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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 0-28652
WASTE CONNECTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3858494
(State or other jurisdiction (I.R.S. Employer Identification)
of incorporation or organization)
620 Coolidge Drive
Suite 350
Folsom, California 95630
(Address of principal executive offices) (Zip Code)
(916) 608-8200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of registrant as
of February 28, 2000: $162,670,376
Number of shares of Common Stock outstanding as of February 28, 2000: 21,397,016
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2000 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
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WASTE CONNECTIONS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM NO. PAGE
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PART I
1. BUSINESS 3
2. PROPERTIES 14
3. LEGAL PROCEEDINGS 14
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 14
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 16
6. SELECTED HISTORICAL AND SUPPLEMENTAL FINANCIAL
AND OPERATING DATA 16
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 19
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 29
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 29
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 29
PART III
PART IV
14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS
ON FORM 8-K II-1
SIGNATURES II-2
EXHIBIT INDEX II-4
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PART I
Forward Looking Statements
Certain information contained in this Annual Report on Form 10-K,
including, without limitation, information appearing under Item 1, "Business,"
and Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," includes forward-looking statements that involve risks
and uncertainties. Various factors that are discussed in connection with the
forward-looking statements, or in our other Securities and Exchange Commission
filings, could affect our actual results and could cause our actual results to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, Waste Connections in this Annual Report on Form 10-K.
ITEM 1. BUSINESS
General
Waste Connections is a regional, integrated solid waste services company
that provides solid waste collection, transfer, disposal and recycling services
in secondary markets of the Western U.S. We currently own and operate 58
collection operations, 15 transfer stations, nine Subtitle D landfills and 17
recycling facilities and operate, but do not own, an additional seven transfer
stations and six Subtitle D landfills. As of January 31, 2000, we served more
than 500,000 commercial, industrial and residential customers in 15 states:
California, Colorado, Idaho, Iowa, Kansas, Minnesota, Nebraska, New Mexico,
Oklahoma, Oregon, South Dakota, Texas, Utah, Washington, and Wyoming.
Approximately 60% of our revenues are derived from exclusive arrangements.
Waste Connections was formed in September 1997 to build a leading solid
waste services company in the secondary markets of the Western U.S. We have
targeted these markets because we believe that: (1) a large number of
independent solid waste services companies suitable for acquisition by us are
located in these markets; (2) there is less competition in these markets from
larger, better-capitalized solid waste services companies; and (3) these markets
have strong projected economic and population growth rates. In addition, our
senior management team has extensive experience in acquiring, integrating and
operating solid waste services businesses in the Western U.S.
We have developed a two-pronged strategy tailored to the competitive and
regulatory factors that affect our markets. In the markets where waste
collection services are performed under exclusive arrangements, we generally
focus on controlling the solid waste stream by providing collection services
under such arrangements. In markets where we believe that competitive and
regulatory factors make owning landfills advantageous, we generally focus on
providing integrated services, from collection through disposal of solid waste
in landfills that we own or operate.
Acquisitions have been and are expected to continue to be a principal
component of our growth strategy. From our initial public offering in May 1998
to January 31, 2000, we acquired 85 solid waste services businesses, including
77 collection operations (of which 44 were "tuck-in" acquisitions), 14 Subtitle
D landfills which we own or operate, 20 transfer stations which we own or
operate and 16 recycling facilities. These acquisitions took us into 14 new
markets in ten additional states: Colorado, Iowa, Kansas, Minnesota, Nebraska,
New Mexico, Oklahoma, Oregon, Texas and Utah. Generating internal growth and
securing additional exclusive arrangements are also important components of our
growth strategy.
Unless otherwise noted, all descriptions of our business in this Annual
Report on Form 10-K are as of January 31, 2000.
Industry Background
According to Waste Age, an industry trade publication, the U.S. solid waste
services industry generated estimated revenues of $36.9 billion in 1997. The
solid waste services industry has undergone significant consolidation and
integration since 1990. We believe that, particularly in the Western U.S., the
following factors have primarily caused the consolidation and integration of the
waste services industry:
- - Increased Impact of Regulations. Stringent industry regulations, such as
the Subtitle D regulations, have caused operating and capital costs to rise
and have accelerated consolidation and acquisition activities in the solid
waste collection and disposal industry. Many smaller industry participants
have found these costs difficult to bear and have decided to either close
their operations or sell them to larger operators. In addition, Subtitle D
requires more stringent engineering of solid waste landfills, and mandates
liner systems, leachate collection, treatment and monitoring systems and
gas collection and monitoring systems. These ongoing costs
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are combined with increased financial reserve requirements for solid waste
landfill operators relating to closure and post-closure monitoring. As a
result, the number of solid waste landfills is declining while the average
size is increasing.
- - Increased Integration of Collection and Disposal Operations. In certain
markets, competitive pressures are forcing operators to become more
efficient by establishing an integrated network of solid waste collection
operations and transfer stations, through which they secure solid waste
streams for disposal. Operators have adopted a variety of disposal
strategies, including owning landfills, establishing strategic
relationships to secure access to landfills and to capture significant
waste stream volumes to gain leverage in negotiating lower landfill fees,
and securing long-term, most-favored-pricing contracts with high capacity
landfills.
- - Pursuit of Economies of Scale. Larger operators achieve economies of scale
by vertically integrating their operations or by spreading their facility,
asset and management infrastructure over larger volumes. Larger solid waste
collection and disposal companies have become more cost-effective and
competitive by controlling a larger waste stream and by gaining access to
significant financial resources to make acquisitions.
Regulatory Framework in the Western U.S. In the Western U.S., waste
collection services are provided largely under three types of contractual
arrangements: certificates or permits, franchise agreements and municipal
contracts. Certificates or permits, such as governmental certificates
awarded to waste collection service providers in unincorporated areas and
electing municipalities of Washington by the Washington Utilities and
Transportation Commission (the "WUTC"), typically grant the certificate
holder the exclusive and perpetual right to provide specific residential,
commercial and industrial waste services in a territory at specified rates.
See "G certificates" below. Franchise agreements typically provide an
exclusive service period of five to ten years or longer and specify the
service territory, a broad range of services to be provided, and rates for
the services. They also often give the service provider a right of first
refusal to extend the term of the agreement. Municipal contracts typically
provide a shorter service period and a more limited scope of services than
franchise agreements and generally require competitive bidding at the end
of the contract term. Unless customers within the areas covered by certain
governmental certificates, franchise agreements and municipal contracts
elect not to receive any waste collection services, they are required to
pay collection fees to the company providing these services in their area.
These exclusive rights and contractual arrangements create barriers to
entry that can be overcome primarily through acquisitions of companies with
such exclusive rights or contractual arrangements.
Despite the ongoing consolidation, the solid waste services industry
remains primarily regional in nature and highly fragmented. Based on published
industry sources, approximately 25% 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. We expect the current consolidation trends
in the solid waste industry to continue, because many independent landfill and
collection operators lack the capital resources, management skills and technical
expertise necessary to comply with stringent environmental and other
governmental regulations and to compete with larger, more efficient, integrated
operators. In addition, many independent operators may wish to sell their
businesses to achieve liquidity in their personal finances or as part of their
estate planning. We believe that the fragmented nature of the industry offers
significant consolidation and growth opportunities, especially in secondary
markets of the Western U.S., for companies with disciplined acquisition
programs, decentralized operating strategies and access to financial resources.
Strategy
Our objective is to build a leading integrated solid waste services company
in secondary markets of the Western U.S. We have developed a two-pronged
strategy tailored to the competitive and regulatory factors that affect our
markets.
First, in markets where waste collection services are provided under
exclusive arrangements, or where waste disposal is municipally funded or
available from multiple municipal sources, we believe that controlling the waste
stream by providing collection services under exclusive arrangements is often
more important to our growth and profitability than owning or operating
landfills. In addition, regulations in some Western U.S. markets dictate the
disposal facility to be used. The large size of many western states increases
the cost of interstate and long haul disposal, heightening the effects of
regulations that direct waste disposal, which may make it more difficult for a
landfill to obtain the disposal volume necessary to operate profitably. In
markets with these characteristics, we believe that landfill ownership or
vertical integration is not critical to our success.
Second, in markets where we believe that owning landfills is a strategic
element to a collection operation because of competitive and regulatory factors,
we generally focus on providing integrated services, from collection through
disposal of solid waste in landfills that we own or operate.
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GROWTH STRATEGY
- - Expansion Through Acquisitions. We intend to expand the scope of our
operations by continuing to acquire solid waste operations in new markets
and in existing or adjacent markets that are combined with or "tuck in" to
existing operations.
We intend to expand into new geographic regions by entering these markets
through acquisitions. We use an initial acquisition in a new market as an
operating base. Then we seek to strengthen the acquired operation's
presence in that market by providing additional services, adding new
customers and making "tuck-in" acquisitions. We next seek to broaden our
regional presence by adding additional operations in markets adjacent to
the new location. We are currently examining opportunities in states other
than those in which we currently operate and are assessing potential
acquisitions of solid waste operations in Arizona and Montana.
We believe that many "tuck-in" acquisition opportunities exist within our
current and targeted market areas. For example, we have identified more
than 460 independent entities that provide collection and disposal services
in the states where we currently operate. We believe that throughout the
Western U.S., many independent entities are suitable for acquisition by
Waste Connections and provide opportunities to increase our market share
and route density.
- - Exclusive Arrangements. We derive a significant portion of our revenues
from arrangements, including franchise agreements, municipal contracts and
governmental certificates, under which we are the exclusive service
provider in a specified market. We intend to devote significant resources
to securing additional franchise agreements and municipal contracts through
competitive bidding and additional governmental certificates by acquiring
other companies. In bidding for franchises and municipal contracts and
evaluating acquisition candidates holding governmental certificates, our
management team draws on its experience in the waste industry and its
knowledge of local service areas in existing and target markets. Our
district managers maintain relationships with local governmental officials
within their service areas, and sales representatives may be assigned to
cover specific municipalities. These personnel focus on maintaining,
renewing and renegotiating existing franchise agreements and municipal
contracts and on securing additional agreements and contracts.
- - Internal Growth. To generate continued internal growth, we will focus on
increasing market penetration in our current and adjacent markets,
soliciting new commercial, industrial, and residential customers in markets
where such customers may elect whether or not to receive waste collection
services, marketing upgraded or additional services (such as compaction or
automated collection) to existing customers and, where appropriate, raising
prices. Where possible, we intend to leverage our franchise-based platforms
to expand our customer base beyond our exclusive market territories. As
customers are added in existing markets, our revenue per routed truck
increases, which generally increases our collection efficiencies and
profitability. In markets in which we have exclusive contracts, franchises
and certificates, we expect internal volume growth generally to track
population and business growth. Transfer stations are also an important
part of our internal growth strategy. They extend our direct-haul reach and
link disparate collection operations with disposal capacity that we own,
operate or contract. We currently own and/or operate 22 transfer stations.
By operating transfer stations, we also engage in direct communications
with municipalities and private operators that deliver waste to our
transfer stations. This positions us to gain additional business in our
markets if a municipality privatizes any solid waste operations it owns or
rebids existing contracts, and it increases our opportunities to acquire
other private collection operations that use the transfer stations.
OPERATING STRATEGY
- - Decentralized Operations. We manage our operations on a decentralized
basis. This places decision-making authority close to the customer,
enabling us to identify customers' needs quickly and to address those
needs in a cost-effective manner. We believe that decentralization
provides a low-overhead, highly efficient operational structure that
allows us to expand into geographically contiguous markets and operate in
relatively small communities that larger competitors may not find
attractive. We believe that this structure gives us a strategic
competitive advantage, given the relatively rural nature of much of the
Western U.S., and makes us an attractive buyer to many potential
acquisition candidates. We currently operate four divisions and are moving
towards a regional management structure with multiple divisions reporting
to each region. We currently deliver our services from 58 operating
locations serving 18 market areas (districts). Each district has a
district manager reporting to, and working in collaboration with, the
divisional vice president. The district manager generally 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. Both divisional
vice presidents and district managers also help identify acquisition
candidates and are responsible for integrating them into our operations
and obtaining the permits and other governmental approvals required for us
to operate the acquired business.
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- - Operating Enhancements. We develop company-wide operating standards, which
are tailored for each of our markets based on industry standards and local
conditions. Using these standards, we track collection and disposal routing
efficiency and equipment utilization. We also implement cost controls and
employee training and safety procedures, and establish a sales and
marketing plan for each market. We have installed a wide area network,
implemented advanced management information systems and financial controls,
and consolidated accounting, insurance and employee benefit functions,
customer service, productivity reporting and dispatching systems. While
district management operates with a high degree of autonomy, our senior
officers monitor district operations and require adherence to our
accounting, purchasing, marketing and internal control policies,
particularly with respect to financial matters. Our executive officers
regularly review the performance of district managers and operations. We
believe that by establishing operating standards, closely monitoring
performance and streamlining certain administrative functions, we can
improve the profitability of existing operations.
To improve an acquired business' operational productivity, administrative
efficiency and profitability, we apply the same operating standards,
information systems and financial controls to acquired businesses as our
existing operations employ. Moreover, if we can internalize the waste
stream of acquired operations, we can further increase operating
efficiencies and improve capital utilization. Where not restricted by
exclusive agreements, contracts, permits or certificates, we also solicit
new commercial, industrial and residential customers in areas within and
surrounding the markets served by acquired collection operations, to
further improve operating efficiencies and increase the volume of solid
waste collected by the acquired operations.
Acquisition Program
We currently operate in 15 states in the Western U.S. We focus our
acquisition efforts on markets in the Western U.S. that generally exhibit the
characteristics listed below, which we believe provide significant growth
opportunities for a well-capitalized market entrant and create economic and
operational barriers to entry by new competitors.
- A potential market revenue base of at least $15 million, usually in
market areas with a geographically dispersed population of 75,000 or
less;
- A fragmented market with additional acquisition candidates;
- The opportunity to acquire a significant market share;
- Strong projected economic or population growth rates;
- The availability of adequate disposal capacity, through acquisition or
agreements with third parties; and
- A favorable regulatory environment.
We believe that our experienced management, decentralized operating
strategy, financial strength, size and public company status make us an
attractive buyer to certain solid waste collection and disposal acquisition
candidates. We have developed a set of financial, geographic and management
criteria to evaluate specific acquisition candidates. The factors that we
consider in evaluating an acquisition candidate include:
- The candidate's historical and projected financial performance;
- The return on capital invested in a candidate, its margins and capital
requirements and its impact on our earnings;
- The experience and reputation of the candidate's management and
customer service providers, their relationships with local communities
and their willingness to continue as employees of Waste Connections;
- The composition and size of the candidate's customer base and whether
the customer base is served under franchise agreements, municipal
contracts, governmental certificates or other exclusive arrangements;
- Whether the geographic location of the candidate will enhance or
expand our market area or ability to attract other acquisition
candidates;
- Whether the acquisition will increase our market share or help protect
our existing customer base;
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- Any potential synergies that may be gained by combining the candidate
with our existing operations; and
- The liabilities of the candidate.
Before completing an acquisition, we perform extensive environmental,
operational, engineering, legal, human resources and financial due diligence.
Our management evaluates and approves all acquisitions. Ronald J. Mittelstaedt,
President, Chief Executive Officer and Chairman of the Board, is authorized to
approve acquisitions for consideration of up to $1 million; the Executive
Committee of the Board of Directors must approve all other acquisitions. We seek
to integrate each acquired business promptly and to minimize disruption to the
ongoing operations of both Waste Connections and the acquired business. Our
senior management team has a proven track record in integrating acquisitions.
SERVICES
COMMERCIAL, INDUSTRIAL AND RESIDENTIAL WASTE SERVICES
We serve more than 500,000 commercial, industrial and residential
customers. Our services are generally provided under one of the following: a)
governmental certificates, b) exclusive franchise agreements, c) exclusive
municipal contracts, d) commercial and industrial service agreements, e)
residential subscriptions and f) residential contracts.
Governmental certificates, exclusive franchise agreements and exclusive
municipal contracts grant us rights to provide services within specified areas
at established rates. Governmental certificates are generally perpetual in
duration. Our exclusive franchise agreements have remaining terms ranging from
10 to 20 years, and our exclusive municipal contracts generally have shorter
contract terms.
We provide commercial and industrial services, other than those we perform
under governmental certificates, franchise agreements or municipal contracts,
under agreements ranging from one to seven years. We determine fees under these
agreements based on such factors as collection frequency, level of service,
route density, the type, volume and weight of the waste collected, type of
equipment and containers furnished, the distance to the disposal or processing
facility, the cost of disposal or processing and prices charged in our markets
for similar service. Collection of larger volumes associated with commercial and
industrial waste streams generally helps improve our operating efficiencies, and
consolidation of these volumes allows us to negotiate more favorable disposal
prices. Our commercial and industrial customers use portable containers for
storage, enabling us to service many customers with fewer collection vehicles.
Commercial and industrial collection vehicles normally require one operator. We
provide one to eight cubic yard containers to commercial customers, 10 to 50
cubic yard containers to industrial customers, and 30 to 95 gallon carts to
residential customers. For an additional fee, we install stationary compactors
that compact waste prior to collection on the premises of a substantial number
of large volume customers.
We provide residential waste services, other than those we perform under
governmental certificates franchise agreements or municipal contracts under
contracts with homeowners' associations, apartment owners or mobile home park
operators, on an individual monthly subscription basis at established rates or
on a contract basis. We base residential fees on a contract basis 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
We have an active program to acquire, develop, own and operate transfer
stations in markets proximate to our operations. Currently, we own and operate
transfer stations in California, Colorado, Nebraska, Oregon and Washington.
Additionally, we operate, but do not own, transfer stations in California,
Oregon and Washington. These transfer stations receive, compact, and transfer
solid waste to be transported by larger vehicles to landfills. We believe that
the transfer stations benefit us by:
- concentrating the waste stream from a wider area, which increases the
volume of disposal at landfills that we operate and gives us greater
leverage in negotiating for more favorable disposal rates at other
landfills;
- improving utilization of collections personnel and equipment; and
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- building relationships with municipalities and private operators that
deliver waste, which can lead to additional growth opportunities.
LANDFILLS
We seek to identify solid waste landfill acquisition candidates to achieve
vertical integration in markets where the economic and regulatory environment
makes such acquisitions attractive. We believe that in some markets, acquiring
landfills provides opportunities to vertically integrate our collection,
transfer and disposal operations while improving operating margins. We evaluate
landfill candidates by determining, among other things, the amount of waste that
could be diverted to the landfill in question, whether access to the landfill is
economically feasible from our existing market areas either directly or through
transfer stations, the expected life of the landfill, the potential for
expanding the landfill, and current disposal costs compared to the cost of
acquiring the landfill. Where the acquisition of a landfill is not attractive,
we pursue long term disposal contracts with facilities, which are typically
municipally controlled.
Currently, we own and operate landfills in Colorado, Minnesota, Nebraska,
New Mexico and Oregon. Additionally, we operate, but do not own, landfills in
California, Nebraska and New Mexico. All landfills that we own or operate are
Subtitle D landfills.
We monitor the available permitted in-place disposal capacity of our
landfills on an ongoing basis and evaluate whether to seek to expand this
capacity. In making this evaluation, we consider various factors, including the
volume of waste projected to be disposed of at the landfill, the size of the
unpermitted acreage included in the landfill, the likelihood that we will be
able to obtain the necessary approvals and permits required for the expansion
and the costs that would be involved in developing the additional capacity. We
also regularly consider whether it is advisable, in light of changing market
conditions and/or regulatory requirements, to seek to expand or change the
permitted waste streams or to seek other permit modifications.
RECYCLING SERVICES
We offer municipal, commercial, industrial and residential customers
recycling services for a variety of recyclable materials, including cardboard,
office paper, plastic containers, glass bottles and ferrous and aluminum metals.
We own and operate 17 recycling processing facilities and sell other collected
recyclable materials to third parties for processing before resale. We often
share the profits from our resale of recycled materials with other parties to
our recycling contracts. For example, certain of our municipal recycling
contracts in Washington and Idaho, negotiated before we acquired those
businesses, specify certain benchmark resale prices for recycled commodities. To
the extent the prices we actually receive for the processed recycled commodities
collected under the contract exceed the prices specified in the contract, we
share the excess with the municipality, after recovering any previous shortfalls
resulting from actual market prices falling below the prices specified in the
contract. To reduce our exposure to commodity price risk with respect to
recycled materials, we have adopted a pricing strategy of charging collection
and processing fees for recycling volume collected from third parties. We
believe that recycling will continue to be an important component of local and
state solid waste management plans due to the public's increasing environmental
awareness and expanding regulations that mandate or encourage recycling.
G CERTIFICATES
We perform a substantial portion of our collection business in Washington
under governmental certificates (referred to as "G certificates") awarded by the
WUTC. G certificates apply only to unincorporated areas of Washington and
municipalities that have elected to have their solid waste collection overseen
by the WUTC. G certificates generally grant the holder the exclusive and
perpetual right to provide certain solid waste collection and transportation
services in a specified territory. The WUTC has repeatedly determined that, in
enacting the statute authorizing G certificates, the Washington Legislature
intended to favor grants of exclusive, rather than overlapping, service rights
for conventional solid waste services. Accordingly, most G certificates
currently grant exclusive solid waste collection and transportation rights for
conventional solid waste services in their specified territories.
The WUTC and the Washington Legislature have generally construed G
certificates as conferring vested property rights that may be defeated,
diminished or cancelled only upon the occurrence of specified events of default,
the demonstrated lack of fitness of the certificate holder, or municipalities'
annexation of territory covered by a certificate. Thus, a certificate holder is
entitled to due process in challenging any action that affects its rights. In
addition, legislation passed in 1997 requires a municipality that annexes
territory covered by a G certificate either to grant the certificate holder an
exclusive franchise, generally with a minimum term of seven years, to continue
to provide services in the affected area, or to negotiate with the certificate
holder some other compensation for the
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collection rights in the affected area. The statute expressly permits the
certificate holder to sue the annexing municipality for measurable damages that
exceed the value of a seven-year franchise agreement to provide services in the
affected area. Under one of the contracts with a municipality in Washington
acquired by a predecessor of Waste Connections, the predecessor purported to
waive its rights to compensation or damages under the statute in return for the
right to service any current or prospectively annexed areas formerly covered by
its G certificate.
In addition to awarding G certificates, the WUTC is required by statute to
establish just, reasonable and compensatory rates to customers of regulated
solid waste collection companies. The WUTC is charged with balancing the needs
of service providers to earn fair and sufficient returns on their investments in
plant and equipment against the needs of commercial and residential customers to
receive adequate and reasonably priced services. Over the past decade, the WUTC
has used a rate making methodology known as the "Lurito-Gallagher" method. This
method calculates rates based on the income statements and balance sheets of
each service provider, with the goal of establishing rates that reflect the
costs of providing service and that motivate service providers to invest in
equipment that improves operating efficiency in a cost-effective manner. The
Lurito-Gallagher rate-setting methodology was adjusted in the early 1990's to
better reflect the costs of providing recycling services, by accounting for
providers' increasing use of automated equipment and adjusting for the
cyclicality of the secondary recyclables markets. This has often resulted in
more frequent rate adjustments in response to material cost shifts.
SALES AND MARKETING
In many of our existing markets, we provide waste collection, transfer and
disposal services to municipalities and governmental authorities under exclusive
franchise agreements, municipal contracts and G certificates; service providers
do not contract directly with individual customers. In addition, because we have
grown to date primarily through acquisitions, we have generally assumed existing
franchise agreements, municipal contracts and G certificates from the acquired
companies, rather than obtaining new contracts. For these reasons, our sales and
marketing efforts to date have been narrowly focused. We have added sales and
marketing personnel as necessary to solicit new customers in markets where we
are not the exclusive provider of solid waste services, expand our presence into
areas adjacent to or contiguous with our existing markets, and market additional
services to existing customers.
COMPETITION
The solid waste services industry is highly competitive and fragmented and
requires substantial labor and capital resources. The industry presently
includes three large national waste companies: Allied Waste Industries, Inc.,
Republic Services, Inc., and Waste Management, Inc. Casella Waste Systems, Inc.,
and Waste Industries, Inc. are other public companies with a regional focus and
annual revenues in excess of $100 million. Certain of the markets in which we
compete or will likely compete are served by one or more large, national solid
waste companies, as well as by numerous privately held regional and local solid
waste companies of varying sizes and resources, some of which have accumulated
substantial goodwill in their markets. We also compete with operators of
alternative disposal facilities, including incinerators, and with counties,
municipalities, and solid waste districts that maintain their own waste
collection and disposal operations. Public sector operations may have financial
advantages over Waste Connections, because of their access to user fees and
similar charges, tax revenues and tax-exempt financing.
We compete for collection, transfer and disposal volume based primarily on
the price and quality of our services. From time to time, competitors may reduce
the price of their services in an effort to expand their market shares or
service areas or to win competitively bid municipal contracts. These practices
may cause us to reduce the price of our services or, if we elect not to do so,
to lose business. We provide a substantial portion of our residential,
commercial and industrial collection services under exclusive franchise and
municipal contracts and certificates, some of which are subject to periodic
competitive bidding. We provide the balance of our services under subscription
agreements with individual households and one to five year service contracts
with commercial and industrial customers.
The solid waste collection and disposal industry is currently undergoing
significant consolidation, and we encounter competition in our efforts to
acquire landfills, transfer and collection operations. Intense competition
exists not only for collection, transfer and disposal volume, but also for
acquisition candidates. We generally compete for acquisition candidates with
publicly owned regional and large national waste management companies.
Competition in the disposal industry may also be affected by the increasing
national emphasis on recycling and other waste reduction programs, which may
reduce the volume of waste deposited in landfills. Accordingly, it may become
uneconomical for us to make further acquisitions or we may be unable to locate
or acquire suitable acquisition candidates at price levels and on terms and
conditions that we consider appropriate, particularly in markets we do not
already serve.
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REGULATION
INTRODUCTION
Our 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 that
affect us are administered by the EPA and other federal, state and local
environmental, zoning, health and safety agencies. The WUTC regulates the
portion of our collection business in Washington performed under G certificates,
which generally grant us perpetual and exclusive collection rights in certain
areas. We are currently in substantial compliance with applicable federal, state
and local environmental laws, permits, orders and regulations. We do not
currently anticipate any material environmental costs necessary to bring our
operations into compliance (although there can be no assurance in this regard).
We anticipate that regulation, legislation and regulatory enforcement actions
related to the solid waste services industry will continue to increase. We
attempt to anticipate future regulatory requirements and to plan in advance as
necessary to comply with them.
The principal federal, state and local statutes and regulations that apply
to our operations are described below. All of the federal statutes described
below contain provisions that authorize, under certain circumstances, lawsuits
by private citizens to enforce the provisions of the statutes. In addition to a
penalty award by the United States, some of those statutes authorize an award of
attorneys' fees to parties that successfully bring such an action. Enforcement
actions under these statutes may include both civil and criminal penalties, as
well as injunctive relief in some instances.
THE RESOURCE CONSERVATION AND RECOVERY ACT OF 1976 ("RCRA")
RCRA regulates the generation, treatment, storage, handling, transportation
and disposal of solid waste and requires states to develop programs to ensure
the safe disposal of solid waste. RCRA divides solid waste into two groups,
hazardous and nonhazardous. Wastes are generally classified as hazardous if they
either (i) are specifically included on a list of hazardous wastes, or (ii)
exhibit certain characteristics defined as hazardous. Household wastes are
specifically designated as nonhazardous. Wastes classified as hazardous under
RCRA are subject to much stricter regulation than wastes classified as
nonhazardous, and businesses that deal with hazardous waste are subject to
regulatory obligations in addition to those imposed on handlers of nonhazardous
waste.
The EPA regulations issued under Subtitle C of RCRA impose a comprehensive
"cradle to grave" system for tracking the generation, transportation, treatment,
storage and disposal of hazardous wastes. The Subtitle C Regulations impose
obligations on generators, transporters and disposers of hazardous wastes, and
require permits that are costly to obtain and maintain for sites where such
material is treated, stored or disposed. Subtitle C requirements include
detailed operating, inspection, training and emergency preparedness and response
standards, as well as requirements for manifesting, record keeping and
reporting, corrective action, facility closure, post-closure and financial
responsibility. Most states have promulgated regulations modeled on some or all
of the Subtitle C provisions issued by the EPA. Some state regulations impose
different, additional and more stringent obligations, and may regulate certain
materials as hazardous wastes that are not so regulated under the federal
Subtitle C Regulations. From the date of inception through January 31, 2000, we
did not, to our knowledge, transport hazardous wastes under circumstances that
would subject us to hazardous waste regulations under RCRA. Some of our
ancillary operations (e.g., vehicle maintenance operations) may generate
hazardous wastes. We manage these wastes in substantial compliance with
applicable laws.
In October 1991, the EPA adopted the Subtitle D Regulations governing solid
waste landfills. The Subtitle D Regulations, which generally became effective in
October 1993, include location restrictions, facility design standards,
operating criteria, closure and post-closure requirements, financial assurance
requirements, groundwater monitoring requirements, groundwater remediation
standards and corrective action requirements. In addition, the Subtitle D
Regulations require that new landfill sites meet more stringent liner design
criteria (typically, composite soil and synthetic liners or two or more
synthetic liners) intended to keep leachate out of groundwater and have
extensive collection systems to carry away leachate for treatment prior to
disposal. Groundwater monitoring wells must also be installed at virtually all
landfills to monitor groundwater quality and, indirectly, the effectiveness of
the leachate collection system. The Subtitle D Regulations also require, where
certain regulatory thresholds are exceeded, that facility owners or operators
control emissions of methane gas generated at landfills in a manner intended to
protect human health and the environment. Each state is required to revise its
landfill regulations to meet these requirements or such requirements will be
automatically imposed by the EPA on landfill owners and operators in that state.
Each state is also required to adopt and implement a permit program or other
appropriate system to ensure that landfills in the state comply with the
Subtitle D Regulations. Various states in which we operate or in which we may
operate in the future have adopted regulations or programs as stringent as, or
more stringent than, the Subtitle D Regulations.
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RCRA also regulates underground storage of petroleum and other regulated
materials. RCRA requires registration, compliance with technical standards for
tanks, release detection and reporting, and corrective action, among other
things. Certain of Waste Connections' facilities and operations are subject to
these requirements.
THE FEDERAL WATER POLLUTION CONTROL ACT OF 1972, AS AMENDED (THE "CLEAN WATER
ACT")
The Clean Water Act regulates the discharge of pollutants from a variety of
sources, including solid waste disposal sites and transfer stations, into waters
of the United States. If run-off from our transfer stations or run-off or
collected leachate from our owned or operated landfills is discharged into
streams, rivers or other surface waters, the Clean Water Act would require us to
apply for and obtain a discharge permit, conduct sampling and monitoring and,
under certain circumstances, reduce the quantity of pollutants in such
discharge. Also, virtually all landfills are required to comply with the EPA's
storm water regulations issued in November 1990, which are designed to prevent
contaminated landfill storm water runoff from flowing into surface waters. We
believe that our facilities comply in all material respects with the Clean Water
Act requirements. Various states in which we operate or in which we may operate
in the future have been delegated authority to implement the Clean Water Act
permitting requirements, and some of these states have adopted regulations that
are more stringent than the federal requirements. For example, states often
require permits for discharges to ground water as well as surface water.
THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION, AND LIABILITY ACT OF
1980 ("CERCLA")
CERCLA established a regulatory and remedial program intended to provide
for the investigation and cleanup of facilities where or from which a release of
any hazardous substance into the environment has occurred or is threatened.
CERCLA's primary mechanism for remedying such problems is to impose strict joint
and several liability for cleanup of facilities on current owners and operators
of the site, former owners and operators of the site at the time of the disposal
of the hazardous substances, any person who arranges for the transportation,
disposal or treatment of the hazardous substances, and the transporters who
select the disposal and treatment facilities. CERCLA also imposes liability for
the cost of evaluating and remedying any damage to natural resources. The costs
of CERCLA investigation and cleanup can be very substantial. Liability under
CERCLA does not depend on the existence or disposal of "hazardous waste" as
defined by RCRA; it can also be based on the existence of even very small
amounts of the more than 700 "hazardous substances" listed by the EPA, many of
which can be found in household waste. In addition, the definition of "hazardous
substances" in CERCLA incorporates substances designated as hazardous or toxic
under the federal Clean Water Act, Clear Air Act and Toxic Substances Control
Act. If we were found to be a responsible party for a CERCLA cleanup, the
enforcing agency could hold us, 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. Our ability to obtain reimbursement from others for their
allocable shares of such costs would be limited by our ability to find other
responsible parties and prove the extent of their responsibility and by the
financial resources of such other parties. Various state laws also impose
liability for investigation, cleanup and other damages associated with hazardous
substance releases.
THE CLEAN AIR ACT
The Clean Air Act generally, through state implementation of federal
requirements, regulates emissions of air pollutants from certain landfills based
on factors such as the date of the landfill construction and tons per year of
emissions of regulated pollutants. Larger landfills and landfills located in
areas where the ambient air does not meet certain requirements of the Clean Air
Act may be subject to even more extensive air pollution controls and emission
limitations. In addition, the EPA has issued standards regulating the disposal
of asbestos-containing materials. Air permits to construct may be required for
gas collection and flaring systems, and operating permits may be required,
depending on the potential air emissions. State air regulatory programs may
implement the federal requirements but may impose additional restrictions. For
example, some state air programs uniquely regulate odor and the emission of
toxic air pollutants.
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THE OCCUPATIONAL SAFETY AND HEALTH ACT OF 1970 (THE "OSH ACT")
The OSH Act is administered by the Occupational Safety and Health
Administration ("OSHA"), and in many states by state agencies whose programs
have been approved by OSHA. The OSH Act establishes employer responsibilities
for worker health and safety, including the obligation to maintain a workplace
free of recognized hazards likely to cause death or serious injury, to comply
with adopted worker protection standards, to maintain certain records, to
provide workers with required disclosures and to implement certain health and
safety training programs. Various OSHA standards may apply to Waste Connections'
operations, including standards concerning notices of hazards, safety in
excavation and demolition work, the handling of asbestos and asbestos-containing
materials, and worker training and emergency response programs.
FLOW CONTROL/INTERSTATE WASTE RESTRICTIONS
Certain permits and approvals, as well as certain state and local
regulations, may limit a landfill or transfer station to accepting waste that
originates from specified geographic areas, restrict the importation of
out-of-state waste or wastes originating outside the local jurisdiction or
otherwise discriminate against non-local waste. These restrictions, generally
known as flow control restrictions, are controversial, and some courts have held
that some flow control schemes violate constitutional limits on state or local
regulation of interstate commerce. From time to time, federal legislation is
proposed that would allow some local flow control restrictions. Although no such
federal legislation has been enacted to date, if such federal legislation should
be enacted in the future, states in which we operate 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 our
landfills. These restrictions could also result in higher disposal costs for our
collection operations. If we were unable to pass such higher costs through to
our customers, our business, financial condition and operating results could be
adversely affected.
Certain state and local jurisdictions may also seek to enforce flow control
restrictions through local legislation or contractually. In certain cases, we
may elect not to challenge such restrictions. These restrictions could reduce
the volume of waste going to landfills in certain areas, which may adversely
affect our ability to operate our landfills at their full capacity and/or reduce
the prices that we can charge for landfill disposal services. These restrictions
may also result in higher disposal costs for our collection operations. If we
were unable to pass such higher costs through to our customers, our business,
financial condition and operating results could be adversely affected.
STATE AND LOCAL REGULATION
Each state in which we now operate or may operate in the future has laws
and regulations governing the generation, storage, treatment, handling,
transportation and disposal of solid waste, occupational safety and health,
water and air pollution and, in most cases, the siting, design, operation,
maintenance, closure and post-closure maintenance of landfills and transfer
stations. State and local permits and approval for these operations may be
required and may be subject to periodic renewal, modification or revocation by
the issuing agencies. In addition, many states have adopted statutes comparable
to, and in some cases more stringent than, CERCLA. These statutes impose
requirements for investigation and cleanup of contaminated sites and liability
for costs and damages associated with such sites, and some provide for the
imposition of liens on property owned by responsible parties. Furthermore, many
municipalities also have ordinances, local laws and regulations affecting our
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 us from operating our facilities at their full capacity.
Some state and local authorities enforce certain federal laws in addition
to state and local laws and regulations. For example, in some states, RCRA, the
OSH Act, parts of the Clean Air Act and parts of the Clean Water Act are
enforced by local or state authorities instead of by the EPA, and in some states
those laws are enforced jointly by state or local and federal authorities.
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PUBLIC UTILITY REGULATION
In many states, public authorities regulate the rates that landfill
operators may charge. The adoption of rate regulation or the reduction of
current rates in states in which we own or operate landfills could adversely
affect our business, financial condition and operating results.
Solid waste collection services in all unincorporated areas of Washington
and in electing municipalities in Washington are provided under G certificates
awarded by the WUTC. The WUTC also sets rates for regulated solid waste
collection services in Washington.
RISK MANAGEMENT, INSURANCE AND PERFORMANCE BONDS
We maintain environmental and other risk management programs appropriate
for our business. Our environmental risk management program includes evaluating
existing facilities and potential acquisitions for environmental law compliance.
We do not presently expect environmental compliance costs to increase above
current levels, but we cannot predict whether future acquisitions will cause
such costs to increase. We also maintain a worker safety program that encourages
safe practices in the workplace. Operating practices at all Waste Connections
operations emphasize minimizing the possibility of environmental contamination
and litigation. Our facilities comply in all material respects with applicable
federal and state regulations.
We carry a broad range of insurance, which our management considers
adequate to protect our assets and operations. The coverage includes general
liability, comprehensive property damage, workers' compensation and other
coverage customary in the industry. These policies generally exclude coverage
for damages associated with environmental conditions. Because of the limited
availability and high cost of environmental impairment liability insurance, we
have not obtained such coverage. If we were to incur liability for environmental
cleanups, corrective action or damage, our financial condition could be
materially and adversely affected. We will continue to investigate the
possibility of obtaining environmental impairment liability insurance,
particularly if we acquire or operate additional landfills. We believe that most
other landfill operators do not carry such insurance.
Municipal solid waste collection contracts may require performance bonds or
other means of financial assurance to secure contractual performance. Certain
environmental regulations also require demonstrated financial assurance to meet
closure and post-closure requirements for landfills. We have not experienced
difficulty in obtaining performance bonds or letters of credit for our current
operations. At January 31, 2000, we had provided customers and various
regulatory authorities with surety bonds and letters of credit in the aggregate
amount of approximately $2.4 million to secure our obligations (exclusive of
letters of credit backing certain municipal bond obligations). If we are unable
to obtain surety bonds or letters of credit in sufficient amounts or at
acceptable rates, we could be precluded from entering into additional municipal
solid waste collection contracts or obtaining or retaining landfill operating
permits.
EMPLOYEES
At January 31, 2000, we employed approximately 1,700 full-time employees,
including approximately 120 persons classified as professionals or managers,
approximately 1,290 employees involved in collection, transfer, disposal and
recycling operations, and approximately 290 sales, clerical, data processing or
other administrative employees.
The Teamsters Union represents approximately 85 drivers and mechanics at
our Vancouver, Washington operation. The labor agreement between the Union and
Waste Connections was renewed in January 2000 for a period of three years.
The Teamsters Union represents approximately 24 drivers and mechanics at
Arrow Sanitary Services, Inc. ("Arrow") in Portland Oregon, a wholly owned
subsidiary of Waste Connections. The current labor agreement term is until March
of 2001.
The Teamsters Union represents approximately 50 of the Murrey Companies'
drivers. A new collective bargaining agreement was negotiated during the 4th
quarter of 1999. This agreement is for a period of 3.5 years.
We are not aware of any other organizational efforts among our employees
and believe that our relations with our employees are good.
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ITEM 2. PROPERTIES
As of January 31, 2000, we owned and operated 58 collection operations, 15
transfer stations, nine Subtitle D landfills and 17 recycling facilities and
operated an additional seven transfer stations and six Subtitle D landfills. We
lease various offices and facilities, including our corporate offices in Folsom,
California. The real estate that we own is not subject to material encumbrances.
We own various equipment, including waste collection and transportation
vehicles, related support vehicles, carts, containers, and heavy equipment used
in landfill operations. We believe that our existing facilities and equipment
are generally adequate for our current operations. However, we expect to make
additional investments in property and equipment for expansion and replacement
of assets and in connection with future acquisitions.
Our corporate headquarters are located in Folsom, California, where we
lease approximately 14,800 square feet of space.
ITEM 3. LEGAL PROCEEDINGS
We are 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. Our management does not believe that these proceedings, either
individually or in the aggregate, are likely to have a material adverse effect
on our business, financial condition, operating results or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1999.
MANAGEMENT
EXECUTIVE OFFICERS
The following table sets forth certain information concerning our executive
officers as of January 31, 2000:
NAME AGE POSITIONS
- ---- --- ---------
Ronald J. Mittelstaedt (1)(2) 36 President, Chief Executive Officer and Chairman
Steven F. Bouck 43 Executive Vice President and Chief Financial Officer
Darrell W. Chambliss 35 Executive Vice President - Operations, Secretary
David M. Hall 42 Vice President - Business Development
Michael R. Foos 34 Vice President - Finance and Chief Accounting Officer
Eric J. Moser 33 Vice President - Corporate Controller, Treasurer
Jerri L. Hunt 48 Vice President - Human Resources and Risk Management
James M. Little 38 Vice President - Engineering
Scott I. Schreiber 43 Vice President - Landfill Operations
(1) Member of the Executive Committee of the Board of Directors
(2) Member of the Audit Committee of the Board of Directors.
Ronald J. Mittelstaedt has been President, Chief Executive Officer and a
director since Waste Connections was formed, and was elected Chairman in January
1998. He also served as a consultant to Waste Connections in August and
September 1997. Mr. Mittelstaedt has more than ten years of experience in the
solid waste industry. He served as a consultant to United Waste Systems, Inc.,
with the title of Executive Vice President, from January 1997 to August 1997,
where he was responsible for corporate development for all states west of
Colorado. As Regional Vice President of USA Waste Services, Inc. (including
Sanifill, Inc., which was acquired by USA Waste Services, Inc.) from November
1993 to January 1997, he was responsible for all operations in 16 states and
Canada. Mr. Mittelstaedt held various positions at Browning-Ferris Industries,
Inc. from August 1987 to November 1993, most recently as Division Vice President
in northern California, overseeing the San Jose market. Previously he was the
District Manager responsible for BFI's operations in Sacramento and the
surrounding areas. He holds a B.S. in Finance from the University of California
at Santa Barbara.
Steven F. Bouck has been Executive Vice President and Chief Financial
Officer 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
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was also responsible for assisting in investing venture capital funds focused on
the environmental industry that were managed by First Analysis. In connection
with those investments, he served on the boards of directors of several
companies. While at First Analysis, Mr. Bouck also provided analytical research
coverage of a number of publicly traded environmental services companies. Mr.
Bouck holds B.S. and M.S. degrees in mechanical engineering from Rensselaer
Polytechnic Institute and an M.B.A. in Finance from the Wharton School. He has
been a Chartered Financial Analyst since 1990.
Darrell W. Chambliss has been Executive Vice President - Operations and
Secretary 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.
David M. Hall has been Vice President - Business Development since August 1,
1998. Mr. Hall has over twelve years of experience in the solid waste industry
with extensive operating and marketing experience in the Western U.S. From
October, 1995 to July 1998, Mr. Hall was the Divisional Vice President of USA
Waste Services, Inc., Rocky Mountain Division (including for Sanifill, Inc.
which was acquired by USA Waste Services, Inc.). In that position, he oversaw
all operations and business development in six Rocky Mountain states. Prior to
his employment with Sanifill, Mr. Hall held various management positions with
BFI from October 1986 to October 1995, including Vice President of Sales for the
Western United States. Mr. Hall was employed from 1979 to 1986 in a variety of
sales and marketing management positions in the high technology sector. Mr. Hall
received a BS degree in Management and Marketing in 1979 from Southwest Missouri
State University.
Michael R. Foos has been Vice President - Finance and Chief Accounting
Officer since October 1999. From October 1997 to September 1999, Mr. Foos served
as Vice President and Corporate Controller of Waste Connections. Mr. Foos served
as Division Controller of USA Waste Services, Inc. (including Sanifill, Inc.,
which was acquired by USA Waste Services, Inc.) from October 1996 to September
1997, where he was responsible for financial compilation and reporting and
acquisition due diligence for a seven-state region. Mr. Foos served as Assistant
Regional Controller at USA Waste Services, Inc. from August 1995 to September
1996, where he was responsible for internal financial reporting for operations
in six states and Canada. Mr. Foos also served as District Controller for Waste
Management, Inc. from February 1990 to July 1995, and was a member of the audit
staff of Deloitte & Touche from 1987 to 1990. Mr. Foos holds a B.S. in
Accounting from Ferris State University.
Eric J. Moser has been Waste Connections' Vice President - Corporate
Controller, Treasurer since October 1999. From October 1997 to September 1999,
Mr. Moser served as Waste Connections' Treasurer and Assistant Corporate
Controller. 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.
Jerri L. Hunt has been Vice President - Human Resources and Risk Management
since December 1999. From 1994 to 1999, Ms. Hunt held various positions with
First Union National Bank (including the Money Store, which was acquired by
First Union National Bank), most recently Vice President of Human Resources in
which she managed all aspects of human resources for over 5,000 employees
located throughout the United States. From 1989 to 1994, Ms. Hunt served as
Manager of Human Resources and Risk Management for BFI, where she was
responsible for all aspects of human resources and safety and environmental
compliance matters. Ms. Hunt also served as a Human Resources Supervisor for
United Parcel Service from 1976 to 1989. She holds a B.A. in Human Resources
from California State University, Sacramento and a M.S. in Human Resources from
Golden Gate University.
Jim M. Little has been Vice President - Engineering since September 1999.
Mr. Little held various management positions with Waste Management, Inc.
(including USA Waste Services, Inc., which was acquired by Waste Management,
Inc. and Chambers Development Co. Inc., which was acquired by USA Waste
Services, Inc.) from January 1990 to September 1999, including most recently
Division Manager in Ohio, where he was responsible for the operations of ten
operating companies in the Northern Ohio area. Mr. Little holds both a B.S. and
M.S. in Geology from Slippery Rock University of Pennsylvania.
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Scott I. Schreiber has been Vice President of Landfill Operations since
October 1998. Prior to joining Waste Connections, Mr. Schreiber gained extensive
experience in landfill management. From September 1993 to September 1998, Mr.
Schreiber served as Director of Landfill Development and Director of
Environmental Compliance for Allied Waste Industries. From August 1988 to
September 1993, Mr. Schreiber served as Regional Engineer and Director of
Landfill Development for Laidlaw Waste Systems. From June 1979 to August 1988,
Mr. Schreiber held several managerial and technical positions in the solid waste
and environmental industry. He holds a B.S. in Chemistry from University of
Wisconsin at Parkside.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock trades on The Nasdaq Stock Market(R) - National Market
under the symbol "WCNX" since our initial public offering on May 22, 1998. The
following table shows the high and low sale prices for the common stock as
reported by the Nasdaq National Market for the periods indicated.
HIGH LOW
-------- --------
1998
Second Quarter (from May 22, 1998) $ 20.75 $ 13.75
Third Quarter 23.38 17.75
Fourth Quarter 21.13 15.88
1999
First Quarter $ 24.00 $ 16.50
Second Quarter 32.13 22.00
Third Quarter 31.00 19.13
Fourth Quarter 20.94 10.88
On January 31, 2000, there were 147 record holders of Waste Connections
common stock.
We have never paid cash dividends on our common stock. We do not currently
anticipate paying any cash dividends on our common stock. We intend to retain
all earnings to fund the operation and expansion of our business. In addition,
our existing credit facility restricts the payment of cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
This table sets forth selected financial data of Waste Connections and our
predecessors for the periods indicated. This data should be read in conjunction
with and is qualified by reference to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Item 7 in this Annual
Report on Form 10-K and our audited consolidated financial statements, including
the notes thereto and the independent auditors' report thereon and the other
financial information included in Item 8 in this Form 10-K. The selected data in
this section are not intended to replace the consolidated financial statements
included in this Report.
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 Predecessors' results of operations are prepared on a combined
basis during those periods in which they were under common ownership and
control. For periods prior to WCI's incorporation on September 7, 1997, the
accompanying Statement of Operations and Balance Sheet Data for Waste
Connections consists of entities acquired by Waste Connections in the
poolings-of-interest transactions described below.
The selected financial information has been restated to reflect the
business combinations of Waste Connections with Murrey's Disposal Company, Inc.,
American Disposal Company, Inc., D.M. Disposal Co., Inc., and Tacoma Recycling
Company, Inc. (collectively, the "Murrey Companies"), Roche & Sons, Inc.,
Ritters Sanitary Service, Inc., Central Waste Disposal, Inc., Omega Systems,
Inc., The Garbage Company, Nebraska Ecology Systems and G&P Development, Inc.
(collectively, "G&P") and Cook's Wastepaper and Recycling, Inc. (each accounted
for as a pooling-of-interests).
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WASTE CONNECTIONS, INC. AND PREDECESSORS
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
FIBRES
INTERNATIONAL,
INC. THE
PERIOD FROM DISPOSAL
JANUARY 1, PREDECESSORS GROUP WASTE
1995 ONE MONTH COMBINED CONNECTIONS
THROUGH ENDED YEAR ENDED YEAR ENDED
NOVEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1995 1995
------------- ------------- ------------- -------------
STATEMENT OF OPERATIONS DATA (1):
Revenues $ 7,340 $ 595 $ 19,660 $ 37,736
Operating expenses:
Cost of operations 5,653 527 16,393 27,499
Selling, general and administrative 823 72 3,312 3,533
Depreciation and amortization 715 74 628 2,227
Start-up and integration - - - -
Stock compensation - - - -
Acquisition related expenses - - - -
------------- ------------- ------------- -------------
Income (loss) from operations 149 (78) (673) 4,477
Interest expense (162) (1) (206) (684)
Other income (expense), net 98 5 - 232
------------- ------------- ------------- -------------
Income (loss) before income tax provision 85 (74) (879) 4,025
Income tax provision (29) - 298 (783)
------------- ------------- ------------- -------------
Income (loss) before extraordinary item 56 (74) (581) 3,242
Extraordinary item - early extinguishment of
debt, net of tax benefit of $264 - - - -
------------- ------------- ------------- -------------
Net income (loss) $ 56 $ (74) $ (581) $ 3,242
============= ============= ============= =============
Redeemable convertible preferred stock accretion - - - -
------------- ------------- ------------- -------------
Net income (loss) applicable to common
stockholders $ 56 $ (74) $ (581) $ 3,242
============= ============= ============= =============
Basic income (loss) per common share:
Income (loss) before extraordinary item $ 0.84
Extraordinary item -
-------------
Net income (loss) per common share $ 0.84
=============
Diluted income (loss) per common share:
Income (loss) before extraordinary item $ 0.84
Extraordinary item -
-------------
Net income (loss) per common share $ 0.84
=============
Share used in calculating basic income (loss) per share 3,849,260
=============
Share used in calculating diluted income (loss) per share 3,849,260
=============
17
18
THE
DISPOSAL
GROUP
COMBINED
FROM PREDECESSORS
JANUARY 1, PREDECESSORS WASTE COMBINED
1996 COMBINED CONNECTIONS NINE MONTHS
THROUGH PERIOD ENDED YEAR ENDED ENDED
JULY 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1996 1996 1997
------------- ------------- ------------- -------------
STATEMENT OF OPERATIONS DATA (1):
Revenues $ 8,738 $ 13,422 $ 35,744 $ 18,114
Operating expenses:
Cost of operations 6,174 11,420 27,426 14,753
Selling, general and administrative 2,126 1,649 3,731 3,009
Depreciation and amortization 324 962 2,580 1,083
Start-up and integration - - - -
Stock compensation - - - -
Acquisition related expenses - - - -
------------- ------------- ------------- -------------
Income (loss) from operations 114 (609) 2,007 (731)
Interest expense (12) (225) (834) (456)
Other income (expense), net 2,661 (147) 420 14
------------- ------------- ------------- -------------
Income (loss) before income tax provision 2,763 (981) 1,593 (1,173)
Income tax provision (505) - (580) -
------------- ------------- ------------- -------------
Income (loss) before extraordinary item 2,258 (981) 1,013 (1,173)
Extraordinary item - early extinguishment of
debt, net of tax benefit of $264 - - - -
------------- ------------- ------------- -------------
Net income (loss) $ 2,258 $ (981) $ 1,013 $ (1,173)
============= ============= ============= =============
Redeemable convertible preferred stock accretion - - - -
------------- ------------- ------------- -------------
Net income (loss) applicable to common
stockholders $ 2,258 $ (981) $ 1,013 $ (1,173)
============= ============= ============= =============
Basic income (loss) per common share:
Income (loss) before extraordinary item $ 0.26
Extraordinary item -
-------------
Net income (loss) per common share $ 0.26
=============
Diluted income (loss) per common share:
Income (loss) before extraordinary item $ 0.26
Extraordinary item -
-------------
Net income (loss) per common share $ 0.26
=============
Share used in calculating basic income (loss) per share 3,849,260
=============
Share used in calculating diluted income (loss) per share 3,849,260
=============
18
19
WASTE CONNECTIONS
---------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
------------- ------------- -------------
STATEMENT OF OPERATIONS DATA (1):
Revenues $ 46,728 $ 98,387 $ 182,618
Operating expenses:
Cost of operations 35,592 70,722 111,555
Selling, general and administrative 4,919 9,728 15,435
Depreciation and amortization 3,142 7,954 14,717
Start-up and integration 493 - -
Stock compensation 4,395 632 265
Acquisition related expenses - - 9,003
------------- ------------- -------------
Income (loss) from operations (1,813) 9,351 31,643
Interest expense (1,922) (3,408) (11,480)
Other income (expense), net 449 410 (66)
------------- ------------- -------------
Income (loss) before income tax provision (3,286) 6,353 20,097
Income tax provision (364) (3,048) (10,902)
------------- ------------- -------------
Income (loss) before extraordinary item (3,650) 3,305 9,195
Extraordinary item - early extinguishment of
debt, net of tax benefit of $264 - (1,027) -
------------- ------------- -------------
Net income (loss) $ (3,650) $ 2,278 $ 9,195
============= ============= =============
Redeemable convertible preferred stock accretion (531) (917) -
------------- ------------- -------------
Net income (loss) applicable to common
stockholders $ (4,181) $ 1,361 $ 9,195
============= ============= =============
Basic income (loss) per common share:
Income (loss) before extraordinary item $ (0.73) $ 0.23 $ 0.50
Extraordinary item - (0.10) -
------------- ------------- -------------
Net income (loss) per common share $ (0.73) $ 0.13 $ 0.50
============= ============= =============
Diluted income (loss) per common share:
Income (loss) before extraordinary item $ (0.73) $ 0.19 $ 0.46
Extraordinary item - (0.08) -
------------- ------------- -------------
Net income (loss) per common share $ (0.73) $ 0.11 $ 0.46
============= ============= =============
Share used in calculating basic income (loss) per share 5,721,827 10,309,553 18,552,486
============= ============= =============
Share used in calculating diluted income (loss) per share 5,721,827 12,220,675 19,826,224
============= ============= =============
See footnotes on page 21.
19
20
THE DISPOSAL
PREDECESSORS GROUP WASTE PREDECESSORS
COMBINED COMBINED CONNECTIONS COMBINED WASTE CONNECTIONS, INC.
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1995 1996 1996 1997
--------------- --------------- --------------- --------------- ---------- ---------
BALANCE SHEET DATA:
Cash and equivalents $ 184 $ 961 $ 1,160 $ 102 $ 483 $ 1,327
Working capital (deficit) 90 2,498 (1,093) 695 (4,447) (5,380)
Property and equipment, net 4,035 2,221 11,264 5,069 15,553 23,275
Total assets 9,151 6,942 18,935 15,291 21,302 45,905
Long-term debt (2) 149 6,890 6,939 89 5,928 14,500
Redeemable convertible preferred stock - - - - - 7,523
Total stockholders' equity (deficit) - (2,067) 2,101 - 4,858 5,374
WASTE CONNECTIONS, INC.
DECEMBER 31,
1998 1999
--------- ---------
BALANCE SHEET DATA:
Cash and equivalents $ 3,351 $ 2,393
Working capital (deficit) (14,039) (9,730)
Property and equipment, net 50,976 334,762
Total assets 176,127 617,294
Long-term debt (2) 67,866 275,030
Redeemable convertible preferred stock - -
Total stockholders' equity (deficit) 66,887 218,539
20
21
(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) Excludes redeemable convertible preferred stock, which converted into common
stock upon our May 1998 initial public offering.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Historical and Supplemental Financial and Operating Data," our Historical and
Supplemental Financial Statements and the notes thereto included elsewhere
herein.
Overview
Waste Connections, Inc. is a regional, integrated solid waste services
company that provides solid waste collection, transfer, disposal and recycling
services in secondary markets of the Western U.S. As of December 31, 1999, we
served more than 500,000 commercial, industrial and residential customers in
California, Colorado, Idaho, Iowa, Kansas, New Mexico, Minnesota, Nebraska,
Oklahoma, Oregon, South Dakota, Texas, Utah, Washington, and Wyoming. As of that
date, we owned 56 collection operations and operated or owned 22 transfer
stations, 15 Subtitle D landfills and 17 recycling facilities.
We intend to pursue an acquisition-based growth strategy, and we acquired 90
businesses from our inception in September 1997 through December 31, 1999, with
53 of these acquisitions occurring in 1999. The aggregate consideration for
acquisitions occurring in 1999, using the purchase method of accounting, was
approximately $309 million. The results of operations of these acquired
businesses have been included in our financial statements only from the
respective dates of acquisition, except for 13 acquisitions accounted for under
the poolings-of-interests method of accounting, which are included for all
periods presented. We anticipate that a substantial part of our future growth
will come from acquiring additional solid waste collection, transfer and
disposal businesses and, as a consequence, additional acquisitions could
continue to affect period-to-period comparisons of our operating results.
On January 19, 1999, we acquired Murrey's Disposal Company, Inc., American
Disposal Company, Inc., DM Disposal Co., Inc. and Tacoma Recycling Company,
Inc., respectively (collectively, the "Murrey Companies"), in a combination
accounted for as a pooling-of-interests. The Murrey companies are Washington
corporations that provide solid waste collection, transportation and recycling
services to more than 65,000 customers in the Seattle-Tacoma, Washington area.
The purchase price consisted of 2,888,880 shares of our common stock. In
connection with the merger with the Murrey Companies, we incurred
transaction-related costs of approximately $6.2 million, which were charged to
operations.
On March 31, 1999, we acquired all of the outstanding capital stock of two
Washington corporations, Management Environmental National, Inc., ("MENI"), and
RH Financial Corporation ("RHFC"). MENI and RHFC are the sole partners of two
limited partnerships, one of which provides solid waste handling and
transportation services in the City of Vancouver and in Clark County,
Washington, and the other of which owns and operates the Finley-Buttes Regional
Landfill in Morrow County, Oregon. The purchase price consisted of approximately
$67.1 million in cash.
On August 11, 1999, we acquired International Environmental Industries, Inc.
("IEII"). IEII provides solid waste collection, transportation and recycling
services, owns and operates one landfill and operates three other landfills, all
in the areas around El Paso, Texas and southern New Mexico. The total
consideration was approximately $96.2 million, consisting of $30.3 million in
cash and $65.9 million of our common stock valued at $26.00 per share (2,541,380
shares).
In 1999, we acquired nine other businesses in combinations accounted for as
poolings-of-interests. The aggregate consideration paid consisted of 960,380
shares of our common stock. In connection with these mergers, we incurred
transaction-related costs of $2.8 million, which were charged to operations.
21
22
General
Our revenues consist mainly of fees we charge customers for solid waste
collection, transfer, disposal and recycling services. A large part of our
collection revenues come from providing commercial, industrial and residential
services. We frequently perform these services under service agreements or
franchise agreements with counties or municipal contracts. County franchise
agreements and municipal contracts generally last from one to ten years. Our
existing franchise agreements and many of our existing municipal contracts give
us 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. We also provide residential collection services on a
subscription basis with individual households. Approximately 60% of our revenues
for the year ended December 31, 1999 were derived from services provided under
exclusive franchise agreements, long term municipal contracts and governmental
certificates. Governmental certificates grant us perpetual and exclusive
collection rights in the covered areas. Contracts with counties and
municipalities and governmental certificates provide relatively consistent cash
flow during the terms of the contracts. Because we bill most residential
customers on a periodic basis, subscription agreements provide a stable source
of revenues. Our collection business also generates revenues from the sale of
recyclable commodities. The table below shows for the periods indicated the
percentage of our total reported revenues attributable to services provided,
prior to intercompany eliminations. The data below have been restated to give
effect to acquisitions that were accounted for using the pooling-of-interests
method for business combinations. Data for 1997 does not include the results of
Predecessor operations.
Year Ended December 31,
-----------------------------------
1997 1998 1999
--------- --------- ---------
Collection 86.1% 85.6% 71.1%
Transfer and processing 11.2 7.4 14.8
Landfill 1.9 4.9 10.1
Recycling 0.8 1.8 3.0
Other - 0.3 1.0
--------- --------- ---------
100.0% 100.0% 100.0%
========= ========= =========
22
23
We charge transfer station and landfill customers a tipping fee on a per
ton basis for disposing of their solid waste at the transfer stations and the
landfill facilities we own and operate. Most of our transfer and landfill
customers have entered into one to ten year disposal contracts with us, most of
which provide for annual indexed price increases.
We typically determine the prices for our solid waste services by the
collection frequency and level of service, route density, volume, weight and
type of waste collected, type of equipment and containers furnished, the
distance to the disposal or processing facility, the cost of disposal or
processing, and prices charged by competitors for similar services. The terms of
our contracts sometimes limit our ability to pass on price increases. Long-term
solid waste collection contracts typically contain a formula, generally based on
a published price index that automatically adjusts fees to cover increases in
some, but not all, operating costs.
We derive a substantial portion of our revenues from services provided under
exclusive municipal contracts and franchise agreements. No single contract or
customer accounted for more than 5.0% of our revenues for the years ended
December 31, 1997, 1998 or 1999.
Costs of operations include labor, fuel, equipment maintenance and tipping
fees paid to third party disposal facilities, worker's compensation and vehicle
insurance, the cost of materials we purchase for recycling, third party
transportation expense, district and state taxes and host community fees and
royalties. As of December 31, 1999, we owned and/or operated 22 transfer
stations, which reduce our costs by allowing us to use collection personnel and
equipment more efficiently and by consolidating waste to gain more favorable
disposal rates that may be available for larger quantities of waste.
Selling, general and administrative ("SG&A") expenses include management,
clerical and administrative compensation overhead costs associated with our
marketing and sales force, professional services and community relations
expense.
Depreciation and amortization expense includes depreciation of fixed assets
over their estimated useful lives using the straight-line method and
amortization of goodwill and other intangible assets using the straight-line
method.
We capitalize some third-party expenditures related to pending acquisitions
or development projects, such as legal and engineering expenses. We expense
indirect acquisition costs, such as executive and corporate overhead, public
relations and other corporate
23
24
services, as we incur them. We charge against net income any unamortized
capitalized expenditures and advances (net of any portion that we believe we may
recover, through sale or otherwise) that relate to any operation that is
permanently shut down and any pending acquisition or landfill development
project that is not completed. We routinely evaluate all capitalized costs, and
expense those related to projects that we believe are not likely to succeed. As
of December 31, 1999, we had $517,000 of capitalized expenditures relating to
landfill development projects and approximately $157,000 in capitalized
expenditures relating to pending acquisitions.
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
of goodwill amounted to $1.7 million and $5.3 million as of December 31, 1998
and 1999, respectively. Within the purchase price of an acquired company, we
first assign value to the tangible assets, followed by intangible assets,
including covenants not to compete and certain contracts and customer lists that
are determinable both in terms of size and life. We determine value of the other
intangible assets by considering, among other things, the present value of the
cash flows associated with those assets.
We continually evaluate the value and future benefits of our intangible
assets, including goodwill. We assess the recoverability from future operations
using cash flows and income from operations of the related acquired businesses
as measures. Under this approach, the carrying value would be reduced if it
becomes probable that our best estimate for expected future cash flows of the
related business would be less than the carrying amount of the intangible
assets. As of December 31, 1999, there have been no adjustments to the carrying
amounts of intangibles resulting from these evaluations. As of December 31,
1999, goodwill and other intangible assets represented approximately 38.5% of
total assets and 108.61% of stockholders' equity.
We accrue for estimated landfill closure and post-closure maintenance costs
at the landfills we own. Under applicable regulations, Waste Connections and
Madera County, as operator and owner, respectively, are jointly liable for
closure and post-closure liabilities with respect to the Fairmead Landfill. We
have not accrued for such liabilities because Madera County, as required by
state law, has established a special fund into which it deposits a portion of
tipping fee surcharges to pay such liabilities. Consequently, we do not believe
that we had any financial obligation for closure and post-closure costs for the
Fairmead Landfill as of December 31, 1999. We will have additional material
financial obligations relating to closure and post-closure costs of the other
disposal facilities that we currently own or operate and that we may own or
operate in the future. We accrue for those obligations based on engineering
estimates of consumption of permitted landfill airspace over the useful life of
such landfills.
Results of Operations
The following table sets forth items in our consolidated statement of
operations in thousands and as a percentage of revenues for the periods
indicated:
24
25
Year Ended December 31,
-------------------------------------------------------------------------
1997 as a 1998 as a 1999 as a
% of % of % of
1997 Revenue 1998 Revenue 1999 Revenue
--------- --------- --------- --------- --------- ---------
Revenues $ 46,728 100.0% $ 98,387 100.0% $ 182,618 100.0%
Cost of operations 35,592 76.2 70,722 71.9 111,555 61.1
Selling, general and administrative 4,919 10.5 9,728 9.9 15,435 8.4
Depreciation and amortization 3,142 6.7 7,954 8.1 14,717 8.1
Start-up and integration 493 1.1 - - - -
Stock compensation 4,395 9.4 632 0.6 265 0.2
Acquisition related expenses - - - - 9,003 4.9
--------- --------- --------- --------- --------- ---------
Operating income (loss) (1,813) (3.9) 9,351 9.5 31,643 17.3
Interest expense, net (1,922) (4.1) (3,408) (3.5) (11,480) (6.3)
Other income (expense), net 449 1.0 410 0.4 (66) -
Income tax provision (364) (0.8) (3,048) (3.1) (10,902) (6.0)
Extraordinary charges - - (1,027) (1.0) - -
--------- --------- --------- --------- --------- ---------
Net income (loss) $ (3,650) (7.8%) $ 2,278 2.3% $ 9,195 5.0%
========= ========= ========= ========= ========= =========
EBITDA margin (1) 13.3% 18.2% 30.5%
========= ========= =========
(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.
Years Ended December 31, 1999 and 1998
Revenues. Revenues for 1999 increased $84.2 million, or 85.6%, to $182.6
million from $98.4 million for 1998. Approximately $50 million of the increase
resulted from acquisitions accounted for using the purchase method of accounting
that closed since the beginning of 1999. The remaining increase was primarily
attributable to the inclusion in 1999 of 12 months of revenues from businesses
acquired in 1998, selective price increases and a nominal contribution from
growth in the businesses acquired prior to 1999.
Cost of Operations. Cost of operations for 1999 increased $40.8 million, or
57.7%, to $111.5 million from $70.7 million for 1998. The increase was primarily
attributable to the inclusion of the cost of operations of acquisitions closed
since the beginning of the year and the inclusion in 1999 of 12 months of
operating costs from businesses acquired in 1998. Cost of operations as a
percentage of revenues declined by 10.8 percentage points to 61.1% in 1999 from
71.9% in 1998. The decline in cost of operations as a percent of revenues was
primarily attributable to the effect of tuck-in acquisitions closed since the
beginning of 1999, economies of scale from the greater revenue base, elimination
of overhead in privately held companies acquired in acquisitions accounted for
as poolings-of-interests, greater integration of collection volumes into
landfills we own or operate and selective price increases.
SG&A. SG&A expenses increased $5.7 million, or 58.7%, to $15.4 million for
1999 from $9.7 million for 1998. The increase resulted primarily from additional
personnel from companies acquired in 1999, the inclusion in 1999 of 12 months of
SG&A costs from businesses acquired in 1998 and additional corporate overhead to
accommodate our growth. SG&A as a percentage of revenues declined by 1.5
percentage points to 8.4% for 1999 from 9.9% for 1998. 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 1999, offset by
increases in corporate overhead and the costs associated with being a public
company for the full year.
Depreciation and Amortization. Depreciation and amortization expense
increased $6.8 million, or 85.0%, to $14.7 million for 1999 from $7.9 million
for 1998. The increase resulted primarily from the inclusion of depreciation and
amortization of businesses acquired in 1999, the inclusion in 1999 of 12 months
of depreciation and amortization from businesses acquired in 1998, the
25
26
amortization of goodwill and other intangible assets associated with
acquisitions accounted for using the purchase method of accounting and a greater
percentage of revenues derived from landfill activity. Depreciation and
amortization as a percentage of revenues was 8.0% in both 1999 and 1998.
Stock Compensation Expense. Stock compensation expense decreased $367,000,
or 58.1%, to $265,000 for 1999 from $632,000 for 1998. Our stock compensation
expense is attributable to the valuation of common stock options and warrants
with exercise prices less than the estimated fair value or our common stock on
the date of grant and relates solely to stock options and warrants granted prior
to the initial public offering in May 1998. Stock compensation as a percentage
of revenues decreased by 0.4 percentage points to 0.2% for 1999 from 0.6% for
1998. The decrease in the amortization of deferred stock compensation for 1999
was due to the amortization of the deferred stock compensation over the vesting
periods of the related options.
Acquisition-Related Expenses. Acquisition-related expenses in 1999 were
$9.0 million, and related primarily to commissions, professional fees, and other
direct costs resulting from the 13 acquisitions that were accounted for using
the pooling-of-interests method.
Operating Income. Operating income increased $22.3 million, or 238.4%, to
$31.6 million in 1999 from $9.3 million in 1998. The increase was attributable
to operating income recognized from acquisitions closed in 1999, the inclusion
in 1999 of 12 months of operating income from acquisitions closed in 1998,
economies of scale from a greater revenue base and greater integration of
collection volumes into transfer stations and landfills we own or operate.
Operating income as a percentage of revenues increased by 7.8 percentage points
to 17.3% for 1999 from 9.5% for 1998. The increase was attributable to
improvements in gross margins coupled with declines in SG&A and stock
compensation expenses as a percentage of revenue, offset by acquisition related
expenses.
Interest Expense. Interest expense increased $8.1 million, or 237.0%, to
$11.5 million for 1999 from $3.4 million for 1998. The increase was primarily
attributable to higher debt levels incurred to fund certain of our acquisitions.
Other Income. Other income decreased $476,000, or 116.1%, to $66,000 in
1999 from $410,000 in 1998. The decrease was primarily attributable to our
recognizing less gain on sales of equipment in 1999, compared to 1998, and the
write-off of the unamortized balance of leasehold improvements on our former
corporate offices.
Provision for Income Taxes. Income taxes increased $7.9 million, or 257.7%,
to $10.9 million for 1999 from $3.0 million for 1998. The effective income tax
rate in 1999 was 54.2%, which is above the federal statutory rate of 35.0% as
the result of the non-deductibility of certain expenses associated with
acquisitions accounted for as poolings-of-interests, state and local taxes,
non-deductible goodwill associated with certain acquisitions and the
non-deductibility of the stock compensation expense.
Extraordinary Charges. Extraordinary charges in 1998 relate to the early
termination of our bank credit facility when it was replaced by a new and larger
facility. We entered into two new credit facilities during 1998.
Net Income. Net income increased by $6.9 million, or 303.6%, to $9.2
million in 1999 from $2.3 million in 1998. The increase was attributable to the
increase in operating income, offset by the increases in interest expense and
income tax expense and the decrease in other income. Net income as a percentage
of revenues increased by 2.7 percentage points to 5.0% for 1999 from 2.3% for
1998. The increase was attributable to improvements in gross margins coupled
with declines in SG&A and stock compensation expenses as a percentage of
revenue, offset by acquisition related expenses and increases in interest
expense and income taxes.
Years Ended December 31, 1998 and 1997
Revenues. Total revenues increased $51.7 million, or 110.6%, to $98.4
million for 1998 from $46.7 million for 1997. Most of the increase resulted
primarily from the acquisitions of BFI's Washington operations and acquisitions
closed since the beginning of 1998. Approximately $2.0 million resulted from
growth in the base business.
Cost of Operations. Total cost of operations increased $35.1 million, or
98.7%, to $70.7 million for 1998 from $35.6 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 by 4.3 percentage points to 71.9% for 1998 from
76.2% for 1997. The decline in cost of operations as a percentage of revenues
was a result of cost reductions at acquired businesses.
26
27
SG&A. SG&A expenses increased $4.8 million, or 97.8%, to $9.7 million for
1998 from $4.9 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 decreased by 0.6 percentage points to 9.9% for 1998 from 10.5% for
1997. The decrease in SG&A as a percentage of revenues was a result of the
acquisitions, which had generally lower overhead expenses, offset by the
additional corporate costs of being a public company and supporting the rapid
pace of growth.
Depreciation and Amortization. Depreciation and amortization expense
increased $4.8 million, or 153.2%, to $7.9 million for 1998 from $3.1 million
for 1997. The increase was primarily attributable to depreciation from acquired
assets and increased amortization of goodwill and other intangible assets from
acquisitions. Depreciation and amortization as a percentage of revenues
increased by 1.4 percentage points to 8.1% for 1998 from 6.7% for 1997. The
increase in depreciation and amortization as a percentage of revenues was
primarily a result of amortization of goodwill and other intangible assets
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 is attributable to the valuation of common stock options
and warrants with exercise prices less than the estimated fair value or our
common stock on the date of grant and relates solely to stock options and
warrants granted prior to the initial public offering in May 1998. Stock
compensation as a percentage of revenues decreased by 8.8 percentage points to
0.6% for 1998 from 9.4% for 1997. The decrease in the amortization of deferred
stock compensation for 1998 was due to the amortization of the deferred stock
compensation over the vesting periods of the related options.
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 $11.2 million, to $9.4 million
in 1998 from a loss of $1.8 million in 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 business acquired from BFI
and other acquisitions closed since the beginning of 1998, offset by increases
in SG&A expenses and depreciation and amortization.
Interest Expense. Interest expense increased $1.5 million, or 77.4%, to
$3.4 million for 1998 from $1.9 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 $2.7 million to $3.0
million for 1998 from $364,000 for 1997. The increase was associated with the
profitability of the operations acquired from BFI. The effective income tax rate
in 1998 was 48.0%, 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 entered into two new credit facilities during 1998.
Net Income. Net income increased by $5.9 million to $2.3 million for 1998,
from a loss of $3.6 million for 1997. The increase was attributable to the
increase in income from operations, offset by increases in interest expense and
income taxes and the recognition of extraordinary charges.
Liquidity and Capital Resources
Our business is capital intensive. Our capital requirements include
acquisitions and fixed asset purchases. We expect that we will also make capital
expenditures for landfill cell construction, landfill development and landfill
closure activities in the future. We plan to meet our capital needs through
various financing sources, including internally generated funds, debt and equity
financings.
As of December 31, 1999, we had a working capital deficit of $9.7 million,
including cash and cash equivalents of $2.4 million. Our strategy in managing
our working capital is generally to apply the cash generated from our operations
that remains after satisfying our working capital and capital expenditure
requirements to reduce our indebtedness under our bank revolving credit facility
and to minimize our cash balances.
27
28
At inception, we sold 2,300,000 shares of common stock at $0.01 per share
to our founders and 2,499,998 shares of Series A Preferred Stock at $2.80 per
share. In May and June 1998, we received approximately $24.0 million in net
proceeds from the sale of 2,300,000 shares in our initial public offering
(including exercise by the underwriters of their over-allotment option). In
February 1999, we received approximately $65.1 million in net proceeds from the
sale of 3,999,307 shares in a secondary public offering (including exercise by
the underwriters of their over-allotment option) and used the proceeds to pay
down approximately $50.2 million of our outstanding debt. As of December 31,
1999, we had options and warrants outstanding to purchase 2,503,714 shares of
common stock at a weighted average exercise price of $10.95 per share.
We have a $315 million revolving credit facility with a syndicate of banks
for which BankBoston, N.A. acts as agent. As of December 31, 1999, we had an
aggregate of $247.5 million outstanding under our credit facility, and the
interest rate on outstanding borrowings under the credit facility was
approximately 8.2%. The credit facility allows us to issue up to $35 million in
stand-by letters of credit. Outstanding letters of credit reduce the amount of
total borrowings available under the credit facility. As of December 31, 1999,
we had $28.0 million of outstanding letters of credit, of which $26.0 million
were issued under the credit facility. Virtually all of our assets, including
our interest in the equity securities of our subsidiaries, secure our
obligations under the credit facility. The credit facility matures in 2004 and
bears interest at a rate per annum equal to, at our discretion, either the
BankBoston Base Rate plus applicable margin, or the Eurodollar Rate plus
applicable margin. The credit facility places certain business, financial and
operating restrictions on Waste Connections relating to, among other things, the
incurrence of additional indebtedness, investments, acquisitions, asset sales,
mergers, dividends, distributions and repurchases and redemption of capital
stock. The credit facility also contains covenants requiring that specified
financial ratios and balances be maintained. As of December 31, 1999, we are in
compliance with these covenants. The Credit Facility also requires the lenders'
approval of acquisitions in certain circumstances. The credit facility is used
for (i) acquisitions; (ii) capital expenditures; (iii) working capital; (iv)
standby letters of credit; and (v) general corporate purposes.
For the year ended December 31, 1999, operations provided approximately
$21.9 million of net cash, most of which was provided by operating results for
the period, adjusted for temporary differences in income taxes, non-cash charges
for depreciation, amortization and stock compensation. This was offset by an
approximately $4.9 million increase in working capital (net of acquisitions) in
1999.
For the year ended December 31, 1999, we used $256.2 million for investing
activities. Of this amount, we used approximately $233.7 million to fund the
cash portion of acquisitions and approximately $18.6 million for capital
expenditures related to the purchase of trucks, containers, information systems
and landfill construction activities.
For the year ended December 31, 1999, financing activities provided net
cash of $233.3 million, which was provided by net borrowings under our credit
facility and revenue bonds and $65.1 million in proceeds from the sale of common
stock in our secondary offering.
We made approximately $18.6 million in capital expenditures during the year
ended December 31, 1999. We expect to make capital expenditures of approximately
$16 million in 2000 in connection with our existing business. We intend to fund
our planned 2000 capital expenditures principally through existing cash,
internally generated funds, and borrowings under our existing credit facility.
In addition, we may make substantial additional capital expenditures in
acquiring solid waste collection and disposal businesses. If we acquire
additional landfill disposal facilities, we may also have to make significant
expenditures to bring them into compliance with applicable regulatory
requirements, obtain permits or expand our available disposal capacity. We
cannot currently determine the amount of these expenditures because they will
depend on the number, nature, condition and permitted status of any acquired
landfill disposal facilities. We believe that our credit facility and the funds
we expect to generate from operations will provide adequate cash to fund our
working capital and other cash needs for the foreseeable future.
INFLATION
To date, inflation has not significantly affected our operations.
Consistent with industry practice, many of our contracts allow us to pass
through certain costs to our customers, including increases in landfill tipping
fees and, in some cases, fuel costs. Therefore, we believe that we should be
able to increase prices to offset many cost increases that result from
inflation. However, competitive pressures may require us to absorb at least part
of these cost increases, particularly during periods of high inflation.
28
29
SEASONALITY
Based on historic trends experienced by the businesses we have acquired, we
expect our operating results to vary seasonally, with revenues typically lowest
in the first quarter, higher in the second and third quarters and lower in the
fourth quarter than in the second and third quarters.
IMPACT OF YEAR 2000
In prior years, we discussed the nature and progress of our plans to become
Year 2000 ready. In late 1999, we completed our remediation and testing of
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believe those systems
successfully responded to the Year 2000 date change. We expensed approximately
$125,000 during 1999 in connection with remediating our systems. We are not
aware of any material problems resulting from Year 2000 issues, either with our
products, our internal systems, or the products and services of third parties.
We will continue to monitor our mission critical computer applications and those
of our suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In November of 1998, we entered into an interest rate swap agreement with
BankBoston that effectively converts $27.7 million of our floating rate debt
into two year fixed rate debt with an interest rate of 4.7% plus an applicable
margin as of December 31, 1999.
In December 1999, we entered into an interest rate hedge (the "Hedge
Agreement") with BankBoston, N.A. Under the Hedge Agreement, which is effective
through December 2001, the interest rate on $125 million of our floating rate
long-term debt is effectively fixed with an interest rate of 6.1% plus an
applicable margin. This rate remains at 6.1% if LIBOR is less than 7.0%. If
LIBOR exceeds 7.0%, the interest rate under the Hedge Agreement will increase
one basis point for every LIBOR basis point above 7.0%.
We are exposed to cash flow risk due to changes in interest rates with
respect to the remainder of the balance of our credit facility and the municipal
bond obligations in the combined amount of approximately $24 million associated
with Madera, Columbia Resource Company and Wasco.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 of Part IV of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
30
INDEX TO FINANCIAL STATEMENTS
WASTE CONNECTIONS, INC. AND PREDECESSORS
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets of Waste Connections, Inc. as
of December 31, 1998 and 1999
Combined Statement of Operations of Predecessors for the
nine months ended September 30, 1997
Consolidated Statements of Operations of Waste
Connections, Inc. for the years ended
December 31, 1997, 1998 and 1999
Consolidated Statements of Redeemable Stock and
Stockholders' Equity of Waste Connections,
Inc. for the years ended December 31, 1997, 1998,
and 1999.
Combined Statement of Cash Flows of Predecessors for the
nine months ended September 30, 1997
Consolidated Statements of Cash Flows of Waste
Connections, Inc. for the years ended
December 31, 1997, 1998 and 1999
Notes to Consolidated Financial Statements
F-1
31
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Waste Connections, Inc.
We have audited the accompanying consolidated balance sheets of Waste
Connections, Inc., as of December 31, 1998 and 1999, the related consolidated
statements of operations, redeemable stock and stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999, and the
combined statements of operations and cash flows of Predecessors for the nine
months ended September 30, 1997. Our audits also included the financial
statement schedule listed in Item 14.(a). 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 auditing standards generally accepted
in the United States. 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 consolidated financial position of Waste Connections,
Inc. and Predecessors at December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. 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 9, 2000
F-2
32
WASTE CONNECTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
1998 1999
--------- ---------
ASSETS
Current assets:
Cash and equivalents $ 3,351 $ 2,393
Accounts receivable, less allowance for doubtful
accounts of $692 and $1,333 at December 31, 1998
and 1999, respectively 14,884 28,440
Prepaid expenses and other current assets 2,358 3,523
--------- ---------
Total current assets 20,593 34,356
Property and equipment, net 50,976 334,762
Intangible assets, net 101,849 237,402
Other assets, net 2,709 10,774
--------- ---------
$ 176,127 $ 617,294
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,771 $ 20,072
Accrued liabilities 5,819 15,648
Deferred revenue 3,174 5,342
Short-term borrowings 1,500 -
Current portion of long-term debt and notes payable 12,039 2,669
Other current liabilities 3,329 355
--------- ---------
Total current liabilities 34,632 44,086
Long-term debt and notes payable 67,866 275,030
Other long-term liabilities 4,396 5,201
Deferred income taxes 2,346 74,438
--------- ---------
Total liabilities 109,240 398,755
--------- ---------
Commitments and contingencies (Notes 8 and 10)
Stockholders' equity:
Preferred stock: $0.01 par value; 10,000,000 shares
authorized; none issued and outstanding - -
Common stock: $0.01 par value; 50,000,000 shares
authorized; 13,284,493 and 21,106,350 shares
issued and outstanding at December 31, 1998
and 1999, respectively 133 211
Additional paid-in capital 66,576 209,148
Deferred stock compensation (428) (163)
Retained earnings 606 9,343
--------- ---------
Total stockholders' equity 66,887 218,539
--------- ---------
$ 176,127 $ 617,294
========= =========
See accompanying notes.
F-3
33
WASTE CONNECTIONS, INC. AND PREDECESSORS
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PREDECESSORS
COMBINED
NINE MONTHS
ENDED WASTE CONNECTIONS, INC. CONSOLIDATED
SEPTEMBER 30, ----------------------------------------------------
1997 (NOTE 1) 1997 1998 1999
------------- ------------ ------------ ------------
Revenues $ 18,114 $ 46,728 $ 98,387 $ 182,618
Operating expenses:
Cost of operations 14,753 35,592 70,722 111,555
Selling, general and administrative 3,009 4,919 9,728 15,435
Depreciation and amortization 1,083 3,142 7,954 14,717
Start-up and integration - 493 - -
Stock compensation - 4,395 632 265
Acquisition related expenses - - - 9,003
------------ ------------ ------------ ------------
Income (loss) from operations (731) (1,813) 9,351 31,643
Interest expense (456) (1,922) (3,408) (11,480)
Other income (expense), net 14 449 410 (66)
------------ ------------ ------------ ------------
Income (loss) before income tax provision (1,173) (3,286) 6,353 20,097
Income tax provision - (364) (3,048) (10,902)
============ ============ ============ ============
Income (loss) before extraordinary item (1,173) (3,650) 3,305 9,195
Extraordinary item - early extinguishment of
debt, net of tax benefit of $264 - - (1,027) -
------------ ------------ ------------ ------------
Net income (loss) $ (1,173) $ (3,650) $ 2,278 $ 9,195
============ ============ ============ ============
Redeemable convertible preferred stock accretion - (531) (917) -
------------ ------------ ------------ ------------
Net income (loss) applicable to common
stockholders $ (1,173) $ (4,181) $ 1,361 $ 9,195
============ ============ ============ ============
Basic income (loss) per common share:
Income (loss) before extraordinary item $ (0.73) $ 0.23 $ 0.50
Extraordinary item - (0.10) -
------------ ------------ ------------
Net income (loss) per common share $ (0.73) $ 0.13 $ 0.50
============ ============ ============
Diluted income (loss) per common share:
Income (loss) before extraordinary item $ (0.73) $ 0.19 $ 0.46
Extraordinary item - (0.08) -
------------ ------------ ------------
Net income (loss) per common share $ (0.73) $ 0.11 $ 0.46
============ ============ ============
Share used in calculating basic income (loss) per share 5,721,827 10,309,553 18,552,486
------------ ------------ ------------
Share used in calculating diluted income (loss) per share 5,721,827 12,220,675 19,826,224
============ ============ ============
See accompanying notes.
F-4
34
WASTE CONNECTIONS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Stockholders' Equity
REDEEMABLE -------------------------
CONVERTIBLE REDEEMABLE
PREFERRED STOCK COMMON STOCK COMMON STOCK
-------------------------- -------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- ----------
Balances at December 31, 1996 - $ - - $ - 3,849,260 $ 38
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 - - - -
Capital distributions and dividends paid - - - - - -
Net loss - - - - - -
----------- ----------- ----------- ----------- ----------- ----------
Balance at December 31, 1997 2,499,998 7,523 - - 6,149,260 61
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 11
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 and warrants - - - - 280,601 3
Payment of stockholder notes - - - - - -
Capital distributions and dividends paid - - - - - -
Net income - - - - - -
----------- ----------- ----------- ----------- ----------- ----------
Balances at December 31, 1998 - - - - 13,284,493 133
Issuance of common
stock warrants - - - - - -
Issuance of common stock - - - - 7,011,269 70
Amortization of deferred
stock compensation - - - - - -
Exercise of stock options and warrants - - - - 810,588 8
Dividends paid - - - - - -
Net income - - - - - -
----------- ----------- ----------- ----------- ----------- ----------
Balances at December 31, 1999 - $ - - $ - 21,106,350 $ 211
=========== =========== =========== =========== =========== ==========
F-5
35
Stockholders' Equity
------------------------------------------------------------------------
RETAINED
ADDITIONAL STOCKHOLDER DEFERRED EARNINGS/
PAID-IN NOTES STOCK (ACCUMULATED
CAPITAL RECEIVABLE COMPENSATION DEFICIT) TOTAL
----------- ----------- ------------ ------------ -----------
Balances at December 31, 1996 $ 583 $ - $ - $ 4,176 $ 4,797
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 - (83) - - (83)
Accretion of redeemable
convertible preferred stock - - - (531) (531)
Capital distributions and dividends paid (93) - - (193) (286)
Net loss - - - (3,650) (3,650)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 5,595 (83) - (198) 5,375
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 17,782 - - - 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 and warrants 359 - - - 362
Payment of stockholder notes - 83 - - 83
Capital distributions and dividends paid (76) - - (557) (633)
Net income - - - 2,278 2,278
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1998 66,576 - (428) 606 66,887
Issuance of common
stock warrants 572 - - - 572
Issuance of common stock 140,514 - - - 140,584
Amortization of deferred
stock compensation - - 265 - 265
Exercise of stock options and warrants 1,486 - - - 1,494
Dividends paid - - - (458) (458)
Net income - - - 9,195 9,195
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1999 $ 209,148 $ - $ (163) $ 9,343 $ 218,539
=========== ========== =========== =========== ===========
See accompanying notes.
F-6
36
WASTE CONNECTIONS, INC. AND PREDECESSORS
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
PREDECESSORS
COMBINED
NINE MONTHS WASTE CONNECTIONS, INC.
ENDED CONSOLIDATED
SEPTEMBER 30, -----------------------------------------
1997 (NOTE 1) 1997 1998 1999
------------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,173) $ (3,650) $ 2,278 $ 9,195
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Loss (gain) on disposition of assets (4) (93) (302) 155
Depreciation 789 2,980 6,284 10,494
Amortization 294 162 1,670 4,223
Deferred income taxes - (397) 1,370 2,200
Amortization of debt issuance costs, debt guarantee
fees and accretion of discount on long-term debt - 860 192 256
Stock and non-cash acquisition related compensation - 4,395 632 1,448
Extraordinary item - early extinguishment of debt - - 1,291 -
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable, net (604) (1,549) (2,525) (5,123)
Prepaid expenses and other current assets (74) (46) (1,429) (1,256)
Accounts payable (221) 3,348 (807) (1,041)
Deferred revenue (137) 325 1,067 1,895
Accrued liabilities (450) 952 499 2,310
Other liabilities - 18 623 (2,885)
--------- --------- --------- ---------
Net cash provided (used) by operating activities (1,580) 7,305 10,843 21,871
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 188 2 1,331 990
Payments for acquisitions, net of cash acquired - (14,393) (56,569) (233,745)
Capital expenditures for property and equipment (735) (3,905) (10,004) (18,636)
Increase in restricted cash - - (1,381) (3,731)
Decrease (increase) change in other assets 22 (527) 1,118 (1,052)
Issuance (repayment) of stockholder notes receivable - (83) 83 -
--------- --------- --------- ---------
Net cash used in investing activities (525) (18,906) (65,422) (256,174)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net intercompany balance 2,142 - - -
Proceeds from short-term borrowings - 600 - -
Proceeds from long-term debt - 10,179 80,405 275,100
Principal payments on notes payable and long-term debt (38) (4,729) (46,333) (103,646)
Proceeds from sale of common stock - 23 23,986 65,118
Proceeds from option and warrant exercises - 6,992 362 1,494
Change in short-term borrowings - 19 (128) (1,500)
Change in advances from a related party - (322) (41) (571)
Payment of capital distributions and dividends - (287) (794) (458)
Proceeds from long-term lease - 375 - -
Principal payments on long-term lease - (255) - -
Debt issuance costs - (150) (854) (2,192)
--------- --------- --------- ---------
Net cash provided by financing activities 2,104 12,445 56,603 233,345
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents (1) 844 2,024 (958)
Cash and equivalents at beginning of period 102 483 1,327 3,351
--------- --------- --------- ---------
Cash and equivalents at end of period $ 101 $ 1,327 $ 3,351 $ 2,393
========= ========= ========= =========
See accompanying notes.
F-7
37
WASTE CONNECTIONS, INC. AND PREDECESSORS
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
PREDECESSORS
COMBINED
NINE MONTHS WASTE CONNECTIONS, INC.
ENDED CONSOLIDATED
SEPTEMBER 30, ------------------------------------
1997 (NOTE 1) 1997 1998 1999
------------- --------- --------- ---------
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION AND NON-CASH TRANSACTIONS:
Cash paid for income taxes $ - $ 861 $ 1,178 $ 2,636
-------------- --------- --------- ---------
Cash paid for interest $ - $ 963 $ 2,655 $ 10,066
-------------- --------- --------- ---------
Redeemable convertible preferred stock accretion $ 531 $ 917 $ -
--------- --------- ---------
Issuance of notes payable for land and buildings $ 315 $ - $ -
--------- --------- ---------
In connection with its acquisitions, the Company
assumed liabilities as follows:
Fair value of assets acquired $ 20,140 $ 120,507 $ 426,702
Cash paid for acquisitions (including acquisition costs) (11,693) (56,341) (233,745)
--------- --------- ---------
Liabilities assumed, stock and notes payable issued
to sellers $ 8,447 $ 64,166 $ 192,957
--------- --------- ---------
See accompanying notes.
F-8
38
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, Colorado, Idaho, Iowa, Kansas, Minnesota, Nebraska, New
Mexico, Oklahoma, Oregon, South Dakota, Texas, Utah, Washington and Wyoming.
Basis of Presentation
These 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.
The Company's consolidated financial statements have been restated to reflect
the mergers with 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"), Roche & Sons,
Inc. ("Roche"), Ritters Sanitary Service, Inc. ("Ritters"), Omega Systems, Inc.
("Omega"), G&P Development, Inc., The Garbage Company, and Nebraska Ecology
Systems, Inc. (collectively, "G&P"), Central Waste Disposal, Inc. and Cen San,
Inc. (collectively, "Central") and Cook's Wastepaper and Recycling, Inc.
("Cook's"), each accounted for as poolings-of-interests (Note 2). For periods
prior to WCI's incorporation on September 9, 1997, the consolidated financial
statements of the Company consist of entities acquired by the Company in
pooling-of-interests transactions.
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. 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 $2,142 during the
nine months ended September 30, 1997.
F-9
39
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company's acquisition of the predecessors from BFI in September 1997 was
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 Company and Predecessors reflect the change in
basis of the underlying assets that were made as a result of the change in
ownership.
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 and
1999, 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. The Company does not
require collateral on its trade receivables. 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 expense as incurred. The cost of
assets retired or otherwise disposed of and the related accumulated depreciation
are eliminated from the accounts in the year of disposal. Gains and losses
resulting from property disposals are included in other income (expense).
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets.
F-10
40
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The estimated useful lives are as follows:
Buildings 20 years
Machinery and equipment 3 - 15 years
Rolling stock 10 years
Containers 5 - 15 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 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 or 1999. 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 landfills. The rates are determined by management based on estimates
provided by the Company's internal and third party 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 estimated fair
value of the net tangible and intangible 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 $1,705 and $5,353 as of December 31,
1998 and 1999, 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. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, the carrying value would be reduced to
estimated net realizable value 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 and 1999.
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, 1998 and 1999, based on current
incremental borrowing rates for similar types of borrowing arrangements.
F-11
41
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 uses the liability method to account for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
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.
The Company reviews its revenue producing contracts in the ordinary course of
business to determine if the direct costs, exclusive of any non-variable costs,
to service the contractual arrangements exceed the revenues to be produced by
the contract. Any resulting excess costs over the life of the contract are
expensed at the time of such determination.
Start-Up and Integration Expenses
During the period from Waste Connections' 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 SFAS No. 123 "Accounting for Stock Based
Compensation", the Company has elected to account for stock-based compensation
using the intrinsic value method prescribed
F-12
42
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
Per Share Information
Basic net income (loss) per share is computed using the weighted average number
of common shares outstanding. Diluted net income (loss) per share is computed
using the weighted average number of common and potential common shares
outstanding. Potential common shares are excluded from the computation if their
effect is anti-dilutive. Earnings per share data have not been presented for the
predecessor operations because such data is not meaningful.
Closure and Post-Closure Costs
Accrued closure and post-closure costs represent an estimate of the current
value of the future obligation associated with closure and post-closure
monitoring of non-hazardous solid waste landfills currently owned and/or
operated by the Company. 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.
Site specific closure and post-closure engineering cost estimates are prepared
annually for landfills owned and/or operated by the Company for which it is
responsible for closure and post-closure. The impact of changes determined to be
changes in estimates, based on the annual update, are accounted for on a
prospective basis. The present value of estimated future costs are accrued based
on accepted tonnage as landfill airspace is consumed. Discounting of future
costs is applied where the Company believes that both the amounts and timing of
related payments are reliably determinable.
Segment Information
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company identifies its operating segments based on business activities,
management responsibility and geographical location. The Company considers each
operating location that reports stand-alone financial information to be
an operating segment; however, all operating segments have been aggregated
together and are reported as a single segment consisting of the collection,
transfer, recycling and disposal of non-hazardous void waste in the Western
United States.
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. As of December 31, 1999, the Company has
not had any transactions, other than its reported net income and losses, that
are required to be reported in comprehensive income.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"). SFAS 133
establishes accounting and reporting standards of derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the Financial Accounting Standards Board
issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133". SFAS 137
deferred the effective date until the first fiscal quarter of the fiscal year
F-13
43
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
beginning after June 15, 2000. The Company will adopt SFAS 133 in its quarter
ending March 31, 2001 and has not yet determined whether such adoption will have
a material impact on the Company's financial statements.
Reclassifications
Certain amounts reported in the Company's prior years' financial statements have
been reclassified to conform with the 1999 presentation.
2. ACQUISITIONS
Poolings-of-Interests
On January 19, 1999, the Company 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. In connection with the business combination with the Murrey
Companies, Waste Connections, Inc. incurred transaction related costs of
approximately $6,200 which were charged to operations.
The Company consummated business combinations with Roche and Ritter's on January
8, 1999, and March 30, 1999, respectively, which included the exchange of
554,248 shares of Waste Connections, Inc. common stock for all of the
outstanding shares of Roche and Ritter's. In connection with the business
combinations with Roche and Ritters, Waste Connections, Inc. incurred
transaction related costs of approximately $1,600 which were charged to
operations.
The Company consummated business combinations with Central, G&P, and Omega on
June 25, 1999, June 30, 1999, and June 30, 1999, respectively, which included
the exchange of 340,207 shares of Waste Connections, Inc. common stock for all
of the outstanding shares of Central, G&P, and Omega. In connection with the
business combinations with Central, G&P, and Omega, Waste Connections, Inc.
incurred transaction related costs of approximately $1,005 which were charged to
operations.
On December 30, 1999, the Company consummated a business combination with Cook's
which included the exchange of 65,925 shares of Waste Connections, Inc. common
stock for all the outstanding shares of Cook's. In connection with the business
combination with Cook's, Waste Connections, Inc. incurred transaction related
costs of approximately $198 which were charged to operations.
The table below sets forth the combined revenues and net income (loss) of WCI,
the Murrey Companies, Roche, Ritters, Central, G&P, Omega and Cook's for the
years ended December 31, 1997, 1998 and 1999 (in thousands):
F-14
44
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Waste The Murrey
Connections, Inc. Companies Other Restated
Before Pooling Pooling Pooling For Pooling
Acquisitions Acquisitions Acquisitions Acquisitions
----------------- ------------- ------------- -------------
YEAR ENDED DECEMBER 31, 1997:
Revenues $ 6,237 $ 28,874 $ 11,617 $ 46,728
Net income (loss) (5,066) 1,316 100 (3,650)
YEAR ENDED DECEMBER 31, 1998:
Revenues 54,042 32,528 11,817 98,387
Net income 1,748 142 388 2,278
YEAR ENDED DECEMBER 31, 1999:
Revenues 175,773 1,788 5,057 182,618
Net income 8,763 245 187 9,195
1998 and 1999 Acquisitions
During 1998, the Company acquired 42 businesses 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.
During 1999, the Company acquired 51 businesses which were accounted for as
purchases. Aggregate consideration for these acquisitions consisted of $233,745
in cash (net of cash acquired), $763 in notes payable to sellers and 2,934,649
shares of common stock valued at $74,359.
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 of 1999 acquisitions are
preliminary. A summary of the purchase price allocations for acquisitions
consummated in 1998 and preliminary purchase price allocations for the
acquisitions consummated in 1999 is as follows:
F-15
45
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1998 1999
Acquisitions Acquisitions
------------- -------------
Acquired assets:
Accounts receivable $ 4,670 $ 8,433
Prepaid expenses and other current assets 301 239
Property and equipment 25,853 276,789
Goodwill 86,358 137,151
Long-term franchise agreements and other 2,390 558
Non-competition agreements 540 900
Other assets 395 2,512
Assumed liabilities:
Deferred revenue (577) (273)
Accounts payable and accrued liabilities (9,210) (19,952)
Other accrued liabilities (1,575) (1,257)
Long-term liabilities assumed (13,638) (26,340)
Deferred income taxes (92) (69,893)
============= =============
$ 95,415 $ 308,867
============= =============
In connection with certain of the acquisitions in 1998 and 1999, 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, 1999, contingent payments relating to these acquisitions total
approximately $1,800 in cash and 61,737 shares placed into escrow, and are to be
earned based upon the achievement of certain milestones. The Company has
included the contingent cash payments in these financial statements as the
events which would give rise to such payments are considered probable. No
amounts related to the contingent shares have been included in these financial
statements as the events which would give rise to such payments have not yet
occurred and are not considered probable.
The following unaudited pro forma results of operations assume that the
Company's significant acquisitions occurring in 1998 and 1999, accounted for
using the purchase method of accounting, were acquired as of January 1, 1998:
Year Ended December 31,
1998 1999
----------- -----------
Total revenue $ 165,119 $ 209,419
Net income 12,674 9,049
Basic income per share 0.99 0.45
Diluted income per share 0.86 0.42
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, 1998, nor are they necessarily indicative of future operating
results
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
F-16
46
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
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
========
3. INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31, 1998 and 1999:
December 31,
1998 1999
--------- ---------
Goodwill $ 99,716 $ 236,250
Long-term franchise agreements
and contracts 2,390 3,577
Non-competition agreements 1,210 2,015
Other, net 777 2,009
--------- ---------
104,093 243,851
Less - accumulated amortization (2,244) (6,449)
--------- ---------
$ 101,849 $ 237,402
========= =========
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
remaining term of the related agreements (ranging from 5 to 18 years). Total
goodwill amortization expense for the years ended December 31, 1997, 1998 and
1999 was $150, $1,640 and $3,766, respectively.
F-17
47
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, 1998 and
1999:
December 31,
1998 1999
--------- ---------
Landfill site costs $ 10,315 $ 250,187
Land, buildings and improvements 11,084 29,735
Rolling stock 24,662 41,781
Containers 18,978 26,586
Machinery and equipment 7,817 17,865
--------- ---------
72,856 366,154
Less accumulated depreciation and depletion (21,880) (31,392)
--------- ---------
$ 50,976 $ 334,762
========= =========
The Company's landfill depletion expense for the years ended December 31, 1997,
1998 and 1999 was $206, $279 and $2,163, respectively.
5. OTHER ASSETS
Other assets consist of the following as of December 31, 1998 and 1999:
December 31,
1998 1999
------- -------
Restricted cash $ 1,381 $ 7,624
Loan fees 250 2,186
Other 1,078 964
------- -------
$ 2,709 $10,774
======= =======
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 and Wasco bonds (Note 9).
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following as of December 31, 1998 and 1999:
December 31,
1998 1999
------- -------
Income taxes $ 1,114 $ 6,030
Payroll and payroll related 1,136 2,650
Interest payable 583 1,964
Insurance claims and premiums 405 1,374
Other 2,581 3,630
------- -------
$ 5,819 $15,648
======= =======
F-18
48
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. SHORT-TERM BORROWINGS
Short-term borrowings consisted of various revolving and non-revolving
lines-of-credit with a bank. These amounts were paid in full in February 1999.
8. CLOSURE AND POST-CLOSURE COSTS
The net present value of the closure and post-closure commitment is calculated
assuming inflation of 3% and a risk-free capital rate of 7%. Discounted amounts
previously recorded are accreted to reflect the effects of the passage of time.
The Company's current estimate of total future payments for closure and
post-closure, in accordance with Subtitle D, is $4,500,000, adjusted for
inflation, while the present value of such estimate is $8,000. At December 31,
1998 and 1999, respectively, accruals for landfill closure and post-closure
costs (including costs assumed through acquisitions) were $2,655 and $4,313,
respectively, and are recorded as other long-term liabilities on the balance
sheet. The accruals reflect landfills whose estimated remaining lives, based on
current waste flows, range from 13 to 174 years, with an estimated average
remaining life of approximately 96 years. The Company estimates that its closure
and post-closure payment commitments for certain of its landfills will begin in
2012.
9. LONG-TERM DEBT
Credit Facility
In January 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 up to $5,000 in
stand-by letters-of-credit, and the borrowings bore interest at various fixed
and/or variable rates at the Company's option. 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 2008 (Note 12).
In May 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 $5,000 in 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.
In November 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
1998 Credit Facility"). As of December 31, 1998, the maximum amount available
under the November Credit Facility was $115,000 (including $15,000 in stand-by
letters of credit, of which $1,829 were issued as of December 31, 1998) 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 1998 Credit
Facility replaced the May Credit Facility.
In March 1999, the Company entered into a new revolving credit facility with a
syndicate of banks for which BankBoston N.A. acts as agent (the "March 1999
Credit Facility"). As of December 31, 1999, the maximum amount available under
the March 1999 Credit Facility is $315,000 (including $35,000 in stand-by
letters of credit, of which $26,000 were issued as of December 31, 1999) and the
borrowings bear interest at various fixed and/or variable rates at the Company's
option (approximately 8.2% as of December 31, 1999). The March 1999 Credit
Facility amended the November 1998 Credit Facility. The March 1999
F-19
49
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Credit Facility requires quarterly payments of interest and it matures in March
2004. Borrowings are secured by substantially all of the Company's assets and
the Company is required to pay an annual commitment fee equal to 0.5% of the
unused portion of the facility. The March 1999 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 repurchases and
redemption of capital stock. The Credit Facility also requires that specified
financial ratios and balances be maintained. As of December 31, 1999, the
Company was in compliance with these covenants.
In December 1999, the Company completed a $13,600 tax-exempt bond financing for
its Wasco subsidiary (the "Wasco Bond"). These funds will be used for the
acquisition, construction, furnishing, equipping and improving of a landfill
located in Wasco County, Oregon (the "Landfill Project"). The bonds mature in
December 2009 and bear interest at variable rates based on market conditions for
Oregon tax exempt bonds (approximately 5.5% at December 31, 1999). The bonds are
backed by a letter of credit issued by BankBoston N.A under the March 1999
Credit Facility for $14,500. At December 31, 1999, approximately $4.6 million of
the funds from the bond offering are held by a trustee and can be used by the
Company to finance capital expenditures on the Landfill Project. These unused
funds held by the trustee are classified as restricted cash and included in
other assets in the accompanying consolidated balance sheet.
CRC Bond
In December 1991, Columbia Resource Company, a wholly-owned subsidiary of the
Company acquired in 1999, received $13,000 in financing through an Industrial
Revenue Bond (the "CRC Bond") issued by Clark County, Washington. These funds
were used for the acquisition of real property and construction thereon of a
solid waste transfer station. The CRC Bond requires escalating annual principal
payments ranging from $1,000 in December 2000 to $1,505 in December 2006 (the
maturity date), bears interest at rates ranging from 7.1% to 7.5%, is secured by
the real property and solid waste transfer station and backed by a letter of
credit issued by BankBoston N.A. under the March 1999 Credit Facility for
$8,625. Additionally, BankBoston N.A. and another lender have issued additional
letters of credit in the amount of $1,000 and $2,000, respectively, in
connection with this project.
Madera Bond
In June 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% and 4.6% at December 31, 1998 and 1999, respectively). The bonds are backed
by a letter of credit issued by BankBoston N.A. under the March 1999 Credit
Facility for $1,828. 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.
Interest Rate Protection Agreements
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% and 6.68% at December 31, 1998 and 1999, respectively). The fair value of
the Interest Agreement as of December 31, 1998 and 1999 is $188 and $327,
respectively, which reflects the estimated amounts that the Company would
receive to terminate the
F-20
50
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Interest Agreement based on quoted market prices of comparable contracts as of
December 31, 1998 and 1999. 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.
In December 1999, we entered into an interest rate hedge (the "Hedge Agreement")
with BankBoston, N.A. Under the Hedge Agreement, which is effective through
December 2001, the interest rate on $125 million of our floating rate long-term
debt is effectively fixed with an interest rate of 6.1% plus an applicable
margin. This rate remains at 6.1% if LIBOR is less than 7.0%. If LIBOR exceeds
7.0%, the interest rate under the Hedge Agreement will increase one basis point
for every LIBOR basis point above 7.0%. 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 Hedge Agreement.
Long-term debt consists of the following as of December 31, 1998 and 1999:
1998 1999
--------- ---------
November 1998 Credit Facility $ 57,281 $ -
March 1999 Credit Facility - 247,500
Wasco Bond - 13,600
CRC Bond - 8,625
Madera Bond 1,800 1,800
Notes payable to sellers in connection with acquisitions,
unsecured, bearing interest at 6.5% to 8.4%, principal
and interest payments due periodically throughout the
year with due dates ranging from 2000 to 2005 8,927 1,570
Notes payable to third parties, secured by substantially all
assets of certain subsidiaries the Company, interest at
7.0% to 11.0%, principal and interest payments due
periodically throughout the year with due dates
ranging from 2000 to 2009 4,153 4,604
Other 7,744 -
--------- ---------
79,905 277,699
Less - current portion (12,039) (2,669)
--------- ---------
$ 67,866 $ 275,030
========= =========
F-21
51
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
As of December 31, 1999, aggregate contractual future principal payments by
calendar year on long-term debt are due as follows:
2000 $ 2,669
2001 3,110
2002 1,933
2003 1,963
2004 249,232
Thereafter 18,792
--------
$277,699
========
10. 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 $441 for the nine months ended
September 30, 1997. The Company's consolidated rent expense under operating
leases during the years ended December 31, 1997, 1998 and 1999 was $235, $730
and $1,063, respectively.
As of December 31, 1999, future minimum lease payments under these leases, by
calendar year, are as follows:
2000 $1,244
2001 1,226
2002 1,166
2003 1,022
2004 923
Thereafter 2,641
------
$8,222
======
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 and 1999, WCI had provided customers and various regulatory
authorities with bonds and letters of credit of approximately $2,000 and $2,414,
respectively, to secure its obligations (exclusive of letters of credit backing
certain municipal bond obligations). 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
F-22
52
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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, 1999, 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 is a 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, 1999 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.
Employees
The Teamsters Union represents approximately 85 drivers and mechanics at WCI's
Vancouver, Washington operation. The labor agreement between the Union and the
Company was renewed in January 2000 for a period of three years.
The Teamsters Union represents approximately 24 drivers and mechanics at Arrow
Sanitary Services, Inc. ("Arrow") in Portland Oregon, a wholly owned subsidiary
of the Company. The current labor agreement term is until March of 2001.
The Teamsters Union represents approximately 50 of the Murrey Companies'
drivers. A new collective bargaining agreement was negotiated during the 4th
quarter of 1999. This agreement is for a period of 3.5 years.
The Company is not aware of any other organizational efforts among its employees
and believes that its relations with its employees are good.
11. 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
F-23
53
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
12. STOCKHOLDERS' EQUITY
Common Stock
Of the 28,893,650 shares of common stock authorized but unissued as of December
31, 1999, the following shares were reserved for issuance:
Stock option plan 2,532,762
Stock purchase warrants 759,569
Shares held in escrow 61,737
---------
3,354,068
=========
Stockholder Notes Receivable
In December 1997, the Company provided loans in the aggregate amount of $83 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.
The Option Plan provides for the reservation of common stock for issuance
thereunder equal to 12% of the outstanding shares of the Company's common stock.
The amount of common stock reserved for issuance under the Option Plan is
decreased for options granted and increased for previously granted options that
have been forfeited, cancelled or exercised. As of December 31, 1997, 1998 and
1999, options for 671,500, 160,450 and 788,617 shares, respectively, of common
stock were available for future grants under the Option Plan.
As of December 31, 1997, 1998 and 1999, 35,000, 333,121 and 495,713 options to
purchase common stock were exercisable under the Option Plan, respectively.
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
years ended December 31, 1998 and 1999 is presented below:
F-24
54
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Weighted
Number of 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
Granted 1,045,350 16.03
Forfeited 28,000 20.20
Exercised 251,969 5.92
----------------
Outstanding as of December 31, 1999 1,744,145 12.57
----------------
The following table summarizes information about stock options outstanding as of
December 31, 1999:
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Weighted
Average
Weighted Remaining Weighted
Average Contractual Average
Exercise Life Exercise
Exercise Range Shares Price (In Years) Shares Price
- ----------------- ------------ ------------ ------------ ------------ ------------
$2.80 to 5.00 371,380 $ 2.90 7.9 222,339 $ 2.93
$6.00 to 9.50 48,833 8.48 8.1 25,666 8.45
$10.50 to 13.00 637,832 11.50 9.3 148,330 11.08
$15.19 to 22.13 617,600 18.37 9.0 92,710 19.37
$24.94 to 26.50 68,500 25.60 9.5 6,668 26.50
------------ ------------
1,744,145 12.57 8.9 495,713 9.05
============ ============
The weighted average grant date fair values for options granted during 1998 and
1999 are as follows:
1997 1998 1999
-------- -------- --------
Exercise prices equal to market price of stock $ -- $ 5.28 $ 7.80
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 years ended December 31, 1998 and 1999: risk-free interest rate
of 6%, 5% and 5.8%, respectively; dividend yield of zero; volatility factor of
the expected market price of the Company's common stock of .40, .55 and .55,
respectively; and a weighted-average expected life of the option of 4 years.
F-25
55
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 years ended December 31, 1997, 1998 and 1999:
Year Ended December 31,
1997 1998 1999
--------- --------- ---------
Net income (loss) applicable to common stockholders:
As reported $ (4,181) $ 1,361 $ 9,195
Pro forma (4,185) 38 7,599
Basic income (loss) per share:
As reported (0.73) 0.13 0.50
Pro forma (0.73) 0.00 0.41
Diluted income (loss) per share:
As reported (0.73) 0.11 0.46
Pro forma (0.73) 0.00 0.38
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. During the years ended December 31, 1998 and 1999, compensation
expense of $393 and $265, respectively, was recorded relating to these options.
Stock Purchase Warrants
The following table summarizes information about warrants outstanding as of
December 31, 1998 and 1999:
F-26
56
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Outstanding at December 31,
Issue Warrants Exercise Fair Value ---------------------------
Date Issued Range of Warrants 1998 1999
--------------- --------- ------------- ----------- ---------- -----------
Warrants issued to bank September 1997 200,000 $ 0.01 $ 382 27,200 -
Warrants issued to guarantors of
Company's debt obligations December 1997 841,000 2.80 328 841,000 374,000
Warrants issued to consultants December 1997 15,000 2.80 to 5.00 15,000 15,000
Warrants issued to bank January 1998 140,000 2.80 855 140,000 -
Warrants issued in connection
with an acquisition February 1998 200,000 4.00 954 200,000 200,000
Warrants issued to an employee February 1998 50,000 2.80 240 - -
Warrants issued to market
development consultants Throughout 1998 67,935 12.00 to 22.13 339 67,935 67,935
Warrants issued to market
development consultants Throughout 1999 102,634 10.88 to 30.50 572 - 102,634
--------- ---------
1,291,135 759,569
--------- ---------
The warrants are exercisable upon vesting and notification and expire between
2000 and 2009.
In September 1997, the Company issued a warrant to purchase 200,000 shares of
the Company's common stock to the Bank that provided a line of credit and term
loan payable. The fair value of the warrant was determined 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
warrants were valued 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 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 warrant was valued 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 $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 in connection with an acquisition. The warrant was valued 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
$7.50 per share and an expected life of 5 years. The value of the warrant was
recorded as an element of purchase price for the acquisition.
F-27
57
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Warrants issued to third party market development consultants are valued using
the Black-Scholes pricing model with an assumed stock price volatility of .40 in
1998 and .55 in 1999, risk-free interest rate of 6.0%, and contractual term of 2
years. These warrants are recorded as an element of the related acquisitions.
13. INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31, 1997,
1998 and 1999 consists of the following:
Year Ended December 31,
----------------------------------
1997 1998 1999
------- ------- -------
Current:
Federal $ 826 $ 1,471 $ 7,778
State - 146 865
Deferred:
Federal (462) 1,286 2,053
State - 145 206
------- ------- -------
$ 364 $ 3,048 $10,902
======= ======= =======
Significant components of deferred income tax assets and liabilities are as
follows as of December 31, 1998 and 1999:
1998 1999
-------- --------
Deferred income tax assets:
Basis step-up in acquired assets $ - $ 396
Accounts receivable reserves 98 66
Accrued expenses 14 142
State taxes 22 42
Other 49 161
-------- --------
Total deferred income tax assets: 183 807
======== ========
Deferred income tax liabilities:
Net asset basis difference in
non-taxable acquisitions (255) (68,505)
Amortization (300) (1,257)
Depreciation (1,641) (3,976)
Other liabilities (153) (410)
Prepaid expenses (180) (1,097)
-------- --------
Total deferred income tax liabilities (2,529) (75,245)
-------- --------
Net deferred income tax liability $ (2,346) $(74,438)
======== ========
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):
F-28
58
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Year Ended December 31,
1997 1998 1999
------ ------ ------
Income tax provision (benefit) at the statutory rate (34.0)% 34.0% 35.0%
State taxes, net of federal benefit - 4.0 3.5
Acquisition charges - - 10.3
Goodwill amortization - 3.0 2.1
Subchapter S (1.3) 3.2 1.1
Stock compensation expense 44.0 3.0 0.5
Other 0.9 0.8 1.7
------ ------ ------
9.6% 48.0% 54.2%
====== ====== ======
14. 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, 1997, 1998 and 1999:
Year Ended December 31,
-----------------------------------------
1997 1998 1999
---------- ------------ -----------
Numerator:
Income (loss) before extraordinary item $ (3,650) $ 3,305 $ 9,195
Redeemable convertible preferred stock accretion (531) (917) -
---------- ------------ -----------
Income (loss) applicable to common stockholders
before extraordinary item $ (4,181) $ 2,388 $ 9,195
========== ============ ===========
Extraordinary item - (1,027) -
---------- ------------ -----------
Net income (loss) applicable to common
stockholder $ (4,181) $ 1,361 $ 9,195
========== =========== ===========
Denominator:
Weighted average common shares outstanding 5,721,827 10,309,553 18,552,486
Dilutive effect of stock options and warrants
outstanding - 1,628,930 1,273,738
Incremental common shares issuable upon redemption
of redeemable common stock - 282,192 -
---------- ----------- ------------
5,721,827 12,220,675 19,826,224
========== =========== ============
As of December 31, 1998 and 1999, the Company had the following common stock
equivalents that have not been included in the computation of diluted net income
per share because to do so would have been antidilutive:
December 31, 1998 December 31, 1999
------------------------------ ------------------------------
Number of Exercise Number of Exercise
Shares Price Range Shares Price Range
--------- ---------------- --------- ----------------
Outstanding options 87,832 $18.62 to $22.13 103,000 $21.50 to $26.50
Outstanding warrants 51,485 $17.00 to $22.13 81,081 $21.50 to $30.50
------- -------
139,317 184,081
------- -------
F-29
59
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15. RELATED PARTY TRANSACTIONS
Advances
As of December 31, 1998, the Murrey Companies had non-interest bearing advances
payable to one of their shareholders totaling $543. These advances were paid in
full in 1999.
Shareholder Notes Payable
As of December 31, 1998, Cook's had notes payable to shareholders and other
related parties totaling $863. These notes payable were secured by all assets of
Cook's, carried an annual interest rate of 12% and were paid in full in December
1999.
Disposal Fees
During the years ended December 31, 1997, 1998 and 1999, the Murrey Companies
paid $8,592, $8,816 and $10,328, 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.
Shareholder Notes Receivable
Central, G&P, and Omega provided loans totaling $365 as of December 31, 1998 to
shareholders of those corporations. These notes were non-interest bearing and
repaid in 1999.
16. EMPLOYEE BENEFIT PLANS
WCI has a voluntary savings and investment plan (the "WCI 401(k) Plan"). The WCI
401(k) Plan is available to all eligible, non-union employees of WCI. Under the
WCI 401(k) Plan, WCI's contributions are 40% of the first 5% of the employee's
contributions. The Murrey Companies have a voluntary savings and investment plan
(the "Murrey 401(k) Plan"). The Murrey 401(k) Plan is available to all eligible,
non-union employees of the Murrey Companies. Under the Murrey 401(k) Plan, the
Murrey Companies' contributions are at the discretion of management. During the
years ended December 31, 1997, 1998 and 1999, the total 401(k) plan expense for
the WCI and Murrey 401(k) plans was approximately $318, $394 and $848,
respectively.
F-30
60
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the unaudited consolidated quarterly results of
operations as reported and as restated for poolings-of-interests for 1998 and
1999 (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
Revenues:
1998 as reported $ 7,601 $ 10,919 $ 16,828 $ 18,706
1998 as restated 18,099 22,208 28,486 29,594
Gross profit:
1998 as reported 2,204 3,486 5,636 6,159
1998 as restated 4,810 6,459 8,409 7,987
Income before extraordinary item:
1998 as reported 35 538 1,042 1,158
1998 as restated 519 1,164 1,050 572
Net income (loss):
1998 as reported 34 (277) 1,042 946
1998 as restated 519 349 1,050 360
Basic earnings (loss) per common share:
1998 as reported (0.23) (0.12) 0.12 0.10
1998 as restated (0.01) 0.00 0.08 0.03
Diluted earnings (loss) per common share:
1998 as reported (0.23) (0.08) 0.10 0.09
1998 as restated (0.01) 0.00 0.07 0.02
Revenues:
1999 as reported 30,883 40,219 48,610 60,391
1999 as restated 32,846 40,490 48,891 60,391
Gross profit:
1999 as reported 10,763 15,414 19,302 24,726
1999 as restated 11,440 15,494 19,403 24,726
Net income (loss):
1999 as reported (4,362) 3,152 4,919 5,390
1999 as restated (4,296) 3,162 4,939 5,390
Basic earnings (loss) per common share:
1999 as reported (0.28) 0.18 0.26 0.26
1999 as restated (0.27) 0.18 0.26 0.26
Diluted earnings (loss) per common share:
1999 as reported (0.28) 0.16 0.24 0.25
1999 as restated (0.27) 0.16 0.24 0.25
F-31
61
PART III
Except as set forth above in Part I under "Executive Officers," the
information required by Part III (Items 10 through 13) has been omitted from
this report, and is incorporated by reference to the captions "Principal
Stockholders," "Election of Directors" and "Executive Compensation" in our
definitive Proxy Statement for the 2000 Annual Meeting of Stockholders, which we
will file with the Commission pursuant to Regulation 14A within 120 days after
the end of our 1999 fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) See Index to Financial Statements on page F-1. The following Financial
Statement Schedule is filed herewith and made a part hereof:
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
(b) The following reports on Form 8-K were filed during the last quarter of
our fiscal year ended December 31, 1999:
On November 15, 1999, we filed a Form 8-K reporting the relocation of our
corporate offices to 620 Coolidge Drive, Suite 350, Folsom, California
95630-3155.
On November 24, 1999, we filed a Form 8-K reporting the acquisition of all
of the outstanding capital stock of Denver Regional Landfill, Inc. ("DRL"), a
Colorado corporation wholly owned by Allied Waste Systems Holdings, Inc., a
wholly owned subsidiary of Allied Waste Industries, Inc. On the same date, Waste
Connections of Colorado, Inc. ("WCIC"), a Delaware corporation that is a wholly
owned subsidiary of WCI, acquired certain assets from Allied Waste
Transportation Inc. ("AWT"), which is wholly owned by Allied Waste Industries,
Inc.
(c) See Exhibit Index immediately following signature pages.
II-1
62
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Waste Connections, Inc.
By: /s/ Ronald J. Mittelstaedt
---------------------------------------
Ronald J. Mittelstaedt
President
Date: March 10, 2000
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Ronald J. Mittelstaedt
Ronald J. Mittelstaedt Chairman, President and Director
(principal executive officer) March 10, 2000
/s/ Steven F. Bouck
Steven F. Bouck Chief Financial Officer
(principal financial officer) March 10, 2000
/s/ Michael R. Foos
Michael R. Foos Chief Accounting Officer and Vice President - Finance
(principal accounting officer) March 10, 2000
/s/ Eugene V. Dupreau
Eugene V. Dupreau Vice President - California Division and Director March 10, 2000
/s/ Michael W. Harlan
Michael W. Harlan Director March 10, 2000
/s/ William J. Razzouk
William J. Razzouk Director March 10, 2000
/s/ Irmgard R. Wilcox
Irmgard R. Wilcox Controller - Northern Washington Division and
Director March 10, 2000
II-2
63
WASTE CONNECTIONS, INC. AND PREDECESSORS
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1998 and 1999
(in thousands)
Additions
-------------------------- Deductions
Balance at Charged to Charged (Write-offs, Balance
Beginning Costs and to Other Net of at End
Description of Period Expenses Accounts Collections) of Period
- ----------- ----------- ----------- ----------- ----------- -----------
Deducted from asset accounts:
Allowance for doubtful accounts:
Predecessors combined:
Nine months ended September 30, 1997 $ 81 $ 139 $ - $ (97) $ 123
Waste Connections, Inc.:
Year ended December 31, 1997 244 79 - (48) 275
Year ended December 31, 1998 275 626 - (209) 692
Year ended December 31, 1999 692 1,549 5 (913) 1,333
II-3
64
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
- -------------- -----------------------
3.1* Amended and Restated Certificate of Incorporation of Waste Connections, in effect
as of the date hereof
3.2* Amended and Restated By-Laws of Waste Connections, in effect as of the date hereof
4.1* Form of Common Stock Certificate
4.2* Amended and Restated Certificate of Incorporation
4.3* Amended and Restated Bylaws, effective March 18, 1998
4.4- Form of Senior Indenture
4.5- Form of Subordinated Indenture
10.1*** Amended and Restating Revolving Credit Agreement, dated as of November 20, 1998, between
Waste Connections and various banks represented by BankBoston, N.A.
10.2### First Amended and Restated 1997 Stock Option Plan
10.3* Form of Option Agreement
10.4* Form of Warrant Agreement
10.5* Warrant Agreement and related Anti-Dilution Agreement issued to Imperial Bank
10.6* Warrant Agreement and related Anti-Dilution Agreement issued to BankBoston, N.A.
10.7* Form of Stock Purchase Agreement dated as of September 30, 1997(3)
10.8*** Form of Third Amended and Restated Investors' Rights Agreement dated as of
December 31, 1998 (3)
10.9* Employment Agreement among Waste Connections, J. Bradford Bishop, Frank W. Cutler,
James N. Cutler, Jr. and Ronald J. Mittelstaedt, dated as of October 1, 1997
10.10* First Amended Employment Agreement between Waste Connections and Darrell Chambliss,
dated as of October 1, 1997
10.11* First Amended Employment Agreement between Waste Connections and Michael Foos, dated
as of October 1, 1997
10.12* First Amended Employment Agreement between Waste Connections and Eric Moser, dated
as of October 1, 1997
10.13* Employment Agreement between Waste Connections and Steven Bouck, dated as of
February 1, 1998
10.14* Employment Agreement between Waste Connections and Eugene V. Dupreau, dated as of
February 23, 1998
10.15* Employment Agreement between Waste Connections and Charles B. Youngclaus, dated as of
February 23, 1998
10.16+* Purchase and Sale Agreement, dated as of September 29, 1997, between
Browning-Ferris Industries, Inc., Browning-Ferris Industries, Inc., and
Browning-Ferris Industries of Idaho, Inc. as Sellers, and Waste Connections,
Waste Connections of Idaho, Inc. and Continental Paper Recycling, LLC as Buyers
10.17+* Stock Purchase Agreement, dated as of January 26, 1998, among Waste Connections,
Waste Connections of Idaho, Inc. and the shareholders of Waste Connections of Idaho, Inc.
10.18+* Stock Purchase Agreement, dated as of February 4, 1998, among Waste Connections and the
II-4
65
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
- -------------- -----------------------
shareholders of Madera Disposal Company, Inc.
10.19+* Asset Purchase Agreement, dated as of March 1, 1998, among Waste Connections, Waste
Connections of Idaho, Inc., Hunter Enterprises, Inc. and the shareholder of Hunter
Enterprises, Inc.
10.20* Form of Indemnification Agreement entered into by Waste Connections and each of its
directors and officers
10.21+# Asset Purchase Agreement, dated as of June 1, 1998, by and among Waste Connections, Waste
Connections of Utah, Inc., Contractor's Waste, L.C., and Brad Kitchen, Heath Johnston, and
R. Scott McQuarrie
10.22+## Stock Purchase Agreement, dated as of June 5, 1998, by and among Waste Connections, B & B
Sanitation, Inc., Red Carpet Landfill, Inc., Darlin Equipment, Inc., Lyle J. Buller, Larue
A. Buller, the Lyle J. Buller Revocable Trust dated 10/11/96 and Larue A. Buller, Trustee
of the Larue A. Buller Revocable Trust dated 10/11/96
10.23++ Stock Purchase Agreement dated as of June 17, 1998, by and among Waste Connections, Arrow
Sanitary Service, Inc., Steven Giusto, Dennis Giusto, John Giusto, Michael Giusto and
Kenneth Giusto
10.24++ Stock Purchase Agreement dated as of June 25, 1998, by and among Waste Connections, Curry
Transfer and Recycling, Oregon Waste Technology, Petty H. Smart, and A. Lewis Rucker
10.25**+ Purchase and Sale Agreement dated as of June 25, 1998, by and between Petty H. Smart and
Waste Connections
10.26** Loan Agreement dated as of June 1, 1998 between Madera Disposal Systems, Inc. and the
California Pollution Control Financing Authority
10.27** Employment Agreement between Waste Connections and David M. Hall, dated as of July 8, 1998
10.28+++ Agreement and Plan of Merger, dated as of July 30, 1998, by and among Waste Connections,
WCI Acquisition Corporation, Shrader Refuse and Recycling Service Company, Duane E.
Shrader, Myrlen A. Shrader, Daniel L. Shrader, Mark S. Shrader, Michael D. Shrader, and
Daren L. Shrader
10.29+++ Purchase and Sale Agreement dated as of July 31, 1998, by and between Ambler Vincent
Development Company and Shrader Refuse and Recycling Service Company
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66
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
- -------------- -----------------------
10.30**+ Purchase Agreement, dated as of July 31, 1998, by and among Waste Connections,
Waste Connections of Nebraska, Inc., J & J Sanitation Inc., Big Red Roll Off
Inc., Garry L. Jeffords, Darin L. 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
10.31***+ 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
10.32****+ 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
10.33####+ Amendment No. 1 to Purchase Agreement, dated as of January 7, 1999, by and among
WCI, Butler County Landfill, Inc., Kobus Construction, Inc., Tom Kobus and Debbie
Kobus
10.34####+ Amendment No. 2 to Purchase Agreement, dated as of January 8, 1999, by and among
WCI, Butler County Landfill, Inc., Kobus Construction, Inc., Tom Kobus and Debbie
Kobus
II-6
67
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
- -------------- -----------------------
10.35+ Stock Purchase Agreement dated as of November 30, 1998, by and among Waste
Connections, Amador Disposal Service, Inc., Mother Lode Sani-Hut, Inc., and
Robert N. Grunigen, Carla Grunigen, Carol Sesser and Gaye Sue Marchini, as
Trustees of the Marchini 1981 Trust, Bennie L. Ratto, Carol Sesser, John D.
Marchini, Gloria Lehman, Sandra Thomas, John H. Tillman and Jeffrey R. Tillman
II-7
68
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
- -------------- -----------------------
10.36--+ 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 thereto
II-8
69
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
- -------------- -----------------------
10.37---+ Acquisition Agreement dated as of August 11, 1999, by and among WCI Acquisition
Corporation I, Waste Connections, Inc., International Environmental Industries,
Inc., J.O. Stewart, Jr., Ralner Corporation, JOS Enterprises, Ltd. and
International Environmental Industries Equipment Company, L.P.
10.38----+ Asset Purchase Agreement dated as of October 15, 1999, by and among Waste
Connections of Colorado, Inc., Allied Waste Transportation, Inc., BFI Services
Group, Inc. and Allied Waste Industries, Inc.
10.39----+ Stock Purchase Agreement dated as of October 15, 1999, by and among Waste
Connections, Inc., Allied Waste Systems Holdings, Inc. and Allied Waste
Industries, Inc.
10.40----+ Closing Agreement dated as of November 17, 1999, by and among Waste Connections,
Inc., Allied Waste Systems Holdings, Inc., Allied Waste Industries, Inc. and
Denver Regional Landfill, Inc.
10.41----+ Agreement dated as of November 17, 1999, among Waste Connections of Colorado,
Inc., Allied Waste Transportation, Inc., BFI Services Group, Inc. and Allied
Waste Industries, Inc.
II-9
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EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
- -------------- -----------------------
10.42 Employment Agreement between Waste Connections and James M. Little, dated as
September 13, 1999
10.43 Employment Agreement between Waste Connections and Jerri L. Hunt, dated as of
October 25, 1999
12.1- Statement regarding computation of ratio of earnings to fixed charges
12.2- Statement of computation of pro forma ratio of earnings to combined fixed charges
and preferred stock dividends
21.1 Subsidiaries of Waste Connections
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule
99.1 Proxy Statement for Waste Connections' 2000 Annual Stockholders Meeting scheduled
to be held May 24, 2000. (To be filed with the Commission prior to 120 days after
December 31, 1999, and incorporated by reference herein to the extent indicated
in Part III to this Form 10-K.)
- ------------------
* Incorporated by reference to the exhibits filed with Waste Connections'
Registration Statement on Form S-1, Registration No. 333-48029.
** Incorporated by reference to the exhibits filed with Waste Connections'
Registration Statement on Form S-4, Registration No. 333-59199.
*** Incorporated by reference to the exhibits filed with Waste Connections'
Registration Statement on Form S-4, Registration No. 333-65615.
**** Incorporated by reference to the exhibits filed with Waste Connections'
Registration Statement on Form S-1, Registration No. 333-70253.
- Incorporated by reference to the exhibits filed with Waste Connections'
Registration Statement on Form S-3, Registration No. 333- 87703.
# Incorporated by reference to the exhibit filed with Waste Connections' Form 8-K
filed on June 15, 1998.
## Incorporated by reference to the exhibit filed with Waste Connections' Form 8-K
filed on June 22, 1998.
II-10
71
EXHIBIT INDEX
- --------------
++ Incorporated by reference to the exhibit filed with Waste Connections' Form 8-K
Filed on August 11, 1998.
#### Incorporated by reference to the exhibit filed with Waste Connections' Form 8-K
filed on January 13, 1999.
-- Incorporated by reference to the exhibit filed with Waste Connections' Form 8-K
filed on April 14, 1999.
--- Incorporated by reference to the exhibit filed with Waste Connections' Form 8-K
filed on August 25, 1999.
---- Incorporated by reference to the exhibit filed with Waste Connections' Form 8-K
filed on November 24, 1999.
### Incorporated by reference to the exhibits filed with Waste Connections' Form S-8,
Registration No. 333-72113.
+ Filed without exhibits and schedules (to be provided supplementally on request of
the Commission).
II-11