UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-19615
TRANSAMERICAN WASTE INDUSTRIES, INC.
(Exact name of registrant as specified in its Charter)
DELAWARE 13-3487422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10554 TANNER ROAD, HOUSTON, TEXAS 77041
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
Registrant's telephone number, including area code: (713) 956-1212
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 periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X/ No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
CLASS OF COMMON STOCK OUTSTANDING AT MAY 12, 1997
--------------------- ---------------------------
$.001 par value 43,626,375
<PAGE>
TRANSAMERICAN WASTE INDUSTRIES, INC.
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 1996 and March 31, 1997........... 3
Consolidated Statements of Operations -
Three Months Ended March 31, 1996 and 1997..... 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1996 and 1997..... 5
Notes to Unaudited Consolidated Financial Statements.. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................... 15
Item 5. Other Information.................................... 15
Item 6. Exhibits and Reports on Form 8-K..................... 15
Signatures .................................................. 16
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANSAMERICAN WASTE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS December 31, March 31,
1996 1997
----------- ---------
(Unaudited)
Current assets
Cash and cash equivalents ...................... $ 1,334 $ 3,048
Restricted cash ................................ 879 2,111
Accounts receivable, less allowance
for doubtful accounts of $316 and $290,
respectively ................................ 3,381 4,517
Other current assets ........................... 1,019 1,027
------- -------
TOTAL CURRENT ASSETS ........................ 6,613 10,703
Restricted cash ............................. 13,400 12,748
Property and equipment, net of accumulated
depreciation ................................ 27,052 37,375
Cost in excess of fair value of assets acquired ... -- 8,751
Deferred financing costs, net of
accumulated amortization of $403 and $460,
respectively ...................................... 2,453 2,535
Other assets, net ................................. 3,156 2,019
------- -------
TOTAL ASSETS .............................. $ 52,674 $ 74,131
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................ $ 1,447 $ 2,790
Accrued liabilities and other ................... 1,746 3,658
Current portion of promissory notes to
Investment Partnership .......................... 1,338 1,365
Current portion of long-term debt ............... 1,731 4,182
Reserve for closure and post-closure costs ...... 211 211
Total current liabilities ................. 6,473 12,206
Promissory notes to Investment Partnership,
less current portion
693 --
Long-term debt, less current portion ............ 37,414 44,285
Reserve for closure and post-closure costs,
less current portion ............................ 4,114 4,182
Other liabilities ............................... 2,344 4,803
------- -------
Total liabilities ......................... 51,038 65,476
------- -------
Commitments and contingencies
Stockholders' equity
Common stock, $.001 par value; 100,000,000
shares authorized; 30,694,041 and ,906,375
shares issued and outstanding, respectively .... 31 43
Additional paid-in capital ...................... 25,799 32,098
Deferred compensation ........................... -- (483)
Warrants ........................................ 394 1,644
Retained earnings (deficit) ..................... (24,588) (24,647)
------- -------
Total stockholders' equity ................ 1,636 8,655
------- -------
Total liabilities and stockholders' equity $ 52,674 $ 74,131
======= =======
See Notes to Unaudited Consolidated Financial Statements
3
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TRANSAMERICAN WASTE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1997
---- ----
(Unaudited)
Revenue .............................................. $ 3,921 $ 6,407
Expenses:
Cost of services ................................... 1,881 4,271
Depreciation and amortization ...................... 401 595
General and administrative ......................... 767 691
-------- --------
Operating income .................................. 872 850
-------- --------
Other income (expense):
Interest expense ................................... (497) (832)
Other net .......................................... 142 (60)
-------- --------
Total other expense ............................... (355) (892)
-------- --------
Solid waste income (loss) ......................... 517 (42)
Loss from oil recovery and disposal operations .... (284) --
-------- --------
Income (loss) before income taxes ................. 233 (42)
Provision for income taxes ........................ -- 17
-------- --------
Net income (loss) ................................. $ 233 $ (59)
======== ========
Income (loss) per common share .................... $ .01 $ --
======== ========
Weighted average common shares outstanding ........ 30,646 38,673
======== ========
See Notes to Unaudited Consolidated Financial Statements
4
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TRANSAMERICAN WASTE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended March 31,
---------------------------
1996 1997
------------ ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................ $ 233 $ (59)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization ................. 401 595
Amortization of debt discount and
deferred financing costs ...................... 84 178
Amortization of deferred compensation ......... -- 17
Closure and post-closure costs ................ (171) 68
Loss from oil recovery and disposal ......... 290 --
Changes in assets and liabilities:
Accounts receivable ........................... 102 (1,136)
Accounts payable and accrued liabilities ...... (379) 2,161
Other, net .................................... 314 124
------------ ------------
Net cash provided by operating activities .. 874 1,948
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of acquisition .............................. -- (12,600)
Purchases of property and equipment .............. (944) (1,855)
Costs incurred on possible acquisitions .......... (19) --
Payments to oil recovery and disposal ............ (79) --
Other ............................................ (17) --
------------ ------------
Net cash used by investing activities ...... (1,059) (14,455)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt and warrants ...... -- 10,088
Payments of debt ................................. (314) (1,202)
Proceeds from issuances of common stock
and warrants ..................................... 208 6,055
Deferred financing costs ......................... -- (140)
Use (increase) of restricted cash ................ 322 (580)
------------ ------------
Net cash provided by financing
activities ................................. 216 14,221
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS ............ 31 1,714
CASH AND CASH EQUIVALENTS:
Beginning of period .............................. 1,499 1,334
------------ ------------
End of period .................................... $ 1,530 $ 3,048
============ ============
See Notes to Unaudited Consolidated Financial Statements
5
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TRANSAMERICAN WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements include
the accounts of TransAmerican Waste Industries, Inc. and its wholly owned
subsidiaries (the "Company") and have been prepared by the Company without audit
pursuant to the rules and regulations of the Securities and Exchange Commission.
All significant intercompany accounts and transactions have been eliminated.
These unaudited consolidated financial statements reflect, in the opinion of
management, all adjustments (all of which are normal and recurring in nature)
necessary to fairly state the financial position and the results of operations
for the interim periods presented, and the disclosures herein are adequate to
make the information presented not misleading. On January 31, 1997, the Company
acquired certain solid waste collection assets and operations from Sanifill,
Inc. ("Sanifill"). The accounts of the acquired assets and operations are
accounted for as a purchase and are included in the accompanying unaudited
consolidated financial statements from the date of acquisition. Operating
results for interim periods are not necessarily indicative of the results that
can be expected for a full year. Certain information related to the Company's
organization, significant accounting policies and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted in this Form 10-Q. These
interim financial statements should be read in conjunction with the Company's
Annual Report for the year ended December 31, 1996 on Form 10-K and the Sanifill
Assets Acquired Financial Statements and the related notes thereto, and the
Unaudited Proforma Condensed Financial Statements and related notes thereto,
included in the Company's Current Report on Form 8-K/A dated April 18, 1997.
2. ACQUISITION OF SANIFILL ASSETS AND RELATED FINANCING
On January 31, 1997, the Company acquired certain solid waste
collection and disposal assets and operations of Sanifill located in the
Houston, Texas area (the "Sanifill Assets"). In connection with the acquisition
of Sanifill by USA Waste Services, Inc. ("USA Waste") in 1996, the United States
Department of Justice ordered the divestiture of the Sanifill Assets, and
pursuant to the order, the Company submitted a bid which was ultimately
accepted. The total consideration for the purchase of the Sanifill Assets was
$13,600,000 in cash plus warrants to purchase 1,500,000 shares of Common Stock
at an exercise price of $1.50 per share ("USA Warrants"). The USA Warrants are
exercisable for a period of five years from the closing date of the Company's
acquisition of the Sanifill Assets. The Company is obligated to register for
resale the common stock issuable upon the exercise of the USA Warrants.
The Sanifill Assets consist of assets used in connection with the
servicing of approximately 100,000 residential and 4,000 commercial waste
collection and disposal customers in the Houston, Texas metropolitan area, a
20-acre construction and demolition landfill located in Galveston County, Texas,
two office, maintenance and parking facilities and preferred pricing at two of
USA Waste's landfills. The preferred pricing agreement gives the Company the
option to dispose of two million tons of municipal solid waste, limited to
270,000 tons per year, at USA Waste's landfills at favorable prices as defined
in the purchase agreement, which in no event shall be less favorable than the
most favorable terms provided to USA Waste's other customers. The Company moved
its corporate office to one of the acquired buildings.
In connection with the acquisition of the Sanifill Assets, the Company
assumed certain contractual obligations to provide residential collection and
related services. Based upon management's analysis of these contractual
obligations, a contract assumed with a commitment period to June 2000, will be
unprofitable to the Company. As the Sanifill Assets had been operated as part of
Sanifill's integrated strategy to bring waste to its existing landfill
operations, the operations were able to obtain waste disposal under terms and
conditions that are not available to the Company. Additionally, there are
inherent risks in the estimation of and bid process for waste collection
contracts that can impact the results of operations
6
<PAGE>
TRANSAMERICAN WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
because actual volumes of waste generated, the availability of disposal
facilities and equipment, labor, maintenance and other operational factors can
vary from the initial estimate. The Company estimates that losses to be
sustained on the contract will approximate $3.2 million and has included this
loss as part of the initial purchase price allocation. At March 31, 1997 the
balance of the reserve was approximately $3.1 million and is included in other
liabilities in the accompanying unaudited consolidated balance sheet.
The Company financed the acquisition of the Sanifill Assets with a
combination of debt and equity funds consisting of an $8.5 million bank facility
(the "Bank Facility") and $6.8 million (approximately $6.1 million, net of
placement agent's commission and offering expenses) private placement of the
Company's common stock (the "Private Placement").
BANK FACILITY. The Bank Facility is composed of a $7.5 million
promissory note bearing interest at the prime rate plus 1% to be repaid based
upon a five year amortization schedule and having a final maturity of February
15, 1999, and a $1 million revolving line of credit at prime plus 1% having a
final maturity of February 15, 1998. The Bank Facility is subject to certain
financial and other covenants and restrictions. The Bank Facility is secured by
a security interest in certain assets of the Company, including the Sanifill
Assets and is guaranteed by the Company, the Company's chief executive officer,
and an individual member of the board of directors (the "Board Member"). As
consideration for the Board Member's guarantee and services provided in
connection with the acquisition of the Sanifill Assets, the Company issued the
Board Member warrants, having a term of five years, to purchase a total of three
million shares of the Company's common stock. The exercise price of such
warrants with respect to two million shares is $1.00 per share, and the exercise
price with respect to the remaining one million shares is $1.25 per share. The
exercise prices are subject to certain anti-dilution provisions. The warrants,
the guarantee and the services provided, are recorded at their respective fair
market values.
PRIVATE PLACEMENT. In the Private Placement, the Company issued
11,250,000 shares of common stock (the "Shares") at a price of $.60 per share
including the exercise of the placement agent's over-allotment for total
proceeds to the Company, net of placement agent's commission and related
expenses, of $6.1 million. The Company will file within four months of the
closing of the acquisition of the Sanifill Assets (the "Closing") a registration
statement covering the resale of the Shares under the Securities Act of 1933
with the Securities and Exchange Commission and in such states as the Company
and the holders may select. The Company has agreed to use its best efforts to
cause such registration statement to become effective within seven months of the
Closing. If the registration is not effective within seven months of the
closing, subject to certain other conditions and exceptions, it could result in
a substantial penalty to the Company. Additionally, the Company issued warrants
to purchase 1,125,000 shares of the Company's stock at $.66 per share, subject
to certain anti-dilution provisions, to the placement agent.
SHORT-TERM FINANCING. In January 1997, as consideration for the waivers,
consents and releases from an investment partnership (the "Investment
Partnership") necessary to complete the acquisition of the Sanifill Assets, the
Company repaid $700,000 which the Company borrowed in December 1996 from the
Investment Partnership to fund the initial deposits on the purchase price of the
Sanifill Assets and exchanged a $1.5 million promissory note issued to the
Investment Partnership in August 1996 for a new convertible promissory note. The
convertible promissory note is payable in twelve monthly installments of
principal and interest beginning in August 1997 and is convertible into shares
of common stock at $1.12 per share, subject to certain anti-dilution provisions.
Additionally, the Company repriced warrants to purchase 275,000 and 300,000
shares of common stock at exercise prices of $1.00 per share and $.75 per share
respectively, to $0.60 per share.
PRO FORMA DATA. The accompanying unaudited consolidated balance sheet
includes the preliminary purchase price allocation which is subject to final
adjustment. Set forth below are unaudited pro forma combined revenues and income
data reflecting the pro forma effect of the acquisition of the Sanifill Assets
on the continuing operations of the Company for the three months ended March 31,
1996 and 1997
7
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TRANSAMERICAN WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
as if the transaction was effective on the first day of the period
being reported (in thousands, except per share data):
1996 1997
---------------- ----------------
Revenue ................. $ 6,559 $ 7,612
================ ================
Net income .............. $ (229) $ (113)
================ ================
Net income per share .... $ (.01) $ --
================ ================
Pro forma adjustments included in the amounts above primarily relate to
(a) adjustment to depreciation and amortization expense due to the purchase
price allocation, (b) adjustment to reflect interest expense on the Bank
Facility, and (c) adjustment for loss contracts assumed in the acquisition of
the Sanifill Assets. Net income per share for the three months ended March 31,
1996 and 1997 assumes that all the shares of the Company's common stock issued
in the Private Placement were outstanding for the period presented. The pro
forma combined results presented above are not necessarily indicative of actual
results which might have occurred had the operations and management of the
Company and the Sanifill Assets been combined at the beginning of the period
presented.
3. 1997 STOCK PARTICIPATION PLAN
Effective January 1, 1997, the Board of Directors of the Company
approved the TransAmerican Waste Industries, Inc. 1997 Stock Participation Plan
("Participation Plan"), pursuant to which the Company issued restricted shares
of common stock to the executive officers and certain key employees of the
Company who were selected in the discretion of the Compensation Committee of the
Board of Directors ("Committee"). Pursuant to the Participation Plan, the
Company issued 833,334 shares of common stock to seven participants under the
Participation Plan.
The shares awarded under the Participation Plan (the "Restricted
Shares") are registered in the name of the grantee but are held by the Chairman
of the Board of Directors of the Company until such time as the restrictions on
their transfer have expired. The Restricted Shares will vest in equal 20%
increments on each anniversary of the grant date over a five-year period. If the
grantee should voluntarily terminate his employment or retire, or if his
employment is terminated by the Company for any reason other than for cause, the
grantee will forfeit his right to receive any shares that are not vested at the
time of termination. In the event that the grantee is terminated for cause, he
will forfeit all rights to receive any vested or unvested shares. If the
grantee's employment is terminated due to his death or disability, or if a
change in control of the Company should occur before the grantee's employment
has been terminated, then all unvested shares will automatically become 100%
vested.
The Company received a bank loan in the amount of $500,000 ("Bank
Loan") to acquire 833,334 shares of common stock from the Company at $.60 per
share pursuant to the Participation Plan. The Bank Loan bears interest at 9% per
annum to be repaid based upon a five-year amortization schedule. The Bank Loan
is secured by the shares of the Company's common stock granted pursuant to the
Participation Plan and is guaranteed personally by the Chairman of the Board of
the Company.
In March 1997, the Company's former chief financial officer resigned,
effective May 1, 1997. The Committee has given the former chief financial
officer the option to purchase his 156,250 unvested restricted shares of common
stock issued under the Participation Plan for $.60 per share. The option expires
September 28, 1997. The Company will use the proceeds, if any, from the exercise
of the option to retire a portion of the Bank Loan.
8
<PAGE>
TRANSAMERICAN WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. EARNINGS PER COMMON SHARE
Earnings per common share ("EPS") have been computed based on the
weighted average number of common equivalent shares outstanding during the
applicable periods. For the three months ended March 31, 1997, common equivalent
("Shares"), including stock options and warrants, did not impact net loss per
share as they were anti-dilutive.
The convertible subordinated debentures are not considered common
equivalent shares and, therefore, are excluded from the primary presentation of
EPS. Assumed conversion is considered for the calculation of fully diluted EPS.
For the three months ended March 31, 1996 and 1997, the assumed conversion of
the Debentures has an anti-dilutive effect on the fully diluted EPS computation
and is excluded from the presentation herein.
The following table reconciles the number of common shares outstanding
with the number of shares used in computing EPS (in thousands):
THREE MONTHS
ENDED MARCH 31,
-------------------
1996 1997
-------- --------
Common shares outstanding, end of period .............. 30,065 42,906
Effect of shares issued during period using
weighted average common shares ................... (246) (4,233)
Effect of shares issuable for stock options and
warrants based on treasury stock method .......... 827 --
-------- --------
Common shares used in computing earnings per share .... 30,646 38,673
======== ========
5. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS AND REGULATION. The Company is subject to
numerous rules and regulations at the federal, state and local levels. The
Company has not experienced any significant regulatory problems in the past and
believes that it is in substantial compliance with all applicable rules and
regulations. No assurance can be given that future changes in the law will not
have an adverse impact on the Company's operations. The Company's business
generally requires certain operating permits in order to conduct its operations.
In recent years, environmental groups and others have put increased pressure on
applicable regulatory authorities to either reject certain operating permits or
to impose restrictions on the Company's disposal practices. The Company believes
it is in material compliance with all of its operating permits. The Company does
not carry insurance coverage for environmental liability related to its waste
disposal operations. In the event uninsured losses occur, the Company's
financial condition and results of operations could be adversely affected.
CLOSURE AND POST-CLOSURE COSTS. The Company has material financial
obligations relating to closure and post-closure costs for the disposal
facilities it owns or operates. While the precise amount of these future
obligations cannot be determined, the Company has estimated for all its existing
facilities, that the total costs for final closure and post-closure monitoring
for an estimated period of up to 30 years after closure for cells currently
being utilized will approximate $6.0 million. At March 31, 1997, the Company had
accrued approximately $4.4 million for such estimated costs based on airspace
utilized to date. The Company will continue to provide accruals based on
engineering estimates, as the available airspace is utilized. The estimate of
the total future liability is subject to change as it is based on current
economic conditions, operational results, existing regulations and a combination
of internal and external engineering specifications which may not yet have been
approved by the appropriate regulatory authorities.
9
<PAGE>
TRANSAMERICAN WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL ASSURANCE OBLIGATIONS. From time to time the Company may be
required to provide performance bonds or bank letters of credit to secure
performance of landfill management and hauling contracts or to secure its
closure and post-closure obligations with respect to its landfills. At March 31,
1997, the Company has provided performance bonds totaling $6.9 million and
letters of credit totaling approximately $200,000 to secure its obligations. The
Company has arranged a $20 million performance bond line of credit, subject to a
review of each contract bonded and certain other conditions. In certain cases,
the Company will be required to provide cash deposits.
LITIGATION. McGinnes Industrial Maintenance Corporation ("MIMC"), a
wholly owned subsidiary of the Company, has been named as one of 17
co-defendants in a lawsuit styled TAMMY FISHER WHALEN, ET AL. V. AES, INC., ET
AL., Cause No. 93-CV0211, filed in the District Court of Galveston County,
Texas, 10th Judicial District. The suit consolidated four separate proceedings
filed by seventy-four persons currently or formerly residing on real property
situated approximately five miles or more from the Company's wastewater sludge
treatment facility located in Galveston County, Texas, and names as defendants,
in addition to MIMC, 13 industrial companies located along or near the Houston
Ship Channel, two subdivisions and one engineering firm. The suit alleges
personal injury and property damages resulting from alleged releases of
hazardous and toxic substances from the Company's wastewater sludge treatment
facility. In September 1994, seventeen of the original plaintiffs were dismissed
with prejudice from the litigation. The Company, as well as the other
defendants, has agreed on an out-of-court settlement with the majority of the
remaining plaintiffs. The Company's contribution toward settlement of the
consolidated lawsuit was approximately $30,000. In March 1994, nine additional
plaintiffs filed a petition in intervention in Cause No. 93-CV0211. In October
1995, the plaintiff-intervenors amended their petition to delete a number of
allegations and causes of actions against defendants. Although there can be no
assurance as to the outcome of any lawsuit, the Company believes that the claims
made by plaintiff-intervenors in this suit are without merit and that the
exposure of the Company in such litigation is minimal. The Company has been
advised by its outside counsel, Ford & Ferraro, L.L.P., to such effect. The
Company is vigorously defending these actions.
In June 1995, certain citizens of Chilton County, Alabama filed a
complaint against the Chilton County Commission and the Company, which claimed
that the Commission failed to comply with certain statutorily mandated
procedures pertaining to (i) the transfer of the Chilton County Landfill from
the County to the Company and (ii) the approval of certain subsequent permit
modifications. Each of the parties filed a motion for summary judgment. While
the Circuit Court of Chilton County, Alabama upheld the transfer of the landfill
to the Company, it overturned the approval of certain permit modifications that
increased the allowable daily volume and expanded the permissible service area
of the facility. During 1996, the Company was permitted to continue to operate
under a daily volume limit. On March 14, 1997, the Supreme Court of Alabama
issued an opinion on the merits and reversed the plaintiff's summary judgment
and upheld the permit modifications including the volume increase. As a result,
the landfill is now permitted to accept up to 1,500 tons per day of solid waste
from an eighteen county service area.
In addition to the foregoing, the Company is involved in other
litigation incidental to the conduct of its business, none of which management
believes is, individually or in the aggregate, material to the Company's
financial condition or results of operations.
DEVELOPMENT SERVICES AGREEMENT. In March 1996, the Company entered into
a Development Services Agreement, with E.C. Development, L.P. ("ECD"), a company
controlled by a director of the Company, whereby ECD would provide the Company
with certain development services related to locating landfill facilities. In
consideration for these services, ECD received warrants to purchase 2 million
shares of common stock at $1.50 per share. The warrants were to vest fully on
March 1, 2001 as long as ECD is providing services to the Company on that date,
however the vesting would accelerate one
10
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TRANSAMERICAN WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
warrant for every one dollar of direct costs incurred by ECD in performing
services under the agreement. ECD was also entitled to additional compensation
upon the closing of each transaction related to landfill facilities identified
for the Company by ECD. This additional compensation consisted of (i) 50,000
shares of common stock of the Company, subject to adjustment under certain
conditions, (ii) a warrant to purchase 100,000 shares of common stock of the
Company at the market price on the trading day immediately preceding the
transaction date, and (iii) $250,000 cash upon the closing of the financing for
the facility or twelve months following the closing, whichever is sooner. The
Company notified ECD, in a letter dated January 24, 1997, of the termination of
the Development Services Agreement. The Company is currently working with ECD to
conclude all outstanding development projects and determine the final number of
warrants vested.
INVESTMENT BANKING AGREEMENT. In July 1994, the Company entered into a
five-year agreement with an investment banking firm, in which a director of the
Company was the controlling shareholder and chief executive officer, to
exclusively represent the Company in the solid waste industry with regard to
obtaining tax-exempt debt financing. The Company agreed to pay the firm a
percentage of the gross proceeds derived from such financings. The Company
issued the firm 400,000 warrants to purchase common stock, subject to certain
forfeiture provisions, at $2.875 per share for this exclusive arrangement. In
addition, warrants to purchase 150,000 restricted share of common stock, at the
then current market price, were issued to the firm for each $15 million of
financing completed. The number of such warrants was adjusted on a pro rata
basis depending upon the actual amount of the financing completed. Either party
could have terminated this agreement at any time by giving 120 days prior
written notice. In a letter dated January 24, 1997, the Company notified the
investment banking firm of the termination of this agreement.
6. ADOPTION OF NEW ACCOUNTING PRINCIPLE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). The Company is required to adopt the provisions of SFAS No. 128 for the
fiscal year ended December 31, 1997. The initial adoption of this standard is
not expected to have a material impact on the Company's financial statements.
7. SUBSEQUENT EVENT
In April 1997, the Company purchased Target Waste Industries, Inc.
("Target"), a commercial solid waste collections company operating in the
greater Mobile, Alabama metropolitan area. Total consideration consisted of
$100,000 cash and 720,000 shares of restricted common stock. The Company is
required to file a registration statement, not later than December 31, 1997,
which at the option of the Target shareholders will include their shares of
common stock. Additionally, in connection with the acquisition, the Company
received a non-compete agreement from Target's principal shareholder for a
period of two years.
11
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
TransAmerican Waste Industries, Inc. and subsidiaries (the ACompany@) is
engaged in the collection, processing and disposal of non-hazardous industrial
and municipal solid waste. The Company has expanded its operations by obtaining
long-term contracts to manage existing municipal landfills and through the
acquisition of existing businesses. The Company believes that trends in the
regulation of waste management have created significant opportunities for growth
through acquisition of facilities and operations currently owned by public and
private entities that lack the funding or the expertise to comply with the
increasingly stringent regulation of waste management services.
As the Company continues to seek additional facilities and collection
operations, the Company will focus on acquiring and/or developing businesses
which are strategically positioned with the Company's existing operations. The
Company believes there is substantial value to be recognized by obtaining
strategically located collection and landfill operations, as this provides the
company with secure waste streams, optimizing the value of the Company's air
space and provides efficiencies to both the collection and disposal operations.
The Company will also look for strategic opportunities to enter into favorable
new markets primarily through the acquisition of existing businesses.
The following table summarizes the Company's management contracts and
acquisitions completed during 1995 through May 15, 1997:
Name Of Type Of Type Of Total Permitted
Date Business Business Location Transaction Acres Acreage
---- -------- -------- -------- ----------- ------ -------
February Central MSW landfill Carriere, Purchase
1995 Landfill Mississippi 20 20
June TransWaste, Transfer Alexandria,
1995 Inc. station, Louisiana Purchase 20 20
materials
recovery
facility and
hauling
operation
July Union County MSW landfill Knoxville, 20-year
1995 Landfill Tennessee management 90 55
contract
April Haleyville MSW and Haleyville, 20-year
1996 Landfill C&D landfill Alabama management 265 192
contract
January North C&D landfill Dickinson, Purchase 20 20
1997 County Texas
Landfill
January Sanifill Residential Houston,
1997 Hauling and Texas Purchase --- ---
commercial
collection
operation
April Target Waste Commercial Mobile, Purchase --- ---
1997 Industries, collection Alabama
Inc. operation
Hauling
<PAGE>
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1996 COMPARED TO THE QUARTER ENDED MARCH 31, 1997
Revenue increased 63% from $3,921,000 to $6,407,000 from the first quarter
of 1996 to the first quarter of 1997. This increase in revenue is primarily due
to the acquisition of the Sanifill Assets. Although there can be no assurance,
the Company anticipates that revenue will continue to increase as the Company
continues to implement its strategy of privatizing municipal landfills, either
by acquisition or long-term landfill management contracts, and acquiring other
selected facilities and collection operations.
Cost of services increased from $1,881,000 to $4,271,000 from the first
quarter of 1996 to the first quarter of 1997, primarily due to the acquisition
of the Sanifill Assets. As a percentage of revenue, cost of services increased
from 48% to 67% due to the nature of the collection operations acquired. The
collection operations have a higher percentage of cost which fluctuate directly
with revenue as compared to the landfill operations which generally have fixed
cost that do not increase proportionately with an increase in revenue.
General and administrative costs decreased from $767,000 to $691,000 from
quarter to quarter as a result of management's continued efforts to monitor
costs and implement cost control measures, as necessary.
Interest expense for the first quarter of 1997 was $832,000 compared to
the prior year amount of $497,000. The increase was primarily due to borrowings
in connection with the acquisition of the Sanifill Assets.
The Company did not incur losses from oil recovery and disposal operations
in the first quarter of 1997 as compared to a loss of $284,000 in the first
quarter of 1996. In September 1996, the Company transferred the stock of its oil
recovery and disposal operations and relinquished management and legal control
of the operations. In consideration for the transfers, the Company will receive
a percentage of defined cash flows from these operations. The Company has no
future obligation to fund the operations of these businesses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been expanding its operations primarily by focusing on the
privatization of municipal landfills, either by acquisition or long-term
management contracts, and with the acquisition of selected collection
operations. The Company's expansion program has required, and will require, a
significant investment of cash for the initial acquisition of management
contracts and businesses, the subsequent upgrade and expansion of the sites and
the start-up of operations under the Company's management. Completion of the
Company's various debts and equity financings over the past two years has
enabled the Company to fund this corporate development and to favorably position
the Company's future operations.
In January 1997, the Company funded the acquisition of the Sanifill Assets
through a $6.8 million (approximately $6.1 million, net of placement agent's
commission and offering expenses) private placement of the Company's common
stock and $8.5 million of borrowings under a Bank Facility.
As of March 31, 1997, the Company had a working capital deficit of $1.5
million and a cash balance of $3.0 million as compared to working capital of
$140,000 and a cash balance of $1.3 million at December 31, 1996. In connection
with the financing of the acquisition of the Sanifill Assets, the Company
borrowed $8.5 million under the terms of the Bank Facility of which $2.4 million
is included in current liabilities, reflecting the balances which must be paid
through the first quarter of 1998. The Company believes that cash flow from
operations will be sufficient to make the necessary Bank Facility
13
<PAGE>
payments and fund the working capital deficit. For the three months ended March
31, 1997, the Company generated positive cash flow from operations of
approximately $1.9 million.
As the Company intends to continue to expand its operations by obtaining
additional landfill management contracts and acquiring additional businesses in
the future, the Company expects to fund this growth through a combination of its
cash on hand, short-term bridge financing, long-term tax-exempt or other debt
financing, or by issuing its common stock. The Company's financing strategy has
included the use of equity and short-term financing until long-term,
low-interest financing could be arranged. As the Company continues its growth,
it will consider all financing alternatives that may become available.
Although the Company will continue to seek additional disposal facilities,
the Company is pursuing additional waste streams and strategically located
collection operations to support its existing disposal facilities. Additional
volumes at competitive market prices would substantially enhance the Company's
results and cash flow as a substantial amount of the landfill operating costs
are fixed in nature and will, therefore, not increase proportionately as volumes
and revenue increase.
The Company's significant cash requirements during the three months ended
March 31, 1997 were $12.6 million for the acquisition of the Sanifill Assets,
$1.9 million for capital expenditures and improvements and $1.2 million for debt
repayments. These requirements were primarily funded with cash generated from
operations of $1.9 million, the proceeds of the $8.5 million Bank Facility and
the $6.8 million Private Placement (approximately $6.1 net of placement agent's
commission and offering expenses.)
The Company estimates that it may make up to $7.0 million in capital
expenditures through 1997 primarily for landfill expansion and improvements and
equipment purchases. The Company has approximately $2.0 million in restricted
cash from previous financings that is designated for the 1997 capital
expenditures. The Company intends to fund the balance of capital expenditures
out of cash flow from operations, working capital and additional long-term
financing. If additional financing should not be available, the Company would
restrict its capital expenditures to an amount available for such purposes.
In the future, the Company will also have material financial obligations
relating to closure and post-closure costs for disposal facilities it owns or
operates. While the precise amount of these future obligations cannot be
determined, the Company has estimated that total costs for final closure of its
existing facilities and post-closure monitoring for an estimated period of up to
30 years after closure will approximate $6.0 million. See Note 5 of the Notes to
Unaudited Consolidated Financial Statements included herein for information
regarding these obligations.
The Company has and will be required from time-to-time to obtain financial
assurance for performance, closure and post-closure obligations, a portion of
which may be funded with cash deposits or other collateral. The Company has
arranged a $20 million performance bond line of credit subject to review of each
contract bonded and certain other conditions. In certain cases, the Company will
be required to provide cash deposits.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 5 to Unaudited Consolidated Financial
Statements for a discussion of certain legal proceedings involving the Company.
ITEM 5. OTHER INFORMATION.
In March 1997, Lance C. Ruud, the Company's former Senior Vice President
and Chief Financial Officer resigned as an officer of the Company effective May
1, 1997. Mr. Ruud continues to serve as a director of the Company.
In February 1997, Michael L. Paxton was elected Vice President and
Corporate Controller. Mr. Paxton joined the Company in May 1993 as Assistant
Corporate Controller and was promoted to Corporate Comptroller in August 1995.
Mr. Paxton will act as the Chief Accounting Officer of the Company.
In connection with the closing of the Private Placement, the Board of
Directors authorized the creation of a committee of officers (the "Management
Committee") to be responsible for the oversight of the day-to-day management of
the Company. The Board of Directors appointed the members of the Management
Committee and instructed the executive officers of the Company, including the
members of the Management Committee, to consult with the members of such
committee prior to making any decision or taking any action which the officer
believes, using his best judgment, would have a significant effect on the
business of the Company or a material effect on its profitability. The
Management Committee currently consists of three executive officers of the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K and a Form 8-K/A dated February 18, 1997
and April 18, 1997, respectively, regarding (i) the acquisition of the Sanifill
Assets, (ii) the Private Placement of the Company's common stock, and (iii) the
borrowings under the Bank Facility.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRANSAMERICAN WASTE INDUSTRIES, INC.
By: /s/ MICHAEL L. PAXTON
Michael L. Paxton
Vice President and Corporate Controller
May 15, 1997
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
TRANSAMERICAN WASTE INSDUSTRIES, INC. QUARTERLY REPORT FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AS FILED ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
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0
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