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, 1999
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)
3301 Benson Drive, Suite 601
Raleigh, North Carolina
(Address of principal executive offices)
27609
(Zip Code)
(919) 325-3000
(Registrant's telephone number, including area code)
3949 Browning Place
Raleigh, North Carolina
(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 13,854,355 shares
(Class) (Outstanding at November 11, 1999)
PART 1 - Financial Information
Item 1. Financial Statements
WASTE INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
1998 1999
-------------------- ---------------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 3,665 $ 917
Accounts receivable - trade, less allowance for uncollectible
accounts (1998-$700 - 1999-$1,358) 16,835 25,491
Inventories 1,334 1,759
Prepaid expenses and other current assets 1,589 3,660
Current deferred income taxes 494 494
-------------------- ---------------------
Total Current Assets 23,917 32,321
-------------------- ---------------------
PROPERTY AND EQUIPMENT, net 88,801 127,559
INTANGIBLE ASSETS, net 63,073 69,620
OTHER NONCURRENT ASSETS 410 456
-------------------- ---------------------
TOTAL ASSETS $ 176,201 $ 229,956
==================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,877 $ 4,698
Accounts payable - trade 10,171 9,242
Federal and state income taxes payable 188 243
Accrued expenses and other liabilities 2,995 4,431
Deferred revenue 1,743 2,450
-------------------- ---------------------
Total current liabilities 16,974 21,064
-------------------- ---------------------
LONG TERM DEBT, net of current maturities 86,465 129,486
NONCURRENT DEFERRED INCOME TAXES 7,838 10,322
DISPOSAL SITE CLOSURE AND LONG-TERM CARE OBLIGATIONS 262 1,435
COMMITMENTS AND CONTINGENCIES (Note 5) - -
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: 1998 - 13,380,905; 1999 - 13,854,355 41,148 46,711
Paid-in capital 7,245 7,245
Retained earnings 16,596 25,467
Note receivable - Liberty Waste (11,538)
Shareholders' loans and receivables (327) (236)
-------------------- ---------------------
Total Shareholders' Equity 64,662 67,649
-------------------- ---------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 176,201 $ 229,956
==================== =====================
See Notes to Unaudited Condensed Consolidated Financial Statements.
2
WASTE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------------
1998 1999 1998 1999
--------- --------- --------- ---------
REVENUES:
Service $ 44,248 $ 56,023 $ 124,336 $ 155,915
Equipment 556 448 1,335 948
--------- --------- --------- ---------
Total revenues 44,804 56,471 125,671 156,863
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES:
Operations 28,100 35,354 78,389 97,589
Equipment sales 423 308 924 602
Selling, general and administrative 6,411 8,344 19,132 22,864
Depreciation and amortization 4,220 5,887 11,864 16,349
Merger and start-up 254 102 502 334
--------- --------- --------- ---------
Total operating costs and expenses 39,408 49,995 110,811 137,738
OPERATING INCOME 5,396 6,476 14,860 19,125
Interest expense 1,195 2,316 3,191 6,251
Interest income (7) (392) (79) (918)
Other (137) (142) (401) (293)
--------- --------- --------- ---------
Total other expense, net 1,051 1,782 2,711 5,040
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 4,345 4,694 12,149 14,085
INCOME TAX EXPENSE 1,470 1,739 4,246 5,214
--------- --------- --------- ---------
NET INCOME $ 2,875 $ 2,955 $ 7,903 $ 8,871
========= ========= ========= =========
Earnings Per Share:
Basic $ 0.22 $ 0.21 $ 0.62 $ 0.65
Diluted $ 0.22 $ 0.21 $ 0.60 $ 0.63
INCOME BEFORE INCOME TAXES $ 4,345 $ 12,149
PRO FORMA INCOME TAX EXPENSE 1,530 4,486
--------- ---------
PRO FORMA NET INCOME $ 2,815 $ 7,663
========= =========
Pro forma - Earnings Per Share:
Basic $ 0.22 $ 0.60
Diluted $ 0.21 $ 0.59
Weighted Average Common Shares:
Basic 12,817 13,854 12,707 13,707
Diluted 13,218 14,203 13,096 14,063
3
WASTE INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1999
--------- ---------
OPERATING ACTIVITIES:
Net income $ 7,903 $ 8,871
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 11,864 16,349
Gain on sale of property and equipment (205) (236)
Provision for deferred income taxes 1,300 2,084
Change in closure/post closure liabilities -- 1,172
Changes in assets and liabilities, net of effects from
acquisitions of related businesses:
Accounts receivable - trade (334) (7,021)
Inventories (1,096) (425)
Prepaid and other current assets (388) (2,029)
Accounts payable - trade (609) (1,332)
Income taxes payable (14) 55
Accrued expenses and other liabilities 42 (654)
Deferred revenue (200) 133
---------- ---------
Net cash provided by operating activities 18,263 16,967
---------- ---------
INVESTING ACTIVITIES:
Other noncurrent assets (587) (245)
Acquisition of related business, net of cash acquired (25,913) (27,487)
Proceeds from sale of property and equipment 552 493
Purchases of property and equipment (24,059) (27,685)
---------- ---------
Net cash used in investing activities (50,007) (54,924)
---------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of long term debt 102,689 96,566
Principal payments of long-term debt (69,225) (53,202)
Repayments of loans and receivables from shareholders 257 91
Net proceeds from common stock issuance 3,250
Net proceeds from exercised options 44
Cash distributions to S-Corporation shareholders (789) --
Loan to Liberty Waste (11,538)
Other 28 (2)
---------- ---------
Net cash provided by financing activities 32,960 35,209
---------- ---------
INCREASE (DECREASE) IN CASH 1,216 (2,748)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,176 3,665
---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,392 $ 917
---------- ---------
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 annual 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
that 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 and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
Recent Developments
Purchase Acquisitions:
During the nine months ended September 30, 1999, the Company made the following
acquisitions accounted for as purchases:
o On June 11, 1999, the Company acquired assets from A&S Waste
Services, Inc. related to its solid waste collection and recycling
business located in the Douglas, Georgia area for approximately
$550,000 in cash.
o On June 1, 1999, the Company acquired assets from Keith D. Threet
of Crossville, Tennessee related to his waste collection business
known as Keith's Disposal Service for approximately $200,000 in
cash.
o On May 31, 1999, the Company acquired assets from Elaine Woodard
related to her residential solid waste collection and recycling
business located in the Raleigh, North Carolina area and known as
A&B Sanitation for approximately $320,000 in cash.
o On May 20, 1999, the Company purchased customer routes, containers
and certain other assets of K&S Sanitation, Inc. related to its
residential solid waste collection business located in the
Charlotte, North Carolina area for approximately $550,000 in cash.
o On May 1, 1999, the Company acquired the assets of S&T Haulers,
LLC associated with its solid waste collection and recycling
business located in and around Kennesaw, Georgia for approximately
$1.6 million in cash.
o On May 1, 1999, the Company acquired North Mecklenburg Sanitation,
Inc., which operates a solid waste collection business in and
around Charlotte, North Carolina. The purchase price for this
company was approximately $4.5 million in cash and 281,249
unregistered shares of our common stock which were registered
effective June 1, 1999. This transaction expands the Company's
operations into the Charlotte, North Carolina area.
o On April 30, 1999, the Company made a tuck-in acquisition of
Central Georgia Waste Services, Inc. for $500,000 in cash. This
tuck-in acquisition further expands the Company's existing
operations in and around Atlanta, Georgia.
o On April 1, 1999, the Company acquired Old Kings Road Solid Waste,
Inc., which operates a landfill and a related solid waste
collection business in and around Jacksonville, Florida, for
approximately $5.0 million in cash. This acquisition gives the
Company its fourth landfill and expands its operations into
northeastern Florida, a new market for the Company in the
southeastern U.S.
o On February 12, 1999 the Company purchased equipment and customer
contracts related to the commercial, industrial and residential
solid waste collection and recycling businesses of Clary's
Container Corp., located in Max Meadow, Virginia, for
approximately $1.3 million in cash.
5
o On January 14, 1999, the Company acquired a regional municipal
solid waste landfill in Decatur County, Tennessee from Waste
Services of Decatur, LLC through Liberty Waste Services, LLC for
approximately $12.9 million in cash.
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, 1999 are as follows:
Fair value of tangible assets acquired 27,153,529
Liabilities assumed (5,945,707)
Non-compete agreements and contracts 94,420
Goodwill 10,636,299
----------
Net acquisition costs $31,938,541
===========
Net acquisition costs include the issuance of 281,249 shares of the Company's
common stock with a fair value of $4,451,541 as partial consideration for
certain business acquisitions (see Note 4).
Non-compete 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 to 40 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 that may be revised at a later date.
The unaudited pro forma results of operations reflecting the effects of the
acquisitions for the three- and nine-month periods ended September 30, 1999 are
not presented because the effects are immaterial.
2. INCOME TAXES
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.
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. Common stock outstanding used to
compute the weighted-average shares was retroactively adjusted for the
acquisitions accounted for applying the pooling-of-interests method of
accounting (including four acquisitions of entities under common control during
the three and nine months ended September 30, 1998).
4. SHAREHOLDERS' EQUITY
On May 4, 1999, the Company issued 281,249 shares of common stock to James M.
Williamson and Dwane J. Williamson for approximately $4.5 million in connection
with the acquisition of North Mecklenburg Sanitation, Inc.
On April 1, 1999, pursuant to its 1997 Stock Option Plan, the Company granted
certain employees options to purchase 37,425 shares of common stock at $15.25
per share, the fair market value on the date of grant, and other employees
options to purchase 23,045 shares at $16.775 per share.
On March 1, 1999, the Company received approximately $44,000 in proceeds from
the exercise of options to purchase 9,200 shares of common stock.
On February 4, 1999, the Company issued 183,000 shares of common stock to
Liberty Waste Services, LLC for $3.3 million. Also accounted for in equity is a
loan made to Liberty Waste Services for $11.5 million.
5. CONTINGENCIES
6
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 has acquired through September 30,
1999. 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.
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, 1998. 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 THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CURRENTLY
ANTICIPATED. SUCH RISKS AND UNCERTAINTIES INCLUDE THOSE RELATED TO WEATHER
CONDITIONS, 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 ANNUAL REPORT ON 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 is a regional, integrated provider of solid waste services. The
Company operates primarily in North Carolina, South Carolina, Virginia,
Tennessee, Mississippi, Alabama, Georgia and Florida, providing solid waste
collection, transfer, recycling, processing and disposal services for
commercial, industrial, municipal and residential customers. We operate 40
collection operations, 22 transfer stations, approximately 100 county
convenience drop-off centers, seven recycling facilities and five landfills in
the southeastern U.S. The Company had revenues of $171.3 million and operating
income of $20.1 million in the year ended December 31, 1998, and revenues of
$156.9 million and operating income of $19.1 million in the nine months ended
September 30, 1999.
The Company's presence in high-growth markets in the southeastern U.S.,
including North Carolina, Georgia and Florida, has supported its internal
growth. In addition, from 1990 through the nine months ended September 30, 1999,
the Company acquired 46 solid waste disposal operations. Current levels of
population growth and economic development in the southeastern U.S. and the
Company's strong market presence in the region should provide the Company an
opportunity to increase its revenues and market share. As the Company adds
customers in existing markets, its density should improve, which the Company
expects will increase its collection efficiencies and profitability.
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 that 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 who receive
services 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
7
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 14 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 seven 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 operates
22 transfer stations that 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 owns and operates five
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 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, 1999, the Company had recorded $1.2 million of capitalized land
acquisition costs in connection with the development of a new land clearing and
inner debris ("LCID") landfill.
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.
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,
---------------------------- ----------------------------
1998 1999 1998 1999
---------------------------- ----------------------------
Total Revenues 100.0% 100.0% 100.0% 100.0%
Service Revenues 98.8% 99.2% 98.9% 99.4%
Equipment Sales 1.2% 0.8% 1.1% 0.6%
---------------------------- ----------------------------
Cost of service operations 62.7% 62.6% 62.4% 62.2%
Cost of equipment sales 0.9% 0.5% 0.7% 0.4%
Selling, general and administrative 14.3% 14.8% 15.2% 14.6%
Depreciation and amortization 9.4% 10.4% 9.4% 10.4%
Merger and start-up costs 0.7% 0.2% 0.5% 0.2%
---------------------------- ----------------------------
Operating income 12.0% 11.5% 11.8% 12.2%
Interest expense 2.6% 3.4% 2.4% 3.4%
Other Income -0.3% -0.2% -0.3% -0.2%
---------------------------- ----------------------------
8
Income before income taxes 9.7% 8.3% 9.7% 9.0%
Pro forma income taxes (1) 3.4% 3.1% 3.6% 3.3%
---------------------------- ----------------------------
Pro forma net income 6.3% 5.2% 6.1% 5.7%
============================ ============================
(1) Certain companies acquired in pooling-of-interests transactions in fiscal
1998 were previously taxed as S corporations. For the three- and nine-month
periods ended September 30, 1998, income taxes have been computed as if the
companies acquired were subject to federal and all applicable state corporate
income taxes for the period presented assuming the tax rate that would have
applied had the companies been taxed as C corporations.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES. Total revenues increased approximately $11.7 million, or 26.0%, and
$31.2 million, or 24.8%, for the three- and nine- month periods ended September
30, 1999, respectively, as compared with the same periods in 1998. These
increases for each 1999 period were attributable primarily to the following
factors: (i) the effect of eight businesses acquired during the year ended
December 31, 1998 and ten businesses acquired during the nine months ended
September 30, 1999; 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 $7.3 million, or 25.8%, and
$19.2 million, or 24.5%, for the three-and nine-month periods ended September
30, 1999, respectively, as compared to the same periods in 1998. These increases
for each 1999 period were attributable primarily to the following factors: (i)
the effect of eight businesses acquired during the year ended December 31, 1998
and ten businesses acquired during the nine-months ended September 30, 1999; and
(ii) to a lesser extent, increased collection volumes resulting from new
municipal and commercial contracts and residential subscriptions.
SG&A. SG&A increased $1.9 million, or 30.2%, and $3.7 million, or 19.5%, for the
three- and nine-month periods ended September 30, 1999, respectively. As a
percentage of revenues, SG&A increased from 14.3% to 14.8% in the third quarter
of 1999 compared to the third quarter of 1998. This increase was due primarily
to added bad debt expense, including for customers who were adversely affected
by Hurricanes Dennis and Floyd. The decrease from 15.2% to 14.6% for the nine
months ended compared to the same period in 1998, due primarily to synergies
achieved through acquisitions.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $1.7
million, or 39.5%, and $4.5 million, or 37.8%, for the three- and nine-month
periods ended September 30, 1999, respectively, compared to the same periods in
1998. Depreciation and amortization, as a percentage of revenues, increased to
10.4% from 9.4% for both the three- and nine-month periods ended September 30,
1999, compared to the same periods in 1998. The principal reasons for the
increase were depreciation of additional property and equipment acquired and put
into service because of higher collection volumes, depreciation of assets of
acquired businesses, amortization of landfill costs, and amortization of
intangibles related to acquired businesses.
INTEREST EXPENSE. Interest expense increased $1.1 million, or 93.8%, and $3.1
million, or 95.9%, for the three- and nine-month periods ended September 30,
1999, respectively, compared to the same periods in 1998. These increases for
each 1999 period were primarily due to the higher level of average outstanding
indebtedness related to acquired businesses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at September 30, 1999 was $9.5 million compared to
$6.9 million at December 31, 1998. The Company generally finances working
capital requirements from internally generated funds and bank borrowings. After
satisfying working capital and capital expenditure requirements, the Company
applies remaining cash generated from operations to reducing indebtedness under
its bank revolving credit facility, thereby minimizing cash balances.
The Company has in place financing arrangements to satisfy its currently
anticipated working capital needs in 1999. At September 30, 1999, the Company
had a revolving credit facility with Branch Banking & Trust ("BB&T") allowing
the Company to borrow up to $50 million for acquisitions and capital
expenditures and $10 million for working capital, and three $25 million term
loan facilities and a $25 million shelf facility with The Prudential Insurance
Company of America ("Prudential"). Approximately $55 million was outstanding
under the BB&T facility at September 30, 1999, and the Company had fully drawn
down the three Prudential term loan facilities, leaving the Company with an
uncommitted shelf facility of $25 million. Both the BB&T and the Prudential
credit facilities require the Company to maintain certain financial ratios, such
as debt to earnings and fixed charges to earnings, and satisfy other
predetermined requirements, such as minimum net worth, net income and deposit
balances. At September 30, 1999, the Company was in compliance with all
covenants. The 12-month weighted average interest rate on outstanding borrowings
under the BB&T facility was 6.33% at September 30, 1999. Interest on the BB&T
facility is payable monthly based on an adjusting spread to LIBOR. Interest on
the three Prudential term facilities is paid quarterly, based on a fixed rate of
7.28%, 6.96% and 6.84%, respectively. Of the
9
Company's committed Prudential facilities, $25 million mature in April 2006, $25
million mature in June 2008, and $25 million mature in February 2009, subject to
renewal. As of September 30, 1999, the Company had a compensating balance
arrangement with BB&T for $375,000.
On November 9, 1999, the Company entered into a revolving credit agreement with
a syndicate of lending institutions for which BankBoston, N.A. acts as agent.
This new credit facility provides up to $200 million through November 2004. The
Company has drawn approximately $55 million on the new facility to terminate and
pay off the BB&T facility. Virtually all of the assets of the Company and its
subsidiaries, including the Company's interest in the equity securities of its
subsidiaries, secure the Company's obligations under the BankBoston credit
facility. Pursuant to an intercreditor agreement with BankBoston, Prudential
shares in the collateral pledged under the BankBoston credit facility. In
addition, the Company's subsidiaries have guarantied the Company's obligations
under the Prudential term loan facilities. The BankBoston credit facility bears
interest at a rate per annum equal to, at the Company's option, either a
BankBoston base rate or at the Eurodollar rate (based on Eurodollar interbank
market rates) plus, in each case, a percentage rate that fluctuates, based on
the ratio of our funded debt to EBITDA, from 0% to 0.5% for base rate borrowings
and 1.5% to 2.5% for Eurodollar rate borrowings. The BankBoston facility
requires the Company to maintain certain financial ratios and satisfy other
predetermined requirements, such as minimum net worth, net income, and limits on
capital expenditures and indebtedness. It also requires the lenders' approval of
acquisitions in some circumstances. As of November 15, 1999, an aggregate of
approximately $75 million was outstanding under the BankBoston credit facility,
and the average interest rate on outstanding borrowings was approximately 8.25%.
Net cash provided by operating activities totaled $17.0 million for the nine
months ended September 30, 1999, compared to $18.2 million for the nine months
ended September 30, 1998. This decrease was caused principally by increases in
outstanding accounts receivable balances that were partially offset by increases
in net income and depreciation and amortization.
Net cash used in investing activities totaled $54.9 million for the nine months
ended September 30, 1999, compared to $50.0 million for the nine months ended
September 30, 1998. This increase was caused principally by (i) a higher level
of acquisitions of related businesses and (ii) an increased level of purchases
of property and equipment.
Capital expenditures for 1999 are currently expected to be approximately $30.0
million, compared to $30.0 million in 1998 which is consistent with 1998 levels.
In 1999, approximately $22.0 million is expected to be utilized for vehicle and
equipment additions and replacements, approximately $1.0 million for expansion
of transfer station services and approximately $7.0 million for facilities,
additions and improvements. The Company intends to fund its planned 1999 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 acquirer 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 these facilities or expand their available
disposal capacity. The amount of these expenditures cannot be currently
determined, since they will depend on the nature and extent of any acquired
landfill disposal facilities, the condition of any facilities acquired and the
permitting status of any acquired sites.
Net cash provided by financing activities totaled $35.2 million for the nine
months ended September 30, 1999, compared to $33.0 million for the nine months
ended September 30, 1998. The increase was primarily attributable to net
increases in long-term debt due to acquisitions.
At September 30, 1999, the Company had approximately $134.2 million of long-term
and short-term borrowings outstanding and approximately $768,000 in letters of
credit. At September 30, 1999, the ratio of the Company's long-term debt to
total capitalization was 65.7% compared to 57.2% at December 31, 1998.
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
10
activities.
As of September 30, 1999, 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 has initiated 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 remedy 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 $1,000 and will be
funded by cash generated from operations. Total Year 2000 expenses are expected
to be approximately 2% of the Company's 1999 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 was substantially completed 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 draw on its existing credit facilities as
necessary. 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 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 Directors have received and will continue to receive regular updates on
the status of the Company's Year 2000 readiness.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the nine months ended September 30, 1999, the Company's market exposure
was affected by the issuance of $96.6 million principal amount of senior notes
and repayments of $53.2 million aggregate principal amount of senior and
subordinated notes. Total fixed-rate long-term debt increased by the principal
amount issued net of repayments; the average interest rate at September 30, 1999
was 6.82%. The proceeds from the issuance were used to fund acquisitions during
the three and nine months ended September 30, 1999.
The Company also assumed $2.5 million in non-interest bearing debt through
acquisitions.
11
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) No material modifications
(b) No material limitations or qualifications
(c) During the nine months ended September 30, 1999, the Company issued
the following unregistered securities, none of which issuances involved
the use of underwriters or the payment of commissions:
(1) On February 1, 1999, the Company issued 183,000 shares of its common
stock to Liberty Waste Services, LLC. These shares were issued in a
transaction intended to qualify as a Section 4(2) exemption from
registration under the Securities Act of 1933.
(2) On May 4, 1999, the Company issued 281,249 shares of its common
stock to James M. Williamson and Dwane J. Williamson. These shares were
registered for resale on a Form S-3 Registration Statement that became
effective June 1, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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 September
30, 1999.
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 15, 1999 Waste Industries, Inc.
(Registrant)
By: /s/ Stephen C. Shaw
-------------------------
Stephen C. Shaw
Vice President, Finance
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WASTE INDUSTRIES, INC.
EXHIBIT INDEX
Third Quarter 1999
Exhibit Number Exhibit Description
-------------- -------------------
10.7 Revolving Credit Agreement dated
as of November 9, 1999 by and
among the Registrant and its
subsidiaries, the lending
institutions party thereto,
BankBoston, N.A. as
Administrative Agent, BancBoston
Robertson Stephens Inc., as
Arranger, and Branch Banking and
Trust Company, as Documentation
Agent.
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 THREE MONTHS
ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
13