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, 1998
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 12,263,390 shares
(Class) (Outstanding at August 11, 1998)
1
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WASTE INDUSTRIES, INC.
UNAUDITED CONDENSED BALANCE SHEETS
December 31, June 30,
1997 1998
------------- -------------
(Restated)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................... $ 1,083,922 $ 1,197,673
Accounts receivable - trade, less
allowance for uncollectible accounts
(1997 - $907,800; 1998 - $797,000) .......... 13,754,078 15,655,793
Inventories .................................. 842,439 1,353,807
Current deferred income taxes ................ 597,835 597,835
Prepaid expenses and other current assets .... 615,750 1,329,967
------------- -------------
Total current assets ................. 16,894,024 20,135,075
------------- -------------
PROPERTY AND EQUIPMENT, net .................. 64,464,923 78,380,853
INTANGIBLE ASSETS ............................ 29,977,579 32,630,627
OTHER NONCURRENT ASSETS ...................... 1,274,912 1,620,800
------------- -------------
TOTAL ASSETS ................................. $ 112,611,438 $ 132,767,355
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ......... $ 1,428,149 $ 2,029,891
Accounts payable - trade ..................... 8,399,155 10,909,755
Federal and state income taxes payable ....... 445,100 998,615
Accrued expenses and other liabilities ....... 3,715,247 3,869,011
Deferred revenue ............................. 1,023,883 1,196,352
------------- -------------
Total current liabilities ................ 15,011,534 19,003,624
------------- -------------
LONG-TERM DEBT, NET OF CURRENT MATURITIES .... 50,787,684 62,179,050
NONCURRENT DEFERRED INCOME TAXES ............. 5,702,000 6,352,000
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:
1997 - 11,881,604; 1998 - 11,881,604 ....... 27,384,567 27,386,411
Additional capital ........................... 8,500,000 8,500,000
Retained earnings ............................ 5,487,256 9,512,571
Shareholders' loans .......................... (261,603) (166,301)
------------- -------------
Total shareholders' equity ........... 41,110,220 45,232,681
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ... $ 112,611,438 $ 132,767,355
============= =============
See Notes to Unaudited Condensed Financial Statements.
2
WASTE INDUSTRIES, INC.
UNUADITED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
(Restated) (Restated)
REVENUES:
Service revenues ....................................... $ 30,390,312 $ 41,225,908 $ 57,161,797 $ 79,973,703
Equipment sales ........................................ 436,193 426,969 791,416 778,027
------------ ------------ ------------ ------------
Total revenues ..................................... 30,826,505 41,652,877 57,953,213 80,751,730
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of service operations ............................... 18,860,098 25,380,799 35,242,569 49,446,354
Cost of equipment sales .................................. 235,899 307,762 505,710 501,337
------------ ------------ ------------ ------------
Total cost of operations .............................. 19,095,997 25,688,561 35,748,279 49,947,691
------------ ------------ ------------ ------------
Selling, general and administrative ...................... 5,697,963 7,043,429 11,022,408 13,862,340
Depreciation and amortization ............................ 2,713,074 3,854,152 5,215,683 7,507,526
Merger Costs ............................................. -- 78,426 -- 78,426
------------ ------------ ------------ ------------
Total operating costs and expenses .................. 27,507,034 36,664,568 51,986,370 71,395,983
------------ ------------ ------------ ------------
OPERATING INCOME ........................................... 3,319,471 4,988,309 5,966,843 9,355,747
OTHER EXPENSE (INCOME):
Interest expense ......................................... 816,353 1,034,472 1,467,837 1,979,011
Other .................................................... (83,810) (191,184) (218,156) (336,033)
------------ ------------ ------------ ------------
Total other expense (income) .......................... 732,543 843,288 1,249,681 1,642,978
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES ................................. 2,586,928 4,145,021 4,717,162 7,712,769
INCOME TAX EXPENSE:
Current and deferred ..................................... 586,250 1,596,000 586,250 2,956,000
Effect of change in tax status ........................... 4,300,000 -- 4,300,000 --
------------ ------------ ------------ ------------
NET INCOME (LOSS) - HISTORICAL BASIS ...................... $ (2,299,322) $ 2,549,021 $ (169,088) $ 4,756,769
============ ============ ============ ============
PRO FORMA INCOME BEFORE INCOME TAXES ....................... $ 2,586,928 $ 4,145,021 $ 4,717,162 $ 7,712,769
PRO FORMA INCOME TAXES ..................................... 1,018,000 1,596,000 1,878,000 2,956,000
------------ ------------ ------------ ------------
PRO FORMA NET INCOME ....................................... $ 1,568,928 $ 2,549,021 $ 2,839,162 $ 4,756,769
============ ============ ============ ============
PRO FORMA EARNINGS PER SHARE:
BASIC ...................................................... $ 0.15 $ 0.21 $ 0.27 $ 0.39
============ ============ ============ ============
DILUTED .................................................... $ 0.14 $ 0.20 $ 0.26 $ 0.38
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
BASIC ...................................................... 10,575,260 12,263,390 10,423,658 12,263,390
============ ============ ============ ============
DILUTED .................................................... 10,930,959 12,659,461 10,779,357 12,609,503
============ ============ ============ ============
See Notes to Unaudited Condensed Financial Statements.
3
WASTE INDUSTRIES, INC.
UNUADITED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
---------------------------
1997 1998
------------ ------------
(Restated)
OPERATING ACTIVITIES:
Net income - historical basis .................... (169,088) 4,756,769
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .................. 5,215,682 7,507,526
Gain on sale of property and equipment ......... (52,791) (159,167)
Provision for deferred income taxes ............ 4,621,165 --
Changes in assets and liabilities, net of
effects from acquisitions of related businesses:
Accounts receivable - trade .................... (1,109,741) (1,560,809)
Inventories .................................... 541,624 (511,368)
Prepaid and other current assets ............... (482,133) (714,217)
Accounts payable - trade ....................... 2,109,492 2,510,600
Income taxes payable ........................... 287,000 1,203,515
Accrued expenses and other liabilities ......... (17,732) 153,764
Deferred revenue ............................... 10,711 131,020
------------ ------------
Net cash provided by operating activities .... 10,954,189 13,317,633
------------ ------------
INVESTING ACTIVITIES:
Other noncurrent assets ........................ (106,209) (445,730)
Acquisitions of related business ............... (17,803,766) (4,655,908)
Proceeds from sale of property and equipment ... 323,327 305,971
Purchase of property and equipment ............. (10,323,411) (17,807,170)
------------ ------------
Net cash used by investing activities ............ (27,910,059) (22,602,837)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ....... 19,563,645 69,682,464
Principal payments on long-term debt ........... (19,239,798) (59,649,766)
Repayments of notes from shareholders ............ (23,543) 95,302
Proceeds from issuance of common stock ......... 19,143,474 --
Capital contributions .......................... 154,356 --
Subchapter S distributions to shareholders ..... (3,256,405) (730,889)
Other .......................................... -- 1,844
------------ ------------
Net cash provided by financing activities ........ 16,341,729 9,398,955
------------ ------------
NET INCREASE (DECREASE) IN CASH .................. (614,141) 113,751
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ... 2,014,821 1,083,922
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......... $ 1,400,680 $ 1,197,673
============ ============
See Notes to Unaudited Condensed Financial Statements.
4
WASTE INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
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. The Company has restated
the previously issued financial statements for the three and six months ended
June 30, 1997 and the consolidated balance sheet as of December 31, 1997 to
reflect the acquisitions of Dumpsters, Inc. ("Dumpsters") and Reliable Trash
Service, Inc. ("RTS") in June 1998 for a total of 351,344 shares of Company
Common Stock, and accounted for using poolings-of-interests method. The merger
costs, consisting primarily of professional fees, were approximately $78,000
($48,000 after-tax). Prior to the mergers, Dumpsters and RTS had elected S
Corporation status for income tax purposes. As a result of the mergers,
Dumpsters and RTS terminated their S Corporation elections. Pro forma provisions
for income taxes are presented for the three- and six-month periods ended June
30, 1997 and 1998 as if Dumpsters and RTS had been taxed as C Corporations. See
also Note 2. The condensed financial statements included herein should be read
in conjunction with the financial statements of the Company's Annual report on
Form 10-K for the year ended December 31, 1997 and the related notes thereto.
On March 31, 1998, the Company exchanged 320,555 shares of its common stock for
all of the issued and outstanding shares of common stock of ECO Services, Inc.
("ECO") and Air Cargo Services, Inc. ("ACS"). Certain of the Company's executive
officers, whom are also Company's controlling shareholders, owned substantially
all of the common stock of ECO and ACS. Accordingly, the assets and liabilities
transferred have been accounted for at historical cost in a manner similar to
that of pooling of interests accounting pursuant to the provisions of AIN #39 of
APB Opinion No 16. The Company's financial statements have been restated to
include the accounts and operations for all periods presented.
Combined and separate results of operation of the Company prior to completion of
the mergers with Dumpsters and RTS for the three and six months ended months
ended June 30, 1997 and 1998 are as follows:
5
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ---------------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
Revenue:
Waste Industries, Inc. ....................... $ 29,892,482 $ 40,744,945 $ 56,085,167 $ 78,967,097
Dumpsters .................................... 134,936 165,431 269,872 299,631
RTS .......................................... 799,087 742,501 1,598,174 1,485,002
------------ ------------ ------------ ------------
$ 30,826,505 $ 41,652,877 $ 57,953,213 $ 80,751,730
============ ============ ============ ============
Income before income taxes:
Waste Industries, Inc. ....................... $ 2,364,209 $ 3,866,984 $ 4,271,724 $ 7,272,722
Dumpsters .................................... (10,670) (50,292) (21,340) (49,191)
RTS .......................................... 233,389 328,329 466,778 489,238
------------ ------------ ------------ ------------
$ 2,586,928 $ 4,145,021 $ 4,717,162 $ 7,712,769
============ ============ ============ ============
Net income - historical basis:
Waste Industries, Inc. ....................... $ (2,522,041) $ 2,270,984 $ (614,526) $ 4,316,722
Dumpsters .................................... (10,670) (50,292) (21,340) (49,191)
RTS .......................................... 233,389 328,329 466,778 489,238
------------ ------------ ------------ ------------
$ (2,299,322) $ 2,549,021 $ (169,088) $ 4,756,769
============ ============ ============ ============
Also during the six months ended June 30, 1998, the Company purchased equipment
and customer contracts related to commercial, industrial and residential solid
waste collection of four businesses, located in Durham, North Carolina, Dalton,
Georgia, Crossville, Tennessee and Lilburn, Georgia. These acquisitions were
accounted for as purchases and the total cash consideration paid was
approximately $4,656,000.
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 the Company's income in 1996 and
1997, during the six months ended June 30, 1997 the Company made cash
distributions of approximately $1.8 million to its S Corporation shareholders.
In connection with its conversion from S Corporation to C Corporation status, in
June 1997 the Company effected an S Corporation distribution (consisting of
approximately $1.5 million in cash payments) to the Company's S Corporation
shareholders. 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. In accordance with SFAS No. 109, the financial statements give
effect to the recognition of deferred tax expense of $4,300,000 as a result of
the termination of the Company's S Corporation election on May 9, 1997. 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.
Prior to the mergers, Dumpsters and RTS had elected S Corporation status for
income tax purposes. See Note 1. The recognition of the cumulative deferred tax
provision associated with Dumpsters' and RTS's conversions from S Corporations
to a C Corporations was immaterial to the Company's consolidated financial
statements.
6
3. PRO FORMA PRIMARY EARNINGS PER SHARE
Pro forma basic and diluted 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, for the 1997
1-for-2.5 reverse stock split and acquisitions accounted for applying the
pooling of interests method of accounting (including two acquisitions of
entities under common control during the quarter ending March 31, 1998). See
Note 6 to Company's Financial Statements for the year ended December 31, 1997
and the related notes thereto included in the Company's Form 10-K.
4. SHAREHOLDERS' EQUITY
On April 1, 1998 pursuant to its 1997 Stock Plan, the Company granted certain
employees options to purchase 88,164 shares of common stock at an exercise price
of $19.67 per share, which was the fair market value on the date of grant.
During the six months ended June 30, 1998, RTS made distributions of
approximately $731,000 to its former shareholders, primarily to fund 1997 and
1998 taxes owed.
5. 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
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 ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 1997. 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 FORM 10-K. 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,
South Carolina, Tennessee and Virginia.
The Company has acquired 31 solid waste collection operations since 1990.
Twenty-seven of these acquisitions were accounted for as purchases. Accordingly,
the results of operations of these acquired businesses accounted for as
purchases 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 common control mergers (ECO and ACS) and
poolings-of-interests (Dumpsters and RTS) have been included in the Company's
financial statements for all periods presented. 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 the Company's income in 1996 and
1997, during the six months ended June 30, 1997 the Company made cash
distributions of approximately $1.8 million to its S Corporation shareholders.
In connection with its conversion from S Corporation to C Corporation status, in
June 1997 the Company effected an S Corporation distribution (consisting of
approximately $1.5 million in cash payments) to the Company's S Corporation
shareholders. 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 18 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, 1998, the Company had recorded $85,510 of capitalized land
acquisition costs in connection with the development of a new Land Clearing and
Inner Debris ("LCID") landfill and $118,338 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.
9
Property and equipment is depreciated over the estimated useful life of the
assets using the straight line method.
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 Six Months
June 30, Ended June 30,
----------------- -----------------
1997 1998 1997 1998
----------------- -----------------
Total Revenues ..................... 100.0% 100.0% 100.0% 100.0%
Service revenues ................... 98.6 99.0% 98.6% 99.0%
Equipment sales .................... 1.4% 1.0% 1.4% 1.0%
----------------- -----------------
Total cost of operations ........... 61.9% 61.7% 61.7% 61.9%
Selling, general and
administrative ..................... 18.5% 16.9% 19.0% 17.2%
Depreciation and
amortization ....................... 8.8% 9.3% 9.0% 9.3%
Merger costs ....................... 0.0% 0.2% 0.0% 0.1%
----------------- -----------------
Operating income ................... 10.8% 11.9% 10.3% 11.5%
Interest expense ................... 2.6% 2.5% 2.5% 2.5%
Other income ....................... (0.3)% (0.5)% (0.4)% (0.4)%
----------------- -----------------
Income before income taxes ......... 8.5% 9.9% 8.2% 9.4%
Pro forma income taxes (1) ......... 3.3% 3.8% 3.2% 3.7%
----------------- -----------------
Pro forma net income (1) ........... 5.2% 6.1% 5.0% 5.7%
================= =================
(1) For each of the 1997 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, 1998 VS. THREE AND SIX MONTHS ENDED JUNE 30,
1997
REVENUES. Total revenues increased approximately $10.8 million, or 35.1%, and
$22.8 million, or 39.3%, for the three- and six-month periods ended June 30,
1998, respectively, as compared to the same periods in 1997. These increases for
each 1998 period were attributable primarily to the following factors: (i) the
effect of seven businesses acquired during the year ended December 31, 1997 and
four businesses acquired during the six months ended June 30, 1998; and (ii) to
a lesser extent, increased collection volumes resulting from new municipal and
commercial contracts and residential subscriptions.
COST OF OPERATIONS. Total cost of operations increased $6.6 million, or 34.5%,
and $14.2 million, or 39.7%, for the three- and six-month periods ended June 30,
1998, respectively, compared to the same periods in 1997. These increases for
each 1998 period were attributable primarily to the following factors: (i) the
effect of seven businesses acquired during the year ended December 31, 1997 and
four businesses acquired during the six months ended June 30, 1998; and (ii) to
a lesser extent, increased collection volumes resulting from new municipal and
commercial contracts and residential subscriptions.
SG&A. SG&A increased $1.3 million, or 23.6%, and $2.8 million, or 25.8%, for the
three- and six-month periods ended June 30, 1998, respectively. As a percentage
of revenues, SG&A decreased from 18.5% to 16.9% in the second quarter of 1998
compared to the second quarter of 1997 and from 19.0% to 17.2% in the first half
of 1998 compared to the first half of 1997, due primarily to synergies achieved
through acquisitions.
10
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $1.1
million, or 42.1%, and $2.3 million, or 43.9%, for the three- and six-month
periods ended June 30, 1998, respectively, compared to the same periods in 1997.
Depreciation and amortization, as a percentage of revenues, has increased to
9.3% from 8.8% and to 9.3% from 9.0% for the three- and six-month periods ended
June 30, 1998, respectively, compared to the same periods in 1997. The principal
reasons for these increases was due to 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.
INTEREST EXPENSE. Interest expense increased $218,000, or 26.7%, and $511,000,
or 34.8%, for the three- and six-month periods ended June 30, 1998,
respectively, compared to the same periods in 1997. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at June 30, 1998 was $1.1 million compared to $1.9
million at December 31, 1997. 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 1998.
The Company has a revolving credit facility with BB&T allowing the Company to
borrow up to $50 million for acquisitions and capital expenditures and $10
million for working capital. As of June 30, 1998, approximately $11.0 million
was outstanding under the BB&T facility, which matures in November 2002. In
addition, on June 30, 1998, the Company increased and extended its credit
facilities with Prudential Insurance Company of America ("Prudential"). As a
result, the Company has two $25 million term loan facilities and a $50 million
shelf facility with Prudential. As of June 30, 1998, the Company had fully drawn
down both Prudential term facilities, leaving the Company with an uncommitted
shelf facility of $50 million. Both 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. The 12-month weighted average interest
rate on outstanding borrowings under the BB&T facility was 6.84% at June 30,
1998. Interest on the BB&T facility is payable monthly based on an adjusting
spread to LIBOR. Interest on the Prudential term facilities is paid quarterly,
based on fixed rates of 7.28% and 6.96%, respectively. Of the Company's
committed Prudential facilities, $25 million mature in April 2006 and $25
million mature in June 2008, subject to renewal. As of June 30, 1998, the
Company had a compensating balance arrangement with BB&T for $370,000.
Net cash provided by operating activities totaled $13.3 million for the
six-months ended June 30, 1998, compared to $11.0 million for the six months
ended June 30, 1997. This increase was caused principally by the increases in
net income and in depreciation and amortization, partially offset by a decrease
in the provision for deferred income taxes, primarily as a result of the change
in the Company's status from an S Corporation to a C Corporation in May 1997.
Net cash used in investing activities totaled $22.6 million for the six months
ended June 30, 1998, compared to $27.9 million for the six months ended June
30, 1997. This decrease was caused principally by the acquisition of certain
assets employed or arising in connection with a residential collection business
in 1997 not recurring at the same level in 1998, which was offset by an increase
in purchases of property and equipment of approximately $7.5 million.
Capital expenditures for 1998 are currently expected to be approximately $23.8
million, compared to $22.5 million in 1997. In 1998, approximately $17.9 million
is expected to be utilized for vehicle and equipment additions and replacements,
approximately $0.5 million for expansion of transfer station services and
approximately $5.4 million for facilities, additions and improvements. The
Company intends to fund its planned 1998 capital expenditures principally
through internally generated funds 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.
11
Net cash provided by financing activities totaled $9.4 million for the six
months ended June 30, 1998, compared to $16.3 million for the six months ended
June 30, 1997. The decrease was primarily attributable to: (i) the Company's
June 1997 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; and (ii) net borrowings of long-term
debt of approximately $10.0 million in 1998 as compared to net proceeds of
$324,000 in 1997. The Company made S Corporation distributions to the former
shareholders of RTS of approximately $731,000 in 1998, primarily to fund 1997
and 1998 taxes owed. Primarily to provide funds for tax obligations payable by
its shareholders on account of the Company's income in 1996 and 1997, during the
six months ended June 30, 1997 the Company made cash distributions of
approximately $1.8 million to its S Corporation shareholders. In connection with
its conversion from S Corporation to C Corporation status, the Company effected
an S Corporation distribution (consisting of approximately $1.5 million in cash
payments) to the Company's S Corporation shareholders in June 1997.
At June 30, 1998, the Company had approximately $64.2 million of long-term and
short-term borrowings outstanding and approximately $580,013 in letters of
credit. At June 30, 1998, the ratio of the Company's long-term debt to total
capitalization was 57.9% compared to 55.5% at December 31, 1997.
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.
YEAR 2000 TECHNOLOGY ISSUES
The Company has made, and will continue to make, certain modifications to its
computer hardware and software systems and applications to ensure they are
capable of handling dates in the year 2000 and thereafter. The Company's major
computer systems have been updated and other systems are being analyzed for
potential modifications. The Company is in the process of formal communications
with its significant suppliers, business partners, and customers to determine
the extent to which it may be affected by these third parties' plans to
remediate their own year 2000 issues in a timely manner. Although there can be
no assurances as such, the financial impact on the Company is not anticipated to
be material to its financial position or results of operations.
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PART II
ITEM 4. SUBMISION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on May 26, 1998. 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 elected the following persons as directors of the
Company: Lonnie C. Poole, Jr.; Jim W. Perry; Robert H. Hall; J. Gregory
Poole, Jr.; and Thomas F. Darden. The votes for and against (withheld) each
nominee were as follows:
Votes Votes Votes
Nominee For Withheld Abstained
------- --- -------- ---------
Lonnie C. Poole, Jr. 8,539,291 0 0
Jim W. Perry 8,539,291 0 0
Robert H. Hall 8,539,291 0 0
J. Gregory Poole, Jr. 8,539,291 0 0
Thomas F. Darden 8,539,291 0 0
(b) The shareholders ratified the appointment of Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year ending December 31, 1998,
with 8,538,291 shares voting for, 200 shares against and 800 shares abstained.
ITEM 5. OTHER INFORMATION
Pursuant to recently amended Rule 14a-4 promulgated under the Securities
Exchange Act of 1934, as amended, any shareholder seeking to have a proposal
considered at the 1999 Annual Meeting of Shareholders must notify the Company of
such proposal by March 16, 1999 or the persons acting as proxies may exercise
their discretionary voting authority on the proposal notwithstanding that the
shareholders have not been advised of the proposal prior to the meeting.
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 reports on Form 8-K were filed during the quarter ended June 30,
1998.
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 14, 1998 Waste Industries, Inc.
(Registrant)
By: /s/ Robert H. Hall
------------------------
Robert H. Hall
Vice President, Chief Financial Officer
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WASTE INDUSTRIES, INC.
EXHIBIT INDEX
SECOND QUARTER 1998
Exhibit Number Exhibit Description
10.4 Note Purchase and Private Shelf Agreement with The Prudential
Insurance Company of America dated as of June 30, 1998
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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
14