SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
Commission File Number 0-22417
Waste Industries, Inc.
(exact name of Registrant as specified in its charter)
North Carolina 56-0954929
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3949 Browning Place
Raleigh, North Carolina
(Address of principal executive offices)
27609
(Zip Code)
(919) 782-0095
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, No Par Value 13,853,980 shares
(Class) (Outstanding at May 10, 1999)
<PAGE>
PART 1 - Financial Information
Item 1. Financial Statements
WASTE INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,665,073 $ 1,400,815
Accounts receivable - trade, less allowance for
uncollectible accounts (1998- $699,600; 1999- $684,800) 16,834,606 18,611,493
Inventories 1,334,409 1,439,233
Current deferred income taxes 493,835 493,835
Prepaid expenses and other current assets 1,588,920 2,134,468
------------- -------------
Total current assets 23,916,843 24,079,844
---------- ----------
PROPERTY AND EQUIPMENT, net 88,801,179 106,906,225
INTANGIBLE ASSETS, net 63,073,024 61,267,854
OTHER NONCURRENT ASSETS 410,122 408,155
------------- -------------
TOTAL ASSETS $ 176,201,168 $ 192,662,078
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,877,128 $ 558,631
Accounts payable - trade 10,170,654 9,050,956
Federal and state income taxes payable 187,906 1,059,658
Accrued expenses and other liabilities 2,995,160 3,770,766
Deferred revenue 1,742,921 2,089,098
------------- -------------
Total current liabilities 16,973,769 16,529,109
------------- -------------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 86,464,655 110,191,360
NONCURRENT DEFERRED INCOME TAXES 7,837,818 8,212,818
DISPOSAL SITE CLOSURE AND LONG-TERM CARE OBLIGATIONS 262,133 555,004
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY:
Preferred stock, undesignated, shares authorized -
10,000,000, shares issued and outstanding - none -- --
Common stock, no par value, shares authorized - 80,000,000, shares
issued and outstanding: 1998 - 13,380,905; 1999 - 13,573,105 41,148,148 42,255,085
Paid-in capital 7,245,000 4,881,844
Retained earnings 16,596,296 21,810,793
Note receivable - Liberty Waste -- (11,538,000)
Shareholders' loans and receivables (326,651) (235,935)
------------- -------------
Total shareholders' equity 64,662,793 57,173,787
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 176,201,168 $ 192,662,078
============= =============
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
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WASTE INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
1998 1999
---- ----
REVENUES:
Service revenues $ 38,988,669 $ 47,290,651
Equipment sales 351,058 245,779
------------ ------------
Total revenues 39,339,727 47,536,430
------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of service operations 24,459,282 29,232,447
Cost of equipment sales 193,575 103,518
------------ ------------
Total cost of operations 24,652,857 29,335,965
------------ ------------
Selling, general and administrative 6,362,482 7,092,497
Depreciation and amortization 3,706,405 5,056,734
Merger and start up costs 77,100 --
------------ ------------
Total operating costs and expenses 34,798,844 41,485,196
------------ ------------
OPERATING INCOME 4,540,883 6,051,234
OTHER EXPENSE (INCOME):
Interest expense 920,299 1,618,144
Other (118,167) (93,516)
------------ ------------
Total other expense (income) 802,132 1,524,628
------------ ------------
INCOME BEFORE INCOME TAXES 3,738,751 4,526,606
INCOME TAX EXPENSE:
Current and deferred 1,360,000 1,675,288
------------ ------------
NET INCOME - HISTORICAL BASIS $ 2,378,751 $ 2,851,318
============ ============
EARNINGS PER SHARE - HISTORICAL BASIS:
BASIC $ 0.19 $ 0.21
DILUTED $ 0.18 $ 0.21
INCOME BEFORE
INCOME TAXES $ 3,738,751
PRO FORMA INCOME TAXES 1,385,000
PRO FORMA NET INCOME $ 2,353,751
PRO FORMA EARNINGS PER SHARE:
BASIC $ 0.19
DILUTED $ 0.18
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
BASIC 12,651,701 13,501,905
DILUTED 13,037,681 13,859,513
See Notes to Unaudited Condensed Consolidated Financial Statements.
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WASTE INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income - historical basis 2,378,751 2,851,318
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,706,405 5,056,734
Gain on sale of property and equipment (6,725) (51,318)
Change in closure/post closure liabilities 10,612 292,871
Changes in assets and liabilities, net of effects
from acquisitions of related businesses:
Accounts receivable - trade (4,300,684) (1,322,042)
Inventories (18,396) (104,824)
Prepaid and other current assets (318,900) (517,378)
Accounts payable - trade 2,872,481 (1,209,212)
Income taxes payable 1,309,690 1,246,752
Accrued expenses and other liabilities (128,526) 342,939
Deferred revenue 212,595 346,177
------------ ------------
Net cash provided by operating activities 5,717,303 6,932,017
------------ ------------
INVESTING ACTIVITIES:
Other noncurrent assets 39,764 1,967
Acquisitions of related business, net of cash acquired (2,661,933) (13,224,522)
Proceeds from sale of property and equipment 112,704 88,065
Purchases of property and equipment (7,939,002) (8,746,637)
------------ ------------
Net cash used by investing activities (10,448,467) (21,881,127)
------------ ------------
FINANCING ACTIVITIES:
Bank Overdraft 573,045 --
Proceeds from issuance of long-term debt 16,750,281 48,142,551
Principal payments on long-term debt (12,561,207) (27,298,375)
Repayments of notes receivable from shareholders -- 90,716
Increase in shareholder loans (43,033) --
Proceeds from issuance of common stock -- 3,250,080
Proceeds from exercised options -- 44,101
Subchapter S distributions to shareholders (582,005) --
Loan to Liberty Waste -- (11,538,000)
Other -- (6,221)
--------- ---------
Net cash provided by financing activities 4,137,081 12,684,852
------------ ------------
NET DECREASE (594,083) (2,264,258)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,175,557 3,665,073
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 581,474 $ 1,400,815
============ ============
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
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WASTE INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Basis of Presentation
The condensed financial statements included herein have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. As applicable under such regulations, certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The Company believes that the presentations and
disclosures in the financial statements included herein are adequate to make the
information not misleading. The financial statements reflect normal adjustments
which are necessary for a fair statement of the results for the interim periods
presented. Operating results for interim periods are not necessarily indicative
of the results for full years or other interim periods.
The condensed financial statements included herein should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
Recent Developments
Poolings-of-Interests Transactions:
The Company has restated the previously issued financial statements for the
three months ended March 31, 1998 to reflect the following acquisitions
accounted for as poolings-of-interests:
o On August 28, 1998, the Company acquired, in exchange for 388,311 shares of
Company common stock valued at approximately $8.5 million, all of the
outstanding stock of Railroad Avenue Disposal, Inc. ("RAD"), a Mississippi
corporation that owns and operates a Class I rubbish pit and sand and gravel
operation in northwest Mississippi.
o On June 30, 1998, the Company exchanged 330,000 shares of its common stock
with a fair value of approximately $7.4 million for all of the issued and
outstanding shares of common stock of Reliable Trash Service, Inc.("RTS"), a
Maryland corporation based in Columbia, Maryland and engaged in the solid
waste collection business in Tidewater Virginia.
o On June 16, 1998, the Company exchanged 21,344 shares of its common stock
with a fair value of approximately $449,000 for all of the issued and
outstanding shares of common stock of Dumpsters, Inc. ("Dumpsters"), a
Tennessee corporation engaged in the industrial solid waste collection
business in and around Memphis, Tennessee.
Merger costs, consisting primarily of professional fees, were approximately
$77,100 for the three months ended March 31, 1998. Prior to these
acquisitions, RAD, RTS and Dumpsters had elected S Corporation status for
income tax purposes. As a result of these mergers, RAD, RTS and Dumpsters,
terminated their S Corporation elections. Pro forma provision for income
taxes is presented for the three-month period ended March 31, 1998 as if
RAD, RTS and Dumpsters had been taxed as C Corporations.
Purchase Acquisitions:
Also during the three months ended March 31, 1999, the Company made the
following acquisitions accounted for as purchases:
o On January 14, 1999, the Company acquired a regional municipal
solid waste landfill in Decatur County, Tennessee from Waste Services of
Decatur, LLC ("WSD") through Liberty Waste Services, LLC ("Liberty") for
approximately $12.9 million in cash. The acquisition was funded with
borrowings under the Company's long-term bank notes payable.
5
<PAGE>
o On February 12, 1999 the Company purchased equipment and customer
contracts related to the commercial, industrial and residential solid
waste collection and recycling businesses of Clary's Container Corp.,
located in Max Meadow, Virginia for approximately $1.3 million in cash.
Components of cash used for the purchase acquisitions reflected in the unaudited
condensed consolidated statement of cash flows for the three months ended March
31, 1999 are as follows:
Fair value of tangible assets acquired 14,344,020
Liabilities assumed (2,086,213)
Non-compete agreements and contracts 12,000
Goodwill 777,557
-----------
Cash paid in acquisitions $13,047,364
===========
Non-compete agreements and contracts are amortized using the straight-line
method over the lives of the agreements. Goodwill is amortized using the
straight-line method over 25-40 years. Such estimated useful lives assigned to
goodwill are based on the period over which management believes that such
goodwill can be recovered through undiscounted future operating cash flows of
the acquired operations.
In accordance with the purchase method of accounting, the purchase price has
been allocated to the underlying assets and liabilities based on their
respective fair values at the dates of acquisition. Such allocation has been
based on preliminary estimates which may be revised at a later date.
The unaudited pro forma results of operations reflecting the effects of the
acquisitions in the first quarter of 1999 are not presented because the effects
are immaterial.
2. INCOME TAXES
Certain companies acquired in poolings-of-interests transactions were previously
taxed as S Corporations. Pro forma net income and earnings per share amounts
have been computed as if the Company was subject to federal and all applicable
state corporate income taxes for each period presented.
3. PRO FORMA EARNINGS PER SHARE
Pro forma basic and diluted earnings per share computations are based on the
weighted-average common stock outstanding and include the dilutive effect of
stock options using the treasury stock method. Common stock outstanding used to
compute the weighted-average shares was retroactively adjusted for the
acquisitions accounted for applying the pooling of interests method of
accounting (including two acquisitions of entities under common control during
the quarter ended March 31, 1998).
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4. SHAREHOLDERS' EQUITY
On April 1, 1999, pursuant to its 1997 Stock Option Plan, the Company granted
certain employees options to purchase 37,425 shares at $15.25 per share, the
fair market value on the date of grant, and other employees options to purchase
23,045 shares at $16.78 per share.
On March 1, 1999, the Company received approximately $44,000 in proceeds from
the exercise of options to purchase 9,200 shares of common stock.
On February 4, 1999, the Company issued 183,000 shares of common stock to
Liberty Waste Services, LLC for $3.5 million. Also accounted for in equity is a
loan made to Liberty Waste Services for $11.5 million.
5. CONTINGENCIES
Certain claims and lawsuits arising in the ordinary course of business have been
filed or are pending against the Company. In the opinion of management, all such
matters have been adequately provided for, are adequately covered by insurance,
or are of such kind that if disposed of unfavorably, would not have a material
adverse effect on the Company's financial position or results of operations.
The Company will have material financial obligations relating to closure and
post-closure of landfill facilities which it has acquired through March 31,
1999. The Company provides accruals for future obligations (generally for a term
of 30 to 40 years after final closure of the landfill) based on engineering
estimates of consumption of permitted landfill airspace over the useful life of
the landfill. There can be no assurance that the Company's ultimate financial
obligations for actual closing or post-closing costs will not exceed the amount
accrued and reserved or amounts otherwise receivable pursuant to insurance
policies or trust funds. Such a circumstance could have a material adverse
effect on the Company's financial condition and results of operation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN THE ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 1998. CERTAIN MATTERS DISCUSSED IN THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS ARE "FORWARD-LOOKING STATEMENTS" INTENDED
TO QUALIFY FOR THE SAFE HARBORS FROM LIABILITY ESTABLISHED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS CAN
GENERALLY BE IDENTIFIED AS SUCH BECAUSE THE CONTEXT OF THE STATEMENT WILL
INCLUDE WORDS SUCH AS THE COMPANY "BELIEVES," "ANTICIPATES," "EXPECTS" OR WORDS
OF SIMILAR IMPORT. SIMILARLY, STATEMENTS THAT DESCRIBE THE COMPANY'S FUTURE
PLANS, OBJECTIVES OR GOALS ARE ALSO FORWARD-LOOKING STATEMENTS. SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CURRENTLY
ANTICIPATED. SUCH RISKS AND UNCERTAINTIES INCLUDE THOSE RELATED TO THE ABILITY
TO MANAGE GROWTH, THE AVAILABILITY AND INTEGRATION OF ACQUISITION TARGETS,
COMPETITION, GEOGRAPHIC CONCENTRATION, GOVERNMENT REGULATION AND OTHERS SET
FORTH IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K. SHAREHOLDERS, POTENTIAL
INVESTORS AND OTHER READERS ARE URGED TO CONSIDER THESE FACTORS CAREFULLY IN
EVALUATING THE FORWARD-LOOKING STATEMENTS AND ARE CAUTIONED NOT TO PLACE UNDUE
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RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS MADE
HEREIN ARE ONLY MADE AS OF THE DATE OF THIS REPORT AND THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY UPDATE SUCH FORWARD-LOOKING STATEMENTS TO REFLECT
SUBSEQUENT EVENTS OR CIRCUMSTANCES.
OVERVIEW
Waste Industries was founded by members of the current senior management team in
1970. The Company provides solid waste collection, transfer, recycling,
processing and disposal services to customers primarily in North Carolina, South
Carolina, Mississippi, Tennessee, Virginia, Alabama, Georgia and Florida.
The Company has acquired 38 solid waste collection operations since 1990.
Thirty-three of these acquisitions were accounted for as purchases. Accordingly,
the results of operations of these acquired businesses accounted for as
purchases have been included in the Company's financial statements only from the
respective dates of acquisition and have affected period-to-period comparisons
of the Company's operating results. The common control mergers (ECO and ACS) and
the poolings-of-interests transactions (RAD, RTS and Dumpsters) have been
included in the Company's financial statements for all periods presented. The
Company anticipates that a substantial part of its future growth will come from
acquiring additional solid waste collection, transfer and disposal businesses
and, therefore, it is expected that additional acquisitions could continue to
affect period-to-period comparisons of the Company's operating results.
RESULTS OF OPERATIONS
GENERAL
The Company's branch waste collection operations generate revenues from fees
collected from commercial, industrial and residential collection and transfer
station customers. The Company derives a substantial portion of its collection
revenues from commercial and industrial services which are performed under
one-year to five-year service agreements. The Company's residential collection
services are performed either on a subscription basis with individual
households, or under contracts with municipalities, apartment owners, homeowners
associations or mobile home park operators. Residential customers on a
subscription basis are billed quarterly in advance and provide the Company with
a stable source of revenues. A liability for future service is recorded upon
billing and revenues are recognized at the end of each month in which services
are actually provided. Municipal contracts in the Company's existing markets are
typically awarded, at least initially, on a competitive bid basis and thereafter
on a bid or negotiated basis and usually range in duration from one to five
years. Municipal contracts provide consistent cash flow during the term of the
contracts.
The Company's prices for its solid waste services are typically determined by
the collection frequency and level of service, route density, volume, weight and
type of waste collected, type of equipment and containers furnished, the
distance to the disposal or processing facility, the cost of disposal or
processing, and prices charged in its markets for similar services.
The Company's ability to pass on price increases is sometimes limited by the
terms of its contracts. Long-term solid waste collection contracts typically
contain a formula, generally based on a predetermined published price index, for
automatic adjustment of fees to cover increases in some, but not all, operating
costs.
The Company currently operates approximately 100 convenience sites under
contract with 15 counties in order to consolidate waste in rural areas. These
contracts, which are usually competitively bid, generally have terms of one to
five years and provide consistent cash flow during the term of the contract
since the Company is paid regularly by the local government. The Company also
operates four recycling processing facilities as part of its collection and
transfer operations where it collects, processes, sorts and recycles paper
products, aluminum and steel cans, pallets, certain plastics, glass, and certain
other items. The Company's recycling facilities generate revenues from the
collection, processing and resale of recycled commodities, particularly recycled
wastepaper. Through a centralized effort, the Company resells recycled
commodities using commercially reasonable practices and seeks to manage
commodity pricing
8
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risk by spreading the risk among its customers. The Company also operates
curbside residential recycling programs in connection with its residential
collection operations in most of the communities it serves.
Operating expenses for the Company's collection operations include labor, fuel,
equipment maintenance and tipping fees paid to landfills. The Company owns or
operates 18 transfer stations which reduce the Company's costs by improving its
utilization of collection personnel and equipment and by consolidating the waste
stream to gain more favorable disposal rates. As a result of the RAD, TransWaste
and Waste Services of Decatur, LLC business combinations, the Company owns and
operates three landfills. Operating expenses for these landfill operations
include labor, equipment, legal and administrative, ongoing environmental
compliance, host community fees, site maintenance and accruals for closure and
post-closure maintenance. Cost of equipment sales primarily consists of the
Company's cost to purchase the equipment that it resells.
The Company capitalizes certain expenditures related to pending acquisitions or
development projects. Indirect acquisition and project development costs, such
as executive and corporate overhead, public relations and other corporate
services, are expensed as incurred. The Company's policy is to charge against
net income any unamortized capitalized expenditures and advances (net of any
portion thereof that the Company estimates to be recoverable, through sale or
otherwise) relating to any operation that is permanently shut down, any pending
acquisition that is not consummated and any landfill development project that is
not expected to be successfully completed. Engineering, legal, permitting,
construction and other costs directly associated with the acquisition or
development of a landfill, together with associated interest, are capitalized.
At March 31, 1999, the Company had recorded $1,216,167 of capitalized land
acquisition costs in connection with the development of a new land clearing and
inner debris ("LCID") landfill and $63,291 relating to pending acquisitions.
Selling, general and administrative ("SG&A") expenses include management
salaries, clerical and administrative overhead, professional services, costs
associated with the Company's marketing and sales force and community relations
expense.
Property and equipment is depreciated over the estimated useful life of the
assets using the straight line method.
Other income and expense, which is comprised primarily of interest income and
gains and losses on sales of equipment, has not historically been material to
the Company's results of operations.
To date, inflation has not had a significant impact on the Company's operations.
The following table sets forth for the periods indicated the percentage of
revenues represented by the individual line items reflected in the Company's
Unaudited Condensed Statements of Operations:
Three Months Ended
March 31,
---------
1998 1999
---- ----
Total Revenues 100.0% 100.0%
Service revenues 99.1% 99.5%
Equipment sales 0.9% 0.5%
---- ----
Cost of service operations 62.2% 61.6%
Cost of equipment sales 0.5% 0.2%
Selling, general and administrative 16.2% 14.9%
Depreciation and amortization 9.4% 10.6%
Merger and start up costs 0.2% 0.0%
---- ----
Operating income 11.5% 12.7%
Interest expense 2.3% 3.4%
Other income (0.3)% (0.2)%
---- ----
Income before income taxes 9.5% 9.5%
Income taxes (1) 3.5% 3.5%
---- ----
Net income (1) 6.0% 6.0%
==== ====
(1) Certain companies acquired in poolings-of-interests transactions in fiscal
1998 were previously taxed as S corporations. For the three-month period ended
March 31, 1998, income taxes have been computed as if the companies acquired
were subject to federal and all applicable state corporate income taxes for the
period presented assuming the tax rate that would have applied had the companies
been taxed as C corporations.
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THREE MONTHS ENDED MARCH 31, 1999 VS. THREE MONTHS ENDED MARCH 31, 1998
REVENUES. Total revenues increased approximately $8.2 million, or 20.8%, for the
three-month period ended March 31, 1999, as compared with the same period in
1998. This increase was attributable primarily to the following factors: (i) the
effect of eight businesses acquired during the year ended December 31, 1998 and
two businesses acquired during the three months ended March 31, 1999; and (ii)
to a lesser extent, increased collection volumes resulting from new municipal
and commercial contracts and residential subscriptions.
COST OF OPERATIONS. Cost of operations increased $4.7 million, or 19.0%, for the
three-month period ended March 31, 1999, compared to the same period in 1998.
This increase was attributable primarily to the following factors: (i) the
effect of eight businesses acquired during the year ended December 31, 1998 and
two businesses acquired during the three-months ended March 31, 1999; and (ii)
to a lesser extent, increased collection volumes resulting from new municipal
and commercial contracts and residential subscriptions.
SG&A. SG&A increased $730,000, or 11.5%, for the three-month period ended March
31, 1999. As a percentage of revenues, SG&A decreased from 16.2% to 14.9% in the
first quarter of 1999 compared to the first quarter of 1998 due primarily to
synergies achieved through acquisitions.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $1.4
million, or 36.4%, for the three-month period ended March 31, 1999, compared to
the same period in 1998. Depreciation and amortization, as a percentage of
revenues, increased to 10.6% from 9.4% for the three-month period ended March
31, 1999, compared to the same period in 1998. The principal reasons for the
increase were depreciation of additional property and equipment acquired and put
into service because of higher collection volumes, depreciation of assets of
acquired businesses and amortization of intangibles related to acquired
businesses.
INTEREST EXPENSE. Interest expense increased $698,000, or 75.8%, for the
three-month period ended March 31, 1999, compared to the same period in 1998.
This increase was primarily due to the higher level of average outstanding
indebtedness related to acquired businesses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at March 31, 1999 was $7.6 million compared to
$6.9 million at December 31, 1998. 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, the Company has in place financing
arrangements to satisfy its currently anticipated working capital needs in 1999.
The Company has a revolving credit facility with BB&T allowing the Company to
borrow up to $50 million for acquisitions and capital expenditures and $10
million for working capital. As of February 2, 1999, the Company has established
three $25 million term loan facilities and a $25 million shelf facility with
Prudential Insurance Company of America ("Prudential"). As of March 31, 1999,
approximately $31.0 million was outstanding under the BB&T facility, which
matures November 2002, and the Company had fully drawn down the three Prudential
term facilities, leaving the Company with an uncommitted shelf facility of $25
million. Both of the BB&T and the Prudential credit facilities require the
Company to maintain certain financial ratios, such as debt to earnings and fixed
charges to earnings, and satisfy other predetermined requirements, such as
minimum net worth, net income and deposit balances. At March 31, 1999, the
Company was in compliance with all covenants. The 12-month weighted average
interest rate on outstanding borrowings under the BB&T facility was 6.45% at
March 31, 1999. Interest on the BB&T facility is payable monthly based on an
adjusting spread to LIBOR. Interest on the Prudential term facilities is paid
quarterly, based on a fixed rate of 7.28%, 6.96% and 6.84%, respectively. Of the
Company's committed Prudential facilities, $25 million mature in April 2006, $25
million mature in June 2008, and $25 million mature in February 2009, subject to
renewal. As of March 31, 1999, the Company had a compensating balance
arrangement with BB&T for $375,000.
Net cash provided by operating activities totaled $6.9 million for the
three months ended March 31, 1999, compared to $5.7 million for the three months
ended March 31, 1998. This increase was caused principally by increases in net
income and depreciation and amortization.
Net cash used in investing activities totaled $21.9 million for the three-months
ended March 31, 1999, compared to $10.4 million for the three months ended March
31, 1998. This increase was caused principally by a higher level of acquisitions
of related businesses.
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Capital expenditures for 1999 are currently expected to be approximately $28.0
million, compared to $30.0 million in 1998. In 1999, approximately $20.0 million
is expected to be utilized for vehicle and equipment additions and replacements,
approximately $1.0 for expansion of transfer station services and approximately
$7.0 million for facilities, additions and improvements. The Company intends to
fund its planned 1999 capital expenditures principally through internally
generated funds and borrowings under existing credit facilities. In addition,
the Company anticipates that it may require substantial additional capital
expenditures to facilitate its growth strategy of acquiring solid waste
collection and disposal businesses. As an owner of and potential acquirer of
additional new landfill disposal facilities, the Company may also be required to
make significant expenditures to bring such newly acquired disposal facilities
into compliance with applicable regulatory requirements, obtain permits for 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 $12.7 million for the three
months ended March 31, 1999, compared to $4.1 million for the three months ended
March 31, 1998. The increase was primarily attributable to net increases in
long-term debt due to acquisitions.
At March 31, 1999, the Company had approximately $110.7 million of long-term and
short-term borrowings outstanding and approximately $540,000 in letters of
credit. At March 31, 1999, the ratio of the Company's long-term debt to total
capitalization was 66.0% compared to 57.2% at December 31, 1998.
SEASONALITY
The Company's results of operations tend to vary seasonally, with the first
quarter typically generating the least amount of revenues, higher revenues in
the second and third quarters, and a decline in the fourth quarter. This
seasonality reflects the lower volume of waste during the fall and winter
months. Also, certain operating and fixed costs remain relatively constant
throughout the calendar year, which when offset by these revenues results in a
similar seasonality of operating income.
YEAR 2000 TECHNOLOGY ISSUES
The Year 2000 Problem is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Any of the
Company's computer programs that have data-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in other routine business activities.
As of March 31, 1999, the Company has substantially completed testing of
information technology ("IT") systems with the assistance of software
specialists and consultants. Based on these tests, the Company has determined
that there are no current Year 2000 problems related to processing within these
IT systems. Going forward, the Company will evaluate the need, if any, for
further testing based on both hardware and software additions.
After an inventory of all non-IT systems within the Company, senior management
determined that one non-IT system required an upgrade in order to be Year 2000
ready. The Company has purchased and installed the appropriate upgrade for this
non-IT system and is, therefore, substantially Year 2000 ready with respect to
non-IT systems.
The Company is in the process of formal communications with its significant
suppliers, business partners, and customers to determine the extent to which it
may be affected by these third parties' plans to remediate their own Year 2000
issues in a timely manner. Although there can be no assurances as such, the
financial impact of potential third party Year 2000 issues on the Company is not
anticipated to be material to its financial position or results of operations.
The Company has incurred approximately $10,000 of Year 2000 project expenses to
date for IT and non-IT systems. The expenses were funded by cash generated from
operations. Future expenses are expected to be approximately $10,000. Total Year
2000 expenses are expected to be approximately 2% of the Company's 1999 IT
budget. These expectations are based on future hardware and software
modifications, if any, and the planned testing of the Company's personal
computers. Such testing of the Company's personal computers is scheduled for
completion during the first half of 1999. Such cost estimates are based on
presently available information and actual costs may materially differ from such
expectations as the Company continues to evaluate Year 2000 issues. Furthermore,
the Company's aggregate cost estimate does not include time and costs that may
be incurred by the Company as a result of the failure of any third parties,
including suppliers, to become Year 2000 ready or costs to implement any
contingency plans. Other IT projects within the Company have not been delayed as
a result of the Company's Year 2000 activities.
11
<PAGE>
The Company has identified the two most reasonably likely worst case scenarios
that the Year 2000 problem could have on operations. First, the Company has
identified several large municipal customers whose potential cash payment delay,
in the event of complications with the Year 2000 problem, could adversely impact
the Company's short term cash flow. However, in the event of such a
complication, the Company plans to utilize existing unused bank working capital
line of credit. Second, the Company has identified a potential delay in diesel
deliveries as another reasonably likely worst case scenario. However, in the
event of an interruption of short-term diesel supplies as a result of Year 2000
problems, the Company believes that existing bulk storage facilities at each
branch will be adequate to supply diesel for operations.
With regard to risk and contingency plans, due to the nature of the Company's
operations, the Company's management does not believe that the Year 2000 issue
will have a materially adverse effect on its financial condition or results of
operations. Accordingly, the Company has not developed a contingency plan based
on currently obtained knowledge. The Company provides service to a largely
diversified customer base and has a large supplier network. Accordingly, the
Company believes that these factors will mitigate potential adverse Year 2000
impacts. The Company believes, however, that due to the widespread nature of
potential Year 2000 issues, the contingency and risk evaluation process is an
ongoing one which will require further modifications as the Company obtains
future information regarding third party readiness. Furthermore, the Company's
beliefs and expectations, are based on certain assumptions and expectations that
may ultimately prove to be inaccurate. The Company's senior management and the
Board of Director has received and will continue to receive regular updates on
the status of the Company's Year 2000 readiness.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the three months ended March 31, 1999, the Company's market exposure was
affected by the issuance of $48.1 million principal amount of senior notes and
repayments of $27.3 million aggregate principal amount of senior and
subordinated notes. Total fixed-rate long-term debt increased by the principal
amount issued; the average interest rate at March 31, 1999 was 6.8%. The
proceeds from the issuance were used to fund acquisitions during the three
months ended March 31, 1999.
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) No material modifications
(b) No material limitations or qualifications
(c) During the three months ended March 31, 1999, the Company issued
the following unregistered securities, none of which involved the use of
underwriters or the payment of commissions:
(1) On February 1, 1999, the Company issued 183,000 shares of its common
stock to Liberty Waste Services, LLC. Such shares were issued in a
transaction intended to qualify as a Section 4(2) exemption from
registration.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None
(b) None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 17, 1999 Waste Industries, Inc.
(Registrant)
By: /s/ Stephen C. Shaw
------------------------
Stephen C. Shaw
Vice President, Finance
12
<PAGE>
WASTE INDUSTRIES, INC.
EXHIBIT INDEX
First Quarter 1999
Exhibit Number Exhibit Description
-------------- -------------------
11 Computations of Earnings Per Share
27 Financial Data Schedule
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
FINANCIAL STATEMENTS OF WASTE INDUSTRIES, INC. AS OF AND FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
13
Exhibit 11
WASTE INDUSTRIES, INC.
COMPUTATION RE: EARNINGS PER SHARE
Pro forma (1)
Three Months Ended
March 31,
1998 1999
---- ----
Net income $ 2,353,751 $ 2,851,606
============ ============
Weighted average number of common shares
issued and outstanding - Basic 12,651,701 13,501,905
Incremental shares under
stock option plans 385,980 357,608
------------ ------------
Weighted average shares outstanding - Diluted 13,037,681 13,859,513
------------ ------------
Basic earnings per share $ 0.19 $ 0.21
============ ============
Diluted earnings per share $ 0.18 $ 0.21
============ ============
(1) Pro forma basic and diluted earnings per share computations are based on the
weighted-average common stock outstanding and include the dilutive effect of
stock options using the treasury stock method. Common stock outstanding used to
compute the weighted-average shares was retroactively adjusted for the
acquisition of entities under common control during the quarter ended March 31,
1998, and for the merger with entities under the pooling of interest method
during 1998.
14
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