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 September 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 |X| NO |_|
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 October 31, 1997)
PART 1 - Financial Information
ITEM 1. FINANCIAL STATEMENTS
WASTE INDUSTRIES, INC.
CONDENSED BALANCE SHEETS
December 31, September 30,
1996 1997
------------ ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,803,438 $ 2,104,882
Accounts receivable - trade, less allowance for
uncollectible accounts (1996 - $616,000; 1997 - $821,000) 9,236,071 13,746,675
Inventories 1,973,810 1,255,496
Current deferred income taxes -- 470,000
Prepaid expenses and other current assets 414,533 571,693
------------ ------------
Total current assets 13,427,852 18,148,746
------------ ------------
PROPERTY AND EQUIPMENT, net 39,841,929 53,058,514
RECEIVABLES - AFFILIATED COMPANIES 1,175,205 1,164,150
INTANGIBLE ASSETS 3,698,963 24,780,221
OTHER NONCURRENT ASSETS 923,926 1,066,796
------------ ------------
TOTAL ASSETS $ 59,067,875 $ 98,218,427
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 155,492 $ 112,190
Accounts payable - trade 5,637,730 9,080,383
Federal and state income taxes payable -- 1,127,000
Accrued expenses and other liabilities 3,300,354 3,439,507
Accrued distributions 1,820,000 --
Deferred revenue 913,389 1,168,132
------------ ------------
Total current liabilities 11,826,965 14,927,212
------------ ------------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 33,070,228 41,196,119
NONCURRENT DEFERRED INCOME TAXES -- 5,108,000
SHAREHOLDERS' EQUITY:
Preferred stock, undesignated, shares authorized -
10,000,000, shares issued and outstanding - none -- --
Common stock, no par value, shares authorized -
80,000,000, shares issued and outstanding:
1996 - 9,600,157; 1997 - 11,527,857 91,989 23,246,093
Additional capital -- 8,500,000
Retained earnings 14,319,583 5,511,583
Shareholders' loans (240,890) (270,580)
------------ ------------
Total shareholders' equity 14,170,682 36,987,096
------------ ------------
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 59,067,875 $ 98,218,427
============ ============
See Notes to Unaudited Condensed Financial Statements.
2
WASTE INDUSTRIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
1996 1997 1996 1997
------------ ------------ ------------ ------------
REVENUES:
Service revenues $ 24,776,757 $ 31,246,413 $ 67,906,042 $ 82,723,386
Equipment sales 511,528 364,372 1,320,892 1,111,699
------------ ------------ ------------ ------------
Total revenues 25,288,285 31,610,785 69,226,934 83,835,085
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of service operations 16,141,606 19,729,566 43,609,753 52,034,716
Cost of equipment sales 394,132 218,607 941,202 692,408
------------ ------------ ------------ ------------
Total cost of operations 16,535,738 19,948,173 44,550,955 52,727,124
------------ ------------ ------------ ------------
Selling, general and administrative 4,441,918 5,450,152 11,982,699 14,707,307
Depreciation and amortization 2,174,206 2,837,547 6,268,866 7,685,341
------------ ------------ ------------ ------------
Total operating costs and expenses 23,151,862 28,235,872 62,802,520 75,119,772
------------ ------------ ------------ ------------
OPERATING INCOME 2,136,423 3,374,913 6,424,414 8,715,313
OTHER EXPENSE (INCOME):
Interest expense 626,303 618,329 1,773,288 2,006,097
Other (265,813) (180,828) (528,124) (434,189)
------------ ------------ ------------ ------------
Total other expense (income) 360,490 437,501 1,245,164 1,571,908
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,775,933 2,937,412 5,179,250 7,143,405
INCOME TAX EXPENSE:
Current and deferred -- 1,090,000 -- 1,715,000
Effect of change in tax status -- -- -- 4,300,000
------------ ------------ ------------ ------------
NET INCOME - HISTORICAL BASIS $ 1,775,933 $ 1,847,412 $ 5,179,250 $ 1,128,405
============ ============ ============ ============
PRO FORMA INCOME BEFORE
INCOME TAXES $ 1,775,933 $ 2,937,412 $ 5,179,250 $ 7,143,405
PRO FORMA INCOME TAXES 717,000 1,090,000 2,091,000 2,765,000
------------ ------------ ------------ ------------
PRO FORMA NET INCOME $ 1,058,933 $ 1,847,412 $ 3,088,250 $ 4,378,405
============ ============ ============ ============
PRO FORMA PRIMARY EARNINGS PER
COMMON SHARE $ 0.11 $ 0.16 $ 0.32 $ 0.41
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 9,927,472 11,918,774 9,819,811 10,759,703
============ ============ ============ ============
See Notes to Unaudited Condensed Financial Statements.
3
WASTE INDUSTRIES, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
1996 1997
---- ----
OPERATING ACTIVITIES:
Net income - historical basis $ 5,179,250 $ 1,128,405
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,268,866 7,685,341
Gain on sale of property and equipment (177,067) (70,486)
Provision for deferred income taxes -- 4,638,000
Changes in assets and liabilities, net:
Accounts receivable - trade (3,784,493) (2,752,918)
Inventories 856,022 755,856
Prepaid expenses and other current assets 113,644 (145,544)
Accounts payable - trade 2,363,307 3,442,653
Federal and state income taxes payable -- 1,127,000
Accrued expenses and other liabilities 188,971 130,808
Deferred revenue 239,499 215,082
------------ ------------
Net cash provided by operating activities 11,247,999 16,154,197
------------ ------------
INVESTING ACTIVITIES:
Other noncurrent assets (872,610) (282,200)
Advances to (borrowings from) affiliates (110,590) 11,055
Acquisitions of related businesses (267,835) (29,799,078)
Proceeds from sale of property and equipment 684,132 507,613
Purchase of property and equipment (12,273,256) (14,226,762)
------------ ------------
Net cash used in investing activities (12,840,159) (43,789,372)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 35,300,000 31,336,580
Principal payments on long-term debt (30,707,433) (23,267,970)
Repayments of notes payable to shareholders (318,884) --
Repayments of notes receivable from shareholders 267,324 (29,690)
Proceeds from exercise of stock options 44,756 --
Proceeds from issuance of common stock -- 23,154,104
Changes in partners' capital (1,816,215) --
Cash distributions to shareholders (3,119,782) (3,256,405)
------------ ------------
Net cash provided by (used in) financing activities (350,234) 27,936,619
------------ ------------
NET INCREASE (DECREASE) IN CASH (1,942,394) 301,444
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 2,071,010 1,803,438
------------ ------------
CASH & CASH EQUIVALENTS, END OF PERIOD $ 128,616 $ 2,104,882
============ ============
See Notes to Unaudited Condensed Financial Statements.
4
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 Company believes that 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. The condensed financial statements included herein should 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 Form S-1 Registration Statement (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 nine months ended September 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 September 30, 1997
were as follows:
Current deferred income tax assets related 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) related to:
Basis and depreciation differences $5,175,000
Other (67,000)
----------
Net current deferred tax liabilities $5,108,000
==========
5
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 public 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 Common
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 August 30, 1997, the Company purchased equipment and customer contracts
related to the commercial, industrial and residential solid waste collection and
recycling business of Browning-Ferris Industries of South Atlantic, Inc.
("BFISA") in and around Rocky Mount and Kinston, North Carolina. The purchase
price for these assets was approximately $12.0 million. 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 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 nine months ended September 30, 1997 were
as follows:
Fair value of tangible assets acquired $8,201,433
Liabilities assumed (61,985)
-----------
8,139,448
Noncompete and consulting agreements 4,000
Goodwill 21,655,630
-----------
Cash paid for acquisitions $29,799,078
===========
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 25 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, as well as those described in Note 7 below, 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:
Nine Months Ended September 30,
1996 1997
----------- ------------
Total revenues $91,836,804 $104,426,050
Operating income 10,279,399 12,287,836
Pro forma net income 4,498,346 5,657,164
Pro forma primary earnings per common share 0.45 0.52
6
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. 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.
On July 2, 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 were
approximately $4.1 million. The Company used the proceeds to repay revolving
bank debt.
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.
7. SUBSEQUENT EVENTS
On October 31, 1997, the Company purchased equipment and customer
contracts related to the solid waste collection businesses of American
Waste Systems, Inc. ("American") in Lilburn, Georgia and Garner Area
Disposal, Inc. ("Garner Disposal") in Garner, North Carolina. The purchase
price of the assets of American and Garner Disposal were approximately
$5.3 million and $635,000, respectively. The consideration paid for the
Garner Disposal acquisition included the issuance of 13,834 shares of the
Company's Common Stock with a fair value of approximately $285,000.
On October 17, 1997, the Company purchased equipment and customer
contracts related to the solid waste collection and recycling business
of Royal DispozAll, Inc. ("Royal") in Easley, South Carolina. The purchase
price of the assets of Royal was approximately $2.0 million. The
consideration paid to the seller included the issuance of 49,800 shares of
the Company's common stock with a fair value of approximately $1.0 million.
The Company used borrowings under its revolving credit facility to fund
these acquisitions.
In October 1997, the Company and BB&T executed a commitment letter (which
is subject to certain conditions) to modify their existing credit facility.
Under the terms of the commitment letter, the Company's borrowing capacity
for acquisition and capital expenditures would increase from $20 million to
$50 million and its borrowing capacity for working capital would increase
from $5 million to $10 million. The modified facility would require monthly
payments of interest, with a balloon repayment in full in five years. The
terms of the commitment letter would also have the effect of reducing
the current interest rate on the facility by approximately 0.75%.
7
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 23 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 nine months ended September 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.
8
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 September 30, 1996, the Company had recorded no such capitalized costs. At
September 30, 1997, the Company had recorded $85,510 of capitalized land
acquisition costs in connection with the development of a new Land Clearing and
Inert Debris ("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
expenses.
Property and equipment is depreciated over the estimated useful life of the
assets using the straight line method.
9
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 Nine Months Ended
September 30, September 30,
1996 1997 1996 1997
---- ---- ---- ----
Service revenues 98.0% 98.8% 98.1% 98.7%
Equipment sales 2.0 1.2 1.9 1.3
---- ---- ---- ----
Total cost of operations 65.4 63.1 64.3 62.9
Selling, general and administrative 17.6 17.2 17.3 17.5
Depreciation and amortization 8.6 9.0 9.1 9.2
---- ---- ---- ----
Operating income 8.4 10.7 9.3 10.4
Interest expense 2.5 2.0 2.6 2.4
Other income 1.1 0.6 0.8 0.5
---- ---- ---- ----
Income before income taxes 7.0 9.3 7.5 8.5
Pro forma income taxes(1) 2.8 3.4 3.0 3.3
---- ---- ---- ----
Pro forma net income(1) 4.2% 5.9% 4.5% 5.2%
==== ==== ==== ====
(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 NINE MONTHS ENDED SEPTEMBER 30, 1997 VS. THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES. Total revenues increased approximately $6.3 million, or 25.0%, and
$14.6 million, or 21.1%, for the three- and nine-month periods, respectively,
ended September 30, 1997 as compared with 1996. These increases 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 four businesses acquired
during the nine months ended September 30, 1997.
COST OF OPERATIONS. Total cost of operations increased $3.4 million, or 20.6%,
and $8.2 million, or 18.4%, for the three- and nine-month periods ended
September 30, 1997, respectively, compared to the same periods in 1996. The
principal reason for the increases was the addition of new customers and
contracts, including those from the acquisitions of new businesses, since
September 30, 1996. Total cost of operations as a percentage of revenues
decreased to 63.1% in the third quarter of 1997 compared to 65.4% in the third
quarter of 1996 and to 62.9 % in the first nine months of 1997 compared to 64.3%
in the first nine months of 1996. These percentage decreases were the result of
increased route density and a decrease in waste stream processing costs.
10
SG&A. SG&A increased $1.0 million, or 22.7%, and $2.7 million, or 22.7%, for the
three-and nine-month periods ended September 30, 1997, respectively, compared to
the same periods in 1996. As a percentage of revenues, SG&A decreased to 17.2%
in the third quarter of 1997 compared to 17.6% in the third quarter of 1996 and
increased to 17.5% in the first nine months of 1997 compared to 17.3% in the
first nine months of 1996. The increase in the first nine months of 1997 is due
primarily to increased costs during the first two quarters of 1997 for personnel
necessary to support the Company's acquisition program and to service new
customers, including those associated with the businesses. During the third
quarter of 1997, these costs were spread over an increased revenue base from
acquisitions and internal growth.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $660,000,
or 30.5%, and $1.4 million, or 22.6%, for the three- and nine-month periods
ended September 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 1996 and
1997. Depreciation and amortization, as a percentage of revenues, increased to
9.0% in the third quarter of 1997 compared to 8.6% in the third quarter of 1996,
and remained relatively stable for the first nine months of 1997 compared to the
first nine months of 1996. The increase in the third quarter of 1997 is
primarily due to acquisitions during the quarter.
INTEREST EXPENSE. Interest expense remained relatively stable for the third
quarter of 1997 compared to the third quarter of 1996, and increased
$232,000, or 13.1%, in the first nine months of 1997 compared to the
first nine months of 1996. The increase was 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 September 30, 1997 was $3.2 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. 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. See "Subsequent Events". In addition, the
Company has established two $25 million term loan facilities with Prudential
Insurance Company of America ("Prudential"). As of September 30, 1997,
the Company had fully drawn down one of these facilities, leaving the Company
with an uncommitted shelf facility 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. Interest on the Prudential facility is paid quarterly, based
on a fixed rate of 7.28%. The 12-month weighted average interest rate
on outstanding borrowings under the BB&T facility was 7.312% at September 30,
1997. 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. The Company has a compensating balance arrangement with
the bank for $370,000.
Net cash provided by operating activities totaled $16.2 million for the
nine months ended September 30, 1997, compared to $11.2 million for the
nine months ended September 30, 1996. This increase was caused
principally by the increases in depreciation and amortization, trade accounts
payable and federal and state income taxes, as well as reductions
in inventories, which was partially offset by increases in trade accounts
receivable.
Net cash used in investing activities totaled $43.8 million for the nine months
ended September 30, 1997, compared to $12.8 million for the nine months ended
September 30, 1996. This increase was caused principally by acquisitions
totaling approximately $29.8 million and an increase in capital expenditures of
approximately $2.0 million.
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Capital expenditures for 1997 are currently expected to be approximately $14.6
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
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.
Net cash provided by financing activities totaled $27.9 million for the
nine months ended September 30, 1997, compared to net cash of $350,000 used for
financing activities for the nine months ended September 30, 1996. This increase
was primarily attributable to: the Company's initial public offering, resulting
in net proceeds, after deduction of underwriting discounts and commissions and
other offering expenses to the Company, of approximately $23.2 million; and net
proceeds from issuances of, and lower principal payments on, long-term debt.
At September 30, 1997, the Company had approximately $41.3 million of long-term
and short-term borrowings outstanding and approximately $621,000 in letters of
credit. At September 30, 1997, the ratio of the Company's long-term debt to
total capitalization was 52.7% compared to 70.0% at December 31, 1996. The
Company used the net proceeds from its initial public offering 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.
SUBSEQUENT EVENTS
On October 31, 1997, the Company purchased equipment and customer contracts
related to the solid waste collection businesses of American Waste Systems, Inc.
("American") in Lilburn, Georgia and Garner Area Disposal, Inc. ("Garner
Disposal") in Garner, North Carolina. The purchase price of the assets of
American and Garner Disposal were approximately $5.3 million and $635,000,
respectively. The consideration paid for the Garner Disposal acquisition
included the issuance of 13,834 shares of the Company's Common Stock with
a fair value of approximately $285,000.
On October 17, 1997, the Company purchased equipment and customer contracts
related to the solid waste collection and recycling business of Royal
DispozAll, Inc. ("Royal") in Easley, South Carolina. The purchase price of the
assets of Royal was approximately $2.0 million. The consideration paid to the
seller included the issuance of 49,800 shares of the Company's Common Stock
with a fair value of approximately $1.0 million.
The Company used borrowings under its revolving credit facility to fund the
acquisitions.
In October 1997, the Company and BB&T executed a commitment letter (which is
subject to certain conditions) to modify their existing credit facility. Under
the terms of the commitment letter the Company's borrowing capacity for
acquisitions and capital expenditures would increase from $20 million to
$50 million and its borrowing capacity for working capital would increase
from $5 million to $10 million. The modified facility would require monthly
payments of interest, with a balloon repayment in full in five years. The
terms of the commitment letter would also have the effect of reducing
the current interest rate on the facility by approximately 0.75%.
12
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) No material modifications
(b) No material limitations or qualifications
(c) During the three months ended September 30, 1997, the Company issued
no unregistered securities.
(d) The Company's Registration Statement on Form S-1 (File No.
333-25631) was declared effective by the Commission on June 13, 1997,
and the Company made its initial public offering on that date. The
offering terminated on that date after sale, for a price to public of
$13.50 per share, of all 1,927,700 shares of Common Stock offered by
the Company, as well as all 544,800 shares offered by selling
shareholders. The managing underwriters were Alex. Brown & Sons
Incorporated and Deutsche Morgan Grenfell. The gross proceeds to the
Company were $26,024,000, approximately $2,870,000 of which was used
to pay expenses of the offering. The $23,154,000 net proceeds to the
Company were used to repay revolving bank debt.
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) Current Reports on Form 8-K were filed by the Company during the
quarter covered by this report on the following dates and for the following
reasons:
August 15, 1997 (relating to the Company's press release dated
August 14, 1997).
September 15, 1997 (relating to the Company's acquisition of the
assets of Browning Ferris Industries of South Atlantic, Inc.'s
("BFI") Rocky Mount and Kinston, North Carolina waste hauling and
recycling operations, excluding BFI's medical waste business.
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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: November 13, 1997 Waste Industries, Inc.
(Registrant)
By: /s/ Robert H. Hall
--------------------------------------
Robert H. Hall
Vice President, Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
14
WASTE INDUSTRIES, INC.
EXHIBIT INDEX
Third 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 NINE MONTHS
ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
15