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, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ______________________
to ___________________________
Commission file number 0-22417
WASTE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0954929
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3301 BENSON DRIVE, SUITE 601
RALEIGH, NORTH CAROLINA 27609
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (919) 325-3000
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 24,
2000, on the NASDAQ National Market System was approximately $134,220,991 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 24, 2000, the registrant had outstanding 13,854,355 shares
of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 2000 Annual Meeting
of Shareholders are incorporated herein by reference into Part III.
<PAGE>
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, vertically
integrated solid waste services company that provides solid waste collection,
transfer, disposal and recycling services to commercial, industrial and
residential customer locations in North Carolina, South Carolina, Virginia,
Tennessee, Mississippi, Alabama, Georgia and Florida. The Company's principal
operations as of December 31, 1999 consisted of 43 collection operations, 22
transfer stations, approximately 100 county convenience drop-off centers, eight
recycling facilities and six landfills, serving more than 360,000 municipal,
residential, commercial and industrial customer locations.
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 119 years of experience in the solid waste industry and
over 101 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 increased integration of 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 ongoing 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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In certain markets, competitive pressures are forcing 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. Operators have adopted a variety of disposal
strategies, including 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 22 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.
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.
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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 examining opportunities to expand its presence in new
and existing markets in the Southeastern U.S. There can be no assurance that the
Company will be able to identify suitable acquisition candidates or, if
identified, negotiate successfully their acquisition. If the Company fails to
implement successfully its acquisition strategy, the Company's growth potential
will be limited.
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 that, 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
Company's 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 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;
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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. Currently, approximately 29% of the Company's waste volume is
directed through Company owned or operated transfer stations.
ACQUISITION PROGRAM
From 1990 through 1999, the Company acquired, either by merger or asset
purchase, 51 solid waste collection or disposal operations, with 15 being
acquired in 1999 and 13 in 1998. 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 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.
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The following table sets forth the Company's acquisitions completed in
1999:
<TABLE>
<CAPTION>
YEAR
COMPANY ACQUIRED PRINCIPAL BUSINESS LOCATION MARKET AREA
------- -------- ------------------ -------- -----------
<S> <C> <C> <C> <C>
Traco 1999 Industrial Collection Tidewater, VA Chesapeake, Norfolk
And Tidewater Counties
Matthews Sanitation Service 1999 Residential Collection Garner, NC Wake, Harnett and
Johnston Counties
Southern Waste Services, Inc. 1999 Industrial and Commercial Service Biloxi, MS Gulfport, Biloxi, MS
Southern Waste of Alabama Industrial and Commercial Service Mobile, AL Mobile, AL
S & S Enterprises Disposal Services Gulfport, MS Harrison County
Quick-Way Salvage, Inc. 1999 Industrial, Commercial and Danville, VA Halifax and Botetourt
Recycling Services Counties
Jerry's Sanitation 1999 Residential Collection North Mecklenburg, NC Mecklenburg, Union,
Cabarrus, South Iredell,
Lincoln, Gaston and
York Counties
A & S Waste Services 1999 Residential Collection Douglas, GA Coffee, Bacon, Irwin,
Ware, Atkinson,
Telfair, Jeff Davis and
Ben Hill Counties
Keith's Disposal Service 1999 Commercial and Industrial Crossville, TN Cumberland and Pike
Collection Counties
A & B Sanitation 1999 Industrial Collection and Recycling Garner, NC Wake, Harnett and
Johnston Counties
K & S Sanitation, Inc. 1999 Residential, Commercial and Charlotte, NC Mecklenburg, Union,
Industrial Collection and Recycling Cabarrus, South Iredell,
Lincoln, Gaston and
York Counties
S & T Haulers, LLC 1999 Industrial Collection Kennesaw, GA Fulton and Forsyth
Counties
North Mecklenburg Residential, Commercial and
Sanitation, Inc. 1999 Industrial Collection North Mecklenburg, NC Mecklenburg, Union,
Cabarrus, South Iredell,
Lincoln, Gaston and
York Counties
Central Georgia Waste Services 1999 Residential, Commercial and Warner Robbins, GA Houston, Bibb, Peach
Industrial Collection Bleckley, and Jones
Counties
Old Kings Road Solid Waste
Services, Inc. 1999 Construction and Demolition Jacksonville, FL Duval and Clay
Landfill Counties
Clary's Container Corp. 1999 Residential and Commercial Wytheville, VA Gracie, Wythe, Smith
Collection Pulaskie, Carroll and
Bland Counties
Waste Services of Decatur, LLC 1999 Municipal Solid Waste Decatur, TN Chester, Hardin,
Landfill, Industrial Collection Henderson, McNairy
Perry and Wayne
Counties
</TABLE>
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1999 ACQUISITIONS
On December 1, 1999, Reliable Trash Service, Inc., a wholly owned
subsidiary of the Company, acquired assets from Traco Waste Systems, Inc.,
related to its solid waste disposal business in and around Newport News,
Virginia, for approximately $705,000 in cash.
On November 1, 1999, North Mecklenburg Sanitation, Inc., a wholly owned
subsidiary of the Company, made a tuck-in acquisition of the assets of Matthews
Sanitation Services related to its solid waste collection, disposal and
recycling business in and around the Wake County, North Carolina area, for
approximately $175,000 in cash.
On October 31, 1999, the Company acquired all of the outstanding
capital stock of Southern Waste Services, Inc., which operates a solid waste
collection and hauling business in southern Mississippi, for approximately $3.3
million in cash.
On October 31, 1999, the Company acquired all of the outstanding
capital stock of Southern Waste of Alabama, Inc., which operates a solid waste
collection and hauling business in and around Mobile, Alabama, for approximately
$580,000 in cash.
On October 31, 1999, the Company acquired all of the outstanding
capital stock of S. & S. Enterprises, Inc., which owns and operates a Class I
rubbish site in Harrison County, Mississippi, for approximately $202,000 in
cash.
On October 31, 1999, the Company acquired all of the outstanding
capital stock of Quick-Way Salvage, Inc., which operates a solid waste
collection, disposal, recycling and scrap metal salvage business in and around
Danville and South Boston, Virginia, for approximately $2.9 million in cash.
On October 30, 1999, North Mecklenburg Sanitation, Inc., a wholly owned
subsidiary of the Company, made a tuck-in acquisition of the assets of Jerry's
Sanitation, Inc. related to its solid waste collection, disposal and recycling
business in and around the Mecklenburg County, North Carolina area, for
approximately $550,000 in cash.
On June 11, 1999, the Company acquired assets from A&S Waste Services,
Inc. related to its solid waste collection and recycling business located in the
Douglas, Georgia area for approximately $550,000 in cash.
On June 1, 1999, the Company acquired assets from Keith D. Threet of
Crossville, Tennessee related to his waste collection business known as Keith's
Disposal Service for approximately $200,000 in cash.
On May 31, 1999, the Company acquired assets from Elaine Woodard
related to her residential solid waste collection and recycling business located
in the Raleigh, North Carolina area and known as A&B Sanitation for
approximately $320,000 in cash.
On May 20, 1999, the Company purchased customer routes, containers and
certain other assets of K&S Sanitation, Inc. related to its residential solid
waste collection business located in the Charlotte, North Carolina area for
approximately $550,000 in cash.
On May 1, 1999, the Company acquired the assets of S&T Haulers, LLC
associated with its solid waste collection and recycling business located in and
around Kennesaw, Georgia for approximately $1.6 million in cash.
On May 1, 1999, the Company acquired North Mecklenburg Sanitation,
Inc., which operates a solid waste collection business in and around Charlotte,
North Carolina. The purchase price for this company was approximately $4.5
million in cash and 281,250 unregistered shares of our common stock which were
registered effective June 1, 1999. This transaction expands the Company's
operations into the Charlotte, North Carolina area.
On April 30, 1999, the Company made a tuck-in acquisition of Central
Georgia Waste Services, Inc. for $500,000 in cash. This tuck-in acquisition
further expands the Company's existing operations in and around Atlanta,
Georgia.
On April 1, 1999, the Company acquired Old Kings Road Solid Waste,
Inc., which operates a landfill and a related solid waste collection business in
and around Jacksonville, Florida, for approximately $5.0 million in cash. This
acquisition gives the Company its fourth landfill and expands its operations
into northeastern Florida, a new market for the Company in the southeastern U.S.
On February 12, 1999 the Company purchased equipment and customer
contracts related to the commercial, industrial and residential solid waste
collection and recycling businesses of Clary's Container Corp., located in Max
Meadow, Virginia, for approximately $1.3 million in cash.
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On January 14, 1999, the Company acquired a regional municipal solid
waste landfill in Decatur County, Tennessee from Waste Services of Decatur, LLC
through Liberty Waste Services, LLC for approximately $12.9 million in cash.
The Company primarily used borrowings under its revolving credit
facility to fund acquisitions during 1999.
RECENT DEVELOPMENTS
On January 13, 2000, the Company signed a nonbinding Letter of Intent
with Allied Waste Industries, Inc., which was amended on March 9, 2000, to
purchase all of Allied's assets used in connection with its Sampson County,
North Carolina landfill and its Fayetteville, North Carolina waste hauling
operation. The aggregate consideration for the acquisition is approximately
$31.5 million.
On January 13, 2000, the Company signed a nonbinding Letter of Intent
with Allied Waste Industries, Inc., to sell all of the Company's assets used in
connection with its Ooltewah, Tennessee and Dalton, Georgia waste hauling
operations. The aggregate consideration for the sale is approximately $11.5
million.
CONTRACTS PROGRAM
The Company currently has approximately 236 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 1999, the Company
retained over 74% 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 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 236 municipal contracts in place as of December 31, 1999. 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.
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The Company owns and operates six solid waste landfills in Florida,
Georgia, Mississippi, North Carolina and Tennessee. The Company's landfill
facilities are designed and operated to meet federal, state and local
regulations in all material respects and the Company believes each of its
landfill sites are in compliance with current applicable state and federal
Subtitle D regulations in all material respects. None of the Company's landfills
are permitted to accept hazardous waste.
TRANSFER STATION SERVICES
The 22 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 18 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 47%
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 of 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 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
1999, less than 3% of the Company's waste stream was recycled. Through a
centralized effort, the Company resells recycled waste products using
commercially reasonable practices and seeks to manage commodity-pricing risk by
spreading the risk among its customers. The resale prices of, and demand for,
recyclable commodities, particularly wastepaper, can be volatile and subject to
changing market conditions. Accordingly, the Company's results of operations
will be affected, and may be affected materially, by changing resale prices or
demand for certain recyclable commodities, particularly wastepaper. These
changes may also contribute to significant variability in the Company's
period-to-period results of operations.
CONVENIENCE SITES AND OTHER SPECIALIZED SERVICES
In 1982, the Company developed the concept of a convenience site in
response to increasing volumes of waste dumped randomly in rural areas. Each
site typically consists of a ramp for easy disposal access, a trash compactor
and trash and recycling containers. Most sites have posted operating hours
during which Company personnel assist residents with the deposit of waste and
recyclables while monitoring the types of waste deposited at the sites. Because
these convenience sites reduce the amount of trash dumped along roads and
adjacent to recreational areas, the Company believes that county and local
governments will contract for these sites to be strategically located. The
Company operates approximately 100 convenience sites located in 13 counties in
its market area.
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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 the Company 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,
1999, the branch network was divided into the seven regions set forth below:
COLLECTION OPERATIONS
<TABLE>
<CAPTION>
CAROLINAS CENTRAL CAROLINAS SOUTH CAROLINAS WEST MISSISSIPPI VALLEY TENNESSEE VALLEY
- ----------------- --------------- -------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Durham, NC Wilmington, NC Graham, NC Olive Branch, MS Chattanooga, TN
Garner, NC Bolivia, NC Greensboro, NC Biloxi, MS Crossville, TN
Hope Mills, NC Charleston, SC Henderson, NC Mobile, AL Dalton, GA
Morrisville, NC Conway, SC Oxford, NC Decatur, TN Lilburn, GA
Sumter, SC Wytheville, VA Easley, SC
Huntersville, NC Alpharetta, GA
CAROLINAS EAST CAROLINAS COASTAL Danville, VA Dawson, GA
- -------------- -----------------
Americus, GA
Elizabeth City, NC Newport, NC Warner Robbins, GA
Goldsboro, NC Jacksonville, NC Douglas, GA
Greenville, NC Albany, GA
Kinston, NC Moultrie, GA
Norfolk, VA Warner Robbins AFB, GA
Rocky Mount, NC
Wilson, NC
</TABLE>
DISPOSAL OPERATIONS
<TABLE>
<CAPTION>
CAROLINAS CENTRAL MISSISSIPPI VALLEY TENNESSEE VALLEY
<S> <C> <C>
Durham, NC Olive Branch, MS Jacksonville, FL
Biloxi, MS Douglas, GA
Decatur, TN
</TABLE>
The managerial philosophy of the Company centers on the principle that
customers' needs can best be served at the local level by a staff of
well-trained personnel led by a branch manager. Each branch manager is
responsible for implementing sales programs, maintaining service quality,
promoting safety in the branch's operations and overseeing the day-to-day
operations for the branch, including contract administration. Branch managers
also assist regional managers in identifying potential acquisition candidates.
Frequently, the branch manager is also the branch facility's sales manager; but
in larger market areas, branch facilities will have one or more sales persons.
Branch managers are compensated based on the performance of their branch. Each
branch manager reports to a regional manager or Vice President, who reports
directly to the Company's President.
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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 systems 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
AS/400 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 in 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 awards, branch safety committees and random facility inspections by both
corporate staff and an outside loss control specialist.
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<PAGE>
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, 1999, the Company owned and
operated six 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, 1999, the Company estimates the total costs to be
approximately $16.0 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
$262,000 and $1,590,000 for such projected costs at December 31, 1998 and 1999,
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 acquired five landfills in 1999 and intends to acquire
more. The Company may acquire other existing landfills or it may develop
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 also intends to develop land clearing and inert debris
("LCID") landfills in the near future. Such development would provide the
Company an opportunity to dispose of a portion of the Company's waste stream in
its own landfill, rather than paying a third party to do so. LCID landfills can
only take limited kinds of waste (namely land-clearing and inert debris such as
trees, rocks and concrete), as opposed to traditional solid waste landfills,
which can take any kind of waste (except hazardous waste). Traditional solid
waste landfills are therefore subject to more stringent regulation than LCID
landfills. As a result, LCID landfills generally can be constructed in a
relatively short time and involve fewer regulatory hurdles compared to
traditional solid waste landfills.
Alternatives to landfill disposal, such as recycling and composting,
are increasingly being used. In addition, incineration is an alternative to
landfill disposal in certain of the Company's markets. There also has been an
increasing trend at the state and local levels to mandate recycling and waste
reduction at the source and to prohibit the disposal of certain type of wastes,
such as yard wastes, at landfills. These developments may result in the volume
of waste being reduced in certain areas. North Carolina, South Carolina and
Virginia have each adopted plans or requirements that set goals for specified
percentages of certain solid waste items to be recycled. These recycling goals
are being phased in over the next few years. These alternatives,
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<PAGE>
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 1999. 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.; Allied Waste
Industries, Inc. and Republic Services, Inc. There are several other public
companies in the industry with annual revenue in excess of $100 million,
including Casella Waste Systems, 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.
EMPLOYEES
At December 31, 1999, the Company employed approximately 1,800
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
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<PAGE>
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, 1999, the Company
had provided customers and various regulatory authorities with bonds and letters
of credit of approximately $1.44 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, 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 non-hazardous. Wastes are generally classified as
hazardous if they (i) either (a) are specifically included on a list of
hazardous
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<PAGE>
wastes or (b) exhibit certain hazardous characteristics and (ii) are not
specifically designated as non-hazardous. Wastes classified as hazardous under
RCRA are subject to much stricter regulation than wastes classified as
non-hazardous.
Among the wastes that are specifically designated as non-hazardous
waste are household waste and "special" waste, including items such as petroleum
contaminated soils, asbestos, foundry sand, shredder fluff and most
non-hazardous 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 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. Various states in which we operate, or in which we may operate
in the future, have been delegated authority to implement the Clean Water Act
permitting requirements, and some of these states have adopted regulations that
are more stringent than the federal requirements.
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
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<PAGE>
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 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
16
<PAGE>
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 3301 Benson
Drive, Raleigh, North Carolina, where it currently leases approximately 25,000
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, 1999, the
Company operated 43 collection operations, 22 transfer stations, eight recycling
facilities and six landfills aggregating approximately 1,517 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 95% of its transportation fleet and
leases the remainder. The Company has implemented an aggressive and reliable
maintenance program to extend the useful lives of its equipment. Preventative
and long-term maintenance is performed on regularly scheduled cycles that are
more frequent than most manufacturers' suggested schedules. Preventative
maintenance is performed on collection vehicles after every 150 to 250 hours of
operation depending on its class, and long-term maintenance (reconstruction of
engines, transmissions, etc.) is performed every four to six years.
Additionally, cosmetic repairs (painting, interior upholstery repairs) are
performed as needed. The majority of the maintenance program is done by Company
personnel located in branch facilities.
ITEM 3. LEGAL PROCEEDINGS.
In the normal course of its business and as a result of the extensive
governmental regulation of the waste industry, the Company may periodically
become subject to various judicial and administrative proceedings involving
federal, state or local agencies. In these proceedings, an agency may seek to
impose fines on the Company or to revoke, or to deny renewal of, an operating
permit held by the Company. In addition, the Company may become party to various
claims and suits pending for alleged damages to persons and property, alleged
violation of certain laws and for alleged liabilities arising out of matters
occurring during the 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, 1999.
17
<PAGE>
EXECUTIVE OFFICERS
As of March 24, 2000, the executive officers of the Company were as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Lonnie C. Poole, Jr....................... 62 Chairman, Chief Executive Officer and Director
Jim W. Perry.............................. 55 President, Chief Operating Officer and Director
Stephen C. Shaw........................... 40 Chief Financial Officer, Secretary and Treasurer
</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 29 years' experience in the solid waste industry.
He has served in the Environmental Industry Association, ("EIA", formerly the
National Solid Waste Management Association or the "NSWMA"), 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 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 29 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 was appointed Chief
Financial Officer in November 1999. Mr. Shaw served as the Company's Vice
President, Finance from 1991 to 1999 and as the Company's controller from 1985
to 1999. 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 14 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, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Lonnie C. Poole, III...................... 38 Vice President and Director of Support Services
Richard D. Lauck.......................... 54 Vice President -- Carolinas Region
Thomas C. Cannon.......................... 50 Vice President -- Georgia/Tennessee Valley Region
James J. Becher........................... 50 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 10 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 18 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
18
<PAGE>
Company during its acquisition of TransWaste Services, Inc. He holds a B.B.A. in
Industrial Management from the University of Georgia and has done graduate work
in Accounting at Georgia Southwestern College. Mr. Cannon has 6 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 14 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 for the years indicated 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>
HIGH LOW
---- ---
<S> <C> <C>
1998
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
1999
First quarter........................................... $19 1/2 $12 13/16
Second quarter.......................................... $18 13/16 $14 7/8
Third quarter........................................... $18 1/4 $12 3/8
Fourth quarter.......................................... $14 3/4 $10 1/4
</TABLE>
(b) Approximate Number of Equity Security Holders
As of December 31, 1999, the number of record holders of the Company's
common stock was 105 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 covenants 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, 1999.
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, 1997, 1998 and 1999 and the consolidated balance
sheet data as of December 31, 1998 and 1999 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,
1995 and 1996 and the consolidated balance sheet data as of December 31, 1995,
1996 and 1997 are derived from financial statements not included in this Annual
Report on Form 10-K.
20
<PAGE>
<TABLE>
<CAPTION>
1995 (1) 1996 (1) 1997 (1) 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Service revenues $ 96,051 $ 104,509 $ 127,581 $ 169,527 $ 213,384
Equipment sales 2,080 1,769 1,601 1,732 1,335
--------- --------- --------- --------- ---------
Total revenues 98,131 106,278 129,182 171,259 214,719
Cost of service operations 57,806 66,542 79,775 105,633 133,923
Cost of equipment sales 1,646 1,240 1,171 1,268 821
--------- --------- --------- --------- ---------
Total cost of operations 59,452 67,782 80,946 106,901 134,744
Selling, general and administrative 18,713 18,990 23,105 26,386 31,196
Depreciation and amortization 8,939 9,307 11,797 16,981 22,298
Merger costs and start-up costs -- -- -- 926 432
--------- --------- --------- --------- ---------
Operating income 11,027 10,199 13,334 20,065 26,049
Interest expense (2,399) (2,497) (3,021) (4,812) (8,653)
Interest income 430 194 312 93 1,287
Other income -- 612 322 538 441
--------- --------- --------- --------- ---------
Income before income taxes 9,058 8,508 10,947 15,884 19,124
Income taxes (2) -- -- 7,011 5,606 7,100
--------- --------- --------- --------- ---------
Net income $ 9,058 $ 8,508 $ 3,936 $ 10,278 $ 12,024
========= ========= ========= ========= =========
Earnings per share:
Basic $ 0.85 $ 0.80 $ 0.34 $ 0.80 $ 0.88
========= ========= ========= ========= =========
Diluted $ 0.85 $ 0.78 $ 0.33 $ 0.77 $ 0.86
========= ========= ========= ========= =========
Pro forma income before income taxes (2) $ 9,058 $ 8,508 $ 10,947 $ 15,884
Pro forma income taxes (2) 3,632 3,434 4,202 5,803
--------- --------- --------- ---------
Pro forma net income (2) $ 5,426 $ 5,074 $ 6,745 $ 10,081
========= ========= ========= =========
Pro forma earnings per share (2):
Basic $ 0.51 $ 0.48 $ 0.58 $ 0.78
========= ========= ========= =========
Diluted $ 0.51 $ 0.47 $ 0.56 $ 0.76
========= ========= ========= =========
Weighted-average shares outstanding:
Basic 10,625 10,660 11,709 12,875 13,707
========= ========= ========= ========= =========
Diluted 10,660 10,880 12,068 13,266 14,051
========= ========= ========= ========= =========
Other Operating Data:
Net cash provided by operating activities $ 18,717 $ 17,340 $ 22,949 $ 27,927 $ 28,890
Net cash used in investing activities (8,912) (15,688) (59,284) (57,097) (70,001)
Net cash provided by (used in) financing
activities (9,336) (1,973) 35,431 31,659 40,622
EBITDA (3) 20,396 20,312 25,765 37,584 48,788
Balance Sheet Data:
Cash and cash equivalents $ 2,400 $ 2,145 $ 1,176 $ 3,665 $ 3,176
Working capital (deficit) 2,214 1,998 1,635 6,943 7,815
Property and equipment, net 36,700 43,233 65,044 88,801 138,523
Total assets 54,167 63,140 113,417 176,201 249,204
Long-term debt and capital lease
obligations, net of current maturities 28,349 34,526 50,788 86,465 139,700
Shareholders' equity $ 14,554 $ 15,138 $ 41,167 $ 64,662 $ 70,141
</TABLE>
(1) 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
21
<PAGE>
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.
(2) For each of the fiscal years presented through 1996 (and for the period
from January 1, 1997 to May 8, 1997), the Company was an S Corporation and,
accordingly, was not subject to federal and certain state corporate income
taxes. 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."
(3) EBITDA is defined as income before income taxes plus interest expense (net
of interest income) 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 in North Carolina,
South Carolina, Virginia, Tennessee, Mississippi, Alabama, Georgia and Florida.
From 1990 through 1999, the Company acquired, either by merger or asset
purchase, 51 solid waste collection or disposal operations. Forty 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
1998 acquisitions of ECO Services, Inc. and Air Cargo Services, Inc., which were
both common control mergers, and the 1998 acquisitions of Railroad Avenue
Disposal, Inc., Reliable Trash Service, Inc. and Dumpsters, Inc., 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
PURCHASE TRANSACTIONS
During 1999, the Company acquired 15 waste collection and disposal
services businesses to expand its operations. Total consideration paid
approximated $42.6 million, including the issuance of 281,250 shares of the
Company's common stock with a fair value of approximately $4.5 million. Cash
consideration paid was funded primarily with borrowings 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 $27.8 million.
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.
23
<PAGE>
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 eight 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, 1999, the Company owned, operated or transported waste from 22
transfer stations that reduce the Company's costs by improving its utilization
of collection personnel and equipment and by consolidating the waste stream to
gain more favorable disposal rates. Eight of these transfer stations were opened
during 1998, a 67% increase over prior years. As of December 31, 1999, the
Company owned six landfill sites. 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 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.
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.
To date, inflation has not had a significant impact on the Company's
operations.
The following table sets forth for the periods indicated the percentage
of revenues represented by the individual line items reflected in the Company's
statements of income:
YEAR ENDED DECEMBER 31,
-------------------------
1997 1998 1999
----- ----- -----
Total revenues 100.0% 100.0% 100.0%
Service revenues 98.8 99.0 99.4
Equipment sales 1.2 1.0 0.6
----- ----- -----
Total cost of operations 62.7 62.4 62.8
Selling, general and administrative 17.8 15.4 14.5
Depreciation and amortization 9.1 9.9 10.4
Merger and start-up costs -- 0.5 0.2
----- ----- -----
Operating income 10.4 11.8 12.1
Interest expense (2.3) (2.8) (4.0)
Interest and other income 0.5 0.3 0.8
----- ----- -----
Income before income taxes 8.6 9.3 8.9
Pro forma income taxes (1) 3.4 3.4 3.3
Pro forma net income (1) 5.2% 5.9% 5.6%
Certain items have been reclassified for presentation purposes only.
24
<PAGE>
(1) 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, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Total revenues increased $43.4 million, or 25.4%, to $214.7
million in 1999 from $171.3 million in 1998. This increase was primarily
attributable to the following two factors: (1) the effect of a full year of
revenues from the 13 businesses acquired in 1998, as well as a partial year of
results from 15 businesses acquired in 1999; and (2) increased collection
volumes resulting from new municipal and commercial contracts and residential
subscriptions, totaling approximately 7%. Price increases in 1999 for the
Company's solid waste collection and disposal services contributed approximately
2% to 1999 revenues.
COST OF OPERATIONS. Total cost of operations increased $27.8 million to
$134.7 million in 1999 from $106.9 million in 1998. 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 1998 and
1999. Total cost of operations as a percentage of revenues increased to 62.8% in
1999 from 62.4% in 1998.
SG&A. SG&A expenses increased $4.8 million to $31.2 million in 1999
from $26.4 million in 1998. As a percentage of revenues, SG&A decreased to 14.5%
in 1999 from 15.4% in 1998. This decrease was primarily the result of synergy
achieved through acquisitions.
MERGER AND START-UP COSTS. Merger costs totaled approximately $818,000
and $327,000 at December 31, 1998 and 1999 and consisted primarily of
professional fees. 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 and $105,000. These merger and start-up costs
had been expended at December 31, 1998 and 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
by $5.3 million to $22.3 million in 1999 from $17.0 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
1998 and 1999. Depreciation and amortization, as a percentage of revenues,
increased to 10.4% in 1999 from 9.9% in 1998, primarily as a result of
acquisitions in 1998 and 1999.
INTEREST EXPENSE. Interest expense increased $3.9 million to $8.7
million in 1999 from $4.8 million in 1998. This increase was due to the higher
level of average annual outstanding indebtedness. Interest expense as a
percentage of revenues increased to 4.0% in 1999 from 2.8% in 1998.
INCOME TAXES AND NET INCOME. Certain companies acquired in
pooling-of-interests transactions in 1998 were previously taxed as S
Corporations. 1998 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.
Income taxes increased $1.3 million, or 22.4%, to $7.1 million in 1999
from $5.8 million in 1998. The Company's effective tax rate increased to 37.1%
in 1999 from a pro forma effective tax rate of 36.5% in 1998. This increase is
primarily attributable to nondeductible goodwill amortization and reduced tax
credits. As a percentage of revenues, income taxes decreased to 3.3% in 1999
from 3.4% in 1998.
Net income increased $1.9 million, or 19.3%, to $12.0 million in 1999
from $10.1 million in 1998. 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, net income decreased to 5.6% in
1999 from 5.9% in 1998.
25
<PAGE>
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 $26.0 million to
$106.9 million in 1998 from $80.9 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 62.4% in
1998 from 62.7% in 1997.
SG&A. SG&A expenses increased $3.3 million to $26.4 million in 1998
from $23.1 million in 1997. As a percentage of revenues, SG&A decreased to 15.4%
in 1998 from 17.8% in 1997. This decrease was primarily the result of synergy
achieved through acquisitions.
MERGER AND START-UP COSTS. Merger costs related to pooling-of-interests
transactions totaled approximately $818,000 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. 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 increased to
5.9% in 1998 from 5.2% in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at December 31, 1999 was $5.8 million,
compared to $7.8 million at December 31, 1998. The Company's strategy in
managing its working capital has been to apply the cash generated from its
operations which remains available after satisfying its working capital and
capital expenditure requirements to reduce its indebtedness under its bank
revolving credit facility and to minimize its cash balances. The Company
generally finances its working capital requirements from internally generated
funds and bank borrowings. In addition to internally generated funds and the
proceeds of its initial public offering in June 1997, the Company has in place
financing arrangements to satisfy its currently anticipated
26
<PAGE>
working capital needs in 2000. As of December 31, 1999, the Company had fully
drawn down three Prudential Insurance Company of America ("Prudential") term
facilities, leaving the Company with an uncommitted shelf facility of $25
million. The Prudential credit facility requires 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. 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.
On November 9, 1999, the Company entered into a revolving credit
agreement with a syndicate of lending institutions for which BankBoston, N.A.
("BankBoston") acts as agent. This credit facility provides up to $200 million
through November 2004. The Company has drawn approximately $55.0 million on this
facility to terminate and pay off its Branch Banking & Trust ("BB&T") facility.
Virtually all of the assets of the Company and its subsidiaries, including the
Company's interest in the equity securities of its subsidiaries, secure the
Company's obligations under the BankBoston credit facility. Pursuant to an
intercreditor agreement with BankBoston, Prudential shares in the collateral
pledged under the BankBoston credit facility. In addition, the Company's
subsidiaries have guarantied the Company's obligations under the Prudential term
loan facilities. The BankBoston credit facility bears interest at a rate per
annum equal to, at the Company's option, either a BankBoston base rate or at the
Eurodollar rate (based on Eurodollar interbank market rates) plus, in each case,
a percentage rate that fluctuates, based on the ratio of our funded debt to
EBITDA, from 0% to 0.5% for base rate borrowings and 1.5% to 2.5% for Eurodollar
rate borrowings. The BankBoston facility requires the Company to maintain
certain financial ratios and satisfy other predetermined requirements, such as
minimum net worth, net income, and limits on capital expenditures and
indebtedness. It also requires the lenders' approval of acquisitions in some
circumstances. As of December 31, 1999, an aggregate of approximately $65.0
million was outstanding under the BankBoston credit facility, and the average
interest rate on outstanding borrowings was approximately 8.44%.
Net cash provided by operating activities totaled $28.9 million for the
year ended December 31, 1999, compared to $27.9 million for the year ended
December 31, 1998. This increase was caused principally by net income and
depreciation and amortization, partially offset by a higher accounts receivable
balance. Net cash provided by operating activities increased to $27.9 million in
1998, compared to $22.9 million in 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 used in investing activities totaled $70.0 million for the
year ended December 31, 1999, compared to $57.1 million in for the year ended
December 31, 1998. This increase was caused principally by an increase in
purchases of property and equipment as well as a higher level of acquisition
activity. 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.
Capital expenditures were $34.9 million in 1999 and $30.0 million in
1998. The Company expects to spend approximately $31.0 million on capital
expenditures in 2000, including an estimated $23.0 million for vehicle and
equipment additions and replacements and $8.0 million for facilities, additions
and improvements. The Company expects to fund its 2000 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 $40.6 million for the
year ended December 31, 1999 compared to $31.7 million provided by financing
activities for the year ended December 31, 1998. This increase was primarily
attributable to an increase in net borrowings under long term debt , which was
offset by the issuance of a note receivable to Liberty Waste Services, LLC. 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.
At December 31, 1999, the Company had approximately $146.6 million of
long-term and short-term borrowings, including capital lease obligations
outstanding and approximately $1.4 million in letters of credit. At December 31,
1999, the ratio of the Company's long-term debt to total capitalization was
66.2% compared to 57.2% at December 31, 1998.
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 2000.
27
<PAGE>
During 1999 a note of $11.5 million was issued to Liberty Waste
Services, LLC. The note bears interest at 11%, and becomes due on December 31,
2001. Simultaneous with the issuance of the note, the Company entered into an
option agreement with Liberty to purchase certain waste disposal business units
from Liberty. The option is exercisable for an 18 month period beginning July 1,
2000. The purchase price of each business unit will be at a predetermined
multiple of the business unit's EBITDA. Also simultaneous to the note and option
agreements, on February 2, 1999, the Company sold 183,000 shares of unregistered
common stock to Liberty at $17.76 per share, which approximated fair value on
the date of issuance.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS.
QUANTITATIVE DISCLOSURES: 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, 1999 by expected maturity dates. Fair
values have been determined based on quoted market prices as of December 31,
1999.
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate
7.28% $ 3,571 $ 3,571 $ 3,571 $ 3,571 $ 3,571 $ 7,145 $ 25,000
6.96% -- -- 3,571 3,571 3,571 14,287 25,000
6.84% 3,571 3,571 17,858 25,000
7.00% 2,255 376 318 59 49 132 3,189
Variable Rate
8.44% -- -- -- -- -- 65,000 65,000
$ 5,826 $ 3,947 $ 7,460 $ 10,772 $ 10,762 $104,422 $143,189
</TABLE>
QUALITATIVE DISCLOSURES:
The Company's primary exposure relates to:
o interest rate risk on long-term and short-term borrowings,
o the impact of interest rate movements on our ability to meet
interest expense requirements and exceed financial covenants,
and
o the impact of interest rate movements on our ability to obtain
adequate financing to fund future acquisitions.
The Company manages interest rate risk on outstanding long-term and
short-term debt through the use of fixed and variable rate debt. While
the Company cannot predict the impact interest rate movements will have
on existing debt, management continues to evaluate its financial
position on an ongoing basis.
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.
28
<PAGE>
PART III
Certain information required by Part III is omitted from this report
because the Registrant will file a definitive proxy statement for its 2000
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.
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.
Report of Independent Auditors on page S-1.
Schedule II - Valuation and Qualifying Accounts on page S-2.
The financial statement schedule should be read in conjunction
with the consolidated financial statements. The financial statement
schedules not included in this annual report on Form 10-K have been
omitted because they are not applicable or the required information is
shown in the financial statements or included in the notes thereto.
(3) Exhibits.
The exhibits filed as part of this Report are listed in Item 14(c)
below.
(b) Reports on Form 8-K The Company filed no reports on Form
8-K during the fourth quarter of the fiscal year ended December 31,
1999.
(c) Exhibits
29
<PAGE>
<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(d) 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(d) Option Agreement dated February 2, 1999 between the Registrant and
Liberty Waste Services, LLC.
10.7(e) Revolving Credit Agreement dated as of November 9,
1999 by and among the Registrant and its subsidiaries,
the lending institutions party thereto, BankBoston,
N.A., as Administrative Agent, BancBoston Robertson
Stephens Inc., as Arranger, and Branch Banking and
Trust Company, as Documentation Agent.
11.1 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.
(d) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1998.
(e) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1999.
30
<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 27, 2000 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 27, 2000
---------------------------------------------- Officer (Principal Executive Officer)
LONNIE C. POOLE, JR.
/s/ Stephen C. Shaw Chief Financial Officer (Principal March 27, 2000
---------------------------------------------- Financial and Accounting Officer)
STEPHEN C. SHAW
/s/ Jim W. Perry Director March 27, 2000
----------------------------------------------
JIM W. PERRY
/s/ J. Gregory Poole, Jr. Director March 27, 2000
----------------------------------------------
J. GREGORY POOLE, JR.
/s/ Thomas F. Darden Director March 27, 2000
----------------------------------------------
THOMAS F. DARDEN
/s/ Thomas C. Cannon Director March 27, 2000
----------------------------------------------
THOMAS C. CANNON
/s/ Paul L. Brunswick Director March 27, 2000
----------------------------------------------
PAUL L. BRUNSWICK
</TABLE>
31
<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, 1998 and 1999........................................................ F-3
Consolidated Statements of Operations for the Years Ended December 31, 1997, 1998 and 1999.......................... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999.......................... F-5
Notes to Consolidated Financial Statements.......................................................................... F-7
Independent Auditors' Report........................................................................................ S-1
Schedule II - Valuation and Qualifying Accounts .................................................................... S-2
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders of
Waste Industries, Inc. and Subsidiaries
Raleigh, North Carolina
We have audited the accompanying consolidated balance sheets of Waste
Industries, Inc. and Subsidiaries (the "Company") as of December 31, 1998 and
1999, and the related consolidated statements of operations and cash flows for
each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States of America. 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, 1998 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States of America.
/S/ DELOITTE & TOUCHE LLP
RALEIGH, NORTH CAROLINA
FEBRUARY 29, 2000
F-2
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents including restricted cash of $379 in 1998 (Note 4) $ 3,665 $ 3,176
Accounts receivable -- trade, less allowance for uncollectible accounts
(1998 -- $700; 1999--$921) 16,835 26,756
Inventories 1,334 1,624
Prepaid expenses and other current assets 1,589 3,017
Deferred income taxes (Note 12) 494 910
--------- ---------
Total current assets 23,917 35,483
--------- ---------
PROPERTY AND EQUIPMENT, net (Notes 2 and 3) 88,801 138,523
INTANGIBLE ASSETS, net (Note 2) 63,073 74,747
OTHER NONCURRENT ASSETS 410 451
--------- ---------
TOTAL ASSETS $ 176,201 $ 249,204
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 4) $ 1,877 $ 5,826
Current maturities of capital lease obligations (Note 5) 1,042
Accounts payable trade 10,171 13,355
Accrued expenses and other liabilities (Note 8) 2,995 4,083
Income taxes payable (Note 12) 188 1,487
Deferred revenue 1,743 1,875
--------- ---------
Total current liabilities 16,974 27,668
--------- ---------
LONG-TERM DEBT, net of current maturities (Note 4) 86,465 137,363
LONG-TERM CAPITAL LEASE OBLIGATIONS, net of current maturities (Note 5) 2,337
NONCURRENT DEFERRED INCOME TAXES (Note 12) 7,838 10,105
CLOSURE/POSTCLOSURE LIABILITIES (Note 9) 262 1,590
COMMITMENTS AND CONTINGENCIES (Notes 5, 7 and 9)
SHAREHOLDERS' EQUITY (Notes 6 and 7):
Common stock, no par value, 80,000,000 shares authorized, shares issued and
outstanding: 1998--13,380,905; 1999--13,854,355 41,148 46,700
Paid-in capital 7,245 7,245
Retained earnings 16,596 28,620
Note receivable - Liberty Waste (11,538)
Shareholders' loans and receivables (327) (886)
--------- ---------
Total shareholders' equity 64,662 70,141
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 176,201 $ 249,204
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Service revenues $ 127,581 $ 169,527 $ 213,384
Equipment sales 1,601 1,732 1,335
--------- --------- ---------
Total revenues 129,182 171,259 214,719
--------- --------- ---------
OPERATING COSTS AND EXPENSES:
Operations 79,775 105,633 133,923
Equipment sales 1,171 1,268 821
Selling, general and administrative (Notes 5 and 8) 23,105 26,386 31,196
Depreciation and amortization 11,797 16,981 22,298
Merger, start-up and refinancing costs (Note 2) -- 926 432
--------- --------- ---------
Total operating costs and expenses 115,848 151,194 188,670
--------- --------- ---------
OPERATING INCOME 13,334 20,065 26,049
--------- --------- ---------
Interest expense (Note 4) 3,021 4,812 8,653
Interest income (312) (93) (1,287)
Other (Note 7) (322) (538) (441)
--------- --------- ---------
Total other expense, net 2,387 4,181 6,925
--------- --------- ---------
INCOME BEFORE INCOME TAXES 10,947 15,884 19,124
INCOME TAX EXPENSE (Note 12):
Current and deferred 2,711 5,606 7,100
Effect of change in tax status 4,300 -- --
--------- --------- ---------
NET INCOME $ 3,936 $ 10,278 $ 12,024
========= ========= =========
EARNINGS PER SHARE
(As Adjusted -- Notes 6 and 12):
Basic $ 0.34 $ 0.80 $ 0.88
Diluted $ 0.33 $ 0.77 $ 0.86
INCOME BEFORE INCOME TAXES (Note 12) $ 10,947 $ 15,884
PRO FORMA INCOME TAXES (Note 12) 4,202 5,803
--------- ---------
PRO FORMA NET INCOME (Note 12) $ 6,745 $ 10,081
--------- ---------
PRO FORMA EARNINGS PER SHARE (Notes 6 and 12)
Basic $ 0.58 $ 0.78
Diluted $ 0.56 $ 0.76
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING (Notes 6 and 12)
Basic 11,709 12,875 13,707
========= ========= =========
Diluted 12,068 13,266 14,051
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
OPERATING ACTIVITIES: (In Thousands)
<S> <C> <C> <C>
Net income $ 3,936 $ 10,278 $ 12,024
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 11,797 16,981 22,298
Gain on sale of property and equipment (212) (305) (298)
Effect of change in tax status 4,300
Provision for deferred income taxes 804 2,240 1,451
Change in closure/postclosure liabilities 41 (13) 731
Changes in assets and liabilities, net of effects
from acquisitions of related businesses:
Accounts receivable - trade (1,431) 418 (7,208)
Inventories 1,335 (492) (290)
Prepaid and other current assets (137) (948) (1,386)
Accounts payable - trade 2,158 1,726 1,912
Income taxes payable 445 (257) 1,299
Accrued expenses and other liabilities 316 (1,823) (1,201)
Deferred revenue (403) 122 (442)
--------- --------- ---------
Net cash provided by operating activities 22,949 27,927 28,890
--------- --------- ---------
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 809 649 721
Purchases of property and equipment (24,095) (30,005) (34,935)
Acquisition of related business, net of cash acquired (35,438) (27,649) (34,934)
Other noncurrent assets (560) (92) (853)
--------- --------- ---------
Net cash used in investing activities (59,284) (57,097) (70,001)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 40,119 114,995 186,809
Principal payments on long-term debt (23,772) (82,527) (135,143)
Debt issuance costs (1,323)
Principal payments on capital lease obligations (906)
Repayments of loans and receivables from shareholders 33 127 91
Advances under shareholder loans and receivables (55) (147) (650)
Net proceeds from common stock issuance 23,158 3,250
Net proceeds from exercise of stock options 34
Cash distributions to S-Corporation shareholders (4,124) (790)
Loan to Liberty Waste (11,538)
Other 72 1 (2)
--------- --------- ---------
Net cash provided by financing activities 35,431 31,659 40,622
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (904) 2,489 (489)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,080 1,176 3,665
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,176 $ 3,665 $ 3,176
========= ========= =========
</TABLE>
F-5
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONCLUDED
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (IN THOUSANDS)--
Cash paid for interest $2,440 $4,926 $8,530
====== ====== ======
Cash paid for taxes $1,445 $3,623 $4,301
====== ====== ======
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS --
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 exchanged 729,204 shares of common stock with
a fair value of approximately $14.0 million as partial consideration for certain
business acquisitions.
During 1999, the Company issued 281,250 shares of common stock with a
fair value of approximately $4.5 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, 1997, 1998 AND 1999
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, Virginia and
Florida.
BASIS OF PRESENTATION - The Company's consolidated financial statements
include its wholly-owned subsidiaries. All intercompany balances and
transactions have been eliminated. The Company's revenues and income are derived
principally from one industry segment, which includes the collection, transfer,
recycling, processing and disposal of municipal solid waste and industrial
wastes.
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 (less costs to
sell) 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:
Machinery and equipment 5 to 10 years
Furniture, fixtures and vehicles 5 to 10 years
Building 30 years
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 independent surveyors conducting
annual topographic surveys, 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 independent engineers and its accounting
staff.
F-7
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES -- (CONTINUED)
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 (in thousands):
1998 1999
------- -------
Goodwill $62,323 $74,148
Customer lists 27 14
Noncompete agreements 723 585
------- -------
Intangible assets $63,073 $74,747
======= =======
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. Accumulated amortization was approximately $28,748,000
and $31,638,000 at December 31, 1998 and 1999 respectively.
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, 1999, the Company estimates the total
costs to be approximately $16,019,000 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
accrued approximately $262,000 and $1,590,000 for such projected costs at
December 31, 1998 and 1999, respectively. The Company will provide additional
accruals based on engineering estimates of airspace consumption 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.
Basic earnings per share computations are based on the weighted-average
common stock outstanding. 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, requires
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 (Note 11).
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 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.
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 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 -- 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 2001. The Company has not determined if the
adoption of SFAS No. 133 will have a material impact on its consolidated
financial statements.
F-9
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES -- (CONTINUED)
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 1997 and 1998 financial statement
amounts have been reclassified to conform with the 1999 presentation.
2. ACQUISITIONS
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 were
previously restated to include the accounts and operations for all periods
presented.
POOLING-OF-INTERESTS TRANSACTIONS:
During 1998, the Company completed the following pooling-of-interests
transactions:
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 the
issued and outstanding share of common stock of Dumpsters, Inc.
("Dumpsters"), based in Memphis, Tennessee and engaged in the
industrial solid waste collection in Shelby County, 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-interests transactions
totaled approximately $818,000 at December 31, 1998 and consisted primarily of
professional fees. All of these amounts had been expended at December 31, 1998.
F-10
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS -- (CONTINUED)
PURCHASE TRANSACTIONS:
During 1997, 1998 and 1999, the Company acquired 7, 8 and 15 waste
collection and disposal services businesses, respectively, to expand its
operations. The assets acquired and liabilities assumed were accounted for by
the purchase method of accounting and include the following (in thousands):
1997 1998 1999
-------- -------- --------
Tangible Net Assets Acquired:
Accounts receivable $ 1,902 $ 3,363 $ 2,713
Inventories 38 -- --
Prepaid expenses and other current assets 12 25 42
Property and equipment 8,933 8,763 22,251
Landfill assets -- -- 12,449
Accounts payable and accrued expenses (42) (1,040) (4,557)
Deferred revenue (511) (597) (574)
Notes payable (848) (3,290) (3,181)
Capital lease obligations -- -- (4,506)
-------- -------- --------
Total net tangible assets acquired 9,484 7,224 24,637
Intangible Assets:
Noncompete agreements 159 504 101
Customer lists, contracts and goodwill 27,070 33,948 14,648
-------- -------- --------
Total acquisition costs $ 36,713 $ 41,676 $ 39,386
======== ======== ========
Purchase price allocations for certain 1999 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. Net acquisition
costs in 1999 include the issuance of 281,250 shares of the Company's common
stock with a fair value of $4.5 million as partial consideration for certain
business acquisitions. The Company primarily used borrowings under its revolving
credit facilities to fund the various purchase 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, 1998 and 1999 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 (in
thousands):
1998 1999
-------- --------
Total revenues $199,010 $225,527
Operating income 24,979 28,243
Net income 11,905 12,914
Earnings per common share:
Basic $ 0.89 $ 0.93
Diluted $ 0.86 $ 0.91
F-11
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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:
The Company incurred nonrecurring start-up costs related to a new
service contract of approximately $108,000 and $105,000 at December 31, 1998 and
1999, respectively. These costs related to the deployment of service equipment
and personnel. All of these amounts had been expended at December 31, 1998 and
1999.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1998
and 1999 (in thousands):
1998 1999
-------- --------
Land, land improvements and buildings $ 15,575 $ 22,426
Landfills and associated land 1,753 15,789
Machinery and equipment 137,106 180,126
Furniture, fixtures and vehicles 3,046 4,210
In-process equipment 1,326 1,210
-------- --------
Total property and equipment 158,806 223,761
Less accumulated depreciation 70,005 85,238
-------- --------
Property and equipment, net $ 88,801 $138,523
======== ========
In-process equipment includes equipment not placed in service at year
end.
Landfill costs include land held for development, representing various
landfill properties with an aggregate cost of approximately $1,340,000 and $-0-
at December 31, 1998 and 1999, respectively, which is not being amortized.
F-12
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT
Long-term debt consist of the following at December 31, 1998 and 1999
(in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Bank Credit Facilities:
BB&T $ 36,000 $ --
Prudential 50,000 75,000
BankBoston -- 65,000
Other installment notes payable, interest ranging from 1% to 7% 1,956 2,910
Present value of noncompete agreement liabilities with
the former shareholders of related businesses acquired,
due in various monthly installments through 2002 386 279
-------- --------
Total notes payable 88,342 143,189
Less current portion 1,877 5,826
-------- --------
Long-term portion $ 86,465 $137,363
======== ========
</TABLE>
On November 9, 1999, the Company entered into a revolving credit
agreement with a syndicate of lending institutions for which BankBoston, N.A.
("BankBoston") acts as agent. This new credit facility provides up to $200
million through November 2004. The Company has drawn approximately $55 million
on the new facility to terminate and pay off its Branch Banking & Trust ("BB&T")
facility. Virtually all of the assets of the Company and its subsidiaries,
including the Company's interest in the equity securities of its subsidiaries,
secure the Company's obligations under the BankBoston credit facility. Pursuant
to an intercreditor agreement with BankBoston, Prudenital Insurance Company of
America ("Prudential") shares in the collateral pledged under the BankBoston
credit facility. In addition, the Company's subsidiaries have guarantied the
Company's obligations under the Prudential term loan facilities. The BankBoston
credit facility bears interest at a rate per annum equal to, at the Company's
option, either a BankBoston base rate or at the Eurodollar rate (based on
Eurodollar interbank market rates) plus, in each case, a percentage rate that
fluctuates, based on the ratio of our funded debt to EBITDA, from 0% to 0.5% for
base rate borrowings and 1.5% to 2.5% for Eurodollar rate borrowings. The
BankBoston facility requires the Company to maintain certain financial ratios
and satisfy other predetermined requirements, such as minimum net worth, net
income, and limits on capital expenditures and indebtedness. It also requires
the lenders' approval of acquisitions in some circumstances. As of December 31,
1999, an aggregate of approximately $65.0 million was outstanding under the
BankBoston credit facility, and the average interest rate on outstanding
borrowings was approximately 8%.
As of December 31, 1999, the Company had fully drawn three of the
Prudential $25 million term facilities, leaving the Company with an uncommitted
shelf facility of $25 million. The Prudential credit facilities require the
Company to maintain certain financial ratios, such as debt to earnings and fixed
charges to earnings, and satisfy other predetermined requirements, such as
minimum net worth, net income and deposit balances. Interest on the three
Prudential term facilities is paid quarterly, based on a fixed rate of 7.28%,
6.96% and 6.84%, respectively. Of the 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.
At December 31, 1999, the Company was in compliance with all BankBoston
loan agreement covenants. Under the agreement, there is no compensating balance
requirement and no dividend payments are permitted. At December 31, 1998 the
Company had a compensating balance arrangement with BB&T for $379,000.
F-13
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Annual aggregate principal maturities at December 31, 1999 are as
follows (in thousands):
2000..................................... $ 5,826
2001..................................... 3,947
2002..................................... 7,460
2003..................................... 10,772
2004..................................... 10,762
Thereafter............................... 104,422
-------
Total $143,189
========
5. LEASES
The Company leases certain property and equipment under both capital
and operating leases. Gross property and equipment recorded under capital leases
and the related accumulated amortization were approximately $4,506,000 and
($744,000), respectively, at December 31, 1999. The Company had not entered into
capital leases prior to 1999.
Future minimum lease payments as of December 31, 1999 for capital and
operating leases that have initial or remaining terms in excess of one year are
as follows (in thousands):
Capital Operating
Leases Leases
------- -------
2000 $ 1,184 $ 1,917
2001 1,119 1,386
2002 853 1,152
2003 461 1,044
2004 165 971
Thereafter -- 6,275
------- -------
Total minimum lease payments 3,782 $12,745
=======
Less amount representing interest
(ranging from 5.25% to 6.96%) (403)
-------
3,379
Less current portion (1,042)
-------
Long term lease obligation $ 2,337
=======
The total rental expense for all operating leases for the years ended
December 31, 1997, 1998 and 1999 is as follows (in thousands):
1997 1998 1999
------ ------ ------
Buildings and sites ............... $ 887 $1,216 $1,474
Trucks and equipment .............. 1,898 2,209 1,310
------ ------ ------
Total ............................. $2,785 $3,425 $2,784
====== ====== ======
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-14
<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,
1997, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
SHARES SHAREHOLDERS' NOTE
------ COMMON PAID-IN LOANS AND RETAINED RECEIVABLE
AUTHORIZED OUTSTANDING STOCK CAPITAL RECEIVABLES EARNINGS LIBERTY WASTE
---------- ----------- ----- ------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 .......... 80,000 10,660 $ 2,687 $ -- $ (285) $ 12,702 $ --
Net income ........................ -- -- -- -- -- 3,936 --
Issuances of stock, net ........... -- 1,992 24,433 -- -- -- --
Reclassification of undistributed S
Corporation earnings .............. -- -- -- 8,500 -- (8,500)
Capital contribution .............. -- -- -- 20 -- -- --
Subchapter S distributions ........ -- -- -- -- -- (2,304) --
Increase in shareholders' loans and
receivables ..................... -- -- -- -- (22) -- --
---------- ----------- ----- ------- ----------- -------- -------------
Balance, December 31, 1997 ........ 80,000 12,652 27,120 8,520 (307) 5,834
Net income ........................ -- -- -- -- -- 10,278 --
Issuances of stock, net ........... 729 14,026
Subchapter S distributions ........ -- -- -- -- -- (790) --
Reclassification of S-Corporation
deficit ......................... -- -- (1,275) -- 1,275
Increase in shareholders' loans and
receivables ..................... -- -- -- (20)
Other ............................. -- -- 2 -- -- (1) --
---------- ----------- ----- ------- ----------- -------- -------------
Balance, December 31, 1998 ........ 80,000 13,381 41,148 7,245 (327) 16,596
Net income ........................ -- -- -- -- -- 12,024 --
Issuances of stock, net ........... 464 7,699
Exercise of stock options ......... -- 9 34 -- -- --
Issue of Liberty Waste receivable . (11,538)
Fair value adjustment related to
stock issued in business purchase
transaction ..................... (2,181)
Increase in shareholders' loans and
receivables ..................... -- -- -- -- (559) -- --
---------- ----------- ----- ------- ----------- -------- -------------
Balance, December 31, 1999 ........ 80,000 13,854 $ 46,700 $ 7,245 $ (886) $ 28,620 $(11,538)
========== =========== ======== ======== =========== ========= =============
</TABLE>
F-15
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. SHAREHOLDERS' EQUITY -- (CONTINUED)
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 consolidated 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.
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.
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. In 1999 and upon completion of a valuation of the restricted stock issued
in this transaction, the Company decreased common stock and goodwill by an
adjustment of $2.2 million.
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.
During 1999, the Company loaned Liberty Waste Services, LLC ("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 within a 75 miles 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 an eighteen
month period beginning July 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.
F-16
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
During 1999, the Company sold 183,000 shares of the Company's common
stock with a fair value of approximately $3.3 million to Liberty.
During 1999, the Company issued 281,250 shares of Company common stock
with a fair value of approximately $4.5 million as partial consideration for
certain business acquisitions.
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 $261,603, $134,939 and $694,226 at December 31,
1997 and 1998 and 1999, respectively. The notes bear interest at an annual rate
of 7% and are payable on demand. 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 $44,860, $191,712 and $191,709 at December 31, 1997, 1998 and
1999, respectively, are interest-free and are payable on demand.
The Company has other related party transactions pertaining to the
leasing of office space and 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
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 $256,772, $509,967 and
$667,799 for the years ended December 31, 1997, 1998 and 1999, respectively. The
Company's profit sharing contribution was $284,994 for the year ended December
31, 1997. 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 91st day of employment. The Company pays premiums for
its employees and dependents and withholds from employees additional amounts for
the premium balance. 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 1997, 1998 and 1999 was $149,226, $246,163 and
$239,580, 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.
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.
F-17
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
While the precise amounts of these future obligations cannot be
determined, at December 31, 1999, the Company estimates the total costs to be
approximately $16.0 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
$262,000 and $1,590,000 for such projected costs at December 31, 1998 and 1999,
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.
In September 1999, the Company filed a lawsuit against one of its
municipal customers concerning payment of a promissory note and accounts
receivable for services the Company rendered to the customer. The customer has
denied liability for the indebtedness and has asserted counterclaims against the
Company. The Company strongly believes the counterclaims are groundless, and
that the receivables from the customer are valid. The Company does not believe
the outcome of this matter will have a material adverse impact on the Company's
financial position or results of operations.
10. LETTERS OF CREDIT
At December 31, 1998 and 1999, the Company has entered into irrevocable
letters of credit totaling approximately $540,500 and $1,444,000, respectively.
According to the terms of the $200 million BankBoston facility, the availability
of funds on that facility are reduced by the lesser of outstanding letters of
credit or $15 million. (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 effected prior to consummation of the Company's public offering. A summary
of the status of the Plans as of December 31, 1997, 1998 and 1999 and changes
during the years ending on those dates is as follows:
F-18
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCK OPTION PLAN -- (CONTINUED)
OPTION PLAN
----------------------
WEIGHTED-
AVERAGE
SHARES
SHARE PRICE
-------- ---------
Balance, December 31, 1996 and 1997 526,000 5.10
Granted ........................... 138,697 14.37
Forfeitures ....................... (4,948) 19.69
-------- ---------
Balance, December 31, 1998 ........ 659,749 8.49
Granted ........................... 127,387 18.05
Forfeitures ....................... (13,311) 14.07
Exercised ......................... (9,200) 3.66
-------- ----------
Balance, December 31, 1999 ........ 764,625 $ 9.55
======== ==========
The following table summarizes information about the Company's Plans at
December 31, 1999:
<TABLE>
<CAPTION>
Exercisable
Range of Number of Weighted Weighted Number of Weighted
Exercise Prices Shares Average Average Shares Average
Outstanding Remaining Life Exercise Price Exercise Prices
<S> <C> <C> <C> <C> <C>
$5.13 514,564 1.25 $5.13 396,800 $5.13
$15.25 - $16.78 67,887 9.3 $15.80 - -
$17.88 50,000 4.5 $17.88 50,000 $17.88
$19.69 - $20.81 132,174 8.3 $20.11 - -
</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, pro forma net income and pro
forma earnings per share for the years ended December 31, 1998 and 1999 would
have been reduced to the pro forma amounts indicated below (in thousands, except
per share data):
F-19
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1998 1999
---- ----
Net Income:
As reported ....................... $ 10,278 $ 12,024
Pro forma -- for SFAS No. 123 ..... 10,043 11,182
Pro Forma Net Income:
As reported ....................... 10,081
Pro forma -- for SFAS No. 123 ..... 9,846
Pro Forma Earnings Per Share:
Basic:
As reported ....................... $ 0.78 $ 0.88
Pro forma -- for SFAS No. 123 ..... $ 0.76 $ 0.82
Diluted:
As reported ....................... $ 0.76 $ 0.86
Pro forma -- for SFAS No. 123 ..... $ 0.74 $ 0.80
No stock options were granted in 1997 and previously issued grants had
fully vested; accordingly, pro forma amount have not been presented for 1997. As
permitted under SFAS No. 123, the fair value of options granted under the
Company's plan during 1998 and 1999 was estimated on the Black-Scholes
option-pricing model using the following assumptions:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Weighted-average grant-date fair value of options granted $16.33 $12.64
Weighted-average expected lives (years) 3.24 7.28
Risk-free interest rate 5.50% 5.24%
Volatility 39.00% 51.00%
</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, 1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Current deferred income tax assets (liabilities) relate to:
Allowance for bad debts ................................. $ 281 $ 570
Accrued vacation ........................................ 240 191
Accruals to related parties ............................. 14 --
Accrued health benefits ................................. (87) 140
Other accruals not currently deductible ................. 46 9
------- -------
Net current deferred tax assets ........................... $ 494 $ 910
======= =======
Noncurrent deferred income tax liabilities relate to:
Basis and depreciation differences ...................... $ 7,728 $10,049
Other ................................................... 110 56
------- -------
Net noncurrent deferred tax liabilities ................... $ 7,838 $10,105
======= =======
</TABLE>
F-20
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of income tax expense for May 9, 1997 to December 31,
1997 and for the years ended December 31, 1998 and 1999 are as follows (in
thousands):
1997 1998 1999
------ ------ ------
Current income taxes:
Federal ................................ $1,628 $2,807 $4,716
State .................................. 262 559 933
------ ------ ------
Total current income taxes ............. 1,890 3,366 5,649
Deferred income taxes .................. 821 2,240 1,451
------ ------ ------
Total .................................. $2,711 $5,606 $7,100
====== ====== ======
The following is a reconciliation of income taxes at the Federal
statutory rate (34%) to actual taxes provided for each of the three years in the
period ended December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Federal tax at the statutory rate ...................... $ 3,722 $ 5,401 $ 6,502
State income taxes, net of federal tax benefit ......... 311 528 791
Goodwill amortization .................................. 6 -- --
Other .................................................. 87 (116) (193)
------- ------- -------
4,126 5,813 7,100
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 ...................................... 1,415 207 --
------- ------- -------
Total .................................................. $ 2,711 $ 5,606 $ 7,100
======== ======= =======
</TABLE>
F-21
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total revenues 1998 $39,340 $41,527 $44,804 $45,588
1999 47,537 52,855 56,471 57,856
Gross profit 1998 14,687 15,390 16,281 18,000
1999 18,200 19,663 20,809 21,303
Net income 1998 2,379 2,649 2,875 2,375
1999 2,852 3,065 2,955 3,152
Pro forma net income (1) 1998 $ 2,353 $ 2,559 $ 2,815 $ 2,354
Earnings per share:
Basic 1998 (1) $ 0.19 $ 0.20 $ 0.22 $ 0.18
1999 0.21 0.22 0.21 0.23
Diluted 1998 (1) 0.18 0.20 0.21 0.17
1999 $ 0.21 $ 0.22 $ 0.21 $ 0.22
Weighted average number of shares outstanding:
Basic 1998 12,652 12,652 12,817 13,381
1999 13,502 13,761 13,854 13,854
Diluted 1998 13,038 13,048 13,218 13,766
1999 13,860 14,124 14,203 14,157
</TABLE>
(1) See Note 1.H.
14. SUBSEQUENT EVENTS
On January 13, 2000, the Company signed a nonbinding Letter of Intent
with Allied Waste Industries, Inc., which was amended on March 9, 2000, to
purchase all of Allied's assets used in connection with its Sampson County,
North Carolina landfill and its Fayetteville, North Carolina waste hauling
operation. The aggregate consideration for the acquisition is approximately
$31.5 million.
On January 13, 2000, the Company signed a nonbinding Letter of Intent
with Allied Waste Industries, Inc. to sell all of the Company's assets used in
connection with its Ooltewah, Tennessee and Dalton, Georgia waste hauling
operations. The aggregate consideration for the sale is approximately $11.5
million.
* * * * * * * * * *
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Waste Industries, Inc. and Subsidiaries
Raleigh, North Carolina
We have audited the consolidated financial statements of Waste Industries, Inc.
and Subsidiaries (the "Company") as of December 31, 1998 and 1999, and for each
of the three years in the period ended December 31, 1999, and have issued our
report thereon dated February 29, 2000; such report is included elsewhere in
this Form 10-K. Our audits also included the financial statement schedule of
Waste Industries, Inc. and Subsidiaries, listed in Item 14. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/S/ DELOITTE & TOUCHE LLP
RALEIGH, NORTH CAROLINA
FEBRUARY 29, 2000
S-1
<PAGE>
WASTE INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Balance Charges to Write-offs/ Balance
1/1/97 Expense Payments 12/31/97
------ ------- -------- --------
Allowance for
doubtful accounts $ 648 $ 642 $ (382) $ 908
Accrued closure and
post-closure costs 234 41 -- 275
Balance Charges to Write-offs/ Balance
12/31/97 Expense Payments 12/31/98
-------- ------- -------- --------
Allowance for
doubtful accounts $ 908 $ 747 $ (955) $ 700
Accrued closure and
post-closure costs 275 -- (13) 262
Balance Charges to Write-offs/ Balance
12/31/98 Expense Payments 12/31/99
-------- ------- -------- --------
Allowance for
doubtful accounts $ 700 $ 1,242 $(1,021) $ 921
Accrued closure and
post-closure costs 262 1,328 -- 1,590
S-2
Exhibit 11.1
COMPUTATION RE: EARNINGS PER SHARE
WASTE INDUSTRIES, INC.
COMPUTATION RE: EARNINGS PER SHARE
<TABLE>
<CAPTION>
Pro forma (1)
--------------------------------
Year Ended December 31,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Basic Earnings Per Share:
Net Income $ 3,936 $ 10,278 $ 12,024
======== ======== ========
Weighted average number of common shares issued
and outstanding 11,709 12,875 13,707
======== ======== ========
Basic earnings per share $ 0.34 $ 0.80 $ 0.88
Diluted Earnings Per Share
Net Income $ 3,936 $ 10,278 $ 12,024
======== ======== ========
Weighted average number of common shares issued
and outstanding 11,709 12,875 13,707
======== ======== ========
Common stock equivalents -
Options for common stock 526 589 530
-------- -------- --------
Weighted average common stock equivalents 12,235 13,464 14,237
Less treasury shares assumed to be repurchased (167) (198) (186)
Weighted average shares outstanding 12,068 13,266 14,051
======== ======== ========
Diluted earnings per share $ 0.33 $ 0.77 $ 0.86
======== ======== ========
</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 non 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.
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 reports
dated February 29, 2000, appearing in this Annual Report on Form 10-K of the
Company for the year ended December 31, 1999.
/S/ DELOITTE & TOUCHE LLP
RALEIGH, NORTH CAROLINA
MARCH 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> 12-Mos 12-Mos 12-Mos
<FISCAL-YEAR-END> Dec-31-1997 Dec-31-1998 Dec-31-1999
<PERIOD-START> Jan-01-1997 Jan-01-1998 Jan-01-1999
<PERIOD-END> Dec-31-1997 Dec-31-1998 Dec-31-1999
<CASH> 1,176 3,665 3,176
<SECURITIES> 0 0 0
<RECEIVABLES> 14,797 17,535 27,677
<ALLOWANCES> 908 700 921
<INVENTORY> 842 1,334 1,624
<CURRENT-ASSETS> 17,121 23,917 35,483
<PP&E> 65,044 88,801 138,523
<DEPRECIATION> 11,797 16,981 22,298
<TOTAL-ASSETS> 113,417 176,201 249,204
<CURRENT-LIABILITIES> 15,486 16,974 27,668
<BONDS> 50,788 86,465 137,363
0 0 0
0 0 0
<COMMON> 27,120 41,148 46,700
<OTHER-SE> 14,047 23,514 23,441
<TOTAL-LIABILITY-AND-EQUITY> 113,417 176,201 249,204
<SALES> 129,182 171,259 214,719
<TOTAL-REVENUES> 129,182 171,259 214,719
<CGS> 80,946 106,901 134,744
<TOTAL-COSTS> 115,848 151,194 188,670
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 3,021 4,812 8,653
<INCOME-PRETAX> 10,947 15,884 19,124
<INCOME-TAX> 7,011 5,606 7,100
<INCOME-CONTINUING> 3,936 10,278 12,024
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 3,936 10,278 12,024
<EPS-BASIC> 0.58 0.78 0.88
<EPS-DILUTED> 0.56 0.76 0.86
</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> 340 1,256 2,392 3,665
<SECURITIES> 0 0 0 0
<RECEIVABLES> 19,302 16,613 18,243 17,535
<ALLOWANCES> 785 808 724 700
<INVENTORY> 861 1,354 1,939 1,334
<CURRENT-ASSETS> 21,177 20,355 23,476 23,917
<PP&E> 71,692 79,091 85,777 88,801
<DEPRECIATION> 3,706 3,938 4,220 5,117
<TOTAL-ASSETS> 127,734 133,700 172,994 176,201
<CURRENT-LIABILITIES> 19,311 18,182 16,192 16,974
<BONDS> 55,515 62,179 86,881 86,465
0 0 0 0
0 0 0 0
<COMMON> 27,120 27,120 41,148 41,148
<OTHER-SE> 16,751 19,512 21,468 23,514
<TOTAL-LIABILITY-AND-EQUITY> 124,734 133,700 172,994 176,201
<SALES> 39,340 41,527 44,804 45,588
<TOTAL-REVENUES> 39,340 41,527 44,804 45,588
<CGS> 24,653 28,523 27,588 27,073
<TOTAL-COSTS> 34,799 36,604 39,408 40,383
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 947 1,049 1,195 1,621
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<INCOME-TAX> 1,360 1,416 1,470 1,361
<INCOME-CONTINUING> 2,379 2,649 2,875 2,375
<DISCONTINUED> 0 0 0 0
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<NET-INCOME> 2,379 2,649 2,875 2,375
<EPS-BASIC> 0.19 0.20 0.22 0.18
<EPS-DILUTED> 0.18 0.20 0.21 0.17
</TABLE>
<TABLE> <S> <C>
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<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-Mos 3-Mos 3-Mos 3-Mos
<FISCAL-YEAR-END> Dec-31-1999 Dec-31-1999 Dec-31-1999 Dec-31-1999
<PERIOD-START> Jan-01-1999 Apr-01-1999 Jul-01-1999 Oct-01-1999
<PERIOD-END> Mar-31-1999 Jun-30-1999 Sep-30-1999 Dec-31-1999
<CASH> 1,401 3,694 917 3,176
<SECURITIES> 0 0 0 0
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<PP&E> 106,906 125,313 127,559 138,523
<DEPRECIATION> 5,057 5,405 5,887 5,949
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<CURRENT-LIABILITIES> 16,529 21,950 21,064 27,668
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0 0 0 0
0 0 0 0
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<TOTAL-LIABILITY-AND-EQUITY> 192,662 228,301 229,956 249,204
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<DISCONTINUED> 0 0 0 0
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<EPS-BASIC> 0.21 0.22 0.21 0.23
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</TABLE>
