UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____ to ____
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 No.)
3949 Browning Place
Raleigh, North Carolina 27609
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 782-0095
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (no par value per share)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant based upon the closing price of the Common Stock on March 26,
1998, on the NASDAQ National Market System was approximately $57,549,060 as of
such date. Shares of Common Stock held by each executive officer and director
and by each person who owns 10% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status may not be conclusive for other purposes.
As of March 26, 1998, the registrant had outstanding 11,591,491 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders are incorporated herein by reference into Part III.
<PAGE>
Statements in this Annual Report on Form 10-K that are not descriptions of
historical facts are forward-looking statements that are subject to risks and
uncertainties. Actual events or results could differ materially from those
currently anticipated due to a number of factors, including those set forth
herein and in the Company's other SEC filings and including, in particular:
ability to manage growth; the availability and integration of acquisition
targets; competition; geographic concentration; and government regulation.
PART I
Item 1. Business.
Introduction
Waste Industries, Inc. (the "Company") is a regional solid waste services
company providing solid waste collection, transfer, recycling, processing and
disposal services to customers primarily in North Carolina and South Carolina
and, to a limited extent, in Virginia, Tennessee, Alabama and Georgia. The
Company's principal operations as of December 31, 1997 consisted of 24 branch
collection operations, 13 transfer stations, and four recycling processing
centers that serve more than 250,000 municipal, residential, commercial and
industrial locations. On January 1, 1998, the Company opened five additional
transfer stations.
Members of the senior management team founded Waste Industries in 1970 and
are recognized for their leadership roles throughout the solid waste management
industry and trade organizations. The Company's management team collectively has
over 250 years of experience in the solid waste industry and over 150 years with
the Company.
Industry Overview
Based on industry information, the Company believes that the U.S.
nonhazardous solid waste collection and disposal industry generated estimated
revenues of approximately $36.9 billion in 1997. The Company also believes that
27% of the total revenues of the U.S. nonhazardous solid waste industry was
accounted for by more than 5,000 private, predominately small, collection and
disposal businesses; 41% by publicly-traded solid waste companies; and 32% by
municipal governments that provide collection and disposal services.
In recent years, the solid waste collection and disposal industry has
undergone a period of significant consolidation and integration. The Company
believes that this consolidation and integration has been caused primarily by:
(i) increasingly stringent environmental regulation and enforcement resulting in
increased capital requirements for collection companies and landfill operators;
(ii) the ability of larger integrated operators to achieve certain economies of
scale; (iii) the evolution of an industry competitive model which emphasizes
providing both
2
<PAGE>
collection and disposal/recycling capabilities; and (iv) the continued
privatization of solid waste collection and disposal services by municipalities
and other governmental bodies and authorities. Despite the considerable
consolidation and integration that has occurred in the solid waste industry in
recent years, the Company believes the industry remains primarily regional in
nature and highly fragmented.
The increasingly stringent industry regulations, such as the Subtitle D
Regulations, have resulted in rising operating and capital costs and have caused
consolidation and acquisition activities to accelerate in the solid waste
collection and disposal industry. Many of the smaller industry participants have
found these costs difficult to bear and have decided to either close their
operations or sell them to larger operators. In addition, Subtitle D requires
more stringent engineering of solid waste landfills including liners, leachate
collection and monitoring and gas collection and monitoring. These on-going
costs are coupled with increased financial reserves from solid waste landfill
operators for closure and post-closure monitoring. As a result, the Company
believes the number of solid waste landfills is declining while the size of
solid waste landfills is increasing.
Larger integrated operators achieve economies of scale in the solid waste
collection and disposal industry through vertical integration of their
operations. These integrated companies have increased their acquisition activity
levels to expand the breadth of services and density in their market area.
Control of the waste stream in these market areas coupled with access to
significant financial resources to make acquisitions has given larger solid
waste collection and disposal companies the ability to be more cost effective
and competitive.
The evolution of the industry competitive model is forcing remaining
operators to become more efficient by establishing an integrated network of
solid waste collection operations and transfer stations through which they
secure solid waste streams for disposal. These remaining operators have dealt
with disposal issues by a variety of methods which include owning landfills,
establishing strategic relationships to secure access to landfills, or by
otherwise capturing significant waste stream volumes to gain leverage in
negotiating lower landfill fees and securing long-term contracts with high
capacity landfills on most favored pricing status terms.
In the Southeastern U.S. solid waste market, city and county governments
have historically provided a variety of solid waste services using their own
personnel. Over time, many municipalities have opted to privatize or contract
out their collection and disposal services to the private sector. Landfills,
transfer stations and incinerators located in the Company's market area are
predominantly municipally owned. The Southeastern market is currently undergoing
significant economic and population growth. Certain of the states in the
Southeastern U.S. exceed the national average in terms of economic growth as
measured by gains in jobs, personal income and population
There is an increasing trend at the state and local levels to encourage
waste reduction at the source and to prohibit the disposal of certain types of
wastes, such as yard wastes and recyclable materials, at landfills. For example,
North Carolina, South Carolina and Virginia
3
<PAGE>
have each established the goal of reducing by 25% the solid waste disposed of in
their respective landfills. The Company believes that these trends and laws have
created significant opportunities for solid waste services companies to provide
additional recycling services to generators of solid waste who are not otherwise
able to dispose of such waste.
Strategy
The Company's objective is to build the premier solid waste services
company in the Southeastern U.S. by expanding its operations and capitalizing on
its strong market presence. The Company's strategy for achieving this objective
is: (i) to generate internal growth by adding customers and services to its
existing operations; (ii) to acquire solid waste collection companies, customers
and, under appropriate circumstances, landfills in existing and new areas of its
target market; and (iii) to increase operating efficiencies and enhance
profitability in its existing and acquired operations. The Company intends to
implement this strategy as follows:
Internal Growth
In order to continue to achieve internal growth, the Company will
focus on increasing sales penetration in current and adjacent market areas,
marketing upgraded or additional services (such as on-site solid waste
compaction) to existing customers and implementing selective price increases.
Current levels of population growth and economic development in the Southeastern
U.S. and the strong market presence should provide an opportunity for the
Company to increase revenues and market share in its region. As customers are
added in existing markets, the Company's density is improved, which should
increase the Company's collection efficiencies and profitability. The Company
has an approximately 35-person sales force dedicated to maintaining and
increasing the Company's sales to new and existing commercial, industrial,
municipal and residential customers.
An important part of the Company's internal growth strategy is to establish
transfer stations strategically located throughout its geographic area to
improve the Company's consolidation of collected solid waste and permit the
Company to deliver the collected solid waste to landfills where the Company has
negotiated favorable volume rates with landfill operators. The Company currently
operates 18 transfer stations, three of which it owns. By operating transfer
stations, the Company engages in direct communication with municipalities
regarding waste disposal services, better positioning the Company to gain
additional business in its markets in the event any of these municipalities
privatize their solid waste operations.
4
<PAGE>
Expansion Through Acquisitions
The Company's strategy for growth includes: (i) "tuck-in" and other
acquisitions of solid waste collection companies and customers in existing and
adjacent markets; (ii) the acquisition of solid waste collection companies and
customers in new markets; and (iii) the acquisition of landfills in certain
circumstances. The Company seeks to acquire companies with a significant market
presence, high service standards and an experienced management team willing to
remain with the Company.
The Company believes that numerous "tuck-in" acquisition opportunities
exist within its current market area. A "tuck-in" acquisition refers to an
acquisition in which the Company acquires a solid waste collection company, a
division of a company, or certain customers of a company located in the
Company's existing market area and integrates the acquired operations or
customers into the operations of one of the Company's existing branch
facilities. These acquisitions have become an integral part of the industry
competitive model due to the efficiencies involved. Such acquisitions, if
consummated, provide the Company opportunities to improve market share and route
density.
As the Company enters new markets through acquisitions, it intends to
continue to implement a regional expansion strategy. The regional expansion
strategy provides the Company with a base of operations to grow internally
through price increases, providing additional services to existing customers,
adding new private and public customers and tuck-in acquisitions. The Company
can then expand its presence in the targeted region by adding solid waste
collection and transfer operations in regional markets adjacent to or contiguous
with the new location. Because the Company's goal is to increase the scale of
its operations through internal growth and through the acquisition of other
solid waste businesses, the Company may experience periods of rapid growth with
significantly increased staffing requirements. Such growth, if it were to occur,
could place a significant strain on the Company's management and on its
operational, financial and other resources. The Company's ability to maintain
and manage its growth effectively will require it to expand its management
information systems capabilities and improve its operational and financial
systems and controls. Moreover, the Company will need to attract, train,
motivate, retain and manage its senior managers, technical professionals and
other employees. Any failure to expand its management information systems
capabilities and its operational and financial systems and controls or to
recruit appropriate additional personnel in an efficient manner at a pace
consistent with any business growth the Company may experience would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company is currently examining opportunities to expand its presence in
areas of the Southeastern U.S. other than North Carolina and South Carolina. The
Company is analyzing potential acquisitions of solid waste services operations
in Mississippi, North Carolina, South Carolina, Tennessee, Georgia, Alabama and
Virginia. There can be no assurance that the Company will be able to identify
suitable acquisition candidates or, if
5
<PAGE>
identified, negotiate successfully their acquisition. Failure by the Company to
implement successfully its acquisition strategy will limit the Company's growth
potential.
The recent consolidation and integration activity in the solid waste
industry, as well as the difficulties, uncertainties and expenses relating to
the development and permitting of solid waste landfills and transfer stations,
has increased competition for the acquisition of existing solid waste
collection, transfer and disposal operations. Increased competition for
acquisition candidates may result in fewer acquisition opportunities being made
available to the Company as well as less advantageous acquisition terms,
including increased purchase prices. These circumstances may increase
acquisition costs to levels beyond the Company's financial capability or pricing
parameters or which, as to acquisitions made by the Company, may have an adverse
effect on the Company's results of operations. Many of the Company's competitors
for acquisitions are larger, better known companies with significantly greater
resources than the Company. The Company also believes that a significant factor
in its ability to consummate acquisitions will be the relative attractiveness of
shares of the Company's Common Stock as an investment instrument to potential
acquisition candidates. This attractiveness may, in large part, be dependent
upon the relative market price and capital appreciation prospects of the Common
Stock compared to the equity securities of the Company's competitors.
While the Company does not currently operate any solid waste landfills, the
Company is actively engaged in identifying solid waste landfill acquisition
candidates in the Southeast. The Company believes that the successful
acquisition of landfills would provide the Company with opportunities to
integrate vertically its collection, transfer and disposal operations while
improving operating margins. Although the Company is actively engaged in
identifying these candidates, the number of candidates is limited in the
Company's current market area. Generally, the Company will evaluate a landfill
target by determining, among other things, whether access to the landfill is
economically feasible from its existing market areas either directly or through
strategically located transfer stations, expected landfill life, the potential
for landfill expansion, and current disposal costs compared with the cost to
acquire the landfill. In addition, where the acquisition of a landfill site is
either not available or not economically feasible, the Company seeks to enter
into long-term disposal contracts with facilities that are located in proximity
to its market areas.
Operating Enhancements
The Company has implemented advanced management information systems,
financial controls, shared support services and benchmarking systems designed to
improve productivity, efficiency and profitability of its existing and acquired
operations. Each branch facility has on-line real time access to the Company's
financial, operating, cost and customer information. This access enables the
Company's managers to evaluate continuously the Company's performance record and
to establish benchmarks in all phases of the Company's operations. Management
utilizes these systems to: improve collection and transportation efficiencies;
enhance equipment and personnel utilization; reduce equipment acquisition and
maintenance costs; reduce disposal costs by maximizing waste streams directed to
lower cost landfills;
6
<PAGE>
timely monitor and collect customer accounts; and provide current information to
the Company's sales force to ensure properly structured pricing for new
customers.
Through the utilization of its systems and controls, the Company will
continue to manage its landfill disposal costs and to negotiate long-term
disposal contracts with Subtitle D landfill operators. In addition, the Company
has developed an extensive network of transfer stations that it uses to
consolidate waste streams to gain greater leverage in negotiating landfill
disposal fees. Management believes the anticipated closing of landfills in North
Carolina will provide opportunities to open more transfer stations and to gain
greater volumes of the waste stream, further enhancing the Company's negotiating
position. Currently, approximately 28% of the Company's waste volume is directed
through Company owned or operated transfer stations.
Acquisition Program
The Company has acquired 23 solid waste companies since 1990. The Company
has developed a set of financial, geographic and management criteria designed
to assist management in the evaluation of acquisition candidates engaged in
solid waste collection and disposal. These criteria evaluate a variety of
factors, including, but not limited to: (i) historical and projected financial
performance; (ii) internal rate of return, return on assets and return on
revenue; (iii) experience and reputation of the candidate's management and
customer service reputation and relationships with the local communities; (iv)
composition and size of the candidate's customer base; (v) whether the
geographic location of the candidate will enhance or expand the Company's
market area or ability to attract other acquisition candidates; (vi) whether
the acquisition will augment or increase the Company's market share or help
protect the Company's existing customer base; (vii) any synergies gained by
combining the acquisition candidate with the Company's existing operations; and
(viii) liabilities of the candidate.
The Company has an established integration procedure for newly acquired
companies designed to effect a prompt and efficient integration of the acquired
business while minimizing disruption to the ongoing business of the Company and
the acquired business. Once a solid waste collection operation is acquired,
programs designed to improve collection and disposal routing, equipment
maintenance and utilization, employee productivity, operating efficiencies and
overall profitability are implemented. To improve an acquired business'
operational productivity, administrative efficiency and profitability, the
Company applies the same benchmarking programs and systems to the acquired
business as are employed at the Company's existing operations. The Company also
solicits new commercial, industrial and residential customers in areas within
and surrounding the markets served by the acquired collection operations as a
means of further improving operating efficiencies and increasing the volumes of
solid waste collected by the acquired operation. The Company typically attempts
7
<PAGE>
to retain the acquired company's management and key employees and to
decentralize operations, while consolidating administrative and management
information systems through the Company's corporate offices.
Prior to completing an acquisition, Waste Industries performs extensive
environmental, operational, engineering, legal, human resource and financial due
diligence. All acquisitions are subject to initial evaluation and approval by
the Company's management before being recommended to the Board of Directors.
The following table sets forth the Company's acquisitions completed since
1990:
<TABLE>
<CAPTION>
Year
Company Acquired Principal Business Location Market Area
- ---------------------------- -------- ----------------------- -------------- ---------------------------
<S> <C> <C> <C> <C>
American Waste Systems, Inc. 1997 Industrial and Lilburn, GA Gwinnett County, GA
Residential Collection
Garner Area Disposal, Inc. 1997 Residential Collection Garner, NC Wake County, NC
Royal DispozAll, Inc. 1997 Commercial and Easley, SC Greenville, SC
Industrial Collection
BFI Rocky Mount and Kinston 1997 Commercial, Industrial, Rocky Mount Northeastern, NC
Residential Collection and Kinston,
and Recycling NC
Waste Management Chattanooga 1997 Commercial, Industrial Chattanooga, TN Bradley, Hamilton, Marion,
and Residential Meigs, Rhea and
Collection Sequatchie Counties, TN;
Catoosa, Chattooga, Dade,
Gordon, Murray, Walker
and Whitfield Counties,
GA; and Jackson County, AL
BFI Charleston 1997 Commercial, Industrial Charleston, SC Charleston County, SC
and Residential
Collection and
Recycling
BFI Raleigh-Durham 1997 Residential Collection Raleigh, NC Wake and Durham Counties, NC
Wayco Sanitation, Inc. 1996 Residential Collection Goldsboro, NC Wayne County, NC
QA Refuse Systems, Inc. 1996 Residential Collection Wilson, NC Wilson County NC
Asi Sanitation 1996 Residential Collection Henderson, NC Vance County, NC
Bruce Kessler 1996 Residential Collection Wake Forest, NC Wake and Franklin Counties,
NC
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Year
Company Acquired Principal Business Location Market Area
- ---------------------------- -------- ----------------------- -------------- ---------------------------
<S> <C> <C> <C> <C>
A. Windfish Disposal Co. 1995 Commercial, Industrial Hampstead, NC Coastal Southeastern, NC
and Residential
Collection
F & M Sanitation Services, Inc. 1995 Commercial and Louisburg, NC Franklin County, NC
Residential Collection
Shaw Sanitation Services 1995 Residential Collection Raleigh, NC Wake County, NC
A-OK Home Services, Inc. 1994 Residential Collection Chapel Hill, NC Orange and Durham Counties,
NC
Kerr Lake Area Sanitation, Inc. 1994 Residential Collection Wake Forest, NC Vance and Wake Counties, NC
Sunshine Sanitation Service - 1994 Residential Collection Raleigh, NC Wake County, NC
East Wake Division
Chambers Development Company - 1993 Commercial, Industrial Conway, SC Horry County, SC
Myrtle Beach- Conway and Residential
Collection
Commercial Trash Container 1991 Container Rental Haw River, NC Alamance County, NC
Service
Thomas Sanitation, Inc. 1991 Commercial and Clinton, NC Sampson County, NC
Industrial Collection
Dependable Sanitation 1990 Commercial and Goldsboro, NC Wayne County, NC
Services, Inc. Industrial Collection
Clean Sweep, Inc. 1990 Commercial and Elizabeth Pasquotank County, NC
Industrial Collection City, NC
Joyner Service, Inc. 1990 Commercial and Fayetteville, Cumberland County, NC
Industrial Collection NC
</TABLE>
1997 Acquisitions
On October 31, 1997, the Company purchased equipment and customer contracts
related to the solid waste collection business of American Waste Systems, Inc.
("American") in Lilburn, Georgia and Garner Area Disposal, Inc. ("Garner
Disposal") in Garner, North Carolina. The purchase price of the assets of
American and Garner Disposal were approximately $5.3 million and $635,000,
respectively. The consideration paid for the Garner Disposal acquisition
included the issuance of 13,834 shares of the Company's Common Stock with a fair
value of approximately $285,000.
On October 17, 1997, the Company purchased equipment and customer contracts
related to the solid waste collection and recycling business of Royal DispozAll,
Inc. ("Royal") in Easley, South Carolina. The purchase price of the assets of
Royal was approximately $2.0 million. The consideration paid to the seller
included the issuance of 49,800 shares of the Company's Common Stock with a fair
value of approximately $1.0 million.
9
<PAGE>
On August 30, 1997, the Company purchased the assets of BFI's Rocky Mount
and Kinston, North Carolina waste hauling and recycling operations (excluding
BFI's medical waste business) for $11.4 million in cash.
On May 15, 1997, the Company purchased equipment and customer contracts
related to the commercial, industrial and residential solid waste collection
business of two subsidiaries of Waste Management, Inc. in and around
Chattanooga, Tennessee. The purchase price for these assets was $11.2 million in
cash.
On April 30, 1997, the Company purchased equipment and customer contracts
related to the solid waste collection business of Browning-Ferris Industries of
South Atlantic, Inc. ("BFISA") in and around Charleston, South Carolina. The
purchase price for these assets was approximately $4.8 million.
On March 21, 1997, the Company purchased equipment and customer contracts
related to the residential solid waste collection business of BFISA in and
around Raleigh and Durham, North Carolina. The purchase price for these assets
was approximately $782,000.
The Company primarily used borrowings under its revolving credit facility
to fund acquisitions during 1997.
Contracts Program
The Company devotes significant resources to securing large contracts from
municipal and other governmental agencies and has been awarded approximately 93
contracts since 1992. The Company believes that opportunities for gaining larger
contracts are increasing due to trends among municipalities to privatize or
outsource solid waste services. In most cases, only larger disposal services
companies such as the Company are financially acceptable to the municipality.
Historically, in the Southeastern U.S., city and county governments have
provided a variety of solid waste services using their own personnel. Over time,
many municipalities have opted to privatize or contract out their collection and
disposal services to the private sector. Typically, these contracts are
competitively bid and have initial terms of one to five years. In bidding for
large contracts, the Company's management team draws on its experience in the
waste industry and its knowledge of local service areas in existing and target
markets. The Company engages in extensive due diligence using its advanced
management information systems and productivity and cost modeling analyses to
respond to requests for proposals to provide services. The Company's regional
managers are responsible for managing the relationships with local
10
<PAGE>
governmental officials within their respective service area and sales
representatives may be assigned specific municipalities for coverage. The
Company may be required to bid for renewal of a contract previously awarded to
the Company, or in certain cases to renegotiate the contract as a result of
changed market conditions. Since 1992, the Company has been successful in
retaining more than 98% of its major contracts at the time of renewal.
Services
Commercial, Industrial And Residential Waste Services
The Company's commercial and industrial collection and disposal services
are performed under one-year to five-year service agreements, and fees are
determined by such factors as collection frequency, level of service, route
density, the type, volume and weight of the 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
service. Collection of larger volumes associated with commercial and industrial
waste streams generally helps improve the Company's operating efficiencies and,
through consolidation of these volumes, enables the Company to negotiate more
favorable disposal prices. The Company's commercial and industrial customers
utilize portable containers for storage thereby enabling the Company to service
many customers with fewer collection vehicles. Commercial and industrial
collection vehicles normally require one operator. The Company provides two to
eight cubic yard containers to commercial customers and 10 to 42 cubic yard
containers to industrial customers. As a part of the services provided by the
Company and for an additional fee under its waste services contract, stationary
compactors that compact waste prior to collection are installed on the premises
of a substantial number of large volume customers. No single commercial or
industrial contract is individually material to the Company's results of
operations.
The Company's residential solid waste collection and disposal services are
performed either on a subscription basis with individual households, or under
contracts with municipalities, homeowners associations, apartment owners or
mobile home park operators. Municipal contracts grant the Company the right to
service all or a portion of the residences in a specified community or to
provide a central repository for residential waste drop-off. The Company had
more than 150 municipal contracts in place as of December 31, 1997. No single
municipal or other residential contract is individually material to the
Company's results of operations. Municipal contracts in the Company's market
areas are typically awarded on a competitive bid basis and thereafter on a bid
or negotiated basis and usually range in duration from one to five years.
Residential contract fees are based primarily on route density, the frequency
and level of service, the distance to the disposal or processing facility, the
cost of
11
<PAGE>
disposal or processing and prices charged in its markets for similar service.
Municipal collection fees are paid either by the municipalities from tax
revenues or through direct service charges to the residents receiving the
service.
Transfer Station Services
The 18 transfer stations operated by the Company receive, compact and
transfer solid waste to larger Company-owned vehicles for transport to
landfills. The Company believes that transfer stations benefit the Company by:
(i) providing access to multiple landfills; (ii) improving utilization of
collection personnel and equipment; (iii) concentrating the waste stream to gain
leverage in negotiating for more favorable disposal rates; and (iv) building
relationships with municipalities that can lead to opportunities for additional
business in the future. The Company expects to develop, own and operate one
additional transfer station in 1998. Depending on the location, size and local
regulatory environment, transfer stations can be constructed for as little as
$150,000 for a small rural facility or as much as $1.0 million for larger sites.
The Company believes that it has obtained all permits and authorizations
necessary to operate its existing transfer stations and that each of its
existing transfer stations has been operated in compliance in all material
respects with applicable environmental regulations.
The Company owns three of the transfer stations it operates, and
operates the remaining fifteen transfer stations pursuant to operating
agreements. These operating agreements have terms ranging from annual one-year
renewals to an indefinite period. The Company generally receives a fixed monthly
operating fee for its services under these agreements, together with a variable
fee based upon the number of hauls made by the Company from the station.
Approximately 27% of waste directed to the transfer stations operated by the
Company is delivered by third parties, who pay the Company a fee based on the
tonnage delivered. Control of these third-party waste streams coupled with the
Company's waste stream adds to the bargaining power exerted by the Company in
its negotiations for favorable solid waste disposal rates with landfill
operators.
Recycling Services
Recycling involves the removal of reusable materials from the waste stream
for processing and sale in various applications. The Company believes that
recycling will continue to be an important component of local and state solid
waste management plans as a result of the public's increasing environmental
awareness and expanding regulations mandating or encouraging waste recycling.
The Company offers commercial, industrial and residential customers recycling
for office paper, cardboard, newspaper, aluminum and steel cans, plastic, glass,
pallets and yard waste. The Company operates approximately 100 convenience sites
located in 15 counties in its market area where residents can dispose of
recyclables. These
12
<PAGE>
commodities are delivered either to third-party processing facilities in
exchange for a fee or to one of four Company-operated facilities for processing
prior to resale.
During the last five years, the Company has invested approximately $5
million in infrastructure to develop regionally located recycling facilities and
equipment. Through these facilities, the Company recycles office paper,
cardboard, aluminum and steel cans, plastic, glass, pallets and yard waste. In
1997, less than 3% of the Company's waste stream was recycled. Through a
centralized effort, the Company resells recycled waste products using
commercially reasonable practices and seeks to manage commodity-pricing risk by
spreading the risk among its customers. The resale prices of, and demand for,
recyclable commodities, particularly wastepaper, can be volatile and subject to
changing market conditions. Accordingly, the Company's results of operations
will be affected, and may be affected materially, by changing resale prices or
demand for certain recyclable commodities, particularly wastepaper. These
changes may also contribute to significant variability in the Company's
period-to-period results of operations.
Convenience Sites and Other Specialized Services
In 1982, the Company developed the concept of a convenience site in
response to increasing volumes of waste dumped randomly in rural areas. Each
site typically consists of a ramp for easy disposal access, a trash compactor
and trash and recycling containers. Most sites have posted operating hours
during which Company personnel assist residents with the deposit of waste and
recyclables while monitoring the types of waste deposited at the sites. Because
these convenience sites reduce the amount of trash dumped along roads and
adjacent to recreational areas, the Company believes that county and local
governments will contract for these sites to be strategically located. The
Company operates approximately 100 of these convenience sites.
In addition, the Company has increased its efforts to secure additional
contracts to manage comprehensive disposal services for large corporations and
municipalities. For example, after thorough review and evaluation, the Company
may provide a lump sum quote for handling all the waste in a Company's facility.
This would include source separating various wastes into commodities for resale
and non-recyclables for disposal. The process of sorting at the source,
processing through a compaction system and scheduling waste and recyclable
removals only when the containers are full reduces the Company's cost and
increases the operating efficiency. Furthermore, confidential documents can be
controlled throughout the process and destroyed to the customer's satisfaction.
13
<PAGE>
Operations
Branch Facility Structure
The Company believes that a branch facilities structure retains
decision-making authority close to the customer, which enables it to identify
customers' needs quickly and implement cost-effective solutions. Furthermore,
the Company believes that it provides a low-overhead, highly efficient
operational structure that allows the Company to branch into geographically
contiguous markets and operate in small communities which larger competitors may
not find attractive. The Company believes that branch facilities and
decentralized management of operations provide the Company with a strategic
competitive advantage given the relatively rural nature of the Southeastern U.S.
The Company delivers its waste services from branch locations, in
contiguous service areas, which permit the Company's branch facilities to
provide back-up services and support to one another. Each manager of a branch
facility has autonomous service and decision-making authority for the local
market area. Each designated region is overseen by a regional manager, who is
typically located at one of the Company's branch facilities. As of December 31,
1997, the branch network was divided into the five regions set forth below:
<TABLE>
<CAPTION>
Central South West Coastal Tennessee Valley
- ------- ----- ---- ------- ----------------
<S> <C> <C> <C> <C>
Durham, NC Wilmington, NC Graham, NC Newport, NC Chattanooga, TN
Elizabeth City, NC Bolivia, NC Greensboro, NC Jacksonville, NC Lilburn, GA
Garner, NC Conway, SC Henderson, NC Easley, SC
Goldsboro, NC Sumter, SC Oxford, NC
Greenville, NC Charleston, SC
Hope Mills, NC
Raleigh, NC
Wilson, NC
Rocky Mount, NC
Kinston, NC
</TABLE>
The managerial philosophy of the Company centers on the principle that
customers' needs can best be served at the local level by a staff of
well-trained personnel led by a branch manager. Each branch manager is
responsible for implementing sales programs, maintaining service quality,
promoting safety in the branch's operations and overseeing the day-to-day
operations for the branch, including contract administration. Branch managers
also assist regional managers in identifying potential acquisition candidates.
Frequently, the branch manager is also the branch facility's sales manager; but
in larger market areas, branch facilities will have one or more sales persons.
Branch managers are compensated based on the performance of their branch. Each
branch manager reports to a regional manager or Vice President, who reports
directly to the Company's Executive Vice President.
14
<PAGE>
In addition to delivering the Company's services, branch staff
responsibilities include setting up customer accounts, answering customer
questions, processing accounts payable and maintaining accurate payroll and
personnel information. Maintenance support for collection equipment is also
provided at the branch facility. The facility size, number of maintenance
personnel and capabilities are determined by the number of vehicles operated and
the type of services provided within the branch facility's market area.
On a monthly basis, the corporate and/or regional officers meet with each
branch manager to discuss and evaluate the branch operations. This evaluation is
conducted through the use of flash reports on a weekly basis at the branch and
regional levels and monthly at the corporate level. Flash reports highlight key
operating data such as man-hours, overtime hours, truck hours, revenues and
extraordinary costs. These meetings are oriented to identifying trends,
opportunities and strategies in the branch facility's proximate geographic area.
Using a decentralized approach, but with strong corporate monitoring and strict
budgetary and operating guidelines and quality control standards, each branch
manager has the authority to exercise discretion in business decisions. The
Company's management information systems provide corporate management timely
oversight of branch performance.
Information Technologies
A cornerstone of the Company's desire to deliver responsive and
cost-effective waste services is its management information system network. Many
of the Company's information systems, controls and services are designed to
assist branch facilities' personnel in making decisions based upon centralized
information. Financial control is maintained through personnel, fiscal and
accounting policies which are established at the corporate level for
implementation at the branch locations. The Company's systems allow for
centralized billing and collection through a lock-box system, thus enhancing
cash management. An internal audit program monitors compliance with Company
policies and the benchmarks are monitored continuously using an advanced
management information system. This information system links the Company's IBM
AS400 computer to each branch using satellite technology which allows each
branch on-line, real-time financial, productivity, maintenance and customer
information.
Support Services
In order to ensure focus at the branch facility level and to support branch
operations, the Company established its Support Services Team during 1995.
Support services include: (i) safety and training services; (ii) risk
management; (iii) capital expenditure evaluation; (iv) human resources services;
(v) equipment maintenance; (vi) location of most economical disposal facilities;
(vii) purchasing; (viii) sales and marketing support; (ix) productivity
analysis; (x) research and development services; and (xi) acquisition due
diligence. The Support Services Team provides significant assistance to the
branch facilities in the integration of newly acquired operations and in
securing new and retaining existing customers. Successful integration of an
acquired business is critical to achieving operational and administrative
efficiencies and improved profitability of the incremental business.
15
<PAGE>
Support services include a comprehensive safety and risk management program
that has strong management support and includes strict safety rules and
policies, accident investigations, tracking and statistical analysis, employee
safety awards, branch safety committees and random facility inspections by both
corporate staff and an outside loss control specialist. Management believes that
its safety program has resulted in accident rates and insurance loss ratios that
are consistently lower than industry averages.
Landfill and Other Disposal Alternatives
Waste Industries currently utilizes approximately 100 disposal sites in the
markets it serves. The Company has historically opted to contract for landfill
services due to the availability of disposal space at favorable tipping fees in
close proximity to its current markets. In certain markets, the Company has been
able to control disposal costs by negotiating long-term disposal contracts with
Subtitle D landfill operators. In addition, the Company operates an extensive
network of transfer stations to consolidate waste streams and receive volume
discounts on disposal costs.
The Company believes that many landfills not in compliance with Subtitle D
Regulations will close in its market area in the next few years. Despite this,
the absolute volume of disposal capacity is increasing due both to the expansion
of capacity at existing landfills and the opening of new landfills. Landfill
operators are aggressively soliciting solid waste volumes to ensure cash flows
sufficient to support the expansion costs and other capital expenditures made to
achieve compliance with the provisions of Subtitle D. Management believes there
will continue to be a significant supply of low-cost disposal capacity in its
current markets and that by controlling a large volume of the waste stream it
will be able to continue to negotiate favorable disposal costs. The Company
plans to continue to secure long-term disposal contracts with Subtitle D
landfill operators and to continue expansion of transfer stations. Transfer
stations allow the Company access to additional disposal sites and are
substantially less expensive to develop than landfills. The Company believes
that landfills that have been targeted for closure may provide prime sites to
develop transfer stations.
Although the Company does not currently own or operate a landfill site, it
may decide to acquire a landfill, develop a landfill, or partner with an
experienced landfill operator for the acquisition, development or assumption of
the operation of a landfill. In its current markets, such action would be
pursued if the Company believed that ownership or operation of a landfill in a
particular market would provide significant cost benefits compared to its
traditional system of consolidating waste and negotiating favorable disposal
rates. In a new market, the Company may become a landfill owner or operator if
that market lacks the amount of disposal capacity that the Company has
experienced in its current markets. In the event that the Company develops or
acquires landfills, the Company will have material financial obligations
relating to closure and post-closure costs of disposal facilities which it may
operate in the future. The Company will provide accruals for future obligations
(generally for a term of 30 to 40 years after final
16
<PAGE>
closure of any such landfill) based on engineering estimates of consumption of
permitted landfill airspace over the useful life of any such 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.
The Company does, however, intend to develop land clearing and inert debris
("LCID") landfills in the near future. Such development would provide the
Company an opportunity to dispose of a portion of the Company's waste stream in
its own landfill, rather than paying a third party to do so. LCID landfills can
only take limited kinds of waste (namely land-clearing and inert debris such as
trees, rocks and concrete), as opposed to traditional solid waste landfills,
which can take any kind of waste (except hazardous waste). Traditional solid
waste landfills are therefore subject to more stringent regulation than LCID
landfills. As a result, LCID landfills generally can be constructed in a
relatively short time and involve fewer regulatory hurdles compared to
traditional solid waste landfills.
Alternatives to landfill disposal, such as recycling and composting, are
increasingly being used. In addition, incineration is an alternative to landfill
disposal in certain of the Company's markets. There also has been an increasing
trend at the state and local levels to mandate recycling and waste reduction at
the source and to prohibit the disposal of certain type of wastes, such as yard
wastes, at landfills. These developments may result in the volume of waste being
reduced in certain areas. North Carolina, South Carolina and Virginia have each
adopted plans or requirements that set goals for specified percentages of
certain solid waste items to be recycled. These recycling goals are being phased
in over the next few years. These alternatives, if and when adopted and
implemented, may have a material adverse effect on the business, financial
condition and results of operations of the Company.
Marketing and Sales
Waste Industries markets its services locally through its regional and
branch managers and approximately 35 direct sales representatives who focus on
commercial, industrial and residential customers. The Company also obtains new
customers from referral sources, its general reputation and local market print
advertising. Leads are also developed from a construction reporting service, new
building permits, business licenses and other public records. Additionally, each
branch facility advertises in the yellow pages and other local business print
media that cover its service area. A variety of methods are used to market
services directly to individual households. Some branch locations have dedicated
sales representatives that market residential services. The Company engages in
direct mail campaigns and door-to-door marketing and works with real estate
agents and developers to sell services to new developments. The Company recently
installed telemarketing programs to sell residential services. All Company
containers display the Company logo, name and telephone number. Additionally,
the Company attends and makes presentations at municipal and state conferences
and advertises in governmental associations' membership publications.
17
<PAGE>
The Company's sales representatives visit customers on a regular basis and
make sales calls to potential new customers. These sales representatives receive
a significant portion of their compensation based upon certain incentive
formulas. The Company emphasizes providing quality services and customer
satisfaction and retention, and believes that its focus on quality service will
help retain existing and attract additional customers. Maintenance of a local
presence and identity is an important aspect of the Company's marketing plan,
and many of the Company's managers are involved in local governmental, civic and
business organizations.
No single Company customer accounted for more than 4% of the Company's
revenues in 1997. The Company does not believe that the loss of any single
customer would have a material adverse effect on the Company's results of
operations.
Competition
The solid waste management industry is highly competitive, very fragmented
and requires substantial labor and capital resources. Intense competition exists
within the industry not only for collection, transportation and disposal volume,
but also for acquisition candidates. The industry includes four large national
waste companies: Waste Management, Inc.; Browning-Ferris Industries, Inc.; USA
Waste Services, Inc.; and Allied Waste Industries, Inc. In March 1998, Waste
Management and USA Waste Services agreed to merge. There are several other
public companies with annual revenue in excess of $100 million, including
Republic Industries, Inc. and Superior Services, Inc. The Company competes with
a number of these and other regional and local companies, including publicly or
privately owned providers of incineration services.
The Company also competes with certain municipalities that operate their
own solid waste collection and disposal facilities. These municipalities may
have certain advantages over the Company due to the availability of tax revenues
and tax-exempt financing.
The Company competes for collection and recycling accounts primarily on the
basis of price and quality of its services. From time to time, competitors may
reduce the price of their services in an effort to expand market share or to win
a competitively bid municipal contract. These practices may also lead to reduced
pricing for the Company's services or the loss of business. The Company provides
a substantial portion of its residential collection services under municipal
contracts. As is generally the case in the industry, municipal contracts are
subject to periodic competitive bidding. The balance of the Company's
residential services are provided on a subscription basis. The Company's
inability to compete with larger and better capitalized companies, or to replace
a significant number of municipal contracts lost through the competitive bidding
process with comparable contracts or other revenue sources within a reasonable
time period, could have a material adverse effect on the Company's results of
operations.
18
<PAGE>
Employees
At December 31, 1997, the Company employed approximately 1,150 full-time
employees. None of the Company's employees are represented by unions, and the
Company has no knowledge of any organizational efforts among its employees. The
Company has experienced low turnover among its employees and believes that its
relations with its employees are good. The Company is highly dependent upon the
services of the members of its management team, the loss of any of whom may have
an adverse effect on the Company.
Risk Management, Insurance and Performance Bonds
Waste Industries actively maintains an environmental and other risk
management programs appropriate for its business. The Company's environmental
risk management program includes evaluating both existing facilities, as well as
potential acquisitions, for environmental law compliance and operating
procedures. The Company also maintains a worker safety program that encourages
safe practices in the workplace. Operating practices at all existing Company
operations stress minimizing the possibility of environmental contamination and
litigation. The Company believes that all of its facilities are in compliance in
all material respects with applicable state and federal regulations.
The Company carries a range of insurance intended to protect its assets and
operations, including a commercial general liability policy and a property
damage policy. A partially or completely uninsured claim against the Company
(including liabilities associated with cleanup or remediation at its own
facilities) if successful and of sufficient magnitude, could have a material
adverse effect on the Company's results of operations or financial condition.
Any future difficulty in obtaining insurance could also impair the Company's
ability to secure future contracts, which may be conditioned upon the
availability of adequate insurance coverage.
Municipal solid waste collection contracts may require performance bonds or
other means of financial assurance to secure contractual performance. The
Company has not experienced difficulty in obtaining performance bonds or letters
of credit for its current operations. At December 31, 1997, the Company had
provided customers and various regulatory authorities with bonds and letters of
credit of approximately $1.6 million to secure its obligations. If the Company
were unable to obtain surety bonds or letters of credit in sufficient amounts or
at acceptable rates, it may be precluded from entering into additional municipal
solid waste collection contracts or obtaining or retaining landfill operating
permits. If the Company develops or owns landfills in the future, the Company
will attempt to obtain insurance coverage for its long-term care and final
closure obligations with respect to any such landfills.
Regulation
Introduction
The Company is currently subject to extensive and evolving federal, state
and local environmental laws and regulations that have been enacted in response
to technological
19
<PAGE>
advances and increased concern over environmental issues. These regulations not
only strictly regulate the conduct of the Company's operations but also are
related directly to the demand for many of the services offered by the Company.
The regulations affecting the Company are administered by the EPA and
various other federal, state and local environmental, zoning, health and safety
agencies. The Company believes that it is currently in substantial compliance
with applicable federal, state and local laws, permits, orders and regulations,
and it does not currently anticipate any material environmental costs (although
there can be no assurance in this regard). The Company anticipates there will
continue to be increased regulation, legislation and regulatory enforcement
actions related to the solid waste services industry. As a result, the Company
attempts to anticipate future regulatory requirements and to plan accordingly to
remain in compliance with the regulatory framework.
In order to transport waste, it is necessary for the Company to possess one
or more permits from state or local agencies. These permits also must be
periodically renewed and are subject to modification and revocation by the
issuing agency. No Company permit has ever been revoked.
In the future, the Company may expand its activities to include ownership
and operation of landfill sites. In order to develop, own or operate a landfill,
a transfer station or most other solid waste facilities, the Company is required
to go through several governmental review processes and obtain one or more
permits and often zoning or other land use approvals. Obtaining these permits
and zoning or land use approvals is difficult, time consuming and expensive and
is often opposed by various local elected officials and citizens' groups. Once
obtained, operating permits generally must be periodically renewed and are
subject to modification and revocation by the issuing agency.
If the Company is successful in acquiring or developing landfill sites, the
Company's facilities will be subject to a variety of operational, monitoring,
site maintenance, closure, post-closure and financial assurance obligations
which change from time to time and which could give rise to increased capital
expenditures and operating costs. In connection with any such landfills, it is
often necessary to expend considerable time, effort and money in complying with
the governmental review and permitting process necessary to maintain or increase
the capacity of these landfills. Governmental authorities have broad power to
enforce compliance with these laws and regulations and to obtain injunctions or
impose civil or criminal penalties in the case of violations.
The principal federal, state and local statutes and regulations applicable
to the Company's various operations are as follows:
The Resource Conservation and Recovery Act Of 1976
RCRA regulates the generation, treatment, storage, handling, transportation
and disposal of solid waste and requires states to develop programs to ensure
the safe disposal of
20
<PAGE>
solid waste. RCRA divides solid waste into two groups, hazardous and
nonhazardous. Wastes are generally classified as hazardous if they (i) either
(a) are specifically included on a list of hazardous wastes or (b) exhibit
certain hazardous characteristics and (ii) are not specifically designated as
nonhazardous. Wastes classified as hazardous under RCRA are subject to much
stricter regulation than wastes classified as nonhazardous.
Among the wastes that are specifically designated as nonhazardous waste are
household waste and "special" waste, including items such as petroleum
contaminated soils, asbestos, foundry sand, shredder fluff and most nonhazardous
industrial waste products.
Although the company is currently not involved with transportation or
disposal of hazardous substances, the Company transported hazardous substances
in the past and may become involved with hazardous substance transportation and
disposal in the future. The EPA regulations issued under Subtitle C of RCRA
impose a comprehensive "cradle to grave" system for tracking the generation,
transportation, treatment, storage and disposal of hazardous wastes. The
Subtitle C regulations provide standards for generators, transporters and
disposers of hazardous wastes, and for the issuance of permits for sites where
such material is treated, stored or disposed. Subtitle C imposes detailed
operating, inspection, training and emergency preparedness and response
standards, as well as requirements for manifesting, record keeping and
reporting, facility closure, post-closure and financial responsibilities.
In October 1991, the EPA adopted the Subtitle D Regulations governing solid
waste landfills. The Subtitle D Regulations, which generally became effective in
October 1993, include location restrictions, facility design standards,
operating criteria, closure and post-closure requirements, financial assurance
requirements, groundwater monitoring requirements, groundwater remediation
standards and corrective action requirements. In addition, the Subtitle D
Regulations require that new landfill sites meet more stringent liner design
criteria (typically, composite soil and synthetic liners or two or more
synthetic liners) designed to keep leachate out of groundwater and have
extensive collection systems to carry away leachate for treatment prior to
disposal. Groundwater monitoring wells must also be installed at virtually all
landfills to monitor groundwater quality and, indirectly, the leachate
collection system operation. The Subtitle D Regulations also require, where
threshold test levels are present, that methane gas generated at landfills be
controlled in a manner that protects human health and the environment. Each
state is required to revise its landfill regulations to meet these requirements
or such requirements will be automatically imposed upon it by the EPA. Each
state is also required to adopt and implement a permit program or other
appropriate system to ensure that landfills within the state comply with the
Subtitle D Regulations criteria. Various states into which the Company operates
or may enter have adopted regulations or programs as stringent as, or more
stringent than, the Subtitle D Regulations. Failure to comply with these
regulations could require the Company to undertake investigatory or remedial
activities, to curtail operations or to close a landfill temporarily or
permanently. Future changes in these regulations may in the future require the
Company to modify, supplement or replace equipment or facilities at costs that
may be substantial. The failure of regulatory agencies to enforce these
regulations vigorously or consistently may give an advantage to competitors of
the Company whose facilities do not comply with the Subtitle D Regulations or
its state counterparts. The
21
<PAGE>
Company's ultimate financial obligations related to any failure to comply with
these regulations could have a material adverse effect on the Company's
operations and financial condition.
The Federal Water Pollution Control Act of 1972
The Federal Water Pollution Control Act of 1972, as amended ("Clean Water
Act"), establishes rules regulating the discharge of pollutants from a variety
of sources, including solid waste disposal sites and transfer stations, into
waters of the U.S. If run-off from the Company's transfer stations or if run-off
or collected leachate from the Company's potentially owned or operated landfills
is discharged into streams, rivers or other surface waters, the Clean Water Act
would require the Company to apply for and obtain a discharge permit, conduct
sampling and monitoring and, under certain circumstances, reduce the quantity of
pollutants in such discharge. Also, virtually all landfills are required to
comply with the EPA's storm water regulations issued in November 1990, which are
designed to prevent possibly contaminated landfill storm water runoff from
flowing into surface waters. The Company believes that its facilities are in
compliance in all material respects with Clean Water Act requirements,
particularly as they apply to treatment and discharge of leachate and storm
water.
The Comprehensive Environmental Response, Compensation and Liability Act Of
1980 ("Cercla")
CERCLA established a regulatory and remedial program intended to provide
for the investigation and cleanup of facilities from which there has been, or is
threatened, a release of any hazardous substance into the environment. CERCLA's
primary mechanism for remedying such problems is to impose strict joint and
several liability for cleanup of facilities on current owners and operators of
the site, former owners and operators of the site at the time of the disposal of
the hazardous substances, as well as the generators of the hazardous substances
and the transporters who arranged for disposal or transportation of the
hazardous substances. The costs of CERCLA investigation and cleanup can be very
substantial. Liability under CERCLA does not depend upon the existence or
disposal of "hazardous waste" as defined by RCRA, but can also be founded upon
the existence of even very small amounts of the more than 700 "hazardous
substances" listed by the EPA, many of which can be found in household waste. If
the Company were to be found to be a responsible party for a CERCLA cleanup, the
enforcing agency could hold the Company, or any other generator, transporter or
the owner or operator of the facility, completely responsible for all
investigative and remedial costs even if others may also be liable. CERCLA also
authorizes the imposition of a lien in favor of the U.S. upon all real property
subject to, or affected by, a remedial action for all costs for which a party is
liable. CERCLA provides a responsible party with the right to bring legal action
against other responsible parties for their allocable share of investigative and
remedial costs. The Company's ability to get others to reimburse it for their
allocable share of such costs would be limited by the Company's ability to find
other responsible parties and prove the extent of their responsibility and by
the financial resources of such other parties.
22
<PAGE>
The Clean Air Act
The Clean Air Act provides for regulation, through state implementation of
federal requirements, of the emission of air pollutants from certain landfills
based upon the date of the landfill construction and volume per year of
emissions of regulated pollutants. The EPA has proposed new source performance
standards regulating air emissions of certain regulated pollutants (methane and
non-methane organic compounds) from municipal solid waste landfills. Landfills
located in areas with air pollution problems may be subject to even more
extensive air pollution controls and emission limitations. In addition, the EPA
has issued standards regulating the disposal of asbestos-containing materials.
Some of the federal statutes described above contain provisions authorizing
under certain circumstances, the institution of lawsuits by private citizens to
enforce the provisions of the statutes.
The Occupational Safety and Health Act of 1970
OSHA establishes employer responsibilities and authorizes the promulgation
by the Occupational Safety and Health Administration of occupational health and
safety standards, including the obligation to maintain a workplace free of
recognized hazards likely to cause death or serious injury, to comply with
adopted worker protection standards, to maintain certain records, to provide
workers with required disclosures and to implement certain health and safety
training programs. Various of those promulgated standards may apply to the
Company's operations, including those standards concerning notices of hazards,
safety in excavation and demolition work, the handling of asbestos and
asbestos-containing materials, and worker training and emergency response
programs. The Company's employees are trained to respond appropriately in the
event there is an accidental spill or release of packaged asbestos-containing
materials or other regulated substances during transportation or landfill
disposal.
State and Local Regulations
Each state in which the Company now operates or may operate in the future
has laws and regulations governing the generation, storage, treatment, handling,
transportation and disposal of solid waste, water and air pollution and, in most
cases, the siting, design, operation, maintenance, closure and post-closure
maintenance of landfills and transfer stations. In addition, many states have
adopted Superfund statutes comparable to, and in some cases more stringent than,
CERCLA. These statutes impose requirements for investigation and cleanup of
contaminated sites and liability for costs and damages associated with such
sites, and some provide for the imposition of liens on property owned by
responsible parties. Furthermore, many municipalities also have ordinances,
local laws and regulations affecting Company operations. These include zoning
and health measures that limit solid waste management activities to specified
sites or activities, flow control provisions that direct the delivery of solid
wastes to specific facilities, laws that grant the right to establish franchises
for
23
<PAGE>
collection services and then put out for bid the right to provide collection
services, and bans or other restrictions on the movement of solid wastes into a
municipality.
Certain permits and approvals may limit the types of waste that may be
accepted at a landfill or the quantity of waste that may be accepted at a
landfill during a given time period. In addition, certain permits and approvals,
as well as certain state and local regulations, may limit a landfill to
accepting waste that originates from specified geographic areas or seek to
restrict the importation of out-of-state waste or otherwise discriminate against
out-of-state waste. Generally, restrictions on the importation of out-of-state
waste have not withstood judicial challenge. However, from time to time federal
legislation is proposed which would allow individual states to prohibit the
disposal of out-of-state waste or to limit the amount of out-of-state waste that
could be imported for disposal and would require states, under certain
circumstances, to reduce the amounts of waste exported to other states. Although
Congress has not yet passed such legislation, if this or similar legislation is
enacted, states in which the Company operates landfills could act to limit or
prohibit the importation of out-of-state waste. Such state actions could
materially adversely affect landfills within those states that receive a
significant portion of waste originating from out-of-state.
In addition, certain states and localities may for economic or other
reasons restrict the exportation of waste from their jurisdiction or require
that a specified amount of waste be disposed of at facilities within their
jurisdiction. In 1994, the U.S. Supreme Court held unconstitutional, and
therefore invalid, a local ordinance that sought to impose flow controls on
taking waste out of the locality. However, certain state and local jurisdictions
continue to seek to enforce such restrictions and, in certain cases, the Company
may elect not to challenge such restrictions based upon various considerations.
In addition, the aforementioned proposed federal legislation would allow states
and localities to impose certain flow control restrictions.
These restrictions could result in the volume of waste going to landfills
being reduced in certain areas, which may materially adversely affect the
Company's ability to operate its landfills at their full capacity and/or affect
the prices that can be charged for landfill disposal services. These
restrictions may also result in higher disposal costs for the Company's
collection operations. If the Company were unable to pass such higher costs
through to its customers, the Company's business, financial condition and
results of operations could be materially adversely affected.
There has been an increasing trend at the state and local level to mandate
and encourage waste reduction at the source and waste recycling, and to prohibit
or restrict the disposal of certain types of solid wastes, such as yard wastes,
leaves and tires, in landfills. The enactment of regulations reducing the volume
and types of wastes available for transport to and disposal in landfills could
affect the Company's ability to operate its facilities at their full capacity.
Item 2. Property and Equipment
As of December 31, 1997, the Company owned 13 of its branch facilities
which covered in the aggregate more than 100 acres and approximately 90,000
square feet of space.
24
<PAGE>
As of December 31, 1997, the Company leased the remaining 11 facilities which
covered in the aggregate more than 40 acres and approximately 75,000 square
feet. The Company's corporate headquarters is leased under a traditional real
property lease and contains approximately 10,000 square feet of space.
The major types of equipment used by the Company to service its customers
are (i) containers in which customers deposit their waste and (ii) vehicles for
collecting and transporting waste.
Containers
Some type of container is used in almost every service provided by the
Company, and the Company therefore has an extensive inventory on-hand or on-site
at customers' locations. The Company owns all of its containers and centrally
manages its inventory located at the branch facility level. The Company also
owns a significant number of on-site compaction containers, which provide
efficiency for high-volume solid waste generators. Container life is dependent
on the location of the container, the type of waste that is deposited into the
container and how the container is maintained. Proper maintenance of commercial
and industrial front loader and roll-off containers consists of regular
repainting, scheduled repairs and switch-outs, quality cleaning, sanding and
priming and monitoring of the container by Company employees to check for needed
repairs. Residential collection containers require minor maintenance.
Collection Vehicles
The Company utilizes a fleet of specialized collection vehicles to collect
and transport waste and to provide recycling and convenience site services. The
Company owns approximately 90% of its transportation fleet and leases the
remainder. The Company has implemented an aggressive and reliable maintenance
program to extend the useful lives of its equipment. Preventative and long-term
maintenance is performed on regularly scheduled cycles that are more frequent
than most manufacturers' suggested schedules. Preventative maintenance is
performed on collection vehicles after every 150 to 250 hours of operation
depending on its class, and long-term maintenance (reconstruction of engines,
transmissions, etc.) is performed every four to six years. Additionally,
cosmetic repairs (painting, interior upholstery repairs) are performed as
needed. The majority of the maintenance program is done by Company personnel
located in branch facilities.
Item 3. Legal Proceedings.
In the normal course of its business and as a result of the extensive
governmental regulation of the waste industry, the Company may periodically
become subject to various judicial and administrative proceedings involving
federal, state or local agencies. In these proceedings, an agency may seek to
impose fines on the Company or to revoke, or to deny renewal of, an operating
permit held by the Company. In addition, the Company may become party to various
claims and suits pending for alleged damages to persons and property, alleged
violation of certain laws and for alleged liabilities arising out of matters
occurring during the
25
<PAGE>
normal operation of the waste management business. However, there is no current
proceeding or litigation involving the Company that it believes will have a
material adverse effect upon the Company's financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1997.
26
<PAGE>
EXECUTIVE OFFICERS
As of February 28, 1998, the executive officers of the Company were as
follows:
<TABLE>
<CAPTION>
Name Age Position(s)
- ---- --- -----------
<S> <C> <C>
Lonnie C. Poole, Jr............ 60 Chairman, Chief Executive Officer and Director
Jim W. Perry................... 53 President, Chief Operating Officer and Director
Robert H. Hall................. 51 Vice President, Chief Financial Officer, Secretary, Treasurer and Director
Henry E. Dick.................. 50 Executive Vice President
</TABLE>
Lonnie C. Poole, Jr. founded the Company in 1970 and has served as Chief
Executive Officer and Chairman of the Board of Directors of the Company since
that time. Mr. Poole holds a B.S. in Civil Engineering from North Carolina State
University and an M.B.A. from the University of North Carolina at Chapel Hill.
Mr. Poole has more than 27 years' experience in the solid waste industry. He has
served in the Environmental Industry Association, a non-profit business
association established to, among other things, inform, educate and assist its
members in cost-effective, safe and environmentally responsible management of
waste ("EIA", formerly the National Solid Waste Management Association or the
"NSWMA"), in the following positions: Chairman, Vice-Chairman, Board Member. In
addition, Mr. Poole has served in the EIA Research and Education Foundation as
Chairman and now is a member of its Board of Directors. Mr. Poole was inducted
into the EIA Hall of Fame in 1994.
Jim W. Perry joined the Company in 1971 and has served as the Company's
President and Chief Operating Officer since 1987 and as a director since 1974.
Mr. Perry holds a B.S. in Agricultural and Biological Engineering from North
Carolina State University and an M.S. in Systems Management from the University
of Southern California. Mr. Perry has more than 27 years' experience in the
solid waste industry and has received the Distinguished Service Award from the
NSWMA. In addition, Mr. Perry has served in the Carolinas Chapter of NSWMA as
Chairman and on the Membership Committee. Mr. Perry was inducted into the EIA
Hall of Fame in 1997.
Robert H. Hall joined the Company in 1978 and has served as the Company's
Chief Financial Officer, Vice President, Secretary and Treasurer since 1983 and
as a director since 1983. Mr. Hall is a Certified Public Accountant and holds a
B.S. in Business Administration from East Carolina University. Mr. Hall has more
than 19 years' experience in the solid waste industry.
Henry E. Dick has served as the Company's Executive Vice President,
responsible for all operating divisions and all sales and marketing activities,
since 1991. Prior thereto, he served in various positions, most recently as the
Company's Vice President of Sales and Marketing from 1987 to 1991. Mr. Dick
holds a B.A. in Political Science from Guilford College. Mr. Dick has more than
15 years' experience in the solid waste industry. Mr. Dick
27
<PAGE>
has served the Carolinas Chapter of NSWMA as Chairman for two years,
Vice-Chairman for four years, Legislative Chairman for four years and member of
the Waste Hauler's Council. Mr. Dick was voted EIA Member of the Year for 1997.
None of the executive officers, directors or other key employees of the
Company is related to any other executive officer, director or other such key
employee, except that Lonnie C. Poole, Jr. and Lonnie C. Poole, III are father
and son.
Other Key Employees
The following table sets forth certain information concerning the other key
employees of the Company as of March 24, 1998:
<TABLE>
<CAPTION>
Name Age Position(s)
- ---- --- -----------
<S> <C> <C>
Lonnie C. Poole, III 36 Vice President and Director of Support Services
Steven C. Goode 48 Vice President of Marketing
Joseph W. Peacock, Jr. 48 Vice President
Stephen C. Shaw 38 Vice President of Finance and Controller
Joe H. Lowry, Jr. 43 Director of Human Resources
Ralph A. Ford 42 Director of Risk Management
Harrell J. Auten 50 Vice President
Roger C. Davis 54 West Regional Manager
Dallas D. Goodwin 47 Coastal Regional Manager
Richard D. Lauck 52 Vice President
James M. Roberts 48 Vice President
William A. Williams 52 Division Manager
</TABLE>
Lonnie C. Poole, III has served as the Company's Vice President, Director
of Support Services since 1995. From 1990 to 1995, he served as the Company's
Risk Management Director. Mr. Poole holds a B.S. in Aerospace Engineering from
North Carolina State University. Mr. Poole is the son of Lonnie C. Poole, Jr.
Mr. Poole has more than eight years' experience in the solid waste industry.
Steven C. Goode has served as Vice President of Marketing since 1995. Prior
thereto, he served in various managerial capacities for the Company, including
as Vice President from 1991 to 1995. Mr. Goode studied Business Administration
at Virginia Commonwealth University and holds an A.S. in Business Administration
from John Tyler Community College. Mr. Goode has more than 14 years' experience
in the solid waste industry.
Joseph W. Peacock, Jr. has served as a Vice President of the Company since
1994. The Company has employed him since 1983, beginning as the parts manager.
Since that time, he has been promoted to Operations Manager, General Manager
and, in 1994, Vice President. Mr. Peacock received a business management degree
from North Carolina State University in 1974. Mr. Peacock has more than 15
years' experience in the solid waste industry.
28
<PAGE>
Stephen C. Shaw has served as the Company's Controller since he joined the
Company in 1985 and as Vice President of Finance since 1991. Mr. Shaw holds a
B.S. in Business Administration from UNC-CH. Mr. Shaw has more than 13 years'
experience in the solid waste industry.
Joe H. Lowry, Jr. has served as the Company's Director of Human Resources
since he joined the Company in October 1995. Prior to joining the Company, he
worked for over 13 years for Carolina Power and Light Company, most recently as
the Senior Human Resources Representative for its Southern Division. Mr. Lowry
holds an A.S. degree from Lees-McRae College and a B.A. in Education from
Western Carolina University. Mr. Lowry has more than two years' experience in
the solid waste industry.
Ralph A. Ford has served as the Company's Risk Manager since he joined the
Company in September 1996. Prior to joining the Company, he worked for over five
years for Chambers Development Company, most recently as the Northern Region
Safety Manager following that company's merger with USA Waste in 1995. Mr. Ford
holds a B.S. in Industrial Education and an M.A. in Vocation/Industrial
Education from Tennessee State University. Mr. Ford has more than seven years'
experience in the solid waste industry.
Harrell J. Auten has served as a Vice President of the Company since March
1998. From 1993 until March 1998, he served as the Company's South Regional
Manager. From 1991 to 1993, he owned and operated his own company, Lodal-South,
Inc., Mr. Auten holds a B.S. in Business Administration from UNC-CH. Mr. Auten
has more than 27 years' experience in the solid waste industry.
Roger C. Davis has served as the Company's West Regional Manager since
1995. Since he joined the Company in 1987, he has served in various positions,
including as Division Manager from 1990 to 1995. Mr. Davis holds a B.S. in
Business Administration from the University of New York at Albany and an A.S. in
Applied Science in Industrial Management from El Paso Community College. Mr.
Davis has more than 11 years' experience in the solid waste industry.
Dallas D. Goodwin has served as the Company's Coastal Regional Manager
since 1990. He holds a B.S. in Business Administration from Pembroke State
University and attended the North Carolina School of Banking and the Graduate
School of Retail Banking at the University of Virginia. Mr. Goodwin has more
than eight years' experience in the solid waste industry.
Richard D. Lauck has served as a Vice President of the Company since March
1998. From November 1995 until March 1998, he served as the Company's Central
Regional Manager. Prior to joining the Company, Mr. Lauck worked for 14 years
with Waste Management, Inc., where he held various operational positions
including General Manager, Vice President and Region Manager. Mr. Lauck holds a
B.S. degree, specializing in Marketing, from the University of Northern Colorado
and an M.S. from Colorado State University. Mr. Lauck has more than 16 years'
experience in the solid waste industry.
29
<PAGE>
James M. Roberts has served as the Company's East Regional Manager since
1990. Since he joined the Company in 1978 he has served in various positions
including Division Manager from 1985 until 1990. Mr. Roberts studied Forestry
and Business Administration at Wayne Community College. Mr. Roberts has more
than 19 years' experience in the solid waste industry.
William A. Williams has served as a Division Manager of the Company since
1978. Since joining the Company in 1973, he has served in various positions,
including Branch Manager from 1973 to 1978. Mr. Williams has more than 25 years'
experience in the solid waste industry.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
(a) Price Range of Common Stock
The Company's Common stock trades on the Nasdaq National Market under the
symbol "WWIN". The following sets forth the quarterly high and low bid prices
from June 13, 1997 (the date trading commenced) through December 31, 1997 as
reported by Nasdaq. These prices are based on quotations between dealers, which
do not reflect retail mark-up, mark-down or commissions.
High Low
---- ---
1997
June 13, 1997 through June 30, 1997................ $18 $15 7/8
Third Quarter...................................... $27 3/4 $17 1/4
Fourth Quarter..................................... $24 1/8 $17 3/4
(b) Approximate Number of Equity Security Holders
As of March 18, 1998, the number of record holders of the Company's Common
Stock was 70 and the Company believes that the number of beneficial owners was
more than 400.
(c) Dividends
Since its conversion from S corporation to C corporation status in
connection with and prior to its initial public offering in June 1997, the
Company has never paid a cash dividend on its Common Stock and anticipates that
for the foreseeable future any earnings will be retained for use in its business
and, accordingly, does not anticipate the payment of cash dividends. The
Company's credit facilities contain convenants that restrict the payment of cash
dividends.
30
<PAGE>
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with
the financial statements and the notes thereto included elsewhere herein. The
consolidated statement of operations data set forth below with respect to the
years ended December 31, 1995, 1996 and 1997 and the consolidated balance sheet
data as of December 31, 1996 and 1997 are derived from, and are referenced to,
the audited consolidated financial statements of the Company included elsewhere
in this Annual Report on Form 10-K. The consolidated statement of operations
data set forth below with respect to the years ended December 31, 1993 and 1994
and the consolidated balance sheet data as of December 31, 1993, 1994 and 1995
are derived from financial statements not included in this Annual Report on Form
10-K.
<TABLE>
<CAPTION>
Year Ended December 31, (1)
-----------------------------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(in thousands, except per share amounts)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Service revenues .............................. $ 49,467 $ 66,382 $ 82,163 92,381 $ 114,759
Equipment sales ............................... 3,825 1,852 1,974 1,671 1,544
--------- --------- --------- --------- ---------
Total revenues ................................ 53,292 68,234 84,137 94,052 116,303
Cost of service operations .................... 27,869 37,398 49,844 58,911 71,289
Cost of equipment sales ....................... 2,694 1,852 1,590 1,162 1,133
--------- --------- --------- --------- ---------
Total cost of operations....................... 30,563 39,250 51,434 60,073 72,422
Selling, general and
administrative ............................. 12,102 15,143 15,877 16,757 21,157
Depreciation and amortization ................. 6,150 7,615 8,217 8,522 10,860
--------- --------- --------- --------- ---------
Operating income .............................. 4,477 6,226 8,609 8,700 11,864
Interest expense .............................. (1,625) (1,920) (2,122) (2,345) (2,831)
Other income .................................. 171 287 473 694 719
--------- --------- --------- --------- ---------
Income before income taxes .................... 3,023 4,593 6,960 7,049 9,752
Pro forma income taxes(2) ..................... 1,230 1,865 2,790 2,845 3,800
--------- --------- --------- --------- ---------
Pro forma net income (2) ...................... $ 1,793 $ 2,728 $ 4,170 $ 4,204 $ 5,952
========= ========= ========= ========= =========
Pro forma earnings per share(2)(3)
Basic .................................... $ 0.22 $ 0.29 $ 0.44 $ 0.44 $ 0.56
========= ========= ========= ========= =========
Diluted .................................. $ 0.19 $ 0.28 $ 0.43 $ 0.43 $ 0.54
========= ========= ========= ========= =========
Weighted average number of shares
outstanding:
Basic .................................... $ 8,183 $ 9,564 $ 9,564 $ 9,600 $ 10,649
Diluted .................................. 9,571 9,597 9,600 9,847 11,008
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, (1)
---------------------------------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Other Operating Data:
Net cash provided by operating
activities ............................ $ 8,845 $ 12,933 $ 15,787 $ 14,946 $ 20,478
Net cash used in investing
activities ............................ (11,356) (11,436) (8,556) (14,794) (57,669)
Net cash provided by (used in)
financing activities .................. 3,472 (1,445) (7,200) (420) 36,144
EBITDA(4) ................................ $ 10,798 $ 14,128 $ 17,299 $ 17,915 $ 23,443
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ................ $ 1,987 $ 2,039 $ 2,071 $ 1,803 $ 757
Working capital (deficit) ................ (2,779) (3,313) 1,801 1,601 1,694
Property and equipment, net .............. 31,184 33,295 33,742 39,842 60,984
Total assets ............................. 45,404 48,836 50,673 59,068 108,259
Long-term debt, net of current
maturities ............................ 23,770 22,466 27,193 33,070 49,442
Shareholders' equity ..................... 8,996 12,579 13,559 14,171 39,848
</TABLE>
- ----------
(1) Effective April 1, 1996, Waste Industries completed a corporate
reorganization in which Waste Enterprises, Inc., Waste Industries East,
Inc., Waste Industries South, Inc., Waste Industries West, Inc., KABCO,
Inc., Conway 378, Inc. and AmLease, Inc. were merged with and into Waste
Industries. Simultaneously, certain real estate properties previously
leased to Waste Industries by Property Management Group, a partnership of
certain shareholders of Waste Industries were transferred to Waste
Industries. These transactions were accounted for at historical cost in a
manner similar to that in pooling of interests accounting. Accordingly,
Waste Industries' financial statements have been restated to include these
accounts and transactions for all periods presented.
(2) For each of the fiscal years presented through 1996 (and for the period
from January 1, 1997 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 "Dividend Policy and Prior S
Corporation Status" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(3) Supplementary basic and diluted earnings per share, assuming that the net
proceeds to the Company from its initial public offering (based on the
issuance by the Company of 1,925,000 shares of Common Stock at the public
offering price per share of $13.50) were used to repay all approximately
$7.8 million of revolving bank debt outstanding as of January 1, 1997, was
$0.56 and $0.54, respectively, for the year ended December 31, 1997. Such
supplementary earnings per share data assume the transaction occurred at
the beginning of the period. Basic and diluted weighted average shares
outstanding for purposes of this computation are 11,535,763 and 11,894,775,
respectively.
32
<PAGE>
(4) EBITDA is defined as income before income taxes plus interest expense and
depreciation and amortization. EBITDA should not be considered an
alternative to (i) operating income or net income (as determined in
accordance with GAAP) as an indicator of the Company's operating
performance or (ii) cash flows from operating activities (as determined in
accordance with GAAP) as a measure of operating performance or liquidity.
However, the Company has included EBITDA data (which are not a measure of
financial performance under GAAP) because it understands that such data are
commonly used by certain investors to evaluate a Company's performance in
the solid waste industry. Furthermore, the Company believes that EBITDA
data are relevant to an understanding of the Company's performance because
they reflect the Company's ability to generate cash flows sufficient to
satisfy its debt service, capital expenditure and working capital
requirements. The Company therefore interprets the trends that EBITDA
depicts as one measure of the Company's operating performance. However,
funds depicted by the EBITDA measure may not be available for debt service,
capital expenditures or working capital due to legal or functional
requirements to conserve funds or other commitments or uncertainties.
EBITDA, as measured by the Company, might not be comparable to similarly
titled measures reported by other companies. Therefore, in evaluating
EBITDA data, investors should consider, among other factors: the non-GAAP
nature of EBITDA data; actual cashflows; the actual availability of funds
for debt service, capital expenditures and working capital; and the
comparability of the Company's EBITDA data to similarly titled measures
reported by other companies.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Introduction
The following presentation of management's discussion and analysis of the
Company's consolidated financial condition and results of operation should be
read in conjunction with the Company's consolidated financial statements and
notes thereto and other financial information appearing elsewhere in this
report.
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 and, to a limited extent, in Virginia, Tennessee, Alabama and
Georgia.
The Company has acquired 23 solid waste collection operations since 1990.
All of these acquisitions were accounted for as purchases. Accordingly, the
results of operations of these acquired businesses have been included in the
Company's financial statements only from the respective dates of acquisition and
have affected period-to-period comparisons of the Company's operating results.
The Company anticipates that a substantial part of its future growth will come
from acquiring additional solid waste collection, transfer and disposal
businesses and, therefore, it is expected that additional acquisitions could
continue to affect period-to-period comparisons of the Company's operating
results.
33
<PAGE>
From 1986 until May 8, 1997, the Company was subject to taxation under
Subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"). As a
result, during that time the net income of the Company, for federal and certain
state income tax purposes, was reported by and taxable directly to the Company's
shareholders, rather than to the Company. Primarily to provide funds for tax
obligations payable by its shareholders on account of the Company's income in
1995 and 1996, the Company made cash distributions of approximately $3.1 million
and $1.8 million during 1996 and 1997, respectively, to its shareholders. In
connection with its conversion from S Corporation to C Corporation status, the
Company effected an S Corporation distribution (consisting of approximately $1.4
million in cash payments) to the Company's S Corporation shareholders in June
1997. The remaining S Corporation retained earnings of approximately $8.5
million have been reclassified to additional capital. The Company's S
Corporation status was terminated on May 8, 1997 and, accordingly, the Company
became fully subject to federal and state income taxes on May 9, 1997.
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 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
34
<PAGE>
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. As of December
31, 1997, the Company operated 13 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. On January
1, 1998, the Company opened five additional transfer stations. The Company does
not currently own or operate any solid waste landfills. In the event that the
Company develops or acquires landfills, operating expenses for such landfill
operations may include labor, equipment, legal and administrative, ongoing
environmental compliance, royalties to former owners, host community fees, site
maintenance and accruals for closure and post-closure maintenance. Cost of
equipment sales primarily consists of the Company's cost to purchase the
equipment that it resells.
The Company capitalizes certain expenditures related to pending
acquisitions or development projects. Indirect acquisition and project
development costs, such as executive and corporate overhead, public relations
and other corporate services, are expensed as incurred. The Company's policy is
to charge against net income any unamortized capitalized expenditures and
advances (net of any portion thereof that the Company estimates to be
recoverable, through sale or otherwise) relating to any operation that is
permanently shut down, any pending acquisition that is not consummated and any
landfill development project that is not expected to be successfully completed.
Engineering, legal, permitting, construction and other costs directly associated
with the acquisition or development of a landfill, together with associated
interest, are capitalized. At December 31, 1996, the Company had recorded no
such capitalized costs. At December 31, 1997, the Company had recorded $85,510
of capitalized land acquisition costs in connection with the development of a
new LCID landfill and $0 relating to pending acquisitions. Because it currently
does not own any landfills, the Company does not accrue for estimated landfill
closure and post-closure maintenance costs.
Selling, general and administrative ("SG&A") expenses include management
salaries, clerical and administrative overhead, professional services, costs
associated with the Company's marketing and sales force and community relations
expense.
Property and equipment is depreciated over the estimated useful life of the
assets using the straight-line method.
35
<PAGE>
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
statements of income:
Year ended December 31,
-----------------------------
1995 1996 1997
----- ----- -----
Total revenues ............................. 100.0% 100.0% 100.0%
Service revenues ........................... 97.7 98.2 98.7
Equipment sales ............................ 2.3 1.8 1.3
----- ----- -----
Total cost of operations ................... 61.1 63.9 62.3
Selling, general and administrative ........ 18.9 17.8 18.2
Depreciation and amortization .............. 9.8 9.1 9.3
----- ----- -----
Operating income ........................... 10.2 9.2 10.2
Interest expense ........................... (2.5) (2.4) (2.4)
Other income ............................... 0.6 0.7 0.6
----- ----- -----
Income before income taxes ................. 8.3% 7.5% 8.4%
Pro forma income taxes(1) .................. 3.3 3.0 3.3
----- ----- -----
Pro forma net income(1) .................... 5.0 4.5 5.1
- ----------
(1) For each of the periods presented, the Company was an S Corporation and,
accordingly, was not subject to federal and certain state corporate income
taxes. The pro forma information has been computed as if the Company were
subject to federal and all applicable state corporate income taxes for each
of the periods presented assuming the tax rate that would have applied had
the Company been taxed as a C Corporation. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview".
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. Total revenues increased $22.3 million, or 23.7%, to $116.3
million in 1997 from $94.1 million in 1996. This increase was primarily
attributable to the following two factors: (i) the effect of a full year of
revenues from the four businesses acquired in 1996, as well as a partial year of
results from seven businesses acquired in 1997; and (ii) to a lesser extent,
increased collection volumes resulting from new municipal and commercial
contracts
36
<PAGE>
and residential subscriptions. Price increases in 1997 for the Company's solid
waste collection and disposal services did not contribute materially to
increased 1997 revenues.
Cost of Operations. Total cost of operations increased $12.3 million to
$72.4 million in 1997 from $60.1 million in 1996. The principal reason for the
increase was the addition of new customers and contracts during the year,
including those from the acquisition of new businesses acquired during 1996 and
1997. Total cost of operations as a percentage of revenues decreased to 62.3% in
1997 from 63.9% in 1996. This decrease was primarily the result of increased
route density and synergy achieved through acquisitions.
SG&A. SG&A expenses increased $4.4 million to $21.2 million in 1997 from
$16.8 million in 1996. As a percentage of revenues, SG&A increased to 18.2% in
1997 from 17.8% in 1996 due to an increase in personnel-related and general
operating expenses incurred in support of the Company's revenue growth.
Depreciation and Amortization. Depreciation and amortization increased by
$2.4 million to $10.9 million in 1997 from $8.5 million for the prior year. The
principal reason for the increase was depreciation of the additional property
and equipment acquired and put into service due to higher collection volumes,
and depreciation of the additional assets of businesses acquired during 1996 and
1997. Depreciation and amortization, as a percentage of revenues, increased to
9.3% in 1997 from 9.1% in 1996, primarily as a result of acquisitions in 1996
and 1997.
Interest Expense. Interest expense increased 0.5 million to $2.8 million in
1997 from $2.3 million in 1996. This increase was due to the higher level of
average annual outstanding indebtedness, partially offset by a decrease in
interest rates. Interest expense as a percentage of revenues remained relatively
constant at 2.4% in 1997 and 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Total revenues increased $9.9 million, or 11.8%, to $94.0 million
in 1996 from $84.1 million in 1995. This increase was primarily attributable to
the following two factors: (i) increased collection volumes resulting from new
municipal and commercial contracts and residential subscriptions; and (ii) to a
lesser extent, the effect of a full year of revenues from the three businesses
acquired in 1995, as well as a partial year of results from four businesses
acquired in 1996. The effect of these revenue increases was partially offset by
the $0.3 million decrease in equipment sales and by a decrease in
revenue from sales of recyclable commodities. This recyclable commodities
decrease was due to a significant decrease in the weighted average price
received by the Company for recyclable commodities, primarily corrugated and
newsprint materials, causing a 2.0% decrease in 1996 revenue growth
from commodity sales. Price increases in 1996 for the Company's solid waste
collection and disposal services did not contribute materially to increased 1996
revenues.
37
<PAGE>
Cost Of Operations. Total cost of operations increased $8.6 million to
$60.0 million in 1996 from $51.4 million in 1995. The principal reason for the
increase was the addition of new customers and contracts during the year,
including those from the acquisition of new businesses acquired during 1995 and
1996. Total cost of operations as a percentage of revenues increased to 63.9% in
1996 from 61.1% in 1995. This increase was primarily the result of: (i)
proportionately more growth in lower margin services; (ii) lower margins in
recycling services as a result of the decline in the weighted average prices of
commodities; and (iii) an increase in waste stream processing and disposal
costs.
SG&A. SG&A expenses increased $0.9 million to $16.8 million in 1996 from
$15.9 million in 1995. As a percentage of revenues, SG&A decreased to 17.8% in
1996 from 18.9% in 1995 primarily due to improved economies of scale in the
Company's collection operations as a result of additional collection volumes
from new customer contracts and acquisitions.
Depreciation and Amortization. Depreciation and amortization increased by
$0.3 million to $8.5 million in 1996 from $8.2 million for the prior
year. The principal reason for the increase was depreciation of the additional
property and equipment acquired and put into service due to higher collection
volumes and depreciation of the additional assets of businesses acquired during
1995 and 1996. Depreciation and amortization, as a percentage of revenues,
decreased to 9.1% in 1996 from 9.8% in 1995, primarily as a result of increased
revenues.
Interest Expense. Interest expense increased $0.2 million to $2.3 million
in 1996 from $2.1 million in 1995. This increase was primarily due to the higher
level of average annual outstanding indebtedness and an increase in the
Company's interest rates on outstanding borrowings. Interest expense as a
percentage of revenues decreased from 2.5% in 1995 to 2.4% in 1996.
Liquidity and Capital Resources
The Company's working capital at December 31, 1997 was $1.7 million,
compared to $1.6 million at December 31, 1996. The Company's strategy in
managing its working capital has been to apply the cash generated from its
operations which remains available after satisfying its working capital and
capital expenditure requirements to reduce its indebtedness under its bank
revolving credit facility and to minimize its cash balances. The Company
generally finances its working capital requirements from internally generated
funds and bank borrowings. In addition to internally generated funds and the
proceeds of its intial public offering in June 1997, the Company has in place
financing arrangements to satisfy its currently anticipated working capital
needs in 1998. In April 1996, the Company entered into agreements with two
lenders under which the Company may borrow up to $75.0 million. Prudential
Insurance Company of America ("Prudential") authorized the Company to borrow up
to $25.0 million under a senior unsecured promissory note and an additional
$25.0 million under an uncommitted, senior unsecured promissory note ("shelf
note"). The committed note matures in April 2006 and both notes bear interest at
38
<PAGE>
7.28% per annum, payable quarterly. The repayment term under the note agreement
is ten years; interest only is payable for the first three years, with principal
payments beginning in April 1999 and continuing for the following seven years.
Effective November 1997, the Company amended its agreement with Branch Banking &
Trust Company ("BB&T") to increase authorized borrowings of $20.0 million and
$5.0 million under two separate unsecured notes to authorized borrowings of
$50.0 million and $10.0 million, respectively. The amended borrowings mature in
November 2002. The amended repayment term under the note agreements is five
years, in with interest only payable monthly and principal due and payable in
full upon maturity. Both notes with this lender bear interest at the monthly
London Interbank Offered Rate (7.3125% and 6.9688% at December 31, 1996 and
1997, respectively). The 12-month weighted average interest rate on outstanding
borrowings under the BB&T facility was 7.26% at December 31, 1997. The Company
has a compensating balance agreement with the bank for $379,000. Both of the
BB&T and the Prudential credit facilities require the Company to maintain
certain financial ratios, such as consolidated current debt to total
capitalization, consolidated debt to earnings and consolidated fixed charges to
earnings, and satisfy other predetermined requirements, such as minimum net
worth, net income and deposit balances.
Net cash provided by operating activities totaled $20.5 million for the
year ended December 31, 1997, compared to $14.9 million for the year ended
December 31, 1996. This increase was caused principally by the increases in
trade accounts payable, depreciation and amortization and income tax effect of a
change in tax status, which was partially offset by an increase in trade
accounts receivable. Net cash provided by operations in 1996 decreased to $14.9
million from $15.8 million in 1995. This decrease in 1996 from the prior year
includes the $0.1 million increase in income before income taxes. In addition,
depreciation and amortization increased $0.3 million in 1996 from 1995.
Net cash used in investing activities totaled $57.7 million for the year
ended December 31, 1997, compared to $14.8 million in for the year ended
December 31, 1996. This increase was caused principally by the acquisition of
certain assets employed or arising in connection with a residential collection
and recycling business for approximately $35.4 million. Net cash used in
investing activities totaled $14.8 million for 1996 compared to $8.6 million in
1995. This increase in 1996 compared to 1995 was caused principally by the $6.3
million increase in the amount of capital expenditures for property and
equipment acquired and put into service due to higher collection volumes and, to
a lesser extent, because (i) proceeds from sale of property and equipment
decreased $0.5 million, (ii) cash used for acquisitions of related businesses
decreased $1.4 million, (iii) the Company incurred debt issuance costs of $0.6
million related to its new credit facilities, and (iv) in 1996 the Company
discontinued acquiring equipment through an operating lease.
Capital expenditures for 1998 are currently expected to be approximately
$23.8 million, compared to $22.5 million in 1997 and $14.4 million in 1996. In
1998, approximately $17.9 million is expected to be utilized for vehicle and
equipment additions and replacements, approximately $0.5 million for expansion
of transfer station services and approximately $5.4
39
<PAGE>
million for facilities, additions and improvements. The Company intends to fund
its planned 1998 capital expenditures principally through internally generated
funds, proceeds of the Company's initial public offering in June 1997 and
borrowings under existing credit facilities. In addition, the Company
anticipates that it may require substantial additional capital expenditures to
facilitate its growth strategy of acquiring solid waste collection and disposal
businesses. If the Company is successful in acquiring landfill disposal
facilities, the Company may also be required to make significant expenditures to
bring any such newly acquired disposal facilities into compliance with
applicable regulatory requirements, obtain permits for any such newly acquired
disposal facilities or expand the available disposal capacity at any such newly
acquired disposal facilities. The amount of these expenditures cannot be
currently determined, since they will depend on the nature and extent of any
acquired landfill disposal facilities, the condition of any facilities acquired
and the permitting status of any acquired sites.
Net cash provided by financing activities totaled $36.1 million for the
year ended December 31, 1997, compared to $0.4 million used for financing
activities for the year ended December 31, 1996. This increase was primarily
attributable to: the Company's initial public offering, which resulted in net
proceeds, after deduction of underwriting discounts and commissions and other
offering expenses to the Company, of approximately $23.2 million; and net
proceeds from issuances of, and lower principal payments on, long-term debt. Net
cash used in financing activities for 1996 was $0.4 million, compared to net
cash used in financing activities of $7.2 million for 1995. The difference
between the 1996 and 1995 amounts was primarily attributable to: (i) the
Company's increased level of borrowings on bank notes payable to $32.8 million
in 1996 from $28.2 million in 1995; (ii) distributions to shareholders and
affiliates of $4.9 million in 1996 compared to distributions of $6.8 million in
1995; and (iii) the discontinuance of acquiring equipment through operating
leases which accounted for approximately $3.8 million in 1995.
At December 31, 1997, the Company had approximately $46.1 million of
long-term and short-term borrowings outstanding and approximately $580,000 in
letters of credit. At December 31, 1997, the ratio of the Company's long-term
debt to total capitalization was 55.4% compared to 70.0% at December 31, 1996.
The Company used the net proceeds from its initial public offering to repay
revolving bank debt.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted in the December 31,
1997 financial statements. Accordingly, the Company has changed its prior method
used to compute earnings per share and has restated all prior periods. Under the
new requirements for calculating basic earnings per share, the dilutive effect
of stock options has been excluded.
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
40
<PAGE>
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.
Item 8. Financial Statements and Supplementary Data.
See Index to Consolidated Financial Statements.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
<PAGE>
PART III
Certain information required by Part III is omitted from this report
because the Registrant will file a definitive proxy statement for its 1998
Annual Meeting of Shareholders (the "Proxy Statement") within 120 days after the
end of its fiscal year pursuant to Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended, and the information included
therein is incorporated herein by reference to the extent provided below.
Item 10. Directors and Executive Officers of the Registrant.
The other information required by Item 10 of Form 10-K is incorporated by
reference to the information under the heading "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement.
The information required by Item 10 of Form 10-K concerning the
Registrant's executive officers is set forth under the heading "Executive
Officers" located at the end of Part I of this Form 10-K.
Item 11. Executive Compensation.
The information required by Item 11 of Form 10-K is incorporated by
reference to the information under the heading "Proposal No. 1--Election of
Directors--Information Concerning the Board of Directors and Its Committees",
"Other Information--Compensation of Executive Officers", "--Compensation of
Directors", "--Report of the Compensation Committee on Executive Compensation",
"--Compensation Committee Interlocks and Insider Participation" and
"--Performance Graph" in the Proxy Statement.
41
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 of Form 10-K is incorporated by
reference to the information under the heading "Other Information--Principal
Shareholders" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 of Form 10-K is incorporated by
reference to the information under the heading "Other Information--Certain
Transactions" in the Proxy Statement.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following Financial Statements, Financial Statement Schedules and
Exhibits are filed as part of this report or incorporated herein by
reference:
(1) Financial Statements.
See Index to Consolidated Financial Statements on page F-1.
(2) Financial Statement Schedules.
All financial statement schedules for which provision is
made in Regulation S-X are omitted because they are not required
under the related instructions, are inapplicable, or the required
information is given in the financial statements, including the
notes thereto and, therefore, have been omitted.
(3) Exhibits.
Exhibit No. Description
2.1(a) Sale of Assets Agreement, dated as of August 30,
1997, by and among the Registrant and BFI.
3.1(b) Articles of Incorporation, as currently in effect.
3.2(b) Bylaws.
10.1(b) 1997 Stock Plan.
10.2(b) Credit Agreement with Branch Banking and Trust
Company dated April 3, 1996.
42
<PAGE>
10.3(b) Note Purchase and Private Shelf Agreement with
The Prudential Insurance Company of America dated
April 3, 1996.
11.1 Computation re: Earnings Per Share
21.1 List of Subsidiaries
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
- ----------
(a) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Current Report on Form 8-K dated September 15, 1997.
(b) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Registration Statement on Form S-1 (File No. 333-25631).
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WASTE INDUSTRIES, INC.
Date: March 24, 1998 By: /s/ Lonnie C. Poole, Jr.
------------------------
Lonnie C. Poole, Jr., Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Lonnie C. Poole, Jr. Director, Chairman and March 24, 1998
- --------------------------- Chief Executive Officer (Principal
Lonnie C. Poole, Jr. Executive Officer)
/s/ Robert H. Hall Director, Vice President, March 24, 1998
- --------------------------- Chief Financial Officer and
Robert H. Hall Treasurer (Principal Financial and
Accounting Officer)
/s/ Jim W. Perry Director March 24 , 1998
- ---------------------------
Jim W. Perry
Director
- ---------------------------
J. Gregory Poole, Jr.
/s/ Thomas F. Darden Director March 24, 1998
- ---------------------------
Thomas F. Darden
</TABLE>
S-1
<PAGE>
WASTE INDUSTRIES, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report ............................................. F-2
Balance Sheets as of December 31, 1996 and 1997 .......................... F-3
Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997 ....................................... F-4
Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997 ....................................... F-5
Notes to Financial Statements ............................................ F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
WASTE INDUSTRIES, INC.:
We have audited the accompanying balance sheets of Waste Industries, Inc. (the
"Company") as of December 31, 1996 and 1997 and the related statements of
operations and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1996 and 1997
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
Raleigh, North Carolina
February 20, 1998
<PAGE>
WASTE INDUSTRIES, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1997
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,803,438 $ 757,135
Accounts receivable -- trade, less allowance for
uncollectible accounts (1996 -- $616,000;
1997 -- $869,750) 9,236,071 12,246,988
Inventories 1,973,810 677,053
Prepaid expenses and other current assets 414,533 698,425
Deferred income taxes (Note 12) 581,000
------------- -------------
Total current assets 13,427,852 14,960,601
PROPERTY AND EQUIPMENT, net (Notes 2 and 3) 39,841,929 60,983,913
RECEIVABLES -- AFFILIATED COMPANIES (Note 7) 1,175,205 1,094,003
INTANGIBLE ASSETS (Notes 2 and 4) 3,698,963 29,967,579
OTHER NONCURRENT ASSETS 923,926 1,252,530
------------- -------------
TOTAL ASSETS $ 59,067,875 $ 108,258,626
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt (Notes 2 and 4) $ 155,492 $ 895,467
Accounts payable -- trade 5,637,730 7,453,128
Accrued expenses and other liabilities (Note 8) 3,300,354 3,457,045
Accrued distributions (Note 6) 1,820,000
Income taxes payable (Note 12) 445,100
Deferred revenue 913,389 1,015,867
------------- -------------
Total current liabilities 11,826,965 13,266,607
------------- -------------
LONG-TERM DEBT, net of current maturities (Notes 2 and 4) 33,070,228 49,441,564
NONCURRENT DEFERRED INCOME TAXES (Note 12) 5,702,000
COMMITMENTS AND CONTINGENCIES (Notes 5, 7 and 9)
SHAREHOLDERS' EQUITY (Notes 6 and 7):
Common stock 91,989 24,524,975
Paid-in capital 8,500,000
Retained earnings 14,319,583 7,085,083
Shareholders' loans (240,890) (261,603)
------------- -------------
Total shareholders' equity 14,170,682 39,848,455
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 59,067,875 $ 108,258,626
============= =============
</TABLE>
See Notes to Financial Statements.
<PAGE>
WASTE INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Service revenues $ 82,163,355 $ 92,381,515 $ 114,758,683
Equipment sales 1,973,441 1,670,539 1,543,924
------------- ------------- -------------
Total revenues 84,136,796 94,052,054 116,302,607
------------- ------------- -------------
OPERATING COSTS AND EXPENSES:
Cost of service operations 49,844,243 58,911,178 71,288,840
Cost of equipment sales 1,589,944 1,163,223 1,133,117
------------- ------------- -------------
Total cost of operations
(Notes 5, 7 and 9) 51,434,187 60,074,401 72,421,957
------------- ------------- -------------
Selling, general and administrative (Note 8) 15,876,764 16,756,966 21,157,203
------------- ------------- -------------
Depreciation and amortization 8,216,715 8,521,900 10,860,262
------------- ------------- -------------
Total operating costs and expenses 75,527,666 85,353,267 104,439,422
------------- ------------- -------------
OPERATING INCOME 8,609,130 8,698,787 11,863,185
------------- ------------- -------------
OTHER EXPENSE (INCOME):
Interest expense (Note 4) 2,121,679 2,344,796 2,830,571
Interest income (318,104) (188,563) (283,267)
Other (Note 7) (154,869) (506,332) (436,024)
------------- ------------- -------------
Total other expense (income) 1,648,706 1,649,901 2,111,280
------------- ------------- -------------
INCOME BEFORE INCOME TAXES 6,960,424 7,048,886 9,751,905
INCOME TAX EXPENSE (Note 12):
Current and deferred 2,750,000
Effect of change in tax status 4,300,000
------------- ------------- -------------
NET INCOME -- Historical Basis $ 6,960,424 $ 7,048,886 $ 2,701,905
============= ============= =============
PRO FORMA INCOME BEFORE
INCOME TAXES (Note 12) $ 6,960,424 $ 7,048,886 $ 9,751,905
PRO FORMA INCOME TAXES (Note 12) 2,790,000 2,845,000 3,800,000
============= ============= =============
PRO FORMA NET INCOME (Note 12) $ 4,170,424 $ 4,203,886 $ 5,951,905
============= ============= =============
PRO FORMA EARNINGS PER SHARE (As Adjusted --
Notes 6 and 12):
Basic $ 0.44 $ 0.44 $ 0.56
============= ============= =============
Diluted $ 0.43 $ 0.43 $ 0.54
============= ============= =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
(As Adjusted -- Notes 6 and 12):
Basic 9,564,343 9,600,157 10,648,622
============= ============= =============
Diluted 9,599,924 9,846,824 11,007,634
============= ============= =============
</TABLE>
See Notes to Financial Statements.
<PAGE>
WASTE INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income -- historical basis $ 6,960,424 $ 7,048,886 $ 2,701,905
Adjustments to reconcile net income --
historical basis to net cash provided
by operating activities:
Depreciation and amortization 8,216,715 8,521,900 10,860,262
Gain on sale of property and equipment (38,999) (175,171) (125,376)
Effect of change in tax status 4,300,000
Provision for deferred income taxes 821,000
Changes in assets and liabilities, net of
effects from acquisitions of
related businesses:
Accounts receivable -- trade (1,071,172) (1,446,650) (1,108,855)
Inventories (581,863) (436,283) 1,334,299
Prepaid and other current assets 440,568 (90,735) (272,276)
Accounts payable -- trade 1,194,074 968,814 1,815,398
Accrued expenses and other liabilities 589,958 349,914 115,385
Income taxes payable 445,100
Deferred revenue 77,756 204,984 (408,735)
------------ ------------ ------------
Net cash provided by operating activities 15,787,461 14,945,659 20,478,107
------------ ------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 1,190,004 715,180 710,787
Purchases of property and equipment (8,141,576) (14,411,360) (22,500,709)
Acquisition of related business (1,685,000) (268,927) (35,438,171)
Advances to (borrowings from) affiliates 179,135 (61,671) 81,202
Collections on other long-term receivables 2,145 2,317 2,670
Other noncurrent assets (100,818) (769,145) (524,434)
------------ ------------ ------------
Net cash used in investing activities (8,556,110) (14,793,606) (57,668,655)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 5,380,000 35,618,225 39,564,190
Principal payments on long-term debt (6,885,033) (31,102,209) (23,300,751)
Proceeds from issuance of notes payable to
shareholders 286,620
Repayments of notes payable to shareholders (318,884)
Repayments of notes receivable from shareholders 820,376 274,404 33,169
Increase in shareholder loans (53,882)
Net proceeds from stock issuance 23,157,924
Proceeds from exercise of stock options 44,756
Changes in partners' capital (900,233) (1,816,215)
Cash distributions to shareholders (5,901,461) (3,119,702) (3,256,405)
------------ ------------ ------------
Net cash (used in) provided by
financing activities (7,199,731) (419,625) 36,144,245
------------ ------------ ------------
NET INCREASE (DECREASE) 31,620 (267,572) (1,046,303)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,039,390 2,071,010 1,803,438
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 2,071,010 $ 1,803,438 $ 757,135
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid for interest $ 2,045,375 $ 1,931,808 $ 2,247,085
============ ============ ============
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS -
During 1997, the Company issued common stock with a fair value of
$1,275,062 as partial consideration for certain business acquisitions.
Also during 1997, the Company reclassified undistributed S Corporation
earnings to paid-in capital as a result of the Company terminating its S
corporation election on May 9, 1997.
At December 31, 1996, the Company accrued $1,820,000 distributions to
shareholders as partial reimbursement for 1996 taxes owed.
See Notes to Financial Statements.
<PAGE>
WASTE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Business Operations -- Waste Industries, Inc. (the "Company") is a regional
solid waste services company providing solid waste collection, transfer,
recycling, processing and disposal services to customers in North Carolina
and South Carolina, and, to a limited extent, in Virginia, Tennessee,
Alabama and Georgia. The Company's financial statements include its
consolidated subsidiaries: Waste Industries South, Inc., Waste Industries
East, Inc., Waste Industries West, Inc. and Kabco, Inc.
In April 1996, the Company exchanged 2,118,457 shares of its common stock
on a share-for-share basis for all of the outstanding common stock of the
following companies affiliated through common ownership: Waste Enterprises,
Inc., Waste Industries South, Inc., Waste Industries West, Inc., Waste
Industries East, Inc., Kabco, Inc., Conway 378, Inc. and AmLease, Inc. As a
result, common stock increased by $18,208, treasury stock decreased by
$85,098 and additional capital decreased by $103,306. Simultaneously,
certain real estate properties previously leased to the Company by Property
Management Group ("PMG"), a partnership of certain shareholders of the
Company, were transferred to the Company. The property previously leased to
the Company by PMG was acquired by the Company on April 1, 1996 for
approximately $4.9 million. PMG's depreciated basis in the property was
approximately $3.2 million. Pursuant to the provisions of AIN #39 of APB
No. 16, the Company recorded the transfer of property at its carryover
basis (approximately $3.2 million) and the difference between the amount
paid and the carryover basis (approximately $4.9 million less approximately
$3.2 million, or $1,686,021) was recorded as a cash distribution to PMG. As
a result, retained earnings decreased by $404,171 and additional capital
decreased by $1,281,850 to $0.
The controlling shareholder of the Company owned a controlling interest in
each of the companies and partnership that were combined. Additionally, the
Company's other shareholders held substantially the same pro rata ownership
in each of these companies and partnership. Accordingly, the assets and
liabilities transferred are accounted for at historical cost in a manner
similar to that in pooling of interests accounting. The Company's financial
statements have been restated to include the accounts and operations for
all periods prior to the merger.
Significant Accounting Policies -- The significant accounting policies are
summarized below:
a. Cash and Cash Equivalents -- For the purposes of presentation in the
financial statements, cash equivalents include highly liquid
investments with original maturities of three months or less.
b. Inventories -- Inventories consist of (i) trucks and containers held
for sale and (ii) operating materials and supplies held for use and
are stated at the lower of cost or market using the
specific-identification method of costing.
<PAGE>
c. Property and Equipment -- Property and equipment are stated at cost.
Depreciation expense is calculated on the straight-line method.
Estimated useful lives are as follows:
Machinery and equipment................... 3 to 10 years
Furniture, fixtures and vehicles.......... 3 to 10 years
Building.................................. 30 years
d. Intangible Assets -- Intangible assets primarily consist of goodwill,
customer lists and noncompete and consulting agreements acquired in
business combinations. Intangible assets are net of accumulated
amortization and consist of the following:
1996 1997
----------- -----------
Goodwill $ 2,974,654 $29,368,996
Customer lists 87,704 59,431
Noncompete and consulting agreements 636,605 539,152
----------- -----------
Intangible assets $ 3,698,963 $29,967,579
=========== ===========
Customer lists are amortized using the straight-line method over 5 to
10 years. Noncompete and consulting agreements are amortized using the
straight-line method over the lives of the agreements. Goodwill is
amortized using the straight-line method, generally over 15 to 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.
Should events or circumstances occur subsequent to the acquisition of
a business which bring into question the realizable value or
impairment of the related goodwill, the Company will evaluate the
remaining useful life and balance of goodwill and make appropriate
adjustments in accordance with SFAS No. 121.
e. Other Noncurrent Assets -- Included in other noncurrent assets are
debt issue costs relating to the new borrowings (see Note 4). Debt
issue costs are amortized to interest expense using the effective
interest method over the life of the related debt.
f. Long-Lived Assets -- As required, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of. Accordingly, long-lived assets are reviewed for
impairment on a market-by-market basis whenever events or changes in
the circumstances indicate that the carrying amount of an asset may
not be recoverable. If an evaluation is required, the projected future
undiscounted future cash flows attributable to each market would be
compared to the carrying value of the long-lived assets (including an
allocation of goodwill, if appropriate) of that market if a write-down
to fair value is required. The Company also evaluates the remaining
useful lives to determine whether events and circumstances warrant
revised estimates of such lives.
<PAGE>
g. Pro Forma Earnings Per Share -- 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 been applied had the Company
been taxed as a C Corporation (see Note 12).
In 1997, the Company adopted SFAS No. 128, Earnings Per Share. SFAS
No. 128 requires the presentation of both basic and diluted earnings
per share, regardless of materiality unless per share amounts are
equal. Earnings per share amounts for all periods presented have been
restated to conform to the requirements of SFAS No. 128.
Pro forma basic earnings per share computations are based on the
weighted-average common stock outstanding. Pro forma diluted earnings
per share includes the dilutive effect of stock options using the
treasury stock method (using the initial public offering price of
$13.50 per share for periods prior to the Company's initial public
offering). Common stock outstanding used to compute the
weighted-average shares was retroactively adjusted for the exchange of
shares resulting from the merger of affiliated companies, for the
conversion of nonvoting to voting stock, and for the 1-for-2.5 reverse
stock split as discussed in Note 6.
h. Stock Option Plan -- The Company accounts for employee stock
compensation in accordance with Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees. Under APB
No. 25, the total compensation expense is equal to the difference
between the award's exercise price and the intrinsic value at the
measurement date, which is the first date that both the exercise price
and number of shares to be issued is known.
SFAS No. 123, Accounting for Stock-Based Compensation, is effective
January 1, 1996. SFAS No. 123 requires expanded disclosures of
stock-based compensation arrangements with employees and encourages
(but does not require) compensation cost to be measured based on the
fair value of the equity instrument awarded. Companies are, however,
permitted to continue to apply APB No. 25. The Company will continue
to apply APB No. 25 to its stock-based compensation awards to
employees and will disclose the required pro forma effect on net
income and earnings per share.
i. Deferred Revenue -- Deferred revenue consists of collection fees
billed in advance. Revenue is recognized as services are provided.
j. 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.
The Company's S Corporation status was terminated on May 9, 1997 and,
accordingly, the Company became fully subject to federal and state
income taxes on that date. In accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes, the financial statements give effect to
the recognition of deferred tax assets of $800,000 and the assumption
of a deferred tax liability of $5,100,000 as a result of the Company's
S Corporation election on May 9, 1997. Deferred income taxes
(benefits) are provided on temporary differences between financial
statement carrying values and the tax basis of assets and liabilities.
<PAGE>
k. Use of Estimates -- In preparing financial statements that conform
with generally accepted accounting principles, management must use
estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at
the date of the financial statements and amounts of revenue and
expenses reflected during the reporting period. Actual results could
differ from those estimates.
l. Reclassifications -- Certain 1995 and 1996 financial statement amounts
have been reclassified to conform with the 1997 presentation.
2. ACQUISITIONS
During 1996 and 1997, the Company acquired the net assets of various waste
collection and disposal services businesses to expand its operations. The
assets acquired and liabilities assumed were accounted for by the purchase
method of accounting and include the following:
1996 1997
----------- -----------
Accounts receivable, net $ $ 1,902,062
Inventories 37,542
Prepaid expenses and other current assets 11,616
Accrued expenses and other liabilities (41,306)
Deferred revenue (511,213)
Property and equipment 150,620 8,933,098
Noncompete and consulting agreements 105,000 159,118
Customer lists and goodwill 255,472 27,070,188
----------- -----------
Total assets acquired 511,092 37,561,105
Less obligations financed under notes payable 242,165 847,872
----------- -----------
Net acquisition costs $ 268,927 $36,713,233
=========== ===========
Net acquisition costs include the issuance of 63,634 shares of the
Company's common stock with a fair value of $1,275,062 as partial
consideration for certain business acquisitions.
Related to the above acquisitions, the Company entered into noncompete
agreements with the former owners of these businesses. These amounts are
being amortized on a straight-line basis over the terms of the agreements
(5 years).
The following pro forma results of operations assume the transactions
described above occurred as of January 1, 1996 and 1997 after giving effect
to certain adjustments, including the amortization of the excess of cost
over the underlying assets and as if the Company were subject to federal
and all applicable state corporate income taxes for the period assuming the
tax rate that would have applied had the Company been taxed as a C
Corporation:
Year Ended December 31,
1996 1997
------------ ------------
Total revenues $122,449,000 $136,894,000
Operating income 13,706,000 15,436,000
Pro forma net income 5,998,000 7,231,000
Pro forma earnings per common share:
Basic 0.62 0.68
Diluted 0.61 0.66
<PAGE>
The pro forma financial information does not purport to be indicative of
the results of operations that would have occurred had the transactions
taken place at the beginning of the periods presented or of future
operating results.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1996 and
1997:
1996 1997
------------ ------------
Land and buildings $ 7,842,952 $ 11,241,901
Machinery and equipment 76,508,723 96,030,438
Furniture, fixtures and vehicles 1,857,843 2,549,048
In-process equipment 4,304,890
------------ ------------
Total property and equipment 86,209,518 114,126,277
Less accumulated depreciation 46,367,589 53,142,364
------------ ------------
Property and equipment, net $ 39,841,929 $ 60,983,913
============ ============
In-process equipment at December 31, 1997 was acquired in connection with
the opening of six new transfer stations in January 1998 (see Note 14.)
4. NOTES PAYABLE
Notes payable consisted of the following at December 31, 1996 and 1997:
1996 1997
----------- -----------
Bank notes payable $32,800,000 $49,227,609
Other -
Other installment notes payable, interest ranging
from 1% to 7% 392,387 1,109,422
Present value of noncompete agreement liabilities
with the former shareholders of related businesses
acquired, due in various monthly installments
through 1997 33,333
----------- -----------
Total notes payable 33,225,720 50,337,031
Less current portion 155,492 895,467
----------- -----------
Long-term portion $33,070,228 $49,441,564
=========== ===========
On April 3, 1996, the Company entered into agreements with two lenders
under which the Company may borrow up to $75,000,000. One lender authorized
the Company to borrow up to $25,000,000 under a senior unsecured promissory
note and an additional $25,000,000 under an uncommitted, senior unsecured
promissory note ("shelf note"). The committed note matures on April 3, 2006
and bears an interest rate of 7.28%. The repayment term under the note
agreements is ten years; interest only is payable for the first three
years, with principal payments beginning in April 1999 and continuing for
the following seven years. Effective November 17, 1997, the Company amended
the
<PAGE>
agreement with the other lender which authorized the Company to borrow
$20,000,000 and $5,000,000 under two separate unsecured notes to authorized
borrowings of $50,000,000 and $10,000,000, respectively. The amended
borrowings mature on November 1, 2002. The amended repayment term under the
note agreements is five years; with interest only payable monthly with
principal due and payable in full upon maturity. Both notes with this
lender bear interest at the monthly London Interbank Offered Rate (7.3125%
and 6.9688% at December 31, 1996 and 1997, respectively).
The note agreements provide for certain covenants and restrictions
regarding, among other things, debt and senior debt to earnings before
interest, depreciation and amortization ratios, minimum net worth,
compensating balance and net income requirements, as well as liens, debt
and capital expenditure limitations, as defined. At December 31, 1997, the
Company was in compliance with all covenants.
Annual aggregate principal maturities for the other notes payable for the
five fiscal years succeeding December 31, 1997 are as follows:
1998 $ 895,467
1999 102,120
2000 4,861,465
2001 5,048,259
2002 and thereafter 39,429,720
-----------
Total $50,337,031
===========
5. LEASES
Operating Leases -- The future minimum rental payments required under
operating leases that have initial or remaining noncancelable lease terms
in excess of one year at December 31, 1997 follow:
1998 $1,504,205
1999 1,165,436
2000 797,585
2001 372,029
2002 and thereafter 201,560
----------
$4,040,815
The total rental expense for all operating leases for the years ended
December 31, 1995, 1996 and 1997 was as follows:
1995 1996 1997
---------- ---------- ----------
Buildings and sites $ 420,091 $ 439,761 $ 745,992
Trucks and equipment 824,461 1,474,321 1,216,338
---------- ---------- ----------
Total $1,244,552 $1,914,082 $1,962,330
========== ========== ==========
Direct rental expense is included in cost of operations in the statements
of operations and indirect rental expense is included in selling, general
and administrative in the statements of operations.
<PAGE>
6. SHAREHOLDERS' EQUITY
Shareholders' equity consisted of the following for the years ended
December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
Shares
----------------------------------------
$ Additional Retained Treasury
Authorized Outstanding Amount Capital Earnings Stock
<S> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1995 4,020,395 2,967,057 $ 73,440 $ 2,371,168 $ 11,555,607 $ (85,098)
Stock dividend of nine
nonvoting shares for
each voting share 14,273,001
Net income 6,960,424
Change in partners' capital (900,233)
Distributions (5,901,461)
---------- --------- ------------ ------------ ------------ ------------
Balance,
December 31, 1995 4,020,395 17,240,058 73,440 1,470,935 12,614,570 (85,098)
Retroactive effect of
1-for-2.5 reverse
stock split (9,794,162)
Effect of merger of
affiliates 75,979,605 2,118,457 18,208 (103,306) 85,098
Net income 7,048,886
Change in partners' capital (1,412,044) (404,171)
Exercise of stock options 35,804 341 44,415
Distributions (4,939,702)
---------- --------- ------------ ------------ ------------ ------------
Balance,
December 31, 1996 80,000,000 9,600,157 91,989 14,319,583
Net income 2,701,905
Issuance of stock, net 1,991,334 24,432,986
Reclassification of
undistributed S Corporation
earnings 8,500,000 (8,500,000)
Distributions (1,436,405)
---------- --------- ------------ ------------ ------------ ------------
Balance,
December 31, 1997 80,000,000 11,591,491 $ 24,524,975 $ 8,500,000 $ 7,085,083 $
========== ========== ============ ============ ============ ============
</TABLE>
In May 1995, the Company issued nonvoting common stock in a stock dividend
of nine shares of nonvoting common stock for each one share of voting
common stock. Subsequently, substantially all issuances of stock by the
Company were made in the ratio of nine shares of nonvoting common stock for
every one share of voting common stock issued.
In April 1997, the Company's Board of Directors authorized a 1-for-2.5
reverse stock split and the conversion of all nonvoting common shares to
voting common shares. The Board of Directors also approved an increase in
the authorized capital of common stock from 4,020,395 shares to 80,000,000
shares and canceled the nonvoting common shares outstanding. The common
stock previously had a par value of $.0380286 per share and was converted
to no par common stock. All share and per share information in the
financial statements has been adjusted to give retroactive effect to the
reverse stock split and conversion of nonvoting stock.
<PAGE>
In April 1997, the Company's Board of Directors also authorized 10,000,000
shares of $0.01 par value preferred stock. Such shares have not been
issued. The Board of Directors can establish the series, the designation
and number of shares to be issued and the rights, preferences, privileges
and restrictions of the shares of each series, and to determine the voting
powers, if any, of such shares.
In June 1997, the Company completed an initial public offering in which it
issued 1,605,200 shares of common stock at a price of $13.50 per share
resulting in net proceeds after deduction of underwriting discounts and
commissions and other offering expenses to the Company of approximately
$19.1 million. The proceeds from the offering were used to repay revolving
bank debt.
On July 2, 1997, the Company's underwriters exercised their option to
purchase an additional 322,500 shares. The net proceeds after deduction of
underwriting discounts and commissions and other offering expenses to the
Company were approximately $4.0 million. The Company used the proceeds to
repay revolving bank debt.
During 1997, the Company issued 63,634 shares of common stock with a fair
value of $1,275,062 as partial consideration for certain business
acquisitions.
Also during 1997, the Company reclassified undistributed S Corporation
earnings to additional capital as a result of the Company terminating its S
Corporation election on May 9, 1997.
Shareholder loans at December 31, 1995, 1996 and 1997 include $66,502,
$33,169 and $-0-, respectively, for advances made to shareholders initiated
during the exercise of stock options (see Note 11). These notes bear
interest at annual rates of 7.5% and are payable in various installments.
Change in partners' capital consists of cash contributions from, or
distributions to, PMG.
At December 31, 1996, the Company accrued $1,820,000 of distributions to
shareholders as partial reimbursement for 1996 taxes owed.
7. RELATED PARTY TRANSACTIONS
Operating Leases -- The Company leases equipment from officers of the
Company and from other partnerships and corporations controlled by these
officers. All of these leases are operating leases. Related party rental
expense was $6,600, $13,794 and $4,200 in 1995, 1996 and 1997,
respectively, and is included in cost of operations in the accompanying
statements of operations.
Management and Accounting Services -- The Company provides management and
accounting services to other companies affiliated by common shareholder
interests (other affiliated companies). Agreements state that management
and accounting services shall be provided to such companies on an
approximate cost reimbursement basis, plus a specified percentage of net
income these affiliated companies generate. Management and accounting
revenue earned from providing services to these other affiliated companies
was $84,004, $88,202 and $134,077 in 1995, 1996 and 1997, respectively, and
are included in other income (expense) in the accompanying statements of
operations.
<PAGE>
Equipment Sales and Services -- The Company sells and leases equipment and
vehicles and provides technical advice to affiliated and nonaffiliated
companies. Revenue generated from such activities is not material.
Receivables -- Affiliated Companies -- At December 31, 1996 and 1997,
accounts receivable due from parties related by common shareholder
interests were $524,029 and $419,154, respectively. Notes receivable from
other affiliated companies were $644,710 at December 31, 1996 and 1997. The
notes bear interest at annual rates ranging from 5.5% to 7.19% and are
payable on demand. These amounts, including unpaid interest thereon of
$6,466 and $19,156 at December 31, 1996 and 1997, respectively, are
included in receivables -- affiliated companies in the accompanying balance
sheets.
Shareholder Loans -- Shareholder loans, included in shareholders' equity of
the accompanying balance sheets, are notes receivable (including unpaid
interest thereon) from shareholders of $448,792, $207,721 and $261,603 at
December 31, 1995 and 1996 and 1997, respectively. The notes bear interest
at an annual rate of 7% and are payable on demand. Shareholder loans at
December 31, 1995 and 1996 and 1997 include $66,502, $33,169 and $-0-,
respectively, for advances made to shareholders initiated during the
exercise of stock options (see Note 11). These notes bear interest at
annual rates of 7.5% and are payable in various installments.
Guarantees -- The Company guarantees operating lease payments of $541 per
month for an affiliate.
8. BENEFIT PLANS
401(k) Profit Sharing and Retirement Plan -- The Company has a 401(k)
Savings and Retirement Plan and Trust (the "401(k) Plan") for the benefit
of its full time employees who have more than one year of service and are
over 21 years of age. The 401(k) Plan also benefits employees of certain
related parties through separate funding arrangements. Contributions to the
401(k) Plan are made by employees and by the Company through matching
contributions and discretionary profit sharing contributions. The
discretionary profit sharing contribution is made annually as determined by
management based on the Company's financial performance. Effective October
1, 1997, the Company amended the 401(k) Plan to discontinue the profit
sharing contribution and increase the employer's matching contribution
percentage. The Company's matching contributions to the 401(k) Plan were
$50,812, $158,804 and $234,767 for the years ended December 31, 1995, 1996
and 1997, respectively. The Company's profit sharing contributions were
$461,244, $333,936 and $284,994 for the years ended December 31, 1995, 1996
and 1997, respectively. Contributions by the Company are included in
operating costs and expenses in the accompanying statements of operations.
Self-Insured Medical Plan -- The Company has a self-insured plan for
employee medical benefits. The plan covers all full-time employees of the
Company beginning on the first day of the month on, or following, their
90th day of employment. The Company pays premiums for its employees to the
plan and withholds from employees additional amounts for elected covered
dependents. As claims are processed by the plan's third-party
administrator, the insurance carrier requests funds from the Company. The
Company maintains stop loss coverage for the plan. The Company's expense
relating to the plan for 1995, 1996 and 1997 was $56,005, $49,933 and
$149,226, respectively.
<PAGE>
9. 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.
10. LETTERS OF CREDIT
At December 31, 1996 and 1997, the Company has entered into irrevocable
letters of credit totaling approximately $362,000 and $580,000,
respectively. According to the terms of the $5,000,000 unsecured note, the
availability of funds on that note are reduced by the amount of outstanding
letters of credit (see Note 4 to financial statements).
11. STOCK OPTION PLAN
The Company's 1997 Stock Plan (the "Stock Plan") was adopted by the
Company's Board of Directors in April 1997 and approved by the Company's
shareholders prior to completion of the Company's initial public offering. A
total of 1,800,000 shares of Common Stock have been reserved for issuance under
the Stock Plan. At the same time that the Stock Plan was adopted, the Board
terminated the Company's Employee Non-Qualified Stock Option Plan (the "Option
Plan"; together with the Stock Plan the "Plans") as to future grants. At
December 31, 1997, no options have been awarded under the Stock Plan. As of
December 31, 1997, 1,416,972 shares of Common Stock had been issued upon
exercise of options granted under the Option Plan and options to purchase
526,000 shares of Common Stock at a weighted average exercise price of $5.10 per
share were outstanding under the Option Plan. The Plan provides for grants of
"incentive stock options," within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), to employees (including officers
and employee directors), and each of the Plans provides for grants of
nonstatutory options to employees and consultants. The Stock Plan also allows
for the grant of purchase rights. The Plans are administered by the
Compensation Committee of the Board of Directors. The Stock Plan will terminate
in April 2007, unless sooner terminated by the Board of Directors. Options have
been retroactively adjusted for the exchange of shares resulting from the merger
of affiliated companies on April 1, 1996, for the stock dividend of nine
nonvoting shares for each voting share in 1995, and for the 1-for-2.5 reverse
stock split and the conversion of all nonvoting shares to common shares, each
effective prior to the consummation of the Company's public offering. A summary
of the status of the Option Plan as of December 31, 1995, 1996 and 1997 and
changes during the years ending on those dates is as follows:
Option Plan
--------------------
Weighted
Average
Share
Shares Price
------- --------
Balance, January 1, 1995 35,804 $ 1.25
Granted -- May 5, 1995 6,000 2.88
-------
Balance, December 31, 1995 41,804 1.48
Exercised (35,804) (1.25)
Granted -- April 1, 1996 520,000 5.13
-------
Balance, December 31, 1996
and 1997 526,000 5.10
=======
<PAGE>
The following table summarizes information about the Company's
Option Plan at December 31, 1997:
<TABLE>
<CAPTION>
Exercisable
Weighted --------------------------
Average Weighted Weighted
Range of Number Remaining Average Average
Exercise of Shares Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price of Shares Price
------------- ----------- ------------ ----- --------- --------
<S> <C> <C> <C> <C> <C>
$1.25 - $5.31 6,000 2 $2.88
$5.13 120,000 3.25 $5.13
$5.13 400,000 3.25 $5.13 400,000 $5.13
</TABLE>
The Company applies ABP No. 25 and related Interpretations in accounting
for the Plans. Accordingly, no compensation cost has been recognized for
the Plans. Had compensation cost for the Plans been determined based on the
fair value at the grant dates for awards under the Plans consistent with
the method of SFAS No. 123, the Company's net income --historical basis,
pro forma net income and pro forma earnings per share for the years ended
December 31, 1995 and 1996, would have been reduced to the pro forma
amounts indicated below. No stock options were granted in 1997 and, as a
result, pro forma amounts have not been presented for 1997.
1995 1996
------------- -------------
Net Income -- Historical Basis:
As reported $ 6,960,424 $ 7,048,886
Pro forma 6,957,424 6,808,886
Pro Forma Net Income:
As reported 4,170,424 4,203,886
Pro forma 4,167,424 3,963,886
Pro Forma Earnings Per Share:
Basic:
As reported $ 0.44 $ 0.44
Pro forma $ 0.44 $ 0.41
Diluted:
As reported $ 0.43 $ 0.43
Pro forma $ 0.43 $ 0.40
As permitted under SFAS No. 123, the fair value of options granted under
the Plans during 1995 and 1996 was estimated on the Black-Scholes option
pricing model without considering volatility of the underlying stock and
using the following assumptions:
1995 1996
----- -----
Weighted-average grant-date fair value
of options granted $5.11 $5.13
Weighted-average expected lives (years) 3.67 2.83
Risk-free interest rate 6.25% 6.25%
<PAGE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that expected in future
years.
12. INCOME TAXES
From 1986 until May 8, 1997, the Company was subject to taxation under
Subchapter S of the Code. The Company's S Corporation status was terminated
on May 8, 1997 and, accordingly, the Company became fully subject to
federal and state income taxes on May 9, 1997. In accordance with SFAS No.
109, the financial statements give effect to the recognition of deferred
tax assets of $800,000 and the assumption of a deferred tax liability of
$5.1 million as a result of the termination of the Company's S Corporation
election on May 8, 1997.
The balance of deferred income tax assets and liabilities at December 31,
1997 were as follows:
Current deferred income tax assets relate to:
Allowance for bad debts $ 337,000
Accrued vacation 177,000
Accruals to related parties 25,000
Other accruals not currently deductible 19,000
Other 23,000
----------
Net current deferred tax assets $ 581,000
==========
Noncurrent deferred income tax liabilities relate to:
Basis and depreciation differences $5,654,000
Other 48,000
----------
Net noncurrent deferred tax liabilities $5,702,000
==========
The components of income tax expense for the period from May 9, 1997 to
December 31, 1997 were as follows:
Current income taxes:
Federal $1,667,000
State 262,000
----------
Total current income taxes 1,929,000
Deferred income taxes 821,000
Total $2,750,000
==========
<PAGE>
The following is a reconciliation of income tax expense to that computed by
applying the federal statutory rate of 34% to income before income taxes
for the year ended December 31, 1997:
Federal tax at the statutory rate $3,316,000
State income taxes, net of federal tax benefit 311,000
Goodwill 6,000
Other 167,000
----------
3,800,000
Less federal taxes at the statutory rates for the period
from January 1 to May 8, 1997 1,050,000
----------
Total $2,750,000
==========
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
Total revenues 1996 $ 20,886,649 $ 23,052,000 $ 25,288,285 $ 24,825,120
1997 24,392,964 27,831,336 31,610,785 32,467,522
Gross profit 1996 7,563,203 8,554,995 8,871,971 9,002,961
1997 9,288,138 10,443,932 11,856,587 12,291,993
Net income - 1996 1,547,241 1,856,076 1,775,933 1,869,636
Historical basis 1997 1,920,670 (2,639,677)(1) 1,847,412 1,573,500
Pro forma 1996 923,241 1,106,076 1,058,933 1,115,636
net income (1) 1997 1,145,670 1,385,323 1,847,412 1,573,500
Pro forma earnings
per share (1):
Basic 1996 $ 0.10 $ 0.12 $ 0.11 $ 0.12
1997 $ 0.12 $ 0.14 $ 0.16 $ 0.14
Diluted 1996 $ 0.10 $ 0.11 $ 0.11 $ 0.11
1997 $ 0.12 $ 0.14 $ 0.16 $ 0.13
Weighted average number
of shares outstanding:
Basic 1996 9,600,157 9,600,157 9,600,157 9,600,157
1997 9,600,157 9,903,361 11,520,690 11,570,280
Diluted 1996 9,604,879 9,927,472 9,927,472 9,927,472
1997 9,927,472 10,259,060 11,918,774 11,970,241
</TABLE>
(1) From 1986 until May 8, 1997, the Company was subject to taxation under
Subchapter S of the Code. The Company's S Corporation status was terminated
on May 8, 1997 and, accordingly, the Company became fully subject to
federal and state income taxes on May 9, 1997. In accordance with SFAS No.
109, the financial statements give effect to the recognition of a deferred
tax expense of $4,300,000 as a result of the termination of the Company's S
Corporation election on May 8, 1997.
<PAGE>
The pro forma information has been computed as if the Company was subject
to federal and all applicable state corporate income taxes for each of the
periods presented assuming the tax rate that would have been applied had
the Company been taxed as a C Corporation.
14. SUBSEQUENT EVENTS
During the first quarter of 1998, the Company opened five new transfer
stations for the consolidation, transportation and disposal of municipal
solid waste. The opening of the transfer stations resulted from
implementation of Subtitle D regulations which caused the closure of
several sites in North Carolina. Two of these transfer stations are
Company-owned and four are operated under municipal contracts with terms
ranging from 3 to 20 years. In addition, the Company purchased equipment
and customer contracts related to the solid waste collection business of
Waste Disposal Services, Inc. in and around Dalton, Georgia. The purchase
price for these assets was approximately $1.4 million.
* * * * * * * * * *
EXHIBIT 11.1
WASTE INDUSTRIES, INC.
COMPUTATION RE: EARNINGS PER SHARE
<TABLE>
<CAPTION>
Pro forma (1)
--------------------------------------------
Year Ended December 31,
--------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Basic Earnings Per Share:
Net Income ........................................ $ 4,170,424 $ 4,203,886 $ 5,951,905
============ ============ ============
Weighted average number of common shares issued and
outstanding .................................... 9,564,353 9,600,157 10,648,622
============ ============ ============
Basic earnings per share .......................... $ 0.44 $ 0.44 $ 0.56
Diluted Earnings Per Share:
Net Income ........................................ $ 4,170,424 $ 4,203,886 $ 5,951,905
============ ============ ============
Weighted average number of common shares issued and
outstanding .................................... 9,564,353 9,600,157 10,648,622
Common stock equivalents -
Options for common stock ....................... 39,721 396,000 526,000
------------ ------------ ------------
Weighted average common stock equivalents ......... 9,604,074 9,996,157 11,174,622
Less treasury shares assumed to be repurchased .... (4,150) (149,333) (166,988)
Weighted average shares outstanding ............... 9,599,924 9,846,824 11,007,634
============ ============ ============
Diluted earnings per share ........................ $ 0.43 $ 0.43 $ 0.54
============ ============ ============
</TABLE>
- ---------
(1) The pro forma number of shares reflected the (i) exchange by the Company of
its common stock on a share-for-share basis for all of the outstanding
common stock of the following companies affiliated through common
ownership: Waste Enterprises, Inc., Waste Industries South, Inc., Waste
Industries West, Inc., Waste Industries East, Inc., Kabco, Inc., Conway
378, Inc. and AmLease, Inc., in April 1996, (ii) stock dividend of nine
nonvoting common shares for each voting common share in 1995, and (iii) a
1-for-2.5 reverse stock split and the conversion of all nonvoting common
shares to common shares in 1997.
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Jurisdiction of
Name of Subsidiary Incorporation
- ------------------ ----------------
Waste Industries South, Inc. South Carolina
Waste Industries East, Inc. North Carolina
Waste Industries West, Inc. North Carolina
Kabco, Inc. North Carolina
Waste Industries of Georgia, Inc. North Carolina
ECO Acquisition Corp. North Carolina
ACS Acquisition Corp. North Carolina
RAD Acquisition Corp. North Carolina
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-48609 of Waste Industries, Inc. (the "Company") on Form S-8 of our report
dated February 20, 1998, appearing in this Annual Report on Form 10-K of the
Company for the year ended December 31, 1997.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 757,135
<SECURITIES> 0
<RECEIVABLES> 13,116,738
<ALLOWANCES> 869,750
<INVENTORY> 677,053
<CURRENT-ASSETS> 14,960,601
<PP&E> 114,126,277
<DEPRECIATION> 53,142,364
<TOTAL-ASSETS> 108,258,626
<CURRENT-LIABILITIES> 13,266,607
<BONDS> 49,441,564
0
0
<COMMON> 24,524,975
<OTHER-SE> 15,323,480
<TOTAL-LIABILITY-AND-EQUITY> 108,258,626
<SALES> 116,302,307
<TOTAL-REVENUES> 116,302,607
<CGS> 72,421,957
<TOTAL-COSTS> 104,439,422
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,830,571
<INCOME-PRETAX> 9,751,905
<INCOME-TAX> 7,050,000
<INCOME-CONTINUING> 2,701,905
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,701,905
<EPS-PRIMARY> 0.56<F1>
<EPS-DILUTED> 0.54
<F1>
<FN>
EPS-BASIC
</FN>
</TABLE>
