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, 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 13,380,905 shares
(Class) (Outstanding at November 15, 1998)
1
PART 1 - Financial Information
Item 1. Financial Statements
WASTE INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1997 1998
------------------ ------------------
(Restated) (unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,175,557 $2,391,575
Accounts receivable - trade, less allowance for
uncollectible accounts (1997 - $907,900; 1998 -
$723,900) 13,889,571 17,518,694
Inventories 842,439 1,938,922
Current deferred income taxes 597,835 597,835
Prepaid expenses and other current assets 615,750 1,028,798
------------------ ------------------
Total current assets 17,121,152 23,475,824
------------------ ------------------
PROPERTY AND EQUIPMENT, net 65,043,853 85,776,923
INTANGIBLE ASSETS 29,977,579 61,878,943
OTHER NONCURRENT ASSETS 1,274,911 1,861,861
================== ==================
TOTAL ASSETS $113,417,495 $172,993,551
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,795,265 $ 1,716,323
Accounts payable - trade 8,399,155 7,790,503
Federal and state income taxes payable 445,100 431,294
Accrued expenses and other liabilities 3,777,793 4,832,136
Deferred revenue 1,023,883 1,421,494
------------------ ------------------
Total current liabilities 15,441,196 16,191,750
------------------ ------------------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 50,787,684 86,881,107
NONCURRENT DEFERRED INCOME TAXES 5,702,000 7,002,000
DISPOSAL SITE CLOSURE AND LONG-TERM CARE OBLIGATIONS 275,000 302,892
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 - 12,651,701; 1998 - 13,380,905 27,119,623 41,148,148
Additional capital 8,520,000 6,981,276
Retained earnings 5,833,595 14,490,799
Shareholders' loans (261,603) (4,421)
------------------ ------------------
Total shareholders' equity 41,211,615 62,615,802
------------------ ------------------
================== ==================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $113,417,495 $172,993,551
================== ==================
See Notes to Unaudited Condensed Consolidated Financial Statements.
2
WASTE INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1998 1997 1998
------------------- ---------------- ------------------ ----------------
(Restated) (Restated)
REVENUES:
Service revenues $34,583,073 $44,539,733 $92,238,712 $124,982,002
Equipment sales 373,428 556,438 1,164,844 1,334,465
------------------- ---------------- ------------------ ----------------
Total revenues 34,956,501 45,096,171 93,403,556 126,316,467
------------------- ---------------- ------------------ ----------------
OPERATING COSTS AND EXPENSES:
Cost of service operations 21,383,451 27,880,071 56,785,349 77,326,428
Cost of equipment sales 223,441 422,555 729,151 923,892
------------------- ---------------- ------------------ ----------------
Total cost of operations 21,606,892 28,302,626 57,514,500 78,250,320
------------------- ---------------- ------------------ ----------------
Selling, general and administrative 6,474,447 6,920,760 17,611,619 20,839,109
Depreciation and amortization 3,037,367 4,215,847 8,281,617 11,860,341
Merger Costs - 153,333 - 400,410
Start-up costs - 101,175 - 101,175
------------------- ---------------- ------------------ ----------------
Total operating costs and expenses 31,118,706 39,693,741 83,407,736 111,451,355
------------------- ---------------- ------------------ ----------------
OPERATING INCOME 3,837,795 5,402,430 9,995,820 14,865,112
OTHER EXPENSE (INCOME):
Interest expense 665,367 1,196,291 2,138,954 3,191,344
Other (158,986) (144,516) (377,142) (480,888)
------------------- ---------------- ------------------ ----------------
Total other expense (income) 506,381 1,051,775 1,761,812 2,710,456
------------------- ---------------- ------------------ ----------------
INCOME BEFORE INCOME TAXES 3,331,414 4,350,655 8,234,008 12,154,656
INCOME TAX EXPENSE:
Current and deferred 1,090,000 1,470,000 1,715,000 4,246,000
Effect of change in tax status 4,300,000
=================== ================ ================== ================
NET INCOME - HISTORICAL BASIS $2,241,414 $2,880,655 $2,219,008 $7,908,656
=================== ================ ================== ================
EARNINGS PER SHARE - HISTORICAL BASIS:
BASIC $0.18 $0.22 $0.19 $0.62
DILUTED $0.17 $0.22 $0.19 $0.60
PRO FORMA INCOME BEFORE
INCOME TAXES $3,331,414 $4,350,655 $8,234,008 $12,154,656
PRO FORMA INCOME TAXES 1,275,000 1,530,000 3,150,000 4,486,000
PRO FORMA NET INCOME $2,056,414 $2,820,655 $5,084,008 $7,668,656
PRO FORMA EARNINGS PER SHARE:
BASIC $0.16 $0.22 $0.45 $0.60
DILUTED $0.16 $0.21 $0.43 $0.59
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
BASIC 12,580,900 12,816,743 11,401,613 12,706,715
DILUTED 12,978,984 13,218,295 11,784,321 13,095,573
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
WASTE INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1997 1998
------------ -------------
(Restated)
OPERATING ACTIVITIES:
Net income - historical basis 2,219,008 7,908,656
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,281,617 11,860,341
Gain on sale of property and equipment (70,484) (200,881)
Provision for deferred income taxes 4,621,165 1,300,000
Changes in assets and liabilities, net of effects from
acquisitions of related businesses:
Accounts receivable - trade (3,125,284) (339,901)
Inventories 755,856 (1,096,483)
Prepaid and other current assets (179,459) (387,580)
Accounts payable - trade 3,460,227 (608,652)
Income taxes payable 1,165,748 (13,806)
Accrued expenses and other liabilities 333,320 41,530
Deferred revenue 216,120 (199,729)
------------ -------------
Net cash provided by operating activities 17,677,834 18,263,495
------------ -------------
INVESTING ACTIVITIES:
Other noncurrent assets (282,200) (586,950)
Acquisitions of related business, net of cash acquired (29,799,078) (25,913,210)
Proceeds from sale of property and equipment 507,610 552,043
Purchases of property and equipment (15,197,722) (24,058,985)
------------ -------------
Net cash used by investing activities (44,771,390) (50,007,102)
------------ -------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 31,886,580 102,688,615
Principal payments on long-term debt (23,585,904) (69,224,542)
Repayments of notes receivable from shareholders - 257,182
Increase in shareholder loans (127,829) -
Proceeds from issuance of common stock 23,154,104 -
Capital contributions 156,986 -
Subchapter S distributions to shareholders (3,359,092) (789,589)
Other - 27,959
------------ -------------
Net cash provided by financing activities 28,124,845 32,959,625
------------ -------------
NET INCREASE (DECREASE) 1,031,289 1,216,018
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,079,681 1,175,557
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $3,110,970 $2,391,575
============ ============
See Notes to Unaudited Condensed Consolidated 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 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 included in the
Company's Form S-4 Registration Statement (No. 333-63587).
Recent Developments
Poolings-of-Interests Transactions:
The Company has restated the previously issued financial statements for the
three and nine months ended September 30, 1997 and the consolidated balance
sheet as of December 31, 1997 to reflect the following acquisitions accounted
for as poolings-of-interests:
o On August 28, 1998, the Company acquired, in exchange for 388,311 shares
of Company common stock valued at approximately $8.5 million, all of the
outstanding stock of Railroad Avenue Disposal, Inc. ("RAD"), a Mississippi
corporation that owns and operates a Class I rubbish pit and sand and gravel
operation in northwest Mississippi. As a result of this transaction, the
Company now owns and operates its first landfill. This acquisition also
complements the Company's recently acquired solid waste collection operations
in and around Memphis, Tennessee.
o On June 30, 1998, the Company exchanged 330,000 shares of its common stock
with a fair value of approximately $7.4 million for all of the issued and
outstanding shares of common stock of Reliable Trash Service, Inc.("RTS"), a
Maryland corporation based in Columbia, Maryland and engaged in the solid
waste collection business in Tidewater Virginia. This acquisition further
expands the Company's operations in Virginia.
o On June 16, 1998, the Company exchanged 21,344 shares of its common stock
with a fair value of approximately $449,000 for all of the issued and
outstanding shares of common stock of Dumpsters, Inc. ("Dumpsters"), a
Tennessee corporation engaged in the industrial solid waste collection
business in and around Memphis, Tennessee. This "tuck-in" acquisition
complements the recent ECO Services, Inc. acquisition, increasing the
Company's route density in the Shelby County, Tennessee.
The merger costs, consisting primarily of professional fees, were approximately
$400,000 ($252,000 after-tax). Prior to these acquisitions, RAD, RTS and
Dumpsters had elected S Corporation status for income tax purposes. As a result
of these mergers, RAD, RTS and Dumpsters, terminated their S Corporation
elections. As a result, pro forma provisions for income taxes are presented for
the three- and nine-month periods ended September 30, 1997 and 1998 as if RAD,
RTS and Dumpsters had been taxed as C Corporations.
Purchase Acquisitions:
Also during the nine months ended September 30, 1998, the Company made the
following acquisitions accounted for as purchases:
o On September 10, 1998, the Company acquired, in exchange for
approximately $10.0 million in cash plus 706,730 shares of Company common
stock valued at approximately $13.5 million, all of the outstanding stock of
TransWaste Services, Inc. ("TransWaste"), a Georgia corporation engaged in
solid waste collection and the development, ownership and operation of four
transfer stations and a landfill in Albany, Georgia. This acquisition will be
accounted for as a purchase, and will expand the Company's operations in
Georgia and provide the Company with its second landfill.
o August 28, 1998, the Company acquired, in exchange for approximately $7.6
million in cash plus 22,474 shares of Company common stock valued at
approximately $500,000, certain assets of Greater Atlanta Sanitation, Inc., a
solid waste collection business in and around Atlanta, Georgia. This
acquisition will be accounted for as a purchase, and will further expand the
Company's operations in Georgia.
o In March 1998, the Company purchased equipment and customer contracts
related to the commercial, industrial and residential solid waste collection
businesses of: Action Waste Systems, Inc., located in Lithia Springs,
Georgia; Waste Disposal Services, Inc., located in Tunnel Hill, Georgia; and
L&M Garbage Service, located in Durham, North Carolina. The total purchase
price for these assets was approximately $4.7 million in cash. The Waste
Disposal Services and L&M acquisitions are "tuck-in" acquisitions that
increase the Company's route density in areas already served. The Action
Waste Systems acquisition further expands the Company's operations in
Georgia.
Addionally, 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 CargoServices, Inc. ("ACS"). Certain of the
Company's executive officers, whom are also the 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 OpinionNo 16. The Company's
financial statements have been restated to include the accounts and operations
for all periods presented.
Combined and separate results of operations of the Company prior to completion
of the Poolings-of-Interests transactions with RAD, Dumpsters and RTS for the
three and nine months ended September 30, 1997 and 1998 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1997 1998 1997 1998
----------- ----------- ----------- ------------
Revenue:
Waste Industries, Inc. $34,745,816 $44,933,907 $90,830,986 $123,901,005
Dumpsters - - 269,872 299,631
RTS - - 1,598,174 1,485,002
RAD 210,685 162,264 704,524 630,829
----------- ----------- ----------- ------------
$34,956,501 $45,096,171 $93,403,556 $126,316,467
=========== =========== =========== ============
Income before income taxes:
Waste Industries, Inc. $3,280,282 $4,338,301 $7,552,007 $11,611,022
Dumpsters - - (21,340) (49,191)
RTS - - 466,778 489,238
RAD 51,132 12,354 236,563 103,587
----------- ----------- ----------- ------------
$3,331,414 $4,350,655 $8,234,008 $12,154,656
=========== =========== =========== ============
5
Net income (loss) - historical basis:
Waste Industries, Inc. $2,190,282 $2,868,301 $1,537,007 $7,365,022
Dumpsters - - (21,340) (49,191)
RTS - - 466,778 489,238
RAD 51,132 12,354 236,563 103,587
---------- ---------- ---------- ----------
$2,241,414 $2,880,655 $2,219,008 $7,908,656
========== ========== ========== ==========
Components of cash used for the purchase acquisitions reflected in the unaudited
condensed consolidated statement of cash flows for the nine months ended
September 30, 1998 are as follows:
Fair value of tangible assets acquired 10,728,972
Liabilities assumed (4,188,453)
Noncompete agreements and contracts 22,284,098
Goodwill 11,088,572
----------
Common stock issued (729,204 shares) (13,999,979)
Cash paid in acquisitions $25,913,210
===========
Noncompete agreements and contracts 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.
In accordance with the purchase method of accounting, the purchase price has
been allocated to the underlying assets and liabilities based on their
respective fair values at the dates of acquisition. Such allocation has been
based on preliminary estimates which may be revised at a later date.
The unaudited pro forma results of operations below assume that 1997 and 1998
acquisitions accounted for as purchases occurred at the beginning of 1997. In
addition to combining the historical results of all such acquired entities, the
pro forma calculations include adjustments for amortization of various
intangibles acquired in conjunction with the acquisitions.
Nine Months Ended September 30,
1997 1998
(Unaudited) (Unaudited)
Total net revenue $141,303,395 $126,243,545
Pro forma Net income $ 8,403,298 $ 7,729,319
Pro forma Earnings per share - basic $ 0.63 $ 0.58
Pro forma Earnings per share - diluted $ 0.61 $ 0.56
The pro forma financial information does not purport to be indicative of the
results of operations, which would actually have been recognized had the
purchase transactions been completed on January 1, 1997 or which may be realized
in the future.
6
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
1996 and 1997, during the six months ended June 30, 1997 the Company made cash
distributions of approximaely $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 SFAS No. 109, the financial statements give effect
to the recognition of deferred tax expense of $4.3 million as a result of the
termination of the Company's S Corporation election on May 9, 1997.
Additionally, certain companies acquired in poolings-of-interests transactions
were previously taxed as S Corporations. 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.
7
3. PRO FORMA 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 ended March 31, 1998). 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 10-K.
4. SHAREHOLDERS' EQUITY
On September 10, 1998, the Company acquired, in exchange for approximately $10.0
million in cash plus 706,730 shares of Company common stock valued at
approximately $13.5 million, all of the outstanding stock of TransWaste. See
Note 1.
On August 28, 1998, the Company acquired, in exchange for approximately $7.6
million in cash plus 22,474 shares of Company common stock valued at
approximately $500,000, certain assets of Greater Atlanta Sanitation, Inc., a
solid waste collection business in and around Atlanta, Georgia. See Note 1.
On April 1, 1998 pursuant to its 1997 Stock Option Plan, the Company granted
certain employees options to purchase 88,164 shares of common stock at an
exercise price of $19.69 per share, which was the fair market value on the date
of grant.
During the nine months ended September 30, 1998, RTS made distributions of
approximately $731,000 to its former shareholders to fund 1997 and 1998 taxes
owed.
In 1997, the Company completed an initial public offering in which it issued
1,927,700 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 $23.2 million. The proceeds
from the offering were used to repay revolving bank debt.
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.
The Company will have material financial obligations relating to closure and
post-closure of landfill facilities which it acquired during the three month
period ended September 30, 1998. The Company provides accruals for future
obligations (generally for a term of 30 to 40 years after final closure of the
landfill) based on engineering estimates of consumption of permitted landfill
airspace over the useful life of the landfill. There can be no assurance that
the Company's ultimate financial obligations for actual closing or post-closing
costs will not exceed the amount accrued and reserved or amounts otherwise
receivable pursuant to insurance policies or trust funds. Such a circumstance
could have a material adverse effect on the Company's financial condition and
results of operation.
8
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 and
South Carolina, Mississippi, Tennessee and Virginia.
The Company has acquired 34 solid waste collection operations since 1990.
Twenty-nine 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
the poolings-of-interests transactions (RAD, RTS and Dumpsters) 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 account of the Company's income in
1996 and 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. 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.
9
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. As a result of the RAD and
TransWaste business combinations, the Company owns and operates two landfills.
Operating expenses for these landfill operations include labor, equipment, legal
and administrative, ongoing environmental compliance, 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, 1998, the Company had recorded $519,000 of capitalized land
acquisition costs in connection with the development of a new land clearing and
inner debris ("LCID") landfill and $3,000 relating to pending acquisitions.
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.
10
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,
------------------------------ ---------------------------------
1997 1998 1997 1998
--------- --------- ----------- ---------
Total Revenues 100.0% 100.0% 100.0% 100.0%
Service revenues 98.9% 98.8% 98.8% 98.9%
Equipment sales 1.1% 1.2% 1.2% 1.1%
--------- --------- ----------- ---------
Total cost of operations 61.8% 62.8% 61.5% 61.9%
Selling, general and administrative 18.5% 15.3% 18.9% 16.5%
Depreciation and amortization 8.7% 9.4% 8.9% 9.4%
Merger costs 0.0% 0.3% 0.0% 0.3%
Start-up costs 0.0% 0.2% 0.0% 0.1%
--------- --------- ----------- ---------
Operating income 11.0% 12.0% 10.7% 11.8%
Interest expense 1.9% 2.6% 2.3% 2.4%
Other income (0.4)% (0.3)% (0.4)% (0.4)%
--------- --------- ----------- ---------
Income before income taxes 9.5% 9.7% 8.8% 9.8%
Pro forma income taxes (1) 3.6% 3.4% 3.4% 3.6%
--------- --------- ----------- ---------
Pro forma net income (1) 5.9% 6.3% 5.4% 6.2%
========= ========= =========== =========
(1) For the period from January 1, to May 8, 1997, 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, 1998 VS. THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES. Total revenues increased approximately $10.1 million, or 29.0%, and
$32.9 million, or 35.2%, for the three- and nine-month periods ended September
30, 1998, respectively, as compared with 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 six businesses acquired during the nine months ended
September 30, 1998; and (ii) to a lesser extent, increased collection volumes
resulting from new municipal and commercial contracts and residential
subscriptions.
COST OF OPERATIONS. Cost of operations increased $6.7 million, or 31.0%, and
$20.7 million, or 36.1%, for the three- and nine-month periods ended September
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 six businesses acquired during the nine-months ended September 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 $446,000 or 6.9%, and $3.2 million, or 18.3%, for the
three- and nine-month periods ended September 30, 1998, respectively. As a
percentage of revenues, SG&A decreased from 18.5% to 15.3% in the third quarter
of 1998 compared to the third quarter of 1997 and to 16.5% from 18.9% in the
first nine months of 1998 compared to the first nine months of 1997 due
primarily to synergies achieved through acquisitions.
11
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $1.2
million, or 38.8%, and $3.6 million, or 43.2%, for the three- and nine-month
periods ended September 30, 1998, respectively, compared to the same periods in
1997. Depreciation and amortization, as a percentage of revenues, has increased
to 9.4% from 8.7% and to 9.4% from 8.9% for the three- and nine-month periods
ended September 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 $531,000, or 79.8%, and $1.1
million, or 49.2%, for the three- and nine-month periods ended September 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 September 30, 1998 was $7.3 million compared to
$1.7 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 for the next twelve
months.
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. In addition, the Company has established two $25
million term loan facilities and a $50 million shelf facility with Prudential
Insurance Company of America ("Prudential"). As of September 30, 1998,
approximately $36.4 million was outstanding under the BB&T facility, which
matures November 2002, and the Company had fully drawn down both of the
Prudential term facilities, leaving the Company with an uncommitted shelf
facility of $50 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. The 12-month weighted average interest rate on outstanding
borrowings under the BB&T facility was 6.79% at September 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 a fixed
rate 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 September 30, 1998, the Company had a
compensating balance arrangement with BB&T for $390,000.
Net cash provided by operating activities totaled $18.0 million for the
nine-months ended September 30, 1998, compared to $17.7 million for the
nine-months ended September 30, 1997. This increase was caused principally by
increases in net income and depreciation and amortization, which was offset by
a decrease in the provision for deferred taxes.
Net cash used in investing activities totaled $50.0 million for the nine-months
ended September 30, 1998, compared to $44.8 million for the nine months ended
September 30, 1997. This increase was caused principally by property and
equipment purchases, offset by a decrease in amounts paid for businesses
acquired.
Capital expenditures for 1998 are currently expected to be approximately $29.8
million, compared to $22.5 million in 1997. In 1998, approximately $23.9 million
is expected to be utilized for vehicle and equipment additions and replacements,
approximately $0.5 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. As an owner of and potential acquiror of
additional new landfill disposal facilities, the Company may also be required to
make significant expenditures to bring such newly acquired disposal facilities
into compliance with applicable regulatory requirements, obtain permits for 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.
12
Net cash provided by financing activities totaled $33.0 million for the nine-
months ended September 30, 1998, compared to $28.1 million for the nine-months
ended September 30, 1997. The increase was primarily attributable to net
increases in long-term debt due to acquisitions. In 1997, the Company completed
an initial public offering in which it issued 1,927,700 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 $23.2 million. Similarly, distributions to shareholders
and affiliates in 1998 were $790,000 compared to distributions of $3.4 million
in 1997.
At September 30, 1998, the Company had approximately $88.6 million of long-term
and short-term borrowings outstanding and approximately $435,000 in letters of
credit. At September 30, 1998, the ratio of the Company's long-term debt to
total capitalization was 58.1% compared to 55.2% 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 Year 2000 Problem is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Any of the
Company's computer programs that have data-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in other routine business activities.
As of September 30, 1998, the Company has substantially completed testing of
information technology ("IT") systems with the assistance of software
specialists and consultants. Based on these tests, the Company has determined
that there are no current Year 2000 problems related to processing within these
IT systems. Going forward, the Company will evaluate the need, if any, for
further testing based on both hardware and software additions.
After an inventory of all non-IT systems within the Company, senior management
determined that one non-IT system required an upgrade in order to be Year 2000
ready. The Company has purchased and installed the appropriate upgrade for this
non-IT system and is, therefore, substantially Year 2000 ready with respect to
non-IT systems.
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 of potential third party Year 2000 issues on the Company is not
anticipated to be material to its financial position or results of operations.
The Company has incurred approximately $10,000 of Year 2000 project expenses to
date for IT and non-IT systems. The expenses were funded by cash generated from
operations. Future expenses are expected to be approximately $10,000. Total Year
2000 expenses are expected to be approximately 3% of the Company's 1998 IT
budget. These expectations are based on future hardware and software
modifications, if any, and the planned testing of the Company's personal
computers. Such testing of the Company's personal computers is scheduled for
completion during the first half of 1999. Such cost estimates are based on
presently available information and actual costs may materially differ from such
expectations as the Company continues to evaluate Year 2000 issues. Furthermore,
the Company's aggregate cost estimate does not include time and costs that may
be incurred by the Company as a result of the failure of any third parties,
including suppliers, to become Year 2000 ready or costs to implement any
contingency plans. Other IT projects within the Company have not been delayed as
a result of the Company's Year 2000 activities.
The Company has identified the two most reasonably likely worst case scenarios
that the Year 2000 problem could have on operations. First, the Company has
identified several large municipal customers whose potential cash payment delay,
in the event of complications with the Year 2000 problem, could adversely impact
the Company's short term cash flow. However, in the event of such a
complication, the Company plans to utilize existing unused bank working capital
line of credit. Second, the Company has identified a potential delay in diesel
deliveries as another reasonably likely worst case scenario. However, in the
event of an interruption of
13
short-term diesel supplies as a result of Year 2000 problems, the Company
believes that existing bulk storage facilities at each branch will be adequate
to supply diesel for operations.
With regard to risk and contingency plans, due to the nature of the Company's
operations, the Company's management does not believe that the Year 2000 issue
will have a materially adverse effect on its financial condition or results of
operations. Accordingly, the Company has not developed a contingency plan based
on currently obtained knowledge. The Company provides service to a largely
diversified customer base and has a large supplier network. Accordingly, the
Company believes that these factors will mitigate potential adverse Year 2000
impacts. The Company believes, however, that due to the widespread nature of
potential Year 2000 issues, the contingency and risk evaluation process is an
ongoing one which will require further modifications as the Company obtains
future information regarding third party readiness. Furthermore, the Company's
beliefs and expectations, are based on certain assumptions and expectations that
may ultimately prove to be inaccurate. The Company's senior management and the
Board of Director has received and will continue to receive regular updates on
the status of the Company's Year 2000 readiness.
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, 1998, the Company issued
the following unregistered securities, none of which involved the use
of underwriters or the payment of commissions:
(1) Effective September 10, 1998, the Company issued an aggregate of
706,370 shares of its Common Stock in connection with its
acquisition of Trans Waste Services, Inc. ("Trans Waste") to the
two shareholders of Trans Waste in a transaction intended to
qualify as a Section 3(a)(10) exemption from registration.
(2) Effective August 28, 1998, the Company issued an aggregate of
388,311 shares of its Common Stock in connection with its
acquisition of Railroad Avenue Disposal, Inc. ("RAD") to the two
shareholders of RAD in a transaction intended to qualify as a
Section 3(a)(10) exemption from registration.
(3) Effective August 28, 1998, the Company issued an aggregate of
22,474 shares of its Common Stock in connection with its
acquisition of the assets of Greater Atlanta Sanitation, Inc.
("GAS"). All of such shares were issued to GAS in a transaction
intended to qualify as a Section 4(2) exemption from
registration.
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) A current report on Form 8-K was filed during the quarter
covered by this report on September 25, 1998 relating to the
Company's acquisition of Trans Waste Services, Inc. At the
time of the filing it was impracticable for the registrant to
provide any of the financial statements or proforma financial
information for the acquired business. Accordingly, the
registrant will file the required financial statements as soon
as practicable, but not later than November 24, 1998, as
required.
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 14, 1998 Waste Industries, Inc.
(Registrant)
By: /s/ Robert H. Hall
---------------------------------------
Robert H. Hall
Vice President, Chief Financial Officer
14
WASTE INDUSTRIES, INC.
EXHIBIT INDEX
Third Quarter 1998
Exhibit Number Exhibit Description
-------------- -------------------
2.2* Agreement and Plan of Merger dated September
9, 1998 by and among the Registrant,
Subsidiary, TransWaste, the shareholders of
TransWaste, Thomas C. Cannon and James F.
Taylor
11 Computations of Earnings Per Share
27 Financial Data Schedule
----------
* Previously filed
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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
15