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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, 1998
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)
2260 Douglas Blvd.
Suite 280
Roseville, California 95661
(Address of principal executive offices) (Zip Code)
(916) 772-2221
(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 March 25, 1999: $286,726,482
Number of shares of Common Stock outstanding as of March 25, 1999:
16,985,539
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 1999 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
PART I 3
1. BUSINESS 3
2. PROPERTIES 20
3. LEGAL PROCEEDINGS 20
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 20
PART II 22
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS. 22
6. SELECTED HISTORICAL AND SUPPLEMENTAL FINANCIAL
AND OPERATING DATA 23
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 28
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 38
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 38
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 38
PART III 38
PART IV 38
14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS
ON FORM 8-K 38
SIGNATURES 41
EXHIBIT INDEX 43
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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. Factors that appear with the forward-looking statements, or
in Waste Connections' 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 32
collection operations, nine transfer stations and two Subtitle D landfills and
operate an additional seven transfer stations, two Subtitle D landfill and seven
recycling facilities. As of March 15, 1999, we served more than 300,000
commercial, industrial and residential customers in ten states: California,
Idaho, Kansas, Nebraska, Oklahoma, Oregon, South Dakota, Utah, Washington, and
Wyoming. Approximately 75% 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 March 15, 1999, we acquired 40 solid waste services businesses, including 24
collection operations, two Subtitle D landfills, 14 transfer stations and six
recycling facilities. These acquisitions took Waste Connections into seven new
markets in five additional states: Kansas, Nebraska, Oklahoma, Oregon and Utah.
Generating internal growth and securing additional exclusive arrangements are
also important components of our growth strategy.
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Recent Developments
On February 25, 1999, we announced the simultaneous purchase and sale of
certain solid waste services assets with Allied Waste Industries, Inc. The
transactions include customer contracts, equipment and facilities and represent
approximately $7 million in acquired revenues to each party. We sold our
collection operations in Issaquah, Washington and Maltby, Washington in exchange
for Allied's collection and transfer operations in Norfolk, Nebraska, Fremont,
Nebraska and its landfill operating contract in Columbus, Nebraska.
On February 16, 1999, we announced that we had signed a definitive
agreement to acquire Columbia Resource Co., L.P. and Finley Buttes L.P. Columbia
Resource Co. operates two transfer stations in Clark County Washington. Finley
Buttes is one of the largest regional landfills in the Pacific Northwest, with
over 200 years of capacity at current rates. Combined annual revenue of the two
operations is approximately $23 million. The transaction is structured as all
cash for stock purchase, however, terms of the transaction have not been
disclosed. Closing is subject to usual and customary closing conditions,
including local governmental approval.
On February 4, 1999 we consummated a secondary public offering of
approximately four million shares of Common Stock priced at $17.50 per share.
Substantially all of the proceeds were used for the payment of debt associated
with our acquisition program.
On January 19, 1999, four wholly owned subsidiaries of Waste Connections
merged into Murrey's Disposal Company, Inc., American Disposal Company, Inc.,
D.M. Disposal Co., Inc. and Tacoma Recycling Company, Inc. (together, the
"Murrey Companies"), and the Murrey Companies became wholly owned subsidiaries
of Waste Connections. The Murrey Companies had revenues for the year ended
December 31, 1998 of approximately $28.9 million, of which more than 75% were
derived from services provided under exclusive arrangements. The Murrey
Companies, which provide solid waste services to more than 65,000 customers in
the Seattle-Tacoma, Washington area, own and operate five collection operations
and one transfer station and operate two transfer stations and two recycling
facilities. The aggregate consideration paid by Waste Connections to the
shareholders of the Murrey Companies was 2,888,880 shares of Common Stock. The
mergers were accounted for as poolings-of-interests.
On January 8, 1999, a wholly owned subsidiary of Waste Connections
merged into Roche & Sons, Inc. As a result of this merger, Roche & Sons, Inc.
became a wholly owned subsidiary of Waste Connections that provides solid waste
services to approximately 6,000 customers in central Utah. This merger was
accounted for as a pooling of interests.
Unless otherwise noted, all descriptions of Waste Connections' business
in this Annual Report on Form 10-K are as of March 15, 1998.
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:
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- - - Increased Impact of Regulations. Stringent industry
regulations, such as the Subtitle D regulations, have caused operating
and capital costs to rise and have accelerated consolidation and
acquisition activities in the solid waste collection and disposal
industry. Many smaller industry participants have found these costs
difficult to bear and have decided to either close their operations or
sell them to larger operators. In addition, Subtitle D requires more
stringent engineering of solid waste landfills, and mandates liner
systems, leachate collection, treatment and monitoring systems and gas
collection and monitoring systems. These ongoing costs are combined with
increased financial reserve requirements for solid waste landfill
operators relating to closure and post-closure monitoring. As a result,
the number of solid waste landfills is declining while the average size
is increasing.
- - - Increased Integration of Collection and Disposal Operations.
In certain markets, competitive pressures are forcing operators to
become more efficient by establishing an integrated network of solid
waste collection operations and transfer stations, through which they
secure solid waste streams for disposal. Operators have adopted a
variety of disposal strategies, including owning landfills, establishing
strategic relationships to secure access to landfills and to capture
significant waste stream volumes to gain leverage in negotiating lower
landfill fees, and securing long-term, most-favored-pricing contracts
with high capacity landfills.
- - - Pursuit of Economies of Scale. Larger operators achieve
economies of scale by vertically integrating their operations or by
spreading their facility, asset and management infrastructure over
larger volumes. Larger solid waste collection and disposal companies
have become more cost-effective and competitive 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 27% of the total revenues of the U.S. solid
waste industry is accounted for by more than 5,000 private, predominantly small,
collection and disposal businesses, approximately 41% by publicly traded solid
waste companies and approximately 32% by municipal governments that provide
collection and disposal services. We expect the current consolidation trends in
the solid waste industry to continue, because many independent landfill and
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collection operators lack the capital resources, management skills and technical
expertise necessary to comply with stringent environmental and other
governmental regulations and to compete with larger, more efficient, integrated
operators. In addition, many independent operators may wish to sell their
businesses to achieve liquidity in their personal finances or as part of their
estate planning. We believe that the fragmented nature of the industry offers
significant consolidation and growth opportunities, especially in secondary
markets of the Western U.S., for companies with disciplined acquisition
programs, decentralized operating strategies and access to financial resources.
Strategy
Our objective is to build a leading integrated solid waste services
company in secondary markets of the Western U.S. We have developed a two-pronged
strategy tailored to the competitive and regulatory factors that affect our
markets.
First, in markets where waste collection services are provided under
exclusive arrangements, or where waste disposal is municipally funded or
available from multiple municipal sources, we believe that controlling the waste
stream by providing collection services under exclusive arrangements is often
more important to our growth and profitability than owning or operating
landfills. In addition, regulations in some Western U.S. markets dictate the
disposal facility to be used. The large size of many western states increases
the cost of interstate and long haul disposal, heightening the effects of
regulations that direct waste disposal, which may make it more difficult for a
landfill to obtain the disposal volume necessary to operate profitably. In
markets with these characteristics, we believe that landfill ownership or
vertical integration is not critical to our success.
Second, in markets where we believe that owning landfills is a strategic
element to a collection operation because of competitive and regulatory factors,
we generally focus on providing integrated services, from collection through
disposal of solid waste in landfills that we own or operate.
GROWTH STRATEGY
- - - Expansion Through Acquisitions. We intend to expand significantly the
scope of our operations by continuing to acquire solid waste operations
in new markets and in existing or adjacent markets that are combined
with or "tuck in" to existing operations.
We intend to expand into new geographic regions by entering these
markets through acquisitions. We use an initial acquisition in a new
market as an operating base. Then we seek to strengthen the acquired
operation's presence in that market by providing additional services,
adding new customers and making "tuck-in" acquisitions. We next seek to
broaden our regional presence by adding additional operations in markets
adjacent to the new location. We are currently examining opportunities
in states other than those in which we currently operate and are
assessing potential acquisitions of solid waste operations in Colorado,
Montana and Texas.
We believe that many "tuck-in" acquisition opportunities exist within
our current and targeted market areas. For example, we have identified
more than 300 independent entities that provide collection and disposal
services in the states where we currently operate. We believe that
throughout the Western U.S., many independent entities are suitable for
acquisition by Waste Connections and provide opportunities to increase
our market share and route density.
- - - Exclusive Arrangements. We derive a significant portion of our
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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 16 transfer stations. By
operating transfer stations, we also engage in direct communications
with municipalities and private operators that deliver waste to our
transfer stations. This positions us to gain additional business in our
markets if a municipality privatizes any solid waste operations it owns
or rebids existing contracts, and it increases our opportunities to
acquire other private collection operations that use the transfer
stations.
OPERATING STRATEGY
- - - Decentralized Operations. We manage our operations on a decentralized
basis. This places decision-making authority close to the customer,
enabling us to identify customers' needs quickly and to address those
needs in a cost-effective manner. We believe that decentralization
provides a low-overhead, highly efficient operational structure that
allows us to expand into geographically contiguous markets and operate
in relatively small communities that larger competitors may not find
attractive. We believe that this structure gives us a strategic
competitive advantage, given the relatively rural nature of much of the
Western U.S., and makes us an attractive buyer to many potential
acquisition candidates. We currently deliver our services from 32
operating locations serving 12 market areas, or districts. Each district
has a district manager, who has autonomous service and decision-making
authority for that district and is responsible for maintaining service
quality, promoting safety in the district's operations, implementing
marketing programs, and overseeing day-to-day operations, including
contract administration. District managers also help identify
acquisition candidates and are responsible for integrating them into our
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operations and obtaining the permits and other governmental approvals
required for us to operate the acquired business.
- - - Operating Enhancements. We develop company-wide operating standards,
which are tailored for each of our markets based on industry standards
and local conditions. Using these standards, we track collection and
disposal routing efficiency and equipment utilization. We also implement
cost controls and employee training and safety procedures, and establish
a sales and marketing plan for each market. We have installed a wide
area network, implemented advanced management information systems and
financial controls, and consolidated accounting, insurance and employee
benefit functions, customer service, productivity reporting and
dispatching systems. While district management operates with a high
degree of autonomy, our senior officers monitor district operations and
require adherence to Waste Connections' accounting, purchasing,
marketing and internal control policies, particularly with respect to
financial matters. Our executive officers regularly review the
performance of district managers and operations. We believe that by
establishing operating standards, closely monitoring performance and
streamlining certain administrative functions, we can improve the
profitability of existing operations.
To improve an acquired business' operational productivity,
administrative efficiency and profitability, we apply the same operating
standards, information systems and financial controls to acquired
businesses as our existing operations employ. Moreover, if we can
internalize the waste stream of acquired operations, we can further
increase operating efficiencies and improve capital utilization. Where
not restricted by exclusive agreements, contracts, permits or
certificates, we also solicit new commercial, industrial and residential
customers in areas within and surrounding the markets served by acquired
collection operations, to further improve operating efficiencies and
increase the volume of solid waste collected by the acquired operations.
Acquisition Program
Waste Connections currently operates in ten states in the Western U.S.
We focus our acquisition efforts on markets in the Western U.S. that generally
exhibit the characteristics listed below, which we believe provide significant
growth opportunities for a well-capitalized market entrant and create economic
and operational barriers to entry by new competitors.
- A potential market revenue base of at least $15 million, usually
in market areas with a geographically dispersed population of
75,000 or less;
- A fragmented market with additional acquisition candidates;
- The opportunity to acquire a significant market share;
- Strong projected economic or population growth rates;
- The availability of adequate disposal capacity, through
acquisition or agreements with third parties; and
- A favorable regulatory environment.
We believe that our experienced management, decentralized operating
strategy, financial strength, size and public company status make us an
attractive buyer to certain solid waste collection and disposal acquisition
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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;
- 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. We
believe our senior management team has a proven track record in integrating
acquisitions.
The following table sets forth Waste Connections' acquisitions completed
from our inception in September 1997 through March 15, 1999:
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ACQUIRED BUSINESS MONTH ACQUIRED* PRINCIPAL BUSINESS LOCATION MARKET AREA
Brecke Sanitation January 1999 Collection Wagner, SD Western South Dakota
Murrey Companies January 1999 Collection Fife, WA Western Washington
Roche & Sons, Inc. January 1999 Collection Layton, UT Central Utah
Butler County Landfill, January 1999 Landfill David City, NE Eastern Nebraska
Inc. and Kobus
Construction, Inc.
City Sanitation, Inc. December 1998 Collection Layton, UT Central Utah
Amador Disposal December 1998 Collection Ione, CA North Central California
Service, Inc. and
Mother Lode
Sani-Hut, Inc.
Heartland Waste December 1998 Collection Arkansas City, KA Southern Kansas
Management, Inc.
Columbia Sanitary November 1998 Collection Portland, OR Northwestern Oregon
Services, Inc. and Southwestern Washington
and Moreland
Sanitary Service, Inc
B&G Sanitation November 1998 Collection Cottage Grove, OR Southwestern Oregon
Veneta Garbage Service November 1998 Collection Veneta, OR Southwestern Oregon
Siuslaw Disposal, Inc. November 1998 Collection Florence, OR Southwestern Oregon
R&N, LLC October 1998 Collection Mountain Home, ID Southwestern Idaho
Westlane Disposal September 1998 Collection Florence, OR Southwestern Oregon
Harrell's Septic Service September 1998 Septic Services Crescent City, CA Northwestern
California and
Southwestern Oregon
Evergreen Waste September 1998 Collection Washougal, WA Southwestern
Systems, Inc. Washington and
Northwestern Oregon
Wolff's Trashmasher September 1998 Collection Stanton, NE Eastern Nebraska
and Haul It
All Sanitary Service
Country Garbage September 1998 Collection Salt Lake City, UT Central Utah
Services, Inc
Youngclaus Enterprises September 1998 Collection Madera, CA North Central
California
Affiliated Waste September 1998 Collection Norfolk, NE Eastern Nebraska
Services, L.L.C. Eastern Nebraska
Contractors Waste, Inc. August 1998 Collection Salt Lake City, UT Central Utah
Big Red Roll Off, Inc. August 1998 Collection O'Neill, NE Eastern Nebraska
ABC Waste, Inc. August 1998 Collection Salt Lake City, UT Central Utah
Miller Containers, Inc. July 1998 Collection Salt Lake City, UT Central Utah
Shrader Refuse and July 1998 Collection Papillion, NE Eastern Nebraska
Recycling Service Company
Red Carpet Landfill, Inc. June 1998 Landfill Enid, OK Western Oklahoma
B&B Sanitation, Inc. June 1998 Collection Enid, OK Western Oklahoma
Darlin Equipment, Inc. June 1998 Equipment Leasing Enid, OK Western Oklahoma
Oregon Waste Technology June 1998 Collection Brookings, OR Southwestern Oregon
Curry Transfer and Recycling June 1998 Collection Brookings, OR Southwestern Oregon
Contractor's Waste June 1998 Collection Orem, UT Central Utah
Removal, L.C.
Arrow Sanitary Services, Inc. June 1998 Collection Portland, OR
Northwestern Oregon and
Southwestern Washington
T&T Disposal, Inc. May 1998 Collection Gillette, WY Northeastern Wyoming
Sunshine Sanitation May 1998 Collection Spearfish, SD Western South Dakota
Incorporated
Sower's Sanitation, Inc. May 1998 Collection Belle Fourche, SD Western South Dakota
Jesse's Disposal April 1998 Collection Gillette, WY Northeastern Wyoming
A-1 Disposal, Inc. April 1998 Collection Gillette, WY Northeastern Wyoming
Hunter Enterprises, Inc. March 1998 Collection Shelley, ID Eastern Idaho
Madera Disposal. February 1998 Collection and Madera, CA North Central California
Services Inc. Landfill
Waste Connections of Idaho, January 1998 Collection Idaho Falls, ID Eastern Idaho
Inc.
Fibres International, Inc. September 1997 Collection Issaquah, WA North Central Washington
and Central Oregon
Browning-Ferris Industries September 1997 Collection Clark County, WA Southwestern Washington
of Washington, Inc.
* Month in which transaction closed.
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SERVICES
COMMERCIAL, INDUSTRIAL AND RESIDENTIAL WASTE SERVICES
Waste Connections serves more than 300,000 commercial, industrial and
residential customers. Of these, we serve more than 94,000 under governmental
certificates that grant us rights, generally perpetual and exclusive, to provide
services within specified areas, more than 26,500 under exclusive franchise
agreements with remaining terms ranging from seven to 18 years, and more than
118,500 under exclusive municipal contracts with generally shorter contract
terms.
We provide commercial and industrial services not performed under
governmental certificates, franchise agreements or municipal contracts under one
to five year service agreements. We determine fees under these agreements by
such factors as collection frequency, level of service, route density, the type,
volume and weight of the waste collected, type of equipment and containers
furnished, the distance to the disposal or processing facility, the cost of
disposal or processing and prices charged in our markets for similar service.
Collection of larger volumes associated with commercial and industrial waste
streams generally helps improve our operating efficiencies, and consolidation of
these volumes allows us to negotiate more favorable disposal prices. Our
commercial and industrial customers use portable containers for storage,
enabling us to service many customers with fewer collection vehicles. Commercial
and industrial collection vehicles normally require one operator. We provide one
to eight cubic yard containers to commercial customers, 10 to 50 cubic yard
containers to industrial customers, and 30 to 95 gallon carts to residential
customers. For an additional fee, we install stationary compactors that compact
waste prior to collection on the premises of a substantial number of large
volume customers.
We provide residential waste services that we do not perform under
governmental certificates, franchise agreements or municipal contracts under
contracts with homeowners' associations, apartment owners or mobile home park
operators, or on a subscription basis with individual households. We base
residential contract fees primarily on route density, the frequency and level of
service, the distance to the disposal or processing facility, the cost of
disposal or processing and prices charged in that market for similar services.
Collection fees are paid either by the municipalities from tax revenues or
directly by the residents receiving the services.
TRANSFER STATION SERVICES
Waste Connections has an active program to acquire, develop, own and
operate transfer stations in markets proximate to our operations. Currently, we
operate three transfer stations in California, three transfer stations in
Nebraska, four transfer stations in Washington and six transfer stations in
Oregon, which receive, compact, and transfer solid waste to be transported by
larger vehicles to landfills. We believe that the transfer stations benefit
Waste Connections by:
- concentrating the waste stream from a wider area, which
increases the volume of disposal at landfills that we operate
and gives us greater leverage in negotiating for more favorable
disposal rates at other landfills;
- improving utilization of collections personnel and equipment;
and
- building relationships with municipalities and private operators
that deliver waste, which can lead to additional growth
opportunities.
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LANDFILLS
Waste Connections seeks to identify solid waste landfill acquisition
candidates to achieve vertical integration in markets where the economic and
regulatory environment makes such acquisitions attractive. We believe that in
some markets, acquiring landfills provides opportunities to vertically integrate
our collection, transfer and disposal operations while improving operating
margins. We evaluate landfill candidates by determining, among other things, the
amount of waste that could be diverted to the landfill in question, whether
access to the landfill is economically feasible from Waste Connections' existing
market areas either directly or through transfer stations, the expected life of
the landfill, the potential for expanding the landfill, and current disposal
costs compared to the cost of acquiring the landfill. Where the acquisition of a
landfill is not attractive, we pursue long term disposal contracts with
facilities, which are typically municipally controlled.
We operate the Fairmead Landfill and own and operate the Red Carpet
Landfill and the Butler County Landfill, all of which are Subtitle D landfills.
Fairmead Landfill. We operate the Fairmead Landfill under an operating
agreement with Madera County with a remaining term of 18 years. As of January
29, 1999, the Fairmead Landfill consisted of 160 total acres, of which 77 acres
were permitted for disposal. As of that date, the Fairmead Landfill had
approximately 550,000 tons of unused permitted capacity remaining, with
approximately 4.9 million additional tons of capacity in various stages of
permitting, and was estimated to have a remaining life of 26 years at current
disposal rates. The Fairmead Landfill is currently permitted to accept up to 378
tons per day of municipal solid waste.
Red Carpet Landfill. As of January 29, 1999, the Red Carpet Landfill
consisted of 82 total acres, of which 40 acres were permitted for disposal. As
of that date, the Red Carpet Landfill had approximately 625,000 tons of unused
permitted capacity remaining, with approximately 1.7 million additional tons of
capacity in various stages of permitting, and was estimated to have a remaining
life of 40 years at current disposal rates. The Red Carpet Landfill is currently
permitted to accept up to 350 tons per day of municipal solid waste.
Butler County Landfill. As of January 29, 1999, the Butler County
Landfill consisted of approximately 282 acres, of which 84 acres were permitted
for disposal. As of that date, the Butler County Landfill had approximately
4.0 million tons of unused permitted capacity remaining, and was estimated to
have a remaining life of 28 years at current disposal rates.
We monitor the available permitted in-place disposal capacity of the
Fairmead, Red Carpet and Butler County Landfills on an ongoing basis and
evaluate whether to seek to expand this capacity. In making this evaluation, we
consider various factors, including the volume of waste projected to be disposed
of at the landfill, the size of the unpermitted acreage included in the
landfill, the likelihood that Waste Connections will be able to obtain the
necessary approvals and permits required for the expansion and the costs that
would be involved in developing the additional capacity. We also regularly
consider whether it is advisable, in light of changing market conditions and/or
regulatory requirements, to seek to expand or change the permitted waste streams
or to seek other permit modifications.
RECYCLING SERVICES
We offer municipal, commercial, industrial and residential customers
recycling services for a variety of recyclable materials, including cardboard,
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office paper, plastic containers, glass bottles and ferrous and aluminum metals.
We operate seven recycling processing facilities and sell other collected
recyclable materials to third parties for processing before resale. The profits
from our resale of recycled materials are often shared between Waste Connections
and the other parties to our recycling contracts. For example, certain of our
municipal recycling contracts in Washington and Idaho, negotiated before we
acquired those businesses, specify certain benchmark resale prices for recycled
commodities. To the extent the prices we actually receive for the processed
recycled commodities collected under the contract exceed the prices specified in
the contract, we share the excess with the municipality, after recovering any
previous shortfalls resulting from actual market prices falling below the prices
specified in the contract. To reduce our exposure to commodity price risk with
respect to recycled materials, we have adopted a pricing strategy of charging
collection and processing fees for recycling volume collected from third
parties. We believe that recycling will continue to be an important component of
local and state solid waste management plans due to the public's increasing
environmental awareness and expanding regulations that mandate or encourage
recycling.
G CERTIFICATES
We perform a substantial portion of our collection business in
Washington under governmental certificates (referred to as "G certificates")
awarded by the WUTC. G certificates apply only to unincorporated areas of
Washington and municipalities that have elected to have their solid waste
collection overseen by the WUTC. G certificates generally grant the holder the
exclusive and perpetual right to provide certain solid waste collection and
transportation services in a specified territory. The WUTC has repeatedly
determined that, in enacting the statute authorizing G certificates, the
Washington Legislature intended to favor grants of exclusive, rather than
overlapping, service rights for conventional solid waste services. Accordingly,
most G certificates currently grant exclusive solid waste collection and
transportation rights for conventional solid waste services in their specified
territories.
The WUTC and the Washington Legislature have generally construed G
certificates as conferring vested property rights that may be defeated,
diminished or cancelled only upon the occurrence of specified events of default,
the demonstrated lack of fitness of the certificate holder, or municipalities'
annexation of territory covered by a certificate. Thus, a certificate holder is
entitled to due process in challenging any action that affects its rights. In
addition, legislation passed in 1997 requires a municipality that annexes
territory covered by a G certificate either to grant the certificate holder an
exclusive franchise, generally with a minimum term of seven years, to continue
to provide services in the affected area, or to negotiate with the certificate
holder some other compensation for the collection rights in the affected area.
The statute expressly permits the certificate holder to sue the annexing
municipality for measurable damages that exceed the value of a seven-year
franchise agreement to provide services in the affected area. Under one of the
contracts with a municipality in Washington acquired by a predecessor of Waste
Connections, the predecessor purported to waive its rights to compensation or
damages under the statute in return for the right to service any current or
prospectively annexed areas formerly covered by its G certificate.
In addition to awarding G certificates, the WUTC is required by statute
to establish just, reasonable and compensatory rates to customers of regulated
solid waste collection companies. The WUTC is charged with balancing the needs
of service providers to earn fair and sufficient returns on their investments in
plant and equipment against the needs of commercial and residential customers to
receive adequate and reasonably priced services. Over the past decade, the WUTC
has used a 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
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providing service and that motivate service providers to invest in
equipment that improves operating efficiency in a cost-effective manner. The
Lurito-Gallagher rate-setting methodology was adjusted in the early 1990's to
better reflect the costs of providing recycling services, by accounting for
providers' increasing use of automated equipment and adjusting for the
cyclicality of the secondary recyclables markets. This has often resulted in
more frequent rate adjustments in response to material cost shifts.
SALES AND MARKETING
In most of our existing markets, we provide waste collection, transfer
and disposal services to municipalities and governmental authorities under
exclusive franchise agreements, municipal contracts and G certificates; service
providers do not contract directly with individual customers. In addition,
because Waste Connections has grown to date primarily through acquisitions, we
have generally assumed existing franchise agreements, municipal contracts and G
certificates from the acquired companies, rather than obtaining new contracts.
For these reasons, our sales and marketing efforts to date have been narrowly
focused. We expect to add sales and marketing personnel as necessary to solicit
new customers in markets where we are not the exclusive provider of solid waste
services, expand our presence into areas adjacent to or contiguous with our
existing markets, and market additional services to existing customers.
COMPETITION
The solid waste services industry is highly competitive and fragmented
and requires substantial labor and capital resources. The industry presently
includes four large national waste companies: Allied Waste Industries, Inc.
(which has announced an impending purchase of Browning-Ferris Industries,
Inc.),Browning-Ferris Industries, Inc., Republic Services, Inc., and Waste
Management, Inc., Casella Waste Systems, Inc., Superior Services, Inc. and Waste
Industries, Inc. are other public companies with annual revenues in excess of
$100 million. Certain of the markets in which Waste Connections competes or will
likely compete are served by one or more large, national solid waste companies,
as well as by numerous privately held regional and local solid waste companies
of varying sizes and resources, some of which have accumulated substantial
goodwill in their markets. We also compete with operators of alternative
disposal facilities, including incinerators, and with counties, municipalities,
and solid waste districts that maintain their own waste collection and disposal
operations. Public sector operations may have financial advantages over Waste
Connections, because of their access to user fees and similar charges, tax
revenues and tax-exempt financing.
We compete for collection, transfer and disposal volume based primarily
on the price and quality of our services. From time to time, competitors may
reduce the price of their services in an effort to expand their market shares or
service areas or to win competitively bid municipal contracts. These practices
may cause Waste Connections to reduce the price of our services or, if we elect
not to do so, to lose business. We provide a substantial portion of our
residential, commercial and industrial collection services under exclusive
franchise and municipal contracts and certificates, some of which are subject to
periodic competitive bidding. We provide the balance of our services under
subscription agreements with individual households and one to five year service
contracts with commercial and industrial customers.
Intense competition exists not only for collection, transfer and
disposal volume, but also for acquisition candidates. We generally compete for
acquisition candidates with publicly owned regional and large national waste
management companies.
The solid waste collection and disposal industry is currently undergoing
significant consolidation, and we encounter competition in our efforts to
acquire
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landfills, transfer and collection operations. Accordingly, it may become
uneconomical for us to make further acquisitions or we maybe 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.
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.
REGULATION
INTRODUCTION
Waste Connections' landfill operations and non-landfill operations,
including waste transportation, transfer stations, vehicle maintenance shops and
fueling facilities, are all subject to extensive and evolving federal, state and
local environmental laws and regulations, the enforcement of which has become
increasingly stringent in recent years. The environmental regulations affecting
Waste Connections are administered by the EPA and other federal, state and local
environmental, zoning, health and safety agencies. The WUTC regulates the
portion of our collection business in Washington performed under G certificates,
which generally grant Waste Connections perpetual and exclusive collection
rights in certain areas. Waste Connections is currently in substantial
compliance with applicable federal, state and local environmental laws, permits,
orders and regulations. We do not currently anticipate any material
environmental costs necessary to bring our operations into compliance (although
there can be no assurance in this regard). We anticipate that regulation,
legislation and regulatory enforcement actions related to the solid waste
services industry will continue to increase. We attempt to anticipate future
regulatory requirements and to plan in advance as necessary to comply with them.
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
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the date of inception through January 29, 1999, Waste Connections did not, to
our knowledge, transport hazardous wastes under circumstances that would subject
Waste Connections to hazardous waste regulations under RCRA. Some of our
ancillary operations (e.g., vehicle maintenance operations) may generate
hazardous wastes. Waste Connections manages these wastes in substantial
compliance with applicable laws.
In October 1991, the EPA adopted the Subtitle D Regulations governing
solid waste landfills. The Subtitle D Regulations, which generally became
effective in October 1993, include location restrictions, facility design
standards, operating criteria, closure and post-closure requirements, financial
assurance requirements, groundwater monitoring requirements, groundwater
remediation standards and corrective action requirements. In addition, the
Subtitle D Regulations require that new landfill sites meet more stringent liner
design criteria (typically, composite soil and synthetic liners or two or more
synthetic liners) intended to keep leachate out of groundwater and have
extensive collection systems to carry away leachate for treatment prior to
disposal. Groundwater monitoring wells must also be installed at virtually all
landfills to monitor groundwater quality and, indirectly, the effectiveness of
the leachate collection system. The Subtitle D Regulations also require, where
certain regulatory thresholds are exceeded, that facility owners or operators
control emissions of methane gas generated at landfills in a manner intended to
protect human health and the environment. Each state is required to revise its
landfill regulations to meet these requirements or such requirements will be
automatically imposed by the EPA on landfill owners and operators in that state.
Each state is also required to adopt and implement a permit program or other
appropriate system to ensure that landfills in the state comply with the
Subtitle D Regulations. Various states in which we operate or in which we may
operate in the future have adopted regulations or programs as stringent as, or
more stringent than, the Subtitle D Regulations.
RCRA also regulates underground storage of petroleum and other regulated
materials. RCRA requires registration, compliance with technical standards for
tanks, release detection and reporting, and corrective action, among other
things. Certain of Waste Connections' facilities and operations are subject to
these requirements.
THE FEDERAL WATER POLLUTION CONTROL ACT OF 1972, AS AMENDED
(THE "CLEAN WATER ACT")
The Clean Water Act regulates the discharge of pollutants from a variety
of sources, including solid waste disposal sites and transfer stations, into
waters of the United States. If run-off from our transfer stations or run-off or
collected leachate from Waste Connections' owned or operated landfills is
discharged into streams, rivers or other surface waters, the Clean Water Act
would require Waste Connections to apply for and obtain a discharge permit,
conduct sampling and monitoring and, under certain circumstances, reduce the
quantity of pollutants in such discharge. Also, virtually all landfills are
required to comply with the EPA's storm water regulations issued in November
1990, which are designed to prevent contaminated landfill storm water runoff
from flowing into surface waters. We believe that our facilities comply in all
material respects with the Clean Water Act requirements. Various states in which
we operate or in which we may operate in the future have been delegated
authority to implement the Clean Water Act permitting requirements, and some of
these states have adopted regulations that are more stringent than the federal
requirements. For example, states often require permits for discharges to ground
water as well as surface water.
THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION, AND LIABILITY ACT OF
1980 ("CERCLA")
CERCLA established a regulatory and remedial program intended to provide
for the investigation and cleanup of facilities where or from which a release of
any hazardous substance into the environment has occurred or is threatened.
CERCLA's primary mechanism for remedying such problems is to impose strict joint
and several liability for cleanup of facilities on current owners and operators
of the site, former owners and operators of the site at the time of the disposal
of the hazardous substances, any person who arranges for the transportation,
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disposal or treatment of the hazardous substances, and the transporters who
select the disposal and treatment facilities. CERCLA also imposes liability for
the cost of evaluating and remedying any damage to natural resources. The costs
of CERCLA investigation and cleanup can be very substantial. Liability under
CERCLA does not depend on the existence or disposal of "hazardous waste" as
defined by RCRA; it can also be based on the existence of even very small
amounts of the more than 700 "hazardous substances" listed by the EPA, many of
which can be found in household waste. In addition, the definition of "hazardous
substances" in CERCLA incorporates substances designated as hazardous or toxic
under the federal Clean Water Act, Clear Air Act and Toxic Substances Control
Act. If Waste Connections were found to be a responsible party for a CERCLA
cleanup, the enforcing agency could hold Waste Connections, or any other
generator, transporter or the owner or operator of the contaminated facility,
responsible for all investigative and remedial costs, even if others were also
liable. CERCLA also authorizes the imposition of a lien in favor of the United
States on all real property subject to, or affected by, a remedial action for
all costs for which a party is liable. CERCLA gives a responsible party the
right to bring a contribution action against other responsible parties for their
allocable shares of investigative and remedial costs. Waste Connections' ability
to obtain reimbursement from others for their allocable shares of such costs
would be limited by our ability to find other responsible parties and prove the
extent of their responsibility and by the financial resources of such other
parties. Various state laws also impose liability for investigation, cleanup and
other damages associated with hazardous substance releases.
THE CLEAN AIR ACT
The Clean Air Act generally, through state implementation of federal
requirements, regulates emissions of air pollutants from certain landfills based
on factors such as the date of the landfill construction and tons per year of
emissions of regulated pollutants. Larger landfills and landfills located in
areas where the ambient air does not meet certain requirements of the Clean Air
Act may be subject to even more extensive air pollution controls and emission
limitations. In addition, the EPA has issued standards regulating the disposal
of asbestos-containing materials. Air permits to construct may be required for
gas collection and flaring systems, and operating permits may be required,
depending on the potential air emissions. State air regulatory programs may
implement the federal requirements but may impose additional restrictions. For
example, some state air programs uniquely regulate odor and the emission of
toxic air pollutants.
THE OCCUPATIONAL SAFETY AND HEALTH ACT OF 1970 (THE "OSH ACT")
The OSH Act is administered by the Occupational Safety and Health
Administration ("OSHA"), and in many states by state agencies whose programs
have been approved by OSHA. The OSH Act establishes employer responsibilities
for worker health and safety, including the obligation to maintain a workplace
free of recognized hazards likely to cause death or serious injury, to comply
with adopted worker protection standards, to maintain certain records, to
provide workers with required disclosures and to implement certain health and
safety training programs. Various OSHA standards may apply to Waste Connections'
operations, including standards concerning notices of hazards, safety in
excavation and demolition work, the handling of asbestos and asbestos-containing
materials, and worker training and emergency response programs.
FLOW CONTROL/INTERSTATE WASTE RESTRICTIONS
Certain permits and approvals, as well as certain state and local
regulations, may limit a landfill or transfer station to accepting waste that
originates from specified geographic areas, restrict the importation of
out-of-state waste or wastes originating outside the local jurisdiction or
otherwise discriminate against non-local waste. These restrictions, generally
known as flow control restrictions, are controversial, and some courts have held
that some flow control schemes violate constitutional limits on state or local
regulation of interstate commerce. From time to time, federal legislation is
proposed that would allow some local flow control restrictions. Although no such
federal legislation has been enacted to date, if such federal legislation should
be enacted in the future, states in which Waste Connections operates landfills
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could limit or prohibit the importation of out-of-state waste or direct that
wastes be handled at specified facilities. Such state actions could adversely
affect Waste Connections' landfills. These restrictions could also result in
higher disposal costs for our collection operations. If we were unable to pass
such higher costs through to our customers, our business, financial condition
and operating results could be adversely affected.
Certain state and local jurisdictions may also seek to enforce flow
control restrictions through local legislation or contractually. In certain
cases, we may elect not to challenge such restrictions. These restrictions could
reduce the volume of waste going to landfills in certain areas, which may
adversely affect our ability to operate our landfills at their full capacity
and/or reduce the prices that we can charge for landfill disposal services.
These restrictions may also result in higher disposal costs for our collection
operations. If we were unable to pass such higher costs through to our
customers, Waste Connections' business, financial condition and operating
results could be adversely affected.
STATE AND LOCAL REGULATION
Each state in which Waste Connections now operates or may operate in the
future has laws and regulations governing the generation, storage, treatment,
handling, transportation and disposal of solid waste, occupational safety and
health, water and air pollution and, in most cases, the siting, design,
operation, maintenance, closure and post-closure maintenance of landfills and
transfer stations. State and local permits and approval for these operations may
be required and may be subject to periodic renewal, modification or revocation
by the issuing agencies. In addition, many states have adopted statutes
comparable to, and in some cases more stringent than, CERCLA. These statutes
impose requirements for investigation and cleanup of contaminated sites and
liability for costs and damages associated with such sites, and some provide for
the imposition of liens on property owned by responsible parties. Furthermore,
many municipalities also have ordinances, local laws and regulations affecting
Waste Connections' operations. These include zoning and health measures that
limit solid waste management activities to specified sites or activities, flow
control provisions that direct or restrict the delivery of solid wastes to
specific facilities, laws that grant the right to establish franchises for
collection services and then put such franchises out for bid, and bans or other
restrictions on the movement of solid wastes into a municipality.
Permits or other land use approvals with respect to a landfill, as well
as state or local laws and regulations, may specify the quantity of waste that
may be accepted at the landfill during a given time period, and/or specify the
types of waste that may be accepted at the landfill. Once an operating permit
for a landfill is obtained, it must generally be renewed periodically.
There has been an increasing trend at the state and local level to
mandate and encourage waste reduction at the source and waste recycling, and to
prohibit or restrict the disposal of certain types of solid wastes, such as yard
wastes, leaves and tires, in landfills. The enactment of regulations reducing
the volume and types of wastes available for transport to and disposal in
landfills could prevent Waste Connections from operating our facilities at their
full capacity.
Some state and local authorities enforce certain federal laws in
addition to state and local laws and regulations. For example, in some states,
RCRA, the OSH Act, parts of the Clean Air Act and parts of the Clean Water Act
are enforced by local or state authorities instead of by the EPA, and in some
states those laws are enforced jointly by state or local and federal
authorities.
PUBLIC UTILITY REGULATION
In many states, public authorities regulate the rates that landfill
operators may charge. The rates that Waste Connections may charge at the
Fairmead Landfill for the disposal of municipal solid waste are regulated by the
Madera County Board of Supervisors. The adoption of rate regulation or the
reduction of current rates in states in which Waste Connections owns or operates
landfills could adversely affect our business, financial condition and operating
results.
Solid waste collection services in all unincorporated areas of
Washington
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and in electing municipalities in Washington are provided under G certificates
awarded by the WUTC. The WUTC also sets rates for regulated solid waste
collection services in Washington.
RISK MANAGEMENT, INSURANCE AND PERFORMANCE BONDS
Waste Connections maintains 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, and
in light of our limited landfill operations, we have not obtained such coverage.
If Waste Connections were to incur liability for environmental cleanups,
corrective action or damage, our financial condition could be materially and
adversely affected. We will continue to investigate the possibility of obtaining
environmental impairment liability insurance, particularly if we acquire or
operate landfills other than the Fairmead Landfill, the Red Carpet Landfill and
the Butler County Landfill. We believe that most other landfill operators do not
carry such insurance.
Municipal solid waste collection contracts may require performance bonds
or other means of financial assurance to secure contractual performance. Certain
environmental regulations also require demonstrated financial assurance to meet
closure and post-closure requirements for landfills. We have not experienced
difficulty in obtaining performance bonds or letters of credit for our current
operations. At January 29, 1999, we had provided customers and various
regulatory authorities with surety bonds and letters of credit in the aggregate
amount of approximately $2.0 million to secure our obligations. Our credit
facility provides for the issuance of letters of credit in an amount up to $15
million, but any letters of credit issued reduce the availability of borrowings
for acquisitions and other general corporate purposes. If we were unable to
obtain surety bonds or letters of credit in sufficient amounts or at acceptable
rates, we could be precluded from entering into additional municipal solid waste
collection contracts or obtaining or retaining landfill operating permits.
EMPLOYEES
At March 15, 1999, we employed approximately 900 full-time employees,
including approximately 40 persons classified as professionals or managers,
approximately 730 employees involved in collection, transfer, disposal and
recycling operations, and approximately 100 sales, clerical, data processing or
other administrative employees.
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Approximately 67 drivers and mechanics at our Vancouver, Washington
operation are represented by the Teamsters Union, with which Browning-Ferris
Industries of Washington, Inc., Waste Connections' predecessor in Vancouver,
entered a four-year collective bargaining agreement in January 1997.
Approximately 11 drivers at Arrow are currently represented by the Teamsters
Union, with which Arrow entered a three-year collective bargaining agreement in
March 1998. Approximately 46 drivers at Murrey's Disposal Company and American
Disposal Company are represent by the Teamsters Union, with which those
companies entered into a three-year collective bargaining agreement in June
1996. We are not aware of any other organizational efforts among our employees
and believe that our relations with our employees are good.
ITEM 2. PROPERTIES
As of March 15, 1999, we owned and operated 32 collection operations,
nine transfer stations and two Subtitle D landfills and operated an additional
seven transfer stations, two Subtitle D landfills and seven recycling
facilities. We lease various offices and facilities, including our corporate
offices in Roseville, California. The real estate owned by Waste Connections is
not subject to material encumbrances. We own various equipment, including waste
collection and transportation vehicles, related support vehicles, carts,
containers, and heavy equipment used in landfill operations. We believe that our
existing facilities and equipment are generally adequate for our current
operations. However, we expect to make additional investments in property and
equipment for expansion and replacement of assets and in connection with future
acquisitions.
Our corporate headquarters are located in Roseville, California, where
we lease approximately 5,700 square feet of space.
ITEM 3. LEGAL PROCEEDINGS
Waste Connections is a party to various legal proceedings in the
ordinary course of business and as a result of the extensive governmental
regulation of the solid waste industry. Management does not believe that these
proceedings, either individually or in the aggregate, are likely to have a
material adverse effect on our business, financial condition, operating results
or cash flows.
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 1998.
MANAGEMENT
EXECUTIVE OFFICERS
The following table sets forth certain information concerning Waste
Connections' executive officers as of March 15, 1999:
NAME AGE POSITIONS
Ronald J. Mittlestaedt (1)(2) 35 President, Chief Executive Officer and Chairman
Steven F. Bouck 42 Executive Vice President and Chief Financial Officer
Eugene V. Dupreau 51 Vice President - Madera; Director
Charles B. Youngclaus 58 Vice President - Madera; Advisory Director
Darrell W. Chambliss 34 Vice President - Operations; Secretary
Michael R. Foos 33 Vice President and Corporate Controller
Eric J. Moser 32 Treasurer and Assistant Corporate Controller
David M. Hall 41 Vice President - Business Development
Irmgard J. Wilcox 56 Vice President - Finance - Northern Washington;
Director
(1) Member of the Executive Committee of the Board of Directors
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(2) Member of the Audit Committee of the Board of Directors.
Ronald J. Mittelstaedt has been President, Chief Executive Officer and a
director of Waste Connections since the company was formed, and was elected
Chairman in January 1998. He also served as a consultant to Waste Connections in
August and September 1997. Mr. Mittelstaedt has more than ten years of
experience in the solid waste industry. He served as a consultant to United
Waste Systems, Inc., with the title of Executive Vice President, from
January 1997 to August 1997, where he was responsible for corporate development
for all states west of Colorado. As Regional Vice President of USA Waste
Services, Inc. (including Sanifill, Inc., which was acquired by USA Waste
Services, Inc.) from November 1993 to January 1997, he was responsible for all
operations in 16 states and Canada. Mr. Mittelstaedt held various positions at
Browning-Ferris Industries, Inc. from August 1987 to November 1993, most
recently as Division Vice President in northern California, overseeing the San
Jose market. Previously he was the District Manager responsible for BFI's
operations in Sacramento and the surrounding areas. He holds a B.S. in Finance
from the University of California at Santa Barbara.
Steven F. Bouck has been Executive Vice President and Chief Financial
Officer of Waste Connections since February 1998. Mr. Bouck held various
positions with First Analysis Corporation from 1986 to 1998, including most
recently as Managing Director coordinating corporate finance. In that capacity,
he provided merger and acquisition advisory services to companies in the
environmental industry. Mr. Bouck was also responsible for assisting in
investing venture capital funds focused on the environmental industry that were
managed by First Analysis. In connection with those investments, he served on
the boards of directors of several companies. While at First Analysis, Mr. Bouck
also provided analytical research coverage of a number of publicly traded
environmental services companies. Mr. Bouck holds B.S. and M.S. degrees in
mechanical engineering from Rensselaer Polytechnic Institute and an M.B.A. in
Finance from the Wharton School. He has been a Chartered Financial Analyst since
1990.
Eugene V. Dupreau has been Vice President -- Madera and a director of
Waste Connections since February 23, 1998. Mr. Dupreau served as President and a
director of Madera Disposal Systems, Inc. beginning in 1981 and
1985,respectively, and held both positions until Waste Connections acquired
Madera in1998. Mr. Dupreau holds a B.S. in Business Administration from Fresno
State University and has completed advanced coursework in waste management. He
serves as a director of several civic and charitable organizations in Madera
County.
Charles B. Youngclaus has been Vice President -- Madera and an advisory
director of Waste Connections since February 23, 1998. Mr. Youngclaus founded
Madera Disposal Systems, Inc. in 1981 and was its Chief Operating Officer and
Vice President before Waste Connections acquired it in 1998. Mr. Youngclaus
owned and operated Madera's predecessor company, Madera County Disposal, from
1965 to 1981. Mr. Youngclaus holds a B.S. from Fresno State University and has
completed advanced coursework in waste management, including certification in
clay liner construction by the University of Texas in 1992. Mr. Youngclaus is a
Board Member of the California Refuse Removal Council and is incoming Treasurer
of the Northern California chapter.
Darrell W. Chambliss has been Vice President -- Operations and Secretary
of Waste Connections since October 1, 1997. Mr. Chambliss held various
management positions at USA Waste Services, Inc. (including Sanifill, Inc. and
United Waste, Inc., both of which were acquired by USA Waste Services, Inc.)
from April 1995 to September 1997, including most recently Division Manager in
Corning, California, where he was responsible for the operations of 19 operating
companies as well as supervising and integrating acquisitions. From July 1989 to
April 1995, he held various management positions with Browning-Ferris
Industries, Inc., including serving as Assistant District Manager in San Jose,
California, where he was responsible for a significant hauling operation, and
serving as District Manager in Tucson, Arizona for more than three years. Mr.
Chambliss holds a B.S. in Business Administration from the University of
Arkansas.
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Michael R. Foos has been Vice President and Corporate Controller of
Waste Connections since October 1, 1997. Mr. Foos served as Division Controller
of USA Waste Services, Inc. (including Sanifill, Inc., which was acquired by USA
Waste Services, Inc.) from October 1996 to September 1997, where he was
responsible for financial compilation and reporting and acquisition due
diligence for a seven-state region. Mr. Foos served as Assistant Regional
Controller at USA Waste Services, Inc. from August 1995 to September 1996, where
he was responsible for internal financial reporting for operations in six states
and Canada. Mr. Foos also served as District Controller for Waste Management,
Inc. from February 1990 to July 1995, and was a member of the audit staff of
Deloitte & Touche from 1987 to 1990. Mr. Foos holds a B.S. in Accounting from
Ferris State University.
David M. Hall has been Vice President -- Business Development since
August 1, 1998. Mr. Hall has over twelve years of experience in the solid waste
industry with extensive operating and marketing experience in the Western U.S.
From October, 1995 to July 1998, Mr. Hall was the Divisional Vice President of
USA Waste Services, Inc., Rocky Mountain Division (including for Sanifill, Inc.
which was acquired by USA Waste Services, Inc.). In that position, he oversaw
all operations and business development in six Rocky Mountain states. Prior to
his employment with Sanifill, Mr. Hall held various management positions with
BFI from October 1986 to October 1995, including Vice President of Sales for the
Western United States. Mr. Hall was employed from 1979 to 1986 in a variety of
sales and marketing management positions in the high technology sector. Mr. Hall
received a BS degree in Management and Marketing in 1979 from Southwest Missouri
State University.
Eric J. Moser has been Waste Connections' Treasurer and Assistant
Corporate Controller since October 1, 1997. From August 1995 to September 1997,
Mr. Moser held various finance positions at USA Waste Services, Inc. (including
Sanifill, Inc., which was acquired by USA Waste Services, Inc.), most recently
as Controller of the Ohio Division, where he was responsible for internal
financial compilation and reporting and acquisition due diligence. Previously
Mr. Moser was Controller of the Michigan Division of USA Waste Services, Inc.,
where he was responsible for internal financial reporting. Mr. Moser served as
Controller for Waste Management, Inc. from June 1993 to August 1995, where he
was responsible for internal financial reporting for a hauling company, landfill
and transfer station. Mr. Moser holds a B.S. in Accounting from Illinois State
University.
Irmgard R. Wilcox has been Vice President -- Finance -- Northern
Washington of Waste Connections since January 19, 1999 and a director of Waste
Connections since February 1999. Ms. Wilcox served as Chief Financial Officer,
Secretary and Treasurer of the Murrey Companies from 1982 until they merged
with Waste Connections in 1999. Ms. Wilcox joined the Murrey Companies in 1975.
She holds a B.A. in Business Administration from Pacific Lutheran University
with a concentration in accounting.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our common stock has traded on the Nasdaq National Market under the
symbol "WCNX" since our initial public offering on May 22, 1998. The following
table shows the high and low sale prices for the common stock as reported by the
Nasdaq National Market for the periods indicated.
HIGH LOW
---- ---
1998
Second Quarter (from May 22, 1998).......................... $20.75 $13.75
Third Quarter............................................... 23.38 17.75
Fourth Quarter.............................................. 21.13 15.88
22
23
1999
First Quarter (through March 15, 1999).................... $21.81 $16.50
On March 15, 1999 there were 127 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 the common stock. We intend to
retain all earnings to fund the operation and expansion of our business. In
addition, our existing credit facility restricts the payment of cash dividends.
ITEM 6. SELECTED HISTORICAL AND SUPPLEMENTAL FINANCIAL AND OPERATING DATA
The following tables present selected historical and supplemental
statements of operations and balance sheet data of Waste Connections and our
predecessors for the periods indicated.
The entities Waste Connections acquired in September 1997 from
Browning-Ferris Industries, Inc. ("BFI") are collectively referred to as Waste
Connections' predecessors. BFI acquired the predecessors during 1995 and
1996. Before being acquired by BFI, the predecessors operated as separate
stand-alone businesses.
The supplemental financial information gives retroactive effect to the
business combinations of Waste Connections with the Murrey Companies (accounted
for as poolings-of-interests) which occurred on January 19, 1999. Generally
accepted accounting principles prohibit giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. The supplemental
financial data does not extend through the date of consummation; however, such
information will be included in the historical consolidated financial statements
of Waste Connections after financial statements covering the date of
consummation of the business combination are issued. This information is based
on the audited supplemental financial statements included elsewhere herein.
23
24
WASTE CONNECTIONS, INC. AND PREDECESSORS
SELECTED HISTORICAL AND SUPPLEMENTAL
FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FIBRES
INTER- THE
NATIONAL, DISPOSAL
INC. GROUP
THE PERIOD THE COMBINED
FIBRES DISPOSAL FROM DISPOSAL FROM
INTERNATIONAL, GROUP JANUARY 1, PREDECESSORS GROUP JANUARY 1, PREDECESSORS
INC. COMBINED 1995 ONE MONTH COMBINED 1996 COMBINED
YEAR ENDED YEAR ENDED THROUGH ENDED YEAR ENDED THROUGH PERIOD ENDED
DECEMBER 31, DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, JULY 31, DECEMBER 31,
1994 1994 1995 1995 1995 1996 1996
-------- -------- -------- -------- -------- -------- --------
HISTORICAL STATEMENTS OF
OPERATIONS DATA(1):
Revenues ............... $ 5,610 $ 22,004 $ 7,340 $ 595 $ 19,660 $ 8,738 $ 13,422
Cost of operations ..... 4,432 18,298 5,653 527 16,393 6,174 11,420
Selling, general and
administrative ....... 552 3,320 823 72 3,312 2,126 1,649
Depreciation and
amortization ......... 642 606 715 74 628 324 962
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations ........... (16) (220) 149 (78) (673) 114 (609)
Interest expense ....... (191) (548) (162) (1) (206) (12) (225)
Other income (expense),
net .................. (2) 871 98 5 -- 2,661 (147)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes ......... (209) 103 85 (74) (879) 2,763 (981)
Income tax (provision)
benefit .............. -- -- (29) -- 298 (505) --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ...... $ (209) $ 103 $ 56 $ (74) $ (581) $ 2,258 $ (981)
======== ======== ======== ======== ======== ======== ========
(See footnotes on page 28)
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25
WASTE
CONNECTIONS, INC.
PREDECESSORS PERIOD FROM
COMBINED INCEPTION
NINE MONTHS (SEPTEMBER 9,
ENDED 1997) THROUGH WASTE CONNECTIONS, INC.
SEPTEMBER 30, DECEMBER 31, YEAR ENDED
1997 1997 DECEMBER 31, 1998
----------- ----------- -----------
HISTORICAL STATEMENTS OF OPERATIONS
DATA(1):
Revenues ..................................... $ 18,114 $ 6,237 $ 54,042
Cost of operations ........................... 14,753 4,703 36,554
Selling, general and administrative .......... 3,009 619 5,317
Depreciation and amortization ................ 1,083 354 4,112
Start-up and integration ..................... -- 493 --
Stock compensation ........................... -- 4,395 632
----------- ----------- -----------
Income (loss) from operations ................ (731) (4,327) 7,427
Interest expense ............................. (456) (1,035) (2,257)
Other income (expense), net .................. 14 (36) --
----------- ----------- -----------
Income (loss) before income taxes ............ (1,173) (5,398) 5,170
Income tax (provision) benefit ............... -- 332 (2,395)
----------- ----------- -----------
Income (loss) before extraordinary
item ....................................... (1,173) (5,066) 2,775
Extraordinary item -- early
extinguishment of debt, net of income
tax benefit of $264 ........................ -- -- (1,027)
----------- ----------- -----------
Net income (loss) ............................ $ (1,173) $ (5,066) $ 1,748
=========== =========== ===========
Redeemable convertible preferred stock
accretion .................................. (531) (917)
----------- -----------
Net income (loss) applicable to common
stockholders ............................... $ (5,597) $ 831
=========== ===========
Basic earnings (loss) per common share:
Income (loss) before extraordinary
item ..................................... $ (2.99) $ 0.29
Extraordinary item ......................... -- (0.16)
----------- -----------
Net income (loss) per common share ......... $ (2.99) $ (0.13)
=========== ===========
Diluted earnings (loss) per common
share:
Income (loss) before extraordinary
item ..................................... $ (2.99) $ 0.22
Extraordinary item ......................... -- (0.12)
----------- -----------
Diluted net income (loss) per common
share .................................... $ (2.99) $ (0.10)
=========== ===========
Shares used in calculating basic net
income (loss) per share .................... 1,872,567 6,460,293
Shares used in calculating diluted
earnings (loss) per share .................. 1,872,567 8,371,415
(See footnotes on page 28)
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26
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1994 1995 1996
----------- ----------- -----------
SUPPLEMENTAL STATEMENTS
OF OPERATIONS DATA(2):
Revenues ............................. $ 23,804 $ 27,786 $ 25,024
Cost of operations ................... 18,829 20,859 20,465
Selling, general and administrative .. 1,940 2,101 2,142
Depreciation and amortization ........ 818 923 1,236
----------- ----------- -----------
Income from operations ............... 2,217 3,903 1,181
Interest expense ..................... (321) (198) (284)
Other income (expense), net .......... (347) 210 309
----------- ----------- -----------
Income before income taxes ........... 1,549 3,915 1,206
Income tax provision ................. (517) (690) (543)
----------- ----------- -----------
Net income ........................... $ 1,032 $ 3,225 $ 663
=========== =========== ===========
Basic and diluted net income per share $ 0.36 $ 1.12 $ 0.23
=========== =========== ===========
Shares used in per share calculation . 2,888,880 2,888,880 2,888,880
=========== =========== ===========
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998
----------- -----------
SUPPLEMENTAL STATEMENTS
OF OPERATIONS DATA(2):
Revenues ................................................. $ 35,111 $ 86,570
Cost of operations ....................................... 27,836 62,964
Selling, general and administrative ...................... 2,942 8,108
Depreciation and amortization ............................ 1,725 6,306
Start-up and integration ................................. 493 --
Stock compensation ....................................... 4,395 632
----------- -----------
Income (loss) from operations ............................ (2,280) 8,560
Interest expense ......................................... (1,415) (2,792)
Other income (expense), net .............................. 247 79
----------- -----------
Income (loss) before income taxes ........................ (3,448) 5,847
Income tax provision ..................................... (302) (2,930)
----------- -----------
Income (loss) before extraordinary item .................. (3,750) 2,917
Extraordinary item -- early extinguishment of debt, net of
income tax benefit of $165 ............................. -- (1,027)
----------- -----------
Net income (loss) ........................................ $ (3,750) $ 1,890
=========== ===========
Redeemable convertible preferred stock accretion ......... (531) (917)
----------- -----------
Net income (loss) applicable to common stockholders ...... $ (4,281) $ 973
=========== ===========
Basic income (loss) per common share:
Income (loss) before extraordinary item ................ $ (0.90) $ 0.21
----------- -----------
Extraordinary item ..................................... -- (0.11)
----------- -----------
Net income (loss) per common share ..................... $ (0.90) $ 0.10
=========== ===========
Diluted income (loss) per common share:
Income (loss) before extraordinary item ................ $ (0.90) $ 0.18
Extraordinary item ..................................... -- (0.09)
----------- -----------
Net income (loss) per common share ..................... $ (0.90) $ 0.09
=========== ===========
Shares used in calculating basic net income (loss) per
share .................................................. 4,761,447 9,349,173
=========== ===========
Shares used in calculating diluted net income (loss) per
share .................................................. 4,761,447 11,260,295
=========== ===========
(See footnotes on page 28)
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27
THE
THE DISPOSAL DISPOSAL WASTE CONNECTIONS, INC.
FIBRES INTERNATIONAL, GROUP PREDECESSORS GROUP PREDECESSORS ----------------------
INC. COMBINED COMBINED COMBINED COMBINED DECEMBER DECEMBER
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 31, 31,
1994 1994 1995 1995 1996 1997 1998
--------- --------- --------- --------- --------- --------- ---------
HISTORICAL BALANCE SHEET
DATA(1):
Cash and equivalents $ 321 $ 203 $ 184 $ 961 $ 102 $ 820 $ 2,675
Working capital (deficit) 155 (4,279) 90 2,498 695 836 (8,717)
Property and equipment, net 3,810 2,771 4,035 2,221 5,069 4,185 33,043
Total assets 6,317 7,318 9,151 6,942 15,291 18,880 149,312
Long-term debt(3) 2,353 90 149 6,890 89 6,762 60,106
Redeemable convertible
preferred stock -- -- -- -- -- 7,523 --
Total stockholders'
equity (deficit) 3,045 (1,486) -- (2,067) -- (551) 61,063
DECEMBER 31,
-----------------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
SUPPLEMENTAL BALANCE SHEET
DATA(2):
Cash and equivalents $ 349 $ 859 $ 81 $ 946 $ 2,848
Working capital (deficit) . 626 (63) (3,721) (2,820) (12,324)
Property and equipment, net
6,301 8,027 12,529 19,004 46,986
Total assets 9,343 12,573 15,065 38,576 168,447
Long-term debt(3) 4,663 2,359 1,851 11,669 63,985
Redeemable convertible
preferred stock -- -- -- 7,523 --
Total stockholders' equity 2,420 3,439 6,258 6,940 68,529
(See footnotes on page 28)
27
28
(1) The entities Waste Connections acquired in September 1997 from BFI are
collectively referred to as Waste Connections' predecessors. BFI acquired the
predecessors at various times during 1995 and 1996, and prior to being acquired
by BFI, the predecessors operated as separate stand-alone businesses. Various
factors affect the year-to-year comparability of the amounts presented. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations" for additional information concerning Waste
Connections and our predecessors.
(2) Supplemental financial data gives retroactive effect to the business
combination with the Murrey Companies which occurred on January 19, 1999.
Generally accepted accounting principles prohibit giving effect to a consummated
business combination accounted for by the pooling-of-interests method in
financial statements that do not include the date of consummation. The
supplemental financial data does not extend through the date of consummation;
however, such information will be included in the historical consolidated
financial statements of Waste Connections after financial statements covering
the date of consummation of the business combination are issued.
(3) Excludes redeemable convertible preferred stock, which converted into common
stock upon our May 1998 initial public offering.
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," the
Company's Historical and Supplemental Financial Statements and the notes
thereto included elsewhere herein.
General
Our revenues consist mainly of fees we charge customers for solid waste
collection, transfer, disposal and recycling services. A large part of our
collection revenues comes from providing commercial, industrial and residential
services. We frequently perform these services under service agreements or
franchise agreements with counties or municipal contracts. County franchise
agreements and municipal contracts generally last from one to ten years. Our
existing franchise agreements and all of our existing municipal contracts give
Waste Connections the exclusive right to provide specified waste services in the
specified territory during the contract term. These exclusive arrangements are
awarded, at least initially, on a competitive bid basis and subsequently on a
bid or negotiated basis. We also provide residential collection services on a
subscription basis with individual households. Approximately 75% of our revenues
for the year ended December 31, 1998 were derived from services provided under
exclusive franchise agreements, long term municipal contracts and governmental
certificates. Governmental certificates grant Waste Connections perpetual and
exclusive collection rights in the covered areas. Contracts with counties and
municipalities and governmental certificates provide relatively consistent cash
flow during the terms of the contracts. Because we bill most residential
customers quarterly, subscription agreements also provide a stable source of
revenues for Waste Connections. Our collection business also generates revenues
from the sale of recyclable commodities.
We charge transfer station and landfill customers a tipping fee on a per
ton basis for disposing of their solid waste at the transfer stations, the
disposal facility we operate in Madera, California and the landfills we own and
operate in Major County, Oklahoma and Butler County, Nebraska. Most of our
transfer and landfill customers have entered into one to ten year
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29
disposal contracts with us, most of which provide for annual cost of living
increases.
We typically determine the prices for our solid waste services by the
collection frequency and level of service, route density, volume, weight and
type of waste collected, type of equipment and containers furnished, the
distance to the disposal or processing facility, the cost of disposal or
processing, and prices charged by competitors for similar services. The terms of
our contracts sometimes limit our ability to pass on price increases. Long-term
solid waste collection contracts typically contain a formula, generally based on
a published price index, that automatically adjusts fees to cover increases in
some, but not all, operating costs.
Costs of operations include labor, fuel, equipment maintenance and
tipping fees paid to third party disposal facilities, worker's compensation and
vehicle insurance, the cost of materials we purchase for recycling, third party
transportation expense, district and state taxes and host community fees and
royalties. Waste Connections owns and/or operates 16 transfer stations, which
reduce our costs by allowing us to use collection personnel and equipment more
efficiently and by consolidating waste to gain more favorable disposal rates
that may be available for larger quantities of waste.
Selling, general and administrative ("SG&A") expenses include
management, clerical and administrative compensation and overhead costs
associated with our marketing and sales force, professional services and
community relations expense.
Depreciation and amortization expense includes depreciation of fixed
assets over their estimated useful life using the straight line method and
amortization of goodwill and other intangible assets using the straight line
method.
Waste Connections capitalizes some third party expenditures related to
pending acquisitions or development projects, such as legal and engineering
expenses. We expense indirect acquisition costs, such as executive and corporate
overhead, public relations and other corporate services, as we incur them. We
charge against net income any unamortized capitalized expenditures and advances
(net of any portion that we believe we may recover, through sale or
otherwise)that relate to any operation that is permanently shut down and any
pending acquisition or landfill development project that is not completed. We
routinely evaluate all capitalized costs, and expense those related to projects
that we believe are not likely to succeed. As of December 31, 1998, Waste
Connections had no capitalized expenditures relating to landfill development
projects and $1.9 million in capitalized expenditures relating to pending
acquisitions, primarily related to the merger with the Murrey Companies which
ocurred on January 19, 1999.
We accrue for estimated landfill closure and post-closure maintenance
costs at the Red Carpet Landfill we own in Major County, Oklahoma and the Butler
County Landfill we own in Butler County, Nebraska. Under applicable regulations,
Waste Connections and Madera County, as operator and owner, respectively, are
jointly liable for closure and post-closure liabilities with respect to the
Fairmead Landfill. We have not accrued for such liabilities because Madera
County, as required by state law, has established a special fund into which it
deposits a portion of tipping fee surcharges to pay such liabilities.
Consequently, we do not believe that Madera had any financial obligation for
closure and post-closure costs for the Fairmead Landfill as of December 31,1998.
We will have additional material financial obligations relating to closure and
post-closure costs of any disposal facilities we may own or operate in the
future. In such case, Waste Connections will accrue for those obligations, based
on
29
30
engineering estimates of consumption of permitted landfill airspace over the
useful life of any such landfill.
Results of Operations
The following table sets forth items in Waste Connections' consolidated
statement of operations as a percentage of revenues for the period indicated.
Year Ended
December 31, 1998
-----------------
Revenues ................ 100.0%
Cost of operations ...... 67.6
Selling, general and
administrative expenses 9.8
Depreciation and
amortization expense .. 7.6
Stock compensation ...... 1.3
-----
Operating income ........ 13.7
Interest expense, net ... (4.2)
Income tax expense ...... (4.4)
Extraordinary loss, net
of income tax ......... (1.9)
-----
Net income (loss) ....... 3.2%
=====
EBITDA margin(1) ........ 22.5%
(1) EBITDA margin represents EBITDA expressed as a percentage of
revenues. EBITDA represents earnings presented above before extraordinary loss,
interest, (other) expense, income taxes, depreciation and amortization expense
and stock compensation expense. EBITDA is not a measure of cash flow, operating
results or liquidity, as determined in accordance with generally accepted
accounting principles.
The financial information for Waste Connections and our predecessors for
the years ended December 31, 1996 and 1997 included in this section relates to
the following entities for the periods indicated:
YEAR ENDED DECEMBER 31, 1996:
The Disposal Group Combined January 1, 1996 through July 31, 1996
(BFI acquisition date)
Predecessors Combined Period ended December 31, 1996
(represents the combined results of
operations of The Disposal Group
subsequent to the BFI acquisition date
and the operations for the year ended
December 31, 1996 of Fibres
International, Inc., which was
acquired by BFI in 1995)
YEAR ENDED DECEMBER 31, 1997:
Predecessors Combined Nine months ended September 30, 1997
(represents the combined results of
operations for the nine month period
of the entities acquired by BFI in
1995 and 1996 described above)
Waste Connections, Inc. Period from(September 9, 1997) through
December 31, 1997
30
31
The Disposal Group Combined consists of three entities that were under
common control before their acquisition by BFI: Diamond Fab and Welding Service,
Inc., Buchmann Sanitary Service, Inc. and The Disposal Group.
1998 vs. 1997
Revenues. Revenues for 1998 increased $47.8 million, or 766% to $54.0
million from $6.2 million for 1997. Our revenues in 1997 resulted primarily from
the purchase of Waste Connections' predecessors on September 30, 1997.
Approximately $47.6 million of the increase resulted primarily from the
acquisitions of our predecessors and the inclusion of their revenues for a full
12 months in 1998 and other acquisitions closed since the beginning of 1998.
Approximately $244,000 of the increase in revenues during 1998 resulted from
growth in the underlying operations of the business acquired from BFI. Revenues
related to Waste Connections' Predecessors Combined for the nine months ended
September 30, 1997 were $18.1 million.
Cost of Operations. Cost of operations for 1998 increased $31.9 million,
or 677%, to $36.6 million from $4.7 million for 1997. Our cost of operations in
1997 was attributable to the purchase of Waste Connections' predecessors on
September 30, 1997. The increase resulted primarily from the acquisitions of our
predecessors and the inclusion of their cost of operations for a full 12 months
in 1998 and other acquisitions closed since the beginning of 1998. This increase
in 1998 was offset slightly by a decline in expenses in the predecessors
operations as a result of cost reduction measures. Cost of operations as a
percentage of revenues declined 7.8% to 67.6% in 1998 from 75.4% in 1997. The
decline in cost of operations as a percent of revenues was as a result of
operating improvements implemented in the acquired businesses. Cost of
operations of Waste Connections' Predecessors Combined for the nine months ended
September 30, 1997 was $14.8 million, or 81.4% of revenues.
SG&A. SG&A expenses increased $4.7 million, or 759.0%, to $5.3 million
for 1998 from $619,000 for 1997. Our SG&A expense in 1997 was attributable to
the purchase of Waste Connections' predecessors on September 30, 1997. The
increase resulted primarily from the acquisitions of our predecessors and the
inclusion of their SG&A expenses for a full 12 months in 1998 and other
acquisitions closed since the beginning of 1998, combined with an increase in
corporate overhead to accommodate our growth. SG&A as a percentage of revenues
declined 0.1% to 9.8% for 1998 from 9.9% for 1997. The decline in SG&A as a
percentage of revenues was a result of spreading of overhead expenses over a
larger base of revenue from the acquisitions completed in 1998, offset by
increases in corporate overhead and the costs associated with being a public
company.
Depreciation and Amortization. Depreciation and amortization expense
increased $3.8 million, or 1061.5%, to $4.1 million for 1998 from $354,000 for
1997. Our depreciation and amortization expense in 1997 was attributable to the
purchase of Waste Connections' predecessors on September 30, 1997. The increase
resulted primarily from the acquisitions of our predecessors and the inclusion
of their depreciation and amortization for a full 12 months in 1998 and other
acquisitions closed since the beginning of 1998. Depreciation and amortization
as a percentage of revenues increased 1.9% to 7.6% for 1998 from 5.7% for 1997.
The increase in depreciation and amortization as a percentage of revenues was
primarily a result of amortization of goodwill associated with acquisitions.
Stock Compensation Expense. Stock compensation expense decreased $3.8
million, or 85.6%, to $632,000 for 1998 from $4.4 million for 1997.
31
32
Our stock compensation expense in 1997 was attributable to the valuation of
common stock issued upon the initial formation of the company. Stock
compensation as a percentage of revenues decreased 69.3% to 1.2% for 1998 from
70.5% for 1997. Our stock compensation expense in 1998 was attributable to stock
options granted with exercise prices less than the estimated fair value of our
common stock on the date of grant.
Start Up and Integration Expense. Start up and integration expenses
relate to expenses incurred in connection with our formation and integration
costs relating to our initial acquisitions.
Operating Income. Operating income increased $11.7 million from a loss
of $4.3 million in 1997 to $7.4 million in 1998. The increase was attributable
to the decline in stock compensation expense combined with improved operating
performance and the inclusion of a full year of our predecessors operating
results and other acquisitions closed since the beginning of 1998.
Interest Expense. Interest expense increased $1.2 million, or 118%, to
$2.3 million for 1998 from $1.0 million for 1997. The increase was primarily
attributable to higher debt levels incurred to fund certain of our acquisitions.
Provision for Income Taxes. Income taxes increased $2.7 million to $2.4
million for 1998 from a benefit of $332,000 for 1997. The effective income tax
rate in 1998 was 46.3%, which is above the federal statutory rate of 34.0% as
the result of state and local taxes, non-deductible goodwill associated with
certain acquisitions and the non-deductibility of the stock compensation
expense.
Extraordinary Charges. Extraordinary charges relate to the early
termination of our bank credit facility when it was replaced by a new and larger
facility. We had two new credit facilities during 1998.
Net Income. Net income increased by $6.8 million to $1.8 million for
1998, from a loss of $5.1 million for 1997. The increase was attributable to the
decline in stock compensation expense combined with improved operating
performance and the inclusion of a full year of our predecessors operating
results and other acquisitions closed since the beginning of 1998.
1997 vs. 1996
Because the predecessors existed for different periods, year-to-year
comparisons are not meaningful and therefore we have not included discussions of
SG&A, depreciation and amortization and interest.
Revenues. Our revenues for 1997 were $6.2 million. The revenues resulted
primarily from the purchase of Waste Connections' predecessors on September 30,
1997. Revenues related to Waste Connections' Predecessors Combined for the nine
months ended September 30, 1997 were $18.1 million. Waste Connections'
Predecessors Combined for the period ended December 31, 1996 had revenues of
$13.4 million. The Disposal Group Combined had revenues of $8.7 million for the
period from January 1, 1996 to July 31, 1996. The monthly revenues for Waste
Connections and Waste Connections' Predecessors Combined were essentially the
same in 1997 and 1996.
Cost of Operations. The cost of operations in 1997 was $4.7 million, or
75.4% of revenues. The cost of operations was attributable to the purchase of
Waste Connections' predecessors on September 30, 1997. Cost of operations of
Waste Connections' Predecessors Combined for the nine months
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33
ended September 30, 1997 was $14.8 million, or 81.4% of revenues. Waste
Connections' Predecessors Combined for the period ended December 31, 1996 had
cost of operations of $11.4 million, or 85.1% of revenues. During the period
from January 1, 1996 to July 31, 1996, the Disposal Group had cost of operations
of $6.2 million, or 70.7% of revenues. Our cost of operations as a percentage of
revenues in 1997 declined from Waste Connections' Predecessors Combined cost of
operations as a percentage of revenues in 1997 and 1996, due to price increases
in the fourth quarter of 1997 and operating cost savings in lease expense,
environmental accrual fee allocations from BFI, franchise fees and amortization
of loss contract accrual. Waste Connections' Predecessors Combined cost of
operations as a percentage of revenues for the nine months ended September 30,
1997 declined from 1996 due to the rollover effect of the acquisition of The
Disposal Group in 1996, which had generally higher margins than the existing
businesses.
SUPPLEMENTAL WASTE CONNECTIONS, INC. AND PREDECESSORS
1998 vs. 1997
Revenues. Total revenues increased $51.5 million, or 146.6%, to $86.6
million for 1998 from $35.1 million for 1997. Substantially all of the increase
resulted primarily from the acquisitions of BFI's Washington operations and
acquisitions closed since the beginning of 1998. Approximately $1.8 million
resulted from growth in the base business.
Cost of Operations. Total cost of operations increased $35.2 million, or
126.2%, to $63.0 million for 1998 from $27.8 million for 1997. The increase
resulted primarily from the acquisitions of BFI's Washington operations and
acquisitions closed since the beginning of 1998. Cost of operations as a
percentage of revenues declined 6.6% to 72.7% for 1998 from 79.3% for 1997. The
decline in cost of operations as a percentage of revenues was a result of cost
reductions at acquired businesses.
SG&A. SG&A expenses increased $5.2 million, or 175.6%, to $8.1 million
for 1998 from $2.9 million for 1997. The increase was primarily attributable to
the inclusion of BFI's Washington operations for 12 months and acquisitions
closed since the beginning of 1998 and the additional corporate costs of being a
public company and supporting the rapid pace of growth. SG&A as a percentage of
revenues increased 0.9% to 9.3% for 1998 from 8.4% for 1997. The increase in
SG&A as a percentage of revenues was a result of the acquisitions, which had
generally higher overhead expenses and the additional corporate costs of being a
public company and supporting the rapid pace of growth.
Depreciation and Amortization. Depreciation and amortization expense
increased $4.6 million, or 265.6%, to $6.3 million for 1998 from $1.7 million
for 1997. The increase was primarily attributable to depreciation from acquired
assets and increased amortization of goodwill from acquisitions. Depreciation
and amortization as a percentage of revenues increased 2.3% to 7.2% for 1998
from 4.9% for 1997. The increase in depreciation and amortization as a
percentage of revenues was primarily a result of amortization of goodwill
associated with acquisitions.
Stock Compensation Expense. Stock compensation expense decreased $3.8
million, or 85.6%, to $632,000 for 1998 from $4.4 million for 1997. Our stock
compensation expense in 1997 was attributable to the valuation of common stock
issued upon the initial formation of the company. Stock compensation as a
percentage of revenues decreased 11.8% to 0.7% for 1998 from 12.5% for 1997. Our
stock compensation expense in 1998 was attributable to stock options granted
with exercise prices less than the estimated fair value of our common stock on
the date of grant.
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34
Start Up and Integration Expense. Start up and integration expenses
relate to expenses incurred in connection with Waste Connections' formation and
integration costs relating to our initial acquisitions.
Operating Income. Operating income increased $10.8 million from a loss
of $2.3 million in 1997 to $8.5 million in 1998. The increase was attributable
to the decline in stock compensation expense combined with improved operating
performance and the inclusion of a full year of the business acquired from BFI
and other acquisitions closed since the beginning of 1998.
Interest Expense. Interest expense increased $1.4 million, or 97.3%, to
$2.8 million for 1998 from $1.4 million for 1997. The increase was primarily
attributable to higher debt levels incurred to fund all or a portion of the
purchase price of acquired businesses.
Provision for Income Taxes. Income taxes increased $2.6 million to $2.9
million for 1998 from $302,000 for 1997. The increase was associated with the
profitability of the operations acquired from BFI. The effective income tax rate
in 1998 was 50.1%, which is above the federal statutory rate of 34.0% as the
result of state and local taxes, non-deductible goodwill associated with certain
acquisitions and the non-deductibility of the stock compensation expense.
Extraordinary Charges. Extraordinary charges relate to the early
termination of our bank credit facility when it was replaced by a new and larger
facility. We had two new credit facilities during 1998.
Net Income. Net income increased by $5.6 million to $1.9 million for
1998, from a loss of $3.8 million for 1997. The increase was attributable to the
decline in stock compensation expense combined with improved operating
performance and the inclusion of a full year of the operations acquired from BFI
and other acquisitions closed since the beginning of 1998.
1997 vs. 1996
Revenues. Total revenues increased by $10.1 million, or 40.3%, to
$35.1 million in 1997 from $25.0 million in 1996. This increase was primarily
attributable to our acquisition of the predecessors from BFI on December
31,1997, increased volumes, price increases as a result of increased disposal
fees, the acquisition of the assets of Vashon Island Disposal and additional
services to existing customers.
Cost of Operations. Total cost of operations increased $7.4 million, or
36.0%, to $27.8 million in 1997 from $20.5 million in 1996. The increase was
principally due to our acquisition of the predecessors from BFI on December
31,1997, increased volume, increased disposal costs and the cost of operations
of Vashon Island Disposal. Cost of operations as a percentage of revenues
declined 2.5% to 79.3% from 81.8% in 1996. The percentage decrease was primarily
due to operating leverage as a result of increased volumes.
SG&A. SG&A expenses increased approximately $800,000, or 37.3%, to $2.9
million in 1997 from $2.1 million in 1996. The increase was principally due to
our acquisition of the predecessors from BFI on December 31, 1997, and increased
wages and contributions to the Murrey Companies' 401(k) plan. As a percentage of
revenues, SG&A decreased 0.2% to 8.4% from
34
35
8.6% in 1996 as a result of operating leverage with the increased revenues.
Depreciation and Amortization. Depreciation and amortization expense
increased approximately $489,000, or 39.6%, to $1.7 million in 1997 from
$1.2 million in 1996. The increase resulted from our acquisition of the
predecessors from BFI on December 31, 1997, and the purchase of additional
collection equipment and containers. Depreciation and amortization expense
remained constant as a percentage of revenues at 4.9%.
Interest Expense. Interest expense increased approximately $1.1 million,
or 398.2%, to $1.4 million in 1997 from approximately $284,000 in 1996. The
increased interest expense was a result of higher debt levels resulting from our
acquisition of the predecessors from BFI on December 31, 1997 and the purchase
of additional property and equipment.
Liquidity and Capital Resources
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, 1998, Waste Connections had a working capital deficit
of $8.7 million, including cash and cash equivalents of $2.7 million.
Approximately $8.5 million of the working capital deficit was a short-term note
payable related to a business acquired in December 1998. In managing our working
capital, we generally apply the cash generated from our operations that remains
after satisfying our working capital and capital expenditure requirements to
reduce our indebtedness under our bank revolving credit facility and to minimize
our cash balances. We finance our working capital requirements from internally
generated funds and bank borrowings.
At inception, Waste Connections sold 2,300,000 shares of common stock at
$0.01 per share to its founders and 2,499,998 shares of Series A Preferred Stock
at $2.80 per share. In May and June 1998, we received approximately $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 $65.3 million in net
proceeds from the sale of 3,999,307 shares in a secondary public offering
(including exercise by the underwriters of their over allotment option). As of
March 15, 1999, Waste Connections had sold or issued an additional 5,760,659
shares of common stock at a weighted average value of $13.32 per share
(excluding the preferred shares and shares issued in the offerings described
above), and had options and warrants outstanding to purchase 1,402,147 shares of
common stock at a weighted average exercise price of $10.71 per share.
Waste Connections has a $125 million revolving credit facility with a
syndicate of banks for which BankBoston, N.A. acts as agent. Virtually all of
our assets, including Waste Connections' interest in the equity securities of
our subsidiaries, secure our obligations under the credit facility. The credit
facility matures in 2003 and bears interest at a rate per annum equal to, at our
discretion, either the BankBoston Base Rate plus applicable margin, or the
Eurodollar Rate plus applicable margin. The credit facility requires Waste
Connections to maintain certain financial ratios and satisfy other predetermined
requirements, such as minimum net worth, net income and limits on capital
expenditures. It also requires the lenders' approval of acquisitions in certain
circumstances. As of December
35
36
31, 1998, an aggregate of approximately $57.3 million was outstanding under our
credit facility, and the interest rate on outstanding borrowings under the
credit facility was approximately 7.0%. We have received preliminary commitments
to increase the credit facility to $210.0 million. The expanded credit facility
will be used for (i) permitted acquisitions; (ii) capital expenditures; (iii)
working capital; (iv) standby letters of credit; and (v) general corporate
purposes. The expanded credit facility will bear interest at a rate per annum
equal to, at our discretion, either: (i) the BankBoston Base Rate; or (ii) the
Eurodollar Rate plus applicable margin. When completed we expect the expanded
credit facility to allow us to continue our acquisition-based growth strategy.
For the year ended December 31, 1998, operations provided approximately
$6.1 million of net cash, most of which was provided by operating results for
the period, non-cash charges for stock compensation and one time extraordinary
non-cash charges for extinguishment of debt. This was offset by an approximately
$3.3 million increase in working capital (net of acquisitions) in 1998.
For the year ended December 31, 1998, we used $62.5 million for
investing activities. Of this amount, we used approximately $56.3 million to
fund the cash portion of acquisitions and approximately $6.2 million for capital
expenditures related to trucks, information systems and landfill construction
activities.
For the year ended December 31, 1998, financing activities provided net
cash of $58.3 million, which was provided by net borrowings under our credit
facility and $24.0 million in proceeds from the sale of common stock in our
initial public offering.
We made approximately $6.2 million in capital expenditures during the
year ended December 31, 1998. We expect to make capital expenditures of
approximately $6.0 million in 1999 in connection with our existing business. We
intend to fund our planned 1999 capital expenditures principally through
existing cash, internally generated funds, and borrowings under our existing
credit facility. In addition, we may make substantial additional capital
expenditures in acquiring solid waste collection and disposal businesses. If we
acquire additional landfill disposal facilities, we may also have to make
significant expenditures to bring them into compliance with applicable
regulatory requirements, obtain permits or expand our available disposal
capacity. We cannot currently determine the 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.
On January 19, 1999, we merged with Murreys Disposal Company, Inc., DM
Disposal Co., Inc. American Disposal Company, Inc., and Tacoma Recycling, Inc.
(collectively, the "Murrey Companies). The transactions were accounted for as
poolings-of-interests, whereby we issued 2,888,880 shares of our common stock
for all of the outstanding shares of the Murrey Companies. In connection with
the merger with the Murrey Companies, we incurred transaction related costs of
approximately $6.2 million, which will be charged to operations in the first
quarter of 1999.
Effective February 9, 1999, we sold approximately 4.0 million shares of
our common stock at $17.50 per share. As a result of the offering, we received
approximately $65.3 million in net proceeds and used the proceeds to pay down
approximately $50.2 million of our outstanding debt.
36
37
Between January 1, 1999 and March 15, 1999, we acquired or signed
definitive agreements to acquire three companies, one of which is subject to
certain regulatory approvals. The consideration to be paid for these
acquisitions consists of a combination of cash and shares of our common stock
and will materially increase our borrowings under our credit facility and our
number of outstanding shares.
Goodwill represents the excess of the purchase price over the fair value
of the net assets of the acquired entities, and is amortized on a straight-line
basis over the period of expected benefit of 40 years. Accumulated amortization
amounted to $64,000 and $1.4 million as of December 31, 1997 and 1998,
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, 1998, there have been no adjustments to the carrying
amounts of intangibles resulting from these evaluations. As of December 31,
1998, our goodwill and other intangible assets represented approximately 66.2%
of our total assets and 161.8% of stockholder's equity.
We derive a substantial portion of our revenues from services provided
under exclusive municipal contracts and franchise agreements. Our single largest
contract, with the City of Vancouver, accounted for approximately 18.1% of our
revenues during the period from inception (September 9, 1997) through December
31, 1997, and 8.7% during the year ended December 31, 1998. Approximately nine
years remain under that contract. No other single contract or customer accounted
for more than 7.1% of our revenues during the period from inception (September
9, 1997) through December 31, 1997, or more than 5.0% during the year ended
December 31, 1998.
INFLATION
To date, inflation has not significantly affected our operations.
Consistent with industry practice, many of our contracts allow us to passthrough
certain costs to our customers, including increases in landfill tipping fees
and, in some cases, fuel costs. Therefore, we believe that we should be able to
increase prices to offset many cost increases that result from inflation.
However, competitive pressures may require us to absorb at least part of these
cost increases, particularly during periods of high inflation.
SEASONALITY
Based on historic trends experienced by the businesses we have acquired,
we expect our operating results to vary seasonally, with revenues typically
lowest in the first quarter, higher in the second and third quarters and lower
in the fourth quarter than in the second and third quarters.
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38
YEAR 2000 ISSUES
We will need to modify or replace portions of our software so that our
computer systems will function properly with respect to dates in the Year 2000
and afterwards. We expect to complete those modifications and upgrades during
1999, at a total cost of approximately $100,000. We have spent part of our Year
2000 budget on replacing our billing systems in Maltby and Vancouver,
Washington. Because our operations rely primarily on mechanical systems such as
trucks to collect solid waste, we do not expect our operations to be
significantly affected by Year 2000 issues. Our customers may need to make Year
2000 modifications to software and hardware that they use to generate records,
bills and payments relating to Waste Connections. We do not rely on vendors on a
routine basis except for providers of disposal services. We bring waste to a
site and are normally billed based on tonnage received. We believe that if our
disposal vendors encounter Year 2000 problems, they will convert to manual
billing based on scale recordings until they resolve those issues.
In assessing our exposure to Year 2000 issues, management believes our
biggest challenges lie in the following areas: Year 2000 issues at Waste
Connections' banks, large (typically municipal) customers, and acquired
businesses between the time Waste Connections acquires them and the time we
implement our own systems. We are obtaining Year 2000 compliance certifications
from our vendors, banks and customers. If Waste Connections and our vendors,
banks and customers do not complete the required Year 2000 modifications on
time, the Year 2000 issue could materially affect our operations. We believe,
however, that in the most reasonably likely worst case, the effects of Year
2000 issues on our operations would be brief and small relative to our overall
operations. We have not made a contingency plan to minimize operational problems
if we and our vendors, banks and customers do not timely complete all required
Year 2000 modifications.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We currently utilize no material derivative financial instruments that
expose us to significant market risk. In October 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 6.4%. We are exposed to cash flow risk due to changes in
interest rates with respect to the remainder of the balance our credit facility
and the letter of credit underlying the Madera bonds. As of March 15, 1999, we
had no debt balance above the $27.7 million that is subject to the interest
rate swap and maintained a letter of credit of $1.8 million.
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.
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 the
Company's definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders, which the Company will file with the Commission pursuant to
Regulation 14A within 120 days after the end of the Company's 1998 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.
38
39
(b) No reports on Form 8-K were filed during the last quarter of the
Company's fiscal year ended December 31, 1998.
(c) See Exhibit Index immediately following signature pages.
39
40
INDEX TO FINANCIAL STATEMENTS
WASTE CONNECTIONS, INC. AND PREDECESSORS
Report of Ernst & Young LLP, Independent Auditors ................. F-3
Consolidated Balance Sheets of Waste Connections, Inc. as
of December 31, 1997 and 1998 ................................. F-4
Combined Statement of Operations of Predecessors for the
nine months ended September 30, 1997 ........................... F-5
Consolidated Statements of Operations of Waste
Connections, Inc. for the period from inception
(September 9, 1997) through December 31, 1997
and the year ended December 31, 1998 ........................... F-5
Combined Statement of Operations of The Disposal Group for
the period from January 1, 1996 through July 31, 1996 .......... F-6
Combined Statement of Operations of Predecessors for the
period ended December 31, 1996 ................................. F-6
Consolidated Statements of Redeemable Stock and
Stockholders' Equity (Deficit) of Waste Connections,
Inc. for the period from inception (September 9, 1997)
through December 31, 1997 and the year ended
December 31, 1998 .............................................. F-7
Combined Statement of Cash Flows of Predecessors for the
nine months ended September 30, 1997 ........................... F-8
Consolidated Statements of Cash Flows of Waste
Connections, Inc. for the period from inception
(September 9, 1997) through December 31, 1997
and the year ended December 31, 1998 ........................... F-8
Combined Statement of Cash Flows of The Disposal Group for
the period from January 1, 1996 through July 31, 1996 .......... F-9
Combined Statement of Cash Flows of Predecessors for the
period ended December 31, 1996 ................................. F-9
Notes to Financial Statements ....................................... F-10
SUPPLEMENTAL WASTE CONNECTIONS, INC. AND PREDECESSORS
Report of Ernst & Young LLP, Independent Auditors ................. F-26
Supplemental Consolidated Balance Sheets of Waste
Connections, Inc. as of December 31, 1997 and 1998 ............. F-27
Combined Statement of Operations of Predecessors for the
nine months ended September 30, 1997 ........................... F-28
Supplemental Consolidated Statements of Operations of
Waste Connections, Inc. for the years ended December 31,
1997 and 1998 .................................................. F-28
F-1
41
Combined Statement of Operations of The Disposal Group for
the period from January 1, 1996 through July 31, 1996 .......... F-29
Combined Statement of Operations of Predecessors for the
period ended December 31, 1996 ................................. F-29
Supplemental Consolidated Statement of Operations of Waste
Connections, Inc. for the year ended December 31, 1996 ......... F-29
Supplemental Consolidated Statement of Redeemable Stock
and Stockholders' Equity of Waste Connections, Inc. for
the years ended December 31, 1996, 1997 and 1998 ............... F-30
Combined Statement of Cash Flows of Predecessors for the
nine months ended September 30, 1997 ........................... F-31
Supplemental Consolidated Statements of Cash Flows of
Waste Connections, Inc. for the years ended December 31,
1997 and 1998 .................................................. F-31
Combined Statement of Cash Flows of The Disposal Group for
the period from January 1, 1996 through July 31, 1996 .......... F-32
Combined Statement of Cash Flows of Predecessors for the
period ended December 31, 1996 ................................. F-32
Supplemental Consolidated Statement of Cash Flows of Waste
Connections, Inc. for the year ended December 31, 1996 ......... F-32
Notes to Supplemental Consolidated Financial Statements ............ F-33
F-2
42
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Waste Connections, Inc.
We have audited the accompanying financial statements of Waste Connections,
Inc. and Predecessors as of December 31, 1997 and 1998, and for each of the
three years in the period ended December 31, 1998 which appear on pages F-4
through F-9 herein as listed in the accompanying Index to Financial Statements.
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Waste Connections, Inc. and
Predecessors at December 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
ERNST & YOUNG LLP
Sacramento, California
February 17, 1999
F-3
43
WASTE CONNECTIONS, INC. AND PREDECESSORS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
WASTE CONNECTIONS, INC.
CONSOLIDATED
---------------------------
DECEMBER 31,
1997 1998
--------- ---------
ASSETS
Current assets:
Cash and equivalents ..................................................... $ 820 $ 2,675
Accounts receivable, less allowance for doubtful accounts of $19 and
$362 at December 31, 1997 and December 31, 1998, respectively ............ 3,940 10,769
Prepaid expenses and other current assets ................................ 358 2,246
--------- ---------
Total current assets ............................................... 5,118 15,690
Property and equipment, net ................................................ 4,185 33,043
Intangible assets, net ..................................................... 9,550 98,785
Other assets ............................................................... 27 1,794
--------- ---------
$ 18,880 $ 149,312
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ......................................................... $ 2,609 $ 6,598
Deferred revenue ......................................................... 597 2,052
Accrued liabilities ...................................................... 825 4,154
Current portion of long-term debt ........................................ -- 9,516
Other current liabilities ................................................ 251 2,087
--------- ---------
Total current liabilities .......................................... 4,282 24,407
Long-term debt ............................................................. 6,762 60,106
Deferred income taxes ...................................................... 162 1,645
Other long-term liabilities ................................................ 702 2,091
Commitments and contingencies (Note 7)
Redeemable convertible preferred stock: $.01 par value; 2,500,000 shares
authorized at December 31, 1997 (none authorized at December 31,
1998); 2,499,998 shares issued and outstanding at December 31, 1997; no
shares issued and outstanding at December 31, 1998 (aggregate liquidation
preference of $10,500 at December 31, 1997) ............................. 7,523 --
Stockholders' equity (deficit):
Preferred stock: $.01 par value; 7,500,000 and 10,000,000 shares
authorized at December 31, 1997 and 1998, respectively; none issued and
outstanding ............................................................ -- --
Common stock: $.01 par value; 50,000,000 shares authorized; 2,300,000
and 9,435,233 shares issued and outstanding at December 31, 1997 and
1998, respectively ...................................................... 23 94
Additional paid-in capital ............................................... 5,105 66,163
Stockholder notes receivable ............................................. (82) --
Deferred stock compensation .............................................. -- (428)
Accumulated deficit ...................................................... (5,597) (4,766)
--------- ---------
Total stockholders' equity (deficit) ............................... (551) 61,063
--------- ---------
$ 18,880 $ 149,312
========= =========
See accompanying notes.
F-4
44
WASTE CONNECTIONS, INC. AND PREDECESSORS
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
WASTE CONNECTIONS, INC. CONSOLIDATED
PREDECESSORS -----------------------------------------
COMBINED PERIOD
NINE MONTHS FROM INCEPTION
ENDED (SEPTEMBER 9, 1997)
SEPTEMBER 30, THROUGH YEAR ENDED
1997 (NOTE 1) DECEMBER 31, 1997 DECEMBER 31, 1998
------------- ----------------- -----------------
Revenues .......................................... $ 18,114 $ 6,237 $ 54,042
Operating expenses:
Cost of operations .............................. 14,753 4,703 36,554
Selling, general and administrative ............. 3,009 619 5,317
Depreciation and amortization ................... 1,083 354 4,112
Start-up and integration ........................ -- 493 --
Stock compensation .............................. -- 4,395 632
----------- ----------- -----------
Income (loss) from operations ..................... (731) (4,327) 7,427
Interest expense .................................. (456) (1,035) (2,257)
Other income (expense), net ....................... 14 (36) --
----------- ----------- -----------
Income (loss) before income taxes ................. (1,173) (5,398) 5,170
Income tax (provision) benefit .................... -- 332 (2,395)
----------- ----------- -----------
Income (loss) before extraordinary item ........... (1,173) (5,066) 2,775
Extraordinary item -- early extinguishment
of debt, net of tax benefit of $264 ............. -- -- (1,027)
----------- ----------- -----------
Net income (loss) ................................. $ (1,173) $ (5,066) $ 1,748
=========== =========== ===========
Redeemable convertible preferred stock accretion .. (531) (917)
----------- -----------
Net income (loss) applicable to common stockholders $ (5,597) $ 831
=========== ===========
Basic income (loss) per share:
Income (loss) before extraordinary item ......... $ (2.99) $ 0.29
Extraordinary item .............................. -- (0.16)
----------- -----------
Net income (loss) per share ..................... $ (2.99) $ 0.13
=========== ===========
Diluted income (loss) per common share:
Income (loss) before extraordinary item ......... $ (2.99) $ 0.22
Extraordinary item .............................. -- (0.12)
----------- -----------
Net income (loss) per common share .............. $ (2.99) $ 0.10
=========== ===========
Shares used in calculating basic income (loss)
per share ...................................... 1,872,567 6,460,293
=========== ===========
Shares used in calculating diluted income (loss)
per share ....................................... 1,872,567 8,371,415
=========== ===========
See accompanying notes.
F-5
45
WASTE CONNECTIONS, INC. AND PREDECESSORS
STATEMENTS OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
PREDECESSORS
--------------------------------------------
THE DISPOSAL
GROUP COMBINED
PERIOD FROM PREDECESSORS
JANUARY 1, 1996 COMBINED PERIOD
THROUGH ENDED DECEMBER 31, 1996
JULY 31, 1996 (NOTE 1)
--------------- -----------------------
Revenues ............................ $ 8,738 $ 13,422
Operating expenses:
Cost of operations ................ 6,174 11,420
Selling, general and administrative 2,126 1,649
Depreciation and amortization ..... 324 962
-------- --------
Income (loss) from operations ....... 114 (609)
Interest expense .................... (12) (225)
Other income (expense), net ......... 2,661 (147)
-------- --------
Income (loss) before income taxes ... 2,763 (981)
Income tax (provision) benefit ...... (505) --
-------- --------
Net income (loss) ................... $ 2,258 $ (981)
======== ========
See accompanying notes.
F-6
46
WASTE CONNECTIONS, INC. AND PREDECESSORS
CONSOLIDATED STATEMENTS OF REDEEMABLE STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM INCEPTION (SEPTEMBER 9, 1997)
THROUGH DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
WASTE CONNECTIONS, INC. CONSOLIDATED
------------------------------------------------------------------------
REDEEMABLE
CONVERTIBLE REDEEMABLE
PREFERRED STOCK COMMON STOCK
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ----------
Balances at inception ............. -- $ -- -- $ --
Sale of redeemable
convertible preferred stock ...... 2,499,998 6,992 -- --
Sale of common stock .............. -- -- -- --
Issuance of common stock warrants . -- -- -- --
Issuance of stockholder notes
receivable ...................... -- -- -- --
Accretion of redeemable
convertible preferred stock ...... -- 531 -- --
Net loss .......................... -- -- -- --
---------- ---------- ---------- ----------
Balances at December 31, 1997 ..... 2,499,998 7,523 -- --
Issuance of redeemable common
stock ............................ -- -- 1,000,000 7,500
Issuance of common stock
warrants ......................... -- -- -- --
Common stock sold in
connection with initial public
offering ......................... -- -- -- --
Issuance of common stock .......... -- -- -- --
Accretion of redeemable
convertible preferred stock ...... -- 917 -- --
Preferred stock dividend .......... -- (161) -- --
Conversion of redeemable
preferred stock .................. (2,499,998) (8,279) -- --
Conversion of redeemable
common stock ..................... -- -- (1,000,000) (7,500)
Deferred stock compensation
associated with stock options .... -- -- -- --
Amortization of deferred
stock compensation ............... -- -- -- --
Exercise of stock options ......... -- -- -- --
Exercise of warrants .............. -- -- -- --
Payment of stockholder notes
receivable ....................... -- -- -- --
Net income ........................ -- -- -- --
---------- ---------- ---------- ----------
Balances at December 31,
1998 ............................. -- $ -- -- $ --
========== ========== ========== ==========
WASTE CONNECTIONS, INC. CONSOLIDATED
---------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL STOCKHOLDER DEFERRED
---------------------------- PAID-IN NOTES STOCK
SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
---------- ---------- ---------- ---------- ----------
Balances at inception ............. -- $ -- $ -- $ -- $ --
Sale of redeemable
convertible preferred stock ...... -- -- -- -- --
Sale of common stock .............. 2,300,000 23 4,395 -- --
Issuance of common stock warrants . -- -- 710 -- --
Issuance of stockholder notes
receivable ...................... -- -- -- (82) --
Accretion of redeemable
convertible preferred stock ...... -- -- -- -- --
Net loss .......................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balances at December 31, 1997 ..... 2,300,000 23 5,105 (82) --
Issuance of redeemable common
stock ............................ -- -- -- -- --
Issuance of common stock
warrants ......................... -- -- 2,388 -- --
Common stock sold in
connection with initial public
offering ......................... 2,300,000 23 23,963 -- --
Issuance of common stock .......... 1,054,634 10 17,783 -- --
Accretion of redeemable
convertible preferred stock ...... -- -- -- -- --
Preferred stock dividend .......... -- -- -- -- --
Conversion of redeemable
preferred stock .................. 2,499,998 25 8,254 -- --
Conversion of redeemable
common stock ..................... 1,000,000 10 7,490 -- --
Deferred stock compensation
associated with stock options .... -- -- 821 -- (821)
Amortization of deferred
stock compensation ............... -- -- -- -- 393
Exercise of stock options ......... 57,912 1 223 -- --
Exercise of warrants .............. 222,689 2 136 -- --
Payment of stockholder notes
receivable ....................... -- -- -- 82 --
Net income ........................ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balances at December 31,
1998 ............................. 9,435,233 $ 94 $ 66,163 $ -- $ (428)
========== ========== ========== ========== ==========
WASTE CONNECTIONS, INC. CONSOLIDATED
--------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------
ACCUMULATED
DEFICIT TOTAL
---------- ----------
Balances at inception ............. $ -- $ --
Sale of redeemable
convertible preferred stock ...... -- --
Sale of common stock .............. -- 4,418
Issuance of common stock warrants . -- 710
Issuance of stockholder notes
receivable ...................... -- (82)
Accretion of redeemable
convertible preferred stock ...... (531) (531)
Net loss .......................... (5,066) (5,066)
---------- ----------
Balances at December 31, 1997 ..... (5,597) (551)
Issuance of redeemable common
stock ............................ -- --
Issuance of common stock
warrants ......................... -- 2,388
Common stock sold in
connection with initial public
offering ......................... -- 23,986
Issuance of common stock .......... -- 17,793
Accretion of redeemable
convertible preferred stock ...... (917) (917)
Preferred stock dividend .......... -- --
Conversion of redeemable
preferred stock .................. -- 8,279
Conversion of redeemable
common stock ..................... -- 7,500
Deferred stock compensation
associated with stock options .... -- --
Amortization of deferred
stock compensation ............... -- 393
Exercise of stock options ......... -- 224
Exercise of warrants .............. -- 138
Payment of stockholder notes
receivable ....................... -- 82
Net income ........................ 1,748 1,748
---------- ----------
Balances at December 31,
1998 ............................. $ (4,766) $ 61,063
========== ==========
See accompanying notes.
F-7
47
WASTE CONNECTIONS, INC. AND PREDECESSORS
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
WASTE CONNECTIONS, INC. CONSOLIDATED
----------------------------------------
PREDECESSORS
COMBINED PERIOD FROM
NINE MONTHS INCEPTION
ENDED (SEPTEMBER 9, 1997)
SEPTEMBER 30, THROUGH YEAR ENDED
1997 (NOTE 1) DECEMBER 31, 1997 DECEMBER 31, 1998
------------- ------------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................................... $ (1,173) $ (5,066) $ 1,748
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Gain on sale of assets ................................. (4) -- --
Depreciation and amortization .......................... 1,083 354 4,112
Deferred income taxes .................................. -- (369) 1,391
Amortization of debt issuance costs, debt guarantee fees
and accretion of discount on long-term debt .......... -- 860 192
Stock compensation ..................................... -- 4,395 632
Extraordinary item -- extinguishment of debt ........... -- -- 1,291
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable, net ............................ (604) (1,021) (2,159)
Prepaid expenses and other current assets ........... (74) (51) (1,587)
Accounts payable .................................... (221) 2,607 (566)
Deferred revenue .................................... (137) 169 878
Accrued liabilities ................................. (450) 801 49
Other liabilities ................................... -- (65) 85
--------- --------- ---------
Net cash provided by (used in) operating activities ........ (1,580) 2,614 6,066
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment ............... 188 -- 132
Payments for acquisitions, net of cash acquired ............ -- (11,493) (56,341)
Prepaid acquisition costs .................................. -- (20) --
Capital expenditures for property and equipment ............ (735) (264) (6,248)
Decrease (increase) in other assets ........................ 22 (19) (94)
Proceeds from stockholder notes receivable ................. -- -- 82
Issuance of stockholder notes receivable ................... -- (82) --
--------- --------- ---------
Net cash used in investing activities ...................... (525) (11,878) (62,469)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net intercompany balance ................................... 2,142 -- --
Proceeds from short-term borrowings ........................ -- 600 --
Proceeds from long-term debt ............................... -- 5,500 77,402
Principal payments on notes payable ........................ (38) (2,724) (3,374)
Principal payments on long-term debt ....................... -- (157) (39,103)
Proceeds from sale of redeemable convertible preferred
stock .................................................... -- 6,992 --
Proceeds from sale of common stock ......................... -- 23 23,986
Proceeds from option and warrant exercises ................. -- -- 362
Payment of preferred stock dividend ........................ -- -- (161)
Debt issuance costs ........................................ -- (150) (854)
--------- --------- ---------
Net cash provided by financing activities .................. 2,104 10,084 58,258
--------- --------- ---------
Net increase (decrease) in cash and equivalents .............. (1) 820 1,855
Cash and equivalents at beginning of period .................. 102 -- 820
--------- --------- ---------
Cash and equivalents at end of period ........................ $ 101 $ 820 $ 2,675
========= ========= =========
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND
NON-CASH TRANSACTIONS:
Cash paid for income taxes ................................. $ -- $ -- $ 509
========= ========= =========
Cash paid for interest ..................................... $ -- $ 183 $ 1,590
========= ========= =========
Redeemable convertible preferred stock accretion ........... $ 531 $ 917
========= =========
In connection with the BFI related acquisitions (Note 2),
the Company assumed liabilities as follows:
Fair value of assets acquired ............................ $ 17,040 $ 120,507
Cash paid for acquisitions (including acquisition costs) . (11,493) (56,341)
--------- ---------
Liabilities assumed, stock and notes payable issued to
sellers ................................................ $ 5,547 $ 64,166
========= =========
See accompanying notes.
F-8
48
WASTE CONNECTIONS, INC. AND PREDECESSORS
STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
PREDECESSORS
----------------------------------
THE DISPOSAL
GROUP COMBINED PREDECESSORS
PERIOD FROM COMBINED
JANUARY 1, PERIOD ENDED
1996 THROUGH DECEMBER 31,
JULY 31, 1996 1996 (NOTE 1)
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................... $ 2,258 $ (981)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ..................... 324 962
Deferred income taxes ............................. 298 --
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable, net ........................ 1,201 (1,992)
Prepaid expenses and other current assets ....... (2) (104)
Accounts payable ................................ (45) 713
Deferred revenue ................................ (522) 421
Accrued liabilities ............................. (987) 428
------- -------
Net cash provided by (used in) operating activities .. 2,525 (553)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment ......... -- 117
Capital expenditures for property and equipment ...... (7) (282)
Decrease in other assets ............................. -- 33
------- -------
Net cash used in investing activities .................. (7) (132)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net intercompany balance ............................. -- 642
Proceeds from long-term debt ......................... 142 --
Principal payments on long-term debt ................. (427) --
Principal payments on notes payable .................. -- (39)
------- -------
Net cash provided by (used in) financing activities .... (285) 603
------- -------
Net increase (decrease) in cash and equivalents ........ 2,233 (82)
Cash and equivalents at beginning of period ............ 961 184
------- -------
Cash and equivalents at end of period .................. $ 3,194 $ 102
======= =======
See accompanying notes.
F-9
49
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Waste Connections, Inc. ("WCI" or "the Company") was incorporated in
Delaware on September 9, 1997 and commenced its operations on October 1, 1997
through the purchase of certain solid waste operations in Washington, as more
fully described below and in Note 2. The Company is a regional, integrated,
non-hazardous solid waste services company that provides collection, transfer,
disposal and recycling services to commercial, industrial and residential
customers in California, Idaho, Kansas, Nebraska, Oklahoma, Oregon, South
Dakota, Utah, Washington and Wyoming.
Basis of Presentation
The consolidated financial statements of the Company include the accounts of
WCI and its wholly owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
The entities the Company acquired in September 1997 from Browning-Ferris
Industries, Inc. ("BFI") are collectively referred to herein as the Company's
predecessors. BFI acquired the predecessor operations at various times during
1995 and 1996, and prior to being acquired by BFI, the predecessors operated as
separate stand-alone businesses.
During the periods in which the Company's predecessors operated as wholly
owned subsidiaries of BFI, they maintained intercompany accounts with BFI for
recording intercompany charges for costs and expenses, intercompany purchases of
equipment and additions under capital leases and intercompany transfers of cash,
among other transactions. It is not feasible to ascertain the amount of related
interest expense that would have been recorded in the historical financial
statements had the predecessors been operated as stand-alone entities. Charges
for interest expense were allocated to the Company's predecessors by BFI as
disclosed in the accompanying Statement of Operations. The interest expense
allocations from BFI are based on formulas that do not necessarily correspond
with the balances in the related intercompany accounts. Moreover, the financial
position and results of operations of the predecessors during this period may
not necessarily be indicative of the financial position or results of operations
that would have been realized had the predecessors been operated as stand-alone
entities. For the periods in which the predecessors operated as wholly owned
subsidiaries of BFI, the statements of operations include amounts allocated by
BFI to the predecessors for selling, general and administrative expenses based
on certain allocation methodologies which the Company's management believes are
reasonable.
During the periods prior to their acquisition by BFI, the Company's
predecessors operated as separate stand-alone businesses. The acquisitions of
the predecessors by BFI were accounted for using the purchase method of
accounting, and the respective purchase prices were allocated to the fair values
of the assets acquired and liabilities assumed. Similarly, the Company's
acquisitions of the predecessors from BFI in September 1997 were accounted for
using the purchase method of accounting, and the purchase price was allocated to
the fair value of the assets acquired and liabilities assumed. Consequently, the
amounts of depreciation and amortization included in the statements of
operations for the periods presented reflect the changes in basis of the
underlying assets that were made as a result of the changes in ownership that
occurred during the periods presented. In addition, because the predecessor
companies operated independently and were not under common control or management
during these periods, and because different tax strategies may have influenced
their results of operations, the data may not be comparable to or indicative of
their operating results after their acquisition by BFI.
Due to the manner in which BFI intercompany transactions were recorded as
described above, it is not feasible to present a detailed analysis of
transactions reflected in the net intercompany balance with BFI. The change in
the predecessors' combined intercompany balance with BFI (net of income (loss)
and initial investment in the acquired companies) was $642 and $2,142 during the
period ended December 31, 1996 and the nine months ended September 30, 1997,
respectively.
F-10
50
The accompanying statements of operations and cash flows for the Company and
its predecessors for the years ended December 31, 1996, 1997 and 1998 are
comprised of the following entities for the periods indicated:
YEAR ENDED DECEMBER 31, 1996:
The Disposal Group Combined January 1, 1996 through July 31, 1996
(BFI acquisition date)
Predecessors Combined Period ended December 31, 1996
(represents the combined results of
operations of The Disposal Group
subsequent to the BFI acquisition date
and the operations for the year ended
December 31, 1996 of Fibres
International, Inc. which was acquired by
BFI in 1995)
YEAR ENDED DECEMBER 31, 1997:
Predecessors Combined Nine months ended September 30, 1997
(represents the combined results of
operations for the nine month period of
the entities acquired by BFI in 1995 and
1996 described above)
Waste Connections, Inc. Period from inception (September 9, 1997)
through December 31, 1997
YEAR ENDED DECEMBER 31, 1998:
Waste Connections, Inc. Year ended December 31, 1998
The Disposal Group Combined consists of three entities that were under
common control prior to their acquisition by BFI: Diamond Fab and Welding
Service, Inc., Buchmann Sanitary Service, Inc., and The Disposal Group.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Common Stock Valuation
In connection with the Company's organization and initial capitalization in
September 1997, the Company sold 2.3 million shares of common stock for $.01 per
share to certain directors, consultants, and management. As a result, the
Company recorded a non-recurring, non-cash stock compensation charge of $4,395
in the accompanying consolidated statement of operations, representing the
difference between the amount paid for the shares and the estimated fair value
of the shares of $1.92 per share on the date of sale. The estimated fair value
of the common shares was determined by the Company based on an independent
valuation of the common stock.
Cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. As of December 31,
1998, cash equivalents consist of demand money market accounts.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risks consist primarily of accounts receivable. Credit risk on
accounts receivable is minimized as a result of the large and diverse nature of
the Company's customer base. The Company maintains an allowance for losses based
on the expected collectibility of accounts receivable. Credit losses have been
within management's expectations.
F-11
51
Property and Equipment
Property and equipment are stated at cost. Improvements or betterments which
significantly extend the life of an asset are capitalized. Expenditures for
maintenance and repair costs are charged to operations as incurred. The cost of
assets retired or otherwise disposed of and the related accumulated depreciation
are eliminated from the accounts in the year of disposal. Gains and losses
resulting from property disposals are included in other income (expense).
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets.
The estimated useful lives are as follows:
Machinery and equipment................... 3 -- 10 years
Rolling stock............................. 10 years
Containers................................ 5 -- 15 years
Furniture and fixtures.................... 3 -- 6 years
In connection with the Company's acquisitions (Note 2), the Company acquired
certain used property and equipment. This used property and equipment is being
depreciated using the straight-line method over the estimated remaining useful
lives, which range from one to fifteen years.
Capitalized landfill costs include expenditures for land and related
airspace, permitting costs and preparation costs. Landfill permitting and
preparation costs represent only direct costs related to those activities,
including legal, engineering and construction. Interest is capitalized on
landfill permitting and construction projects and other projects under
development while the assets are undergoing activities to ready them for their
intended use. The interest capitalization rate is based on the Company's
weighted average cost of indebtedness. No interest was capitalized in 1998.
Landfill permitting, acquisition and preparation costs, are amortized as
permitted airspace of the landfill is consumed. Landfill preparation costs
include the costs of construction associated with excavation, liners, site berms
and the installation of leak detection and leachate collection systems. In
determining the amortization rate for a landfill, preparation costs include the
total estimated costs to complete construction of the landfills' permitted
capacity. Units-of-production amortization rates are determined annually for the
Company's operating landfill. The rates are based on estimates provided by the
Company's outside engineers and consider the information provided by surveys
which are performed at least annually.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
the net assets of the acquired entities, and is amortized on a straight-line
basis over the period of expected benefit of 40 years. Accumulated amortization
amounted to $64 and $1,443 as of December 31, 1997 and 1998, respectively.
The Company continually evaluates the value and future benefits of its
intangible assets, including goodwill. The Company assesses recoverability from
future operations using cash flows and income from operations of the related
acquired business as measures. Under this approach, the carrying value would be
reduced if it becomes probable that the Company's best estimate for expected
future cash flows of the related business would be less than the carrying amount
of the related intangible assets. There have been no adjustments to the carrying
amounts of intangible assets resulting from these evaluations as of December 31,
1998.
Fair Values of Financial Instruments
The Company's financial instruments consist primarily of cash, trade
receivables, restricted funds held in trust, trade payables and debt
instruments. The carrying values of cash, trade receivables, restricted funds
held in trust, and trade payables are considered to be representative of their
respective fair values. The carrying values of the Company's debt instruments
approximate their fair values as of December 31, 1997 and 1998, based on current
incremental borrowing rates for similar types of borrowing arrangements.
Interest Rate Protection Agreements
Interest rate protection agreements are used to reduce interest rate risks
and interest costs of the Company's debt portfolio. The Company enters into
these agreements to change the fixed/variable interest rate mix of the portfolio
to reduce the Company's aggregate exposure to increases in interest rates. The
Company does not hold or issue derivative financial instruments for trading
F-12
52
purposes. Hedge accounting treatment is applied to interest rate derivative
contracts that are designated as hedges of specified debt positions. Amounts
payable or receivable under interest rate swap agreements are recognized as
adjustments to interest expense in the periods in which they accrue. Net
premiums paid for derivative financial instruments are deferred and recognized
ratably over the life of the instruments. Under hedge accounting treatment,
current period income is not affected by the increase or decrease in the fair
market value of derivative instruments as interest rates change and these
instruments are not reflected in the financial statements at fair market value.
Early termination of a hedging instrument does not result in recognition of
immediate gain or loss except in those cases when the debt instruments to which
a contract is specifically linked is terminated.
Income Taxes
The Company and The Disposal Group use the liability method to account for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
During the periods in which the predecessors were owned by BFI, their
operations were included in the consolidated income tax returns of BFI, and no
allocations of income taxes were reflected in the historical statements of
operations. For purposes of the combined predecessor financial statements,
current and deferred income taxes have been provided on a separate income tax
return basis.
Revenue Recognition
Revenues are recognized as services are provided. Certain customers are
billed in advance and, accordingly, recognition of the related revenues is
deferred until the services are provided.
Start-Up and Integration Expenses
During the period from inception (September 9, 1997) through December 31,
1997, the Company incurred certain start-up expenses relating to the formation
of the Company, primarily for legal and other professional services, and the
costs associated with recruiting the Company's initial management team. In
addition, the Company incurred certain integration expenses relating to its
initial acquisitions. These start-up and integration expenses have been charged
to operations as incurred.
Stock-Based Compensation
As permitted under the provisions of Financial Accounting Standards No. 123
"Accounting for Stock Based Compensation" ("SFAS 123"), the Company has elected
to account for stock-based compensation using the intrinsic value method
prescribed by Accounting Principles Board's Opinion No. 25 "Accounting for Stock
Issued to Employees" ("APB 25"). Under the intrinsic value method, compensation
cost is the excess, if any, of the quoted market price or fair value of the
stock at the grant date or other measurement date over the amount an employee
must pay to acquire the stock. None of the predecessor entities awarded
stock-based compensation to employees. Consequently, the related disclosures in
the accompanying financial statements and notes relate solely to the Company.
Per Share Information
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 128, Earnings per Share. Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts have been presented on the
basis set forth in Statement 128 (Note 11). Earnings per share data have not
been presented for the predecessor operations because such data is not
meaningful.
Closure and Post-Closure Costs
The Company does not accrue for closure and post-closure costs related to
the Fairmead Landfill it operates in Madera County, California. Madera County as
required by state law, has established a special fund to pay such liabilities.
In 1998, the Company acquired the stock of Red Carpet Landfill ("Red Carpet") in
Oklahoma and Butler County Landfill ("Butler") in Nebraska. Both Red
F-13
53
Carpet and Butler are engaged in landfilling of municipal solid waste and other
acceptable waste streams. Accrued closure and post-closure costs include the
current and non-current portion of accruals associated with obligations for
closure and post-closure of the landfill. The Company, based as input from its
outside engineers, estimates its future closure and post-closure monitoring and
maintenance costs for solid waste landfills based on its interpretation of the
technical standards of the U.S. Environmental Protection Agency's Subtitle D
regulations and the air emissions standards under the Clean Air Act as they are
being applied on a state-by-state basis. Closure and post-closure monitoring and
maintenance costs represent the costs related to cash expenditures yet to be
incurred when a landfill facility ceases to accept waste and closes. Accruals
for closure and post-closure monitoring and maintenance requirements in the U.S.
consider final capping of the site, site inspection, groundwater monitoring,
leachate management, methane gas control and recovery, and operating and
maintenance costs to be incurred during the period after the facility closes.
Certain of these environmental costs, principally capping and methane gas
control costs, are also incurred during the operating life of the site in
accordance with the landfill operation requirements of Subtitle D and the air
emissions standards. Reviews of the future requirements for closure and
post-closure monitoring and maintenance costs for the Company's operating
landfills are performed by the Company's consulting engineers at least annually
and are the basis upon which the Company's estimates of these future costs and
the related accrual rates are revised. The Company provides accruals for these
estimated costs as the remaining permitted airspace of such facilities is
consumed. The states in which the Company operates its landfills require a
specified portion of these accrued closure and post-closure obligations to be
funded at any point in time. As of December 31, 1998, the Company estimates that
total closure and post closure costs relating to its landfills will be
approximately $5,474, of which approximately $1,233 has been accrued as of
December 31, 1998 and included in other long-term liabilities in the
accompanying balance sheet.
Segment Information
The Company adopted FASB Statement No. 131, Disclosure About Segments of an
Enterprise and Related Information in 1998. Statement 131 established standards
for the way that public business enterprises report information about operating
segments. It also established standards for related disclosures about products
and services, geographic areas and major customers. Implementation of the
provisions of Statement 131 did not have a significant impact on the Company's
disclosures.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. The statement, which is
to be applied prospectively, is effective for the Company's year ended December
31, 2000. The Company is currently evaluating the impact of SFAS No. 133 on its
future results of operations and financial position.
In April 1998, Statement of Position ("SOP") No. 98-5 - "Reporting on the
Costs of Start-Up Activities" was issued by the American Institute of Certified
Public Accountants. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. Initial application of the
statement, which is effective for the Company's year ended December 31, 1999, is
to be reported as a cumulative effect of a change in accounting principle. The
Company believes that the future adoption of SOP No. 98-5 will not have a
material effect on its results of operations or financial position.
Reclassifications
Certain amounts reported in the Company's prior year's financial statements
have been reclassified to conform with the 1998 presentation.
2. ACQUISITIONS
1998 ACQUISITIONS
During 1998, the Company acquired 42 businesses, including 2 operational
landfills, which were accounted for as purchases. Aggregate consideration for
these acquisitions consisted of $56,341 in cash (net of cash acquired), $12,488
in notes payable to sellers, 2,054,634 shares of common stock valued at $25,293,
and warrants to purchase 267,925 shares of common stock valued at $1,293. The
results of operations of the acquired businesses have been included in the
Company's consolidated financial statements from their respective acquisition
dates.
Certain items affecting the purchase price allocations are preliminary. A
summary of the preliminary purchase price allocations as of December 31, 1998
for the acquisitions consummated in 1998 is as follows:
F-14
54
Acquired assets:
Accounts receivable.............................. $ 4,670
Prepaid expenses and other current assets........ 301
Property and equipment........................... 25,853
Goodwill......................................... 86,358
Long-term franchise agreements and other......... 2,390
Non-competition agreement........................ 540
Other assets..................................... 395
Assumed liabilities:
Deferred revenue................................. (577)
Accounts payable and accrued liabilities......... (9,210)
Other accrued liabilities........................ (1,575)
Long-term liabilities assumed.................... (13,638)
Deferred income taxes............................ (92)
--------
$ 95,415
========
In connection with certain of the acquisitions in 1998, the Company is
required to pay contingent consideration to certain former shareholders of the
respective companies, subject to the occurrence of specified events. As of
December 31, 1998, contingent payments relating to these acquisitions total
approximately $4,400, including 51,746 shares placed into escrow, are payable
primarily in cash and stock, and are earned based upon the achievement of
certain milestones. No amounts related to these contingent payments have been
included in the Company's financial statements as the events which would give
rise to such payments have not yet occurred nor are probable.
Browning-Ferris Industries Related
On September 29, 1997, the Company purchased all of the outstanding stock of
Browning-Ferris Industries of Washington, Inc. and Fibres International, Inc.
from BFI (collectively the "BFI Acquisitions"). The total purchase price for the
BFI Acquisitions was approximately $15,036, comprised principally of $11,493 in
cash and promissory notes payable to BFI totaling $3,543. Of the combined
$15,036 purchase price, $9,869 was recorded as goodwill and $150 was assigned to
a non-competition agreement. The BFI Acquisitions were accounted for in
accordance with the purchase method of accounting and, accordingly, the net
assets acquired were included in the Company's consolidated balance sheet based
upon their estimated fair values on the date of the BFI Acquisitions. The
Company's consolidated statement of operations includes the revenues and
expenses of the acquired businesses after the effective date of the transaction.
A summary of the purchase price allocation for the BFI Acquisitions is as
follows:
Acquired assets:
Accounts receivable.............................. $ 2,919
Prepaid expenses and other current assets........ 287
Property and equipment........................... 4,106
Goodwill......................................... 9,869
Non-competition agreement........................ 150
Assumed liabilities:
Deferred revenue................................. (428)
Accounts payable and accrued liabilities......... (26)
Accrued losses on acquired contracts............. (1,309)
Deferred income taxes............................ (532)
--------
$ 15,036
========
Predecessor Acquisitions
As described in Note 1, BFI acquired for cash and debt The Disposal Group
Combined on July 31, 1996 in a transaction accounted for as a purchase.
Accordingly, the respective purchase price was allocated to the fair values of
the assets acquired and liabilities assumed. The following presents purchase
price information for this acquisition:
Tangible assets acquired........ $2,076
Goodwill........................ 2,671
Assumed liabilities............. (33)
------
$4,714
======
F-15
55
The following unaudited pro forma results of operations assume that the
Company's significant acquisitions included above had occurred at the beginning
of each period presented:
YEAR ENDED DECEMBER 31,
1997 1998
------- ---------
(UNAUDITED)
Total revenue................................ $61,347 $ 70,360
Net income (loss)............................ (5,187) 2,678
Basic income (loss) per share................ (2.12) 0.26
Diluted income (loss) per share.............. (2.12) 0.20
The unaudited pro forma results do not purport to be indicative of the
results of operations which actually would have resulted had the acquisitions
occurred on January 1, 1997, nor are they necessarily indicative of future
operating results.
3. INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31, 1997 and 1998:
DECEMBER 31,
1997 1998
------- --------
Goodwill..................................... $ 9,472 $ 96,545
Long-term franchise agreements and contracts. -- 2,390
Non-competition agreement.................... 150 690
Other........................................ -- 777
------- --------
9,622 100,402
Less accumulated amortization................ (72) (1,617)
------- --------
$ 9,550 $ 98,785
======= ========
The Company acquired certain long-term franchise agreements, contracts and
non-competition agreements in connection with certain of its acquisitions. The
estimated fair value of the acquired long-term franchise agreements and
contracts was determined by management based on the discounted net cash flows
associated with the agreements and contracts. The estimated fair value of the
non-competition agreements was determined by management based on the discounted
adjusted operating income stream that would have otherwise been subject to
competition. The amounts assigned to the franchise agreements, contracts, and
non-competition agreements is being amortized on a straight-line basis over the
lesser of 40 years or the remaining term of the related agreements (ranging from
17 to 40 years).
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 1997 and
1998:
DECEMBER 31,
1997 1998
------- --------
Land, buildings and improvements....... $ -- $ 13,287
Rolling stock.......................... 2,353 11,325
Containers............................. 1,995 7,410
Machinery and equipment................ 60 3,866
Furniture and fixtures................. 67 86
------- --------
4,475 35,974
Less accumulated depreciation.......... (290) (2,931)
------- --------
$ 4,185 $ 33,043
======= ========
Landfill costs of approximately $9,044 are included in land, buildings and
improvements at December 31, 1998. No landfills were owned as of December 31,
1997.
Combined depreciation expense for the predecessor operations was $1,101 and
$789 for the year ended December 31, 1996 and the nine months ended September
30, 1997, respectively. The Company's depreciation expense for the period from
inception (September 9, 1997) through December 31, 1997 and for the year ended
December 31, 1998 was $290 and $2,556, respectively.
F-16
56
5. OTHER ASSETS
Other assets consist of the following as of December 31, 1997 and 1998:
DECEMBER 31,
1997 1998
----- ------
Restricted funds held in trust............. $ -- $1,521
Other...................................... 27 273
----- ------
$ 27 $1,794
===== ======
Restricted funds held in trust are included as part of other assets and
consist of amounts on deposit with various banks that support the Company's
financial assurance obligations for its landfill facilities' closure and
postclosure costs and amounts outstanding under the Madera Bond (Note 6).
6. LONG-TERM DEBT
On January 30, 1998, the Company obtained a revolving credit facility from
BankBoston N.A. (the "January Credit Facility"). The maximum amount available
under the January Credit Facility was $25,000 including stand-by
letters-of-credit, and the borrowings bore interest at various fixed and/or
variable rates at the Company's option. The January Credit Facility allowed for
the Company to issue up to $5,000 in stand-by letters-of-credit. The January
Credit Facility required quarterly payments of interest and required the Company
to pay an annual commitment fee equal to 0.5% of the unused portion of the
January Credit Facility. In connection with the January Credit Facility the
Company granted to an affiliate of BankBoston a warrant to purchase 140,000
shares of the Company's common stock with an exercise price of $2.80 per share
and an expiration date of January 29, 2008 (Note 9).
On May 28, 1998, the Company entered into a new revolving credit facility
with a syndicate of banks for which BankBoston N.A. acted as agent (the "May
Credit Facility"). The maximum amount available under the May Credit Facility
was $60,000 (including stand-by letters of credit) and the borrowings bore
interest at various fixed and/or variable rates at the Company's option. The May
Credit Facility replaced the January Credit Facility. The May Credit Facility
allowed for the Company to issue up to $5,000 in stand-by letters-of-credit. The
May Credit Facility required quarterly payments of interest and borrowings were
secured by virtually all of the Company's assets. The May Credit Facility
required the Company to pay an annual commitment fee equal to 0.375% of the
unused portion of the facility.
On November 20, 1998, the Company entered into a new revolving credit
facility with a syndicate of banks for which BankBoston N.A. acted as agent (the
"November Credit Facility"). As of December 31, 1998, the maximum amount
available under the November Credit Facility is $115,000 (including stand-by
letters of credit) and the borrowings bear interest at various fixed and/or
variable rates at the Company's option (approximately 7.0% as of December 31,
1998). The maximum amount available was increased to $125,000 in January 1999.
The November Credit Facility replaced the May Credit Facility. The November
Credit Facility allows for the Company to issue up to $15,000 in stand-by
letters-of-credit, of which $1,829 were issued as of December 31, 1998. The
November Credit Facility requires quarterly payments of interest and it matures
in November 2003. Borrowings are secured by substantially all of the Company's
assets and the Company is required to pay an annual commitment fee equal to
0.375% of the unused portion of the facility. The November Credit Facility
places certain business, financial and operating restrictions on the Company
relating to, among other things, the incurrence of additional indebtedness,
investments, acquisitions, asset sales, mergers, dividends, distributions and
repurchase and redemption of capital stock. The November Credit Facility also
contains covenants that require specified financial ratios and balances be
maintained. As of December 31, 1998, the Company was in compliance with these
covenants.
On June 16, 1998, the Company completed a $1,800 tax-exempt bond financing
for its Madera subsidiary (the "Madera Bond"). These funds will be used for
specified capital expenditures and improvements, including installation of a
landfill gas recovery system. The bonds mature on May 1, 2016 and bear interest
at variable rates based on market conditions for California tax exempt bonds
(approximately 3.8% at December 31, 1998). The bonds are backed by a letter of
credit issued by BankBoston N.A. under the November Credit Facility for $1,800.
Funds from the bond offering are held by a trustee until the capital
expenditures are completed. The unused funds are classified as restricted cash
and included in other assets in the accompanying consolidated balance sheet.
F-17
57
Long-term debt consists of the following as of December 31, 1997 and 1998:
DECEMBER 31,
1997 1998
-------- --------
November Credit Facility ....................................................... $ -- $ 57,281
Madera Bond .................................................................... -- 1,800
Term loan payable to a bank bearing interest at the bank's prime rate plus 2.0%
(aggregating 10.5% as of December 31, 1997); monthly principal payments of $76
plus interest beginning October 1997 through August 2002; all outstanding
principal and interest are due September 2002; secured by substantially all of
the Company's assets; subordinate to the notes payable to BFI with respect
to certain specified assets .................................................. 5,343 --
Note payable to sellers in connection with acquisition,
non-interest bearing, due January 1999 ....................................... -- 8,546
Revolving line of credit from a bank bearing interest at the bank's prime rate
plus 1.5% (aggregating 10% at December 31, 1997); interest was payable monthly
and the line was to expire on September 29, 1998; secured
by substantially all of the Company's assets ................................. 600 --
Note payable to BFI bearing interest at 6.0%; all
outstanding principal and interest are due December
1997; secured by substantially all of the Company's accounts receivable ...... 319 --
Note payable to BFI bearing interest at 10%; quarterly payments of interest
beginning December 1997; all outstanding principal and interest are due March
1998; secured by substantially all of WCII's assets .......................... 500 --
Other .......................................................................... -- 1,995
-------- --------
6,762 69,622
Less: current portion ......................................................... -- (9,516)
-------- --------
$ 6,762 $ 60,106
======== ========
The term loan payable to the Bank and the notes payable to BFI were
personally guaranteed by certain officers and stockholders of the Company (Note
9).
As of December 31, 1998, aggregate contractual future principal payments by
calendar year on long-term debt are due as follows:
1999................................ $ 9,516
2000................................ 561
2001................................ 251
2002................................ 84
2003................................ 57,367
Thereafter.......................... 1,843
-------
$69,622
=======
Management used borrowings from the January Credit Facility to pay off all
amounts outstanding under the term loan payable to the bank and all notes
payable to BFI, and as such, these amounts have been classified as long-term
debt as of December 31, 1997.
The Company has entered into an interest rate protection agreement (the
"Interest Agreement"), with its primary banking institution to reduce its
exposure to fluctuations in variable interest rates. The Interest Agreement,
which is effective November 2, 1998 through November 2, 2000, effectively
changes the Company's interest rate paid on a notional amount of $27,700 of its
floating rate long-term debt to a weighted average fixed rate (approximately
6.43% at December 31, 1998). The fair value of the Interest Agreement as of
December 31, 1998 was approximately $188, which reflects the estimated amounts
that the Company would receive to terminate the Interest Agreement based on
quoted market prices of comparable contracts as of December 31, 1998. In the
event of nonperformance by the counterparty, the Company would be exposed to
interest rate risk if the variable interest rate received were to exceed the
fixed rate paid by the Company under the terms of the Interest Agreement.
F-18
58
7. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Leases
The Company leases its facilities and certain equipment under non-cancelable
operating leases for periods ranging from one to five years. Combined rent
expense for the predecessor operations was $412 and $441 for the year ended
December 31, 1996 and the nine months ended September 30, 1997, respectively.
The Company's rent expense under operating leases during the period from
inception (September 9, 1997) through December 31, 1997 and for the year ended
December 31, 1998 amounted to $52 and $500, respectively.
As of December 31, 1998, future minimum lease payments under these leases,
by calendar year, are as follows:
1999....................... $ 521
2000....................... 539
2001....................... 490
2002....................... 418
2003....................... 413
Thereafter................. 1,774
------
$4,155
======
Performance Bonds and Letters of Credit
Municipal solid waste collection contracts may require performance bonds or
other means of financial assurance to secure contractual performance. As of
December 31, 1998, the Company had provided customers and various regulatory
authorities with bonds and letters of credit of approximately $3,692 to secure
its obligations. The Company's November Credit Facility provides for the
issuance of letters of credit in an amount up to $15,000, but any letters of
credit issued reduce the availability of borrowings for acquisitions or other
general corporate purposes. If the Company were unable to obtain surety bonds or
letters of credit in sufficient amounts or at acceptable rates, it could be
precluded from entering into additional municipal solid waste collection
contracts or obtaining or retaining landfill operating permits.
CONTINGENCIES
Environmental Risks
The Company is subject to liability for any environmental damage that its
solid waste facilities may cause to neighboring landowners or residents,
particularly as a result of the contamination of soil, groundwater or surface
water, and especially drinking water, including damage resulting from conditions
existing prior to the acquisition of such facilities by the Company. The Company
may also be subject to liability for any off-site environmental contamination
caused by pollutants or hazardous substances whose transportation, treatment or
disposal was arranged by the Company or its predecessors. Any substantial
liability for environmental damage incurred by the Company could have a material
adverse effect on the Company's financial condition, results of operations or
cash flows. As of December 31, 1998, the Company is not aware of any such
environmental liabilities.
Legal Proceedings
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, the Company is subject to
various judicial and administrative proceedings involving federal, state or
local agencies. In these proceedings, an agency may seek to impose fines on the
Company or to revoke or deny renewal of an operating permit held by the Company.
From time to time the Company may also be subject to actions brought by
citizens' groups or adjacent landowners or residents in connection with the
permitting and licensing of landfills and transfer stations, or alleging
environmental damage or violations of the permits and licenses pursuant to which
the Company operates.
In addition, the Company may become party to various claims and suits
pending for alleged damages to persons and property, alleged violations of
certain laws and alleged liabilities arising out of matters occurring during
the normal operation of the waste
F-19
59
management business. However, as of December 31, 1998 there is no current
proceeding or litigation involving the Company that the Company believes will
have a material adverse impact on its business, financial condition, results of
operations or cash flows.
During the period from January 1, 1996 through July 31, 1996, The Disposal
Group won a lawsuit against the city of Vancouver, Washington relating to the
city's annexation of certain territories served by The Disposal Group. The
Disposal Group received approximately $2,600 from the lawsuit, which is included
in other income in the accompanying statement of operations.
Employees
Approximately 67 drivers and mechanics at the Company's Vancouver,
Washington operation are represented by the Teamsters Union, with which
Browning-Ferris Industries of Washington, Inc., the Company's predecessor in
Vancouver, entered a four-year collective bargaining agreement in January 1997.
Approximately 11 drivers at Arrow Sanitary Services, Inc. ("Arrow"), a wholly
owned subsidiary of the Company, are represented by the Teamsters Union, with
which Arrow entered into a three-year collective bargaining agreement in March
1998. In addition, in July 1997, the employees at the Company's facility in
Issaquah, Washington, adopted a measure to select a union to represent them in
labor negotiations with management. The union and management operated under a
one-year negotiating agreement, that ended July 27, 1998.
Since July 27, 1998, negotiations have continued between the union and the
Company, although the union is permitted to call a strike or call for
arbitration of the outstanding issues. The employees at Issaquah have filed to
decertify the union, and the union has filed a claim with the National Labor
Relation Board to attempt to block the decertification. The Company is not aware
of any other organizational efforts among its employees and believes that its
relations with its employees are good.
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In September 1997, the Company received net proceeds of $6,992 from the sale
of 2,499,998 shares of redeemable convertible preferred stock (the "Preferred
Stock"). The Preferred Stock accrued cumulative dividends at the rate of $.098
per share annually. Accumulated and unpaid dividends on Preferred Stock amounted
to $61 as of December 31, 1997. Each share of Preferred Stock was redeemable, at
the holder's option, during the period from April 1, 1999 through October 1,
1999 for $4.20 per share plus any accumulated and unpaid dividends. The
Preferred Stock and any accumulated and unpaid dividends were convertible at the
holder's option into shares of the Company's common stock at the calculated rate
of $2.80 per share divided by the "Conversion Price" subject to certain
anti-dilution adjustments. Each share was automatically converted into common
stock immediately upon the closing of the Company's initial public offering of
common stock at a Conversion Price of $2.80 per share.
9. STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
Of the 40,564,767 shares of common stock authorized but unissued as of
December 31, 1998, the following shares were reserved for issuance:
Stock option plan.......................... 1,139,214
Stock purchase warrants.................... 1,291,135
Shares held in escrow...................... 51,746
--------
2,482,095
=========
Stockholder Notes Receivable
In December 1997, the Company provided loans in the aggregate amount of $82
to certain employees, who are also common stockholders, for the purchase of
shares of the Company's Preferred Stock. The notes bore interest at 8%, were
secured by the Preferred Stock purchased and common stock owned by the
employees, and were paid in full during 1998.
Stock Options
In November 1997, the Company's Board of Directors adopted a stock option
plan in which all officers, employees, directors and consultants may participate
(the "Option Plan"). Options granted under the Option Plan may either be
incentive stock options or nonqualified stock options (the "Options"), generally
have a term of 10 years from the date of grant, and will vest over periods
F-20
60
determined at the date of grant. The exercise prices of the options are
determined by the Company's Board of Directors and will be at least 100% or 110%
of the fair market value of the Company's common stock on the date of grant as
provided for in the Option Plan.
In connection with the Option Plan, the Company's Board of Directors
approved the reservation of 1,200,000 shares of common stock for issuance
thereunder. As of December 31, 1997 and 1998, 35,000 and 333,121 options to
purchase common stock were exercisable under the Option Plan, respectively. In
addition, as of December 31, 1997 and 1998, options for 671,500 and 160,450
shares, respectively of common stock were available for future grants under the
Option Plan.
A summary of the Company's stock option activity and related information
during the period from inception (September 9, 1997) through December 31, 1997
and the year ended December 31, 1998 is presented below:
NUMBER OF WEIGHTED AVERAGE
SHARES (OPTIONS) EXERCISE PRICE
---------------- --------------
Outstanding at inception................. -- $ --
Granted.................................. 528,500 4.92
-------
Outstanding as of December 31, 1997...... 528,500 4.92
Granted.................................. 511,050 9.58
Forfeited................................ 2,874 5.00
Exercised................................ 57,912 4.69
-------
Outstanding as of December 31, 1998...... 978,764 7.38
======
The following table summarizes information about stock options outstanding
as of December 31, 1998:
OPTIONS OUTSTANDING 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 .......... 544,099 $ 2.92 8.9 190,869 $ 2.97
$ 6.00 to 9.50 .......... 62,415 8.42 8.9 14,582 8.01
$10.50 to 12.50 .......... 240,000 11.06 9.2 80,003 11.05
$15.19 to 19.00 .......... 95,750 17.25 9.5 47,667 16.23
$21.00 to 22.13 .......... 36,500 21.90 9.6 -- --
------- -------
978,764 7.38 8.9 333,121 7.04
======= =======
The weighted average grant date fair values for options granted during 1997
and 1998 are as follows:
YEAR ENDED DECEMBER 31,
1997 1998
---- ----
Exercise prices equal to market price of stock $ -- $ 5.28
Exercise prices less than market price of
stock ...................................... -- 6.52
Exercise prices greater than market price of
stock ...................................... 0.30 3.09
Pro Forma information regarding net income (loss) and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the period from inception (September 9, 1997) through December
31, 1997 and the year ended December 31, 1998: risk-free interest rate of 6% and
5%, respectively; dividend yield of zero; volatility factor of the expected
market price of the Company's common stock of .40 and .55, respectively; and a
weighted-average expected life of the option of 4 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-21
61
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The following
table summarizes the Company's pro forma net loss and pro forma basic net loss
per share for the period from inception (September 9, 1997) through December 31,
1997 and for the year ended December 31, 1998:
YEAR ENDED DECEMBER 31,
1997 1998
---- ----
Pro forma net income (loss) ........... $(5,070) $ 425
Pro forma net loss applicable to common
stockholders ........................ (5,601) (492)
Pro forma basic net loss per share .... (2.99) (0.08)
During the year ended December 31, 1998, the Company recorded deferred stock
compensation of $821 relating to stock options granted with exercise prices less
than the estimated fair value of the Company's common stock on the date of
grant. The deferred stock compensation is being amortized into expense over the
vesting periods of the stock options which generally range from 1 to 3 years.
Compensation expense of $393 was recorded during the year ended December 31,
1998 relating to these options, and the remaining $428 will be amortized into
expense in future periods.
Stock Purchase Warrants
At December 31, 1998, the Company had outstanding warrants to purchase
1,291,135 shares of the Company's common stock at exercise prices between $0.01
and $22.13 per share. The warrants are exercisable upon vesting and notification
and expire between 2000 and 2008.
In September 1997, the Company issued a warrant to purchase 200,000 shares
of the Company's common stock to the bank that provided the line of credit and
term loan payable. The exercise price of the warrant is $.01 per share and
contains provisions for a cashless exercise at the bank's option. The warrant
was valued at $382 on its date of issuance using the Black-Scholes pricing model
with an assumed stock price volatility of .40, risk-free interest rate of 6.0%,
estimated fair value of the common stock of $1.92 per share and an expected life
of 7 years. The value assigned to the warrant was reflected as a discount on
long-term debt. The discount was fully accreted to interest expense using the
straight-line method over the expected term of the debt agreements
(approximately three months). In 1998, the bank received 172,578 shares of
common stock through the exercise of 172,689 warrants.
In connection with their guarantee of certain of the Company's debt
obligations, the Company issued in December, 1997, warrants to purchase 841,000
shares of the Company's common stock to certain directors and stockholders of
the Company. The exercise price of the warrants is $2.80 per share. The warrants
were valued at $328 on their date of issuance using the Black-Scholes pricing
model with an assumed stock price volatility of .40, risk-free interest rate of
6.0%, estimated fair value of the common stock of $1.92 per share and expected
lives of 3 years. The value assigned to these warrants was fully amortized to
interest expense over the expected term of the debt agreements (approximately
three months).
In December 1997, the Company issued to consultants warrants to purchase
15,000 shares of the Company's common stock. Warrants to purchase 10,000 and
5,000 shares of common stock had exercise prices of $5.00 per share and $2.80
per share, respectively.
In January 1998, the Company issued a warrant to purchase 140,000 shares of
its common stock to BankBoston N.A. in connection with the January Credit
Facility. The exercise price of the warrant is $2.80 per share. The warrant was
valued at $855 on its date of issuance using the Black-Scholes pricing model
with an assumed stock price volatility of .40, risk-free interest rate of 6%,
estimated fair value of the common stock of $7.50 per share and an expected life
of 10 years. The value assigned to the warrant was reflected as a discount on
long-term debt and accreted to interest expense using the interest method over
the expected term of the January Credit Facility. The January Credit Facility
was extinguished in May, 1998 and the unamortized discount on the debt was
expensed as an extraordinary loss on early extinguishment of debt.
In February 1998, the Company issued warrants to purchase 200,000 shares of
its common stock with an exercise price of $4.00 per share in connection with an
acquisition. The warrants were valued at $954 using the Black-Scholes pricing
model and recorded as an element of purchase price for the acquisition.
F-22
62
In February 1998, the Company granted warrants to an employee to purchase
50,000 shares of the Company's common stock at $2.80 per share. The Company
recorded stock compensation expense of approximately $240 relating to these
warrants. All such warrants were exercised in 1998.
During 1998, the Company issued warrants to certain third party market
development consultants to purchase 67,935 shares of the Company's common stock
with exercise prices ranging from $12.00 to $22.13 per share. The warrants were
valued at $339 using the Black-Scholes pricing model and recorded as an element
of purchase price of the related acquisitions.
10. INCOME TAXES
The provision (benefit) for income taxes for the periods ended December 31,
1996, the nine months ended September 30, 1997, the period from inception
(September 9, 1997) through December 31, 1997 and the year ended December 31,
1998 consists of the following:
PREDECESSORS WASTE CONNECTIONS, INC.
------------------ ------------------------------------------
THE DISPOSAL GROUP
COMBINED
PERIOD FROM PERIOD FROM INCEPTION
JANUARY 1, 1996 (SEPTEMBER 9, 1997)
THROUGH THROUGH YEAR ENDED
JULY 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
------------------- --------------------- -----------------
Current:
Federal...... $ 207 $ 38 $ 862
State........ -- -- 142
Deferred:
Federal...... 298 (370) 1,252
State........ -- -- 139
----- ------ -------
$ 505 $ (332) $ 2,395
===== ====== =======
Significant components of the Company's deferred income tax assets and
liability were as follows as of December 31, 1997 and 1998:
WASTE CONNECTIONS, INC.
DECEMBER 31,
------------------------
1997 1998
------- -------
Deferred income tax assets:
Accounts receivable reserves ...... $ 8 $ 152
Amortization ...................... 290 --
Accrued expenses .................. -- 8
Vacation accrual .................. 15 6
State taxes ....................... -- 22
Other ............................. -- 49
Net operating losses .............. 54 --
------- -------
Total deferred income tax assets .... 367 237
Deferred income tax liabilities:
Amortization ...................... -- (757)
Depreciation ...................... (529) (745)
Other liabilities ................. -- (146)
Prepaid expenses .................. -- (234)
------- -------
Total deferred income tax liabilities (529) (1,882)
------- -------
Net deferred income tax liability ... $ (162) $(1,645)
======= =======
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-23
63
PREDECESSORS
-------------------------------------------------------
THE DISPOSAL
GROUP
COMBINED PREDECESSORS PREDECESSORS
PERIOD FROM COMBINED COMBINED
JANUARY 1, 1996 PERIOD ENDED NINE MONTHS ENDED
THROUGH DECEMBER 31, SEPTEMBER 30,
JULY 31, 1996 1996 1997
--------------- ------------- -----------------
Income tax provision
(benefit) at the statutory rate 34.0% (34.0%) (34.0%)
Effect of valuation allowance ... (16.0%) 34.0% 34.0%
---- ---- ----
18.0% -- --
==== ==== ====
WASTE CONNECTIONS, INC.
----------------------------------------
PERIOD FROM INCEPTION
(SEPTEMBER 9, 1997)
THROUGH YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
--------------------- -----------------
Income tax provision/(benefit) at the
statutory rate .................... (34.0%) 34.0%
State taxes, net of federal benefit . -- 4.0%
Goodwill amortization ............... -- 3.0%
Stock compensation expense .......... 28.0% 4.0%
Other ............................... -- 1.0%
---- ----
(6.0%) 46.0%
==== ====
11. NET INCOME (LOSS) PER SHARE INFORMATION
The following table sets forth the calculation of the numerator and
denominator used in the computation of basic and diluted net income (loss) per
share for the period from inception (September 9, 1997) through December 31,
1997 and the year ended December 31, 1998:
PERIOD FROM
INCEPTION
(SEPTEMBER 9, 1997)
THROUGH YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
BASIC AND -------------------------------------
DILUTED BASIC NET DILUTED NET
NET LOSS INCOME (LOSS) INCOME (LOSS)
PER SHARE PER SHARE PER SHARE
------------------ ------------ --------------
Numerator:
Income (loss) before
extraordinary item .............. $ (5,066) $ 2,775 $ 2,775
Redeemable convertible
preferred stock accretion ....... (531) (917) (917)
----------- ----------- -----------
Income (loss) applicable to
common stockholders before
extraordinary item .............. $ (5,597) $ 1,858 $ 1,858
=========== =========== ===========
Extraordinary item ................ -- (1,027) (1,027)
----------- ----------- -----------
Net income (loss) applicable
to common stockholders .......... $ (5,597) $ 831 $ 831
=========== =========== ===========
Denominator:
Weighted average common
shares outstanding .............. 1,872,567 6,460,293 6,460,293
Dilutive effect of stock
options and warrants outstanding -- -- 1,628,930
Incremental common shares
issuable upon redemption
of redeemable common stock ...... -- -- 282,192
----------- ----------- -----------
1,872,567 6,460,293 8,371,415
=========== =========== ===========
As of December 31, 1998, outstanding options and warrants to purchase 87,832
shares of common stock (with exercise prices from $18.62 to $22.13) could
potentially dilute basic net income per share in the future and have not been
included in the computation of diluted net income per share because to do so
would have been antidilutive for the period presented.
F-24
64
12. RELATED PARTY TRANSACTIONS
The Company has entered into certain transactions with Continental Paper,
LLC ("Continental"), in which the Company delivers to Continental all of the
Company's collected recyclable materials in areas in which Continental has
processing facilities and Continental pays the Company market rates for the
recyclable materials. Certain of the Company's stockholders are the majority
owners of Continental. During the period from inception (September 9, 1997)
through December 31, 1997 and the year ended December 31, 1998, the Company
received, after deducting amounts paid to Continental, approximately $10 and
paid approximately $108, respectively, to/from Continental in these
transactions.
13. EMPLOYEE BENEFIT PLAN
The Company has a voluntary savings and investment plan (the "401(k) Plan").
The 401(k) Plan is available to all eligible, non-union employees of the
Company. Under the 401(k) Plan, the Company's contributions are 40% of the first
5% of the employee's contributions. During the period from inception (September
9, 1997) through December 31, 1997 and the year ended December 31, 1998, the
Company's 401(k) Plan expense was approximately $2 and $58, respectively.
14. SUBSEQUENT EVENTS
Murrey Companies Merger
On January 19, 1999, the Company merged with Murreys Disposal Company, Inc.,
DM Disposal Co., Inc., American Disposal Company, Inc., and Tacoma Recycling,
Inc. (Collectively, the "Murrey Companies"). The transactions were accounted for
as poolings-of-interests, whereby the Company issued 2,888,880 shares of its
common stock for all of the outstanding shares of the Murrey Companies. In
Connection with the merger with the Murrey Companies, the Company incurred
transaction related costs of approximately $6,200, which will be charged to
operations in the first quarter of 1999.
Secondary Public Offering
Effective February 9, 1999, the Company sold approximately 4,000,000 shares
of its common stock at $17.50 per share. As a result of the offering, the
Company received approximately $65,300 in net proceeds and used the proceeds to
pay down approximately $50,200 of its then outstanding debt.
Other Acquisitions
During the period from January 1, 1999 through February 17, 1999, the
Company acquired or signed definitive agreements to acquire three companies, one
of which is subject to certain regulatory approvals. The consideration to be
paid for these acquisitions consists of a combination of cash and shares of the
Company's common stock, and will materially increase the Company's borrowings
under the November Credit Facility (Note 6) and its number of outstanding common
shares.
F-25
65
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Waste Connections, Inc.
We have audited the supplemental consolidated balance sheets of Waste
Connections, Inc., and Predecessors (resulting from the consolidation of Waste
Connections, Inc. and Murrey's Disposal Company, Inc., American Disposal
Company, Inc., D.M. Disposal Co., Inc. and Tacoma Recycling Company, Inc.,
collectively the "Murrey Companies") as of December 31, 1997 and 1998 and the
related supplemental consolidated statements of operations, redeemable stock and
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998 which appear on pages F-27 through F-32 herein as listed
in the accompanying Index to Financial Statements. The supplemental consolidated
financial statements give retroactive effect to the mergers of Waste
Connections, Inc. and the Murrey Companies on January 19, 1999, which have been
accounted for using the pooling-of-interests method as described in the notes to
the supplemental consolidated financial statements. These supplemental financial
statements are the responsibility of the management of Waste Connections, Inc.
Our responsibility is to express an opinion on these supplemental financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the supplemental consolidated financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of Waste Connections, Inc. and Predecessors at
December 31, 1997 and 1998, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, after giving retroactive effect to the mergers of Waste Connections, Inc.
and the Murrey Companies, as described in the notes to the supplemental
consolidated financial statements, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Sacramento, California
February 17, 1999
F-26
66
WASTE CONNECTIONS, INC. AND PREDECESSORS
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
WASTE CONNECTIONS, INC.
SUPPLEMENTAL CONSOLIDATED
-----------------------------
DECEMBER 31,
1997 1998
--------- ---------
Current assets:
Cash and equivalents ................................... $ 946 $ 2,848
Accounts receivable, less allowance for doubtful
accounts $93 and $511 at December 31, 1997
and 1998, respectively ............................... 6,719 13,776
Prepaid expenses and other current assets .............. 437 2,273
--------- ---------
Total current assets ............................ 8,102 18,897
Property and equipment, net .............................. 19,004 46,986
Intangible assets, net ................................... 11,412 100,586
Other assets ............................................. 58 1,978
--------- ---------
$ 38,576 $ 168,447
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings .................................. $ 1,628 $ 1,500
Accounts payable ....................................... 4,226 8,107
Advances from a related party .......................... 543 543
Deferred revenue ....................................... 1,516 3,147
Accrued liabilities .................................... 1,885 5,484
Current portion of long-term debt ...................... 873 10,247
Other current liabilities .............................. 251 2,193
--------- ---------
Total current liabilities ....................... 10,922 31,221
Long-term debt ........................................... 11,669 63,985
Deferred income taxes .................................... 820 2,268
Other long term liabilities .............................. 702 2,444
Commitments and contingencies (Note 8)
Redeemable convertible preferred stock: $.01 par
value; 2,500,000 shares authorized at December 31,
1997; 2,499,998 shares issued and outstanding at
December 31, 1997 (none authorized at December 31, 1998) 7,523 --
Stockholders' equity:
Preferred stock: $.01 par value; 7,500,000 and
10,000,000 shares authorized at December 31,
1997 and December 31, 1998, respectively; none issued
and outstanding ...................................... -- --
Common stock: $.01 par value; 50,000,000 shares
authorized; 5,188,880, and 12,324,113 shares
issued and outstanding at December 31, 1997 and 1998,
respectively .......................................... 52 123
Additional paid-in capital ............................... 5,576 66,634
Stockholder notes receivable ............................. (82) --
Deferred stock compensation .............................. -- (428)
Retained earnings ........................................ 1,394 2,200
--------- ---------
Total stockholders' equity ...................... 6,940 68,529
--------- ---------
$ 38,576 $ 168,447
========= =========
See accompanying notes.
F-27
67
WASTE CONNECTIONS, INC. AND PREDECESSORS
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PREDECESSORS
COMBINED NINE WASTE CONNECTIONS, INC.
MONTHS ENDED SUPPLEMENTAL CONSOLIDATED
SEPTEMBER 30, -----------------------------------
1997 YEAR ENDED DECEMBER 31,
(NOTE 1) 1997 1998
------------ ------------ -------------
Revenues ................................. $ 18,114 $ 35,111 $ 86,570
Operating expenses:
Cost of operations ..................... 14,753 27,836 62,964
Selling, general and administrative .... 3,009 2,942 8,108
Depreciation and amortization .......... 1,083 1,725 6,306
Start-up and integration ............... -- 493 --
Stock compensation ..................... -- 4,395 632
------------ ------------ ------------
Income (loss) from operations ............ (731) (2,280) 8,560
Interest expense ......................... (456) (1,415) (2,792)
Other income (expense), net .............. 14 247 79
------------ ------------ ------------
Income (loss) before income taxes ........ (1,173) (3,448) 5,847
Income tax provision ..................... -- (302) (2,930)
------------ ------------ ------------
Income (loss) before extraordinary item .. (1,173) (3,750) 2,917
Extraordinary item -- early extinguishment
of debt, net of tax benefit of $264 .... -- -- (1,027)
------------ ------------ ------------
Net income (loss) ........................ $ (1,173) $ (3,750) $ 1,890
============ ============ ============
Redeemable convertible preferred stock
accretion .............................. (531) (917)
------------ ------------
Net income (loss) applicable to common
stockholders ........................... $ (4,281) $ 973
============ ============
Basic income (loss) per common share:
Income (loss) before extraordinary item $ (0.90) $ 0.21
Extraordinary item ..................... -- (0.11)
------------ ------------
Net income (loss) per share ............ $ (0.90) $ 0.10
============ ============
Diluted income (loss) per share:
Income (loss) before extraordinary item $ (0.90) $ 0.18
Extraordinary item ..................... -- (0.09)
------------ ------------
Net income (loss) per common share ..... $ (0.90) $ 0.09
============ ============
Shares used in calculating basic net
income (loss) per share ................ 4,761,447 9,349,173
============ ============
Shares used in calculating diluted net
income (loss) per share ................ 4,761,447 11,260,295
============ ============
See accompanying notes.
F-28
68
WASTE CONNECTIONS, INC. AND PREDECESSORS
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PREDECESSORS
-----------------------------------
THE DISPOSAL
GROUP
COMBINED PREDECESSORS WASTE CONNECTIONS, INC.
PERIOD FROM COMBINED PERIOD SUPPLEMENTAL
JANUARY 1, 1996 ENDED CONSOLIDATED
THROUGH DECEMBER 31, 1996 YEAR ENDED
JULY 31, 1996 (NOTE 1) DECEMBER 31, 1996
------------- -------- -----------------
Revenues ........................ $ 8,738 $ 13,422 $ 25,024
Operating expenses:
Cost of operations ............ 6,174 11,420 20,465
Selling, general and
administrative ............. 2,126 1,649 2,142
Depreciation and amortization . 324 962 1,236
----------- ----------- -----------
Income (loss) from operations ... 114 (609) 1,181
Interest expense ................ (12) (225) (284)
Other income (expense), net ..... 2,661 (147) 309
----------- ----------- -----------
Income (loss) before income taxes 2,763 (981) 1,206
Income tax (provision) benefit .. (505) -- (543)
----------- ----------- -----------
Net income (loss) ............... $ 2,258 $ (981) $ 663
=========== =========== ===========
Basic and diluted net income per
share ......................... $ 0.23
===========
Shares used in per share
calculation ................... 2,888,880
===========
See accompanying notes.
F-29
69
WASTE CONNECTIONS, INC. AND PREDECESSORS
SUPPLEMENTAL CONSOLIDATED STATEMENT OF REDEEMABLE STOCK
AND STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
WASTE CONNECTIONS, INC. SUPPLEMENTAL CONSOLIDATED
----------------------------------------------------------------------------
REDEEMABLE
CONVERTIBLE REDEEMABLE
PREFERRED STOCK COMMON STOCK
-------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
Balances at December 31, 1995 . -- $ -- -- $ --
Net income .................... -- -- -- --
------------ ------------ ------------ ------------
Balances at December 31, 1996 . -- -- -- --
Sale of redeemable convertible
preferred stock ............. 2,499,998 6,992 -- --
Sale of common stock .......... -- -- -- --
Issuance of common stock
warrants .................... -- -- -- --
Issuance of stockholder notes
receivable .................. -- -- -- --
Accretion of redeemable
convertible preferred stock . -- 531 -- --
Dividends paid ................ -- -- -- --
Net loss ...................... -- -- -- --
------------ ------------ ------------ ------------
Balances at December 31, 1997 . 2,499,998 7,523 -- --
Issuance of redeemable common
stock ....................... -- -- 1,000,000 7,500
Issuance of common stock
warrants .................... -- -- -- --
Common stock sold in connection
with initial public offering -- -- -- --
Issuance of common stock ...... -- -- -- --
Accretion of redeemable
convertible preferred stock . -- 917 -- --
Preferred stock dividend ...... -- (161) -- --
Conversion of redeemable
preferred stock ............. (2,499,998) (8,279) -- --
Conversion of redeemable
common stock ................ -- -- (1,000,000) (7,500)
Deferred stock compensation
associated with stock options -- -- -- --
Amortization of deferred stock
compensation ................ -- -- -- --
Exercise of stock options ..... -- -- -- --
Exercise of warrants .......... -- -- -- --
Payment of stockholder notes
receivable .................. -- -- -- --
Dividends paid ................ -- -- -- --
Net income .................... -- -- -- --
------------ ------------ ------------ ------------
Balances at December 31, 1998 . -- $ -- -- $ --
============ ============ ============ ============
WASTE CONNECTIONS, INC. SUPPLEMENTAL CONSOLIDATED
------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL STOCKHOLDER DEFERRED
------------------------------- PAID-IN NOTES STOCK
SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1995 . 2,888,880 $ 29 $ 471 $ -- $ --
Net income .................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1996 . 2,888,880 29 471 -- --
Sale of redeemable convertible
preferred stock ............. -- -- -- -- --
Sale of common stock .......... 2,300,000 23 4,395 -- --
Issuance of common stock
warrants .................... -- -- 710 -- --
Issuance of stockholder notes
receivable .................. -- -- -- (82) --
Accretion of redeemable
convertible preferred stock . -- -- -- -- --
Dividends paid ................ -- -- -- -- --
Net loss ...................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1997 . 5,188,880 52 5,576 (82) --
Issuance of redeemable common
stock ....................... -- -- -- -- --
Issuance of common stock
warrants .................... -- -- 2,388 -- --
Common stock sold in connection
with initial public offering 2,300,000 23 23,963 -- --
Issuance of common stock ...... 1,054,634 10 17,783 -- --
Accretion of redeemable
convertible preferred stock . -- -- -- -- --
Preferred stock dividend ...... -- -- -- -- --
Conversion of redeemable
preferred stock ............. 2,499,998 25 8,254 -- --
Conversion of redeemable
common stock ................ 1,000,000 10 7,490 -- --
Deferred stock compensation
associated with stock options -- -- 821 -- (821)
Amortization of deferred stock
compensation ................ -- -- -- -- 393
Exercise of stock options ..... 57,912 1 223 -- --
Exercise of warrants .......... 222,689 2 136 -- --
Payment of stockholder notes
receivable .................. -- -- -- 82 --
Dividends paid ................ -- -- -- -- --
Net income .................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1998 . $ 12,324,113 $ 123 $ 66,634 $ -- $ (428)
============ ============ ============ ============ ============
WASTE CONNECTIONS, INC. SUPPLEMENTAL CONSOLIDATED
-------------------------------------------------
STOCKHOLDERS' EQUITY
-------------------------------------------------
RETAINED
EARNINGS TOTAL
------------ ------------
Balances at December 31, 1995 . $ 5,095 $ 5,595
Net income .................... 663 663
------------ ------------
Balances at December 31, 1996 . 5,758 6,258
Sale of redeemable convertible
preferred stock ............. -- --
Sale of common stock .......... -- 4,418
Issuance of common stock
warrants .................... -- 710
Issuance of stockholder notes
receivable .................. -- (82)
Accretion of redeemable
convertible preferred stock . (531) (531)
Dividends paid ................ (83) (83)
Net loss ...................... (3,750) (3,750)
------------ ------------
Balances at December 31, 1997 . 1,394 6,940
Issuance of redeemable common
stock ....................... -- --
Issuance of common stock
warrants .................... -- 2,388
Common stock sold in connection
with initial public offering -- 23,986
Issuance of common stock ...... -- 17,793
Accretion of redeemable
convertible preferred stock . (917) (917)
Preferred stock dividend ...... -- --
Conversion of redeemable
preferred stock ............. -- 8,279
Conversion of redeemable
common stock ................ -- 7,500
Deferred stock compensation
associated with stock options -- --
Amortization of deferred stock
compensation ................ -- 393
Exercise of stock options ..... -- 224
Exercise of warrants .......... -- 138
Payment of stockholder notes
receivable .................. -- 82
Dividends paid ................ (167) (167)
Net income .................... 1,890 1,890
------------ ------------
Balances at December 31, 1998 . $ 2,200 $ 68,529
============ ============
See accompanying notes.
F-30
70
WASTE CONNECTIONS, INC. AND PREDECESSORS
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
PREDECESSORS
COMBINED NINE WASTE CONNECTIONS, INC.
MONTHS ENDED SUPPLEMENTAL CONSOLIDATED
SEPTEMBER 30, ------------------------------
1997 YEAR ENDED DECEMBER 31,
(NOTE 1) 1997 1998
-------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $ (1,173) $ (3,750) $ 1,890
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Gain on sale of assets ....................................... (4) -- --
Depreciation and amortization ................................ 1,083 1,725 6,306
Deferred income taxes ........................................ -- (413) 1,356
Amortization of debt issuance costs, debt guarantee fees and
accretion of discount on long-term debt .................... -- 860 192
Stock compensation ........................................... -- 4,395 632
Gain on sale of land ......................................... -- -- (8)
Extraordinary item -- extinguishment of debt ................. -- -- 1,291
Changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable, net ................................. (604) (1,467) (2,387)
Prepaid expenses and other current assets ................ (74) (11) (1,535)
Accounts payable ......................................... (221) 3,116 (674)
Deferred revenue ......................................... (137) 323 1,054
Accrued liabilities ...................................... (450) 835 319
Other liabilities ........................................ -- (65) 544
--------- --------- ---------
Net cash provided by (used in) operating activities .............. (1,580) 5,548 8,980
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment ..................... 188 -- 132
Payments for acquisitions, net of cash acquired .................. -- (14,393) (56,341)
Prepaid acquisition costs ........................................ -- (20) --
Capital expenditures for property and equipment .................. (735) (2,372) (8,122)
Proceeds from sale of land ....................................... -- -- 625
Net change in other assets ....................................... 22 (47) (247)
Proceeds from stockholder notes receivable ....................... -- -- 82
Issuance of stockholder notes receivable ......................... -- (82) --
--------- --------- ---------
Net cash used in investing activities ............................. (525) (16,914) (63,871)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net intercompany balance ......................................... 2,142 -- --
Proceeds from short-term borrowings .............................. -- 600 --
Proceeds from long-term debt ..................................... -- 8,914 77,402
Principal payments on notes payable .............................. (38) (2,724) (3,374)
Principal payments on long-term debt ............................. -- (1,085) (40,273)
Proceeds from sale of redeemable convertible preferred stock ..... -- 6,992 --
Proceeds from sale of common stock ............................... -- 23 23,986
Proceeds from option and warrant exercises ....................... -- -- 362
Net change in short term borrowings .............................. -- 19 (128)
Net change in advances from a related party ...................... -- (275) --
Payment of dividends ............................................. -- (83) (328)
Debt issuance costs .............................................. -- (150) (854)
--------- --------- ---------
Net cash provided by financing activities ......................... 2,104 12,231 56,793
--------- --------- ---------
Net increase (decrease) in cash and equivalents ................... (1) 865 1,902
Cash and equivalents at beginning of period ....................... 102 81 946
--------- --------- ---------
Cash and equivalents at end of period ............................. $ 101 $ 946 $ 2,848
========= ========= =========
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH
TRANSACTIONS:
Cash paid for interest ........................................... $ -- $ 541 $ 2,130
========= ========= =========
Cash paid for income taxes ....................................... $ -- $ 744 $ 970
========= ========= =========
Redeemable convertible preferred stock accretion ................. $ 531 $ 917
========= =========
Issuance of notes payable for land and buildings ................. $ 315 $ --
========= =========
In connection with acquisitions, the Company assumed liabilities
as follows:
Fair value of assets acquired .................................... $ 20,140 $ 120,507
Cash paid for acquisitions (including acquisition costs) ......... (11,693) (56,341)
--------- ---------
Liabilities assumed, stock and notes payable issued to sellers ... $ 8,447 $ 64,166
========= =========
See accompanying notes.
F-31
71
WASTE CONNECTIONS, INC. AND PREDECESSORS
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
PREDECESSORS
------------------------------
THE DISPOSAL WASTE
GROUP COMBINED PREDECESSORS CONNECTIONS, INC.
PERIOD FROM COMBINED SUPPLEMENTAL
JANUARY 1, PERIOD ENDED CONSOLIDATED
1996 THROUGH DECEMBER 31, YEAR ENDED
JULY 31, 1996 1996 (NOTE 1) DECEMBER 31, 1996
------------- ------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................ $ 2,258 $ (981) $ 663
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization ............. 324 962 1,236
Deferred income taxes ..................... 298 -- (19)
Changes in operating assets and
liabilities, net of effects from
acquisitions:
Accounts receivable, net ................ 1,201 (1,992) 63
Prepaid expenses and other current
assets ................................. (2) (104) (36)
Accounts payable ........................ (45) 713 932
Deferred revenue ........................ (522) 421 42
Accrued liabilities ..................... (987) 428 129
Income taxes payable .................... -- -- (232)
------- ------- -------
Net cash provided by (used in) operating
activities ................................ 2,525 (553) 2,778
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment . -- 117 --
Capital expenditures for property and
equipment ................................... (7) (282) (4,790)
Net change in other assets ................... -- 33 31
------- ------- -------
Net cash used in investing activities .......... (7) (132) (4,759)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net intercompany balance ..................... -- 642 --
Proceeds from long-term debt ................. 142 -- 1,418
Principal payments on long-term debt ......... (427) -- (615)
Principal payments on notes payable .......... -- (39) --
Net change in short-term borrowings .......... -- -- 659
Net change in advances to related party ...... -- -- (259)
------- ------- -------
Net cash provided by (used in) financing
activities ................................... (285) 603 1,203
------- ------- -------
Net increase (decrease) in cash ................ 2,233 (82) (778)
Cash and equivalents beginning of period ....... 961 184 859
------- ------- -------
Cash and equivalents at end of period .......... $ 3,194 $ 102 $ 81
======= ======= =======
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION AND NON-CASH TRANSACTIONS:
Cash paid for interest ....................... $ -- $ -- $ 284
======= ======= =======
Cash paid for income taxes ................... $ -- $ -- $ 792
======= ======= =======
Issuance of notes payable for land and
buildings ................................. $ -- $ -- $ 260
======= ======= =======
See accompanying notes.
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WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Waste Connections, Inc. ("WCI" or "the Company") was incorporated in
Delaware on September 9, 1997 and commenced its operations on October 1, 1997
through the purchase of certain solid waste operations in Washington, as more
fully described below and in Note 2. The Company is a regional, integrated,
non-hazardous solid waste services company that provides collection, transfer,
disposal and recycling services to commercial, industrial and residential
customers in California, Idaho, Kansas, Nebraska, Oklahoma, Oregon, South
Dakota, Utah, Washington and Wyoming.
Basis of Presentation
These supplemental consolidated financial statements include the accounts of
WCI and its wholly-owned subsidiaries. The consolidated entity is referred to
herein as the Company. All intercompany accounts and transactions have been
eliminated in consolidation.
As more fully described in Note 2, on January 19, 1999, the Company entered
into a business combination with the Murrey Companies. The business combination
has been accounted for as pooling-of-interests and the historical consolidated
financial statements of the Company and its predecessors for all years prior to
the business combination have been restated in the accompanying supplemental
consolidated financial statements to include the financial positions, results of
operations and cash flows of the Murrey Companies. The supplemental financial
statements will become the historical financial statements of the Company upon
issuance of financial statements for a subsequent period that includes the date
of the merger.
The supplemental consolidated financial statements of the Company include
reclassifications made to conform financial statement presentation of the Murrey
Companies to that of Waste Connections, Inc.
The entities the Company acquired in September 1997 from Browning-Ferris
Industries, Inc. ("BFI") are collectively referred to herein as the Company's
predecessors. BFI acquired the predecessor operations at various times during
1995 and 1996, and prior to being acquired by BFI, the predecessors operated as
separate stand-alone businesses.
During the periods in which the Company's predecessors operated as wholly
owned subsidiaries of BFI, they maintained intercompany accounts with BFI for
recording intercompany charges for costs and expenses, intercompany purchases of
equipment and additions under capital leases and intercompany transfers of cash,
among other transactions. It is not feasible to ascertain the amount of related
interest expense that would have been recorded in the historical financial
statements had the predecessors been operated as stand-alone entities. Charges
for interest expense were allocated to the Company's predecessors by BFI as
disclosed in the accompanying Statement of Operations. The interest expense
allocations from BFI are based on formulas that do not necessarily correspond
with the balances in the related intercompany accounts. Moreover, the financial
position and results of operations of the predecessors during this period may
not necessarily be indicative of the financial position or results of operations
that would have been realized had the predecessors been operated as stand-alone
entities. For the periods in which the predecessors operated as wholly owned
subsidiaries of BFI, the statements of operations include amounts allocated by
BFI to the predecessors for selling, general and administrative expenses based
on certain allocation methodologies which management of the Company believes are
reasonable.
During the periods prior to their acquisition by BFI, the Company's
predecessors operated as separate stand-alone businesses. The acquisitions of
the predecessors by BFI were accounted for using the purchase method of
accounting, and the respective purchase prices were allocated to the fair values
of the assets acquired and liabilities assumed. Similarly, the Company's
acquisitions of the predecessors from BFI in September 1997 were accounted for
using the purchase method of accounting, and the purchase price was allocated to
the fair value of the assets acquired and liabilities assumed. Consequently, the
amounts of depreciation and amortization included in the statements of
operations for the periods presented reflect the changes in basis of the
underlying assets that were made as a result of the changes in ownership that
occurred during the periods presented. In addition, because the predecessor
companies operated independently and were not under common control or management
during these periods, and because different tax strategies
F-33
73
may have influenced their results of operations, the data may not be comparable
to or indicative of their operating results after their acquisition by BFI.
Due to the manner in which BFI intercompany transactions were recorded as
described above, it is not feasible to present a detailed analysis of
transactions reflected in the net intercompany balance with BFI. The change in
the predecessors' combined intercompany balance with BFI (net of income (loss)
and initial investment in the acquired companies) was $642 and $2,142 during the
period ended December 31, 1996 and the nine months ended September 30, 1997,
respectively.
The accompanying statements of operations and cash flows for the Company's
predecessors for the years ended December 31, 1996 and 1997 are comprised of the
following entities for the periods indicated:
YEAR ENDED DECEMBER 31, 1996:
The Disposal Group Combined......... January 1, 1996 through July 31, 1996
(BFI acquisition date)
Predecessors Combined............... Period ended December 31, 1996
(represents the combined results of
operations of The Disposal Group
subsequent to the BFI acquisition date
and the operations for the year ended
December 31, 1996 of Fibres
International, Inc. which was acquired by
BFI in 1995)
YEAR ENDED DECEMBER 31, 1997:
Predecessors Combined............... Nine months ended September 30, 1997
(represents the combined results of
operations for the twelve month period of
the entities acquired by BFI in 1995 and
1996 described above)
The Disposal Group Combined consists of three entities that were under
common control prior to their acquisition by BFI: Diamond Fab and Welding
Service, Inc., Buchmann Sanitary Service, Inc., and The Disposal Group.
For periods prior to WCI's incorporation on September 9, 1997, the
supplemental consolidated financial statements of the Company consist solely of
the Murrey Companies. The financial statements of the Murrey Companies include
the combined accounts of Murrey's Disposal Company, Inc. ("Murrey's"), American
Disposal Company, Inc. ("American"), D.M. Disposal Co., Inc. ("DM"), and Tacoma
Recycling Company, Inc. ("Tacoma") as a result of their common management which
exercises significant influence over their operations. Significant intercompany
balances and transactions between the Murrey Companies have been eliminated in
combination.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Common Stock Valuation
In connection with the Company's organization and initial capitalization in
September 1997, the Company sold 2.3 million shares of common stock for $.01 per
share to certain directors, consultants, and management. As a result, the
Company recorded a non-recurring, non-cash stock compensation charge of $4,395
in the accompanying statement of operations, representing the difference between
the amount paid for the shares and the estimated fair value of the shares of
$1.92 per share on the date of sale. The estimated fair value of the common
shares was determined by the Company based on an independent valuation of the
common stock.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at purchase to be cash equivalents. As of December 31, 1998, cash
equivalents consist of demand money market accounts.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risks consist primarily of accounts receivable. Credit risk on accounts
receivable is minimized as a result of the large and diverse nature of the
Company's customer
F-34
74
base. The Company maintains allowances for losses based on the expected
collectibility of accounts receivable. Credit losses have been within
management's expectations.
Property and Equipment
Property and equipment are stated at cost. Improvements or betterments which
significantly extend the life of an asset are capitalized. Expenditures for
maintenance and repair costs are charged to operations as incurred. The cost of
assets retired or otherwise disposed of and the related accumulated depreciation
are eliminated from the accounts in the year of disposal. Gains and losses
resulting from property disposals are included in other income (expense).
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets.
The estimated useful lives are as follows:
Buildings..................... 20 years
Machinery and equipment....... 3 - 15 years
Rolling stock................. 10 years
Containers.................... 5 - 15 years
Furniture and fixtures........ 3 - 6 years
In connection with acquisitions (Note 2), the Company acquired certain used
property and equipment. This used property and equipment is being depreciated
using the straight-line method over its estimated remaining useful lives, which
range from one to fifteen years.
Capitalized landfill costs include expenditures for land and related
airspace, permitting costs and preparation costs. Landfill permitting and
preparation costs represent only direct costs related to those activities,
including legal, engineering and construction. Interest is capitalized on
landfill permitting and construction projects and other projects under
development while the assets are undergoing activities to ready them for their
intended use. The interest capitalization rate is based on the Company's
weighted average cost of indebtedness. No interest was capitalized in 1998.
Landfill permitting, acquisition and preparation costs are amortized as
permitted airspace of the landfill is consumed. Landfill preparation costs
include the costs of construction associated with excavation, liners, site berms
and the installation of leak detection and leachate collection systems. In
determining the amortization rate for a landfill, preparation costs include the
total estimated costs to complete construction of the landfills' permitted
capacity. Units-of-production amortization rates are determined annually for the
Company's operating landfill. The rates are based on estimates provided by the
Company's outside engineers and consider the information provided by surveys
which are performed at least annually.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
the net assets of the acquired entities, and is amortized on a straight-line
basis over the period of expected benefit of 40 years. Accumulated amortization
amounted to $81 and $1,687 as of December 31, 1997 and 1998, respectively.
The Company continually evaluates the value and future benefits of its
intangible assets, including goodwill. The Company assesses recoverability from
future operations using cash flows and income from operations of the related
acquired business as measures. Under this approach, the carrying value would be
reduced if it becomes probable that the Company's best estimate for expected
future cash flows of the related business would be less than the carrying amount
of the related intangible assets. There have been no adjustments to the carrying
amount of intangible assets resulting from these evaluations as of December 31,
1998.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, trade
receivables, restricted funds held in trust, trade payables and debt
instruments. The carrying values of cash, trade receivables, restricted funds
held in trust, and trade payables are considered to be representative of their
respective fair values. The carrying values of the Company's debt instruments
approximate their fair values as of December 31, 1997 and 1998, based on current
incremental borrowing rates for similar types of borrowing arrangements.
F-35
75
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, The Disposal Group, and DM use the liability method to account
for income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
During the periods in which the predecessors were owned by BFI, their
operations were included in the consolidated income tax returns of BFI, and no
allocations of income taxes were reflected in the historical statements of
operations. For purposes of the combined predecessor financial statements,
current and deferred income taxes have been provided on a separate income tax
return basis.
Murrey's, American and Tacoma operate under Subchapter S of the Internal
Revenue Code for federal and state income tax reporting purposes. Consequently
all of the income tax attributes and liabilities of these companies' operations
flow through to the individual shareholders.
Revenue Recognition
Revenues are recognized as services are provided. Certain customers are
billed in advance and, accordingly, recognition of the related revenues is
deferred until the services are provided.
Start-Up and Integration Expenses
During the period from inception (September 9, 1997) through December 31,
1997, the Company incurred certain start-up expenses relating to the formation
of the Company, primarily for legal and other professional services, and the
costs associated with recruiting the Company's initial management team. In
addition, the Company incurred certain integration expenses relating to its
initial acquisitions. These start-up and integration expenses have been charged
to operations as incurred.
Stock-Based Compensation
As permitted under the provisions of Financial Accounting Standards No. 123
"Accounting for Stock Based Compensation" ("SFAS 123"), the Company has elected
to account for stock-based compensation using the intrinsic value method
prescribed by Accounting Principles Board's Opinion No. 25 "Accounting for Stock
Issued to Employees" ("APB 25"). Under the intrinsic value method, compensation
cost is the excess, if any, of the quoted market price or fair value of the
stock at the grant date or other measurement date over the amount an employee
must pay to acquire the stock. None of the predecessor entities awarded
stock-based compensation to employees. Consequently, the related disclosures in
the accompanying financial statements and notes relate solely to the Company.
Per Share Information
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 128, Earnings per Share. Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts have been
F-36
76
presented on the basis set forth in Statement 128 (Note 12). Earnings per share
data have not been presented for the predecessor operations because such data is
not meaningful.
Closure and Post-Closure Costs
The Company does not accrue for closure and post-closure costs related to
the Fairmead Landfill it operates in Madera County, California. Madera County as
required by state law, has established a special fund to pay such liabilities.
In 1998, the Company acquired the stock of Red Carpet Landfill ("Red Carpet") in
Oklahoma and Butler County Landfill ("Butler") in Nebraska. Both Red Carpet and
Butler are engaged in landfilling of municipal solid waste and other acceptable
waste streams. Accrued closure and post-closure costs include the current and
non-current portion of accruals associated with obligations for closure and
post-closure of the landfill. The Company, based as input from its outside
engineers, estimates its future closure and post-closure monitoring and
maintenance costs for solid waste landfills based on its interpretation of the
technical standards of the U.S. Environmental Protection Agency's Subtitle D
regulations and the air emissions standards under the Clean Air Act as they are
being applied on a state-by-state basis. Closure and post-closure monitoring and
maintenance costs represent the costs related to cash expenditures yet to be
incurred when a landfill facility ceases to accept waste and closes. Accruals
for closure and post-closure monitoring and maintenance requirements in the U.S.
consider final capping of the site, site inspection, groundwater monitoring,
leachate management, methane gas control and recovery, and operating and
maintenance costs to be incurred during the period after the facility closes.
Certain of these environmental costs, principally capping and methane gas
control costs, are also incurred during the operating life of the site in
accordance with the landfill operation requirements of Subtitle D and the air
emissions standards. Reviews of the future requirements for closure and
post-closure monitoring and maintenance costs for the Company's operating
landfills are performed by the Company's consulting engineers at least annually
and are the basis upon which the Company's estimates of these future costs and
the related accrual rates are revised. The Company provides accruals for these
estimated costs as the remaining permitted airspace of such facilities is
consumed. The states in which the Company operates its landfills require a
specified portion of these accrued closure and post-closure obligations to be
funded at any point in time. As of December 31, 1998, the Company estimates that
total closure and post-closure costs relating to its landfills will be
approximately $5,474, of which approximately $1,233 has been accrued as of
December 31, 1998 and included in other long-term liabilities in the
accompanying balance sheet.
Segment Information
The Company adopted FASB Statement No. 131, Disclosure About Segments of an
Enterprise and Related Information in 1998. Statement 131 established standards
for the way that public business enterprises report information about operating
segments. It also established standards for related disclosures about products
and services, geographic areas and major customers. Implementation of the
provisions of Statement 131 did not have a significant impact on the Company's
disclosures.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. The statement, which is
to be applied prospectively, is effective for the Company's year ended December
31, 2000. The Company is currently evaluating the impact of SFAS No. 133 on its
future results of operations and financial position.
In April 1998, Statement of Position ("SOP") No. 98-5 - "Reporting on the
Costs of Start-Up Activities" was issued by the American Institute of Certified
Public Accountants. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. Initial application of the
statement, which is effective for the Company's year ended December 31, 1999, is
to be reported as a cumulative effect of a change in accounting principle. The
Company believes that the future adoption of SOP No. 98-5 will not have a
material effect on its results of operations or financial position.
Reclassifications
Certain amounts reported in the Company's prior year's financial statements
have been reclassified to conform with the 1998 presentation.
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77
2. ACQUISITIONS
The Murrey Companies
On January 19, 1999, Waste Connections, Inc. consummated a business
combination with the Murrey Companies which included the exchange of 2,888,880
shares of Waste Connections, Inc. common stock for all outstanding shares of the
Murrey Companies. This business combination will be accounted for as
poolings-of-interests, and accordingly, the historical financial statements of
the Company have been restated on a supplemental basis to include the
consolidated financial statements of Waste Connections, Inc. and the Murrey
Companies for all periods presented.
The supplemental consolidated financial statements have been prepared to
give retroactive effect to the business combination with the Murrey Companies.
Generally accepted accounting principles prohibit giving effect to a consummated
business combination accounted for by the pooling-of-interests method in
financial statements that do not include the date of consummation. The
accompanying supplemental consolidated financial statements do not extend
through the date of consummation, however, they will become the historical
consolidated financial statements of the Company after financial statements
covering the date of consummation of the business combinations are issued.
In connection with the business combination with the Murrey Companies, Waste
Connections, Inc. incurred transaction related costs of approximately $6,200
which will be to charged to operations in the period during which the merger is
consummated.
The table below sets forth the combined revenues and net income (loss) for
the years ended December 31, 1996, 1997 and 1998 (in thousands):
WASTE THE MURREY SUPPLEMENTAL
CONNECTIONS, INC. COMPANIES CONSOLIDATED
----------------- --------- ------------
YEAR ENDED DECEMBER 31, 1996:
Revenues........................... $ -- $ 25,024 $ 25,024
Net income......................... -- 663 663
YEAR ENDED DECEMBER 31, 1997:
Revenues........................... 6,237 28,874 35,111
Net income (loss).................. (5,066) 1,316 (3,750)
YEAR ENDED DECEMBER 31, 1998:
Revenues........................... 54,042 32,528 86,570
Net income......................... 1,748 142 1,890
1998 Acquisitions
During 1998, the Company acquired 42 businesses, including 2 operational
landfills, which were accounted for as purchases. Aggregate consideration for
these acquisitions consisted of $56,341 in cash (net of cash acquired), $12,488
in notes payable to sellers, 2,054,634 shares of common stock valued at $25,293,
and warrants to purchase 267,925 shares of common stock valued at $1,293. The
results of operations of the acquired businesses have been included in the
Company's consolidated financial statements from their respective acquisition
dates.
Certain items affecting the purchase price allocations are preliminary. A
summary of the preliminary purchase price allocations as of December 31, 1998
for the acquisitions consummated in 1998 is as follows:
Acquired assets:
Accounts receivable.............................. $ 4,670
Prepaid expenses and other current assets........ 301
Property and equipment........................... 25,853
Goodwill......................................... 86,358
Long-term franchise agreements and other......... 2,390
Non-competition agreement........................ 540
Other assets..................................... 395
Assumed liabilities:
Deferred revenue................................. (577)
Accounts payable and accrued liabilities......... (9,210)
Other accrued liabilities........................ (1,575)
Long-term liabilities assumed.................... (13,638)
Deferred income taxes............................ (92)
--------
$ 95,415
========
In connection with certain of the acquisitions in 1998, the Company is
required to pay contingent consideration to certain former shareholders of the
respective companies, subject to the occurrence of specified events. As of
December 31, 1998, contingent payments relating to these acquisitions total
approximately $4,400, including 51,746 shares placed into escrow, are payable
primarily
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78
in cash and stock, and are earned based upon the achievement of certain
milestones. No amounts related to these contingent payments have been included
in the Company's financial statements as the events which would give rise to
such payments have not yet occurred nor are probable.
Browning-Ferris Industries Related
On September 29, 1997, the Company purchased all of the outstanding stock of
Browning-Ferris Industries of Washington, Inc. and Fibres International, Inc.
from BFI (collectively the "Acquisitions"). The total purchase price for the
Acquisitions was approximately $15,036, comprised principally of $11,493 in cash
and promissory notes payable to BFI totaling $3,543. Of the combined $15,036
purchase price, $9,869 was recorded as goodwill and $150 was assigned to a
non-competition agreement. The Acquisitions were accounted for in accordance
with the purchase method of accounting and, accordingly, the net assets acquired
were included in the Company's consolidated balance sheet based upon their
estimated fair values on the date of the Acquisitions. The Company's
consolidated statement of operations includes the revenues and expenses of the
acquired businesses after the effective date of the transaction.
A summary of the purchase price allocation for the BFI Acquisitions is as
follows:
Acquired assets:
Accounts receivable........................ $ 2,919
Prepaid expenses and other current assets.. 287
Property and equipment..................... 4,106
Goodwill................................... 9,869
Non-competition agreement.................. 150
Assumed liabilities:
Deferred revenue........................... (428)
Accounts payable and accrued liabilities... (26)
Accrued losses on acquired contracts....... (1,309)
Deferred income taxes...................... (532)
--------
$ 15,036
========
Island Disposal
During 1997, the Murrey Companies purchased substantially all of the assets
of Island Disposal (effective May 2, 1997) and Environmental Waste Systems and
Olympic Disposal (both effective December 1, 1997) (collectively the "Murrey
Acquisitions"). The total purchase price for the Murrey Acquisitions was
approximately $3,100, comprised of $2,900 in cash and promissory notes payable
to the sellers totaling $200. Of the combined $3,100 purchase price, $1,791
was recorded as goodwill and $80 was assigned to non-competition agreements.
The Murrey Acquisitions were accounted for in accordance with the purchase
method of accounting and, accordingly, the net assets acquired were included in
the Murrey Companies' combined balance sheet based upon their estimated fair
values on the date of the Acquisitions. The Murrey Companies' combined
statement of operations includes the revenues and expenses of the acquired
businesses after the effective date of the transactions.
A summary of the purchase price allocation is as follows:
Acquired assets:
Property and equipment..................... $ 1,229
Goodwill................................... 1,791
Non-competition agreements................. 80
-------
$ 3,100
=======
Predecessor Acquisitions
As described in Note 1, BFI acquired for cash and debt The Disposal Group
Combined on July 31, 1996 in a transaction accounted for as a purchase.
Accordingly, the respective purchase price was allocated to the fair values of
the assets acquired and liabilities assumed. The following presents purchase
price information for this acquisition:
Tangible assets acquired..................... $ 2,076
Goodwill..................................... 2,671
Assumed liabilities.......................... (33)
-------
$ 4,714
=======
The following unaudited pro forma results of operations assume that the
Company's significant acquisitions included above had occurred at the beginning
of each period presented.
YEAR ENDED DECEMBER 31,
1997 1998
---- ----
(UNAUDITED)
Total revenue........................ $90,221 $102,888
Net income (loss).................... (3,871) 2,820
Basic income (loss) per share........ (0.79) 0.19
Diluted income (loss) per share...... (0.79) 0.17
The unaudited pro forma results do not purport to be indicative of the
results of operations which actually would have resulted had the acquisitions
occurred on January 1, 1997, nor are they necessarily indicative of future
operating results.
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3. INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31, 1997 and 1998:
DECEMBER 31,
1997 1998
---- ----
Goodwill............................. $ 11,263 $ 98,336
Long-term franchise agreements
and contracts...................... -- 2,390
Non-competition agreement............ 230 770
Other, net........................... -- 777
-------- --------
11,493 102,273
Less accumulated amortization........ (81) (1,687)
-------- --------
$ 11,412 $100,586
======== ========
The Company acquired certain long-term franchise agreements, contracts and
non-competition agreements in connection with certain of its acquisitions. The
estimated fair value of the acquired long-term franchise agreements and
contracts was determined by management based on the discounted net cash flows
associated with the agreements and contracts. The estimated fair value of the
non-competition agreements was determined by management based on the discounted
adjusted operating income stream that would have otherwise been subject to
competition. The amounts assigned to the franchise agreements, contracts, and
non-competition agreements is being amortized on a straight-line basis over the
lesser of 40 years or the remaining term of the related agreements (ranging from
17 to 40 years).
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 1997 and
1998:
DECEMBER 31,
1997 1998
---- ----
Land and buildings............... $ 6,668 $ 19,461
Rolling stock.................... 9,923 19,713
Containers....................... 6,375 12,644
Machinery and equipment.......... 3,840 7,638
Furniture and fixtures........... 322 335
------- ---------
27,128 59,791
Less accumulated depreciation.... (8,124) (12,805)
------- ---------
$19,004 $ 46,986
======= =========
Landfill costs of approximately $9,044 are included in land, buildings and
improvements at December 31, 1998. No landfills were owned as of December 31,
1997.
Combined depreciation expense for the predecessor operations was $1,101 and
$789 for the year ended December 31, 1996, and the nine months ended September
30, 1997, respectively. The Company's depreciation expense for the period from
inception (September 9, 1997) through December 31, 1997 and for the year ended
December 31, 1998 was $1,652 and $4,689, respectively.
5. OTHER ASSETS
Other assets consist of the following as of December 31, 1997 and 1998:
DECEMBER 31,
1997 1998
---- ----
Restricted cash.................. $ -- $ 1,521
Other............................ 58 457
------- ---------
$ 58 $ 1,978
======= =========
Restricted funds held in trust are included as part of other assets and
consist of amounts on deposit with various banks that support the Company's
financial assurance obligations for its landfill facilities' closure and
postclosure costs and amounts outstanding under the Madera Bond (Note 7).
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6. SHORT-TERM BORROWINGS
Short-term borrowings consist of various revolving and non-revolving
lines-of-credit with a bank, bearing interest at 8.50% as of December 31, 1998
and which mature at various dates through February 28, 1999. The lines of credit
are secured by all accounts receivable and inventory accounts, which totaled
$3,176 as of December 31, 1998. The lines-of-credit were fully utilized as of
December 31, 1998.
7. LONG-TERM DEBT
On January 30, 1998, the Company obtained a revolving credit facility from
BankBoston N.A. (the "January Credit Facility"). The maximum amount available
under the January Credit Facility was $25,000, including stand-by
letters-of-credit, and the borrowings bore interest at various fixed and/or
variable rates at the Company's option. The January Credit Facility allowed for
the Company to issue up to $5,000 in stand-by letters-of-credit. The January
Credit Facility required quarterly payments of interest and required the Company
to pay an annual commitment fee equal to 0.5% of the unused portion of the
January Credit Facility. In connection with the January Credit Facility the
Company granted to an affiliate of BankBoston a warrant to purchase 140,000
shares of the Company's common stock with an exercise price of $2.80 per share
and an expiration date of January 29, 2008 (Note 10).
On May 28, 1998, the Company entered into a new revolving credit facility
with a syndicate of banks for which BankBoston N.A. acted as agent (the "May
Credit Facility"). The maximum amount available under the May Credit Facility
was $60,000 (including stand-by letters of credit) and the borrowings bore
interest at various fixed and/or variable rates at the Company's option. The May
Credit Facility replaced the January Credit Facility. The May Credit Facility
allowed for the Company to issue up to $5,000 in stand-by letters-of-credit. The
May Credit Facility required quarterly payments of interest and borrowings were
secured by virtually all of the Company's assets. The May Credit Facility
required the Company to pay an annual commitment fee equal to 0.375% of the
unused portion of the facility.
On November 20, 1998, the Company entered into a new revolving credit
facility with a syndicate of banks for which BankBoston N.A. acted as agent (the
"November Credit Facility"). As of December 31, 1998, the maximum amount
available under the November Credit Facility is $115,000 (including stand-by
letters of credit) and the borrowings bear interest at various fixed and/or
variable rates at the Company's option (approximately 7.0% as of December 31,
1998). The maximum amount available was increased to $125,000 in January 1999.
The November Credit Facility replaced the May Credit Facility. The November
Credit Facility allows for the Company to issue up to $15,000 in stand-by
letters-of-credit, of which $1,829 were issued as of December 31, 1998. The
November Credit Facility requires quarterly payments of interest and it matures
in November 2003. Borrowings are secured by substantially all of the Company's
assets and the Company is required to pay an annual commitment fee equal to
0.375% of the unused portion of the facility. The November Credit Facility
places certain business, financial and operating restrictions on the Company
relating to, among other things, the incurrence of additional indebtedness,
investments, acquisitions, asset sales, mergers, dividends, distributions and
repurchase and redemption of capital stock. The November Credit Facility also
contains covenants that require specified financial ratios and balances be
maintained. As of December 31, 1998, the Company was in compliance with these
covenants.
On June 16, 1998, the Company completed a $1,800 tax-exempt bond financing
for its Madera subsidiary (the "Madera Bond"). These funds will be used for
specified capital expenditures and improvements, including installation of a
landfill gas recovery system. The bonds mature on May 1, 2016 and bear interest
at variable rates based on market conditions for California tax exempt bonds
(approximately 3.8% at December 31, 1998). The bonds are backed by a letter of
credit issued by BankBoston N.A. under the November Credit Facility for $1,800.
Funds from the bond offering are held by a trustee until the capital
expenditures are completed. The unused funds are classified as restricted cash
and included in other assets in the accompanying consolidated balance sheet.
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Long-term debt consists of the following as of December 31, 1997 and 1998:
DECEMBER 31,
1997 1998
---- ----
November Credit Facility .............................................................. $ -- $ 57,281
Madera Bond ........................................................................... -- 1,800
Term loan payable to the Bank bearing interest at the Bank's prime rate plus
2.0% (aggregating 10.5% as of December 31, 1998); monthly principal
payments of $76 plus interest beginning October 1997 through August 2002; all
outstanding principal and interest are due September 2002; secured by
substantially all of WCI's assets; subordinate to the notes payable to
BFI with respect to certain specified assets ........................................ 5,343 --
Note payable to sellers in connection with acquisition, non-interest bearing,
due January 1999 .................................................................... -- 8,546
Note payable to a bank bearing interest at a variable rate (approximately 8.4%
as of December 31, 1998); monthly payments of principal and interest of $25;
maturing in November 2007; secured by certain cash accounts and a pledge of one
of the Murrey Companies exclusive franchise
agreements .......................................................................... 2,000 1,866
Notes payable to a bank bearing interest at various fixed rates (ranging from
9.1% to 9.2% as of December 31, 1998); monthly payments of principal and
interest aggregating $25 and one-time payments of $470 and $751 in September
2000 and May 2001, respectively; maturing at various dates between September
2000 and May 2001; secured by land and buildings with a net book value of
approximately $2,463 as of December 31, 1998 ........................................ 1,544 1,350
Equipment financing notes payable bearing interest at various rates (ranging
from 8.6% to 8.8% as of December 31, 1998); monthly payments of principal and
interest aggregating $21; maturing at various dates through September 2001;
secured by equipment with an aggregate net book value of approximately $660 as
of December 31, 1998 ................................................................ 822 423
Note payable to a bank bearing interest at 8.6%; monthly payments of principal
and interest aggregating $13; maturing in October 2001; secured by equipment
with a net book value of approximately $400 as of December 31, 1998 and certain
cash accounts ...................................................................... 632 514
Notes payable to sellers bearing interest at 9.0% as of December 31, 1998;
monthly principal and interest payments of $3; maturing October 2007; secured by land
and buildings with a net book value of approximately $901 as of December 31,
1998 ................................................................................ 471 291
Note payable to BFI bearing interest at 6.0%; all outstanding principal and
interest are due December 1997; secured by substantially all of WCI's accounts
receivable .......................................................................... 319 --
Note payable to BFI bearing interest at 10.0%; quarterly payments of interest
beginning December 1997; all outstanding principal and interest are due
March 1998; secured by substantially all of WCI's assets ............................ 500 --
Unsecured notes payable to seller bearing interest at 8.0% as of December 31,
1998; monthly principal and interest payments of $4; maturing in June 2002 .......... 189 90
Revolving line of credit from a bank bearing interest at the bank's prime rate
plus 1.5% (aggregating 10% at December 31, 1997); interest was payable monthly
and the line was to expire on September 29, 1998; secured by substantially all
of the Company's assets ............................................................. 600 --
Other ................................................................................. 122 2,071
-------- --------
12,542 74,232
Less: current portion ................................................................. (873) (10,247)
-------- --------
$ 11,669 $ 63,985
======== ========
The term loan payable to the Bank and the notes payable to BFI were
personally guaranteed by certain officers and stockholders of the Company (Note
10).
As of December 31, 1998, aggregate contractual future principal payments by
calendar year on long-term debt are due as follows:
1999............. $ 10,247
2000............. 1,497
2001............. 1,433
2002............. 420
2003............. 57,593
Thereafter....... 3,042
--------
$ 74,232
========
Management used borrowings from the January Credit Facility to pay off all
amounts outstanding under the term loan payable to the Bank and all notes
payable to BFI, and as such, these amounts have been classified as long-term
debt as of December 31, 1997.
The Company has entered into an interest rate protection agreement (the
"Interest Agreement"), with its primary banking institution to reduce its
exposure to fluctuations in variable interest rates. The Interest Agreement,
which is effective November 2, 1998 through November 2, 2000, effectively
changes the Company's interest rate paid on a notional amount of $27,700 of its
floating rate long-term debt to a weighted average fixed rate (approximately
6.43% at December 31, 1998). The fair value of the Interest Agreement as of
December 31, 1998 was approximately $188, which reflects the estimated amounts
that the Company would receive to terminate the Interest Agreement based on
quoted market prices of comparable contracts as of December 31, 1998. In the
event of nonperformance by the counterparty, the Company would be exposed to
interest rate risk if the variable interest rate received were to exceed the
fixed rate paid by the Company under the terms of the Interest Agreement.
F-42
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8. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Leases
The Company leases its facilities and certain equipment under non-cancelable
operating leases for periods ranging from one to five years. The Company's
supplemental consolidated rent expense under operating leases during the years
ended December 31, 1996, 1997 and 1998 was $170, $235 and $730, respectively.
As of December 31, 1998, future minimum lease payments under these leases,
by calendar year, are as follows:
1999........... $ 715
2000........... 713
2001........... 599
2002........... 504
2003........... 485
Thereafter..... 2,059
-------
$ 5,075
=======
Performance Bonds and Letters of Credit
Municipal solid waste collection contracts may require performance bonds or
other means of financial assurance to secure contractual performance. As of
December 31, 1998, WCI had provided customers and various regulatory authorities
with bonds and letters of credit of approximately $3,692 to secure its
obligations. The Company's November Credit Facility provides for the issuance of
letters of credit in an amount up to $15,000, but any letters of credit issued
reduce the availability of borrowings for acquisitions or other general
corporate purposes. If the Company were unable to obtain surety bonds or letters
of credit in sufficient amounts or at acceptable rates, it could be precluded
from entering into additional municipal solid waste collection contracts or
obtaining or retaining landfill operating permits.
CONTINGENCIES
Environmental Risks
The Company is subject to liability for any environmental damage that its
solid waste facilities may cause to neighboring landowners or residents,
particularly as a result of the contamination of soil, groundwater or surface
water, and especially drinking water, including damage resulting from conditions
existing prior to the acquisition of such facilities by the Company. The Company
may also be subject to liability for any off-site environmental contamination
caused by pollutants or hazardous substances whose transportation, treatment or
disposal was arranged by the Company or its predecessors. Any substantial
liability for environmental damage incurred by the Company could have a material
adverse effect on the Company's financial condition, results of operations or
cash flows. As of December 31, 1998, the Company is not aware of any such
environmental liabilities.
Legal Proceedings
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, the Company is subject to
various judicial and administrative proceedings involving federal, state or
local agencies. In these proceedings, an agency may seek to impose fines on the
Company or to revoke or deny renewal of an operating permit held by the Company.
From time to time the Company may also be subject to actions brought by
citizens' groups or adjacent landowners or residents in connection with the
permitting and licensing of landfills and transfer stations, or alleging
environmental damage or violations of the permits and licenses pursuant to which
the Company operates.
In addition, the Company may become party to various claims and suits
pending for alleged damages to persons and property, alleged violations of
certain laws and alleged liabilities arising out of matters occurring during the
normal operation of the waste management business. However, as of December 31,
1998 there is no 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.
F-43
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During the period from January 1, 1996 through July 31, 1996, The Disposal
Group won a lawsuit against the city of Vancouver, Washington relating to the
city's annexation of certain territories served by The Disposal Group. The
Disposal Group received approximately $2,600 from the lawsuit, which is included
in other income in the accompanying statement of operations.
Disposal Site
The Murrey Companies have been informed that the Hidden Valley Landfill,
which is currently utilized by them for disposal of waste collected in Pierce
County, is currently operating under a Consent Decree with the Washington State
Department of Ecology and the Environmental Protection Agency. Under the terms
of the Consent Decree, the Hidden Valley Landfill was closed on December 31,
1998; and subsequent to that date, all of the waste collected by the Murrey
Companies in Pierce County was long hauled to an alternate disposal site pending
completion of a new solid waste landfill in Pierce County. Management of the
Company does not believe that the closure of the Hidden Valley Landfill will
have a material adverse impact on it's business, financial position, results of
operations or cash flows.
Employees
Approximately 67 drivers and mechanics at WCI's Vancouver, Washington
operation are represented by the Teamsters Union, with which Browning-Ferris
Industries of Washington, Inc., the Company's predecessor in Vancouver, entered
a four-year collective bargaining agreement in January 1997. Approximately 11
drivers at Arrow Sanitary Services, Inc. ("Arrow"), a wholly owned subsidiary of
the Company, are represented by the Teamsters Union, with which Arrow entered
into a three-year collective bargaining agreement in March 1998. In addition, in
July 1997, the employees at the Company's facility in Issaquah, Washington,
adopted a measure to select a union to represent them in labor negotiations with
management. The union and management operated under a one-year negotiating
agreement, that ended July 27, 1998.
Since July 27, 1998, negotiations have continued between the union and the
Company, although the union is permitted to call a strike or call for
arbitration of the outstanding issues. The employees at Issaquah have filed to
decertify the union, and the union has filed a claim with the National Labor
Relation Board to attempt to block the decertification. The Company is not aware
of any other organizational efforts among its employees and believes that its
relations with its employees are good.
Approximately 46 of the Murrey Companies' route drivers are represented by
the Teamsters Union. The Murrey Companies have a collective bargaining agreement
that expires in June 1999. The Murrey Companies are not aware of any other
organizational efforts among their employees and believes that their relations
with their employees are good.
9. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In September 1997, the Company received net proceeds of $6,992 from the sale
of 2,499,998 shares of redeemable convertible preferred stock (the "Preferred
Stock"). The Preferred Stock accrued cumulative dividends at the rate of $.098
per share annually. Accumulated and unpaid dividends on Preferred Stock amounted
to $61 as of December 31, 1997. Each share of Preferred Stock was redeemable, at
the holder's option, during the period from April 1, 1999 through October 1,
1999 for $4.20 per share plus any accumulated and unpaid dividends. The
Preferred Stock and any accumulated and unpaid dividends were convertible at the
holder's option into shares of the Company's common stock at the calculated rate
of $2.80 per share divided by the "Conversion Price" subject to certain
anti-dilution adjustments. Each share was automatically converted into common
stock immediately upon the closing of the Company's initial public offering of
common stock at a Conversion Price of $2.80 per share.
10. STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
Of the 37,675,887 shares of common stock authorized but unissued as of
December 31, 1998, the following shares were reserved for issuance:
Stock option plan............. 1,139,214
Stock purchase warrants....... 1,291,135
Shares held in escrow......... 51,746
---------
2,482,095
=========
F-44
84
Stockholder Notes Receivable
In December 1997, the Company provided loans in the aggregate amount of $82
to certain employees, who are also common stockholders, for the purchase of
shares of the Company's Preferred Stock. The notes bore interest at 8%, were
secured by the Preferred Stock purchased and common stock owned by the
employees, and were paid in full during 1998.
Stock Options
In November 1997, WCI's Board of Directors adopted a stock option plan in
which all officers, employees, directors and consultants may participate (the
"Option Plan"). Options granted under the Option Plan may either be incentive
stock options or nonqualified stock options (the "Options"), generally have a
term of 10 years from the date of grant, and will vest over periods determined
at the date of grant. The exercise prices of the options are determined by the
Company's Board of Directors and will be at least 100% or 110% of the fair
market value of the Company's common stock on the date of grant as provided for
in the Option Plan.
In connection with the Option Plan, WCI's Board of Directors approved the
reservation of 1,200,000 shares of common stock for issuance thereunder. As of
December 31, 1997 and 1998, 35,000 and 333,121 options to purchase common stock
were exercisable under the Option Plan, respectively. In addition, as of
December 31, 1997 and 1998, options for 671,500 and 160,450 shares, respectively
of common stock were available for future grants under the Option Plan.
A summary of WCI's stock option activity and related information during the
period from inception (September 9, 1997) through December 31, 1997 and the year
ended December 31, 1998 is presented below:
NUMBER OF WEIGHTED AVERAGE
SHARES (OPTIONS) EXERCISE PRICE
---------------- ----------------
Outstanding at inception.......... -- $ --
Granted........................... 528,500 4.92
--------
Outstanding as of December 31, 1997 528,500 4.92
Granted (unaudited)............... 511,050 9.58
Forfeited (unaudited)............. 2,874 5.00
Exercised (unaudited)............. 57,912 4.69
--------
Outstanding as of December 31, 1998 978,764 7.38
========
The following table summarizes information about stock options outstanding
as of December 31, 1998:
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 ............ 544,099 $ 2.92 8.9 190,869 $ 2.97
$ 6.00 to 9.50 ............ 62,415 8.42 8.9 14,582 8.01
$10.50 to 12.50 ............ 240,000 11.06 9.2 80,003 11.05
$15.19 to 19.00 ............ 95,750 17.25 9.5 47,667 16.23
$21.00 to 22.13 ............ 36,500 21.90 9.6 -- --
------- -------
978,764 7.38 8.9 333,121 7.04
======= =======
The weighted average grant date fair values for options granted during 1997
and 1998 are as follows:
YEAR ENDED DECEMBER 31,
1997 1998
---- ----
Exercise prices equal to market price of stock $ -- $ 5.28
Exercise prices less than market price of
stock ........................................ -- 6.52
Exercise prices greater than market price of
stock ........................................ 0.30 3.09
Pro Forma information regarding net income (loss) and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the period from inception (September 9, 1997) through December
31, 1997 and the year ended December 31, 1998: risk-free interest rate of 6%;
and 5%, respectively; dividend yield of zero; volatility factor of the expected
market price of the Company's common stock of .40 and .55, respectively; and a
weighted-average expected life of the option of 4 years.
F-45
85
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The following
table summarizes the Company's pro forma net loss and pro forma basic net loss
per share for the period from inception (September 9, 1997) through December 31,
1997 and for the year ended December 31, 1998:
YEAR ENDED DECEMBER 31,
1997 1998
---- ----
Pro forma net income (loss)............ $(3,754) $ 567
Pro forma net loss applicable to common
stockholders......................... (4,285) (350)
Pro forma basic net loss per share..... (.90) (0.04)
During the year ended December 31, 1998, the Company recorded deferred stock
compensation of $821 relating to stock options granted during the period with
exercise prices less than the estimated fair value of the Company's common stock
on the date of grant. The deferred stock compensation is being amortized into
expense over the vesting periods of the stock options which generally range from
1 to 3 years. Compensation expense of $393 was recorded during the year ended
December 31, 1998 relating to these options, and the remaining $428 will be
amortized into expense in future periods.
Stock Purchase Warrants
At December 31, 1998, the Company had outstanding warrants to purchase
1,291,135 shares of the Company's common stock at exercise prices between $0.01
and $22.13 per share. The warrants are exercisable upon vesting and notification
and expire between 2000 and 2008.
In September 1997, the Company issued a warrant to purchase 200,000 shares
of the Company's common stock to the Bank that provided the line of credit and
term loan payable. The exercise price of the warrant is $.01 per share and
contains provisions for a cashless exercise at the bank's option. The warrant
was valued at $382 on its date of issuance using the Black-Scholes pricing model
with an assumed stock price volatility of .40, risk-free interest rate of 6.0%,
estimated fair value of the common stock of $1.92 per share and an expected life
of 7 years. The value assigned to the warrant was reflected as a discount on
long-term debt. The discount was fully accreted to interest expense using the
straight-line method over the expected term of the debt agreements
(approximately three months). In 1998, the bank received 172,578 shares of
common stock through the exercise of 172,689 warrants.
In connection with their guarantee of certain of the Company's debt
obligations, the Company issued in December 1997 warrants to purchase 841,000
shares of the Company's common stock to certain directors and stockholders of
the Company. The exercise price of the warrants is $2.80 per share. The warrants
were valued at $328 on their date of issuance using the Black-Scholes pricing
model with an assumed stock price volatility of .40, risk-free interest rate of
6.0%, estimated fair value of the common stock of $1.92 per share and expected
lives of 3 years. The value assigned to these warrants was fully amortized to
interest expense over the expected term of the debt agreements (approximately
three months).
In December 1997, the Company issued to consultants warrants to purchase
15,000 shares of the Company's common stock. Warrants to purchase 10,000 and
5,000 shares of common stock had exercise prices of $5.00 per share and $2.80
per share, respectively.
In January 1998, the Company issued a warrant to purchase 140,000 shares of
its common stock to BankBoston N.A. in connection with the January Credit
Facility. The exercise price of the warrant is $2.80 per share. The warrant was
valued at $855 on its date of issuance using the Black-Scholes pricing model
with an assumed stock price volatility of .40, risk-free interest rate of 6%,
estimated fair value of the common stock of $7.50 per share and an expected life
of 10 years. The value assigned to the warrant was reflected as a discount on
long-term debt and accreted to interest expense using the interest method over
the expected term 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.
F-46
86
In February 1998, the Company issued warrants to purchase 200,000 shares of
its common stock with an exercise price of $4.00 per share in connection with an
acquisition. The warrants were valued at $954 using the Black-Scholes pricing
model and recorded as an element of purchase price for the acquisition.
In February 1998, the Company granted warrants to an employee to purchase
50,000 shares of the Company's common stock at $2.80 per share. The Company
recorded stock compensation expense of approximately $240 relating to these
warrants. All such warrants were exercised in 1998.
During 1998, the Company issued warrants to certain market development
consultants to purchase 67,935 shares of the Company's common stock with
exercise prices ranging from $12.00 to $22.13 per share. The warrants were
valued at $339 using the Black-Scholes pricing model and recorded as an element
of purchase price of the related acquisitions.
11. INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31,
1996, 1997 and 1998 consists of the following:
PREDECESSOR
------------------- WCI
THE DISPOSAL GROUP SUPPLEMENTAL
COMBINED CONSOLIDATED
PERIOD FROM YEAR ENDED
JANUARY 1, 1996 DECEMBER 31,
THROUGH -----------------------------------
JULY 31, 1996 1996 1997 1998
---------------- ------- ------ ------
Current:
Federal........ $ 207 $ 562 $ 716 $1,432
State.......... -- -- -- 142
Deferred:
Federal........ 298 (19) (414) 1,217
State.......... -- -- -- 139
----- ------ ------ ------
$ 505 $ 543 $ 302 $2,930
===== ====== ====== ======
Significant components of deferred income tax assets and liabilities are as
follows as of December 31, 1997 and 1998:
WCI SUPPLEMENTAL
CONSOLIDATED
-----------------------
1997 1998
--------- ---------
Deferred income tax assets:
Accounts receivable reserves............... $ 8 $ 152
Amortization............................... 290 --
Accrued expenses........................... -- 8
Vacation accrual........................... 15 6
State taxes................................ -- 22
Other...................................... -- 49
Net operating losses....................... 54 --
-------- --------
Total deferred income tax assets............. 367 237
Deferred income tax liabilities:
Amortization............................... -- (757)
Depreciation............................... (1,187) (1,368)
Other liabilities.......................... -- (146)
Prepaid expenses........................... -- (234)
-------- --------
Total deferred income tax liabilities........ (1,187) (2,505)
-------- --------
Net deferred income tax liability............ $ (820) $ (2,268)
======== ========
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87
The differences between the Company's provision (benefit) for income taxes
as presented in the accompanying statements of operations and benefit for income
taxes computed at the federal statutory rate is comprised of the items shown in
the following table as a percentage of pre-tax income (loss):
PREDECESSORS
-----------------------------------------------------------
THE DISPOSAL
GROUP
COMBINED
PERIOD FROM PREDECESSORS PREDECESSORS
JANUARY 1, 1996 COMBINED COMBINED
THROUGH PERIOD ENDED NINE MONTHS ENDED
JULY 31, 1996 DECEMBER 31, 1996 SEPTEMBER 30, 1997
------------------ ------------------ -------------------
Income tax provision (benefit) at
the statutory rate................... 34.0% (34.0%) (34.0%)
Effect of allowance.................... (16.0%) 34.0% 34.0%
----- ----- -----
18.0% -- --
===== ===== =====
WCI SUPPLEMENTAL
CONSOLIDATED
---------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
---- ---- ----
Income tax provision (benefit) at the statutory
rate .......................................... 34.0% (34.0%) 34.0%
State taxes, net of federal benefit ............. -- -- 4.0%
Goodwill amortization ........................... -- -- 3.0%
Tax effect of companies reporting under
Subchapter S .................................... 10.0% (1.0%) 5.0%
Stock compensation expense ...................... -- 44.0% 3.0%
Other ........................................... 1.0% -- 1.0%
---- ---- ----
45.0% 9.0% 50.0%
==== ==== ====
12. NET INCOME (LOSS) PER SHARE INFORMATION
The following table sets forth the calculation of the numerator and
denominator used in the computation of basic and diluted net loss per share for
the years ended December 31, 1996, 1997 and 1998:
DECEMBER 31, DECEMBER
1996 31, 1997 DECEMBER 31, 1998
BASIC AND BASIC AND ----------------------------------
DILUTED DILUTED BASIC DILUTED
NET INCOME NET LOSS NET INCOME NET INCOME
PER SHARE PER SHARE PER SHARE PER SHARE
------------ ------------ ------------ ------------
Numerator:
Income (loss) before extraordinary item $ 663 $ (3,750) $ 2,917 $ 2,917
Redeemable convertible preferred stock
accretion ............................ -- (531) (917) (917)
------------ ------------ ------------ ------------
Income (loss) applicable to common
stockholders before extraordinary item $ 663 $ (4,281) $ 2,000 2,000
============ ============ ============ ============
Extraordinary item .................... -- -- (1,027) (1,027)
------------ ------------ ------------ ------------
Net income (loss) applicable to common
stockholders ........................ $ 663 $ (4,281) $ 973 $ 973
============ ============ ============ ============
Denominator:
Weighted average common shares
outstanding .......................... 2,888,880 4,761,447 9,349,173 9,349,173
Dilutive effect of stock options and
warrants outstanding ................. -- -- -- 1,628,930
Incremental common shares issuable
upon redemption of redeemable common
stock ................................ -- -- -- 282,192
------------ ------------ ------------ ------------
2,888,880 4,761,447 9,349,173 11,260,295
============ ============ ============ ============
As of December 31, 1998, outstanding options to purchase 87,832 shares of
common stock (with exercise prices ranging from $18.62 to $22.13) could
potentially dilute basic net income per share in the future and have not been
included in the computation of diluted net loss per share because to do so would
have been antidilutive for the period presented.
F-48
88
13. RELATED PARTY TRANSACTIONS
Recycling Agreement
WCI has entered into certain transactions with Continental Paper, LLC
("Continental"), in which WCI delivers to Continental all of it's collected
recyclable materials in areas in which Continental has processing facilities and
Continental pays WCI market rates for the recyclable materials. Certain of WCI's
stockholders are the majority owners of Continental. During the period from
inception (September 9, 1997) through December 31, 1997 and the year ended
December 31, 1998, the Company received, after deducting amounts paid to
Continental, approximately $10 and paid approximately $108, respectively,
to/from Continental in these transactions.
Operating Lease
The Murrey Companies lease land (on which certain of their facilities are
located) from a shareholder of the Murrey Companies. This lease is pursuant to
an informal arrangement whereby the Murrey Companies pay all of the property
taxes and other expenses associated with the leased land in lieu of monthly
rent. These payments totaled approximately $10 during each of the years ended
December 31, 1996, 1997 and 1998.
Advances
As of December 31, 1997 and 1998, the Murrey Companies had non-interest
bearing advances payable to one of their shareholders totaling $543.
Disposal Fees
During the years ended December 31, 1996, 1997 and 1998, the Murrey
Companies paid $7,730, $8,592 and $8,816, respectively, in disposal fees to a
landfill that is owned and operated by a company in which one of the Murrey
Companies' shareholders has an approximate 33% ownership interest.
14. EMPLOYEE BENEFIT PLAN
WCI has a voluntary savings and investment plan (the "401(k) Plan"). The
401(k) Plan is available to all eligible, non-union employees of WCI. Under the
401(k) Plan, WCI's contributions are 40% of the first 5% of the employee's
contributions. During the period from inception (September 9, 1997) through
December 31, 1997 and the year ended December 31, 1998, WCI's 401(k) Plan
expense was approximately $2 and $58, respectively.
The Murrey Companies have a voluntary savings and investment plan (the
"401(k) Plan"). The 401(k) Plan is available to all eligible, non-union
employees of the Murrey Companies. Under the 401(k) Plan, the Murrey Companies'
contributions are at the discretion of management. During the years ended
December 31, 1996, 1997 and 1998, the Murrey Companies' 401(k) Plan expense was
approximately $267, $316 and $336, respectively.
15. SUBSEQUENT EVENTS
Murrey Companies Merger
On January 19, 1999, WCI merged with Murreys Disposal Company, Inc., DM
Disposal Co., Inc., American Disposal Company, Inc., and Tacoma Recycling, Inc.
(Collectively, the "Murrey Companies"). The transaction was accounted for as
poolings-of-interests, whereby the Company issued 2,888,880 shares of its common
stock for all of the outstanding shares of the Murrey Companies. In Connection
with the merger with the Murrey Companies, the Company incurred transaction
related costs of approximately $6,200, which will be charged to operations in
the first quarter of 1999.
Secondary Public Offering
Effective February 9, 1999, the Company sold approximately 4,000,000 shares
of common stock at $17.50 per share. As a result of the offering, the Company
received approximately $65,300 in net proceeds and used the proceeds to pay down
approximately $50,200 of its then outstanding debt.
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Other Acquisitions
During the period from January 1, 1999 through February 17, 1999, the
Company acquired or signed definitive agreements to acquire three companies, one
of which is subject to certain regulatory approvals. The consideration to be
paid for these acquisitions consists of a combination of cash and shares of the
Company's common stock, and will materially increase the Company's borrowings
under the November Credit Facility (Note 7) and its number of outstanding common
shares.
F-50
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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
Date: March 29, 1999 President
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 29, 1999
/s/ Steven F. Bouck
Steven F. Bouck Chief Financial Officer
(principal financial officer) March 29, 1999
/s/ Michael R. Foos
Michael R. Foos Vice President and
Controller (principal
accounting officer) March 29, 1999
/s/ Eugene V. Dupreau
Eugene V. Dupreau Vice President-California Divison
and Director March 29, 1999
/s/ Michael W. Harlan
Michael W. Harlan Director March 29, 1999
/s/ William J. Razzouk
William J. Razzouk Director March 29, 1999
/s/ Irmgard R. Wilcox
Irmgard R. Wilcox Controller - Northern
Washington Division and
Director March 29, 1999
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WASTE CONNECTIONS, INC. AND PREDECESSORS
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1996, 1997 and 1998
(in thousands)
Additions
---------------------- Deductions
Balance at Charged to Charged to (write-offs, Balance at
beginning costs and other net of at end
Description of period expenses accounts collections) of period
----------- ---------- ---------- ---------- ------------ ----------
Deducted from asset accounts:
Allowance for doubtful accounts:
Period from January 1, 1996
through July 31, 1996 ......... $113 $ 72 $ - $(94) $ 91
Predecessors Combined:
One month ended December 31,
1995 .......................... 28 - - - 28
Period ended December 31,
1996 .......................... 28 61 - (8) 81
Nine Months ended
September 30, 1997 ............ 81 139 - (97) 123
Waste Connections, Inc.:
Period from inception
(September 9, 1997) through
December 31, 1997 ........... - 19 - - 19
Waste Connections, Inc.:
Year ended December 31, 1998 .... 19 343 - - 362
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EXHIBIT INDEX
Page
Exhibit Number Description of Exhibits Number
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
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
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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 shareholders of Madera Disposal
Company, Inc.
10.19+* Asset Purchase Agreement, dated as of March 1, 1998,
among Waste Connections, Waste Connections of Idaho,
Inc., Hunter Enterprises, Inc. and the shareholder of
Hunter Enterprises, Inc.
10.20* Form of Indemnification Agreement entered into by Waste
Connections and each of its directors and officers
10.21+* Asset Purchase Agreement, dated as of April 8, 1998, between
Waste Connections, Waste Connections of Wyoming, Inc, A-1
Disposal, Inc., David Jones and Thomas Fries
10.22+* Asset Purchase Agreement, dated as of April 8, 1998, between
Waste Connections, Waste Connections of Wyoming, Inc., and
Gwendolyn L. Sullivan
10.23+* Stock Purchase Agreement, dated as of May 8,1998, by and among
Waste Connections, Sunshine Sanitation, Incorporated, Robert E.
Ewing and Sherry D. Ewing
10.24+* Stock Purchase Agreement, dated as of May 8, 1998, by and among
Waste Connections, Sower's Sanitation, Inc., James C. Sowers and
Mildred A. Sowers
10.25+* Stock Purchase Agreement, dated as of May 11, 1998, by
and among Waste Connections, T & T Disposal, Inc., and
Timothy Thomas
10.26+# Asset Purchase Agreement, dated as of June 1, 1998, by
and among Waste Connections, Waste Connections of
Utah, Inc., Contractor's Waste, L.C., and Brad
Kitchen, Heath Johnston, and R. Scott McQuarrie
10.27+## Stock Purchase Agreement, dated as of June 5, 1998, by
and among Waste Connections, B & B Sanitation, Inc.,
Red Carpet Landfill, Inc., Darlin Equipment, Inc.,
Lyle J. Buller, Larue A. Buller, the Lyle J. Buller
Revocable Trust dated 10/11/96 and Larue A. Buller,
Trustee of the Larue A. Buller Revocable Trust dated
10/11/96
10.28++ Stock Purchase Agreement dated as of June 17, 1998, by and among
Waste Connections, Arrow Sanitary Service, Inc., Steven Giusto,
Dennis Giusto, John
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Giusto, Michael Giusto and Kenneth Giusto
10.29++ Stock Purchase Agreement dated as of June 25, 1998, by and among
Waste Connections, Curry Transfer and Recycling, Oregon Waste
Technology, Petty H. Smart, and A. Lewis Rucker
10.30**+ Purchase and Sale Agreement dated as of June 25, 1998, by and
between Petty H. Smart and Waste Connections
10.31**+ Loan Agreement dated as of June 1, 1998 between Madera Disposal
Systems, Inc. and the California Pollution Control Financing
Authority
10.32** Employment Agreement between Waste Connections and David M. Hall,
dated as of July 8, 1998
10.33**+ Asset Purchase Agreement, dated as of July 27, 1998 by and among
Waste Connections, Waste Connections of Utah, Inc., Miller
Containers, Inc., and Douglas L. Miller
10.34+++ Agreement and Plan of Merger, dated as of July 30, 1998, by and
among Waste Connections, WCI Acquisition Corporation, Shrader
Refuse and Recycling Service Company, Duane E. Shrader, Myrlen A.
Shrader, Daniel L. Shrader, Mark S. Shrader, Michael D. Shrader,
and Daren L. Shrader
10.35+++ Purchase and Sale Agreement dated as of July 31, 1998, by and
between Ambler Vincent Development Company and Shrader Refuse and
Recycling Service Company
10.36**+ Asset Purchase Agreement dated as of August 21, 1998, among Waste
Connections, Waste Connections of Utah, Inc., and Joseph E.
Cunningham and Scott L. Helm
10.37**+ Asset Purchase Agreement, dated as of August 10, 1998, by and
among Waste Connections, Waste Connections of Utah, Inc., ABC
Waste Inc., and David Boren
10.38** Form of Investors' Rights Agreement, dated as of July 31, 1998
10.39**+ Purchase Agreement, dated as of July 31, 1998, by and among Waste
Connections, Waste Connections of Nebraska, Inc., J & J
Sanitation Inc., Big Red Roll Off Inc., Garry L. Jeffords, Darin
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
10.40***+ Asset Purchase Agreement, dated as of September 18, 1998, by and
among Waste Connections, Waste Connections of Nebraska, Inc.,
Affiliated Waste Services, L.L.C., Leroy's Sanitary Service,
Inc., Dennis' Sanitary Service, Inc., LeRoy Hintz and Janice
Hintz, Dennis J. Mrsny and Mary Mrsny, and
45
95
Elden W. Mrsny and Doris Mrsny
10.41***+ Asset Purchase Agreement, dated as of September 9,1998, by and
among Waste Connections, Madera Disposal Systems, Inc., and
Charles B. Youngclaus
10.42***+ Asset Purchase Agreement, dated as of September 21, 1998, by and
among Waste Connections, Waste Connections of Utah, Inc., Country
Garbage Service Inc., Jay Mecham, Karl Bankowski, and Robert Lopez
10.43***+ Asset Purchase Agreement, dated as of September 18, 1998, by and
among Waste Connections, Waste Connections of Nebraska, Inc.,
Gary D. Wolff and Elizabeth L. Wolff
10.44***+ Agreement and Plan of Merger, dated as of September 21, 1998 by
and among Waste Connections, WCI Acquisition Corporation,
Evergreen Waste Systems Inc., Keith H. Alexander, and Todd D.
Alexander
10.45***+ Asset Purchase Agreement, dates as of September 22, 1998, by and
among Waste Connections, Curry Transfer & Recycling, Inc,
Harrell's Septic, Ralph Hirt and Renate Hirt
10.46***+ Asset Purchase Agreement, dated as of September 25, 1998, by and
among Waste Connections, Curry Transfer & Recycling, Inc.,
Westlane Disposal, Loren Parker and Roberta Parker
10.47***+ Asset Purchase Agreement, dated as of October 15, 1998, by and
among Waste Connections, Waste Connections of Idaho, Inc., R&N
LLC, Rumsey Sanitation, Inc., NADL Sanitation Inc, Bradley D.
Rumsey, Emil Nejdl, and Kathy K. Rumsey
10.48***+ Purchase and Sale Agreement, dated as of October 15, 1998 by and
between R&N LLC and Waste Connections of Idaho, Inc.
10.49***+ Agreement and Plan of Merger dated as of October 22,
1998, by and among Waste Connections, WCI Acquisition
Corporation I, WCI Acquisition Corporation II, WCI
Acquisition Corporation III, WCI Acquisition
Corporation IV, Murrey's Disposal Company, Inc.,
American Disposal Company, Inc., D.M. Disposal Co.,
Inc., Tacoma Recycling Company, Inc., the Murrey Trust
UTA August 5, 1993, as amended, the Bonnie L. Murrey
Revocable Trust UTA August 5, 1993, as amended, Donald
J. Hawkins, and Irmgard R. Wilcox
10.50****+ Purchase Agreement dated as of December 11, 1998, by and among
Waste Connections, Butler County Landfill, Inc., Kobus
Construction, Inc., Tom Kobus and Debbie Kobus
21.1**** Subsidiaries of the Waste Connections
23.1 Consent of Ernst & Young LLP, Independent Auditors.
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27.1 Financial Data Schedule
99.1 Proxy Statement for Waste Connections' 1999 Annual
Stockholders Meeting scheduled to be held May 26,
1999. (To be filed with the Commission prior to 120
days after December 31, 1998, 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 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.
+ Incorporated by reference to the exhibit filed with Waste
Connections' Form 8-K filed on July 1, 1998.
### Incorporated by reference to the exhibits filed with Waste
Connections' Form S-8, Registration No. 333-72113.
++ Incorporated by reference to the exhibit filed with Waste
Connections' Form 8-K Filed on August 11, 1998.
+ Filed without exhibits and schedules (to be provided
supplementally on request of the Commission).
47