATIONS: (See Schedule A) THE SHAREHOLDER: (See Schedule A) 45 47 SCHEDULE A TO AMENDED AND RESTATED STOCK PURCHASE AGREEMENT Each of the undersigned (i) Management Environmental National, Inc., (ii) RH Financial Corporation, and (iii) the Shareholder of Management Environmental National, Inc. and RH Financial Corporation hereby agrees that it or he is a party to the Amended and Restated Stock Purchase Agreement dated as of March 31, 1999, among Waste Connections, Inc., Management Environmental National, Inc., RH Financial Corporation and the Shareholder and further agrees that it or he is bound by all of the terms and provisions thereof as though it or he had executed the signature page thereof, it being understood that each of the undersigned has executed this Schedule A in lieu of the signature page at the Shareholder's request as a matter of convenience and confidentiality. Each of the undersigned has executed this Schedule A as of the date of the Stock Purchase Agreement. THE CORPORATIONS: MANAGEMENT ENVIRONMENTAL NATIONAL, INC. By: ------------------------------------- Wesley J. Hickey, President RH FINANCIAL CORPORATION By: ------------------------------------- Wesley J. Hickey, President THE SHAREHOLDER: ---------------------------------------- Wesley J. Hickey 48 TABLE OF CONTENTS
PAGE ---- 1. PURCHASE OF CORPORATIONS' STOCK.....................................................1 1.1 Shares to be Purchased.......................................................1 1.2 Purchase Price...............................................................2 1.3 Allocation of the Purchase Price.............................................2 1.4 Excluded Assets..............................................................2 2. CLOSING TIME AND PLACE..............................................................3 2.2 Termination..................................................................3 2.3 Notice and Effect of Termination.............................................4 2.4 Exclusive Negotiations.......................................................4 3. REPRESENTATIONS AND WARRANTIES OF THE CORPORATIONS AND THE SHAREHOLDER..............4 3.1 Organization, Standing and Qualification.....................................4 3.2 Capitalization...............................................................5 3.3 All Stock Being Acquired.....................................................5 3.4 Authority for Agreement......................................................5 3.5 No Breach or Default.........................................................5 3.6 Subsidiaries.................................................................6 3.7 Financial Statements.........................................................6 3.8 Liabilities..................................................................6 3.9 Accurate and Complete Records................................................7 3.10 Permits and Licenses.........................................................8 3.11 Certain Receivables..........................................................9 3.12 Fixed Assets and Real Property..............................................10 3.13 Related Party Transactions..................................................11 3.14 Contracts and Agreements; Adverse Restrictions..............................11 3.15 Insurance...................................................................11 3.16 Personnel...................................................................12 3.17 Benefit Plans and Union Contracts...........................................12 3.18 Taxes.......................................................................13 3.19 Copies Complete; Required Consents..........................................14 3.20 Customers, Billings, Current Receipts and Receivables.......................14
-i- 49 TABLE OF CONTENTS (CONTINUED)
PAGE ---- 3.21 No Change With Respect to the Corporations..................................15 3.22 Closing Date Debt; Effective Date Current Assets and Effective Date Current Liabilities.........................................................16 3.23 Bank Accounts...............................................................17 3.24 Compliance With Laws........................................................17 3.25 Powers of Attorney..........................................................18 3.26 Underground Storage Tanks...................................................19 3.27 Patents, Trademarks, Trade Names, etc.......................................19 3.28 Assets, etc., Necessary to Business.........................................20 3.29 Condemnation................................................................20 3.30 Suppliers and Customers.....................................................20 3.31 Absence of Certain Business Practices.......................................20 3.32 No Misleading Statements....................................................20 3.33 Brokers; Finders............................................................21 3.34 S Corporation Matters.......................................................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 Governmental Authorities; Consents..........................................21 4.5 No Misleading Statements....................................................22 4.6 Brokers; Finders............................................................22 5. COVENANTS FROM SIGNING TO CLOSING DATE.............................................22 5.1 Operations..................................................................22 5.2 No Change...................................................................23 5.3 Obtain Consents.............................................................24 5.4 Access; Confidential Information............................................24 5.5 Control of the Corporations' Operations.....................................24 5.6 Acquisition Transactions....................................................25 6. CONDITIONS PRECEDENT TO OBLIGATION OF WCI TO CLOSE.................................25 6.1 Representations and Warranties..............................................25
-ii- 50 TABLE OF CONTENTS (CONTINUED)
PAGE ---- 6.2 Conditions..................................................................25 6.3 No Material Adverse Change..................................................25 6.4 Certificates................................................................25 6.5 No Litigation...............................................................26 6.6 Other Deliveries............................................................26 6.7 Necessary Consents..........................................................26 6.8 HSR Waiting Period..........................................................26 6.9 Title Insurance.............................................................26 7. CONDITIONS PRECEDENT TO OBLIGATION OF THE SHAREHOLDER AND THE CORPORATION TO CLOSE..............................................................................26 7.1 Representations and Warranties..............................................26 7.2 Conditions..................................................................26 7.3 Certificate.................................................................26 7.4 No Litigation...............................................................27 7.5 Other Deliveries............................................................27 7.6 Necessary Consents..........................................................27 7.7 HSR Waiting Period..........................................................27 8. CLOSING DELIVERIES.................................................................27 8.1 WCI Deliveries..............................................................27 8.2 Shareholder Deliveries......................................................27 9. ADDITIONAL COVENANTS OF WCI, THE CORPORATION AND THE SHAREHOLDER...................28 9.1 No Delay....................................................................28 9.2 Release of Guaranties.......................................................28 9.3 Release of Security Interests...............................................29 9.4 Confidentiality.............................................................29 9.5 Brokers and Finders Fees....................................................29 9.6 Taxes.......................................................................29 9.7 Short Year Tax Returns......................................................29 9.8 General Release by the Shareholder..........................................30 9.9 Certain Tax Matters.........................................................30
-iii- 51 TABLE OF CONTENTS (CONTINUED)
PAGE ---- 9.10 Agreement to Cooperate......................................................31 9.11 Notification of Certain Matters.............................................31 9.12 Employees...................................................................32 9.13 NonCompetition Agreement....................................................32 10. INDEMNIFICATION....................................................................32 10.1 Indemnity by the Shareholder................................................32 10.2 Limitations on the Shareholder's Indemnities................................34 10.3 Notice of Indemnity Claim...................................................35 10.4 Liability for Breaches of Representations and Warranties....................36 10.5 No Exhaustion of Remedies; Subrogation; Right of Set Off....................36 11. OTHER POST-CLOSING COVENANTS OF THE SHAREHOLDER AND WCI............................37 11.1 Restrictive Covenants.......................................................37 11.2 Rights and Remedies Upon Breach.............................................39 12. GENERAL............................................................................40 12.1 Additional Conveyances......................................................40 12.2 Assignment..................................................................40 12.3 Public Announcements........................................................40 12.4 Counterparts................................................................40 12.5 Notices.....................................................................41 12.6 Attorneys' Fees.............................................................41 12.7 Applicable Law..............................................................41 12.8 Payment of Fees and Expenses................................................41 12.9 Incorporation by Reference..................................................42 12.10 Captions....................................................................42 12.11 Number and Gender of Words; Corporations....................................42 12.12 Entire Agreement............................................................42 12.13 Waiver......................................................................42 12.14 Construction................................................................42 12.15 Disclosure Schedules........................................................42 13. GLOSSARY...........................................................................43
-iv- EX-21.1 4 SUBSIDIARIES OF WASTE CONNECTIONS, INC. 1 EXHIBIT 21.1 SUBSIDIARIES OF WASTE CONNECTIONS, INC. Waste Connections of Idaho, Inc., a Delaware corporation Waste Connections of Washington, Inc., a Washington corporation Waste Connections of Wyoming, Inc., a Delaware corporation Madera Disposal Systems, Inc., a California corporation Sunshine Sanitation, Incorporated, a South Dakota corporation Sowers' Sanitation, Inc., a South Dakota corporation Waste Connections of Utah, Inc., a Delaware corporation B&B Sanitation, Inc., an Oklahoma corporation Red Carpet Landfill, Inc., an Oklahoma corporation Darlin Equipment, Inc., an Oklahoma corporation Arrow Sanitary Service, Inc., an Oregon corporation doing business as "Oregon Paper Fiber" Curry Transfer and Recycling, Inc., an Oregon corporation Oregon Waste Technology, Inc., an Oregon corporation (wholly owned by Curry Transfer and Recycling, Inc.) T&T Disposal, Inc., a Wyoming corporation Waste Connections of Nebraska, Inc., a Delaware corporation Shrader Refuse and Recycling Service Company, a Nebraska corporation Big Red Roll Off, Inc., a Nebraska corporation J&J Sanitation, Inc., a Nebraska corporation Evergreen Waste Systems, Inc., an Oregon corporation Siuslaw Disposal, Inc., an Oregon corporation Moreland Sanitary Service, Inc., an Oregon corporation Columbia Sanitary Service, Inc., an Oregon corporation Amador Disposal Service, Inc., a California corporation Mother Lode Sani-Hut, Inc., a California corporation Roche & Sons, Inc., a Utah corporation City Sanitation, Inc., a Utah corporation Butler County Landfill, a Nebraska corporation Murrey's Disposal Company, Inc., a Washington corporation American Disposal Company, Inc., a Washington corporation D. M. Disposal Co., Inc., a Washington corporation Tacoma Recycling Company, Inc., a Washington corporation CRX Inc., a Nebraska corporation Dopheide Sanitary Service Inc., a Nebraska corporation Better Disposal Service, Inc., a Nebraska corporation Wahoo Sanitation, Inc., a Nebraska corporation Saunders County Disposal, Inc., a Nebraska corporation Ritter's Sanitary Service, Inc., a Minnesota corporation Management Environmental National, Inc., a Washington corporation RH Financial Corporation, a Washington corporation EX-23.2 5 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 reports listed below included in Post Effective Amendment No. 5 to the Registration Statement (Form S-4 No. 333-65615) and related Prospectus of Waste Connections, Inc. for the registration of 3,000,000 shares of its common stock: Report dated February 17, 1999 (except for the third and fourth paragraphs of Note 14, as to which the dates are March 31, 1999) with respect to the financial statements and schedule of Waste Connections, Inc. and Predecessors; Report dated February 4, 1999 with respect to the combined financial statements of The Murrey Companies (which consist of Murrey's Disposal Company, Inc., American Disposal Company, Inc., D.M. Disposal Co., Inc. and Tacoma Recycling Company, Inc.); and, Report dated February 17, 1999 (except for the third and fourth paragraphs of Note 15, as to which the dates are March 31, 1999) with respect to the supplemental consolidated financial statements of Waste Connections, Inc. and Predecessors. ERNST & YOUNG LLP Sacramento, California April 22, 1999 EX-23.3 6 CONSENT OF PERKINS & COMPANY, P.C. 1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the use of our report on the combined financial statements of Columbia Resource Co., L.P. and Finley-Buttes Limited Partnership included in this Registration Statement on Form S-4 and to the reference to our Firm under the caption "Experts" in the Prospectus. PERKINS & COMPANY, P.C. Portland, Oregon April 23, 1999 -----END PRIVACY-ENHANCED MESSAGE-----