SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
COMMISSION FILE NUMBER 0-22417
WASTE INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NORTH CAROLINA 56-0954929
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3949 BROWNING PLACE
RALEIGH, NORTH CAROLINA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
27609
(ZIP CODE)
(919) 782-0095
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES NO X
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
COMMON STOCK, NO PAR VALUE 11,527,857 SHARES
(CLASS) (OUTSTANDING AT AUGUST 14, 1997)
PART 1 - Financial Information
ITEM 1. FINANCIAL STATEMENTS
WASTE INDUSTRIES, INC.
CONDENSED BALANCE SHEETS
December 31, June 30,
1996 1997
-------------- ---------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,803,438 $755,174
Accounts receivable - trade, less allowance for
uncollectible accounts (1996 - $616,000; 1997 -
$675,000) 9,236,071 11,205,498
Inventories 1,973,810 1,469,728
Current deferred income taxes - 470,000
Prepaid expenses and other current assets 414,533 814,100
-------------- --------------
Total current assets 13,427,852 14,714,500
-------------- --------------
PROPERTY AND EQUIPMENT, net 39,841,929 48,393,945
RECEIVABLES - AFFILIATED COMPANIES 1,175,205 1,251,564
INTANGIBLE ASSETS 3,698,963 16,734,744
OTHER NONCURRENT ASSETS 923,926 922,114
============== ==============
TOTAL ASSETS $ 59,067,875 $ 82,016,867
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $155,492 $117,027
Accounts payable - trade 5,637,730 7,716,146
Federal and state income taxes payable - 287,000
Accrued expenses and other liabilities 3,300,354 3,207,735
Accrued distributions 1,820,000 -
Deferred revenue 913,389 962,723
-------------- --------------
Total current liabilities 11,826,965 12,290,631
-------------- --------------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 33,070,228 33,483,035
NONCURRENT DEFERRED INCOME TAXES - 5,108,000
SHAREHOLDERS' EQUITY:
Common stock, no par value, shares authorized -
80,000,000, shares issued and outstanding:
1996 - 9,600,157; 1997 - 11,205,357 91,989 19,235,463
Additional capital - 8,500,000
Retained earnings 14,319,583 3,664,171
Shareholders' loans (240,890) (264,433)
-------------- --------------
Total shareholders' equity 14,170,682 31,135,201
-------------- --------------
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 59,067,875 $ 82,016,867
============== ==============
See Notes to Unaudited Condensed Financial Statements.
WASTE INDUSTRIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------- ------------------------------------
1996 1997 1996 1997
---------------- ----------------- --------------- ---------------
REVENUES:
Service revenues $ 22,644,430 $ 27,434,887 $ 43,130,285 $ 51,476,973
Equipment sales 407,570 396,449 807,954 747,327
---------------- ------------------ ---------------- -----------------
Total revenues 23,052,000 27,831,336 43,938,239 52,224,300
---------------- ------------------ ---------------- -----------------
OPERATING COSTS AND EXPENSES:
Cost of service operations 14,332,872 17,337,904 27,457,723 32,305,150
Cost of equipment sales 255,467 205,231 555,659 473,801
---------------- ------------------ ---------------- -----------------
Total cost of operations 14,588,339 17,543,135 28,013,382 32,778,951
---------------- ------------------ ---------------- -----------------
Selling, general and administrative 3,934,552 4,798,494 7,540,781 9,257,155
Depreciation and amortization 2,112,640 2,528,418 4,094,660 4,847,794
---------------- ------------------ ---------------- -----------------
Total operating costs and expenses 20,635,531 24,870,047 39,648,823 46,883,900
---------------- ------------------ ---------------- -----------------
OPERATING INCOME 2,416,469 2,961,289 4,289,416 5,340,400
OTHER EXPENSE (INCOME):
Interest expense 649,889 778,005 1,146,985 1,387,768
Interest income (33,714) (61,714) (58,755) (109,256)
Other (55,782) (40,325) (202,051) (144,105)
---------------- ------------------ ---------------- -----------------
Total other expense, net 560,393 675,966 886,179 1,134,407
---------------- ------------------ ---------------- -----------------
INCOME BEFORE INCOME TAXES 1,856,076 2,285,323 3,403,237 4,205,993
INCOME TAX EXPENSE:
Current and deferred - 625,000 - 625,000
Effect of change in tax status 4,300,000 4,300,000
---------------- ------------------ ---------------- -----------------
NET INCOME (LOSS) - HISTORICAL BASIS $ 1,856,076 $ (2,639,677) $ 3,403,237 $ (719,007)
================ ================== ================ =================
PRO FORMA INCOME BEFORE
INCOME TAXES $ 1,856,076 $ 2,285,323 $ 3,403,237 $ 4,205,993
PRO FORMA INCOME TAXES 750,000 900,000 1,375,000 1,675,000
---------------- ------------------ ---------------- -----------------
PRO FORMA NET INCOME $ 1,106,076 $ 1,385,323 $ 2,028,237 $ 2,530,993
================ ================== ================ =================
PRO FORMA PRIMARY EARNINGS PER
COMMON SHARE $ 0.11 $ 0.14 $ 0.21 $ 0.25
================ ================== ================ =================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 9,927,472 10,259,060 9,766,176 10,107,458
================ ================== ================ =================
See Notes to Unaudited Condensed Financial Statements.
2
WASTE INDUSTRIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
1996 1997
--------------------- ---------------------
OPERATING ACTIVITIES:
Net income (loss) $ 3,403,237 $ (719,007)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 4,095,000 4,847,794
Gain on sale of property and equipment (2,863) (52,792)
Provision for deferred income taxes - 4,638,000
Changes in assets and liabilities, net of effects from acquisitions of
related businesses:
Accounts receivable - trade (1,485,711) (939,431)
Inventories 534,521 541,624
Prepaid and other current assets (65,796) (387,951)
Accounts payable - trade 1,219,382 2,078,416
Federal and state income taxes payable - 287,000
Accrued expenses and other liabilities (199,218) (100,964)
Deferred revenue 257,206 9,673
--------------------- ---------------------
Net cash provided by operating activities 7,755,758 10,202,362
--------------------- ---------------------
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment
279,791 323,327
Purchases of property and equipment (9,222,753) (9,833,423)
Acquisitions of related businesses (220,000) (17,803,766)
Borrowings from affiliates (483,768) (76,359)
Other noncurrent assets (592,166) (84,294)
--------------------- ---------------------
Net cash used in investing activities (10,238,896) (27,474,515)
--------------------- ---------------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 35,300,000 19,336,580
Principal payments on long-term debt (30,707,812) (18,976,217)
Repayments of notes payable to shareholders (318,884) -
Repayments of (borrowings under) notes receivable 273,699 (23,543)
from shareholders
Proceeds from issuance of common stock - 19,143,474
Proceeds from exercise of stock options 44,756 -
Changes in partners' capital (1,412,044) -
Cash distributions to shareholders (2,634,284) (3,256,405)
--------------------- ---------------------
Net cash provided by financing activities 545,431 16,223,889
--------------------- ---------------------
NET DECREASE (1,937,707) (1,048,264)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,071,010 1,803,438
===================== =====================
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 133,303 $ 755,174
===================== =====================
See Notes to Unaudited Condensed Financial Statements.
3
WASTE INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. As applicable under such regulations, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The Company believes that the presentations and
disclosures in the financial statements included herein are adequate to make the
information not misleading. The financial statements reflect normal adjustments
which are necessary for a fair statement of the results for the interim periods
presented. Operating results for interim periods are not necessarily indicative
of the results for full years or other interim periods. It is suggested that the
condensed financial statements included herein be read in conjunction with the
financial statements of the Company for the year ended December 31, 1996 and the
related notes thereto (the "Financial Statements") included in the Company's
Registration Statement on Form S-1 (No.
333-25631).
2. CHANGE IN TAX STATUS AND INCOME TAXES
From 1986 until May 9, 1997, the Company was subject to taxation under
Subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"). As a
result, during that time the net income of the Company, for federal and certain
state income tax purposes, was reported by and taxable directly to the Company's
shareholders, rather than to the Company. Primarily to provide funds for tax
obligations payable by its shareholders on account of the Company's income in
1995 and 1996, the Company made cash distributions of approximately $3.1 million
and $1.8 million during 1996 and the six months ended June 30, 1997,
respectively, to its shareholders. In addition, in connection with its
conversion from S Corporation to C Corporation status, the Company effected an S
Corporation distribution (consisting of approximately $1.48 million in cash
payments) to the Company's S Corporation shareholders in June 1997. The
remaining S Corporation retained earnings of approximately $8.5 million have
been reclassified to additional capital.
The Company's S Corporation status was terminated on May 9, 1997 and,
accordingly, the Company became fully subject to federal and state income taxes
on that date. Pro forma net income and earnings per share amounts have been
computed as if the Company was subject to federal and all applicable state
corporate income taxes for each period presented.
In accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, ACCOUNTING FOR INCOME TAXES, the Unaudited Condensed Financial
Statements give effect to the recognition of deferred tax assets of $800,000 and
the assumption of a deferred tax liability of $5.1 million as a result of
termination of the Company's S Corporation election on May 9, 1997.
The balances of deferred income tax assets and liabilities at June 30, 1997 were
as follows:
Current deferred income taxes relate to:
Accrued vacation $ 142,000
Accruals to related parties 65,000
Allowance for bad debts 263,000
------------------
Net current deferred tax assets $ 470,000
==================
Noncurrent deferred tax income tax liabilities (assets) relate to:
Basis and depreciation differences $5,175,000
Other (67,000)
----------------
Net current deferred tax assets $5,108,000
================
4
3. PRO FORMA PRIMARY EARNINGS PER SHARE
Pro forma primary earnings per share computations are based on the
weighted-average common stock outstanding and include the dilutive effect of
stock options using the treasury stock method (using the initial offering price
of $13.50 per share for periods prior to the initial public offering). Common
stock outstanding used to compute the weighted-average shares was retroactively
adjusted for the 1996 exchange of shares resulting from the merger of affiliated
companies, for the 1997 conversion of nonvoting to voting stock, and for the
1997 1-for-2.5 reverse stock split. Fully diluted earnings per share are not
presented because potentially dilutive securities, in the aggregate, dilute
primary earnings per share by less than three percent. See Note 6 to Company's
Financial Statements for the year ended December 31, 1996 and the related notes
thereto included in the Company's Form S-1 Registration Statement (No.
333-25631).
4. ACQUISITIONS
On May 15, 1997, the Company purchased equipment and customer contracts related
to the commercial, industrial and residential solid waste collection business of
two subsidiaries of Waste Management, Inc. in and around Chattanooga, Tennessee.
The purchase price for these assets was approximately $11.8 million in cash. On
April 30, 1997, the Company purchased equipment and customer contracts related
to the solid waste collection business of Browning-Ferris Industries of South
Atlantic, Inc. ("BFISA") in and around Charleston, South Carolina. The purchase
price for these assets was approximately $5.2 million in cash. On March 21,
1997, the Company purchased equipment and customer contracts related to the
residential solid waste collection business of BFISA in and around Raleigh and
Durham, North Carolina. The purchase price for these assets was approximately
$782,000 in cash.
Components of cash used for these acquisitions reflected in the Unaudited
Condensed Financial Statements for the six months ended June 30, 1997 were as
follows:
Fair value of tangible assets acquired $ 4,530,747
Liabilities assumed (61,985)
------------------
4,468,762
Noncompete and consulting agreements 3,000
Goodwill 13,332,004
------------------
Cash paid for acquisitions $ 17,803,766
==================
Noncompete and consulting agreements are amortized using the straight-line
method over the lives of the agreements. Goodwill is amortized using the
straight-line method over 20 years. Such estimated useful lives assigned to
goodwill are based on the period over which management believes that such
goodwill can be recovered through undiscounted future operating cash flows of
the acquired operations.
The following unaudited pro forma results of operations assume the transactions
described above occurred as of January 1, 1996 and 1997 after giving effect to
certain adjustments, including the amortization of the excess of cost over the
underlying assets and as if the Company were subject to federal and all
applicable state corporate income taxes for the period assuming the tax rate
that would have applied had the Company been taxed as a C Corporation:
Six Months Ended June 30,
-------------------------------------
1996 1997
----------------- -----------------
Total revenues $48,769,648 $56,764,605
Operating income 4,243,707 5,762,575
Pro forma net income 1,891,156 2,751,397
Pro forma primary earnings per common share 0.19 0.27
The unaudited pro forma financial information does not purport to be indicative
of the results of operations that would have occurred had the transactions taken
place at the beginning of the periods presented or of future operating results.
5
5. SHAREHOLDERS' EQUITY
In June 1997, the Company completed an initial public offering in which it
issued 1,605,200 shares of common stock at a price of $13.50 per share resulting
in net proceeds after deduction of underwriting discounts and commissions and
other offering expenses to the Company of approximately $19.1 million. The
proceeds from the offering were used to repay revolving bank debt.
Subsequent to June 30, 1997, the Company's underwriters exercised their option
to purchase an additional 322,500 shares. The net proceeds after deduction of
underwriting discounts and commissions and other offering expenses to the
Company will be approximately $4.0 million. The Company used the proceeds to
repay revolving bank debt.
Supplementary net income per share, assuming that the net proceeds to the
Company from its initial public offering (based on the issuance by the Company
of 1,927,700 shares of common stock at the initial public offering price per
share of $13.50) were used to repay approximately $7.8 million of revolving bank
debt outstanding as of January 1, 1997, was $0.24 for the six months ended June
30, 1997. Such supplementary net income per share data assume the transaction
occurred at the beginning of the period. Weighted average shares outstanding
for purposes of this computation is 11,527,857.
6. CONTINGENCIES
Certain claims and lawsuits arising in the ordinary course of business have been
filed or are pending against the Company. In the opinion of management, all such
matters have been adequately provided for, are adequately covered by insurance,
or are of such kind that if disposed of unfavorably, would not have a material
adverse effect on the Company's financial position or results of operations.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN THE COMPANY'S REGISTRATION
STATEMENT ON FORM S-1 (NO. 333-25631). CERTAIN MATTERS DISCUSSED IN THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS ARE "FORWARD-LOOKING STATEMENTS" INTENDED
TO QUALIFY FOR THE SAFE HARBORS FROM LIABILITY ESTABLISHED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS CAN
GENERALLY BE IDENTIFIED AS SUCH BECAUSE THE CONTEXT OF THE STATEMENT WILL
INCLUDE WORDS SUCH AS THE COMPANY "BELIEVES," "ANTICIPATES," "EXPECTS" OR WORDS
OF SIMILAR IMPORT. SIMILARLY, STATEMENTS THAT DESCRIBE THE COMPANY'S FUTURE
PLANS, OBJECTIVES OR GOALS ARE ALSO FORWARD-LOOKING STATEMENTS. SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CURRENTLY
ANTICIPATED. SUCH RISKS AND UNCERTAINTIES INCLUDE THOSE RELATED TO THE ABILITY
TO MANAGE GROWTH, THE AVAILABILITY AND INTEGRATION OF ACQUISITION TARGETS,
COMPETITION, GEOGRAPHIC CONCENTRATION, GOVERNMENT REGULATION AND OTHERS SET
FORTH IN THE COMPANY'S REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-25631).
SHAREHOLDERS, POTENTIAL INVESTORS AND OTHER READERS ARE URGED TO CONSIDER THESE
FACTORS CAREFULLY IN EVALUATING THE FORWARD-LOOKING STATEMENTS AND ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. THE
FORWARD-LOOKING STATEMENTS MADE HEREIN ARE ONLY MADE AS OF THE DATE OF THIS
REPORT AND THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE SUCH
FORWARD-LOOKING STATEMENTS TO REFLECT SUBSEQUENT EVENTS OR CIRCUMSTANCES.
OVERVIEW
Waste Industries was founded by members of the current senior management team in
1970. The Company provides solid waste collection, transfer, recycling,
processing and disposal services to customers primarily in North Carolina and
South Carolina, Tennessee and Virginia.
The Company has acquired 19 solid waste collection operations since 1990. All of
these acquisitions were accounted for as purchases. Accordingly, the results of
operations of these acquired businesses have been included in the Company's
financial statements only from the respective dates of acquisition and have
affected period-to-period comparisons of the Company's operating results. The
Company anticipates that a substantial part of its future growth will come from
acquiring additional solid waste collection, transfer and disposal businesses
and, therefore, it is expected that additional acquisitions could continue to
affect period-to-period comparisons of the Company's operating results.
From 1986 until May 9, 1997, the Company was subject to taxation under
Subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"). As a
result, during that time the net income of the Company, for federal and certain
state income tax purposes, was reported by and taxable directly to the Company's
shareholders, rather than to the Company. Primarily to provide funds for tax
obligations payable by its shareholders on account of the Company's income in
1995 and 1996, the Company made cash distributions of approximately $3.1 million
and $1.8 million during 1996 and the six months ended June 30, 1997,
respectively, to its shareholders. In addition, in connection with its
conversion from S Corporation to C Corporation status, the Company effected an S
Corporation distribution (consisting of approximately $1.48 million in cash
payments) to the Company's S Corporation shareholders in June 1997. The
remaining S Corporation retained earnings of approximately $8.5 million have
been reclassified to additional capital. The Company's S Corporation status was
terminated on May 9, 1997 and, accordingly, the Company became fully subject to
federal and state income taxes on that date.
7
RESULTS OF OPERATIONS
GENERAL
The Company's branch waste collection operations generate revenues from fees
collected from commercial, industrial and residential collection and transfer
station customers. The Company derives a substantial portion of its collection
revenues from commercial and industrial services which are performed under
one-year to five-year service agreements. The Company's residential collection
services are performed either on a subscription basis with individual
households, or under contracts with municipalities, apartment owners, homeowners
associations or mobile home park operators. Residential customers on a
subscription basis are billed quarterly in advance and provide the Company with
a stable source of revenues. A liability for future service is recorded upon
billing and revenues are recognized at the end of each month in which services
are actually provided. Municipal contracts in the Company's existing markets are
typically awarded, at least initially, on a competitive bid basis and thereafter
on a bid or negotiated basis and usually range in duration from one to five
years. Municipal contracts provide consistent cash flow during the term of the
contracts.
The Company's prices for its solid waste services are typically determined by
the collection frequency and level of service, route density, volume, weight and
type of waste collected, type of equipment and containers furnished, the
distance to the disposal or processing facility, the cost of disposal or
processing, and prices charged in its markets for similar services.
The Company's ability to pass on price increases is sometimes limited by the
terms of its contracts. Long-term solid waste collection contracts typically
contain a formula, generally based on a predetermined published price index, for
automatic adjustment of fees to cover increases in some, but not all, operating
costs.
The Company currently operates approximately 100 convenience sites under
contract with 15 counties in order to consolidate waste in rural areas. These
contracts, which are usually competitively bid, generally have terms of one to
five years and provide consistent cash flow during the term of the contract
since the Company is paid regularly by the local government. The Company also
operates four recycling processing facilities as part of its collection and
transfer operations where it collects, processes, sorts and recycles paper
products, aluminum and steel cans, pallets, certain plastics, glass, and certain
other items. The Company's recycling facilities generate revenues from the
collection, processing and resale of recycled commodities, particularly recycled
wastepaper. Through a centralized effort, the Company resells recycled
commodities using commercially reasonable practices and seeks to manage
commodity pricing risk by spreading the risk among its customers. The Company
also operates curbside residential recycling programs in connection with its
residential collection operations in most of the communities it serves.
Operating expenses for the Company's collection operations include labor, fuel,
equipment maintenance and tipping fees paid to landfills. The Company owns or
operates 11 transfer stations which reduce the Company's costs by improving its
utilization of collection personnel and equipment and by consolidating the waste
stream to gain more favorable disposal rates. The Company does not currently own
or operate any solid waste landfills. In the event that the Company develops or
acquires landfills, operating expenses for such landfill operations may include
labor, equipment, legal and administrative, ongoing environmental compliance,
royalties to former owners, host community fees, site maintenance and accruals
for closure and post-closure maintenance. Cost of equipment sales primarily
consists of the Company's cost to purchase the equipment that it resells.
The Company capitalizes certain expenditures related to pending acquisitions or
development projects. Indirect acquisition and project development costs, such
as executive and corporate overhead, public relations and other corporate
services, are expensed as incurred. The Company's policy is to charge against
net income any unamortized capitalized expenditures and advances (net of any
portion thereof that the Company estimates to be recoverable, through sale or
otherwise) relating to any operation that is permanently shut down, any pending
acquisition that is not consummated and any landfill development project that is
not expected to be successfully completed. Engineering, legal, permitting,
construction and other costs directly associated with the acquisition or
development of a landfill, together with associated interest, are capitalized.
At June 30, 1996, the Company had recorded no such capitalized costs. At June
30, 1997, the Company had recorded $85,510 of capitalized land acquisition costs
in connection with the development of a new LCID landfill and $0 relating to
pending acquisitions. Because it currently does not own any landfills, the
Company does not accrue for estimated landfill closure and post-closure
maintenance costs.
Selling, general and administrative ("SG&A") expenses include management
salaries, clerical and administrative overhead, professional services, costs
associated with the Company's marketing and sales force and community relations
expense.
Property and equipment is depreciated over the estimated useful life of the
assets using the straight line method.
8
Other income and expense, which is comprised primarily of interest income and
gains and losses on sales of equipment, has not historically been material to
the Company's results of operations.
To date, inflation has not had a significant impact on the Company's operations.
The following table sets forth for the periods indicated the percentage of
revenues represented by the individual line items reflected in the Company's
Unaudited Condensed Statements of Operations:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- --------------------------------
1996 1997 1996 1997
--------------- -------------- -------------- --------------
Total revenues 100.0% 100.0% 100.0% 100.0%
Service revenues 98.2 98.6 98.2 98.6
Equipment sales 1.8 1.4 1.8 1.4
--------------- -------------- -------------- --------------
Total cost of operations 63.3 63.0 63.8 62.8
Selling, general and administrative 17.1 17.2 17.2 17.7
Depreciation and amortization 9.2 9.1 9.2 9.3
--------------- -------------- -------------- --------------
Operating income 10.4 10.7 9.8 10.2
Interest expense 2.8 2.8 2.6 2.7
Other income (0.4) (0.3) (0.5) (0.6)
--------------- -------------- -------------- --------------
Income before income taxes 8.0 8.2 7.7 8.1
Pro forma income taxes (1) 3.2 3.2 3.1 3.2
--------------- -------------- -------------- --------------
Pro forma net income (1) 4.8% 5.0% 4.6% 4.9%
=============== ============== ============== ==============
(1) For each of the periods presented, the Company was an S Corporation and,
accordingly, was not subject to federal and certain state corporate income
taxes. The pro forma information has been computed as if the Company were
subject to federal and all applicable state corporate income taxes for each of
the periods presented assuming the tax rate that would have applied had the
Company been taxed as a C Corporation. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Overview".
THREE AND SIX MONTHS ENDED JUNE 30, 1997 VS. THREE AND SIX MONTHS ENDED
JUNE 30, 1996
REVENUES. Total revenues increased approximately $4.8 million, or 20.7%, and
$8.3 million, or 18.9%, for the three and six-month periods, respectively, ended
June 30, 1997 as compared with 1996. These increases for each 1997 period were
attributable primarily to the following factors: (i) increased collection
volumes resulting from new municipal and commercial contracts and residential
subscriptions; and (ii) to a lesser extent, the effect of four businesses
acquired during the year ended December 31, 1996 and 3 businesses acquired
during the three months ended June 30, 1997.
COST OF OPERATIONS. Cost of operations increased $3.0 million, or 20.3%, and
$4.8 million, or 17.0%, for the three- and six-month periods ended June 30,
1997, respectively, compared to the same periods in 1996. The principal reason
for the increase was the addition of new customers and contracts, including
those from the acquisitions of new businesses, since June 30, 1996. Total cost
of operations as a percentage of revenues decreased to 63.0% from 63.3% in the
second quarter of 1997 compared to the second quarter of 1996 and to 62.8 % from
63.8% in the first half of 1997 compared to the first half of 1996. These
percentage decreases were primarily the result of increased route density and a
decrease in waste stream processing costs.
SG&A. SG&A increased $864,000, or 22.0%, and $1.7 million, or 22.8%, for the
three- and six-month periods ended June 30, 1997, respectively, compared to the
same periods in 1996. As a percentage of revenues, SG&A increased to 17.2% from
17.1% in the second quarter of 1997 compared to the second quarter of 1996 and
to 17.7% from 17.2% in the first half of 1997 compared to the first half of 1996
due primarily to increased costs for personnel necessary to support the
Company's acquisition program and to service new customers, including those
associated with the businesses.
9
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $416,000,
or 19.7%, and $753,000, or 18.4%, for the three- and six- month periods ended
June 30, 1997, respectively, compared to the same periods in 1996. The principal
reason for these increases was depreciation of additional property and equipment
acquired and put into service due to higher collection volumes and depreciation
of the additional assets of businesses acquired during 1995, 1996 and 1997.
Depreciation and amortization, as a percentage of revenues, remained relatively
constant for the three- and six- month periods ended June 30, 1997,
respectively, compared to the same periods in 1996.
INTEREST EXPENSE. Interest expense increased $128,000, or 19.7%, and $241,000,
or 21.0%, for the three- and six- month periods ended June 30, 1997,
respectively, compared to the same periods in 1996. These increases were
primarily due to the higher level of the average outstanding indebtedness
related to the Company's purchases of assets of businesses acquired and an
increase in the interest rates on outstanding borrowings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at June 30, 1997 was $1.2 million compared to $1.6
million at December 31, 1996. The Company's strategy in managing its working
capital has been to apply the cash generated from its operations which remains
available after satisfying its working capital and capital expenditure
requirements to reduce its indebtedness under its bank revolving credit facility
and to minimize its cash balances. The Company finances its working capital
requirements from internally generated funds and bank borrowings. The Company
believes that, in addition to internally generated funds, the Company has in
place financing arrangements to satisfy its currently anticipated working
capital needs in 1997. The Company has an established revolving credit facility
with BB&T allowing the Company to borrow up to $20 million for acquisitions and
capital expenditures and $5 million for working capital. In addition, the
Company has established two $25 million term loan facilities with Prudential
Insurance Company of America ("Prudential"). As of June 30, 1997, the Company
had fully drawn down one of these facilities, leaving the Company with an
uncommitted shelf facility with Prudential of $25 million. Both of the BB&T and
the Prudential credit facilities require the Company to maintain certain
financial ratios, such as current debt to total capitalization, debt to earnings
and fixed charges to earnings, and satisfy other predetermined requirements,
such as minimum net worth, net income and deposit balances. Interest on the BB&T
facility is payable monthly based on an adjusting spread to LIBOR. The 12-month
weighted average interest rate on outstanding borrowings under the BB&T facility
was 7.351% at June 30, 1997. Interest on the Prudential facility is paid
quarterly, based on a fixed rate of 7.28%. Of the Company's $50 million in
committed facilities, $5 million mature on April 1, 1999, with the remainder
maturing on April 1, 2006, subject to renewal.
Net cash provided by operating activities totaled $10.2 million for the six
months ended June 30, 1997, compared to $7.8 million for the six months ended
June, 1996. This increase was caused principally by the increases in trade
accounts payable and federal and state income taxes, as well as reductions in
trade accounts receivable, which was partially offset by increases in prepaid
and other current assets.
Net cash used in investing activities totaled $27.4 million for the six months
ended June 30, 1997, compared to $10.2 million in for the six months ended June
30, 1996. This increase was caused principally by the acquisition of certain
assets employed or arising in connection with commercial, industrial and
residential collection businesses for approximately $17.8 million and an
increase in capital expenditures of approximately $611,000.
Capital expenditures for 1997 are currently expected to be approximately $17.1
million, compared to $14.4 million in 1996. In 1997, approximately $13.0 million
is expected to be utilized for vehicle and equipment additions and replacements,
approximately $2.5 million for construction of a new LCID landfill site and
approximately $1.6 million for expansion of transfer station services. The
Company intends to fund its planned 1997 capital expenditures principally
through internally generated funds, proceeds of its initial public offering and
borrowings under existing credit facilities. In addition, the Company
anticipates that it may require substantial additional capital expenditures to
facilitate its growth strategy of acquiring solid waste collection and disposal
businesses. If the Company is successful in acquiring landfill disposal
facilities, the Company may also be required to make significant expenditures to
bring any such newly acquired disposal facilities into compliance with
applicable regulatory requirements, obtain permits for any such newly acquired
disposal facilities or expand the available disposal capacity at any such newly
acquired disposal facilities. The amount of these expenditures cannot be
currently determined, since they will depend on the nature and extent of any
acquired landfill disposal facilities, the condition of any facilities acquired
and the permitting status of any acquired sites.
10
Net cash provided by financing activities totaled $16.2 million for the six
months ended June 30, 1997, compared to $545,000 for the six months ended June
30, 1996. This increase was primarily attributable to the Company's June 1996
initial public offering in which it issued 1,605,200 shares of common stock at a
price of $13.50 per share resulting in net proceeds of approximately $19.1
million, after deduction of underwriting discounts and commissions and other
offering expenses to the Company, and distributions to shareholders and
affiliates of $3.3 million in 1997 compared to distributions of $4.0 million in
1996. This increase was partially offset by a decrease in net proceeds from
issuances of bank notes payable to $360,000 in 1997 from $4.6 million in 1996.
At June 30, 1997, the Company had approximately $33.6 million of long-term and
short-term borrowings outstanding and approximately $746,000 in letters of
credit. At June, 1997, the ratio of the Company's long-term debt to total
capitalization was 50.9% compared to 70.0% at December 31, 1996. The Company
used the net proceeds from its June 1997 sale of shares in its initial public
offering to repay all outstanding amounts under the BB&T revolving credit
facility. Subsequent to June 30, 1997, the Company's underwriters exercised
their option to purchase an additional 322,500 shares. The net proceeds after
deduction of underwriting discounts and commissions and other offering expenses
to the Company was approximately $4.0 million. The Company used the proceeds to
repay revolving bank debt.
SEASONALITY
The Company's results of operations tend to vary seasonally, with the first
quarter typically generating the least amount of revenues, higher revenues in
the second and third quarters, and a decline in the fourth quarter. This
seasonality reflects the lower volume of waste during the fall and winter
months. Also, certain operating and fixed costs remain relatively constant
throughout the calendar year, which when offset by these revenues results in a
similar seasonality of operating income.
11
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Shareholders of the Company was held on May 27, 1997. The
following is a brief description of each matter voted upon at the meeting and
the number of affirmative votes and the number of negative votes cast with
respect to each matter.
(a) The shareholders approved amendments to the Company's Articles of
incorporation to, among other things; (i) effect a 1-for-2.5 reverse stock split
of all outstanding capital stock (the "Reverse Split"); (ii) increase the number
of authorized shares of Common Stock to 80,000,000 shares; and (iii) provide for
conversion, upon consummation of the Company's initial public offering, of the
outstanding Voting Common Stock and Non-voting Common Stock of the Company into
a single class of voting Common Stock. 24,000,392 shares of Common Stock,
constituting all of the Company's outstanding capital stock, voted for these
amendments.
(b) The shareholders approved the adoption of the Company's 1997 Stock
Plan (the "Plan") and the reservation of 1,800,000 post-Reverse Split shares of
Common Stock for issuance thereunder. 24,000,392 shares of Common Stock,
constituting all of the Company's outstanding capital stock, voted to approve
the Plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibits filed with this Form 10-Q report are incorporated
herein by reference to the Exhibit Index accompanying this
report.
(b) No Current Reports on Form 8-K were filed during the quarter
ended June 30, 1997.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 13, 1997 Waste Industries, Inc.
By: /s/ Robert H. Hall
Robert H. Hall
Vice President, Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
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WASTE INDUSTRIES, INC.
EXHIBIT INDEX
SECOND QUARTER 1997
Exhibit Number Exhibit Description
11 Computations of Earnings Per Share
27 Financial Data Schedule
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
FINANCIAL STATEMENTS OF WASTE INDUSTRIES, INC. AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.