1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) January 8, 1999
WASTE CONNECTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
0-23981
(Commission File Number)
94-3283464
(IRS Employer Identification No.)
2260 Douglas Boulevard, Suite 280, Roseville, California 95661
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (916) 772-2221
Not Applicable
(Former name or former address, if changed since last report.)
INFORMATION TO BE INCLUDED IN THE REPORT
Item 2. Acquisition or Disposition of Assets
On the dates indicated below, Waste Connections, Inc. ("WCI") acquired
the stock of Roche & Sons, Inc., (January 8, 1999) the Murrey Companies (that
consist of Murrey's Disposal Company, Inc., D.M. Disposal Co., Inc., Tacoma
Recycling Company, Inc. and American Disposal Company, Inc.) (January 19, 1999),
Ritter's Sanitary Service, Inc. (March 30, 1999), Central Waste Disposal, Inc.
and Cen San, Inc. (June 25, 1999), G&P Development, Inc. and the Garbage
Company/Nebraska Ecology Systems, Inc. (June 30, 1999), and Omega Systems, Inc.
(June 30, 1999) (the "Acquired Companies"). The mergers with the Acquired
Companies were accounted for as poolings-of-interests. WCI hereby amends its
historical audited financial statements for each of the three years in the
period ended December 31, 1998, to include the financial information of the
Acquired Companies. The amended financial statements of the Acquired Companies
are included under Item 7 hereof.
2
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
The following exhibits are filed herewith:
Exhibit Number Description
-------------- -----------
ex-23.1 Consent of Ernst & Young LLP,
Independent Auditors
ex-99.1 Schedule II
3
INDEX TO FINANCIAL STATEMENTS
WASTE CONNECTIONS, INC. AND PREDECESSORS
Report of Ernst & Young LLP, Independent Auditors ................. F-2
Consolidated Balance Sheets of Waste Connections, Inc. as
of December 31, 1997 and 1998 ................................. F-3
Combined Statement of Operations of Predecessors for the
nine months ended September 30, 1997 ........................... F-4
Consolidated Statements of Operations of Waste
Connections, Inc. for the years ended
December 31, 1997 and December 31, 1998 ........................ F-4
Combined Statement of Operations of The Disposal Group for
the period from January 1, 1996 through July 31, 1996 .......... F-5
Combined Statement of Operations of Predecessors for the
period ended December 31, 1996 ................................. F-5
Consolidated Statement of Operations of Waste
Connections, Inc. for the year ended
December 31, 1996 .............................................. F-5
Consolidated Statements of Redeemable Stock and
Stockholders' Equity of Waste Connections,
Inc. for the years ended December 31, 1996, 1997,
and 1998 ....................................................... F-6
Combined Statement of Cash Flows of Predecessors for the
nine months ended September 30, 1997 ........................... F-7
Consolidated Statements of Cash Flows of Waste
Connections, Inc. for the years ended
December 31, 1997 and December 31, 1998 ........................ F-7
Combined Statement of Cash Flows of The Disposal Group for
the period from January 1, 1996 through July 31, 1996 .......... F-8
Combined Statement of Cash Flows of Predecessors for the
period ended December 31, 1996 ................................. F-8
Consolidated Statements of Cash Flows of Waste
Connections for the year ended December 31, 1996 ............... F-8
Notes to Consolidated Financial Statements .......................... F-9
F-1
4
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-3
through F-8 herein as listed in the accompanying Index to Financial Statements.
Our audits also included the financial statement schedule included in
exhibit 99.1. 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 consolidated financial position of Waste
Connections, Inc. and Predecessors at December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Sacramento, California
February 17, 1999, except for
the third, fourth, and fifth
paragraphs of Note 15, as to
which the date is March 30, 1999,
the sixth paragraph of Note 15 as
to which the date is June 30, 1999,
and the seventh paragraph of
Note 15, as to which the date is
August 11, 1999
F-2
5
WASTE CONNECTIONS, INC. AND PREDECESSORS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
WASTE CONNECTIONS, INC.
CONSOLIDATED
-----------------------------
DECEMBER 31,
1997 1998
--------- ---------
Current assets:
Cash and equivalents ................................... $ 1,179 $ 3,244
Accounts receivable, less allowance for doubtful
accounts $127 and $544 at December 31, 1997
and 1998, respectively ............................... 7,711 14,858
Prepaid expenses and other current assets .............. 564 2,355
--------- ---------
Total current assets ............................ 9,454 20,457
Property and equipment, net .............................. 22,144 50,297
Intangible assets, net ................................... 12,213 101,560
Other assets ............................................. 700 2,709
--------- ---------
$ 44,511 $ 175,023
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings .................................. $ 1,628 $ 1,500
Accounts payable ....................................... 5,075 8,731
Advances from a related party .......................... 741 571
Deferred revenue ....................................... 1,530 3,174
Accrued liabilities .................................... 466 5,767
Current portion of long-term debt and notes payable .... 3,023 11,939
Other current liabilities .............................. 2,403 2,758
--------- ---------
Total current liabilities ....................... 14,866 34,440
Long-term debt and notes payable ......................... 13,442 67,176
Deferred income taxes .................................... 922 2,339
Other long term liabilities .............................. 2,570 4,396
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; 6,083,335, and 13,218,568 shares
issued and outstanding at December 31, 1997 and 1998,
respectively .......................................... 61 132
Additional paid-in capital ............................... 5,575 66,557
Stockholder notes receivable ............................. (82) --
Deferred stock compensation .............................. -- (428)
Retained earnings (accumulated deficit) .................. (366) 411
--------- ---------
Total stockholders' equity ...................... 5,188 66,672
--------- ---------
$ 44,511 $ 175,023
========= =========
See accompanying notes.
F-3
6
WASTE CONNECTIONS, INC. AND PREDECESSORS
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PREDECESSORS
COMBINED NINE WASTE CONNECTIONS, INC.
MONTHS ENDED CONSOLIDATED
SEPTEMBER 30, -----------------------------------
1997 YEAR ENDED DECEMBER 31,
(NOTE 1) 1997 1998
------------ ------------ -------------
Revenues ................................. $ 18,114 $ 45,821 $ 97,446
Operating expenses:
Cost of operations ..................... 14,753 35,019 70,030
Selling, general and administrative .... 3,009 4,846 9,672
Depreciation and amortization .......... 1,083 3,046 7,822
Start-up and integration ............... -- 493 --
Stock compensation ..................... -- 4,395 632
------------ ------------ ------------
Income (loss) from operations ............ (731) (1,978) 9,290
Interest expense ......................... (456) (1,842) (3,299)
Other income (expense), net .............. 14 387 315
------------ ------------ ------------
Income (loss) before income taxes ........ (1,173) (3,433) 6,306
Income tax provision ..................... -- (339) (3,030)
------------ ------------ ------------
Income (loss) before extraordinary item .. (1,173) (3,772) 3,276
Extraordinary item -- early extinguishment
of debt, net of tax benefit of $264 .... -- -- (1,027)
------------ ------------ ------------
Net income (loss) ........................ $ (1,173) $ (3,772) $ 2,249
============ ============ ============
Redeemable convertible preferred stock
accretion .............................. (531) (917)
------------ ------------
Net income (loss) applicable to common
stockholders ........................... $ (4,303) $ 1,332
============ ============
Basic income (loss) per common share:
Income (loss) before extraordinary item $ (0.76) $ 0.23
Extraordinary item ..................... -- (0.10)
------------ ------------
Net income (loss) per share ............ $ (0.76) $ 0.13
============ ============
Diluted income (loss) per share:
Income (loss) before extraordinary item $ (0.76) $ 0.19
Extraordinary item ..................... -- (0.08)
------------ ------------
Net income (loss) per common share ..... $ (0.76) $ 0.11
============ ============
Shares used in calculating basic net
income (loss) per share ................ 5,655,902 10,243,628
============ ============
Shares used in calculating diluted net
income (loss) per share ................ 5,655,902 12,154,750
============ ============
See accompanying notes.
F-4
7
WASTE CONNECTIONS, INC. AND PREDECESSORS
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PREDECESSORS
-----------------------------------
THE DISPOSAL
GROUP
COMBINED PREDECESSORS
PERIOD FROM COMBINED PERIOD WASTE CONNECTIONS, INC.
JANUARY 1, 1996 ENDED CONSOLIDATED
THROUGH DECEMBER 31, 1996 YEAR ENDED
JULY 31, 1996 (NOTE 1) DECEMBER 31, 1996
------------- -------- -----------------
Revenues ........................ $ 8,738 $ 13,422 $ 34,977
Operating expenses:
Cost of operations ............ 6,174 11,420 26,923
Selling, general and
administrative ............. 2,126 1,649 3,629
Depreciation and amortization . 324 962 2,497
----------- ----------- -----------
Income (loss) from operations ... 114 (609) 1,928
Interest expense ................ (12) (225) (757)
Other income (expense), net ..... 2,661 (147) 370
----------- ----------- -----------
Income (loss) before income taxes 2,763 (981) 1,541
Income tax (provision) benefit .. (505) -- (577)
----------- ----------- -----------
Net income (loss) ............... $ 2,258 $ (981) $ 964
=========== =========== ===========
Basic and diluted net income per
share ......................... $ 0.25
===========
Shares used in per share
calculation ................... 3,783,335
===========
See accompanying notes.
F-5
8
WASTE CONNECTIONS, INC. AND PREDECESSORS
CONSOLIDATED STATEMENT OF REDEEMABLE STOCK
AND STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
WASTE CONNECTIONS, INC. 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. CONSOLIDATED
---------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------
COMMON STOCK ADDITIONAL STOCKHOLDER DEFERRED
--------------------------- PAID-IN NOTES STOCK
SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1995 . 3,783,335 $ 38 $ 670 $ -- $ --
Net income .................... -- -- -- -- --
Capital distribution .......... -- -- (107) -- --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1996 . 3,783,335 38 563 -- --
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 .................. -- -- -- (83) --
Accretion of redeemable
convertible preferred stock . -- -- -- -- --
Capital distribution .......... (93)
Dividends paid ................ -- -- -- -- --
Net loss ...................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1997 . 6,083,335 61 5,575 (83) --
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 .................. -- -- -- 83 --
Capital distribution .......... -- -- (76) -- --
Dividends paid ................ -- -- -- -- --
Net income .................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1998 . 13,218,568 $ 132 $ 66,557 $ -- $ (428)
============ ============ ============ ============ ============
WASTE CONNECTIONS, INC. CONSOLIDATED
-------------------------------------------------
STOCKHOLDERS' EQUITY
-------------------------------------------------
RETAINED
EARNINGS TOTAL
(ACCUMULATED
DEFICIT)
------------ ------------
Balances at December 31, 1995 . $ 3,353 $ 4,061
Net income .................... 964 964
Dividends paid ................ (185) (185)
Capital distribution .......... -- (107)
------------ ------------
Balances at December 31, 1996 . 4,132 4,733
Sale of redeemable convertible
preferred stock ............. -- --
Sale of common stock .......... -- 4,418
Issuance of common stock
warrants .................... -- 710
Issuance of stockholder notes
receivable .................. -- (83)
Accretion of redeemable
convertible preferred stock . (531) (531)
Capital distribution .......... -- (93)
Dividends paid ................ (193) (193)
Net loss ...................... (3,772) (3,772)
------------ ------------
Balances at December 31, 1997 . (364) 5,189
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 .................. -- 83
Capital distribution .......... -- (76)
Dividends paid ................ (557) (557)
Net income .................... 2,249 2,249
------------ ------------
Balances at December 31, 1998 . $ 411 $ 66,672
============ ============
See accompanying notes.
F-6
9
WASTE CONNECTIONS, INC. AND PREDECESSORS
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
PREDECESSORS
COMBINED NINE WASTE CONNECTIONS, INC.
MONTHS ENDED CONSOLIDATED
SEPTEMBER 30, ------------------------------
1997 YEAR ENDED DECEMBER 31,
(NOTE 1) 1997 1998
-------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $ (1,173) $ (3,772) $ 2,249
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Gain on sale of assets ....................................... (4) -- --
Depreciation and amortization ................................ 1,083 3,046 7,822
Deferred income taxes ........................................ -- (400) 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 ......................................... -- (93) (244)
Extraordinary item -- extinguishment of debt ................. -- -- 1,291
Changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable, net ................................. (604) (1,532) (2,541)
Prepaid expenses and other current assets ................ (74) (46) (1,426)
Accounts payable ......................................... (221) 3,348 (807)
Deferred revenue ......................................... (137) 325 1,067
Accrued liabilities ...................................... (450) 919 465
Income taxes payable...................................... -- -- (31)
Other liabilities ........................................ -- 18 654
--------- --------- ---------
Net cash provided by (used in) operating activities .............. (1,580) 7,068 10,679
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment ..................... 188 2 422
Payments for acquisitions, net of cash acquired .................. -- (14,393) (56,569)
Prepaid acquisition costs ........................................ -- (420) --
Capital expenditures for property and equipment .................. (735) (3,760) (9,805)
Proceeds from sale of land ....................................... -- -- 625
Net change in other assets ....................................... 22 (76) (340)
Proceeds from stockholder notes receivable ....................... -- -- 83
Issuance of stockholder notes receivable ......................... -- (83) --
--------- --------- ---------
Net cash used in investing activities ............................. (525) (18,730) (65,584)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net intercompany balance ......................................... 2,142 -- --
Proceeds from short-term borrowings .............................. -- 600 --
Proceeds from long-term debt ..................................... -- 9,990 80,405
Principal payments on notes payable .............................. (38) (2,753) (3,374)
Principal payments on long-term debt ............................. -- (1,833) (42,592)
Proceeds from sale of redeemable convertible preferred stock ..... -- --
Proceeds from sale of common stock ............................... -- 23 23,986
Proceeds from option and warrant exercises ....................... -- 6,992 362
Net change in short term borrowings .............................. -- 19 (128)
Net change in advances from a related party ...................... -- (322) (41)
Payment of dividends ............................................. -- (194) (718)
Capital distributions ............................................ -- (93) (76)
Proceeds from long-term lease .................................... -- 375 --
Principal payments on long-term lease ............................ -- (255) --
Debt issuance costs .............................................. -- (150) (854)
--------- --------- ---------
Net cash provided by financing activities ......................... 2,104 12,399 56,970
--------- --------- ---------
Net increase (decrease) in cash and equivalents ................... (1) 737 2,065
Cash and equivalents at beginning of period ....................... 102 442 1,179
--------- --------- ---------
Cash and equivalents at end of period ............................. $ 101 $ 1,179 $ 3,244
========= ========= =========
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH
TRANSACTIONS:
Cash paid for interest ........................................... $ -- $ 960 $ 2,647
========= ========= =========
Cash paid for income taxes ....................................... $ -- $ 781 $ 1,070
========= ========= =========
Redeemable convertible preferred stock accretion ................. $ 581 $ 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-7
10
WASTE CONNECTIONS, INC. AND PREDECESSORS
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
PREDECESSORS
------------------------------
THE DISPOSAL
GROUP COMBINED PREDECESSORS WASTE
PERIOD FROM COMBINED CONNECTIONS, INC.
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) $ 964
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization ............. 324 962 2,497
Deferred income taxes ..................... 298 -- (19)
Changes in operating assets and
liabilities, net of effects from
acquisitions:
Accounts receivable, net ................ 1,201 (1,992) 15
Prepaid expenses and other current
assets ................................. (2) (104) 48
Accounts payable ........................ (45) 713 967
Deferred revenue ........................ (522) 421 42
Accrued liabilities ..................... (987) 428 140
Other liabilities ....................... -- -- 82
Income taxes payable .................... -- -- (232)
------- ------- -------
Net cash provided by (used in) operating
activities ................................ 2,525 (553) 4,504
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment . -- 117 72
Capital expenditures for property and
equipment ................................... (7) (282) (5,387)
Net change in other assets ................... -- 33 (30)
------- ------- -------
Net cash used in investing activities .......... (7) (132) (5,345)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net intercompany balance ..................... -- 642 --
Proceeds from long-term debt ................. 142 -- 1,879
Principal payments on long-term debt ......... (427) -- (1,569)
Principal payment on long-term lease.......... -- -- (59)
Payment of dividends ......................... -- -- (185)
Capital distributions ........................ -- -- (107)
Principal payments on notes payable .......... -- (39) --
Net change in short-term borrowings .......... -- -- 659
Net change in advances to related party ...... -- -- (360)
------- ------- -------
Net cash provided by (used in) financing
activities ................................... (285) 603 258
------- ------- -------
Net increase (decrease) in cash ................ 2,233 (82) (583)
Cash and equivalents beginning of period ....... 961 184 1,025
------- ------- -------
Cash and equivalents at end of period .......... $ 3,194 $ 102 $ 442
======= ======= =======
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION AND NON-CASH TRANSACTIONS:
Cash paid for interest ....................... $ -- $ -- $ 762
======= ======= =======
Cash paid for income taxes ................... $ -- $ -- $ 826
======= ======= =======
Issuance of notes payable for land and
buildings ................................. $ -- $ -- $ 260
======= ======= =======
See accompanying notes.
F-8
11
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO 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 consolidated financial statements include the accounts of WCI and its
wholly-owned subsidiaries. The consolidated entity is referred to herein as the
Company. All intercompany accounts and transactions have been eliminated in
consolidation.
The Company's consolidated financial statements have been restated to
reflect the mergers with Murrey's Disposal Company, Inc. ("Murrey's"), American
Disposal Company, Inc. ("American"), D.M. Disposal Co., Inc. ("DM") and Tacoma
Recycling Company, Inc. ("Tacoma") (collectively, the "Murrey Companies"), Roche
& Sons, Inc. ("Roche"), Ritters Sanitary Service, Inc. ("Ritters"), Omega
Systems, Inc. ("Omega"), G&P Development, Inc., The Garbage Company, and
Nebraska Ecology Systems, Inc. (collectively, "G&P"), and Central Waste
Disposal, Inc. and Cen San, Inc. (collectively, "Central") each accounted for as
poolings-of-interests (Notes 2 and 15).
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-9
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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
consolidated financial statements of the Company consist of the Murrey
Companies, Ritters and Roche. 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
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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 $548 and $2,210 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-11
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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, Tacoma, Omega, G&P, and Central 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 Waste Connections' inception (September 9, 1997)
through December 31, 1997, the Company incurred certain start-up expenses
relating to the formation of the Company, primarily for legal and other
professional services, and the costs associated with recruiting the Company's
initial management team. In addition, the Company incurred certain integration
expenses relating to its initial acquisitions. These start-up and integration
expenses have been charged to operations as incurred.
Stock-Based Compensation
As permitted under the provisions of 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-12
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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. In addition, on June
30, 1999 the Company consummated a business combination with G&P Development
Inc. (G&P) and Nebraska Ecology Systems, Inc. (NES). Both G&P and NES own a
landfill in Nebraska. Butler, G&P and NES 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 $9,648, of which approximately $2,655 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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2. ACQUISITIONS
Poolings-of-Interests
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. 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 was consummated.
The Company consummated business combinations with Roche and Ritter's on
January 8, 1999, and March 30, 1999, respectively, which included the exchange
of 554,248 shares of Waste Connections, Inc. common stock for all of the
outstanding shares of Roche and Ritter's. In connection with the business
combinations with Roche and Ritters, Waste Connections, Inc. incurred
transaction related costs of approximately $1,600 which will be charged to
operations in the period during which the mergers were consummated.
The Company consummated business combinations with Central, G&P, and Omega
on June 25, 1999, June 30, 1999, and June 30, 1999, respectively, which
included the exchange of 340,307 shares of Waste Connections, Inc. common stock
for all of the outstanding shares of Central, G&P, and Omega. In connection
with the business combinations with Central, G&P, and Omega, Waste Connections,
Inc. incurred transaction related costs of approximately $1,005 which will be
charged to operations in the period during which the mergers were consummated.
The table below sets forth the combined revenues and net income (loss) of
WCI, the Murrey Companies, Roche, Ritters, Central, G&P and Omega for the years
ended December 31, 1996, 1997 and 1998 (in thousands):
WASTE THE MURREY OTHER
CONNECTIONS, INC. COMPANIES POOLINGS TOTAL
----------------- ---------- --------- ---------
YEAR ENDED DECEMBER 31, 1996:
Revenues........................... $ -- $ 25,024 $ 9,953 $34,977
Net income......................... -- 663 301 964
YEAR ENDED DECEMBER 31, 1997:
Revenues........................... 6,237 28,874 10,710 45,821
Net income (loss).................. (5,066) 1,316 (22) (3,772)
YEAR ENDED DECEMBER 31, 1998:
Revenues........................... 54,042 32,528 10,876 97,446
Net income......................... 1,748 142 359 2,249
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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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........................ $100,931 $113,764
Net income (loss).................... (3,893) 3,179
Basic income (loss) per share........ (0.68) 0.22
Diluted income (loss) per share...... (0.68) 0.19
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............................. $ 12,091 $ 99,393
Long-term franchise agreements
and contracts...................... -- 2,390
Non-competition agreement............ 670 1,210
Other, net........................... -- 777
-------- --------
12,761 103,770
Less accumulated amortization........ (548) (2,210)
-------- --------
$ 12,213 $101,560
======== ========
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............... $ 8,324 $ 21,262
Rolling stock.................... 14,707 25,498
Containers....................... 10,016 16,525
Machinery and equipment.......... 4,485 8,323
Furniture and fixtures........... 422 452
------- ---------
37,954 72,060
Less accumulated depreciation.... (15,810) (21,763)
------- ---------
$22,144 $ 50,297
======= =========
Landfill costs of approximately $1,000 and $10,135 are included in land,
buildings and improvements at December 31, 1997 and 1998.
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 years ended
December 31, 1996, 1997 and 1998 was $2,347, $2,892 and $5,255, respectively.
5. OTHER ASSETS
Other assets consist of the following as of December 31, 1997 and 1998:
DECEMBER 31,
1997 1998
---- ----
Restricted cash.................. $ 187 $ 1,737
Other............................ 513 972
------- ---------
$ 700 $ 2,709
======= =========
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.
F-17
20
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 ................................................................................. 4,045 6,954
-------- --------
16,465 79,115
Less: current portion ................................................................. ( 3,023) (11,939)
-------- --------
$ 13,442 $ 67,176
======== ========
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............. $11,939
2000............. 2,323
2001............. 2,018
2002............. 1,001
2003............. 58,087
Thereafter....... 3,747
--------
$79,115
========
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
21
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
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-19
22
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 37,121,639 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-20
23
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-21
24
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The following
table summarizes the Company's pro forma net loss and pro forma basic net loss
per share for the years ended December 31, 1997 and December 31, 1998:
YEAR ENDED DECEMBER 31,
1997 1998
---- ----
Pro forma net income (loss)......................... $(3,776) $ 926
Pro forma net loss applicable to common
stockholders...................................... (4,307) 9
Pro forma basic and diluted net loss per share...... (0.76) 0.00
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-22
25
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
-------------------
THE DISPOSAL GROUP WCI
COMBINED CONSOLIDATED
PERIOD FROM YEAR ENDED
JANUARY 1, 1996 DECEMBER 31,
THROUGH -----------------------------------
JULY 31, 1996 1996 1997 1998
---------------- ------- ------ ------
Current:
Federal........ $ 207 $ 587 $ 804 $1,467
State.......... -- -- -- 146
Deferred:
Federal........ 298 (20) (465) 1,272
State.......... -- -- -- 145
----- ------ ------ ------
$ 505 $ 567 $ 339 $3,030
===== ====== ====== ======
Significant components of deferred income tax assets and liabilities are as
follows as of December 31, 1997 and 1998:
WCI
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............................... (1,289) (1,439)
Other liabilities.......................... -- (146)
Prepaid expenses........................... -- (234)
-------- --------
Total deferred income tax liabilities........ (1,289) (2,576)
-------- --------
Net deferred income tax liability............ $ (922) $(2,339)
======== ========
F-23
26
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
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 .................................... 2.4% (1.3%) 3.2%
Stock compensation expense ...................... -- 44.0% 3.0%
Other ........................................... 1.0% 1.3% 0.8%
---- ---- ----
37.4% 10.0% 48.0%
==== ==== ====
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 $ 964 $ (3,772) $ 3,276 $ 3,276
Redeemable convertible preferred stock
accretion ............................ -- (531) (917) (917)
------------ ------------ ------------ ------------
Income (loss) applicable to common
stockholders before extraordinary item $ 964 $ (4,303) $ 2,359 2,359
============ ============ ============ ============
Extraordinary item .................... -- -- (1,027) (1,027)
------------ ------------ ------------ ------------
Net income (loss) applicable to common
stockholders ........................ $ 964 $ (4,303) $ 1,332 $ 1,332
============ ============ ============ ============
Denominator:
Weighted average common shares
outstanding .......................... 3,783,335 5,655,902 10,243,628 10,243,628
Dilutive effect of stock options and
warrants outstanding ................. -- -- -- 1,628,930
Incremental common shares issuable
upon redemption of redeemable common
stock ................................ -- -- -- 282,192
------------ ------------ ------------ ------------
3,783,335 5,655,902 10,243,628 12,154,750
============ ============ ============ ============
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-24
27
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.
Shareholder Notes Receivables
Central, G&P, and Omega provided loans totaling $326 and $365 as of
December 31, 1997 and 1998, respectively, to shareholders of those
corporations. These notes were non-interest bearing and payable on demand.
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
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.
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") (Note 2). 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.
New Credit Facility
In March 1999, the Company obtained commitments from a syndicate of banks
led by BankBoston, N.A., which increased the Company's borrowing capacity from
$125,000 to $225,000 and modified certain covenants. The revised credit
facility matures in 2004.
Roche and Ritters Mergers
The Company merged with Roche and Sons, Inc. and Ritter's Sanitary Service,
Inc. on January 8, 1999, and March 30, 1999 (Note 2), respectively. The
transactions were accounted for as poolings-of-interests, whereby the Company
issued a total of 554,248 shares of its common stock for all of the outstanding
shares of Roche and Sons and Ritter's Sanitary Service. In connection with the
mergers, the Company incurred transaction related costs of approximately $1,600,
which were charged to operations in the first quarter of 1999.
Acquisition of Columbia Resource Co., L.P. and Finley-Buttes Limited
Partnership (CRCFBLP)
In March 1999, the Company acquired the stock of two companies that are
the sole partners of CRCFBLP. Total consideration paid for CRCFBLP was
approximately $67,100 in cash.
Central, G&P, and Omega Mergers
The Company merged with Central, G&P, and Omega on June 25, 1999, June 30,
1999, and June 30, 1999 (Note 2), respectively. The transactions were accounted
for as poolings-of-interests, whereby the Company issued a total of 340,207
shares of its common stock for all of the outstanding shares of Omega, G&P, and
Central. In connection with the mergers, the Company incurred transaction
related costs of approximately $1,005 which were charged to operations in the
second quarter of 1999.
Acquisition of International Environmental Industries, Inc. ("IEII")
On August 11, 1999, the Company signed a definitive agreement to acquire
the stock of IEII, which operates four landfills and three collection operations
in and around El Paso, Texas and southern New Mexico in a transaction to be
accounted for as a Purchase. Total consideration paid for IEII was approximately
$136,000, consisting of $68,500 in cash and 2,596,000 shares of the Company's
common stock. Consummation of the merger is subject to satisfaction of several
conditions as set forth in the acquisition agreement.
F-25
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WASTE CONNECTIONS, INC.
(Registrant)
Date: September 15, 1999 By /s/ Steven F. Bouck
Steven F. Bouck
Executive Vice President and
Chief Financial Officer
29
The following exhibits are filed herewith:
Exhibit Number Description
-------------- -----------
ex-23.1 Consent of Ernst & Young LLP,
Independent Auditors
ex-99.1 Schedule II