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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 SEPTEMBER 30, 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 OCTOBER 29, 1997
$.001 par value 44,193,750
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TRANSAMERICAN WASTE INDUSTRIES, INC.
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 1996 and September 30, 1997............ 3
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 1996
and 1997............................................ 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 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................. 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................... 18
Item 6. Exhibits and Reports on Form 8-K...................... 18
Signatures ...................................................... 19
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANSAMERICAN WASTE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, SEPTEMBER 30,
ASSETS 1996 1997
----------- ------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents................... $ 1,334 $ 1,722
Cash restricted for developmental projects.. 879 3,209
Accounts receivable, net.................... 3,381 6,643
Other current assets........................ 1,019 1,119
----------- ----------
TOTAL CURRENT ASSETS...................... 6,613 12,693
Cash restricted for developmental projects..... 13,400 16,259
Property and equipment, net.................... 27,052 41,615
Cost in excess of fair value of assets acquired - 17,475
Deferred financing costs, net.................. 2,453 2,956
Other assets, net.............................. 3,156 488
----------- ----------
TOTAL ASSETS............................. $ 52,674 $ 91,486
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................ $ 1,447 $ 3,570
Accrued liabilities and other............... 1,746 5,039
Current portion of long-term debt........... 3,069 4,900
Reserve for closure and post-closure costs.. 211 112
----------- ----------
TOTAL CURRENT LIABILITIES................ 6,473 13,621
Long-term debt, less current portion .......... 38,107 55,976
Reserve for closure and post-closure costs,
less current portion......................... 4,114 4,242
Other liabilities.............................. 2,344 6,511
----------- ----------
TOTAL LIABILITIES........................ 51,038 80,350
----------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par value; 100,000,000
shares authorized; 30,694,041 and 44,193,750
shares issued and outstanding, respectively 31 44
Additional paid-in capital.................. 25,799 33,267
Deferred compensation....................... - (356)
Warrants.................................... 394 2,004
Retained earnings (deficit)................. (24,588) (23,823)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY............... 1,636 11,136
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 52,674 $ 91,486
=========== ==========
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1996 1997 1996 1997
------- ------ ------- ------
(UNAUDITED) (UNAUDITED)
Revenue .......................... $ 4,085 $ 9,519 $ 12,074 $ 24,420
Expenses:
Cost of services .............. 2,285 6,081 6,369 16,027
Depreciation and amortization . 397 898 1,206 2,243
General and administrative .... 782 782 2,495 2,283
------- ------- -------- --------
Operating income .......... 621 1,758 2,004 3,867
------- ------- -------- --------
Other income (expense):
Interest expense .............. (566) (1,089) (1,571) (2,874)
Gain on sale of assets ........ -- -- 437 --
Other, net .................... (38) (64) 52 (135)
------- ------- -------- --------
Total other expense ........ (604) (1,153) (1,082) (3,009)
------- ------- -------- --------
Solid waste income ............... 17 605 922 858
Loss from oil recovery and
disposal operations ............. (280) -- (690) --
------- ------- -------- --------
Income before income taxes .... (263) 605 232 858
Provision for income taxes ....... (12) (37) (37) (93)
------- ------- -------- --------
Net income .................. $ (275) $ 568 $ 195 $ 765
======= ======= ======== ========
Income per common share ..... $ (.01) $ .01 $ .01 $ .02
======= ======= ======== ========
Weighted average common
and common equivalent
shares outstanding.......... 30,472 45,421 31,413 43,043
======= ======= ======== ========
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)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1997
---------- ----------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 195 $ 765
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 1,206 2,243
Amortization of debt discount and deferred
financing costs............................ 283 586
Amortization of deferred compensation expense - 60
Closure and post-closure costs.............. (24) 29
Gain on sale of assets...................... (437) -
Loss from oil recovery and disposal operations 690 -
Changes in assets and liabilities:
Accounts receivable.............. 162 (3,196)
Accounts payable and accrued liabilities.... 143 4,081
Other, net.................................. 128 (1,455)
---------- ----------
Net cash provided by operating activities.. 2,346 3,113
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of acquisitions......................... (1,603) (16,293)
Purchases of property and equipment.......... (3,099) (6,196)
Proceeds from sales of assets................ 649 171
Payments to oil recovery and disposal
operations.................................. (221) -
Other........................................ (205) -
---------- ----------
Net cash used by investing activities...... (4,479) (22,318)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt and warrants.. 10,027 22,010
Payments of debt............................. (1,175) (2,592)
Proceeds from issuance of common stock and
warrants.................................... 75 6,067
Deferred financing costs and other........... (378) (703)
Increase in cash restricted for developmental
projects.................................... (5,910) (5,189)
---------- ----------
Net cash provided by financing activities.. 2,639 19,593
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS........... 506 388
CASH AND CASH EQUIVALENTS:
Beginning of period.......................... 1,532 1,334
---------- ----------
End of period................................ $ 2,038 $ 1,722
========== ==========
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. ACQUISITIONS 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 has registered 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,
(the "North County Landfill"), 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, 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, certain contracts assumed with commitment periods to April 2002,
will be unprofitable to the Company. The Company estimates that losses to be
sustained on the contracts will approximate $7.6 million, over the life of the
respective contracts, and has included this
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loss as part of the initial purchase price allocation. At September 30, 1997,
the balance of the reserve was approximately $6.4 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 was composed of a $7.5 million promissory
note and a $1 million revolving line of credit. The Bank Facility was secured by
a security interest in certain assets of the Company, including the Sanifill
Assets and 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
are recorded at their respective fair market values.
Effective June 30, 1997, the $8.5 million of borrowings under the Bank
Facility were refinanced with a $8.5 million term loan. Additionally, the
Company issued a $500,000 term loan, the proceeds of which will be used
primarily for the expansion of the North County Landfill. The term loans bear
interest at prime plus 1.5% and mature June 30, 1999. Interest is payable
monthly with monthly principal payments beginning January 1998, based on a seven
year amortization schedule. The term loans are secured by the assignment of the
security interest and guarantees, as modified, of the Bank Facility and are
subject to certain financial and other covenants.
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. As required by the terms of the Private Placement, the Company filed a
registration statement covering the resale of the Shares under the Securities
Act of 1933 with the Securities and Exchange Commission, which became effective
June 20, 1997. The Company is obligated to register the Shares in such states as
the holders may select. 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 September 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 $.60 per share.
7
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PRO FORMA DATA. The accompanying unaudited consolidated balance sheet as
of September 30, 1997, 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 as if the
transaction was effective on the first day of the period being reported (in
thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
1996 1997 1996 1997
---------- ---------- ---------- ---------
Revenue............... $ 8,389 $ 9,519 $ 22,487 $ 25,625
========== ========== ========== =========
Net income............ $ (894) $ 568 $ (1,243) $ 711
========== ========== ========== =========
Net income per share.. $ (.02) $ .01 $ (.03) $ .02
========== ========== ========== =========
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 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. OTHER ACQUISITIONS AND RELATED FINANCINGS
The following acquisitions, all of which have been accounted for under the
purchase method of accounting, have been included in the consolidated financial
statements since the acquisition date. The pro forma effects of these
acquisitions, individually or in the aggregate, are not material to the
Company's financial condition or its results of operations.
TARGET WASTE INDUSTRIES, INC. 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. In
connection with the acquisition, the Company received a non-compete agreement
from Target's principal shareholder for a period of two years.
WASTE MANAGEMENT ASSETS. In August 1997, the Company completed its
acquisition of certain assets (the Waste Management Assets) used in the solid
waste collection, hauling and recycling operations in the western Louisiana area
from Waste Management of Louisiana, L.L.C. The total consideration consisted of
$2,060,000 in cash and the assumption of certain liabilities in connection with
these operations.
THE OMEGA ONE ASSETS. In August 1997, the Company acquired from The Omega
One Company certain assets used in the solid waste collection, hauling and
recycling operations in Sabine Parish, DeSoto Parish, and Natchitoches Parish,
Louisiana (the Omega One Assets). The total consideration consisted of
$1,200,000 in cash, the forgiveness of approximately $400,000 of indebtedness
and the assumption of certain liabilities in connection with the operations.
BOUDIN'S WASTE AND RECYCLING, INC. In August 1997, the Company purchased
all the issued and outstanding common stock of Boudin's Waste and Recycling,
Inc. ("Boudin"). The total consideration
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consisted of $125,000 cash, shares of common stock of the Company having a fair
market value at the closing of the transaction of $425,000, a seller note in the
aggregate principal amount of $325,000 and the assumption of certain
liabilities.
The Company financed the acquisition of the Waste Management Assets, the
Omega One Assets and the acquisition of Boudin with the proceeds of a $5.0
million bank loan (the Bank Loan). The Bank Loan requires monthly interest
payments at prime plus 1.0% and quarterly principal payments of $250,000. The
Bank Loan, which matures in September 2000, is subject to certain customary
financial and other covenants. The Bank Loan is secured by a security interest
in certain assets of the Company, including the assets acquired, and guaranteed
by the Company's Chief Executive Officer and the Board Member. As consideration
for the Board Member's guarantee, the Company issued the Board Member warrants,
having a term of seven years, to purchase 1.5 million shares of the Company's
common stock at an exercise price of $1.625, subject to certain anti-dilution
provisions. The warrants are recorded at their respective fair market values.
4. 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 (the
"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 (the "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.
The Company's chief financial officer resigned effective May 1, 1997. The
Committee gave 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 former chief financial officer
exercised his option in August 1997 and the proceeds were used to retire a
portion of the Bank Loan.
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5. 1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
On June 25, 1997, the Company's stockholders approved the 1997
Non-Employee Director Stock Option Plan (the Plan), which will be made effective
as of February 25, 1997. The Plan is expressly and exclusively for the benefit
of non-employee directors in order to (i) provide additional incentive for
securing and retaining qualified non-employee persons to serve on the Board of
Directors of the Company and (ii) enhance the future growth of the Company by
furthering the non-employee directors' identification with the interests of the
Company and its stockholders. The Plan authorized the grant of options to
purchase up to 900,000 shares of common stock. The options are subject to a four
year vesting schedule and expire 10 years from the date of grant. All 900,000 of
the authorized options were granted, effective February 25, 1997, to the
non-employee directors at an exercise price of $1.22 (fair market value on grant
date), subject to certain anti-dilution provisions.
6. SOLID WASTE REVENUE BONDS
On June 26, 1997 the Company received bond proceeds from the sale of Solid
Waste Revenue Bonds (the "Bonds") issued by Pearl River County, Mississippi
consisting of $4,550,000 of 20-year, tax-exempt bonds bearing interest at 7.75%
and $525,000 of 5-year taxable bonds bearing interest at 10.75%. Pursuant to the
related Trust Indenture Agreement, the Company is the indirect obligor of the
bonds which will be repaid from the revenues of the Company's Central Landfill
operations. The proceeds will be used for debt issuance cost, the establishment
of debt service and capitalized interest funds, permit expansion expenses,
purchase of adjacent properties, construction of new cells, and purchases of
equipment. The Bonds are secured by the assets of the Company's Central Landfill
operations.
7. 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.
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 and nine months ended September 30, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1996 1997 1996 1997
--------- --------- --------- ---------
Common shares outstanding, end of
period......................... 30,473 44,194 30,473 44,194
Effect of shares issued during
period using weighted average
common shares.................. (1) (225) (266) (2,112)
Effect of shares issuable for
stock options and warrants based
on treasury stock method. - 1,452 1,206 961
--------- --------- --------- ---------
Common shares used in computing
earnings per share............. 30,472 45,421 31,413 43,043
========= ========= ========= =========
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8. 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.
LIMITED ENVIRONMENTAL IMPAIRMENT LIABILITY INSURANCE. The Company is
subject to potential liability for any environmental damage its facilities may
cause, particularly as a result of the contamination of water or the soil. The
Company maintains $5 million of environmental impairment liability insurance,
limited to $1 million per occurrence, covering both the sudden and the gradual
onset of environmental damage (subject to a $100,000 deductible). There can be
no assurance that liabilities that may be incurred by the Company will be
covered by the insurance or that the dollar amount of such liabilities which are
covered by its insurance will not exceed the Company's policy limit. As a
result, if the Company were to incur liability for environmental damage, its
financial condition 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 September 30, 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.
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 September
30, 1997, the Company has provided performance bonds totaling $9.1 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 was named as one of seventeen co-defendants in a
lawsuit styled TAMMY FISHER WHALEN, ET AL. V. AES, INC., ET AL., Cause No.
93-CV-0211, filed in the 10th Judicial District Court of Galveston County,
Texas. The suit alleged personal injuries and property damages resulting from
alleged releases of toxic substances from the Company's wastewater/sludge
treatment facility located in Galveston County, Texas. On May 15, 1995, the
Company, as well as the other defendants agreed on an out-of-court settlement
with thirty plaintiffs. The Company's contribution towards settlement of the
consolidated
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lawsuit was approximately $30,000. In August 1997, the Company concluded an
out-of-court settlement with all of the remaining plaintiffs/intervenors in this
lawsuit with the payment of $37,500.
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 was providing services to the Company on that date,
however the vesting would accelerate one 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. The Company and ECD,
in a letter dated January 24, 1997, mutually agreed to the termination of the
Development Services Agreement. In consideration for services rendered pursuant
to this agreement, ECD will receive warrants to purchase approximately 417,000
shares of common stock at $1.50 per share.
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 is 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 shares 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 and the
investment banking firm mutually agreed to the termination of this agreement.
12
<PAGE>
9. 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.
13
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
TransAmerican Waste Industries, Inc. and subsidiaries (the "Company") 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 privatization of municipal facilities and the
acquisition of existing businesses.
The following table summarizes the Company's management contracts and
acquisitions completed during 1995 through September 30, 1997:
<TABLE>
<CAPTION>
NAME OF TYPE OF TYPE OF TOTAL PERMITTED
DATE BUSINESS BUSINESS LOCATION TRANSACTION ACRES ACREAGE
<S> <C> <C> <C> <C> <C> <C>
- --------- -------------- --------------- ------------- ------------- -------- ---------
February Central Carriere, Purchase
1995 Landfill MSW landfill Mississippi 20 20
- --------- -------------- --------------- ------------- ------------- -------- ---------
Transfer
station,
materials
recovery
facility and
June TransWaste, hauling Alexandria
1995 Inc. operation Louisiana Purchase 20 20
- --------- -------------- --------------- ------------- ------------- -------- ---------
20-year
July Union County Knoxville, management
1995 Landfill MSW landfill Tennessee contract 90 55
- --------- -------------- --------------- ------------- ------------- -------- ---------
20-year
April Haleyville MSW and Haleyvill emanagement
1996 Landfill C&D landfill Alabama contract 265 192
- --------- -------------- --------------- ------------- ------------- -------- ---------
North
January County Dickinson,
1997 Landfill C&D landfill Texas Purchase 20 20
- --------- -------------- --------------- ------------- ------------- -------- ---------
Residential
and
commercial
January Sanifill collection Houston,
1997 Hauling operation Texas Purchase --- ---
- --------- -------------- --------------- ------------- ------------- -------- ---------
Target Waste
Industries, Commercial
April Inc. collection Mobile,
1997 Hauling operation Alabama Purchase --- ---
- --------- -------------- --------------- ------------- ------------- -------- ---------
14
<PAGE>
- --------- -------------- --------------- ------------- ------------- -------- ---------
Residential
Waste and
Management commercial
August Assets collection Natchitoches,
1997 Hauling operation Louisiana Purchase --- ---
- --------- -------------- --------------- ------------- ------------- -------- ---------
Residential
and
commercial
August Omega One collection Many,
1997 Assets operation Louisiana Purchase --- ---
- --------- -------------- --------------- ------------- ------------- -------- ---------
Residential
Boudin Waste and
& Recycling, commercial Bay St. Purchase
August Inc. collection Louis,
1997 Hauling operation Mississippi --- ---
- --------- -------------- --------------- ------------- ------------- -------- ---------
</TABLE>
RESULTS OF OPERATIONS
Revenue for the three months ended in September 30, 1996 and 1997, were
$4,085,000 and $9,519,000 respectively, representing an increase of 133%.
Revenue for the nine months ended September 30, 1996 and 1997, were $12,074,000
and $24,420,000 respectively, representing an increase of 102%. The increase in
revenue is primarily due to the acquisition of the Sanifill Assets. Although
there can be no assurances, 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 management contracts,
and acquiring other selected facilities and collection operations.
Cost of services increased from $2,285,000 for the three months ended
September 30, 1996 to $6,081,000 for the three months September 30, 1997,
representing an increase from 56% to 64% as a percentage of revenue. Cost of
services increased from $6,369,000 for the nine months ended September 30, 1996
to $16,027,000 for the nine months September 30, 1997, representing an increase
from 53% to 66% as a percentage of revenue. The increase in cost of services is
due to the acquisition of collection operations, primarily the Sanifill Assets.
The cost of services increased as a percentage of revenue as collection
operations generally 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 were $782,000 for the three months ended
September 30, 1996 and 1997. General and administrative cost for the nine months
ended September 30, 1996 and 1997 were $2,495,000 and $2,283,000, respectively,
representing a decrease of 8%. As a percentage of revenue, general and
administrative expenses decreased from 19% and 21% for the three and nine months
ended September 30, 1996, respectively, to 8% and 9% for the three and nine
months ended September 30, 1997. The decrease in general and administrative
expenses is a result of management's continued efforts to monitor costs and
implement cost control measures, as necessary, and management's ability to
integrate recent business acquisitions, primarily the Sanifill Assets, without a
proportionate increase in general and administrative cost.
Interest expense was $1,089,000 and $2,874,000 for the three and nine
months ended September 30, 1997, respectively, compared to interest expense of
$566,000 and $1,571,000 for the three and nine months ended September 30, 1996,
respectively. The increased interest expense is primarily due to borrowings in
connection with the acquisition of the Sanifill Assets, Solid Waste Recovery
Bonds issued in April 1996 and June 1997, the $5,000,000 Bank Loan issued in
August 1997 and additional equipment financings.
The Company did not incur losses from oil recovery and disposal operations
in 1997 as compared to losses of $280,000 and $690,000 for the three and nine
months ended September 30, 1996, respectively. In September 1996, the Company
transferred the stock of its oil recovery and disposal operations and
relinquished management and legal control. 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.
15
<PAGE>
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.
The Company intends to fund its cash requirements, including capital
projects, for the foreseeable future through cash on hand, cash generated from
its operations and the completion of additional debt or equity financings. If
additional debt or equity were not available in the future, it could have an
adverse effect on the Company's liquidity.
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 the $8.5 million Bank Facility. In June 1997, the Company received
proceeds totaling approximately $5.1 million from the issuance of Solid Waste
Recovery Bonds which will be utilized to expand the Company's Central Landfill
operations. The Company borrowed $5.0 million under the terms of a Bank Loan in
August 1997 to fund other acquisitions and working capital.
At September 30, 1997, the Company had current assets of $12,693,000 and
current liabilities of $13,621,000 representing a working capital deficit of
$928,000 as compared to current assets of $6,613,000 and current liabilities of
$6,473,000, representing working capital of $140,000, at December 31, 1996. The
increase in current assets and liabilities is primarily due to the acquisition
of the Sanifill Assets and the related increase in operating activities. The
Company believes that cash flow from operations will be sufficient to make the
necessary debt payments and fund the Company's working capital requirements. The
Company had a cash balance of $1,722,000 at September 30, 1997 as compared to
$1,334,000 at December 31, 1996 and generated positive cash flow from operations
of approximately $3,113,000 for the nine months ended September 30, 1997.
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
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. Increased
volumes at competitive market prices would substantially enhance the Company's
financial results and cash flow as a significant amount of the landfill
operating costs are fixed in nature and will, therefore, not increase
proportionately as volumes and revenue increase.
16
<PAGE>
The Company's significant cash requirements during the nine months ended
September 30, 1997 were $12.6 million for the acquisition of the Sanifill
Assets, $3.7 million for other acquisitions, $6.2 million for capital
expenditures and improvements and $2.6 million for debt repayments. These
requirements were primarily funded with cash generated from operations of $3.1
million, the proceeds of the $8.5 million Bank Facility, the $6.8 million
Private Placement (approximately $6.1 net of placement agent's commission and
offering expenses) the $5.0 million Bank Loan and $3.6 million of equipment
financing and promissory notes.
The Company estimates that it may make up to $7.2 million in capital
expenditures during 1997 primarily for landfill expansion and improvements and
equipment purchases. Approximately $6.2 million of the estimated $7.2 million in
capital expenditures were made during the nine months ended September 30, 1997.
The Company has approximately $500,000 in cash restricted for developmental
projects that is designated for the remaining $1.0 million of estimated 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 8 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.
PRIVATE SECURITIES LITIGATION REFORM ACT DISCLOSURE
Certain forward-looking information contained in this report is being
provided in reliance upon the "safe harbor" provision of the Private Securities
Litigation Reform Act of 1995, as set forth in Section 27A of the Securities Act
of 1993, as amended, and Section 21E of the Securities Exchange of 1934, as
amended. Such information includes, without limitation, discussions as to
estimates, expectations, beliefs, plans and objectives concerning the Company's
future financial and operating performance. Such forward-looking information is
subject to assumptions and beliefs based on current information known to the
Company and factors that are subject to uncertainties, risks and other
influences, which are outside the Company's control, and could yield actual
results differing materially from those anticipated.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 8 to Unaudited Consolidated Financial Statements
for a discussion of certain legal proceedings involving 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
None.
18
<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
October 31, 1997
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TRANSAMERICAN WASTE INDUSTRIES, INC. FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,722
<SECURITIES> 0
<RECEIVABLES> 3,209
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,693
<PP&E> 47,042
<DEPRECIATION> 5,427
<TOTAL-ASSETS> 90,650
<CURRENT-LIABILITIES> 13,621
<BONDS> 55,976
0
0
<COMMON> 33,311
<OTHER-SE> 1,648
<TOTAL-LIABILITY-AND-EQUITY> 90,650
<SALES> 24,420
<TOTAL-REVENUES> 24,420
<CGS> 16,027
<TOTAL-COSTS> 20,553
<OTHER-EXPENSES> 135
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,874
<INCOME-PRETAX> 858
<INCOME-TAX> 93
<INCOME-CONTINUING> 765
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 765
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
