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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, 1998 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)
<TABLE>
<CAPTION>
NORTH CAROLINA 56-0954929
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<CAPTION>
3949 BROWNING PLACE
RALEIGH, NORTH CAROLINA 27609
<S> <C>
(Address of principal executive offices) (Zip Code)
</TABLE>
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. [ ]
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 25,
1999, on the NASDAQ National Market System was approximately $63,072,551 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 25, 1999, the registrant had outstanding 13,563,905 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders are incorporated herein by reference into Part III.
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NOTE RELATING TO FORWARD-LOOKING STATEMENTS
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. THESE STATEMENTS AND OTHER STATEMENTS MADE ELSEWHERE BY THE
COMPANY OR ITS REPRESENTATIVES, WHICH ARE IDENTIFIED OR QUALIFIED BY WORDS SUCH
AS "LIKELY," "WILL," "SUGGESTS," "EXPECTS," "MAY," "BELIEVE," "COULD,"
"SHOULD," "WOULD," "ANTICIPATES," "PLANS" OR SIMILAR EXPRESSIONS, ARE BASED ON
A NUMBER OF ASSUMPTIONS. 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. SHAREHOLDERS, POTENTIAL INVESTORS AND OTHER READERS ARE URGED TO
CONSIDER THESE FACTORS CAREFULLY IN EVALUATING THE FORWARD-LOOKING STATEMENTS
AND ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING
STATEMENTS. THE FORWARD-LOOKING STATEMENTS MADE HEREIN ARE ONLY MADE AS OF THE
DATE OF THIS REPORT AND THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE
SUCH FORWARD-LOOKING STATEMENTS TO REFLECT SUBSEQUENT EVENTS OR CIRCUMSTANCES.
PART I
ITEM 1. BUSINESS.
INTRODUCTION
Waste Industries, Inc. (the "Company") is a regional, integrated solid
waste services company that provides solid waste collection, transfer,
recycling, processing and disposal services to customers primarily in North
Carolina, South Carolina, Virginia, Tennessee, Mississippi, Alabama and
Georgia. The Company's principal operations as of December 31, 1998 consisted
of 35 branch collection operations, 20 transfer stations, more than 100 county
convenience drop-off centers, seven recycling facilities and two landfills,
serving more than 300,000 municipal, residential, commercial and industrial
customer locations. Since December 31, 1998, the Company has added another two
transfer stations and has acquired its third landfill.
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 113 years of experience in the solid waste industry and over 93 years
with the Company.
INDUSTRY OVERVIEW
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:
(1) increasingly stringent environmental regulation and enforcement
resulting in increased capital requirements for collection companies and
landfill operators;
(2) the ability of larger integrated operators to achieve certain
economies of scale;
(3) the evolution of an industry competitive model which emphasizes
providing collection, transfer, disposal and recycling capabilities; and
(4) 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.
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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 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:
(1) to generate internal growth by adding customers and services to its
existing operations;
(2) to acquire solid waste collection companies, customers and, under
appropriate circumstances, landfills in existing and new areas of its target
market; and
(3) 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 20 transfer stations, four 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.
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EXPANSION THROUGH ACQUISITIONS
The Company's strategy for growth includes:
(1) "tuck-in" and other acquisitions of solid waste collection companies
and customers in existing and adjacent markets;
(2) the acquisition of solid waste collection companies and customers in
new markets; and
(3) 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.
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,
Florida, Alabama and Virginia. There can be no assurance that the Company will
be able to identify suitable acquisition candidates or, if 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.
The Company is actively engaged in identifying solid waste landfill
acquisition candidates in the Southeast, although the number of candidates is
limited in the Company's current market area. The Company believes that the
successful acquisition of landfills will provide the Company with opportunities
to integrate vertically its collection, transfer and disposal operations while
improving operating margins. 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
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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:
o improve collection and transportation efficiencies;
o enhance equipment and personnel utilization;
o reduce equipment acquisition and maintenance costs;
o reduce disposal costs by maximizing waste streams directed to lower cost
landfills;
o timely monitor and collect customer accounts; and
o 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 30% of the Company's waste
volume is directed through Company owned or operated transfer stations.
ACQUISITION PROGRAM
From 1990 through 1998, the Company acquired, either by merger or asset
purchase, 36 solid waste collection operations. 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:
(1) historical and projected financial performance;
(2) internal rate of return, return on assets and return on revenue;
(3) experience and reputation of the candidate's management and customer
service reputation and relationships with the local communities;
(4) composition and size of the candidate's customer base;
(5) whether the geographic location of the candidate will enhance or
expand the Company's market area or ability to attract other acquisition
candidates;
(6) whether the acquisition will augment or increase the Company's market
share or help protect the Company's existing customer base;
(7) any synergies gained by combining the acquisition candidate with the
Company's existing operations; and
(8) 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
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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 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 in
1998:
<TABLE>
<CAPTION>
YEAR
COMPANY ACQUIRED PRINCIPAL BUSINESS LOCATION MARKET AREA
- ------------------------------ ---------- -------------------------- ------------------ ----------------------------------
<S> <C> <C> <C> <C>
Curb Appeal New Home 1998 Residential Construction Apex, NC Wake County, NC
New Home Services, Inc. Waste Removal
C&M Carting Company, Inc. 1998 Commercial, Industrial Wytheville, VA Bland, Carroll, Grayson, Pulaski,
and Residential Smyth and Wythe Counties, VA
Collection and
Recycling
TransWaste Services, Inc. 1998 Construction and Albany, GA Coffee, Crisp, Dougherty, Sumter
Demolition Landfill; and Terrell Counties, GA
Commercial, Industrial
and Residential
Collection and
Recycling
Greater Atlanta Sanitation, 1998 Residential Collection Cumming, GA Forsyth and Fulton Counties, GA
Inc. and Recycling
Railroad Avenue Disposal, 1998 Construction and Olive Branch, MS De Soto, Marshall, Tunica and
Inc. Demolition Landfill Tate Counties, MS; Crittenden
County, AR; Fayette and
Shelby Counties, TN
Reliable Trash Service, Inc. 1998 Commercial and Columbia, MD Tidewater, VA
Industrial Collection
and Recycling
Dumpsters, Inc. 1998 Industrial Collection Memphis, TN Shelby County, TN
Cumberland Waste Disposal, 1998 Commercial, Industrial Crossville, TN Cumberland, Bledsoe, Overton
LLC and Residential and Putnam Counties, TN
Collection and
Recycling
ECO Services, Inc. 1998 Commercial and Olive Branch, MS De Soto, Marshall, Tunica and
Industrial Collection Tate Counties, MS; Crittenden
County, AR; Fayette and
Shelby Counties, TN
Air Cargo Services, Inc. 1998 Recycling and Solid Raleigh, NC Raleigh and Greensboro, NC
Waste Transportation
Action Waste Systems, Inc. 1998 Commercial, Industrial Lithia Springs, Barrow, Cherokee, Clarke, Cobb,
and Residential GA DeKalb, Douglas, Forsyth,
Collection and Fulton, Gwinnett, Jackson,
Recycling Rockdale and Walton Counties,
GA
Waste Disposal Services, 1998 Commercial, Industrial Tunnel Hill, GA Catoosa, Murray and Whitfield
Inc. and Residential Counties, GA
Collection and
Recycling
L&M Garbage Service 1998 Residential Collection Durham, NC Durham County, NC
and Recycling
</TABLE>
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1998 ACQUISITIONS
On December 2, 1998, the Company acquired the solid waste collection and
new home construction cleanup business of Curb Appeal New Home Services, Inc.,
located in Apex, North Carolina, for approximately $800,000 in cash (a portion
of which is payable only if the acquired business achieves certain service
revenue targets). This "tuck-in" acquisition increases the Company's route
density and complements its current operations in Wake County, North Carolina.
On October 7, 1998, the Company purchased equipment and customer contracts
related to the commercial, industrial and residential solid waste collection
and recycling business of C&M Carting Company, Inc., located in Wytheville,
Virginia, for approximately $1.36 million in cash. This acquisition further
expands the Company's operations in Virginia.
On September 10, 1998, the Company acquired, in exchange for approximately
$10.0 million in cash plus 706,730 shares of Company Common Stock valued at
approximately $13.5 million, all of the outstanding stock of TransWaste
Services, Inc., a Georgia corporation engaged in solid waste collection and the
development, ownership and operation of four transfer stations and a landfill
in Albany, Georgia. This acquisition expands the Company's operations in
Georgia.
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., a Mississippi corporation
that owns and operates a Class I rubbish pit and sand and gravel operation in
northwest Mississippi. This acquisition complements the Company's solid waste
collection operations in and around Memphis, Tennessee.
On August 28, 1998, the Company acquired, in exchange for approximately
$7.6 million in cash plus 22,474 shares of Company Common Stock valued at
approximately $500,000, certain assets of Greater Atlanta Sanitation, Inc., a
solid waste collection business in and around Atlanta, Georgia. This
acquisition further expands the Company's operations in Georgia.
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., a Maryland
corporation based in Columbia, Maryland and engaged in the solid waste
collection business in Tidewater Virginia. This acquisition further expands the
Company's operations in Virginia.
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., a Tennessee corporation
engaged in the industrial solid waste collection business in and around
Memphis, Tennessee. This "tuck-in" acquisition complements the recent ECO
Services, Inc. acquisition, increasing the Company's route density in the
Shelby County, Tennessee.
On May 13, 1998, the Company purchased equipment and customer contracts
related to the commercial, industrial and residential solid waste collection
business of Cumberland Waste Disposal, LLC, located in Crossville, Tennessee,
for approximately $3.3 million in cash. This acquisition further expands the
Company's operations in Tennessee.
On March 31, 1998, the Company exchanged 300,933 shares of its Common
Stock with a fair value of approximately $5.75 million for all of the issued
and outstanding shares of common stock of ECO Services, Inc., a Georgia
corporation based in Olive Branch, Mississippi and engaged in the solid waste
collection business in Mississippi, Tennessee and Arkansas. This acquisition
expands the Company's operations into western Tennessee, as well as Mississippi
and Arkansas.
On March 31, 1998, the Company exchanged 19,622 shares of its Common Stock
with a fair value of approximately $375,000 for all of the issued and
outstanding shares of common stock of Air Cargo Services, Inc., a North
Carolina corporation engaged in the business of collection and processing of
recyclables, intermediate transportation of solid waste, and local and long
distance freight pick-up and delivery in Raleigh and Greensboro, North
Carolina. This "tuck-in" acquisition increases the Company's route density and
expands its business into complementary transportation and freight operations.
In March 1998, the Company purchased equipment and customer contracts
related to the commercial, industrial and residential solid waste collection
businesses of: Action Waste Systems, Inc., located in Lithia Springs, Georgia;
Waste Disposal Services, Inc., located in Tunnel Hill, Georgia; and L&M Garbage
Service, located in Durham, North Carolina. The total purchase price for these
assets was approximately $4.7 million in cash. The Waste Disposal Services and
L&M acquisitions are "tuck-in" acquisitions that increase the Company's route
density in areas already served. The Action Waste Systems acquisition further
expands the Company's operations in Georgia.
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The Company primarily used borrowings under its revolving credit facility
to fund acquisitions during 1998.
RECENT DEVELOPMENTS
On January 14, 1999, the Company acquired its third landfill site,
together with a related waste hauling business, from Waste Services of Decatur,
LLC, a solid waste services company located in Decatur County, Tennessee, for
approximately $12.4 million in cash. The 34-acre landfill has 88 permitted
acres with an estimated airspace capacity of more than 16 million cubic yards
and receives waste from six surrounding counties (Chester, Hardin, Henderson,
McNairy, Perry and Wayne) and five transfer stations, two of which are operated
by the Company. The Company acquired the right to purchase the Decatur landfill
and other assets from Liberty Waste Services, LLC ("Liberty"), a waste services
development enterprise, for which the Company will pay Liberty certain
management and other fees based on revenues generated by the Decatur operation.
The acquisition of the Decatur landfill and other assets expands the Company's
operations in western Tennessee and is one component of a long-range plan for
the Company and Liberty to jointly develop landfill-based waste disposal
operations in Tennessee, Kentucky and northern Mississippi over the next two
years. As part of the Company's relationship with Liberty, the Company sold
183,000 shares of its unregistered Common Stock to Liberty for $3.25 million,
which it has committed to register for resale. The Company has also agreed to
loan Liberty up to $11.5 million to be used to develop landfill-based waste
disposal operations which the Company has the option to purchase at prices to
be determined according to an agreed-upon formula. As of March 26, 1999,
Liberty had borrowed $11.5 million under this arrangement.
On February 12, 1999, the Company purchased equipment and customer
contracts related to the commercial, industrial and residential solid waste
collection and recycling business of Clary's Container Corporation, located in
Max Meadows, Virginia for approximately $1.29 million in cash. This "tuck-in"
acquisition further expands the Company's operations in Virginia.
In addition the Company has entered into letters of intent to acquire two
landfills in new markets in the Southeastern U.S. for an aggregate of
approximately $8.6 million in cash. These acquisitions, which the Company
expects to complete in the near future, will increase the number of landfills
owned by the Company to five and further the Company's plans to expand its
operations in new markets in the Southeastern U.S.
CONTRACTS PROGRAM
The Company currently has approximately 153 municipal contracts. 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 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. During 1998,
the Company retained over 65% of its municipal contracts that were up for bid
or renewal.
SERVICES
COMMERCIAL, INDUSTRIAL AND RESIDENTIAL WASTE SERVICES
The Company provides commercial and industrial collection and disposal
services under one-year to five-year service agreements. 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, the Company can 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
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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, the Company installs
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
approximately 153 municipal contracts in place as of December 31, 1998. 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 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 20 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:
(1) providing access to multiple landfills;
(2) improving utilization of collection personnel and equipment;
(3) concentrating the waste stream to gain leverage in negotiating for
more favorable disposal rates; and
(4) building relationships with municipalities that can lead to
opportunities for additional business in the future.
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 four of the transfer stations it operates, and operates
the remaining 16 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
55% 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 13 counties in its market area where residents can
dispose of recyclables. These 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
1998, less than 4% 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,
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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 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.
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,
1998, the branch network was divided into the six regions set forth below:
<TABLE>
<CAPTION>
CAROLINAS REGION
- -------------------------------------------------------------
CENTRAL SOUTH WEST MISSISSIPPI VALLEY TENNESSEE VALLEY
- --------------------- ------------------ ---------------- ---------------------- -------------------
<S> <C> <C> <C> <C>
Durham, NC Wilmington, NC Graham, NC Olive Branch, MS (2) Chattanooga, TN
Elizabeth City, NC Bolivia, NC Greensboro, NC Crossville, TN
Garner, NC Charleston, SC Henderson, NC Dalton, GA
Goldsboro, NC Conway, SC Oxford, NC Lilburn, GA
Greenville, NC Sumter, SC Wytheville, VA Easley, SC
Hope Mills, NC Alpharetta, GA
Kinston, NC COASTAL Dawson, GA
------------------ Americus, GA
Morrisville, NC Newport, NC Warner Robbins, GA
Rocky Mount, NC Jacksonville, NC Douglas, GA
Wilson, NC
Norfolk, VA
</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
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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 President.
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:
(1) safety and training services;
(2) risk management;
(3) capital expenditure evaluation;
(4) human resources services;
(5) equipment maintenance;
(6) location of most economical disposal facilities;
(7) purchasing;
(8) sales and marketing support;
(9) productivity analysis;
(10) research and development services; and
(11) 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.
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
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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 uses approximately 100 landfill disposal sites
in the markets it serves. At December 31, 1998, the Company owned and operated
two of these landfill sites. The Company has financial obligations relating to
closure and post-closure or remediation costs (long-term care) for the landfill
sites it now owns and operates, and the Company's obligations for such costs
will increase if the Company decides to develop or acquire additional landfill
sites in the future.
Landfill closure and post-closure costs include estimated costs to be
incurred for final closure of landfills and estimated costs for providing
required post-closure monitoring and maintenance of landfills. The Company
estimates these future cost requirements based on its interpretation of the
technical standards of the Environmental Protection Agency's Subtitle D
regulations. While the precise amounts of these future obligations cannot be
determined, at December 31, 1998, the Company estimates the total costs to be
approximately $1.7 million for remediation, final closure of its operating
facilities and post-closure monitoring costs. The Company's estimate of these
costs is expressed in current dollars and is not discounted to reflect
anticipated timing of future expenditures. The Company had accrued
approximately $275,000 and $263,122 for such projected costs at December 31,
1997 and 1998, respectively. The Company provides accruals for these future
costs (generally for a term of 30 years after final closure of any landfill),
and will provide additional accruals for these and other landfills the Company
may acquire or develop in the future, based on engineering estimates of
consumption of airspace over the useful lives of such facilities. There can be
no assurance that the Company's ultimate financial obligations for actual
closure or post-closure 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 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.
The Company may decide to acquire additional landfills or it may develop
additional landfills or partner with an experienced landfill operator for the
acquisition, development or assumption of the operation of additional
landfills. 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.
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.
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<PAGE>
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.
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 1998. 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 three large
national waste companies: Waste Management, Inc.; Browning-Ferris Industries,
Inc.; and Allied Waste Industries, Inc. There are several other public
companies in the industry with annual revenue in excess of $100 million,
including Republic Industries, Inc., Superior Services, Inc. and Waste
Connections, 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.
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<PAGE>
EMPLOYEES
At December 31, 1998, the Company employed approximately 1,500 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, 1998, the Company
had provided customers and various regulatory authorities with bonds and
letters of credit of approximately $0.5 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.
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 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 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.
The Company's facilities are 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,
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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 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 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
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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.
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
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control provisions that direct the delivery of solid wastes to specific
facilities, laws that grant the right to establish franchises for 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
The Company's principal executive offices are located at 3949 Browning
Place, Raleigh, North Carolina, where it currently leases approximately 13,000
square feet of office space.
The principal property and equipment of the Company consists of land
(primarily transfer stations, bases for collection operations and landfill
sites), buildings, and vehicles and equipment. The Company owns or leases real
property in the states in which it does business. At December 31, 1998, the
Company operated 35 branch collection locations, 20 transfer stations, seven
recycling facilities and two landfills aggregating approximately 155 acres.
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
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<PAGE>
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 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, 1998.
17
<PAGE>
EXECUTIVE OFFICERS
As of March 24, 1999, the executive officers of the Company were as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ------------------------------ ----- ------------------------------------------------
<S> <C> <C>
Lonnie C. Poole, Jr .......... 61 Chairman, Chief Executive Officer and Director
Jim W. Perry ................. 54 President, Chief Operating Officer and Director
Stephen C. Shaw .............. 39 Vice President, Finance and Assistant Secretary
</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 28 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 28 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.
STEPHEN C. SHAW joined the Company in 1985 and has served as the Company's
Vice President, Finance since 1991. Mr. Shaw had served as the Company's
controller since 1985. He is a Certified Public Accountant and holds a B.S. in
Business Administration from the University of North Carolina at Chapel Hill.
Mr. Shaw has more than 13 years' experience in the solid waste industry.
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, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ------------------------------- ----- --------------------------------------------------
<S> <C> <C>
Lonnie C. Poole, III .......... 37 Vice President and Director of Support Services
Richard D. Lauck .............. 53 Vice President -- Carolinas Region
Thomas C. Cannon .............. 49 Vice President -- Georgia/Tennessee Valley Region
James J. Becher ............... 49 Vice President -- Mississippi Valley Region
</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 nine 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 17
years' experience in the solid waste industry.
THOMAS C. CANNON has served as a Vice President of the Company since
September 1998. Mr. Cannon joined the Company during its acquisition of
TransWaste Services, Inc. He holds a B.B.A. in Industrial Management from the
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<PAGE>
University of Georgia and has done graduate work in Accounting at Georgia
Southwestern College. Mr. Cannon has 5 years of experience in the solid waste
industry.
JAMES J. BECHER has served as a Vice President of the Company since March
1998. He joined the Company in 1986 as a Branch Manager. Mr. Becher holds a
B.A. in History from Guilford College in North Carolina. He has 13 years'
experience in the solid waste industry.
19
<PAGE>
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, 1998 as
reported by Nasdaq. These prices are based on quotations between dealers, which
do not reflect retail mark-up, mark-down or commissions.
<TABLE>
<CAPTION>
1997 HIGH LOW
- -------------------------------------- ---------- ----------
<S> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
1998
- --------------------------
<S> <C> <C>
First quarter ....................... $21 1/4 $15 1/4
Second quarter ...................... $22 3/4 $16 1/8
Third quarter ....................... $ 24 $ 19
Fourth quarter ...................... $25 5/8 $16 1/2
</TABLE>
(b) Approximate Number of Equity Security Holders
As of March 26, 1999, the number of record holders of the Company's Common
Stock was 102 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.
(d) Recent Sales of Unregistered Securities
The Company did not sell any equity securities during the quarter ended
December 31, 1998.
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, 1996, 1997 and 1998 and the consolidated balance sheet
data as of December 31, 1997 and 1998 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, 1994 and 1995
and the consolidated balance sheet data as of December 31, 1994, 1995 and 1996
are derived from financial statements not included in this Annual Report on
Form 10-K.
20
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, (1)(2)
------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Service revenues ........................................ $ 79,451 $ 96,051 $ 104,509 $ 127,581 $ 169,527
Equipment sales ......................................... 1,909 2,080 1,769 1,601 1,732
--------- -------- --------- --------- ---------
Total revenues .......................................... 81,360 98,131 106,278 129,182 171,259
Cost of service operations .............................. 44,259 56,697 65,341 78,316 103,523
Cost of equipment sales ................................. 1,888 1,646 1,240 1,171 1,268
--------- -------- --------- --------- ---------
Total cost of operations ................................ 46,147 58,343 66,581 79,487 104,791
Selling, general and administrative ..................... 19,578 19,822 20,191 24,564 28,496
Depreciation and amortization ........................... 8,451 8,939 9,307 11,797 16,981
Merger costs and start-up costs ......................... -- -- -- -- 926
--------- -------- --------- --------- ---------
Operating income ........................................ 7,184 11,027 10,199 13,334 20,065
Interest expense ........................................ (2,193) (2,399) (2,497) (3,021) (4,812)
Interest income ......................................... 334 430 806 634 631
Other income ............................................ -- -- -- -- --
--------- -------- --------- --------- ---------
Income before income taxes .............................. 5,325 9,058 8,508 10,947 15,884
Income taxes ............................................ -- -- -- 7,011 5,606
--------- -------- --------- --------- ---------
Net income -- historical basis .......................... $ 5,325 $ 9,058 $ 8,508 $ 3,936 $ 10,278
========= ======== ========= ========= =========
Earnings per share -- historical basis:
Basic ................................................. $ 0.50 $ 0.85 $ 0.80 $ 0.34 $ 0.80
========= ======== ========= ========= =========
Diluted ............................................... 0.50 0.85 0.78 0.33 0.77
========= ======== ========= ========= =========
Pro forma income before income taxes (3) ................ $ 5,325 $ 9,058 $ 8,508 $ 10,947 $ 15,884
Pro forma income taxes (3) .............................. 2,161 3,632 3,434 4,202 5,803
--------- -------- --------- --------- ---------
Pro forma net income (3) ................................ $ 3,164 $ 5,426 $ 5,074 $ 6,745 $ 10,081
========= ======== ========= ========= =========
Pro forma earnings per share (3):
Basic ................................................. $ 0.30 $ 0.51 $ 0.48 $ 0.58 $ 0.78
========= ======== ========= ========= =========
Diluted ............................................... 0.30 0.51 0.47 0.56 0.76
========= ======== ========= ========= =========
Weighted-average shares outstanding:
Basic ................................................. 10,625 10,625 10,660 11,709 12,875
========= ======== ========= ========= =========
Diluted ............................................... 10,657 10,660 10,880 12,068 13,266
========= ======== ========= ========= =========
Other Operating Data:
Net cash provided by operating activities ............... $ 14,865 $ 18,717 $ 17,340 $ 22,949 $ 27,927
Net cash used in investing activities ................... (11,788) (8,912) (15,688) (59,284) (57,097)
Net cash provided by (used in) financing activities ..... (2,764) (9,336) (1,973) 35,431 31,660
EBITDA (4) .............................................. 15,969 20,396 20,312 25,765 37,677
Balance Sheet Data:
Cash and cash equivalents ............................... $ 2,401 $ 2,400 $ 2,145 $ 1,176 $ 3,665
Working capital (deficit) ............................... (3,466) 2,214 1,998 1,635 6,943
Property and equipment, net ............................. 36,726 36,700 43,233 65,044 88,801
Total assets ............................................ 53,330 54,167 63,140 113,417 176,201
Long-term debt, net of current maturities ............... 24,216 28,349 34,526 50,788 86,465
Shareholders' equity .................................... $ 13,370 $ 14,554 $ 15,138 $ 41,167 $ 64,663
</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
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<PAGE>
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) On June 16, 1998, the Company exchanged 21,344 shares of its common stock
(with a fair value of $449,000) for all of the issued and outstanding
shares of common stock of Dumpsters, Inc. On June 30, 1998, the Company
exchanged 330,000 shares of its common stock (with a fair value of $7.4
million) for all of the issued and outstanding shares of common stock of
Reliable Trash Services, Inc. On August 28, 1998, the Company exchanged
388,311 shares of its common stock (with a fair value of approximately of
$8.5 million) for all of the issued and outstanding shares of common stock
of Railroad Avenue Disposal, Inc. These business combinations have been
accounted for as poolings-of-interests. Accordingly, the Company has
restated its previously issued consolidated financial statements as of and
for each of the four years in the period ended December 31, 1997.
(3) 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. Additionally, certain companies acquired in
poolings-of-interests transactions were previously taxed as S
Corporations. 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."
(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.
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
The following presentation of management's discussion and analysis of the
Company's consolidated financial condition and results of operations 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,
South Carolina, Virginia, Tennessee, Mississippi, Alabama and Georgia.
From 1990 through 1998, the Company acquired, either by merger or asset
purchase, 36 solid waste collection operations. Thirty-one 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
ECO Services, Inc. and Air Cargo Services, Inc. acquisitions, which were both
common control mergers, and the Railroad Avenue Disposal, Inc., Reliable Trash
Service, Inc. and Dumpsters, Inc. acquisitions, which were all
pooling-of-interests transactions, have been included in the Company's
financial statements for all periods presented. The Company anticipates that a
substantial part of its future growth will come from acquiring additional solid
waste collection, transfer and disposal businesses and, therefore, it is
expected that additional acquisitions could continue to affect period-to-period
comparisons of the Company's operating results.
From 1986 until May 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 1996 and 1997, the Company made cash distributions of approximately
$1.8 million to its shareholders. In connection with its conversion from S
Corporation to C Corporation status in May of 1997, the Company effected an S
Corporation distribution (consisting of approximately $1.5 million in cash
payments) to the Company's S Corporation shareholders. The remaining S
Corporation retained earnings of approximately $8.5 million have been
reclassified to additional capital. The Company's S Corporation status was
terminated on May 9, 1997 and, accordingly, the Company became fully subject to
federal and state income taxes on that date.
RECENT DEVELOPMENTS
POOLING-OF-INTERESTS TRANSACTIONS
The Company has restated the previously issued consolidated statements of
operations for the years ended December 31, 1997 and 1996, the consolidated
balance sheet as of December 31, 1997 and related footnotes to reflect the
following acquisitions accounted for as poolings-of-interests:
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.
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 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 in northwest
Mississippi.
PURCHASE TRANSACTIONS
During 1998, the Company acquired eight waste collection and disposal
services businesses to expand its operations. Total consideration paid
approximated $41.7 million, including the issuance of 729,204 shares of the
Company's common stock with a fair value of approximately $14.0 million. Cash
consideration paid was funded primarily with borrowings
23
<PAGE>
under the Company's long-term bank notes payable. The assets acquired and
liabilities assumed were accounted for by the purchase method of accounting.
Tangible net assets acquired approximate $7.2 million.
COMMON CONTROL MERGERS
On March 31, 1998, the Company exchanged 320,555 shares of its common
stock for all of the issued and outstanding shares of common stock of ECO
Services, Inc. ("ECO") and Air Cargo Services, Inc. ("ACS"). Certain of the
Company's executive officers, who are also Company shareholders, owned
substantially all of the common stock of ECO and ACS. Accordingly, all assets
and liabilities transferred have been accounted for at historical cost in a
manner similar to that of pooling-of-interests accounting (see Note 1 to the
Consolidated Financial Statements). The Company's financial statements have
been restated to include the accounts and operations for all periods presented.
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 13 counties in order to consolidate waste in rural areas. These
contracts, which are usually competitively bid, generally have terms of one to
five years and provide consistent cash flow during the term of the contract
since the Company is paid regularly by the local government. The Company also
operates seven recycling processing facilities as part of its collection and
transfer operations where it collects, processes, sorts and recycles paper
products, aluminum and steel cans, pallets, certain plastics, glass, and
certain other items. The Company's recycling facilities generate revenues from
the collection, processing and resale of recycled commodities, particularly
recycled wastepaper. Through a centralized effort, the Company resells recycled
commodities using commercially reasonable practices and seeks to manage
commodity pricing risk by spreading the risk among its customers. The Company
also operates curbside residential recycling programs in connection with its
residential collection operations in most of the communities it serves.
Operating expenses for the Company's collection operations include labor,
fuel, equipment maintenance and tipping fees paid to landfills. As of December
31, 1998, the Company operated 20 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. Eight of
these transfer stations were opened during 1998, a 67% increase over prior
years. As of December 31, 1998, the Company owned two landfill sites. In the
first quarter of 1999, the Company acquired its third landfill site as well as
two additional transfer stations. Operating expenses for these landfill
operations 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
24
<PAGE>
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, 1998, the Company had recorded $519,000 of capitalized land
acquisition costs in connection with the development of a new LCID landfill and
$56,000 relating to pending acquisitions.
Selling, general and administrative ("SG& A") expenses include management
salaries, clerical and administrative overhead, professional services, costs
associated with the Company's marketing and sales force and community relations
expense.
Property and equipment is depreciated over the estimated useful life of
the assets using the straight-line method.
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Total revenues .............................. 100.0% 100.0% 100.0%
Service revenues ............................ 98.3 98.8 99.0
Equipment sales ............................. 1.7 1.2 1.0
----- ----- -----
Total cost of operations .................... 62.6 61.5 61.2
Selling, general and administrative ......... 19.0 19.0 16.6
Depreciation and amortization ............... 8.8 9.1 9.9
Merger and start-up costs ................... -- -- .5
----- ----- -----
Operating income ............................ 9.6 10.4 11.8
Interest expense ............................ ( 2.3) ( 2.3) ( 2.8)
Other income ................................ .7 .5 .3
----- ----- -----
Income before income taxes .................. 8.0 8.6 9.3
Pro forma income taxes (1) .................. 3.2 3.4 3.4
Pro forma net income (1) .................... 4.8% 5.2% 5.9%
</TABLE>
- ---------
(1) 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. Additionally, certain companies acquired in
pooling-of-interests transactions were previously taxed as S Corporations.
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, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Total revenues increased $42.1 million, or 32.6%, to $171.3
million in 1998 from $129.2 million in 1997. This increase was primarily
attributable to the following two factors: (1) the effect of a full year of
revenues from the seven businesses acquired in 1997, as well as a partial year
of results from thirteen businesses acquired in 1998; and (2), increased
collection volumes resulting from new municipal and commercial contracts and
residential subscriptions, totaling approximately 11%. Price increases in 1998
for the Company's solid waste collection and disposal services contributed
approximately 1% to 1998 revenues.
COST OF OPERATIONS. Total cost of operations increased $25.3 million to
$104.8 million in 1998 from $79.5 million in 1997. 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 1997 and
1998. Total cost of operations as a percentage of revenues decreased to 61.2%
in 1998 from 61.5% in 1997.
25
<PAGE>
SG&A. SG&A expenses increased $3.9 million to $28.5 million in 1998 from
$24.6 million in 1997. As a percentage of revenues, SG&A decreased to 16.6% in
1998 from 19.0% in 1997. This decrease was primarily the result of synergy
achieved through acquisitions.
MERGER AND START-UP COSTS. Merger costs related to poolings-of-interest
transactions totaled approximately $818,000 ($519,000 after-tax, or $0.04 per
share) and consisted primarily of professional fees. During 1998, the Company
incurred nonrecurring start-up costs related to deployment of service equipment
and personnel associated with a new service contract of approximately $108,000
($69,000 after-tax, or $0.01 per share). These merger and start-up costs had
been expended at December 31, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$5.2 million to $17.0 million in 1998 from $11.8 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 1997 and 1998. Depreciation and amortization, as a percentage of
revenues, increased to 9.9% in 1998 from 9.1% in 1997, primarily as a result of
acquisitions in 1997 and 1998.
INTEREST EXPENSE. Interest expense increased $1.8 million to $4.8 million
in 1998 from $3.0 million in 1997. 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 increased to 2.8%
in 1998 from 2.3% in 1997.
PRO FORMA INCOME TAXES AND NET INCOME. 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 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.
Additionally, certain companies acquired in pooling-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.
Pro forma income taxes increased $1.6 million, or 38.1%, to $5.8 million
in 1998 from $4.2 million in 1997. The Company's pro forma effective tax rate
decreased to 36.5% in 1998 from 38.4% in 1997. This decrease is primarily
attributable to state targeted jobs tax credits, which the Company had not been
historically qualified to receive. As a percentage of revenues, pro forma
income taxes remained flat at 3.4%.
Pro forma net income increased $3.3 million, or 49.5%, to $10.1 million in
1998 from $6.8 million in 1997. This increase was primarily attributable to the
increase in revenues and the decrease in SG&A as a percent of sales, as
discussed above. As a percentage of revenues, pro forma net income taxes
increased to 5.9% in 1998 from 5.2% in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Total revenues increased $22.9 million, or 21.6%, to $129.2
million in 1997 from $106.3 million in 1996. This increase was primarily
attributable to the following two factors: (1) 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 (2) increased collection
volumes resulting from new municipal and commercial contracts and residential
subscriptions, totaling approximately 10%. Price increases in 1997 for the
Company's solid waste collection and disposal services contributed
approximately 1% to increased 1997 revenues.
COST OF OPERATIONS. Total cost of operations increased $12.9 million, or
19.4%, to $79.5 million in 1997 from $66.6 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 61.5% in 1997 from 62.6% 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 $24.6 million in 1997 from
$20.2 million in 1996. As a percentage of revenues, SG&A remained constant at
19.0% in 1997 and 1996.
26
<PAGE>
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$2.5 million to $11.8 million in 1997 from $9.3 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 9.1% in 1997 from 8.8% in 1996, primarily as a result of acquisitions in
1996 and 1997.
INTEREST EXPENSE. Interest expense increased $0.5 million to $3.0 million
in 1997 from $2.5 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 2.3% in 1997 and 1996.
PRO FORMA INCOME TAXES AND NET INCOME. 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 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.
Additionally, certain companies acquired in pooling-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.
Pro forma income taxes increased $0.8 million, or 22.4%, to $4.2 million
in 1997 from $3.4 million in 1996. The Company's effective tax rate decreased
to 38.4% in 1998 from 40.4% in 1997. As a percentage of revenues, pro forma
income taxes increased to 3.4% in 1997 from 3.2% in 1996.
Pro forma net income increased $1.7 million, or 32.9%, to $6.7 million in
1997 from $5.0 million in 1997. This increase was primarily attributable to the
increase in revenues as discussed above. As a percentage of revenues, pro forma
net income taxes increased to 5.2% in 1997 from 4.8% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at December 31, 1998 was $6.9 million,
compared to $1.6 million at December 31, 1997. The Company's strategy in
managing its working capital has been to apply the cash generated from its
operations which remains available after satisfying its working capital and
capital expenditure requirements to reduce its indebtedness under its bank
revolving credit facility and to minimize its cash balances. The Company
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 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 25, 1999, approximately $32.8 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 current debt to total capitalization, debt to
earnings and fixed charges to earnings, and satisfy other predetermined
requirements, such as minimum net worth, net income and deposit balances. The
12-month weighted average interest rate on outstanding borrowings under the
BB&T facility was 6.68% at December 31, 1998. Interest on the BB&T facility is
payable monthly based on an adjusting spread to LIBOR. Interest on the
Prudential term facilities is paid quarterly, based on a fixed rate of 7.28%,
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 December 31,
1998, the Company had a compensating balance arrangement with BB&T for
$379,000.
On September 17, 1998, the Company filed a shelf registration statement on
Form S-4 with the Securities and Exchange Commission registering 2,000,000
shares of the Company's Common Stock. As of December 31, 1998, none of these
shares had been issued.
27
<PAGE>
Net cash provided by operating activities totaled $27.9 million for the
year ended December 31, 1998, compared to $22.9 million for the year ended
December 31, 1997. This increase was caused principally by net income and
depreciation and amortization, partially offset by the $4.3 million effect of
change in tax status in 1997. Net cash provided by operations in 1997 increased
to $22.9 million from $17.3 million in 1996. This increase was caused
principally by the increases in depreciation and amortization, the income tax
effect of a change in tax status, and provision for deferred income taxes, and
a decrease in inventories, which was partially offset by a decrease in net
income.
Net cash used in investing activities totaled $57.1 million for the year
ended December 31, 1998, compared to $59.3 million in for the year ended
December 31, 1997. This decrease was caused principally by a reduction in cash
consideration paid for acquisitions of related businesses, which was partially
offset by an increase in purchases of property and equipment. Net cash used in
investing activities totaled $59.3 million for 1997 compared to $15.7 million
in 1996. This increase in 1997 compared to 1996 was caused principally by the
acquisition of related businesses and purchases of property and equipment.
Capital expenditures were $30.0 million in 1998 and $24.1 million in 1997.
The Company expects to spend approximately $27.5 million on capital
expenditures in 1999, including an estimated $19.5 million for vehicle and
equipment additions and replacements, $1.0 million for expansion of transfer
station services and $7.0 million for facilities, additions and improvements.
The Company expects to fund its 1999 capital expenditures through internally
generated funds and borrowings under its currently existing credit facilities.
However, for the Company to pursue its growth strategy of acquiring solid waste
collection and disposal businesses, it may require substantial capital
expenditures in addition to those it currently estimates. For example, the
Company may have to make significant expenditures to obtain permits for any
newly acquired disposal facilities, to bring them into compliance with
applicable regulations or to expand their available disposal capacity. The
Company cannot estimate the amount of these expenditures because they will
depend on circumstances particular to each facilities acquisition.
Net cash provided by financing activities totaled $31.7 million for the
year ended December 31, 1998, compared to $35.4 million provided by financing
activities for the year ended December 31, 1997. This decrease was primarily
attributable to net proceeds from the Company's 1997 initial public offering of
$23.2 million, which was partially offset by an increase in net borrowings
under long-term debt and a decrease in cash distributions to shareholders. Net
cash provided by financing activities for 1997 was $35.4 million, compared to
net cash used in financing activities of $2.0 million for 1996. The difference
between the 1997 and 1996 amounts was primarily attributable to: the Company's
1997 initial public offering, which resulted in net proceeds to the Company of
$23.2 million; and net borrowings under long-term debt.
At December 31, 1998, the Company had approximately $88.3 million of
long-term and short-term borrowings outstanding and approximately $540,500 in
letters of credit. At December 31, 1998, the ratio of the Company's long-term
debt to total capitalization was 57.2% compared to 55.2% at December 31, 1997.
The Company used the net proceeds from its initial public offering to repay
revolving bank debt.
Although there can be no assurances, the Company believes that its
existing cash and financing arrangements, together with internally generated
funds, will be sufficient to allow the Company to meet its cash requirements
related to its operating and capital requirements for 1999.
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.
28
<PAGE>
As of December 31, 1998, the Company had 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.
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.
29
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS.
The Company currently utilizes no material derivative financial
instruments which expose the Company to significant market risk. The Company is
exposed to cash flow and fair value risk due to changes in interest rates with
respect to its long-term debt. The table below presents principal cash flows
and related weighted average interest rates of the Company's long-term debt at
December 31, 1998 by expected maturity dates. Weighted average variable rates
are based on implied forward rates in the yield curve at December 31, 1998.
Implied forward rates should not be considered a predictor of actual future
interest rates.
Expected Maturity Dates
(Amounts in thousands except for percentages)
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER TOTAL
------ --------- --------- --------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate
7.28% ......... $-- $3,751 $3,751 $ 3,751 $3,751 $ 9,996 $25,000
6.96% ......... -- -- -- 3,751 3,751 17,858 25,000
7.00% ......... -- 215 140 88 22 -- 465
Variable Rate
6.30% ......... -- -- -- 36,000 -- -- 36,000
</TABLE>
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.
PART III
Certain information required by Part III is omitted from this report
because the Registrant will file a definitive proxy statement for its 1999
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.
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.
30
<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.
The exhibits filed as part of this Report are listed in Item 14(c)
below.
(b) Reports on Form 8-K
On November 24, 1998, the Company filed an amended current report on
Form 8-K/A, dated September 10, 1998, reporting under Item 2 of the Form
the closing of its acquisition of all of the outstanding stock of
TransWaste Services, Inc. ("TransWaste"). The report included audited
financial statements of TransWaste as of September 30, 1997 and the year
then ended, unaudited interim financial statements of TransWaste as of
June 30, 1998 and for the nine-month periods ended June 30, 1998 and 1997,
and unaudited pro forma financial data for the nine months ended September
30, 1998 and for the year ended December 31, 1997, giving pro forma effect
to the acquisition.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- ----------------------------------------------------------------------------
<S> <C>
2.2(a) Agreement and Plan of Merger dated as of September 9, 1998, by and
among the Registrant, TWS Merger Corporation, TransWaste Services, Inc.,
the shareholders of TransWaste Services, Inc., Thomas C. Cannon and
James F. Taylor.
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.
10.3(b) Note Purchase and Private Shelf Agreement with The Prudential Insurance
Company of America dated April 3, 1996.
10.4(c) Note Purchase and Private Shelf Agreement with The Prudential Insurance
Company of America dated as of June 30, 1998.
10.5 Senior Subordinated Loan and Security Agreement dated February 2, 1999
between Liberty Waste Lending Company, LLC, a subsidiary of the
Registrant, and Liberty Waste Services, LLC and its direct and indirect
subsidiaries.
10.6 Option Agreement dated February 2, 1999 between the Registrant and
Liberty Waste Services, LLC.
11.1 Computation re: Earnings Per Share
21.1 List of Subsidiaries
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
</TABLE>
- ---------
(a) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Current Report on Form 8-K dated September 25, 1998.
(b) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Registration Statement on Form S-1 (File No. 333-25631).
(c) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.
31
<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 25, 1999 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 Chief Executive March 25, 1999
----------------------------------
LONNIE C. POOLE, JR. Officer (Principal Executive Officer)
/s/ STEPHEN C. SHAW Vice President, Finance (Principal March 25, 1999
----------------------------------
STEPHEN C. SHAW Financial and Accounting Officer)
/s/ ROBERT H. HALL Director March 25, 1999
----------------------------------
ROBERT H. HALL
/s/ JIM W. PERRY Director March 25, 1999
----------------------------------
JIM W. PERRY
/s/ Director
----------------------------------
J. GREGORY POOLE, JR.
/s/ THOMAS F. DARDEN Director March 25, 1999
----------------------------------
THOMAS F. DARDEN
</TABLE>
32
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report ............................................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 ............................ F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997 and F-4
1998
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and F-5
1998
Notes to Consolidated Financial Statements .............................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Waste Industries, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Waste
Industries, Inc. and Subsidiaries (the "Company") as of December 31, 1997 and
1998 and the related consolidated statements of operations and cash flows for
each of the three years in the period ended December 31, 1998. 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 consolidated financial statements present fairly, in
all material respects, the financial position of Waste Industries, Inc. and
Subsidiaries at December 31, 1997 and 1998 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
/S/ DELOITTE & TOUCHE LLP
RALEIGH, NORTH CAROLINA
MARCH 1, 1999
F-2
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
---------------- ----------------
(RESTATED --
SEE NOTE 2)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents including restricted cash of $379,000 (Note 4)..... $ 1,175,557 $ 3,665,073
Accounts receivable -- trade, less allowance for uncollectible accounts
(1997 -- $907,800; 1998--$699,600)......................................... 13,889,571 16,834,606
Inventories ................................................................. 842,439 1,334,409
Prepaid expenses and other current assets ................................... 615,750 1,588,920
Deferred income taxes (Note 12) ............................................. 597,835 493,835
------------ ------------
Total current assets ...................................................... 17,121,152 23,916,843
------------ ------------
PROPERTY AND EQUIPMENT, net (Notes 2 and 3) .................................. 65,043,853 88,801,179
INTANGIBLE ASSETS, net (Notes 2 and 4) ....................................... 30,934,639 63,073,024
OTHER NONCURRENT ASSETS ...................................................... 317,851 410,122
------------ ------------
TOTAL ASSETS ................................................................. $113,417,495 $176,201,168
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt (Notes 2 and 4) ........................ $ 1,795,265 $ 1,877,128
Accounts payable -- trade ................................................... 8,444,015 10,170,654
Accrued expenses and other liabilities (Note 8) ............................. 3,777,793 2,995,160
Income taxes payable (Note 12) .............................................. 445,100 187,906
Deferred revenue ............................................................ 1,023,883 1,742,921
------------ ------------
Total current liabilities ................................................. 15,486,056 16,973,769
------------ ------------
LONG-TERM DEBT, net of current maturities (Notes 2 and 4) .................... 50,787,684 86,464,655
NONCURRENT DEFERRED INCOME TAXES (Note 12) ................................... 5,702,000 7,837,818
CLOSURE/POSTCLOSURE LIABILITIES .............................................. 275,000 262,133
COMMITMENTS AND CONTINGENCIES (Notes 5, 7 and 9)
SHAREHOLDERS' EQUITY (Notes 6 and 7):
Common stock ................................................................ 27,119,623 41,148,148
Paid-in capital ............................................................. 8,520,000 7,245,000
Retained earnings ........................................................... 5,833,595 16,596,296
Shareholders' loans and receivables ......................................... (306,463) (326,651)
------------ ------------
Total shareholders' equity ................................................ 41,166,755 64,662,793
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................... $113,417,495 $176,201,168
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------------- ---------------- ----------------
(RESTATED -- SEE NOTE 2)
<S> <C> <C> <C>
REVENUES:
Service revenues ............................................... $104,509,260 $ 127,580,690 $ 169,526,443
Equipment sales ................................................ 1,768,518 1,601,279 1,732,040
------------ ------------- -------------
Total revenues ................................................ 106,277,778 129,181,969 171,258,483
------------ ------------- -------------
OPERATING COSTS AND EXPENSES:
Cost of service operations ..................................... 65,341,190 78,315,559 103,522,737
Cost of equipment sales ........................................ 1,239,786 1,171,002 1,268,127
------------ ------------- -------------
Total cost of operations (Notes 5, 7 and 9) ................... 66,580,976 79,486,561 104,790,864
------------ ------------- -------------
Selling, general and administrative (Notes 5 and 8) .............. 20,190,492 24,564,335 28,496,159
Merger and start-up costs (Note 2) ............................... -- -- 925,737
Depreciation and amortization .................................... 9,307,168 11,796,807 16,980,855
------------ ------------- -------------
Total operating costs and expenses ............................ 96,078,636 115,847,703 151,193,615
------------ ------------- -------------
OPERATING INCOME ................................................. 10,199,142 13,334,266 20,064,868
------------ ------------- -------------
OTHER EXPENSE (income):
Interest expense (Note 4) ...................................... 2,497,484 3,021,496 4,811,957
Interest income ................................................ (194,082) (311,586) (92,989)
Other (Note 7) ................................................. (611,962) (322,431) (538,477)
------------ ------------- -------------
Total other expense (income) .................................. 1,691,440 2,387,479 4,180,491
------------ ------------- -------------
INCOME BEFORE INCOME TAXES ....................................... 8,507,702 10,946,787 15,884,377
INCOME TAX EXPENSE (Note 12):
Current and deferred ........................................... -- 2,711,250 5,606,500
Effect of change in tax status ................................. -- 4,300,000 --
------------ ------------- -------------
NET INCOME -- Historical Basis ................................... $ 8,507,702 $ 3,935,537 $ 10,277,877
============ ============= =============
EARNINGS PER SHARE -- Historical Basis
(As Adjusted -- Notes 6 and 12):
Basic .......................................................... $ 0.80 $ 0.34 $ 0.80
Diluted ........................................................ $ 0.78 $ 0.33 $ 0.77
INCOME BEFORE INCOME TAXES (Note 12) ............................. $ 8,507,702 $ 10,946,787 $ 15,884,377
PRO FORMA INCOME TAXES (Note 12) ................................. 3,433,709 4,202,000 5,803,000
------------ ------------- -------------
PRO FORMA NET INCOME (Note 12) ................................... $ 5,073,993 $ 6,744,787 $ 10,081,377
============ ============= =============
PRO FORMA EARNINGS PER SHARE (Notes 6 and 12)
Basic .......................................................... $ 0.48 $ 0.58 $ 0.78
Diluted ........................................................ $ 0.47 $ 0.56 $ 0.76
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING (Notes 6 and 12)
Basic .......................................................... 10,660,367 11,708,832 12,875,262
============ ============= =============
Diluted ........................................................ 10,880,151 12,067,844 13,266,178
============ ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
---------------- ---------------- ---------------
(RESTATED -- SEE NOTE 2)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income -- historical basis ............................................ $ 8,507,702 $ 3,935,537 $ 10,277,877
Adjustments to reconcile net income -- historical basis to net cash
provided by operating activities:
Depreciation and amortization ............................................ 9,307,168 11,796,807 16,980,855
Gain on sale of property and equipment ................................... (429,293) (211,527) (305,105)
Effect of change in tax status ........................................... -- 4,300,000 --
Provision for deferred income taxes ...................................... -- 804,165 2,239,818
Closure/Postclosure liabilities .......................................... 38,901 41,179 (12,867)
Changes in assets and liabilities, net of effects from acquisitions of
related businesses:
Accounts receivable -- trade ............................................ (1,268,106) (1,431,291) 418,241
Inventories ............................................................. (436,587) 1,334,603 (491,970)
Prepaid and other current assets ........................................ (91,294) (137,191) (947,702)
Accounts payable -- trade ............................................... 1,090,497 2,158,476 1,726,639
Accrued expenses and other liabilities .................................. 415,603 315,896 (1,823,339)
Income taxes payable .................................................... -- 445,100 (257,194)
Deferred revenue ........................................................ 204,984 (403,149) 121,698
------------- ------------- -------------
Net cash provided by operating activities ............................. 17,339,575 22,948,605 27,926,951
------------- ------------- -------------
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment .............................. 1,067,063 808,887 649,403
Purchases of property and equipment ....................................... (15,662,427) (24,094,420) (30,005,475)
Acquisition of related business ........................................... (268,927) (35,438,171) (27,648,964)
Other ..................................................................... (823,230) (560,170) (92,220)
------------- ------------- -------------
Net cash used in investing activities .................................... (15,687,521) (59,283,874) (57,097,256)
------------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt .................................. 36,431,662 40,118,512 114,995,264
Principal payments on long-term debt ...................................... (31,669,289) (23,771,753) (82,526,923)
Proceeds from issuance of notes payable to shareholders ................... 146,200 -- --
Repayments of notes payable to shareholders ............................... (318,884) -- --
Repayments of loans and receivables from shareholders ..................... 274,404 33,169 126,661
Advances under shareholder loans and receivables .......................... (2,211) (54,747) (146,849)
Net proceeds from stock issuance .......................................... 18,500 23,157,924 --
Proceeds from exercise of stock options ................................... 44,756 -- --
Changes in partners' capital .............................................. (1,716,215) -- --
Cash distributions to S-Corporation shareholders .......................... (5,181,994) (4,123,651) (789,589)
Other ..................................................................... -- 71,691 1,257
------------- ------------- -------------
Net cash provided by (used in) financing activities ...................... (1,973,071) 35,431,145 31,659,821
------------- ------------- -------------
Net increase (decrease) ..................................................... (321,017) (904,124) 2,489,516
Cash and cash equivalents, beginning of year ................................ 2,400,698 2,079,681 1,175,557
------------- ------------- -------------
Cash and cash equivalents, end of year ...................................... $ 2,079,681 $ 1,175,557 $ 3,665,073
============= ============= =============
</TABLE>
F-5
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONCLUDED
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Cash paid for interest ............................. $ 2,078,168 $ 2,440,406 $ 4,926,396
=========== =========== ===========
Cash paid for taxes ................................ $ -- $ 1,445,150 $ 3,623,394
=========== =========== ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS --
At December 31, 1996, the Company accrued $1,820,000 distributions to
shareholders as partial reimbursement for 1996 taxes owed.
During 1997, the Company issued common stock with a fair value of
approximately $1,275,000 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.
On March 31, 1998, the Company exchanged 320,555 shares of its common
stock (with a fair value of $6,125,000) for all of the issued and outstanding
shares of common stock of ECO Services, Inc. ("ECO") and Air Cargo Services,
Inc. ("ACS"). Certain of the Company's executive officers, who are also Company
shareholders, owned substantially all of the common stock of ECO and ACS.
Accordingly, all assets and liabilities transferred have been accounted for at
historical cost in a manner similar to that of pooling of interests accounting
pursuant to the provisions of AIN #39 of APB No. 16. The Company's financial
statements have been restated to include the accounts and operations for all
periods presented.
On June 16, 1998, the Company exchanged 21,344 shares of its common stock
(with a fair value of $449,000) for all of the issued and outstanding shares of
common stock of Dumpsters, Inc. On June 30, 1998, the Company exchanged 330,000
shares of its common stock (with a fair value of $7.4 million) for all of the
issued and outstanding shares of common stock of Reliable Trash Services, Inc.
On August 28, 1998, the Company exchanged 388,311 shares of its common stock
(with a fair value of approximately of $8.5 million) for all of the issued and
outstanding shares of common stock of Railroad Avenue Disposal, Inc. These
business combinations have been accounted for as poolings-of-interests.
During 1998, the Company issued common stock with a fair value of
approximately $14.0 million as partial consideration for certain business
acquisitions.
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
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, South Carolina, Alabama, Georgia, Mississippi, Tennessee and
Virginia. The Company's financial statements include its consolidated
subsidiaries: Waste Industries South, Inc., Waste Industries East, Inc., Kabco,
Inc., Dumpsters, Inc., Waste Industries of Tennessee, LLC, ECO Services, Inc.,
Waste Industries of Georgia, Inc., TransWaste Services, Inc., Air Cargo
Services, Inc., Reliable Trash Service, Inc., Railroad Avenue Disposal, Inc.
and Curb Appeal New Home Services, 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.
Pursuant to the provisions of Accounting Interpretation ("AIN") #39 of
Accounting Principles Board Opinion ("APB") No. 16, the Company recorded the
transfer of property at its historical basis (approximately $3.2 million) and
the difference between the amount paid and the historical basis ($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.
At the time of the merger, 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.
On March 31, 1998, the Company exchanged 320,555 shares of its common
stock for all of the issued and outstanding shares of common stock of ECO
Services, Inc. ("ECO") and Air Cargo Services, Inc. ("ACS"). Certain of the
Company's executive officers, who are also Company shareholders, owned
substantially all of the common stock of ECO and ACS. Accordingly, all assets
and liabilities transferred have been accounted for at historical cost in a
manner similar to that of pooling-of-interests accounting pursuant to the
provisions of AIN #39 of APB No. 16. The Company's financial statements have
been restated to include the accounts and operations for all periods presented.
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.
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:
<TABLE>
<S> <C>
Machinery and equipment ......... 3 to 10 years
Furniture, fixtures and vehicles 3 to 10 years
Building ........................ 30 years
</TABLE>
Landfill costs, including engineering and other professional fees, are
amortized using the units-of-production method, which is calculated using
the total units of airspace filled during the year in relation to total
estimated permitted airspace capacity. The determination of airspace usage
and remaining airspace is an essential component in the calculation of
landfill asset depletion. This determination is performed by conducting
annual topographic surveys,
F-7
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES -- (Continued)
using aerial survey techniques, of the Company's landfill facilities to
determine remaining airspace in each landfill. The surveys are reviewed by
the Company's consulting engineers and its accounting staff.
Engineering and legal fees paid to third parties incurred to obtain a
disposal facility permit are capitalized as landfill costs and amortized
over the estimated related airspace capacity. These costs are not amortized
until the permit is obtained and operations have commenced. If the Company
determines that the facility cannot be developed, these costs are charged
to expense.
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:
<TABLE>
<CAPTION>
1997 1998
--------------- ---------------
<S> <C> <C>
Goodwill ................... $ 30,336,056 $ 62,322,934
Customer lists ............. 59,431 27,468
Noncompete agreements ...... 539,152 722,622
------------ ------------
Intangible assets .......... $ 30,934,639 $ 63,073,024
============ ============
</TABLE>
Customer lists are amortized using the straight-line method over 5 to 10
years. Noncompete 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 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.
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 or other intangible assets, the Company will evaluate
the remaining useful life and balance of goodwill and make appropriate
adjustments. See also note 1.F.
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 -- In accordance with 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, 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 net cash flows on an undiscounted basis 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 an impairment is indicated, the amount of the impairment is
measured based on the fair value of the asset. The Company also evaluates
the remaining useful lives to determine whether events and circumstances
warrant revised estimates of such lives.
G. DISPOSAL SITE CLOSURE AND LONG-TERM CARE -- The Company has financial
obligations relating to closure and post-closure costs (long-term care) or
remediation of disposal facilities it operates or for which it is or may
become responsible. While the precise amounts of these future obligations
cannot be determined, at December 31, 1998, the Company estimates the total
costs to be approximately $1,700,000 for remediation, final closure of its
current operating facilities and post-closure monitoring costs pursuant to
applicable regulations (generally for a term of 30 years after final
closure). The Company's estimate of these costs is expressed in current
dollars and is not discounted to reflect anticipated timing of future
expenditures. The Company had accrued approximately $275,000 and $262,133
for such projected costs at December 31, 1997 and 1998, respectively. The
Company will provide additional accruals based on engineering estimates of
consumption of airspace over the useful lives of the facilities.
F-8
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES -- (Continued)
H. EARNINGS PER SHARE AND PRO FORMA INFORMATION -- 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.
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. Additionally, certain
companies acquired in pooling-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 were subject to federal and
all applicable state corporate income taxes for each period presented.
Historical and pro forma basic earnings per share computations are based
on the weighted-average common stock outstanding. Historical and pro forma
diluted earnings per share include the dilutive effect of stock options
using the treasury stock method (using the initial offering price of $13.50
per share for periods prior to the 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.
I. STOCK OPTION PLAN -- The Company accounts for employee stock
compensation in accordance with 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, which became
effective January 1, 1996, 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 applies APB No. 25 to its stock-based
compensation awards to employees and discloses the required information by
SFAS No. 123.
J. DEFERRED REVENUE -- Deferred revenue consists of collection fees
billed in advance. Revenue is recognized as services are provided.
K. 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 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.
L. NEW ACCOUNTING STANDARDS -- During fiscal 1998, the Company was
required to adopt SFAS No. 130, REPORTING COMPREHENSIVE INCOME. This
Statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full
set of general-purpose financial statements. The adoption of SFAS No. 130
did not have an effect on the Company's financial statements because it has
no transactions that would be reported as part of comprehensive income.
During fiscal 1998, the Company was required to adopt SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS
No. 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports. The Company's revenues and
income are
F-9
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES -- (Continued)
derived principally from one industry segment, which includes the
collection, transfer, recycling, processing and disposal municipal solid
waste and industrial wastes. This segment renders services to a variety of
commercial, industrial, governmental and residential customers. All
revenues represent income from unaffiliated customers.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for
changes in the fair value of a derivative (that is, gains and losses)
depends on the intended use of the derivative and the resulting
designation. SFAS No. 133 is required to be adopted in fiscal 2000. The
Company has not determined if the adoption of SFAS No. 133 will have a
material impact on its consolidated financial statements.
M. 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.
N. RECLASSIFICATIONS -- Certain 1996 and 1997 financial statement amounts
have been reclassified to conform with the 1998 presentation.
2. ACQUISITIONS
POOLING-OF-INTERESTS TRANSACTIONS:
The Company has restated the previously issued consolidated statements of
operations for the years ended December 31, 1997 and 1996, the consolidated
balance sheet as of December 31, 1997 and related footnotes to reflect the
following acquisitions accounted for as poolings-of-interests:
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.
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 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 in northwest
Mississippi.
The merger costs related to these pooling-of-interest transactions totaled
approximately $818,000 ($519,000 after-tax) and consisted primarily of
professional fees. All of these amounts had been expended at December 31, 1998.
These pooling-of-interests transactions and the related restatements were
immaterial to the Company's previously issued consolidated statements of
operations for the years ended December 31, 1997 and 1996 and the consolidated
balance sheet as of December 31, 1997.
F-10
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS -- (Continued)
PURCHASE TRANSACTIONS:
During 1996, 1997 and 1998, the Company acquired 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:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ---------------- ----------------
<S> <C> <C> <C>
Accounts receivable, net .......................... $ -- $ 1,902,062 $ 3,363,276
Inventories ....................................... -- 37,542 --
Prepaid expenses and other current assets ......... -- 11,616 25,468
Accrued expenses and other liabilities ............ -- (41,306) (1,040,705)
Deferred revenue .................................. -- (511,213) (597,340)
Property and equipment ............................ 150,620 8,933,098 8,763,465
Noncompete agreements ............................. 105,000 159,118 504,020
Customer lists, contracts and goodwill ............ 255,472 27,070,188 33,947,954
--------- ------------ ------------
Total assets acquired .......................... 511,092 37,561,105 44,966,138
Less obligations financed under notes payable ..... 242,165 847,872 3,290,493
--------- ------------ ------------
Net acquisition costs ............................. $ 268,927 $ 36,713,233 $ 41,675,645
========= ============ ============
</TABLE>
Purchase price allocations for 1998 acquisitions have not been finalized,
pending receipt of valuations and other information. Net acquisition costs in
1997 include the issuance of 63,634 shares of the Company's common stock with a
fair value of $1,275,000 as partial consideration for certain business
acquisitions. Net acquisition costs in 1998 include the issuance of 729,204
shares of the Company's common stock with a fair value of $14.0 million 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 (generally
5 years).
The following unaudited pro forma results of operations assume the
transactions described above occurred as of January 1, 1997 and 1998 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:
<TABLE>
<CAPTION>
1997 1998
------------------ ------------------
<S> <C> <C>
Total revenues ....................... $ 164,711,000 $ 188,201,000
Operating income ..................... 19,163,000 22,784,000
Pro forma net income ................. 8,716,000 11,008,000
Pro forma earnings per common share:
Basic ................................ $ 0.65 $ 0.82
Diluted .............................. $ 0.63 $ 0.80
</TABLE>
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.
OTHER:
During 1998, the Company incurred nonrecurring start-up costs related to a
new service contract of approximately $108,000 ($69,000 after-tax). These costs
related to the deployment of service equipment and personnel. All of these
amounts had been expended at December 31, 1998.
F-11
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
--------------- ---------------
<S> <C> <C>
Land, land improvements and buildings $ 11,984,303 $ 17,327,514
Machinery and equipment ............ 104,677,133 137,106,609
Furniture, fixtures and vehicles ... 3,168,387 3,045,997
In-process equipment ............... 4,304,890 1,325,974
------------ ------------
Total property and equipment .............. 124,134,713 158,806,094
Less accumulated depreciation ...... 59,090,860 70,004,915
------------ ------------
Property and equipment, net ........ $ 65,043,853 $ 88,801,179
============ ============
</TABLE>
In-process equipment includes equipment not placed in service at year end.
In-process equipment at December 31, 1997 also includes equipment acquired in
connection with the opening of six new transfer stations in January 1998.
Landfill costs of approximately $284,660 and $1,752,627 are included in
land and land improvements at December 31, 1997 and 1998, respectively.
Landfill costs include land held for development, representing various landfill
properties with an aggregate cost of approximately $-0- and $1,340,000 at
December 31, 1997 and 1998, respectively, which is not being amortized.
4. NOTES PAYABLE
Notes payable consist of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
--------------- ---------------
<S> <C> <C>
Bank notes payable ................................... $ 51,473,527 $ 86,000,000
Other installment notes payable, interest ranging from
1% to 7% ...................................... 1,109,422 1,956,067
Present value of noncompete agreement liabilities with
the former shareholders of related businesses acquired,
due in various monthly installments through 2002 -- 385,716
------------ ------------
Total notes payable ............................... 52,582,949 88,341,783
Less current portion ................................. 1,795,265 1,877,128
------------ ------------
Long-term portion .................................... $ 50,787,684 $ 86,464,655
============ ============
</TABLE>
On April 3, 1996, the Company entered into agreements with two lenders,
Branch Banking & Trust ("BB&T") and Prudential Insurance Company of America
("Prudential"), under which the Company may borrow up to $75,000,000.
Prudential 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 shelf note matures on
June 30, 2008 and bears an interest rate of 6.96%. The repayment term under the
note agreements requires interest only payments until principal payments begin
in April 2000, after which principal and interest payments continue for the
following seven years. Effective November 17, 1997, the Company amended the
BB&T agreement. This amendment increased the Company's two unsecured credit
facilities from $20,000,000 and $5,000,000 to $50,000,000 and $10,000,000,
respectively. The amended facilities mature on November 1, 2002. The amended
repayment term under the facilities is five years; with interest only payable
monthly with principal due and payable in full upon maturity. Both facilities
with this lender bear interest at the monthly London Interbank Offered Rate
(6.9688% and 6.3141% at December 31, 1997 and 1998, respectively). The total
outstanding under these BB&T facilities was $36,000,000 at December 31, 1998.
On June 30, 1998, the Company increased and extended its credit facilities
with Prudential. As a result, the Company had two $25 million term loan
facilities and a $50 million shelf facility with Prudential. As of December 31,
1998, the Company had fully drawn both Prudential term facilities, leaving the
Company with an uncommitted shelf facility of $50
F-12
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTES PAYABLE -- (Continued)
million. The twelve-month weighted-average interest rate on outstanding
borrowings under the BB&T facility was 6.68% at December 31, 1998. Interest on
the Prudential term facilities is paid quarterly, based on fixed rates of 7.28%
and 6.96%.
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, 1998, the Company was in
compliance with all covenants. At December 31, 1998 and 1997, the Company had a
compensating balance arrangement with BB&T for $379,000. Consolidated retained
earnings free of dividend restrictions imposed by the debt covenants amounted
to $3,982,000 at December 31, 1998.
Annual aggregate principal maturities at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 ............... $ 1,877,128
2000 ............... 3,786,219
2001 ............... 3,710,978
2002 ............... 7,230,180
2003 ............... 7,524,000
Thereafter ......... 64,213,278
-----------
Total .............. $88,341,783
===========
</TABLE>
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, 1998 are as follows:
<TABLE>
<S> <C>
1999 ........................ $1,997,142
2000 ........................ 1,698,625
2001 ........................ 1,557,102
2002 ........................ 1,205,195
2003 and thereafter ......... 3,084,234
----------
$9,542,298
==========
</TABLE>
The total rental expense for all operating leases for the years ended
December 31, 1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Buildings and sites ........... $ 584,398 $ 886,892 $ 1,215,558
Trucks and equipment .......... 1,880,756 1,897,554 2,209,339
----------- ----------- -----------
Total ......................... $ 2,465,154 $ 2,784,446 $ 3,424,897
=========== =========== ===========
</TABLE>
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.
F-13
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. SHAREHOLDERS' EQUITY
Shareholders' equity consisted of the following for the years ended
December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
SHARES
-----------------------------
COMMON
AUTHORIZED OUTSTANDING STOCK
------------ ---------------- --------------
<S> <C> <C> <C>
Balance, January 1, 1996 .................. 4,020,395 18,882,734 $ 2,668,088
Retroactive effect of 1-for-2.5 reverse
stock split .............................. -- (10,376,628) --
Effect of merger of Affiliates ............ 75,979,605 2,118,457 18,208
Net income ................................ -- -- --
Change in partners' capital ............... -- -- --
Decrease in shareholders'
loans and receivables .................... -- -- --
Exercise of stock options ................. -- 35,804 341
Subchapter S Distributions ................ -- -- --
---------- ----------- ------------
Balance, December 31, 1996 ................ 80,000,000 10,660,367 2,686,637
Net income ................................ -- -- --
Issuances of stock, net ................... -- 1,991,334 24,432,986
Reclassification of undistributed S
Corporation earnings ..................... -- -- --
Capital Contribution ...................... -- -- --
Subchapter S Distributions ................ -- -- --
Increase in shareholders' loans and
receivables .............................. -- -- --
---------- ----------- ------------
Balance, December 31, 1997 ................ 80,000,000 12,651,701 27,119,623
Net income ................................ -- -- --
Issuances of stock ........................ 729,204 14,026,681
Subchapter S Distributions ................ -- -- --
Reclassification of S Corporation
deficit .................................. -- -- --
Increase in shareholders' loans and
receivables .............................. -- -- --
Other ..................................... -- -- 1,844
---------- ----------- ------------
Balance, December 31, 1998 ................ 80,000,000 13,380,905 $ 41,148,148
========== =========== ============
<CAPTION>
SHAREHOLDERS'
ADDITIONAL LOANS AND RETAINED TREASURY
CAPITAL RECEIVABLES EARNINGS STOCK
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 .................. $ 1,470,935 $ (557,078) $ 11,600,172 $ (85,098)
Retroactive effect of 1-for-2.5 reverse
stock split .............................. -- -- -- --
Effect of merger of Affiliates ............ (103,306) -- -- 85,098
Net income ................................ -- -- 8,507,702 --
Change in partners' capital ............... (1,412,044) -- (404,171) --
Decrease in shareholders'
loans and receivables .................... -- 272,193 -- --
Exercise of stock options ................. 44,415 -- -- --
Subchapter S Distributions ................ -- -- (7,001,994) --
------------ ---------- ------------ ----------
Balance, December 31, 1996 ................ -- (284,885) 12,701,709 --
Net income ................................ -- -- 3,935,537 --
Issuances of stock, net ................... -- -- -- --
Reclassification of undistributed S
Corporation earnings ..................... 8,500,000 -- (8,500,000) --
Capital Contribution ...................... 20,000 -- -- --
Subchapter S Distributions ................ -- -- (2,303,651) --
Increase in shareholders' loans and
receivables .............................. -- (21,578) -- --
------------ ---------- ------------ ----------
Balance, December 31, 1997 ................ 8,520,000 (306,463) 5,833,595 --
Net income ................................ -- -- 10,277,877 --
Issuances of stock ........................
Subchapter S Distributions ................ -- -- (789,589) --
Reclassification of S Corporation
deficit .................................. (1,275,000) -- 1,275,000 --
Increase in shareholders' loans and
receivables .............................. -- (20,188) -- --
Other ..................................... -- -- (587) --
------------ ---------- ------------ ----------
Balance, December 31, 1998 ................ $ 7,245,000 $ (326,651) $ 16,596,296 $ --
============ ========== ============ ==========
</TABLE>
At December 31, 1996, the Company accrued $1,820,000 of distributions to
shareholders as partial reimbursement for 1996 taxes owed.
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.
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.
F-14
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. SHAREHOLDERS' EQUITY -- (Continued)
In July 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 $1,275,000 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.
Change in partners' capital consists of cash contributions from, or
distributions to, PMG.
On March 31, 1998, the Company exchanged 320,555 shares of its common
stock (with a fair value of $6,125,000) for all of the issued and outstanding
shares of common stock of ECO and ACS.
On June 16, 1998, the Company exchanged 21,344 shares of its common stock
(with a fair value of $449,000) for all of the issued and outstanding shares of
common stock of Dumpsters. On June 30, 1998, the Company exchanged 330,000
shares of its common stock (with a fair value of $7.4 million) for all of the
issued and outstanding shares of common stock of RTS. On August 28, 1998, the
Company exchanged 388,311 shares of its common stock (with a fair value of $8.5
million) for all of the issued and outstanding shares of common stock of RAD.
These business combinations have been accounted for as poolings-of-interests.
See Note 2.
On August 28, 1998, the Company issued 22,474 shares of Company common
stock with a fair value of approximately $500,000 as partial consideration for
the stock of Greater Atlanta Sanitation, Inc. On September 10, 1998, the
Company issued 706,730 shares of Company common stock with a fair value of
approximately $13.5 million as partial consideration for the stock of
TransWaste Services, Inc. See Note 2.
Certain companies acquired in 1998 accounted for as pooling-of-interests
transactions were previously taxed as S Corporations. The S Corporation
elections were effectively terminated on their respective acquisition dates.
Consequently, the Company reclassified a net S Corporation deficit to
additional capital as a result of the termination of the S Corporation
elections.
7. RELATED PARTY TRANSACTIONS
Shareholder loans, included in shareholders' equity of the accompanying
consolidated balance sheets, are notes receivable (including unpaid interest
thereon) from shareholders of $207,721, $261,603 and $134,939 at December 31,
1996 and 1997 and 1998, respectively. The notes bear interest at an annual rate
of 7% and are payable on demand. Shareholder loans at December 31, 1996 and
1997 and 1998 include $33,169, $-0- 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. Shareholders' receivables, included in the shareholders' equity
of the accompanying consolidated balance sheets, are from a related company
owned by certain shareholders and officers of the Company. These receivables of
$43,995, $44,860 and $191,712 at December 31, 1996, 1997 and 1998,
respectively, are interest-free and are payable on demand.
The Company has other related party transactions pertaining to the leasing
of equipment from officers of the Company and from other partnerships and
corporations controlled by these officers, the sale and leasing of equipment
and vehicles to affiliated companies, and the providing of management and
accounting services and technical advice to other companies affiliated by
common shareholder interests (other affiliated companies). All of the
transactions are on terms comparable to those with third parties, and are
immaterial individually and in the aggregate.
8. BENEFIT PLANS
401(K) PROFIT SHARING AND RETIREMENT PLAN -- The Company has a 401(k)
Savings and Retirement Plan and Trust ("401(k)" or the "Plan") for the benefit
of its full time employees who have more than one year of service and are over
F-15
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. BENEFIT PLANS -- (Continued)
21 years of age. The plan also benefits employees of certain related parties
through separate funding arrangements. Employees make contributions to this
retirement plan under a 401(k) pre-tax contribution plan and by the Company
through 401(k) 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 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
$179,198, $256,772 and $509,967 for the years ended December 31, 1996, 1997 and
1998, respectively. The Company's profit sharing contributions were $343,469,
$284,994 and $-0- for the years ended December 31, 1996, 1997 and 1998,
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 1996,
1997 and 1998 was $49,933, $149,226 and $246,163, respectively.
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, 1997 and 1998, the Company has entered into irrevocable
letters of credit totaling approximately $580,000 and $540,500, respectively.
According to the terms of the $10,000,000 unsecured facility, the availability
of funds on that facility are reduced by the amount of outstanding letters of
credit (see Note 4).
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 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. The Stock
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, under the Plans, 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 to be effective prior to consummation
of the Company's public offering. A summary of the status of the Plans as of
December 31, 1996, 1997 and 1998 and changes during the years ending on those
dates is as follows:
F-16
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCK OPTION PLAN -- (Continued)
<TABLE>
<CAPTION>
OPTION PLAN
-----------------------
WEIGHTED-
AVERAGE
SHARES
SHARE PRICE
------------ ----------
<S> <C> <C>
Balance, January 1, 1996 ................ 41,804 $ 1.48
Exercised ............................... (35,804) ( 1.25)
Granted ................................. 520,000 5.13
------- --------
Balance, December 31, 1996 and 1997 ..... 526,000 5.10
Granted ................................. 88,697 10.75
Forfeitures ............................. (4,948) 19.69
------- --------
Balance, December 31, 1998 .............. 609,749 $ 7.42
======= ========
</TABLE>
The following table summarizes information about the Company's Plans at
December 31, 1998:
<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>
$2.88 ................. 6,000 1 $ 2.88 6,000 $ 2.88
$5.13 ................. 520,000 2.25 $ 5.13 400,000 $ 5.13
$19.69-$20.65 ......... 83,749 4.25 $ 19.70 -- --
</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 Plan 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, 1996
and 1998 would have been reduced to the pro forma amounts indicated below. No
stock options were granted in 1997 and previously issued grants had fully
vested; accordingly, pro forma amounts have not been presented for 1997.
<TABLE>
<CAPTION>
1996 1998
--------------- ----------------
<S> <C> <C>
Net Income -- Historical Basis:
As reported ....................... $ 8,507,702 $ 10,277,877
Pro forma -- for SFAS No. 123 ..... 8,267,702 10,042,877
Pro Forma Net Income:
As reported ....................... 5,073,993 10,081,377
Pro forma -- for SFAS No. 123 ..... 4,833,993 9,846,377
Pro Forma Earnings Per Share:
Basic:
As reported ....................... $ 0.48 $ 0.78
Pro forma -- for SFAS No. 123 ..... $ 0.45 $ 0.76
Diluted:
As reported ....................... $ 0.47 $ 0.76
Pro forma -- for SFAS No. 123 ..... $ 0.44 $ 0.74
</TABLE>
As permitted under SFAS No. 123, the fair value of options granted under
the Company's plan during 1996 and 1998 was estimated on the Black-Scholes
option-pricing model using the following assumptions:
F-17
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCK OPTION PLAN -- (Continued)
<TABLE>
<CAPTION>
1996 1998
----------- ------------
<S> <C> <C>
Weighted-average grant-date fair value of options
granted ............................................. $ 5.13 $ 16.33
Weighted-average expected lives (years) ............. 2.83 4.25
Risk-free interest rate ............................. 6.25% 5.50%
Volatility .......................................... -- 39.00%
</TABLE>
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 might 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 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
-------------- ---------------
<S> <C> <C>
Current deferred income tax assets (liabilities) relate to:
Allowance for bad debts ............................... $ 337,000 $ 281,000
Accrued vacation ...................................... 177,000 240,000
Accruals to related parties ........................... 25,000 14,000
Other accruals not currently deductible ............... 19,000 21,000
Other ................................................. 39,835 (62,165)
----------- -----------
Net current deferred tax assets ........................ $ 597,835 $ 493,835
=========== ===========
Noncurrent deferred income tax liabilities relate to:
Basis and depreciation differences .................... $ 5,654,000 $ 7,727,600
Other ................................................. 48,000 110,218
----------- -----------
Net noncurrent deferred tax liabilities ................ $ 5,702,000 $ 7,837,818
=========== ===========
</TABLE>
The components of income tax expense for May 9, 1997 to December 31, 1997
and for the year ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
-------------- -------------
<S> <C> <C>
Current income taxes:
Federal ........................ $ 1,628,250 $2,807,200
State .......................... 262,000 559,000
----------- ----------
Total current income taxes ..... 1,890,250 3,366,200
Deferred income taxes .......... 821,000 2,240,300
----------- ----------
Total .......................... $ 2,711,250 $5,606,500
=========== ==========
</TABLE>
F-18
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. INCOME TAXES -- (Continued)
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 years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------------ --------------
<S> <C> <C>
Federal tax at the statutory rate ........................ $ 3,722,000 $ 5,401,000
State income taxes, net of federal tax benefit ........... 311,000 528,000
Goodwill amortization .................................... 6,000 --
Other .................................................... 87,250 (115,500)
----------- -----------
4,126,250 5,813,500
Less federal taxes at the statutory rates for the period
from January 1 to May 8, 1997 and for the periods
companies acquired in poolings-of-interests were taxed
as S Corporations ....................................... 1,415,000 207,000
----------- -----------
Total .................................................... $ 2,711,250 $ 5,606,500
=========== ===========
</TABLE>
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Total revenues ................................ 1997 $ 27,428,453 $ 31,018,602 $ 34,956,501 $ 35,778,413
1998 39,339,726 41,526,801 44,804,346 45,587,610
Gross profit .................................. 1997 10,692,167 11,847,280 13,349,609 13,806,352
1998 15,131,871 16,032,693 16,788,196 18,514,859
Net income (loss) ............................. 1997 2,272,547 (2,256,202) 2,241,415 1,677,777
Historical basis 1998 2,378,750 2,649,253 2,874,673 2,375,201
Pro forma net income .......................... 1997 1,389,547 1,624,048 2,056,415 1,674,777
1998 2,353,750 2,559,253 2,814,673 2,353,701
Pro forma earnings per share:
Basic ........................................ 1997 $ 0.13 $ 0.15 $ 0.16 $ 0.13
1998 $ 0.19 $ 0.20 $ 0.22 $ 0.18
Diluted ...................................... 1997 $ 0.13 $ 0.14 $ 0.16 $ 0.13
1998 $ 0.18 $ 0.20 $ 0.21 $ 0.17
Weighted average number of shares outstanding:
Basic ........................................ 1997 10,660,367 10,963,571 12,580,900 12,630,490
1998 12,651,701 12,651,701 12,816,743 13,380,905
Diluted ...................................... 1997 10,987,682 11,319,270 12,978,984 13,030,451
1998 13,037,681 13,047,772 13,218,295 13,765,734
</TABLE>
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.
Additionally, certain companies acquired in pooling-of-interests
transactions were previously taxed as S Corporations. 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.
F-19
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. SUBSEQUENT EVENTS
Effective on January 1, 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 $12,450,000 in cash. The acquisition was funded with borrowings
under the Company's long-term bank notes payable.
In connection with Liberty's assignment of its right to acquire WSD to the
Company, the Company is obligated to pay two contingent brokerage fee payments
("Contingent Payments"), one for each of fiscal 1999 and fiscal 2000. The
Contingent Payments are based on WSD's EBITDA growth multiplied by the
Company's enterprise value multiple, reduced by WSD's funded debt, as defined
in the brokerage agreement. If the resulting product is zero or negative, no
Contingent Payment is due. The additional consideration under the brokerage
agreement, if any, will be accounted for as goodwill.
On February 2, 1998, the Company loaned Liberty $11,538,000 under a senior
subordinated note purchase agreement due December 31, 2001. Interest is payable
annually at the rate of 11% per annum. The Company also received an option to
purchase ("Option") any subsidiary of Liberty that operates a landfill or a
waste disposal business with a 75 mile radius of a landfill owned by one of the
Liberty subsidiaries or any other waste disposal business wherever located if
the Company's funds loaned under the note purchase agreement are used, directly
or indirectly, to purchase, develop or operate such business (a "Business
Unit"). The Option will be exercisable for the two-year period beginning
January 1, 2000. The exercise price for each Business Unit will equal
seventy-five (75%) percent of the Company's market capitalization multiple
times the Business Unit's annualized EBITDA, less the Business Unit's funded
debt assumed by the Company, as defined in the note purchase agreement.
Assuming Liberty's existing senior indebtedness is paid in full, principal in
the amount of $2,884,500 is payable upon each closing, if any, of the
acquisition or merger by the Company of a Business Unit from Liberty, or the
sale by Liberty to a third party if the Company elects not to exercise its
option with respect to a certain Business Unit, for a purchase price in excess
of $5.0 million. Any unpaid principal balance and accrued but unpaid interest
will be due and payable in full on December 31, 2001.
Also on February 2, 1999, the Company sold 183,000 shares of its
unregistered common stock to Liberty at $17.76 per share, which approximated
fair value on the date of issue.
On January 4, 1999, the Company reached a settlement with a lessor and
paid approximately $1,400,000 to terminate certain operating lease agreements.
Simultaneously, property and equipment leased under the operating lease
agreements were transferred to the Company.
On February 2, 1999, the Company authorized the issuance of its senior
promissory notes in the aggregate principal amount of $25,000,000 under its
existing note purchase and private shelf agreement ("shelf notes") with
Prudential Insurance Company of America ("Prudential") and affiliates. The
notes mature February 2, 2009 and bear interest at the rate of 6.84% per annum.
* * * * * * * * * *
F-20
SENIOR SUBORDINATED LOAN AND SECURITY AGREEMENT
THIS SENIOR SUBORDINATED LOAN AND SECURITY AGREEMENT ("Agreement"),
dated as of the 2nd day of February 1999, is made and entered into on the terms
and conditions hereinafter set forth, among LIBERTY WASTE LENDING COMPANY, LLC,
a North Carolina limited liability company ("Lender") and a wholly-owned
subsidiary of WASTE INDUSTRIES, INC., a North Carolina corporation ("Waste
Industries"), and LIBERTY WASTE SERVICES, LLC, a Delaware limited liability
company ("Borrower"), and its direct and indirect subsidiaries: WASTE SERVICES
OF N.E. MISSISSIPPI, INC., a Delaware corporation (A.K.A. Waste Services of N.E.
Mississippi, LLC), LIBERTY WASTE SERVICES OF DECATUR, INC., a Delaware
corporation, LIBERTY WASTE SERVICES MANAGEMENT, INC., a Delaware corporation,
LIBERTY WASTE SERVICES OF TENNESSEE HOLDINGS, INC., a Delaware corporation,
QUICK GARBAGE PICK-UP SERVICE, INC., a Delaware corporation, and SCOTT SOLID
WASTE DISPOSAL COMPANY, a Tennessee corporation (each a "Subsidiary" and
together the "Subsidiaries").
RECITALS:
WHEREAS, Borrower has requested that Lender make available to Borrower
loans in the principal amount of up to $11,538,000 (the "Loan") on the terms and
conditions hereinafter set forth, and for the purposes hereinafter set forth;
and
WHEREAS, in order to induce Lender to make the Loan to Borrower,
Borrower has made certain representations to Lender and Borrower has agreed to
grant Lender an option to purchase the business operations of certain of its
subsidiaries, all as hereinafter set forth; and
WHEREAS, Lender, in reliance upon the representations and inducements of
Borrower, and Borrower's grant of such option, has agreed to make the Loan upon
the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the agreement of Lender to make the
Loan, the mutual covenants and agreements hereinafter set forth, and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Borrower and Lender hereby agree as follows.
ARTICLE I
SENIOR SUBORDINATED NOTE
1.01 Authorization of Note. Borrower has authorized the issue and sale
of a Senior Subordinated Note in favor of Lender due December 31, 2001, in the
aggregate principal amount of up to $11,538,000 (the "Note"), which shall be
substantially in the form attached hereto as Exhibit A.
<PAGE>
1.02 Description of Note. The Note shall be dated the date of issue, to
mature on December 31, 2001, and shall bear interest from the date of issuance
at a rate of eight percent (8%) per annum (the "Base Rate"), plus three percent
(3%) per annum (the "Additional Interest"), of which the Base Rate will be
payable quarterly in arrears on (and shall include) the last day of each
calendar quarter during the term of the Note (with the first such interest
payment being due on March 31, 1999 and subsequent installments being payable on
the last day of each calendar quarter thereafter) and the Additional Interest
will accrue and be payable on December 31, 2001, and to bear interest on overdue
principal and on any overdue installment of interest at the rate of fourteen
percent (14%) per annum, whether by acceleration or otherwise, until paid;
provided, however, that following the payment in full of the Senior Indebtedness
(as defined below), in addition to regularly scheduled payments of interest,
principal of $2,884,500 under the Note will be due and payable upon each
closing, if any, of the acquisition by Lender (or its designee) of a Business
Unit (as defined below) from Borrower or any one or more of the Subsidiaries, or
upon the sale by Borrower or any such Subsidiary to a third party if Lender
elects not to exercise its option with respect to a particular Business Unit,
for a purchase price in excess of $5,000,000 for such Business Unit. Interest on
the Note will be computed on the basis of a 360-day year of twelve 30-day
months. Subject to Section 4.17 hereof, the Note may be prepaid at any time
without penalty or premium; provided, however, that payment or prepayment of the
Note will not affect (i) the rights of Lender or its designee under the Option
Agreement or under Article VII hereof to exercise its options to acquire certain
Subsidiaries and Business Units pursuant to the provisions and during the term
of the Option Agreement, or (ii) any obligations of Borrower or any Subsidiary,
the performance of which would survive the payment of the Secured Obligations.
"Business Unit" means any Subsidiary or group of Subsidiaries of
Borrower that owns or operates a landfill and/or waste disposal business within
a 75-mile radius of a landfill owned or operated by one of those Subsidiaries.
The parties acknowledge and agree that the term "Business Unit" may include
businesses that have not yet been acquired by Borrower, and the character and
composition of those Business Units and their assets and liabilities, cannot at
the date of this Agreement be predicted. If Borrower has more than one
Subsidiary operating a landfill or waste disposal business within a 75-mile
radius of a landfill owned by one of those Subsidiaries, then all of those
Subsidiaries will be considered part of a single Business Unit, and may not be
purchased separately under the Option Agreement discussed in Article VII,
hereof. Neither Borrower nor any of the Subsidiaries anticipate that any of them
will own or operate landfills within 150 miles of each other, but if they
acquire or contract to operate any such landfills, Waste Industries, Inc. and
Borrower will consult in advance and determine the Business Unit radius. As of
the date of this Agreement, Borrower has Business Units operating within 75
miles of landfills or landfill projects located in or about Scott County,
Tennessee (Scott County Project) and Tippah County, Mississippi (Northeast
Mississippi Project). In addition, Borrower has entered letters of intent, or
has rights of first refusal, to acquire Business Units located in or about Scott
County, Kentucky (Georgetown Project); Hopkins County, Kentucky (Western
Kentucky Project) and Boyd County, Kentucky (Ashland Area Project).
2
<PAGE>
1.03 Sale and Purchase of Note.
(a) Closing. Subject to the terms and conditions hereof and on the
basis of the representations and warranties hereinafter set forth, Borrower
agrees to issue and sell to Lender and Lender agrees to purchase from Borrower
the Note in the aggregate principal amount of $11,538,000 at a price of 100% of
the principal amount thereof.
(b) Delivery. Delivery of the Note will be made to Lender on February
2, 1999, or such later date as Borrower and Lender shall agree (the "Closing
Date") against payment therefor by federal funds wire transfer to Borrower's
account in immediately available funds and to the accounts and in the amounts in
accordance with Borrower's written instructions (the "Closing"). The Note
delivered to Lender on the Closing Date will be delivered to the Lender in the
form of a single Note for the full amount of such purchase.
ARTICLE II
SECURITY; SUBORDINATION; GUARANTY
2.01 Security. The Secured Obligations (as defined below) are and shall
continue to be secured as follows. Borrower and each Subsidiary (as a guarantor
under the Guaranty Agreement (as defined below)) hereby grants, assigns and
pledges to Lender a security interest (subordinated only to the security
interest granted to the holders of the Senior Indebtedness) in their respective
properties and assets and interests in properties and assets, together with all
proceeds thereof, wherever located (collectively, the "Collateral"), as follows:
(a) Equipment. All machinery and equipment, all data processing and
office equipment, all computer equipment, hardware and firmware, all furniture,
fixtures, appliances, containers and all other goods of every type and
description, whether now owned or hereafter acquired and wherever located,
together with all parts, accessories and attachments and all replacements
thereof and additions thereto; and
(b) Inventory. All inventory and goods whether held for lease, sale or
furnishing under contracts of service, all agreements for lease of same and
rentals therefrom, whether now in existence or owned or hereafter acquired and
wherever located; and
(c) General Intangibles. All rights, interests, choses in action,
causes of action, claims and all other intangible property of every kind and
nature, in each instance whether now owned or hereafter acquired including, but
not limited to, all corporate and business records; all loans, royalties, and
other obligations receivable; all trade secrets, inventions, designs, patents,
patent applications, registered or unregistered service marks, trade names,
trademarks, copyrights and the goodwill associated therewith and incorporated
therein, and all registrations and applications for registration related
thereto; goodwill, licenses, permits, franchises, customer lists and credit
files; all customer and supplier contracts, firm sale orders, rights under
license and franchise agreements, and other contracts and contract rights; all
rights, title and interests under leases, subleases, licenses and concessions
and other agreements relating to real or personal property and any security
agreements relating thereto; all rights to indemnification; all proceeds of
insurance of which Borrower or any Subsidiary, is a beneficiary; all letters of
credit,
3
<PAGE>
guarantees, liens, security interests and other security held by or granted to
Borrower or to any Subsidiary; and all other intangible property, whether or not
similar to the foregoing; and
(d) Accounts, Chattel Paper, Instruments and Documents. All cash, cash
equivalents, accounts, accounts receivable, chattel paper, instruments and
documents, whether now in existence or owned or hereafter acquired, entered
into, created or arising, and wherever located; and
(e) Real, Personal and Other Property. All personal and real property,
leasehold interests and other interests in any other property now owned or
hereafter acquired.
Borrower and each Subsidiary, additionally at the option of Lender, will grant
to Lender a mortgage or deed of trust ("Mortgage") creating a mortgage lien on
any and all real property owned by Borrower or such Subsidiary, as applicable
(subordinated only to the security interest granted to the holders of the Senior
Indebtedness), in appropriate form for recording in the place where such real
property is located, together with such other instruments and documents as may
be reasonably required by Lender or Lender's title insurance company. Borrower
or the Subsidiary executing such Mortgage shall be responsible for payment of
the costs of preparing and recording the same (including reasonable attorneys'
fees and recording fees and taxes). Any such real property collateral shall
hereinafter be included in the definition of "Collateral".
This Agreement and any other instruments, documents or agreements, including any
mortgage or guaranty, now or hereafter securing or perfecting the Secured
Obligations are herein collectively referred to as the "Security Instruments."
The Security Instruments, together with the Note and any other instruments and
documents now or hereafter evidencing, securing or delivered to Lender by
Borrower in connection with the indebtedness evidenced by the Note are herein
individually referred to as a "Loan Document" and collectively referred to as
the "Loan Documents". Borrower and/or any one or more Subsidiaries, as
appropriate, will execute additional Security Instruments in order to give
effect to the provisions of this Agreement, as directed by Lender. Any security
granted to Lender pursuant to this Agreement is given to secure the joint and
several obligations of Subsidiaries under the Guaranty Agreement (as defined
below).
2.02 Secured Obligations. Without limiting any of the provisions thereof,
the Security Instruments will secure:
(a) The full and timely payment of the indebtedness evidenced by the Note,
together with interest thereon, and any extensions, modifications,
consolidations, and/or renewals thereof, and any notes given in payment thereof;
(b) The full and prompt performance of all of the obligations of Borrower
or any Subsidiary, as applicable, to Lender under the Loan Documents to which
Borrower or such Subsidiary is a party; and
(c) The full and prompt payment of all court costs, and other reasonable
expenses and costs of whatever kind incident to the collection of the
indebtedness evidenced by the Note, the enforcement or protection of the
security interests of the Security Instruments or the exercise by
4
<PAGE>
Lender of any rights or remedies of Lender with respect to the indebtedness
evidenced by the Note, including without limitation reasonable attorney's fees
incurred by Lender, all of which Borrower and the Subsidiaries agree to pay to
Lender upon demand.
All of the foregoing indebtedness and other obligations are herein collectively
referred to as the "Secured Obligations".
2.03 Subordination. Notwithstanding anything to the contrary in this
Agreement or in the Note, the indebtedness evidenced by the Note, including
principal and interest, will be subordinate to the prior payment of all Senior
Indebtedness on the terms and conditions set forth in the Subordination and
Intercreditor Agreement dated February __, 1999, a copy of which is attached
hereto as Exhibit B and made a part hereof (the "Subordination Agreement"),
among Borrower, Lender and Comerica Bank on behalf of itself and as agent of the
senior lenders (the "Senior Lender"), or on such other terms and conditions as
shall be acceptable to Lender and any holders of Senior Indebtedness, and in the
event such Senior Indebtedness is owed to a creditor other than the Senior
Lender, such other creditor shall have the same rights vis-a-vis the Lender as
the Senior Lender has against the Lender pursuant to the Subordination
Agreement, except as otherwise agreed by Lender and such other creditor.
Amendment of the Subordination Agreement or waiver of any provision thereof
shall not change the rights of any other holder of Senior Indebtedness, unless
such holder of Senior Indebtedness consents in writing thereto.
2.04 Senior Indebtedness Default. Except as otherwise permitted under
the Subordination Agreement, Borrower shall not declare or pay any dividends or
make any distributions to the holders of interests or capital stock of Borrower
or purchase, redeem or acquire for value any portion of the Note if any default
has occurred and is continuing with respect to the payment of principal of, or
premium (if any) or interest on, any Senior Indebtedness. Furthermore, any
default by Borrower with respect to the Senior Indebtedness shall be an Event of
Default under this Agreement and the other Loan Documents; provided, however,
that, subject to Section 4.24(b) hereof, any waiver by the Senior Lender or
permitted cure of such default under the Senior Indebtedness will be deemed to
be a waiver or permitted cure, as the case may be, of such Event of Default
under Section 6.01(l) hereof and under the other Loan Documents except to the
extent that such default constitutes a separate and independent default under
this Agreement or the other Loan Documents without regard to the Senior
Indebtedness.
2.05 Subrogation. In the event of the prior payment of the Senior
Indebtedness by Lender, Lender shall be subrogated to the rights of the holder
of the Senior Indebtedness to receive payments or distributions of assets of
Borrower applicable to the Senior Indebtedness until all amounts paid by Lender
on the Senior Indebtedness are recouped in full by Lender, and for the purpose
of such subrogation, no payments or distributions to Lender otherwise payable or
distributable to the holder of Senior Indebtedness shall, as between Borrower,
its creditors (other than the holders of Senior Indebtedness) and Lender, be
deemed to be payment by Borrower to or on account of the Note, it being
understood that the provisions of Sections 2.03, 2.04 and 2.05 of this Article
II are intended solely for the purpose of defining the relative rights of
Lender, on the one hand, and the holders of the Senior Indebtedness, on the
other hand.
5
<PAGE>
2.06 Guaranty by Subsidiaries. Each of the Subsidiaries shall execute
the Guaranty Agreement attached hereto as Exhibit C and made a part hereof (the
"Guaranty Agreement") jointly and severally guarantying the obligations of
Borrower under the Loan Documents.
2.07 Borrower's Obligations Not Impaired. (a) Nothing contained in this
Article II or in the Note (i) is intended to or shall impair, as between
Borrower and Lender, the obligation of Borrower, which is absolute and
unconditional, to pay Lender the principal of and interest on the Note as and
when the same shall become due and payable in accordance with the terms of the
Note or (ii) is intended to or shall affect the relative rights of Lender other
than with respect to the holders of the Senior Indebtedness as expressly
provided in the Subordination Agreement, nor (b), except as expressly provided
in this Article II or in the Subordination Agreement, shall anything herein or
therein prevent Lender from exercising all remedies otherwise permitted by
applicable law upon the occurrence of an Event of Default under this Agreement
or under the Note.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Borrower and each Subsidiary hereby represents and warrants to Lender as
follows:
3.01 Legal Status.
(a) Borrower is a limited liability company duly organized, validly
existing and in good standing under the laws of the State of Delaware, and has
the limited liability company power to own and operate its properties, to carry
on its business as now conducted and to enter into and to perform its
obligations under this Agreement and the other Loan Documents to which it is a
party. Borrower is duly qualified to do business and is in good standing in each
state in which a failure to be so qualified would have a materially adverse
effect on such entity's financial position or its ability to conduct its
business in the manner now conducted.
(b) Liberty Waste Services Management, Inc., Liberty Waste Services of
Tennessee Holdings, Inc., Waste Services of N.E. Mississippi, Inc. and Liberty
Waste Services of Decatur, Inc. are wholly-owned subsidiaries of Borrower. Quick
Garbage Pick-Up Service, Inc. and Scott Solid Waste Disposal Company are
wholly-owned subsidiaries of Liberty Waste Services of Tennessee Holdings, Inc.
Liberty Waste Services Management, Inc., Liberty Waste Services of Tennessee
Holdings, Inc., Waste Services of N.E. Mississippi, Inc. A.K.A. Waste Services
of N.E. Mississippi, LLC, Liberty Waste Services of Decatur, Inc. and Quick
Garbage Pick-Up Service, Inc. are each duly organized, validly existing and in
good standing under the laws of the State of Delaware. Scott Solid Waste
Disposal Company is duly organized, validly existing and in good standing under
the laws of the State of Tennessee. Each of the entities named in this Section
3.01(b) has the corporate power to own and operate its properties, to carry on
its business as now conducted and to enter into and to perform its obligations
under this Agreement and the other Loan Documents to which it is a party; and
each is duly qualified to do business and is in good standing in each state in
which a failure to be so qualified would have a materially adverse effect on
such entity's financial position or its ability to conduct its business in the
manner now conducted.
6
<PAGE>
3.02 Subsidiaries. The entities named in Section 3.01(b) hereof are
deemed to be Subsidiaries, as that term is used in this Agreement and the other
Loan Documents. The names and addresses of all of the direct and indirect
subsidiaries of Borrower are set forth on Schedule 3.02. Except as disclosed on
Schedule 3.02, Borrower has no other subsidiaries and has no direct or indirect
ownership interests in any other entity.
3.03 Authorization. Borrower and each Subsidiary has full legal right,
power and authority to enter into and perform its obligations under each Loan
Document to which it is a party, without the consent or approval of any other
person, firm, governmental agency or other legal entity other than such consents
and approvals as have or shall have been obtained as of the Closing. The
execution and delivery of this Agreement, the borrowing hereunder, the execution
and delivery of each Loan Document to which Borrower or any Subsidiary is a
party, and the performance by Borrower and such Subsidiary of its obligations
hereunder and/or thereunder are within its powers and have been duly authorized
by all necessary corporate or limited liability company action (as applicable)
properly taken, have received all necessary governmental approvals, if any were
required, and do not and will not contravene or conflict with any provision of
law, any applicable judgment, ordinance, regulation or order of any court or
governmental agency, the articles or certificate of organization or operating
agreement of Borrower or the articles or certificate of incorporation or bylaws
of such Subsidiary, or any agreement binding upon it or its properties. The
officer(s) or manager(s) executing this Agreement, the Note and all of the other
Loan Documents to which Borrower or any Subsidiary is a party, is (are) duly
authorized to act on behalf of Borrower or such Subsidiary, as applicable.
3.04 Validity and Binding Effect. This Agreement and the other Loan
Documents to which Borrower or any Subsidiary is a party are the legal, valid
and binding obligations of Borrower or such Subsidiary, as applicable,
enforceable in accordance with their terms.
3.05 No Consent Required. The execution, delivery and performance by
Borrower and each Subsidiary of the Loan Documents to which it is a party do not
require the consent or approval of or the giving of notice to any person or
entity other than the approval of (a) the managers, directors and/or
shareholders of Borrower or such Subsidiary, as applicable, or (b) Senior
Lender, as applicable, and such other consents or approvals as have or will have
been obtained as of the Closing.
3.06 Other Transactions. Except as disclosed on Schedule 3.06 and except
with respect to the Senior Indebtedness, there are no outstanding loans, liens,
pledges, security interests, agreements or other facilities upon which Borrower
or any Subsidiary is obligated or by which Borrower or any Subsidiary is bound
that will in any way permit any third person to have or obtain priority over
Lender as to any of the Collateral granted to Lender pursuant to this Agreement
and the other Security Instruments. Subject to receipt of consent from Senior
Lender, consummation of the transactions hereby contemplated and the performance
of the obligations of Borrower and each Subsidiary under and by virtue of the
Loan Documents to which it is a party will not result in any breach of, or
constitute a default under, any mortgage, security deed or agreement,
conditional sales agreement, deed of trust, lease, bank loan or credit
agreement, articles or certificate of organization or operating agreement,
license, franchise or any other instrument or agreement to which Borrower or
such Subsidiary is a party or by which Borrower
7
<PAGE>
or such Subsidiary or its properties may be bound or affected or as to which
Borrower or such Subsidiary has not obtained an effective waiver.
3.07 Capitalization. As of the date hereof, and upon consummation of the
transactions contemplated by the Loan Documents, Borrower will have a total of
2,121,414 units of membership interest (referred to as Common Shares)
outstanding. Except as set forth in Schedule 3.07 hereto, no holder of any
security of Borrower or any Subsidiary is entitled to preemptive or similar
statutory or contractual rights, either arising pursuant to any agreement or
instrument to which Borrower (with respect to a Subsidiary) or such Subsidiary
is a party or that are otherwise binding upon Borrower (with respect to a
Subsidiary) or such Subsidiary.
3.08 Place of Business. The records with respect to all intangible
personal property constituting the Collateral for the Secured Obligations are
and will be maintained at the offices of Borrower at 625 Liberty Avenue, Suite
3100 CNG Tower, Pittsburgh, Pennsylvania 15222; Sulphur Creek Road, Halenwood,
Tennessee 37755; and 506 South President
Street, Jackson, Mississippi 39201.
3.09 Litigation. Except as disclosed on Schedule 3.09, there are no
actions, suits or proceedings pending, or, to the knowledge of Borrower or any
Subsidiary, threatened, against or affecting Borrower or a Subsidiary or
involving the validity or enforceability of any of the Loan Documents or the
priority of the liens thereof, at law or in equity, or before any governmental
or administrative agency, except actions, suits and proceedings that are fully
covered by insurance and that, if adversely determined, would not impair the
ability of Borrower or any Subsidiary, as applicable, to perform each and every
one of its obligations under and by virtue of the Loan Documents to which it is
a party; and Borrower and each Subsidiary is not in default with respect to any
order, writ, injunction, decree or demand of any court or any governmental
authority.
3.10 Financial Statements. The unaudited financial statement(s) of
Borrower and each Subsidiary as of and for the year ended December 31, 1998,
have heretofore been delivered to Lender and have been prepared on the basis of
generally accepted accounting principles consistently applied ("GAAP"), and
fairly present the consolidated financial condition of the Borrower and each
Subsidiary, as applicable, as of the date(s) thereof; provided, however, that
such financial statements are subject to normal year-end adjustments, which
adjustments individually and in the aggregate will not be material, and the
absence of footnotes. No material adverse change has occurred in the financial
condition of Borrower or any Subsidiary since December 31, 1998, and, except for
the Senior Indebtedness, no additional borrowings have been made by Borrower or
any Subsidiary since December 31, 1998.
3.11 No Defaults. Consummation of the transactions hereby contemplated
and the performance of the obligations of Borrower and each Subsidiary under and
by virtue of the Loan Documents will not result in any breach of, or constitute
a default under, the articles or certificate of organization or operating
agreement of Borrower or the articles or certificate of incorporation or bylaws
of any Subsidiary or any mortgage, security deed or agreement, conditional sales
agreement, deed of trust, lease, loan or credit agreement, partnership or joint
venture agreement, license, franchise or any other material instrument or
agreement to which Borrower or any Subsidiary is a party or by which Borrower or
any Subsidiary or its properties may be bound or, to the knowledge of Borrower
and each Subsidiary, affected.
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3.12 Compliance with Law. Borrower and each Subsidiary have obtained all
material licenses, permits and governmental approvals and authorizations
necessary or proper in order to conduct their business and affairs as heretofore
conducted. Borrower and each Subsidiary are in compliance with all laws,
regulations, decrees and orders applicable to it (including but not limited to
laws, regulations, decrees and orders relating to environmental, occupational
and health standards and controls, antitrust, monopoly, restraint of trade or
unfair competition), except for any noncompliance that, in the aggregate, may
not reasonably be expected to have a materially adverse effect on its business,
operations, property or financial condition and will not adversely affect its
ability to perform its obligations under the Loan Documents to which it is a
party.
3.13 No Burdensome Restrictions. No instrument, document or agreement to
which Borrower or any Subsidiary is a party, or by which Borrower or any
Subsidiary or its properties may be bound or affected, materially adversely
affects, or may reasonably be expected so to affect, the business, operations,
property or financial condition thereof.
3.14 Taxes. Borrower and each Subsidiary, as applicable, has filed or
caused to be filed all tax returns that are required to be filed (except for
returns that have been appropriately extended), and have paid all taxes shown to
be due and payable on said returns and all other taxes, impositions,
assessments, fees or other charges imposed on it by any governmental authority,
agency or instrumentality, prior to any delinquency with respect thereto (other
than taxes, impositions, assessments, fees and charges currently being contested
in good faith by appropriate proceedings, for which appropriate amounts have
been reserved). No tax liens have been filed against Borrower or any Subsidiary
or any of its property.
3.15 Collateral. Borrower and each Subsidiary have all necessary right,
power and authority to grant to Lender a valid and enforceable security interest
in the Collateral for the Secured Obligations. Except for any Collateral with
respect to the Senior Indebtedness, Lender's security interest in such
Collateral constitutes a lien upon and security interest in such Collateral
second in priority only to the Senior Lender, and, except for liens arising by
operation of law in the ordinary course of Borrower's business and that do not
materially impair, in the aggregate, Lender's rights or priority in such
collateral, no other person or entity (except the Senior Lender) has any right,
title, interest, security interest, claim or lien with respect thereto.
3.16 Certain Transactions. Except as provided on Schedule 3.16, neither
Borrower nor any Subsidiary is indebted, directly or indirectly, to any of its
officers, directors, managers or members or to their spouses or children; and
none of said officers, directors, managers or members or any members of their
immediate families are indebted to Borrower or any Subsidiary or have any direct
or indirect ownership interest in any firm or corporation with which Borrower or
any Subsidiary has a business relationship, or any firm or corporation that
competes with Borrower or any Subsidiary, except that managers, members,
officers and/or directors of Borrower and each Subsidiary may own no more than
five percent (5%) of the outstanding stock of publicly traded companies that
compete directly with Borrower or any Subsidiary. Except as provided on Schedule
3.16, no manager, member, officer or director or any member of their immediate
families, is, directly or indirectly, interested in any material
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contract with Borrower or any Subsidiary, and neither Borrower nor any
Subsidiary is a guarantor or indemnitor of any indebtedness, except for the
Subsidiaries under the Guaranties.
3.17 Title to Property. Borrower and each Subsidiary, as applicable, has
good and marketable title to its real and personal property, including the
Collateral, free and clear of any and all claims, liens, encumbrances, equities
and restrictions of every kind and nature whatsoever, except as disclosed on
Schedule 3.17 hereto and except for such claims, liens, encumbrances, equities
and restrictions as are not in the aggregate material to the business,
operations or financial condition of Borrower or such Subsidiary.
3.18 Business Units. Borrower or the Subsidiaries have, will have or are
working to acquire, at a minimum, Business Units operating within 75 miles of
the landfills or landfill projects located in or about Scott County, Tennessee
(Scott County Project), Tippah County, Mississippi (Northeast Mississippi
Project), Scott County, Kentucky (Georgetown Project); Hopkins County, Kentucky
(Western Kentucky Project) and Boyd County, Kentucky (Ashland Area Project). The
Borrower's business plan for development of the first four (4) Business Units
above, attached hereto as Schedule 3.18, represents the good faith estimate (but
not guaranty) of Borrower and its senior management concerning Borrower's most
probable course of Business Unit development as of and immediately following the
Closing Date. The parties acknowledge that, despite its commercial best efforts,
Borrower may not be able to close on one or more of such Business Units.
3.19 Intellectual Property. Except as disclosed in Schedule 3.19,
Borrower and each Subsidiary is the lawful owner of its proprietary information
(as defined herein), free and clear of any claim, right, trademark, patent or
copyright protection of any third party. As used herein, "proprietary
information" includes without limitation any documentation and data related to
plans, methods, techniques, drawings, finances, customer lists, suppliers,
products, pricing and cost information, processes, procedures, research data
owned or used by Borrower or Subsidiary, as applicable, or marketing studies
conducted by Borrower and any Subsidiary, as applicable, all of which Borrower
and such Subsidiary considers to be commercially important and competitively
sensitive and which generally has not been disclosed to third parties other than
customers in the ordinary course of business or pursuant to confidentiality
agreements whereby the third party is prohibited form disclosing such
proprietary information. Borrower and each Subsidiary, as applicable, has good
and marketable title to all trademarks, trade names, service marks, copyrights
and registrations or applications for registration with respect to all material
interests in the Proprietary Information that is or is expected to be included
in the products of Borrower or such Subsidiary owned by Borrower or such
Subsidiary or used or required by Borrower or such Subsidiary in the operation
of its business.
3.20 Investment Company Act. Neither Borrower nor any Subsidiary is an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
3.21 Unsecured Loans. Without limiting the provisions of Section 3.15
hereof, the following obligations of Borrower and/or Subsidiaries, as
applicable, under that certain Merger and Stock Acquisition Agreement, dated as
of December 15, 1998, by and among, INTER ALIA, Borrower, certain of the
Subsidiaries and W. Todd Skaggs (the "Skaggs Agreement"), do not
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constitute liens against or interests in the Collateral and are and shall remain
unsecured as to Borrower and the applicable Subsidiaries and their respective
assets and properties: (a) payments totaling approximately $1,000,000 due to W.
Todd Skaggs under Section 1.5 of the Skaggs Agreement, and (b) annuity payments
due to W. Todd Skaggs of $156,000 per year for 10 years under Section 1.6 of the
Skaggs Agreement.
3.22 Solvency. Borrower and each Subsidiary is solvent as of the date of
this Agreement. For purposes of this Section 3.22, "solvent" shall mean Borrower
and each Subsidiary (i) is able to pay its debts as they mature and (ii) owns
assets having present fair saleable value greater than the amount required to
pay its debts.
3.23 Compliance with Environmental Laws. Borrower and each Subsidiary
has duly complied with, and its properties are owned and operated in compliance
in all material respects with, all federal, state and local environmental laws
and regulations, including, but not limited to, the Comprehensive Environmental
Response, Compensation and Liability Act (codified as amended, 42 U.S.C. ss.ss.
9601 ET seq.) ("CERCLA"), the Resource Conservation and Recovery Act (codified
as amended, 42 U.S.C. ss.ss. 6901 ET seq.) ("RCRA"), and equivalent applicable
state laws and regulations (collectively, "Environmental Laws"). There have been
no citations, notices or orders of noncompliance issued to Borrower or any
Subsidiary or relating to its businesses or properties. Borrower and each
Subsidiary has obtained all federal, state and local licenses, certificates or
permits required by such Environmental Laws relating to Borrower and each
Subsidiary and its properties relating to: (i) air emissions; (ii) discharges to
surface water or groundwater; (iii) noise emissions; (iv) solid or liquid waste
disposal; (v) the use, generation, storage, transportation or disposal of toxic
or hazardous substances or wastes (intended hereby and hereafter to include any
and all such materials listed in any local, state or federal statute, ordinance
or regulation); (vi) the use, storage, transportation or disposal of petroleum
or petroleum products; or (vii) other environmental, health and safety matters.
Borrower and each Subsidiary has provided Lender with all environmental audits
or assessments undertaken by or on behalf of Borrower and each Subsidiary or any
governmental agencies with respect to Borrower and each such Subsidiary pursuant
to the Environmental Laws. Neither Borrower nor any Subsidiary has caused,
suffered, permitted or sustained any emission, spill, release or discharge of
any toxic or hazardous substances or wastes, or any petroleum products, in any
reportable quantities, into or upon: (i) the air; (ii) soils or any improvements
located thereon; (iii) surface water or groundwater; or (iv) a sewer, septic
system or waste treatment, storage or disposal system except in accordance with
applicable law or a valid government permit, license, certificate or approval.
3.24 OSHA Compliance. Borrower and each Subsidiary is in compliance in
all material respects with the Federal Occupational Safety and Health Act, as
amended, and all regulations thereunder (collectively, "OSHA"). Borrower and
each Subsidiary has provided Lender with all occupational health studies
undertaken by or on behalf of Borrower and each Subsidiary or any governmental
agencies with respect to Borrower and each such Subsidiary pursuant to OSHA.
3.25. ERISA Compliance. With respect to the Employee Retirement Income
Security Act of 1974, as amended from time to time, and the regulations
promulgated and rulings issued thereunder ("ERISA"):
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(a) Benefit Plans. Schedule 3.25 sets forth any and all "employee benefit
plans" maintained by or on behalf of Borrower or any Subsidiary or any ERISA
Affiliates as defined in Section 3(3) of ERISA (a "Plan"), including, but not
limited to, any profit sharing plan, money purchase pension plan, savings or
thrift plan, stock bonus plan, employee stock ownership plan or any plan, fund,
program, arrangement or practice providing for medical (including
post-retirement medical), hospitalization, accident, sickness, disability, or
life insurance benefits. For purposes of this Agreement, "ERISA Affiliate" shall
mean each trade or business (whether or not incorporated) that, together with
Borrower or any Subsidiary, is treated as a single employer under Section
414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as amended from
time to time, and the regulations promulgated and the rulings issued thereunder
(the "Code"); and "Multiemployer Plan" shall mean a "multiemployer plan" as
defined in Section 4001(a)(3) of ERISA. Neither Borrower, any Subsidiary nor any
ERISA Affiliate maintains or contributes to, or has maintained or contributed
to, any defined benefit plan (as defined in Section 3(35) of ERISA) or
Multiemployer Plan.
(b) Compliance. Except as set forth in Schedule 3.25, Borrower and each
Subsidiary, as applicable, has at all times maintained each Plan, by its terms
and in operation, in accordance in all materials respects with all applicable
laws.
(c) Liabilities. Except for liabilities and expenses that become payable
and are timely paid pursuant to the terms and usual operations of the Plans,
neither Borrower nor any Subsidiary is currently and, to the best of its
knowledge, will become subject to any material liability, tax or penalty
whatsoever to any person whomsoever with respect to any Plan including, but not
limited to, any material tax, penalty or liability arising under Title I or
Title IV or ERISA or Chapter 43 of the Code.
(d) Funding. Borrower, each Subsidiary and each of its ERISA Affiliates has
made full and timely payment of all amounts (i) required to be contributed under
the terms of each Plan and applicable law and (ii) required to be paid as
expenses of each Plan.
3.26 Statements Not False or Misleading. Borrower and each Subsidiary
has fully advised Lender of all matters involving Borrower's and such
Subsidiary's financial condition, operations, properties or industry that might
have a materially adverse effect on Borrower or such Subsidiary. No
representation or warranty given as of the date hereof by Borrower or any
Subsidiary contained in this Agreement, any Loan Document or any schedule
attached hereto or any statement in any document, certificate or other
instrument furnished or to be furnished to Lender pursuant hereto, taken as a
whole, contains or will (as of the Closing) contain any untrue statement of a
material fact, or omits or will (as of the Closing) omit to state any material
fact that is necessary in order to make the statements contained therein not
misleading.
3.27 Survival. The representations and warranties of Borrower and each
Subsidiary contained in this Agreement shall survive until this Agreement
terminates in accordance with Article VIII hereof.
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ARTICLE IV
COVENANTS AND AGREEMENTS
4.01 Payment of Secured Obligations. Subject to the terms of the
Subordination Agreement, Borrower shall pay the indebtedness evidenced by the
Note according to the terms thereof, and shall timely pay or perform, as the
case may be, all the other Secured Obligations.
4.02 Transfer of Collateral. Neither Borrower nor any Subsidiary will
sell, exchange, lease, negotiate, pledge, assign or otherwise dispose of the
Collateral or any interest therein or the Security Instruments to anyone other
than Lender, except as permitted by Section 4.19, and except that Borrower and
each Subsidiary may sell or otherwise dispose of obsolete or retired equipment
in the ordinary course of business. Borrower and each Subsidiary will maintain
its Collateral in good operating condition, normal wear and tear excepted.
4.03 Use of Proceeds; Restrictions on Activities. Notwithstanding
anything to the contrary contained in the Loan Documents, Borrower will use the
proceeds from the Loan solely to finance the development of the Business Units
described in Schedule 3.18, and acquisitions to support such Business Units;
provided, however, use of any Loan proceeds in connection with the development
of a new Business Unit that has a projected cost in excess of $500,000, or any
acquisition of a business by asset or stock purchase or merger valued in excess
of $500,000, will be subject to Lender's prior written approval, which approval
will not be unreasonably withheld. Furthermore, with respect to Borrower's
acquisitions of a business where the consideration paid and/or debt assumed
equals or exceeds $500,000, Lender shall have the right to review Borrower's due
diligence information (including environmental reports), pro forma financial
information and acquisition documents prior to Borrower's (or a Subsidiary's)
execution of any binding documentation (other than a confidentiality and
nondisclosure agreement, which will not prohibit or limit Lender's due diligence
review with respect to the transactions contemplated under the Loan Documents).
Borrower will deliver within thirty (30) days of the Closing to Lender a written
report, certified as correct by Borrower's chief executive officer or chief
financial officer, verifying the purposes and the amounts for which proceeds
from the Loan have been disbursed, and, if the proceeds have not been fully
disbursed within that 30-day period, an additional report also so certified,
delivered not later than the end of each succeeding 30-day period, verifying the
purposes and the amounts for which proceeds have been disbursed. Borrower will
supply to Lender such additional information and documents as Lender reasonably
requests with respect to use of proceeds and will permit Lender to have
reasonable access to any and all Company records and information and personnel
as Lender reasonably deems necessary to verify how proceeds have been or are
being used and to assure that the proceeds have been used for the purposes
specified. Without expanding the limited uses of proceeds of the Loan set forth
in this Section 4.03 and in Schedule 4.03, Borrower shall not use any of the
funds advanced under the Loan for the purpose of acquiring or carrying "margin
stock" for the purposes of Regulations G, T, X or U of the Federal Reserve
Board.
4.04 Further Assurances. Borrower and each Subsidiary will take all
actions reasonably requested by Lender to create and maintain in Lender's favor
valid liens upon, security titles to and/or perfected security interests in all
Collateral and/or the Security Instruments and all other security for the
Secured Obligations now or hereafter held by or for
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Lender, subject only to liens securing the Senior Indebtedness or otherwise
expressly permitted hereunder. Without limiting the foregoing, Borrower shall
cause each New Affiliate (as defined below) to execute a joinder to this
Agreement, a Guaranty and such further instruments (including financing
statements and continuation statements) as may reasonably be required or
permitted by any law relating to notices of, or affidavits in connection with,
the creation and perfection of Lender's security interests in and to the
Collateral of Borrower and of the Subsidiaries, and to cooperate with Lender in
the filing or recording and renewal thereof.
4.05 Limitations on Debt and Obligations. Neither Borrower nor any
Subsidiary shall issue, assume, guarantee or otherwise become liable or permit
to exist any indebtedness except: (i) Senior Indebtedness covered by the
Subordination Agreement; (ii) the indebtedness incurred pursuant to the Note;
(iii) accounts payable and other trade payables incurred in the ordinary course
of business; (iv) obligations of Borrower or any Subsidiary pursuant to
capitalized leases and/or purchase money financing of equipment in the ordinary
course of business, provided that the collateral for any such leases or purchase
money financing is limited to such equipment; (v) indebtedness that refinances
secured indebtedness under clause (i) above, provided that the collateral for
such new indebtedness is the collateral from the refinanced secured indebtedness
and the aggregate principal amount of such indebtedness does not exceed the
principal amount outstanding under the refinanced indebtedness; or (vi)
indebtedness incurred in connection with the acquisition of a business
(including the assets of a business) permitted hereunder; provided, however,
that such indebtedness is unsecured and is expressly subordinated to Borrower's
indebtedness to Lender under the Note. Until the Note is paid in full, the
amount of indebtedness to Senior Lender (the "Senior Indebtedness") will not
exceed the principal amount of $21,250,000 ($18,000,000 secured 2-year revolving
credit facility (including $2,000,000 in letter of credit availability) and
$3,250,000 secured specific advance facility) plus ten percent (10%) of such
amount as provided under the Subordination Agreement (the "Commitment Amount "),
plus accrued and unpaid interest thereon (the "Senior Indebtedness"), as set
forth in that certain commitment letter to Borrower from Comerica Bank, dated
January 13, 1999, and attached hereto as Exhibit D and made a part hereof (the
"Comerica Commitment Letter"). In addition, Borrower acknowledges and agrees
that each time (if any) that Lender (or its designee) exercises its option under
the Option Agreement to purchase a Business Unit, the cash purchase price paid
for such Business Unit (less distribution to Borrower's members of the amount
required by such members to pay their respective income tax liability
attributable solely to such purchase price -- the "Purchase Price") will be
applied in full as payment on the Senior Indebtedness and the Commitment Amount
will be reduced (and may not be redrawn above the Commitment Amount as reduced)
by the amount of the Purchase Price applied to the Senior Indebtedness
principal, until the Senior Indebtedness is paid in full. Thereafter, in
addition to regularly scheduled payments of interest, principal on the Note will
be paid as follows: the lesser of principal of $2,884,500 or the balance of the
principal under the Note will be due and payable upon each closing, if any, of
the acquisition by Lender (or its designee) of a Business Unit from Borrower or
any one or more of the Subsidiaries, or upon the sale by Borrower or any such
Subsidiary to a third party if Lender elects not to exercise its option with
respect to a particular Business Unit, for a purchase price in excess of
$5,000,000 for such Business Unit.
4.06 Financial Statements and Reports. Until such time as the Loan is no
longer outstanding, Borrower shall furnish to Lender: (i) within one hundred
twenty (120) days after
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the end of each fiscal year of Borrower, an audited consolidating and
consolidated balance sheet of Borrower and the Subsidiaries as of the close of
such fiscal year, an audited consolidated and consolidating income statement of
Borrower and the Subsidiaries for such fiscal year, and audited consolidating
and consolidated statements of cash flows for Borrower and the Subsidiaries for
such fiscal year, all in reasonable detail, prepared in accordance with GAAP
consistently applied, and in such form as has customarily been prepared by
Borrower; (ii) within forty-five (45) days of the end of each of the first three
calendar quarters of each fiscal year, unaudited consolidating and consolidated
balance sheets of Borrower and the Subsidiaries as of the close of such quarter,
and an unaudited consolidating and consolidated income statement of Borrower and
the Subsidiaries for such quarter, and unaudited consolidating and consolidated
statements of cash flow for Borrower and the Subsidiaries for such quarter, all
in reasonable detail, and prepared on the basis of GAAP consistently applied,
together with a certificate signed by Borrower's Chief Financial Officer (and
Borrower's auditors solely with respect to the information set forth in Section
4.06(i) that such auditors, in the normal scope of its audit of Borrower, did
not discover to be in default or an Event of Default) confirming the Borrower's
compliance (or lack thereof) with all the terms and conditions of the Loan
Documents; (iii) copies of any notice from any governmental authority to
Borrower or any Subsidiary that could reasonably be expected to have a material
adverse effect on Borrower or such Subsidiary; (iv) copies of any notices and
certificates including without limitation, borrowing base certificates and
covenant compliance certificates, provided by Borrower to Senior Lender; and (v)
with reasonable promptness, such other data relating to the business,
operations, properties or financial condition of Borrower and the Subsidiaries
as Lender may reasonably request.
4.07 Maintenance of Books and Records; Inspection. Borrower and each
Subsidiary will maintain its books, accounts and records on the basis of GAAP
consistently applied, and permit representatives of Lender, at Lender's expense
and upon five (5) days' prior written notice to Borrower or such Subsidiary as
the case may be, to visit and inspect any of Borrower's or any Subsidiary's
properties (including but not limited to the Collateral described in Section
2.01 or the Security Instruments), corporate books and financial records, and to
discuss its accounts, affairs and finances with Borrower, Subsidiary, or the
principal officers or auditors of Borrower or any such Subsidiary, during
business hours and without interruption of Borrower's or any such Subsidiary's
business, all at such times as Lender may reasonably request.
4.08 Insurance. Without limiting any of the requirements of any of the
other Loan Documents, Borrower and/or each Subsidiary will maintain, in amounts
customary for entities engaged in comparable business activities, life, fire,
casualty liability and other forms of insurance on its properties (including but
not limited to the Collateral now or hereafter securing payment and performance
of the Secured Obligations), against such hazards and in at least such amounts
as is customary in Borrower's and each such Subsidiary's business. At the
request of Lender, Borrower and each Subsidiary, as applicable, will deliver
forthwith a certificate specifying the details of such insurance in effect and
naming Lender as a loss payee as its interests shall appear.
4.09 Taxes and Assessments. Borrower and each Subsidiary will (a) file
all tax returns and appropriate schedules thereto that are required to be filed
under applicable law, prior to the date of delinquency, (b) pay and discharge
all taxes, assessments and governmental charges or
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levies imposed upon it, upon its income and profits or upon any properties
belonging to it, prior to the date on which penalties attach thereto, and (c)
pay all taxes, assessments and governmental charges or levies that, if unpaid,
might become a lien or charge upon any of its properties; provided, however,
that Borrower or any Subsidiary in good faith may contest any such tax,
assessments and governmental charge or levy described in the foregoing clauses
(b) and (c) so long as adequate reserves are maintained with respect thereto.
4.10 Legal Existence. Borrower and each Subsidiary will maintain its
existence and good standing in the state of its organization or incorporation,
and its qualification and good standing as a foreign corporation in each
jurisdiction in which such qualification is required by applicable law.
4.11 Compliance with Law and Agreements. Borrower and each Subsidiary
will maintain its business operations and property owned or used in connection
therewith in compliance with (i) all applicable federal, state and local laws,
regulations and ordinances governing such business operations and the use and
ownership of such property, and (ii) all agreements, licenses, permits,
franchises, indentures and mortgages to which Borrower or any Subsidiary is a
party or by which Borrower or any Subsidiary or any of its properties is bound.
Without limiting the foregoing, Borrower shall pay and shall cause each
Subsidiary to pay, all of its indebtedness promptly in accordance with the terms
thereof.
4.12 Notice of Default. Borrower or the Subsidiaries, as applicable,
shall give written notice to Lender of the occurrence of any default or Event of
Default (as defined below) under this Agreement, any other Loan Document or
under any loan documents between Borrower and the Senior Lender, or under any
material contract to which Borrower or any Subsidiary is a party, of which
Borrower or any such Subsidiary becomes aware, promptly upon the occurrence
thereof.
4.13 Notice of Litigation. Borrower or the Subsidiaries, as applicable,
shall give notice, in writing, to Lender of (i) any actions, suits or
proceedings instituted by any persons whomsoever against Borrower or any
Subsidiary or materially affecting any of the assets of Borrower or any
Subsidiary (and in any event where the claim or amount in issue is greater than
$50,000), and (ii) any dispute between Borrower or any Subsidiary on the one
hand and any governmental regulatory body on the other hand, which dispute could
reasonably be expected to interfere with the normal operations of Borrower or
any Subsidiary; provided, however, that Lender shall not disclose any such
information to any third party other than Lender's counsel and except to the
extent compelled by legal process or law or otherwise authorized by Borrower or
such Subsidiary.
4.14 ERISA Plan. If Borrower or any Subsidiary has in effect, or
hereafter institutes, a pension plan that is subject to the requirements of
Title IV of ERISA, then the following warranty and covenants shall be applicable
during such period as any such plan (the "Pension Plan") shall be in effect: (i)
Borrower hereby warrants that no fact that might constitute grounds for the
involuntary termination of the Plan, or for the appointment by the appropriate
United States District Court of a trustee to administer the Plan, exists at the
time of execution of this Agreement, (ii) Borrower hereby covenants that
throughout the existence of the Pension Plan, Borrower's contributions under the
Pension Plan will meet the minimum funding standards
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required by ERISA and Borrower will not institute a distress termination of the
Pension Plan, and (iii) Borrower covenants that it will send to Lender a copy of
any notice of a reportable event (as defined in ERISA) required by ERISA to be
filed with the Labor Department or the Pension Benefit Guaranty Corporation, at
the time that such notice is so filed.
4.15 Observer Rights. Borrower shall invite one representative of Lender
to attend, at Borrower's expense, all meetings of Borrower's Board of Directors
or other managing group and all committees of Borrower's Board of Directors or
other managing group in a nonvoting capacity and, in this respect, shall give
such representative copies of all notices and other materials provided to
directors or managers in their capacity as directors or managers and in
preparation for such or as part of meetings; provided, however, that such
representative shall keep confidential all proprietary, nonpublic materials and
information received at such meetings and shall not disclose the same to any
person except to Lender's directors or managers, employees and advisors with a
need to know and who will be subject to this requirement of confidentiality and
nondisclosure, unless required to enforce the terms hereof, or as may be
required by law.
4.16 Limitation on Liens. Without the prior written consent of Lender,
Borrower will not, and will not permit any Subsidiary to, create or incur, or
suffer to be incurred or to exist, any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (collectively, "Liens"), except as
related to the Senior Indebtedness, on its or their property or assets,
including the Collateral, whether now owned or hereafter acquired, or upon any
income or profits therefrom, or transfer any property for the purpose of
subjecting the same to the payment of obligations in priority to the payment of
its or their general creditors, or acquire or agree to acquire, or permit any
Subsidiary to acquire, any property or assets upon conditional sales agreement
or other title retention devices, except (i) Liens hereafter created securing
Senior Indebtedness; or (ii) purchase money security interests or leasehold
interests, subject to Section 4.16(iv), on property acquired by Borrower or any
Subsidiary in the ordinary course of business; or (iii) any capitalized lease
obligation or obligations in the ordinary course of business not to exceed
$100,000 in any one transaction or series of related transactions but only to
the extent permitted by Section 4.05(iv).
4.17 Dividends; Redemptions. Borrower will not, nor will it permit any
Subsidiary to,
(a) declare, set aside, or pay any dividend or make any other distribution
(a "Distribution"), whether in cash, in kind, or otherwise, on account of or
with respect to, or
(b) apply any of its funds, property or assets to the purchase, redemption
or other retirement of, any class of its capital stock (or interests) or any
warrants, options or other rights with respect to any class of its capital stock
(or interests), except (i) Subsidiaries may make Distributions to Borrower, (ii)
Borrower may declare and make Distributions to its members or other equity
holders for fiscal years end December 31, 1999, 2000 and 2001, respectively,
which do not exceed the tax liability of its members attributable to income of
Borrower (assuming the highest marginal federal tax rate applicable to any
member) for each such taxable year, as and to the extent such liability is
incurred, so long as Borrower is a limited liability company, and (iii) payment
of management fees to Laurel Mountain Partners LLC as set forth on Schedule 4.17
attached hereto. If, prior to July 1, 2000, Borrower purchases or otherwise
acquires control of a
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NYSE, AMEX or NASDAQ publicly-traded company, upon and after such purchase or
other acquisition of control, and during the period of ninety (90) days prior
thereto, Borrower may not prepay the Note but may only cancel the Note for a
cancellation fee equal to $17,307,000 plus the repayment of any accrued and
unpaid interest under the Note; provided, however, that upon such cancellation
and payment of such cancellation fee and accrued and unpaid interest, the rights
of Lender or its designee under the Option Agreement shall be terminated to the
extent of any unexercised options thereunder.
4.18 Investments. Neither Borrower nor any Subsidiary will make any
investments outside the ordinary course of business for Borrower or such
Subsidiary, without the prior written consent of Lender, which shall not be
unreasonably withheld, except:
(a) Investments in direct obligations of the United States of America,
or any agency or instrumentality of the United States of America, the payment or
guaranty of which constitutes a full faith and credit obligation of the United
States of America, in either case maturing in twelve (12) months or less from
the date of acquisition thereof;
(b) Investments in certificates of deposit maturing within one year from
the date of origin, issued by a bank or trust company organized under the laws
of the United States or any state thereof, having capital, surplus and undivided
profits aggregating at least $100,000,000 and whose long-term certificates of
deposit are, at the time of acquisition thereof, rated AA or better by Standard
& Poor's Corporation or AA or better by Moody's Investors Service, Inc.;
(c) Investments in commercial paper maturing in two hundred seventy
(270) days or less from the date of issuance that, at the time of acquisition by
Borrower or any Subsidiary is accorded the highest rating by Standard & Poor's
Corporation, Moody's Investors Service, Inc. or another nationally recognized
credit rating agency of similar standing;
(d) Loans or advances in the usual and ordinary course of business to
officers, managers, directors and employees for expenses incidental to carrying
on the business of Borrower or any Subsidiary;
(e) Receivables arising from the sale of goods and services in the
ordinary course of business of Borrower and the Subsidiaries; and
(g) Transactions permitted by Section 4.19 hereof.
4.19 Mergers, Consolidations and Sales of Assets.
(a) Without Lender's prior written consent, which consent shall not be
unreasonably withheld:
(i) Neither Borrower nor any Subsidiary will (1) consolidate with
or be a party to a merger or share exchange with any other corporation
or other legal entity, or (2) sell, lease or otherwise dispose of all or
any substantial part (as defined in paragraph (b) of this Section 4.19)
of the assets of Borrower or any Subsidiary; provided, however, that any
Subsidiary may merge, consolidate or exchange shares with another
Subsidiary
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so long as such merger, consolidation or exchange could not
reasonably be expected to have a materially adverse effect on Lender
under this Agreement or any of the other Loan Documents;
(ii) Borrower will not permit any Subsidiary to issue or sell any
shares of stock or interests of any class (including any warrants,
rights or options to purchase or otherwise acquire stock or interests or
other securities exchangeable for or convertible into stock or
interests) or other equity (or debt convertible into equity) of such
Subsidiary to any person other than Borrower;
(iii) Except pursuant to the Option Agreement discussed in
Article VII, hereof, Borrower will not sell, transfer or otherwise
dispose of any shares of stock or interests in any Subsidiary (except
for pledges of stock or interests of Subsidiaries to secure the Senior
Indebtedness); and
(iv) Neither Borrower nor any Subsidiary will sell any
non-substantial part of the assets of Borrower or any Subsidiary except
in the normal course of business.
(b) A substantial part of the assets of Borrower or any Subsidiary shall
mean assets having a fair market value (as determined in the reasonable, good
faith discretion of Lender) equal to more than twenty percent (20%) of the fair
market value of Borrower or such Subsidiary, as applicable.
4.20 Transactions with Affiliates.
(a) Except as set forth on Schedule 4.20, Borrower will not, and will not
permit any Subsidiary to, enter into or be a party to any transaction or
arrangement with any officer, manager, member, director or affiliate of Borrower
or a Subsidiary (including, without limitation, the purchase from, sale to or
exchange of property with, or the rendering of any service by or for, any
affiliate), except pursuant to the reasonable requirements of Borrower's or such
Subsidiary's business for actual services rendered as employees and upon fair
and reasonable terms no less favorable to Borrower or such Subsidiary than would
obtain in a comparable arm's-length transaction with a person other than an
affiliate.
(b) Except for the payment of management fees to Laurel Mountain Partners
LLC, as set forth on Schedule 4.17, hereto, Borrower will not, and will not
permit any Subsidiary to, make any payments on or with respect to any
indebtedness of Borrower to any manager or member of Borrower, or any family
member of any such manager or member, or repurchase or retire any such
indebtedness, so long as the Loan shall be outstanding.
4.21 Change in Control. Borrower will not, without Lender's prior
written approval, permit to occur (a) any transaction, or series of related
transactions, in which any person(s) or entity(ies) that is (are) not a member
or members of Borrower on the date hereof acquire(s) securities or interests
representing greater than fifty percent (50%) of the voting power with respect
to Borrower; (b) any change in the composition of Borrower's Board of Managers,
when such change results from a change in the composition of the voting groups
of the Borrower, in connection with any series of related transactions such that
a majority of Borrower's managers
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shall not have served previously as managers of Borrower; or (c) any cessation
of active involvement in Borrower by any two of Jeff Kendall, Andy Russell, Don
Rea and Steve McCarthy; provided, however, that in the case of Jeff Kendall and
Steve McCarthy, "active involvement" shall mean significant involvement in the
day-to-day operations of the Borrower, and in the case of Andy Russell and Don
Rea, "active involvement" shall mean attentive service as a director or officer
of Borrower.
4.22 Confidentiality. Borrower shall not disclose the material terms of
this Agreement or the Loan Documents to any person or entity except to its
managers or Board of Directors, members, employees and advisors who are under an
obligation of confidentiality to Borrower, and investors (including debt
investors) of Borrower, unless required to enforce the terms hereof, or as may
be required by law.
4.23 Future Affiliates and Subsidiaries. With respect to each person
which is or becomes a New Affiliate, Borrower will, at Lender's election, cause
such New Affiliate to execute and deliver to Lender (i) a joinder or amendment
to this Agreement and any other applicable Loan Documents as required by Lender;
(ii) a security agreement in form satisfactory to Lender granting Lender a
security interest in all assets of such New Affiliate whether then owned or
thereafter acquired, subject to the terms of the Subordination Agreement; (iii)
in the case of each New Affiliate which owns or acquires any parcel of real
estate, a written environmental audit or risk assessment acceptable to Lender
prepared at the New Affiliate's expense by an engineer or auditing firm
experienced in such matters reasonably acceptable to Lender with respect to the
subject real estate and a Mortgage, together with real estate documentation
substantially equivalent to that required to be delivered to the Senior Lender
in connection with the Senior Indebtedness, in each case accompanied by such
supporting documentation, including without limitation corporate authority
items, lien waivers, certificates and opinions of counsel reasonably required by
Lender or Lender's title insurance company; and (iv) a Guaranty. "New Affiliate"
shall mean an entity used or created for purposes of acquiring, owning or
operating a Business Unit. Each New Affiliate shall be deemed to be a Subsidiary
under this Agreement.
4.24 Senior Loan Covenants.
(a) Neither Borrower nor any Subsidiary will violate (i) any covenant
contained in the Comerica Commitment Letter or (ii) any covenant contained in
the loan documents evidencing the Senior Indebtedness, to which it is a party.
(b) Borrower and each Subsidiary will give Lender prior written notice
of any waiver or amendment of, and any request for any waiver or amendment of,
any affirmative or negative covenant in any loan documentation for the Senior
Indebtedness;
(c) In the event that Lender elects to purchase for Senior Lender the
Senior Indebtedness pursuant to Section 20(d) of the Subordination Agreement,
Borrower will provide such release to Senior Lender as is required thereunder.
4.25 Fraudulent Conveyance. Borrower and the Subsidiaries will take all
actions and execute such agreements and instruments as may reasonably be
required in order to prevent any
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collateral conveyance to Lender from Borrower or any such Subsidiaries pursuant
to the Loan Documents from being deemed a fraudulent conveyance.
ARTICLE IV-A
COVENANTS AND REPRESENTATIONS OF LENDER
4A.1 Existence and Power of Lender. Lender is duly organized, validly
existing and in good standing under the laws of the State of North Carolina and
has the power and authority to execute, deliver and perform this Agreement and
each of Loan Documents to which it is a party.
4A.2 Authorization. The execution, delivery and performance of Lender
under this Agreement and under the Loan Documents has been duly authorized by
all requisite action on the part of the Lender and will not violate the articles
of organization or operating agreement of Lender or any provision of any
indenture, mortgage, deed of trust, loan agreement, lease or other agreement or
instruments to which Lender is a party or to which any of its properties or
assets are subject.
4A.3 No Conflicts. Except for consents which have been obtained by
Lender, the execution, delivery and performance by Lender of this Agreement and
the Loan Documents to which Lender is a party and the consummation of the
transaction contemplated hereby or thereby do not and will not (with or without
notice or lapse of time or both) (a) violate or conflict with, constitute a
breach or a default under, or require the consent of any party under, any
indenture, mortgage, deed of trust, loan agreement, lease or other agreement or
instrument to which Lender is a party or to which any of its properties or
assets is subject or (b) conflict with or violate any provision of the articles
of organization or operating agreement of Lender, as the case may be, or to the
Lender's knowledge, any rule or regulation or any order, judgment or decree of
any court or governmental agency or body having jurisdiction over Lender or any
of its properties or assets.
4A.4 Binding Effect. This Agreement has been, and on or prior to the
Closing Date each of the Loan Documents to which Lender is a party will be, duly
executed and delivered by Lender and does or will constitute, as the case may
be, the legal, valid and binding obligation or Lender, enforceable against
Lender in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally, general equitable principles and the
discretion of courts in granting equitable remedies.
ARTICLE V
CONDITIONS TO CLOSING
The obligation of Lender to purchase and pay for the Note on any Closing
Date shall be subject to the fulfillment on or before such Closing Date of each
of the following conditions.
5.01 Representations and Warranties; Covenants. The representations and
warranties of Borrower contained in this Agreement and in any Schedule hereto,
the Loan Documents
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or any document or instrument delivered to Lender or its representatives
hereunder, shall have been true and correct when made and shall be true and
correct as of the Closing Date as if made on such date. Borrower shall have duly
performed all of the covenants and agreements to be performed by it hereunder on
or prior to the Closing Date.
5.02 Satisfactory Proceedings. All proceedings taken in connection with
the transactions contemplated by this Agreement, and all documents necessary to
the consummation thereof, shall be satisfactory in form and substance to Lender
and Lender's counsel and to Borrower and Borrower's counsel.
5.03 Required Consents. Any consents or approvals required to be
obtained from any third party, including any holder of indebtedness or any
outstanding security of Borrower, and any amendments of agreements that shall be
necessary to permit the consummation of the transactions contemplated hereby on
the Closing Date, shall have been obtained and all such consents or amendments
shall be satisfactory in form and substance to Lender and Lender's counsel.
5.04 Conditions of Lender's Obligations. Lender shall have received the
following documents, in form and substance satisfactory to Lender in its sole
discretion:
(a) Limited Liability Company and Corporate Documents. Copies of the
Certificate of Organization of Borrower certified by the Secretary of State of
Delaware, and the certificate of organization for each Subsidiary existing on
the Closing Date, each certified by the secretary of state of the state in which
such Subsidiary is organized, together with any amendments, and certificates of
good standing from the secretaries of state of Delaware and each state in which
the Subsidiaries are organized and each state where Borrower or any Subsidiary
is required to be qualified to do business, all as of a recent date.
(b) Officer's Certificate. A certificate of the managers of Borrower to the
effect set forth in Exhibit E hereto.
(c) Opinion of Counsel. The opinion of counsel to Borrower, in form
reasonably satisfactory to Lender, substantially in the form of Exhibit F
hereto.
(d) Loan Documents. This Agreement, the Note, the Guaranty Agreement, the
Option Agreement and all other Loan Documents, duly completed, executed and
delivered.
(e) UCC-1 Financial Statements. Financing Statements on Form UCC-1 duly
completed and executed by Borrower and each Subsidiary, as applicable, securing
the rights of Lender to the Collateral listed in Section 2.01.
(f) Mortgages. Mortgages on all real property identified in Schedule 5.04
hereto in recordable form subject only to the lien of the Senior Indebtedness
and any lien expressly permitted hereunder, if any, together with funds from
Borrower sufficient to cover the cost of recording such Mortgages, including any
recording, transfer or intangibles taxes.
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(g) Title Insurance. At Lender's election, a title insurance commitment (in
a form and from a company reasonably acceptable to Lender) insuring Lender's
interest under any of the Mortgages in paragraph (f), above.
(h) Perfection Certificate. Prior to Closing, Perfection Certificates of
Borrower and each Subsidiary, as applicable, shall be provided to Lender by
Borrower and each such Subsidiary.
(i) Subordination Agreement. The Subordination Agreement as described in
Section 2.03 completed and fully executed by Borrower, Lender and the Senior
Lender.
(j) Senior Funding. Documents reasonably satisfactory to Lender evidencing
commitment from Senior Lender to loan funds to Borrower sufficient to execute
Borrower's business plan submitted to Lender as Schedule 3.18 .
(k) Lender and Board Approval. Lender's Board of Directors and lenders, as
applicable, shall each have given its final approval for the Loan and related
transactions.
(l) Due Diligence. Lender shall have completed its due diligence
investigation of Borrower and shall have been satisfied with the results thereof
and the documents delivered in connection therewith.
ARTICLE VI
DEFAULT AND REMEDIES
6.01 Events of Default. The occurrence of any of the following shall
constitute an Event of Default hereunder:
(a) Default in the payment of principal of the indebtedness evidenced by
the Note in accordance with the terms of the Note;
(b) Default in the payment of the interest on the indebtedness evidenced by
the Note in accordance with the terms of the Note, which default is not cured
within ten (10) days after the due date;
(c) Any material misrepresentation by Borrower or any Subsidiary as to any
matter hereunder or under any of the other Loan Documents, or delivery by
Borrower or any Subsidiary of any schedule, statement, resolution, report,
certificate, notice or writing to Lender, that is untrue in any material respect
on the date as of which the facts set forth therein are stated or certified;
(d) Failure of Borrower or any Subsidiary to perform any of its obligations
in any material respect under this Agreement, any of the Security Instruments or
any of the other Loan Documents;
(e) Borrower's (i) admission of its inability to pay its debts generally as
they become due; or (ii) assignment for the benefit of creditors or petition or
application to any tribunal for the
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appointment of a custodian, receiver or trustee for it or a substantial part of
its assets; or (iii) voluntary commencement of any proceeding under any
bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, whether now or hereafter in
effect, or the involuntary commencement of any such proceeding that is not
dismissed within ninety (90) days; or (iv) suffering to exist any such petition
or application or any such proceeding against it in which an order for relief is
entered or an adjudication or appointment is made; or (v) indication, by any act
or omission, of its consent to, approval of or acquiescence in any such
petition, application, proceeding or order for relief or the appointment of a
custodian, receiver or trustee for it or a substantial part of its assets; or
(vi) permitting any such custodianship, receivership or trusteeship to continue
undischarged for a period of ninety (90) days or more;
(f) Borrower's liquidation, dissolution, partition or termination;
(g) A default or event of default under any of the other Loan Documents
that, if subject to a cure right, is not cured within the applicable cure
period;
(h) Borrower's or any Subsidiary's default in the timely (i) payment of any
obligation or (ii) performance of any material obligation now or hereafter owed
to Lender other than pursuant to the Loan Documents;
(i) (i) Borrower's default in the timely payment or performance of any
principal of or premium or interest on any debt owed by Borrower (other than the
Loan) that is outstanding in a principal amount of at least $200,000 in the
aggregate, when the same becomes due and payable (whether by scheduled maturity,
acceleration, demand or otherwise), if such failure shall continue after any
cure period applicable thereto; or (ii) the occurrence of any other event or
condition under any agreement or instrument relating to any such indebtedness
that continues after any applicable cure period, if the effect of such event or
condition is to accelerate or permit the acceleration of such indebtedness; or
(iii) the acceleration of any such indebtedness or otherwise declaration to be
due and payable prior to the stated maturity thereof of any such indebtedness;
or (iv) requirement that any such indebtedness be prepaid, redeemed, purchased
or defeased prior to the stated maturity thereof;
(j) The existence of a final non-appealable judgment against Borrower or
any Subsidiary in excess of $200,000;
(k) The Senior Indebtedness with Comerica Bank, substantially in accordance
with the Comerica Commitment Letter, is not effected within sixty (60) days
after the Closing Date; or
(l) The occurrence of a default or event of default under the Senior
Indebtedness.
With respect to any Event of Default described above that is capable of being
cured and that is not otherwise subject to a cure procedure (a "Curable
Default"), the occurrence of such Curable Default shall not constitute an Event
of Default hereunder if such Curable Default is fully cured and/or corrected
within thirty (30) days (ten (10) days from the due date, in the case of an
interest payment default) of notice thereof to Borrower; provided, however, that
no cure period
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applies to any default in payment of principal; and provided, further, that,
unless capable of being cured without materially adverse effect on Lender, no
cure applies to any default arising in connection with a breach of a negative
covenant or a misrepresentation under paragraph (c), above.
6.02 Acceleration of Maturity; Remedies. Upon the occurrence of any
Event of Default described in subsection 6.01, the indebtedness evidenced by the
Note shall be immediately due and payable in full; and Lender at any time
thereafter may at its option accelerate the maturity of the indebtedness
evidenced by the Note, provided, however, that until the Senior Indebtedness has
been indefeasibly paid in full, no acceleration of the maturity of the
indebtedness evidenced by the Note shall become effective until such
acceleration is no longer prohibited by the terms of the Subordination
Agreement. Subject to the limitations imposed by, and in addition to any other
rights and remedies provided in, the Subordination Agreement, upon the
occurrence of any such Event of Default and the acceleration of the maturity of
the indebtedness evidenced by the Note, as set forth herein, Lender shall have
the following rights and remedies:
(a) All of the rights and remedies of a secured party under the
Uniform Commercial Code of the state of North Carolina, or under other
applicable law where the Collateral is located, all of which rights and remedies
shall be cumulative, and none of which shall be exclusive, to the extent
permitted by law, in addition to any other rights and remedies contained in this
Agreement or the Note;
(b) The right to (i) enter upon the premises of Borrower and each
Subsidiary, as applicable, or any other place or places where the Collateral is
located and kept, through self-help and without judicial process, without first
obtaining a final judgment or giving Borrower or any such Subsidiary notice and
opportunity for a hearing on the validity of Lender's claims and without any
obligation to pay rent to Borrower or such Subsidiary, and remove the Collateral
therefrom to the premises of Lender or any agent of Lender, for such time as
Lender may desire, in order to effectively collect or liquidate the Collateral,
and/or (ii) require Borrower and each Subsidiary, as applicable, to assemble the
Collateral and make it available to Lender at a place to be designated by
Lender, in its sole discretion;
(c) The right to apply to any court of competent jurisdiction for
the appointment of a receiver for all purposes including, without limitation, to
manage and operate the properties and business of Borrower and the Subsidiaries,
as applicable, and the Collateral or any part thereof, and to apply the net
rents and proceeds therefrom to the payment of any of the Secured Obligations.
In the event of such application, Borrower and each Subsidiary consents to the
appointment of a receiver, and agrees that a receiver may be appointed without
notice to Borrower or any Subsidiary, without regard to the adequacy of any
security for the Secured Obligations, and without regard to the solvency of
Borrower or any Subsidiary or any other person, firm or corporation who or which
may be liable for the payment of the Secured Obligations. The taking of
possession of any of the Collateral by Lender or by a receiver for Lender, shall
not prevent concurrent or later proceedings for the sale, by foreclosure or
otherwise, of the Collateral;
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(d) The right to sell or to otherwise dispose of all or any
Collateral in its then condition, or after any further manufacturing or
processing thereof, at public or private sale or sales, with such notice as may
be required by law, in lots or in bulk, for cash or on credit, all as Lender, in
its sole discretion, may deem advisable; such sales may be adjourned from time
to time with or without notice. Lender shall have the right to conduct such
sales on the premises of Borrower or any Subsidiary, as applicable, or elsewhere
and shall have the right to use Borrower's or such Subsidiary's premises without
charge for such sales for such time or times as Lender may see fit. Lender is
hereby granted a license or other right to use, without charge, Borrower's or
any Subsidiary's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in advertising
for sale and selling any Collateral. Lender shall have the right to sell, lease
or otherwise dispose of the Collateral, or any part thereof, for cash, credit or
any combination thereof, and Lender may purchase all or any part of the
Collateral at public or, if permitted by law, private sale and, in lieu of
actual payment of such purchase price, may set off the amount of such price
against the Secured Obligations;
(e) Any notice required to be given by Lender of a sale, lease,
other disposition of the Collateral or any other intended action by Lender,
given to Borrower or any Subsidiary in the manner set forth in Section 10.9
below ten (10) days prior to such proposed action, shall constitute commercially
reasonable and fair notice thereof to Borrower or such Subsidiary; and
(f) Upon and during the continuance of an Event of Default and
subject to the Subordination Agreement, Borrower and each Subsidiary irrevocably
designates, makes, constitutes and appoints Lender (and all persons designated
by Lender) as Borrower's and each Subsidiary's true and lawful attorney-in-fact,
and Lender, may, without notice to Borrower or any Subsidiary, and at such time
or times thereafter as Lender, in its sole discretion, may determine, in
Borrower's, and any Subsidiary's, or Lender's name(s): (i) demand payment of
accounts; (ii) enforce payment of accounts, by legal proceedings or otherwise;
(iii) exercise all of Borrower's or any Subsidiary's rights and remedies with
respect to the collection of accounts; (iv) settle, adjust, compromise, extend
or renew accounts; (v) settle, adjust or compromise any legal proceedings
brought to collect accounts; (vi) if permitted by applicable law, sell or assign
accounts and other Collateral upon such terms, for such amounts and at such time
or times as Lender deems advisable; (vii) discharge and release accounts and
other Collateral; (viii) prepare, file and sign Borrower's or any Subsidiary's
name on a Proof of Claim in bankruptcy or similar document against any account
debtor and exercise Borrower's or any Subsidiary's rights to vote with respect
thereto in such Bankruptcy case; (ix) prepare, file and sign Borrower's and each
Subsidiary's name on any notice of lien, assignment or satisfaction of lien or
similar document in connection with accounts and other Collateral; (x) do all
acts and things necessary, in Lender's sole discretion, to fulfill Borrower's
and each Subsidiary's obligations under this Agreement; (xi) endorse the name of
Borrower or any Subsidiary upon any of the items of payment or proceeds thereof
and deposit the same to the account of Lender on account of the Secured
Obligations; (xii) endorse the name of Borrower or any Subsidiary upon any
chattel paper, document, instrument, invoice freight bill, bill of lading or
similar document or agreement relating to the accounts, inventory and other
Collateral; (xiii) use Borrower's or any Subsidiary's stationery and sign the
name of Borrower or any Subsidiary to verifications of such accounts and
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notices thereof to account debtors; and (xiv) use the information recorded on or
contained in any data processing equipment and computer hardware and software
relating to the Collateral to which Borrower or any Subsidiary has access.
6.03 Remedies Cumulative; No Waiver. No right, power or remedy conferred
upon or reserved to Lender by this Agreement or any of the other Loan Documents
is intended to be exclusive of any other right, power or remedy, but each and
every such right, power and remedy shall be cumulative and concurrent and shall
be in addition to any other right, power and remedy given hereunder, under any
of the other Loan Documents or now or hereafter existing at law, in equity or by
statute. No delay or omission by Lender to exercise any right, power or remedy
accruing upon the occurrence of any Event of Default shall exhaust or impair any
such right, power or remedy or shall be construed to be a waiver of any such
Event of Default or an acquiescence therein, and every right, power and remedy
given by this Agreement and the other Loan Documents to Lender may be exercised
from time to time and as often as may be deemed expedient by Lender.
6.04 Proceeds of Remedies. Any or all proceeds resulting from the
exercise of any or all of the foregoing remedies shall be applied as set forth
in the Loan Document(s) and the Subordination Agreement providing the remedy or
remedies exercised; if none is specified, or if the remedy is provided by this
Agreement, then as follows:
First, to the costs and expenses, including reasonable attorney's
fees, incurred by Lender in connection with the exercise of its
remedies, including fees and expenses incurred by Lender for collection
and for acquisition, completion, protection, removal, storage, sale and
delivery of the Collateral;
Second, to the expenses of curing the default that has occurred,
in the event that Lender elects, in its reasonable discretion, to cure
the default that has occurred;
Third, to the payment of the Secured Obligations, including but
not limited to the payment of the principal of and interest on the
indebtedness evidenced by the Note, in such order of priority as Lender
shall determine in its sole discretion; and
Fourth, the remainder, if any, to Borrower or to any other person
lawfully thereunto entitled.
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<PAGE>
ARTICLE VII
OPTION TO PURCHASE BORROWER'S SUBSIDIARIES
In lieu of receiving warrants or other equity participation, Lender is
hereby granted an option to purchase one or more of the Subsidiaries of the
Borrower operating Business Units pursuant to the terms and conditions of the
Option Agreement attached hereto as Exhibit G. Such option to purchase may be
transferred to and exercised by a designee owned directly or indirectly by
Lender.
ARTICLE VIII
TERMINATION
This Agreement shall remain in full force and effect until the later of
December 31, 2002, or the repayment in full of the Note and any other Secured
Obligations; provided, however, that Articles VI and VII of this Agreement shall
survive any such termination until the closing of the last acquisition of a
Subsidiary or Business Unit by Lender or its designee pursuant to the Option
Agreement and the performance of all of Borrower's and Subsidiaries' obligations
hereunder and under the Loan Agreement.
ARTICLE IX
RESERVED
ARTICLE X
MISCELLANEOUS
10.01 Performance by Lender. Notwithstanding anything in this Agreement to
the contrary, and in addition to Lender's other remedies herein, if Borrower
shall default in the payment, performance or observance of any covenant, term or
condition of this Agreement, Lender may, at its option, pay, perform or observe
the same, and all payments made or costs or expenses incurred by Lender in
connection therewith (including but not limited to reasonable attorney's fees),
with interest thereon at the highest default rate provided in the Note (if none,
then at the maximum rate from time to time allowed by applicable law), shall be
immediately repaid to Lender by Borrower and shall constitute a part of the
Secured Obligations and be secured hereby until fully repaid. Lender, in its
reasonable discretion, shall determine the necessity for any such actions and of
the amounts to be paid.
10.02 Successors and Assigns Included in Parties. Whenever in this
Agreement one of the parties hereto is named or referred to, the heirs, legal
representatives, successors, successors-in-title and assigns of such parties
shall be included, and all covenants and agreements contained in this Agreement
by or on behalf of Borrower or by or on behalf of
28
<PAGE>
Lender shall bind and inure to the benefit of its heirs, legal representatives,
successors-in-title and assigns, whether so expressed or not.
10.03 Costs and Expenses. Borrower agrees to pay all costs and expenses
reasonably incurred by Lender in connection with the making of the Loan that is
the subject of this Agreement, including but not limited to any subsequent
amendments thereto, and all filing fees, recording taxes and reasonable
attorneys' fees for a single counsel, promptly upon demand of Lender. Borrower
further agrees to pay all premiums for insurance required to be maintained
pursuant to the terms of the Loan Documents and all of the out-of-pocket costs
and expenses incurred by Lender in connection with the collection of the Loan
upon an Event of Default, including but not limited to reasonable attorneys'
fees, promptly upon demand of Lender. In the event the Loan does not close for
any reason, each party will bear its own fees and expenses.
10.04 Assignment. Subject to compliance with securities laws, the Note,
this Agreement, the Security Instruments and the other Loan Documents may be
endorsed, assigned and/or transferred by Lender, and any such holder and/or
assignee of the same shall succeed to and be possessed of the rights and powers
of Lender under all of the same to the extent transferred and assigned.
Notwithstanding the foregoing and only in compliance with state and federal
securities laws, the Note may be transferred, at Lender's option, to one or more
persons, in whole or in part, so long as such transferees (a) are members,
partners, shareholders or affiliates of Lender, or members, partners or
shareholders of any of the foregoing; (b) agree to hold the Note subject to all
the terms hereof; and (c) shall appoint Lender as its sole Lender for exercising
the rights of such transferees hereunder, excepting the right to collect amounts
due on the Note (or part thereof) held by such transferee, which collection
rights may be exercised by any transferee. Borrower shall not assign any of its
rights nor delegate any of its duties hereunder or under any of the other Loan
Documents without the prior express written consent of Lender. Lender shall not
assign any of its rights nor delegate any of its duties hereunder or under any
of the other Loan Documents to any person or entity which has not become a party
to the Subordination Agreement or a replacement subordination agreement in form
acceptable to Lender.
10.05 Time of the Essence. Time is of the essence with respect to each and
every covenant, agreement and obligation of Borrower and Lender hereunder and
under all of the other Loan Documents.
10.06 Severability. If any provision(s) of this Agreement or the
application thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the application
of such provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
10.07 Interest and Loan Charges Not to Exceed Maximum Allowed by Law.
Anything in this Agreement, the Note, the Security Instruments or any of the
other Loan Documents to the contrary notwithstanding, in no event whatsoever,
whether by reason of advancement of proceeds of the loan made pursuant to this
Agreement, acceleration of the maturity of the unpaid balance of the loan or
otherwise, shall the interest and loan charges agreed to be paid to Lender for
the use of the money advanced or to be advanced hereunder exceed the maximum
amounts collectible under applicable laws in effect from time to time. It is
understood and agreed by the
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<PAGE>
parties that, if for any reason whatsoever the interest or loan charges paid or
contracted to be paid by Borrower in respect of the indebtedness evidenced by
the Note shall exceed the maximum amounts collectible under applicable laws in
effect from time to time, then ipso facto, the obligation to pay such interest
and/or loan charges shall be reduced to the maximum amounts collectible under
applicable laws in effect from time to time, and any amounts collected by Lender
that exceed such maximum amounts shall be applied to the reduction of the
principal balance of the indebtedness evidenced by the Note and/or refunded to
Borrower so that at no time shall the interest or loan charges paid or payable
in respect of the indebtedness evidenced by the Note exceed the maximum amounts
permitted from time to time by applicable law.
10.08 Article and Section Headings; Defined Terms. Numbered and titled
article and section headings and defined terms are for convenience only and
shall not be construed as amplifying or limiting any of the provisions of this
Agreement.
10.09 Notices. Any and all notices, elections or demands permitted or
required to be made under this Agreement shall be in writing, signed by the
party giving such notice, election or demand and shall be delivered personally,
telecopied, telexed, or sent by certified mail or nationally recognized courier
service (such as Federal Express), to the other party at the address set forth
below, or at such other address as may be supplied in writing and of which
receipt has been acknowledged in writing, The date of personal delivery,
telecopy or telex or the date of mailing (or delivery to such courier service),
as the case may be, shall be the date of such notice, election or demand. For
the purposes of this Agreement:
The address of
Lender is: Liberty Waste Lending Company, LLC
3949 Browning Place
Raleigh, North Carolina 27609
Attention: Stephen C. Shaw, CFO
with a copy to: Wyrick Robbins Yates & Ponton LLP
4101 Lake Boone Trail, Suite 300
Raleigh, North Carolina 27607
Attention: James M. Yates, Jr.
The address of Borrower
and each Subsidiary is: Liberty Waste Services, LLC
625 Liberty Avenue
CNG Tower, Suite 3100
Pittsburgh, Pennsylvania 15222-3124
Attention: Jeffrey D. Kendall, President
with a copy to: Kirkpatrick & Lockhart LLP
1500 Oliver Building
Pittsburgh, PA 15222-2312
Attention: David L. Forney
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<PAGE>
10.10 Entire Agreement. This Agreement and the other written agreements
between Borrower and Lender represent the entire agreement between the parties
concerning the subject matter hereof, and all oral discussions and prior
agreements are merged herein. No amendment or modification of this Agreement
shall be effective except in a writing executed by each of the parties hereto.
10.11 Governing Law; Jurisdiction. This Agreement shall be construed and
enforced under the laws of the State of North Carolina. Each party hereto hereby
irrevocably submits to the non-exclusive jurisdiction of any United States
Federal Court or North Carolina State Court sitting in Raleigh, North Carolina
in any action or proceeding arising out of or relating to this Agreement, and
each party hereby irrevocably agrees that all claims in respect of such action
or proceeding may be heard and determined in any such courts. Each party hereto
irrevocable consents to the service of process in any such action or proceeding
brought in any court in or of the State of North Carolina by the delivery of
copies of such process, by overnight courier, hand delivery, or by United States
certified mail, to such party at the address specified in this Agreement.
Nothing in this Section 10.11 shall affect the right of Lender to serve process
in any other manner permitted by law or limit the right of Lender to bring any
such action or proceeding against Borrower or any Subsidiary or any of the
Collateral in the courts with subject matter jurisdiction or any other
jurisdiction over such matter. Each party hereto hereby irrevocably waives any
objection to the laying of venue of any suit or proceeding in the
above-described courts.
10.12 Counterparts. This Agreement may be executed in multiple originals
or counterparts, each of which shall be deemed an original and all or which when
taken together shall constitute but on and the same instrument.
10.13. Amendments and Waivers. This Agreement may be amended and any
provision may be waived by written instrument executed by Borrower and Lender.
In the event all or part of the Note is sold or otherwise transferred to one or
more transferees, this Agreement may be amended and any provision waived by a
written instrument executed by Borrower and the holders of Notes who hold a
majority of the principal amount of the Notes then outstanding.
[THE NEXT PAGE IS THE SIGNATURE PAGE]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
have caused this Agreement to be executed by their duly authorized managers or
officers, as of the day and year first above written.
LENDER:
LIBERTY WASTE LENDING COMPANY, LLC
By: __________________________________________
Name: __________________________________________
Title: __________________________________________
BORROWER:
LIBERTY WASTE SERVICES, LLC
By: __________________________________________
Name: __________________________________________
Title: __________________________________________
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<PAGE>
SUBSIDIARIES:
WASTE SERVICES OF N.E. MISSISSIPPI ACQUISITION, INC.
By: __________________________________________
Name: __________________________________________
Title: __________________________________________
LIBERTY WASTE SERVICES OF DECATUR, INC.
By: __________________________________________
Name: __________________________________________
Title: __________________________________________
LIBERTY WASTE SERVICES MANAGEMENT, INC.
By: __________________________________________
Name: __________________________________________
Title: __________________________________________
LIBERTY WASTE SERVICES
OF TENNESSEE HOLDINGS, INC.
By: __________________________________________
Name: __________________________________________
Title: __________________________________________
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<PAGE>
QUICK GARBAGE PICK-UP SERVICE, INC.
By: __________________________________________
Name: __________________________________________
Title: __________________________________________
SCOTT SOLID WASTE DISPOSAL COMPANY
By: __________________________________________
Name: __________________________________________
Title: __________________________________________
LIBERTY WASTE SERVICES, LLC
OPTION AGREEMENT
THIS OPTION AGREEMENT (this "Option Agreement") is made and entered into
this 2nd day of February, 1999, by and between Waste Industries, Inc., a North
Carolina corporation ("Optionee"), and Liberty Waste Services, LLC, a Delaware
limited liability company (the "Company").
R E C I T A L S
WHEREAS, Liberty Waste Lending Company, LLC ("Lender"), a wholly owned
subsidiary of Optionee has, pursuant to a certain Senior Subordinated Loan and
Security Agreement dated the date hereof between Lender and the Company (the
"Loan Agreement") loaned or committed to loan up to $11,538,000 to the Company
(the "Loan") for the acquisition and development by the Company of various
landfill and waste disposal businesses;
WHEREAS, as part of and a condition to the Loan Agreement, it was agreed
that Lender or its designee be granted an option to acquire all of the issued
and outstanding capital stock or other equity interests of any one or more
direct or indirect subsidiaries of the Company which operate Business Units, as
defined below;
WHEREAS, Lender has designated and assigned such option to Optionee,
which is hereby acknowledged by the Company; and
WHEREAS, the Company and Optionee have agreed upon all of the terms and
conditions of this Option Agreement, and the execution and delivery of this
Option Agreement have been duly authorized by the Company and Optionee;
NOW, THEREFORE, pursuant to these premises and in consideration of the
mutual covenants and conditions herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:
1. Grant of Option. Subject to the terms and conditions hereof, the
Company hereby grants to Optionee the option (an "Option") to acquire (by
merger, stock purchase, business combination, capital contribution or otherwise)
all of the issued and outstanding capital stock or other equity interests or
business of any corporation or entity owned directly or indirectly by the
Company which operates a Business Unit (each, a "Subsidiary"), and thereby to
acquire such Business Unit, in the manner and subject to the conditions
hereinafter provided, at the price determined pursuant to the formula set forth
on Schedule 1 hereto (the "Purchase Price"). Optionee has one Option for each
Business Unit. If Optionee exercises an Option with respect to any Business Unit
and chooses not to close the purchase of such Business Unit as provided herein,
then the Option with respect to that Business Unit will expire; provided,
however, that
<PAGE>
such Option will not expire if Optionee elects not to close the purchase because
(a) of circumstances that constitute a material misrepresentation or default by
the Company or a Subsidiary under the Acquisition Agreement, or (b) the amount
of proceeds that the Senior Lender (as defined under the Loan Agreement) would
require in order to release such Business Unit from all liens pursuant to that
certain Subordination and Intercreditor Agreement among the Company, Lender and
the Senior Lender (the "Subordination Agreement") would exceed the Purchase
Price. The Company hereby represents and warrants that it is and will be the
sole owner of each Subsidiary.
2. Business Unit.
(a) For purposes of this Option Agreement, "Business Unit" means
any Subsidiary or group of Subsidiaries that owns or operates a landfill and/or
waste disposal business within a 75 mile radius of a landfill owned or operated
by one of those Subsidiaries. The parties acknowledge and agree that the term
"Business Unit" may include businesses that have not yet been acquired by the
Company, and the character and composition of those Business Units and their
assets and liabilities, cannot at the date of this Option Agreement be
predicted. If the Company has more than one Subsidiary operating a landfill or
waste disposal business within a 75 mile radius of a landfill owned or operated
by one of those Subsidiaries, then all of those Subsidiaries will be considered
part of a single Business Unit and may not be purchased separately under this
Option Agreement.
(b) Because the character and composition of the Business Units
cannot at the date of this Option Agreement be determined, Optionee shall have
the right to investigate, and the Company shall permit Optionee complete access
to investigate, prior to Optionee's exercise of an Option, all of each Business
Unit's assets, liabilities, permits, real estate, contracts, organizational
structure, other property and any other matters that Optionee believes would
bear upon Optionee's determination of whether or not to exercise an Option.
Whether or not Optionee exercises an Option with respect to any Business Unit,
therefore, will be based substantially upon that investigation. Nothing
contained in this Section will preclude Optionee from continuing its due
diligence investigation of such Business Unit after exercise of the Option
therefor and prior to closing of the acquisition thereof.
(c) The Company agrees that it will operate, or will cause the
Subsidiaries to operate, each Business Unit in the ordinary course of business
and in compliance in all material respects with the restrictions set forth in
this Option Agreement. The Company will or will cause each Subsidiary to
maintain its operations of Business Units and property owned or used in
connection therewith in compliance in all material respects with (i) all
applicable federal, state and local laws, regulations and ordinances governing
such business operations and the use and ownership of such property, and (ii)
all agreements, licenses, permits, franchises, indentures and mortgages to which
the Company or any of Subsidiary is a party or by which the Company or any of
Subsidiary or Business Units or any of their respective properties is bound.
Without limiting the foregoing, Borrower will pay and will cause each Subsidiary
to pay, as applicable, all of its indebtedness promptly in accordance with the
terms thereof, except for amounts which the
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<PAGE>
Company or such Subsidiary disputes in good faith and for which adequate reserve
has been made on its financial statements in accordance with GAAP.
(d) The Company does not anticipate that any Subsidiaries will
own or operate landfills within 150 miles of each other, but if they acquire or
contract to operate any such landfills, Optionee and the Company will consult in
advance and determine the Business Unit radius. As of the date of this Option
Agreement, the Company has operating Business Units in Scott County, Tennessee
(Scott County Project) and Tippah County, Mississippi (Northeast Mississippi
Project). In addition, Borrower has entered letters of intent, or has rights of
first refusal, to acquire Business Units located in or about Scott County,
Kentucky (Georgetown Project); Hopkins County, Kentucky (Western Kentucky
Project) and Boyd County, Kentucky (Ashland Area Project).
3. Acquisition. Optionee will acquire the Subsidiaries of each Business
Unit pursuant an acquisition agreement having terms and conditions substantially
similar to those attached hereto as Exhibit A (the "Acquisition Agreement"). The
parties acknowledge that the form of the Acquisition Agreement to be used by
them to consummate the acquisition of the Business Units by Optionee and the
Company cannot be determined specifically at the date of this Option Agreement
due to many factors, including, without limitation, federal income tax
structuring considerations, the form and number of entities in which each
Business Unit is held and possible change of control issues under permits and
contracts, and may take the form of a stock purchase agreement, merger
agreement, combination agreement, capital contribution agreement, a combination
thereof or other form. Nevertheless, the parties hereby agree to the following
essential terms to the Acquisition Agreement:
(a) The Purchase Price of each Business Unit will be paid at
closing as provided under the Acquisition Agreement therefor, except that
certificates representing Optionee's shares, if any, may be delivered within
seven (7) business days after closing per arrangements with Optionee's transfer
agent.
(b) The purchase of each Business Unit will be consummated in
tax-free exchanges or reorganizations under the Internal Revenue Code using
freely tradable, registered shares of Optionee as the consideration, with such
shares being valued at the average closing price for Optionee's common stock for
the ten (10) trading day period immediately preceding the date of closing of the
purchase of such Business Unit; provided, however, that up to fifty percent
(50%) of the consideration may be paid in cash to the Company at Optionee's
option so long as the non-cash portion of the consideration is tax free to the
Company. Notwithstanding the foregoing, for so long as the Senior Indebtedness
(as defined under the Loan Agreement) is outstanding, up to one hundred percent
(100%) of the consideration, or an amount equal to the Senior Indebtedness
outstanding, if less, may be paid in cash to the Company at Optionee's option;
provided, however, that regardless of the amount of Senior Indebtedness
outstanding, up to fifty percent (50%) of the consideration may be paid in cash
to the Company at Optionee's option.
(c) The Company and the appropriate Subsidiaries will warrant in
the Acquisition Agreement that they will have operated each Business Unit in
compliance with the
3
<PAGE>
covenants under Section 2(c) hereof from the date of acquisition of the Business
Unit to the closing under the Acquisition Agreement, will warrant all other
matters typical for the form such acquisition will take related to the Business
Unit for the period of the Company's and/or such Subsidiaries' ownership of the
Business Unit and will warrant to their knowledge matters concerning the
Business Unit prior to the acquisition of the Business Unit by the Company.
d) The Acquisition Agreement will contain such other terms and
conditions that are typical for the form such acquisition will take, including,
without limitation, representations, warranties, covenants and indemnities
substantially similar to those set forth in Exhibit A, as applicable or
appropriate. Any inability of the parties to agree to the terms of the final
Acquisition Agreement, if not resolved among them, may be resolved in the same
manner as provided in Section 7.8 of the Management Agreement, dated as of
January 1, 1999, among Optionee, Liberty Waste Services of Decatur, Inc. and
Waste Services of Decatur, LLC.
4. Method of Exercise. An Option may be exercised only by delivery of a
written notice pursuant to Section 10 hereof, in a form substantially similar to
Exhibit B attached hereto, to the Company. The Business Unit with respect to
which an Option is being exercised must be identified with particularity. Upon
exercise of an Option, (i) the Purchase Price (as determined in accordance with
Schedule 1) shall be fixed and locked in on the date of Optionee's exercise of
an Option regardless of any closing delay permitted under Section 6, and (ii)
the Company and Optionee will proceed in good faith to negotiate and finalize an
Acquisition Agreement for such Business Unit and close the acquisition of such
Business Unit pursuant to such Acquisition Agreement within the period required
under Section 6. Upon the closing thereof and pursuant to the terms and
conditions of such Acquisition Agreement, Optionee will deliver the Purchase
Price to the Company (or to the Company's Senior Lender as required under the
Subordination Agreement).
5. Comerica Indebtedness. Release by Senior Lender of the Company, each
Subsidiary and/or Business Unit and their respective assets, capital stock
and/or equity interests as collateral under the Senior Indebtedness upon
exercise of an Option shall be as provided under the Loan Agreement and the
Subordination Agreement.
6. Term of Option. This Option Agreement is effective as of the date
first set forth above and will continue until January 4, 2002 and during any
extension of the Note. Any Option hereunder may be exercised by Optionee at any
time during the period beginning July 1, 2000 and ending 11:59 p.m. on January
4, 2002 or the last day of any such extension of the Note; provided, however,
that, Options may be exercised only to acquire such Subsidiaries that the
Company has acquired from third parties and owned at least one year unless the
acquisition is structured as a tax free exchange or reorganization under the
Internal Revenue Code of 1986, as amended, with respect to the Company,
whereupon the Option may be exercised without regard to the length of time that
the Company has owned such Subsidiary. If, upon the date the Option is
exercised, there is less than one year remaining in the term of this Option
Agreement and the Company will not have held such Subsidiary at least one year
by the end of the term of this Option Agreement, the term of this Option
Agreement will be extended until the Company shall have held such Subsidiary at
least one year. The parties acknowledge that the purpose of the aforementioned
1-year ownership period is allow the Company capital gains tax treatment of the
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<PAGE>
purchase a Business Unit pursuant to exercise of an Option and that such 1-year
period may be shortened by the parties to the extent that Optionee may exercise
its Option and close the applicable acquisition earlier (including, without
limitation, by means of escrowing the purchase price for a period of time)
without affecting the Company's ability to claim capital gains tax treatment
with respect thereto. Any Option must be exercised within 30 days after the end
of any calendar month, and closing of the acquisition of any Business Unit must
occur within 60 days after exercise of an Option; provided, however, that such
periods may be extended by Optionee or the Company as necessary (and with the
exercise of reasonable diligence) to provide for the aforementioned 1-year
ownership period or to resolve any change-of-control conditions including,
without limitation, Hart-Scott-Rodino report filings, acquisition or transfer of
licenses or permits, governmental consents, and other change-of-control issues.
If such delay extends beyond January 4, 2002, Optionee may exercise the Option
Agreement within 30 days after expiration of the period of delay,
notwithstanding that such exercise may occur after January 4, 2002, and will
have the same 60-day period to close such acquisition. Notwithstanding the
foregoing, upon cancellation of the Note pursuant to Section 4.17 of the Loan
Agreement, this Option Agreement will terminate to the extent of any unexercised
Options.
7. Assignment of Option Agreement. Optionee may assign this Option
Agreement and any or all of its rights, interest and obligations under this
Option Agreement to an entity owned directly or indirectly by Optionee at any
time prior to exercise. The Company may not assign its rights or delegate its
duties hereunder without the prior written consent of Optionee.
8. Restrictions.
(a) During the term of this Option Agreement, no Subsidiary
(acting on behalf of itself or a Business Unit) will, without the prior written
consent of Optionee:
(i) issue, sell or transfer any of its securities or
equity interest to anyone other than another Subsidiary (or a direct or indirect
wholly-owned subsidiary thereof) or Optionee; or
(ii) incur any debt outside the ordinary course of
business.
(b) During the term of this Option Agreement, neither the Company
nor any Subsidiary (acting on behalf of itself or a Business Unit) will:
(i) transfer, sell, assign, pledge or encumber any of
equity interest in any Subsidiary or Business Unit (except pledges to Senior
Lender with respect to the Senior Indebtedness), or any material assets of any
Subsidiary or Business Unit outside of the ordinary course of business, or
incur, create or assume any lien thereon outside the ordinary course of
business, in any case without the prior written consent of Optionee;
(ii) lease (as lessor) or otherwise dispose of any assets
of any Subsidiary or Business Unit outside of the ordinary course of business,
without the prior written consent of Optionee;
5
<PAGE>
(iii) merge or consolidate with any entity other than
another Subsidiary (or a direct or indirect wholly-owned subsidiary thereof);
(iv) terminate or withdraw from any ERISA plan (other than
a multiemployer plan) so as to result in any material liability to the Pension
Benefit Guaranty Corporation;
(v) engage in or permit any person under the control of
the Company or a Subsidiary or any Business Unit to engage in any prohibited
transaction involving any ERISA plan that would subject such Subsidiary or any
Business Unit or its assets to any material tax, penalty or other liability;
(vi) incur or suffer to exist any material accumulated
funding deficiency (as defined in section 302 of ERISA and section 412 of the
Code) whether or not waived, involving any ERISA plan;
(vii) allow or suffer to exist any risk or condition,
which presents a material risk of incurring a material liability to the Pension
Benefit Guaranty Corporation;
(viii) engage in any transaction with any affiliate of the
Company except as provided in the Loan Agreement or in the ordinary course of
business on terms no less favorable than could be obtained in an arms-length
transaction; or
(ix) agree to do any of the foregoing items (i) through
(viii).
(c) The Company will not manipulate the trading price or the
market for Optionee's shares of common stock.
9. Rights of Optionee. Without limiting Optionee's rights under
Section 2(b) hereof, during the term of this Option Agreement, the Company will
permit Optionee to visit and inspect any Subsidiary's or Business Unit's
properties, review and inspect their books and records, and discuss with
principal officers, managers and independent public accountants the affairs and
finances of, any Subsidiary or Business Unit, all at such times during normal
business hours and as often as Optionee shall reasonably request. Except as
otherwise provided herein, Optionee will have no rights or obligations as a
shareholder of any Subsidiary until the closing of an acquisition of such
Subsidiary's shares by Optionee.
10. Notices. All notices and other communications will be in writing
and will be deemed to have been duly given upon (a) hand delivery, (b) deposit
with U.S. Post Office by first class mail, postage prepaid, return receipt
requested, (c) delivery by nationally recognized overnight courier, or (b)
transmission by telefacsimile:
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
if to the Company or with copy to: Kirkpatrick & Lockhart LLP
Business Unit: Liberty Waste Services 1500 Oliver Building
Management, Inc. Pittsburgh, PA 15222-2312
CNG Tower, Suite 3100 Attn: David L. Forney
625 Liberty Avenue fax: (412) 355-6501
Pittsburgh, PA 15222-3124
Attn: Stephen J. McCarthy
fax: (412) 562-0248
if to Optionee: Waste Industries, Inc. with copy to: Wyrick Robbins et al.
3949 Browning Place 4101 Lake Boone Trail #300
Raleigh, NC 27612 Raleigh, NC 27607
Attn: Stephen C. Shaw Attn: James M. Yates, Jr.
fax: (919) 571-0256 fax: (919) 781-4865
</TABLE>
or at such other address distributed to all of the parties pursuant to this
Section 10.
11. Binding Effect. This Option Agreement will inure to the benefit of
and be binding upon each of the parties hereto and each and all of their
respective successors and permitted assigns.
12. Entire Agreement. This Option Agreement represents the entire
agreement between the parties concerning the subject matter hereof, and all oral
discussions and prior agreements are merged herein. No amendment or modification
hereof shall be effective except in a writing executed by each of the parties
hereto.
13. Governing Law. This Option Agreement shall be construed and enforced
under the laws of the State of North Carolina.
14. Nondisclosure. Neither party will disclose the material terms of
this Option Agreement or the exercise of any Option pursuant hereto to any
person or entity except to its managers or Board of Directors, employees and
advisors with a need to know such information with respect hereto, and the
Company's senior lender or Optionee's permitted assignee, if any, without the
prior written consent of the other party, unless required to enforce the terms
hereof or as may be required by law.
[END OF PAGE; NEXT PAGE IS SIGNATURE PAGE]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Option Agreement
to be executed effective as of the day and year first above written.
OPTIONEE: WASTE INDUSTRIES, INC.
By:________________________________
Title:_____________________________
THE COMPANY LIBERTY WASTE SERVICES, LLC
By:______________________________
Title:_____________________________
8
<PAGE>
SCHEDULE 1
PURCHASE PRICE
Business Unit Purchase Price = ((0.75 X (A) X (B)) - (C) + $125,000
A = Enterprise Value Multiple: as of the last day of any Latest 3-Month Period,
the result obtained by dividing the Annualized EBITDA of Optionee into the sum
of (a) Optionee's debt for borrowed money, plus the present value of capital
(non-operating) leases by Optionee extending longer than 6 months, on the last
day of the Latest 3-Month Period, plus (b) the product of (i) Optionee's number
of outstanding shares of capital stock on the last day of the Latest 3-Month
Period (on a fully diluted basis), times (ii) the average closing price (or
other measure of value) for such shares over the last ten (10) trading days of
the Latest 3-Month Period, less (c) Optionee's cash and cash equivalents. The
term "Latest 3-Month Period" means the most recent 3-calendar-month period
ending on the last day of the calendar month immediately prior to the date of
exercise of the Option. The term "Annualized EBITDA" means income before income
taxes plus interest expense, depreciation and amortization ("EBITDA") for
Optionee over the Latest 3-Month Period expressed on an annualized basis by
multiplying EBITDA for the Latest 3-Month Period by four, all as determined in
accordance with generally accepted accounting principles ("GAAP") on a basis
consistent with Optionee's EBITDA disclosure in its filings with the Securities
and Exchange Commission, exclusive of (x) extraordinary or non-recurring items,
and (y) any revenue included in a Business Unit's EBITDA that has previously
been included in the purchase price of another Business Unit purchased by
Optionee or Lender (or its designee), or previously included in EBITDA of Waste
Services of Decatur, LLC or its Tennessee predecessor of the same name. EBITDA
for any businesses acquired by Optionee during the Latest 3-Month Period (other
than those acquired using pooling-of-interest accounting) will be annualized on
the basis of the number of days in the Latest 3-Month Period such business will
have been owned by Optionee.
B = Business Unit's Annualized EBITDA: EBITDA for the Business Unit over the
Latest 3-Month Period expressed on an annualized basis. EBITDA for any
businesses acquired by the Business Unit during the Latest 3-Month Period (other
than those acquired using pooling-of-interest accounting) will be annualized on
the basis of the number of days in the Latest 3-Month Period such business will
have been owned by the Business Unit.
C = Funded Debt assumed by Optionee: the Business Unit's debt for borrowed money
plus the present value of any capital (non-operating) leases of the Business
Unit extending longer than 6 months, that is assumed by Optionee (or retained by
the Business Unit after consummation of the sale to Optionee) upon exercise of
the Option.
Notwithstanding the foregoing, the Purchase Price for a Business Unit
shall be the greater of: (i) ((0.75 x (A) x (B)) - C + $125,000 or (ii) (0.75 x
(A) x (B)) - (C) + $125,000 where "(A)" becomes 90% of the Trailing 12-months
Industry Average EBITDA Multiple determined as of the end of the
12-calendar-month period ending on the laste day of the calendar month
immediately preceding Optionee's exercise of an Option, rather than Optionee's
Enterprise Value
i
<PAGE>
Multiple; provided, however, that once Optionee has properly exercised an
Option, the Purchase Price (as determined in accordance with the foregoing
provisions of this Schedule 1) shall be fixed and locked in as of the date of
Optionee's exercise of the applicable Option.
For purposes of determining the Trailing 12-months Industry Average
EBITDA Multiple, the following shall apply:
1. Only publicly-traded companies (NYSE, AMSE or NASDAQ, including
American Depository Receipts of domestic publicly traded companies) in the solid
waste management industry with United States sales in excess of $100 million for
the preceding 12-months period shall be considered. As of December 31, 1998,
such companies were: Waste Management, Inc., Browning-Ferris Industries, Allied
Waste Industries, Eastern Environmental Services, Republic Services, Inc.,
Superior Services, Casella Waste Systems, Waste Industries, Inc., and Waste
Connections.
2. The Trailing 12-months Industry Average EBITDA Multiple shall be
determined by taking the mean average of such multiple as determined and
published by DMG, BT Alex. Brown & Sons, Inc. and First Boston/Credit Suisse
through and including the last day of the calendar month immediately preceding
Optionee's exercise of an Option under this Option Agreement.
3. Publicly traded companies then presently subject to an agreement to
be acquired by another publicly traded company in the waste industry peer group
shall be disregarded.
ii
<PAGE>
EXHIBIT A
[Form of Acquisition Agreement]
<PAGE>
EXHIBIT B
Liberty Waste Services, LLC
625 Liberty Avenue
CNG Tower, Suite 3100
Pittsburgh, Pennsylvania 15222-3124
Attention: Manager
Re: EXERCISE OF OPTION
Dear Sir:
The undersigned hereby exercises the option granted under that certain
Option Agreement by and between Waste Industries, Inc. and Liberty Waste
Services, LLC to acquire all of the issued and outstanding capital stock or
other equity interests of__________________________________________________
___________________________________________________________________________
(the "Business Unit").
This exercise notice is delivered this ____ day of _______________ , _____
___________________________________
By:___________________________
Its:___________________________
EXHIBIT 11.1
WASTE INDUSTRIES, INC.
COMPUTATION RE: EARNINGS PER SHARE
<TABLE>
<CAPTION>
Pro forma (1)
--------------------------------------------
Year Ended December 31,
--------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Basic Earnings Per Share:
Net Income ........................................ $ 8,507,702 $ 3,935,537 $ 10,277,877
============ ============ ============
Weighted average number of common shares issued and
outstanding .................................... 10,660,367 11,708,832 12,875,262
============ ============ ============
Basic earnings per share .......................... $ 0.80 $ 0.34 $ 0.80
Diluted Earnings Per Share:
Net Income ........................................ $ 8,507,702 $ 3,935,537 $ 10,277,877
============ ============ ============
Weighted average number of common shares issued and
outstanding .................................... 10,660,367 11,708,832 12,875,262
============ ============ ============
Common stock equivalents -
Options for common stock ....................... 352,667 526,000 588,812
------------ ------------ ------------
Weighted average common stock equivalents ......... 11,013,034 12,234,832 13,464,074
Less treasury shares assumed to be repurchased .... (132,883) (166,988) (197,896)
Weighted average shares outstanding ............... 10,880,151 12,067,844 13,266,178
============ ============ ============
Diluted earnings per share ........................ $ 0.78 $ 0.33 $ 0.77
============ ============ ============
</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
EXHIBIT 21.1
List of Subsidiaries
Subsidiaries of Waste Industries, Inc.
Waste Industries South, Inc.
Waste Industries East, Inc.
Kabco, Inc.
Dumpsters, Inc.
Waste Industries of Tennessee, LLC
ECO Services, Inc.
Waste Industries of Georgia, Inc.
TransWaste Services, Inc.
Air Cargo Services, Inc.
Reliable Trash Service, Inc.
Railroad Avenue Disposal, Inc.
Curb Appeal New Home Services, Inc.
Exhibit 23.1
INDEPENDENT AUDITORS' 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 March 1, 1999, appearing in this Annual Report on Form 10-K of the Company
for the year ended December 31, 1998.
/s/ DELOITTE & TOUCHE LLP
Raleigh, North Carolina
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1996 JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1996 DEC-31-1997 DEC-31-1998
<CASH> 2,079,681 1,175,557 3,665,073
<SECURITIES> 0 0 0
<RECEIVABLES> 10,878,489 14,797,371 17,534,206
<ALLOWANCES> 616,000 907,800 699,600
<INVENTORY> 1,974,114 842,439 1,334,409
<CURRENT-ASSETS> 14,783,067 17,121,152 23,916,843
<PP&E> 43,233,148 65,043,853 88,801,179
<DEPRECIATION> 9,307,168 11,796,807 16,980,855
<TOTAL-ASSETS> 62,673,071 113,417,495 176,201,168
<CURRENT-LIABILITIES> 13,252,193 15,486,056 16,973,769
<BONDS> 34,380,184 50,787,684 86,464,655
0 0 0
0 0 0
<COMMON> 2,686,637 27,119,623 41,148,148
<OTHER-SE> 11,974,037 14,047,132 23,514,645
<TOTAL-LIABILITY-AND-EQUITY> 62,673,071 113,417,495 176,201,168
<SALES> 106,277,778 129,181,969 171,258,483
<TOTAL-REVENUES> 106,277,778 129,181,969 171,258,483
<CGS> 66,580,976 79,486,561 104,790,864
<TOTAL-COSTS> 96,078,636 115,847,703 151,193,615
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 2,497,484 3,021,496 4,811,957
<INCOME-PRETAX> 8,507,702 10,946,787 15,884,377
<INCOME-TAX> 0 7,011,250 5,606,500
<INCOME-CONTINUING> 8,507,702 3,935,537 10,277,877
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 8,507,702 3,935,537 10,277,877
<EPS-PRIMARY> 0.48 0.58 0.78
<EPS-DILUTED> 0.47 0.56 0.76
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 APR-01-1997 JUL-01-1997 OCT-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997
<CASH> 911,262 1,489,404 3,110,970 1,175,557
<SECURITIES> 0 0 0 0
<RECEIVABLES> 10,992,354 13,273,365 16,019,576 14,797,371
<ALLOWANCES> 711,754 725,806 874,117 907,800
<INVENTORY> 1,124,984 1,470,032 1,255,800 842,439
<CURRENT-ASSETS> 12,674,197 16,870,556 20,638,527 17,121,152
<PP&E> 46,657,258 52,111,105 56,840,169 65,043,853
<DEPRECIATION> 2,516,826 2,727,424 3,037,367 3,515,190
<TOTAL-ASSETS> 64,534,360 86,678,901 103,365,845 113,417,495
<CURRENT-LIABILITIES> 12,475,562 14,435,424 17,175,012 15,486,056
<BONDS> 35,234,817 34,916,785 42,669,357 50,787,684
0 0 0 0
0 0 0 0
<COMMON> 2,686,637 27,119,623 27,119,623 27,119,623
<OTHER-SE> 13,893,484 4,841,872 11,028,165 14,047,132
<TOTAL-LIABILITY-AND-EQUITY> 64,534,360 86,678,901 103,365,845 113,417,495
<SALES> 27,428,453 31,018,602 34,956,501 35,778,413
<TOTAL-REVENUES> 27,428,453 31,018,602 34,956,501 35,778,413
<CGS> 16,736,286 19,171,322 21,606,892 21,972,061
<TOTAL-COSTS> 24,638,078 27,650,952 31,118,706 32,439,967
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 652,175 821,413 665,367 882,541
<INCOME-PRETAX> 2,272,547 2,630,048 3,331,415 2,712,777
<INCOME-TAX> 0 4,886,250 1,090,000 1,035,000
<INCOME-CONTINUING> 2,272,547 (2,256,202) 2,241,415 1,677,777
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 2,272,547 (2,256,202) 2,241,415 1,677,777
<EPS-PRIMARY> 0.13 0.15 0.16 0.13
<EPS-DILUTED> 0.13 0.14 0.16 0.13
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 APR-01-1998 JUL-01-1998 OCT-01-1998
<PERIOD-END> MAR-31-1998 JUN-30-1998 SEP-30-1998 DEC-31-1998
<CASH> 339,937 1,255,640 2,391,575 3,665,073
<SECURITIES> 0 0 0 0
<RECEIVABLES> 19,301,537 16,612,932 18,242,594 17,534,206
<ALLOWANCES> 784,673 807,701 723,900 699,600
<INVENTORY> 860,835 1,353,807 1,938,922 1,334,409
<CURRENT-ASSETS> 21,177,297 20,354,560 23,475,824 23,916,843
<PP&E> 71,691,625 79,091,316 85,776,923 88,801,179
<DEPRECIATION> 3,706,405 3,938,089 4,219,792 5,116,569
<TOTAL-ASSETS> 127,734,431 133,699,651 172,993,551 176,201,168
<CURRENT-LIABILITIES> 19,311,346 18,182,163 16,191,750 16,973,769
<BONDS> 55,514,602 62,179,050 86,881,107 86,464,655
0 0 0 0
0 0 0 0
<COMMON> 27,119,623 27,119,623 41,148,148 41,148,148
<OTHER-SE> 16,750,668 19,511,889 21,467,654 23,514,645
<TOTAL-LIABILITY-AND-EQUITY> 124,734,431 133,699,651 172,993,551 176,201,168
<SALES> 39,339,726 41,526,801 44,804,346 45,587,610
<TOTAL-REVENUES> 39,339,726 41,526,801 44,804,346 45,587,610
<CGS> 24,207,856 25,494,107 28,016,150 27,072,751
<TOTAL-COSTS> 34,798,844 36,604,058 39,407,868 40,382,845
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 946,779 1,048,812 1,195,464 1,620,902
<INCOME-PRETAX> 3,738,750 4,065,253 4,344,673 3,735,701
<INCOME-TAX> 1,360,000 1,416,000 1,470,000 1,360,500
<INCOME-CONTINUING> 2,378,750 2,649,253 2,874,673 2,375,201
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 2,378,750 2,649,253 2,874,673 2,375,201
<EPS-PRIMARY> 0.19 0.20 0.22 0.18
<EPS-DILUTED> 0.18 0.20 0.21 0.17
</TABLE>
