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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ---------------
Commission file number 000-23211
CASELLA WASTE SYSTEMS, INC.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 03-0338873
---------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
25 Greens Hill Lane, Rutland, Vermont 05701
-------------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (802) 775-0325
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 4, 2001:
Class A Common Stock 22,441,517
Class B Common Stock 988,200
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
ASSETS April 30, July 31,
------ 2001 2001
--------- ---------
CURRENT ASSETS:
Cash and Cash Equivalents $ 22,001 $ 4,400
Restricted Cash 7,175 7,620
Accounts Receivable - Trade, net of allowance
for doubtful accounts of $4,904 and $3,941 51,776 51,649
Notes Receivable - Officers/Employees 1,953 1,953
Prepaid Expenses 5,669 6,180
Inventory 3,017 2,458
Investments 3,641 3,708
Deferred Income Taxes 8,015 11,810
Net Assets Held for Sale 8,041 --
Net Assets of Discontinued Operations 11,534 15,747
Other Current Assets 2,763 2,955
--------- ---------
Total Current Assets 125,585 108,480
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at Cost:
Land and Land Held for Investment 11,813 11,650
Landfills 77,620 80,729
Landfill Development 12,553 13,334
Buildings and Improvements 50,597 51,033
Machinery and Equipment 139,921 143,229
Rolling Stock 84,076 84,350
Containers 39,117 39,769
--------- ---------
415,697 424,094
Less: Accumulated Depreciation and Amortization (125,160) (135,123)
--------- ---------
Property, Plant and Equipment, net 290,537 288,971
--------- ---------
OTHER ASSETS:
Intangible Assets, net 237,573 234,502
Restricted Cash 2,902 3,101
Deferred Income Taxes 5,259 2,155
Investment in Unconsolidated Entities 21,844 24,786
Other Non-Current Assets 2,593 2,685
--------- ---------
270,171 267,229
--------- ---------
$ 686,293 $ 664,680
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
2
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except for share and per share data)
LIABILITIES AND
STOCKHOLDERS' EQUITY April 30, July 31,
-------------------- 2001 2001
--------- ---------
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt $ 6,690 $ 3,789
Current Maturities of Capital Lease Obligations 1,429 1,428
Accounts Payable 29,158 30,752
Accrued Payroll and Related Expenses 2,542 3,495
Accrued Interest 4,880 3,290
Accrued Income Taxes 3,388 4,260
Accrued Closure and Post-Closure Costs,
Current Portion 77 77
Deferred Revenue 520 378
Other Current Liabilities 21,844 27,374
--------- ---------
Total Current Liabilities 70,528 74,843
--------- ---------
Long-Term Debt, Less Current Maturities 350,511 320,793
--------- ---------
Capital Lease Obligations, Less Current Maturities 4,593 4,179
--------- ---------
Accrued Closure and Post-Closure Costs,
Less Current Maturities 17,153 19,254
--------- ---------
Minority Interest 677 605
--------- ---------
Other Long-Term Liabilities 12,160 15,121
--------- ---------
COMMITMENTS AND CONTINGENCIES
Series A Redeemable, Convertible Preferred Stock,
55,750 Shares Authorized, Issued and Outstanding, Liquidation
Preference of $1,000 per share 57,720 58,423
STOCKHOLDERS' EQUITY
Class A Common Stock -
Authorized - 100,000,000 Shares, $0.01 par value
Issued and Outstanding - 22,198,000 and 22,384,000
Shares as of April 30, 2001 and July 31, 2001, respectively 222 224
Class B Common Stock -
Authorized - 1,000,000 Shares, $0.01 par value 10 Votes per
Share
Issued and Outstanding - 988,000 Shares 10 10
Accumulated Other Comprehensive Income/(Loss) 586 (3,779)
Additional Paid-In Capital 271,502 272,902
Accumulated Deficit (99,369) (97,895)
--------- ---------
Total Stockholders' Equity 172,951 171,462
--------- ---------
$ 686,293 $ 664,680
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
3
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
Three Months Ended
---------------------------
July 31, July 31,
2000 2001
--------- ---------
Revenues $ 141,081 $ 112,341
--------- ---------
Operating Expenses:
Cost of Operations 97,375 74,466
General and Administration 15,895 13,727
Depreciation and Amortization 13,755 12,631
--------- ---------
127,025 100,824
--------- ---------
Operating Income 14,056 11,517
--------- ---------
Other (Income)/Expense:
Interest Income (601) (280)
Interest Expense 10,539 8,704
(Income)/Loss from Equity Method Investments 364 (566)
Minority Interest 190 (72)
Other Income (66) (843)
--------- ---------
Other Expenses, net 10,426 6,943
--------- ---------
Income from Continuing Operations Before
Income Taxes and Discontinued Operations 3,630 4,574
Provision for Income Taxes 1,952 2,147
--------- ---------
Net Income from Continuing Operations Before
Discontinued Operations 1,678 2,427
--------- ---------
Discontinued Operations:
Income from Discontinued Operations to be
Disposed (net of income taxes of $933) 1,641 --
Cumulative Effect of Change in Accounting Principle
(net of income tax benefit of $170) -- (250)
--------- ---------
Net Income 3,319 2,177
--------- ---------
Accretion of Preferred Stock Dividend -- 703
--------- ---------
Net Income Available to Common Stockholders $ 3,319 $ 1,474
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
4
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except for share and per share data)
Three Months Ended
------------------------------
July 31, July 31,
2000 2001
---------- ----------
Earnings Per Share:
Basic:
Income from Continuing Operations Before
Discontinued Operations $ 0.07 $ 0.07
Income from Discontinued Operations $ 0.07 $ --
Cumulative Effect of Accounting Changes $ -- $ (0.01)
---------- ----------
Net Income per Common Share $ 0.14 $ 0.06
========== ==========
Basic Weighted Average Common
Shares Outstanding 23,211 23,267
========== ==========
Diluted:
Income from Continuing Operations Before
Discontinued Operations $ 0.07 $ 0.07
Income from Discontinued Operations $ 0.07 $ --
Cumulative Effect of Accounting Changes $ -- $ (0.01)
---------- ----------
Net Income per Common Share $ 0.14 $ 0.06
========== ==========
Diluted Weighted Average Common
Shares Outstanding 23,889 23,929
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
5
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Three Months Ended
---------------------------
July 31, July, 31
2000 2001
-------- --------
Cash Flows from Operating Activities:
Net Income $ 3,319 $ 2,177
-------- --------
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities -
Depreciation and Amortization 13,755 12,631
Income from Equity Method Investments 364 (566)
Gain on Sale of Assets (169) (789)
Minority Interest 190 (72)
Deferred Income Taxes -- 2,311
Changes in Assets and Liabilities, net of
Effects of Acquisitions -
Accounts Receivable (13,749) 127
Accounts Payable 6,276 1,594
Other Current Assets and Liabilities 13,211 4,743
-------- --------
19,878 19,979
-------- --------
Net Cash Provided by Operating Activities 23,197 22,156
-------- --------
Cash Flows from Investing Activities:
Acquisitions, Net of Cash Acquired (3,761) --
Proceeds from Divestitures, Net of Cash Divested -- 8,008
Additions to Property and Equipment (20,588) (9,142)
Proceeds from Sale of Equipment 568 636
Advances to Unconsolidated Entities (1,603) (2,591)
Other (475) (812)
-------- --------
Net Cash Used in Investing Activities (25,859) (3,901)
-------- --------
Cash Flows from Financing Activities:
Proceeds from Long-Term Borrowings 18,920 4,900
Principal Payments on Long-Term Debt (7,260) (37,934)
Proceeds from Issuance of Common Stock 88 1,391
Proceeds from Equity Transactions of Majority-
Owned Subsidiary 469 --
-------- --------
Net Cash Provided by (Used in) Financing Activities 12,217 (31,643)
-------- --------
Cash from Discontinued Operations (2,819) (4,213)
Net Increase (Decrease) in Cash and Cash Equivalents 6,736 (17,601)
Cash and Cash Equivalents, Beginning of Period 8,864 22,001
-------- --------
Cash and Cash Equivalents, End of Period $ 15,600 $ 4,400
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
6
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Three Months Ended
---------------------------
July 31, July, 31
2000 2001
-------- --------
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period for -
Interest $ 1,605 $ 10,714
======== ========
Income Taxes $ -- $ (111)
======== ========
Supplemental Disclosures of Non-Cash Investing
and Financing Activities:
Summary of Entities Acquired
in Purchase Business Combinations
Fair Market Value of Assets Acquired $ 17,044 $ --
Cash Paid, net (3,761) --
-------- --------
Exchange of Note Receivable $ 13,283 $ --
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
7
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in thousands, except for share and per share data)
The condensed consolidated balance sheets of Casella Waste Systems, Inc. and
Subsidiaries (the "Company") as of July 31, 2001, the consolidated statements of
operations for the three months ended July 31, 2000 and 2001 and the condensed
consolidated statements of cash flows for the three months ended July 31, 2000
and 2001 are unaudited. In the opinion of management, such financial statements
include all adjustments (which include normal recurring and nonrecurring
adjustments) necessary for a fair presentation of financial position, results of
operations, and cash flows for the periods presented. The previously issued
consolidated statements of operations for the three months ended July 31, 2000
and the condensed consolidated statement of cash flows for the three months
ended July 31, 2000 have been changed to reflect the effects of discontinued
operations. The consolidated financial statements presented herein should be
read in connection with the Company's audited consolidated financial statements
as of and for the twelve months ended April 30, 2001. These were included as
part of the Company's Annual Report on Form 10-K (the "Annual Report"). The
results of the three months ended July 31, 2001 may not be indicative of the
results that may be expected for the fiscal year ended April 30, 2002.
1. BUSINESS COMBINATIONS
During the three months ended July 31, 2001, the Company did not acquire any
operations. During the three months ended July 31, 2000, the Company acquired
six solid waste hauling operations in transactions accounted for as purchases,
in which the operating results of these businesses are included in the
Consolidated Statement of Operations from the dates of acquisition. The purchase
prices have been allocated to the net assets acquired based on fair values at
the dates of acquisition with the residual amounts allocated to goodwill.
The following unaudited pro forma combined information shows the results of the
Company's operations as though each of the acquisitions had been completed as of
May 1, 2000. Since the Company did not acquire any operations during the three
months ended July 31, 2001, the actual results for that period are reflected
below for comparative purposes only.
Three Months Three Months
Ended Ended
July 31, 2000 July 31, 2001
---------- ----------
Revenues $ 142,508 $ 112,341
========== ==========
Operating Income $ 14,359 $ 11,517
========== ==========
Net Income applicable to Common Stockholders $ 2,189 $ 1,474
========== ==========
Diluted Income per Share $ 0.09 $ 0.06
========== ==========
Weighted Average Diluted
Shares Outstanding 23,889 23,929
========== ==========
The pro forma results have been prepared for comparative purposes only and are
not necessarily indicative of the actual results of operations had the
acquisitions taken place as of May 1, 2000 or the results of future operations
of the Company. Furthermore, the pro forma results do not give effect to all
cost savings or incremental costs that may occur as a result of the integration
and consolidation of the completed acquisitions.
2. ADOPTION OF NEW ACCOUNTING STANDARD
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133". SFAS No. 137 amends FASB Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", by deferring the effective date of SFAS No. 133 to fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting
8
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. The Company adopted
SFAS No. 133 on May 1, 2001. The Company's objective for utilizing derivative
instruments is to reduce its exposure to fluctuations in cash flows due to
changes in the variable interest rates under its credit facility and changes in
the commodity prices of recycled paper.
The Company's strategy to hedge against fluctuations in variable interest rates
involves entering into interest rate swaps that are specifically designated to
existing debt under our credit facility and accounted for as cash flow hedges
pursuant to SFAS 133. The Company has six interest rate swaps outstanding,
expiring at various times between January and April 2003 with a notional amount
of $250 million. The Company has evaluated these swaps and believes these
instruments qualify for hedge accounting pursuant to SFAS 133. Upon adoption of
SFAS 133, the Company recorded the fair value of these interest rate swaps as an
obligation of $6.9 million, with the offset (net of taxes of $2.8 million)
recorded as an unrealized loss in other comprehensive income (loss) (see Note
6). Because the relevant terms of the interest rate swaps and the specific debts
they have been designated to hedge are not identical, the swaps are not
perfectly effective, and could result in ineffectiveness being recorded in
earnings.
Accordingly, the ineffective portion of the hedge was recorded as a cumulative
effect of change in accounting principle in the accompanying financial
statements. The ineffectiveness recorded in earnings for the quarter ended July
31, 2001 was approximately $420K and is reflected as a reduction in interest
expense in the accompanying financial statements. The estimated net amount of
the existing losses as of July 31, 2001 included in accumulated other
comprehensive income expected to be reclassified into earnings as payments are
either made or received under the terms of the interest rate swaps within the
next 12 months is approximately $5.3 million, included in current liabilities on
the financial statements. The actual amounts reclassified into earnings are
dependent on future movements in interest rates.
The Company's strategy to hedge against fluctuations in the commodity prices of
recycled paper is to enter into hedges to mitigate the variability in cash flows
generated from the sales of recycled paper at floating prices, resulting in a
fixed price being received from these sales. The Company has entered into nine
commodity hedges, which expire at various times between September 2001 and June
2002. The Company has evaluated these hedges and believes these instruments
qualify for hedge accounting pursuant to SFAS 133. Because the relevant terms of
the hedges and the transactions they have been designated to hedge are
identical, there was no ineffectiveness required to be recognized into earnings.
Upon adoption of SFAS 133, the Company recorded the fair value of these hedges
as an asset of $1.8 million, with the offset (net of taxes of $.7 million)
recorded as an unrealized gain in other comprehensive income (loss) (see Note
6), all of which is expected to be reclassified into earnings as the hedged
transactions occur within the next 12 months. The actual amounts reclassified
into earnings are dependent on future movements in commodity prices.
3. LEGAL PROCEEDINGS
In the normal course of its business and as a result of the extensive
governmental regulation of the waste industry, the Company may periodically
become subject to various judicial and administrative proceedings involving
Federal, state or local agencies. In these proceedings, an agency may seek to
impose fines on the Company or to revoke, or to deny renewal of, an operating
permit held by the Company. In addition, the Company may become party to various
claims and suits pending for alleged damages to persons and property, alleged
violation of certain laws and for alleged liabilities arising out of matters
occurring during the normal operation of the waste management business.
The Company is a defendant in certain lawsuits alleging various claims incurred
in the ordinary course of business, none of which, either individually or in the
aggregate, the Company believes are material to its financial condition, results
of operations or cash flows.
9
4. ENVIRONMENTAL LIABILITIES
The Company is subject to liability for any environmental damage, including
personal injury and property damage, that its solid waste, recycling and power
generation facilities may cause to neighboring property owners, particularly as
a result of the contamination of drinking water sources or soil, possibly
including damage resulting from conditions existing before the Company acquired
the facilities. The Company may also be subject to liability for similar claims
arising from off-site environmental contamination caused by pollutants or
hazardous substances if the Company or its predecessors arrange to transport,
treat or dispose of those materials. Any substantial liability incurred by the
Company arising from environmental damage could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company is not presently aware of any situations that it expects would have a
material adverse impact.
5. EARNINGS PER SHARE
The following table reconciles the number of common shares outstanding at July
31 of each year indicated to the weighted average number of common shares
outstanding and the weighted average number of common and potentially dilutive
common shares outstanding for the respective three month periods for the purpose
of calculating basic and dilutive earnings per common share:
Three Months Three Months
Ended Ended
July 31, 2000 July 31, 2001
---------- ----------
Number of Shares Outstanding, End of Period:
Class A Common Stock 22,233 22,384
Class B Common Stock 988 988
Effect of Weighted Average Shares
Outstanding for the Period (10) (105)
------- -------
Basic Shares Outstanding 23,211 23,267
Impact of Potentially Dilutive Securities 678 662
------- -------
Diluted Shares Outstanding 23,889 23,929
======= =======
For the three months ended July 31, 2000 and 2001, 4,100 and 7,713 common stock
equivalents related to options, convertible debt, and redeemable convertible
preferred stock were excluded from the calculation of dilutive shares since the
inclusion of such shares would be anti-dilutive.
6. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents the change in the Company's equity from
transactions and other events and circumstances from non-owner sources and
includes all changes in equity except those resulting from investments by owners
and distributions to owners.
10
Comprehensive loss is as follows:
Three Months Ended
July 31, 2001
-------------
Net Income $ 1,474
Other Comprehensive Loss (4,365)
-------
Comprehensive Loss $(2,891)
=======
The components of other comprehensive income and related tax effects for the
three months ended July 31, 2001 are shown as follows (in thousands):
Gross Tax effect Net of tax
------- ---------- ----------
Cumulative effect of change in accounting
principle, beginning of period $(4,650) $(1,885) $(2,765)
Changes in fair value of interest rate swaps
and commodity hedges during period, net (2,757) (1,117) (1,640)
Changes in fair value of marketable securities
during the period 67 27 40
------- ------- -------
$(7,340) $(2,975) $(4,365)
======= ======= =======
7. SEGMENT REPORTING
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for reporting information about operating
segments in financial statements. In general, SFAS No. 131 requires that
business entities report selected information about operating segments in a
manner consistent with that used for internal management reporting.
The Company classifies its operations into Eastern, Central, Western and FCR
Recycling. The Company's revenues in the Eastern, Central and Western segments
are derived mainly from one industry segment, which includes the collection,
transfer, recycling and disposal of non-hazardous solid waste. The Eastern
Region also includes Maine Energy, which generates electricity from
non-hazardous solid waste. The Company's revenues in the FCR Recycling segment
are derived from integrated waste handling services, including processing and
recycling of wood, paper, metals, plastics and glass and disposal and brokerage
of recycled materials. Ancillary operations, mainly bio-fuel plants and major
customer accounts, are included in Other.
11
Eastern Central Western Recycling Other
Region Region Region
-------- -------- -------- -------- --------
Three Months Ended July 31, 2001:
Outside Revenue $ 37,820 $ 27,615 $ 17,640 $ 22,985 $ 6,281
======== ======== ======== ======== ========
Inter-segment Revenue $ 8,167 $ 12,720 $ 4,504 $ 3,579 $ 57
======== ======== ======== ======== ========
Income/(Loss)
from Continuing Operations $ 417 $ 5,337 $ 979 $ (2,070) $ (2,736)
======== ======== ======== ======== ========
Total Assets $274,738 $126,253 $111,316 $ 74,097 $ 78,276
======== ======== ======== ======== ========
Elimination
Total
-------- --------
Outside Revenue $ - $112,341
======== ========
Inter-segment Revenue $(29,027) $ -
======== ========
Income/(Loss)
from Continuing Operations $ - $ 2,427
======== ========
Total Assets $ - $664,680
======== ========
Eastern Central Western Recycling Other
Region Region Region
-------- -------- -------- -------- --------
Three Months Ended July 31, 2000:
Outside Revenue $ 42,268 $ 26,924 $ 16,905 $ 34,619 $ 20,365
======== ======== ======== ======== ========
Inter-segment Revenue $ 10,872 $ 10,082 $ 3,599 $ 6,343 $ 997
======== ======== ======== ======== ========
Income/(Loss)
from Continuing Operations $ 1,076 $ 4,433 $ 1,389 $ 1,186 $ (6,406)
======== ======== ======== ======== ========
Total Assets $382,102 $131,545 $127,566 $ 93,873 $163,161
======== ======== ======== ======== ========
Elimination
Total
-------- --------
Outside Revenue $ - $141,081
======== ========
Inter-segment Revenue $(31,893) $ -
======== ========
Income/(Loss)
from Continuing Operations $ - $ 1,678
======== ========
Total Assets $ - $898,247
======== ========
12
8. RESTRUCTURING
In April 2001, the Company's Board of Directors approved a reorganization of
certain of the Company's operations. This reorganization consisted of the
elimination of various positions and the closure of certain facilities. The
following items were charged to earnings during 2001:
Severance $3,786
Facility closures 365
------
$4,151
------
Severance relates to the termination of 19 employees, primarily in management
and administration, as well as three officers of the Company. Facility closures
include the costs of closing two transfer stations.
During the three months ended July 31, 2001, $502 was charged against the
accrual. The remaining balance in the accompanying balance sheet, included in
other current liabilities, amounted to $3,649.
9. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
Discontinued Operations:
At the end of fiscal year 2001, the Company adopted a formal plan to dispose of
its Tire Processing, Commercial Recycling and Mulch Recycling businesses (herein
"discontinued businesses"). The Company is accounting for these planned
dispositions in accordance with APB Opinion No. 30, and accordingly the
discontinued businesses are carried at estimated net realizable value less costs
to be incurred through date of disposition.
The Mulch Recycling business was sold effective June 30, 2001 for one dollar,
and the Company retained equipment having a fair market value of approximately
$1.6 million. Additionally, the Company's obligations for a lease and employment
agreements with a gross remaining value of approximately $2.6 million were
terminated at a cost of $375,000.
On August 17, 2001 the Company signed a purchase and sale agreement to sell its
Tire Processing business including its investment in New Heights. The
transaction is expected to close in September 2001.
Net Assets Held for Sale:
The Company had identified for sale certain other businesses, which do not
qualify as discontinued operations and which were classified as Net Assets Held
for Sale as of April 30, 2001. These included its Timber Energy business and its
one remaining plastics recycling facility.
On May 17, 2001, the plastics recycling business was sold for approximately $998
in total consideration. The consideration consisted of $406 in cash and $592 in
notes.
On July 31, 2001, the Timber Energy business was sold for approximately $15.0
million in total consideration. The consideration comprised the buyer's
assumption of debt, reimbursement of restricted cash funds, and a working
capital adjustment, resulting in $10.7 million cash.
10. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets".
These standards, among other things, significantly modify the current accounting
rules related to accounting for business acquisitions, amortization of
intangible assets and the method of accounting for impairments. The Company has
not completed an analysis as to the magnitude of the impact of these new
pronouncements on the Company's financial statements. However, the Company
believes that the impact, when ultimately determined, could have a significant
adverse effect on the Company's carrying value of certain long-term assets
(mainly goodwill). The Company will adopt SFAS No. 141 and SFAS No. 142 as of
the beginning of its fiscal year 2003.
13
In July 2001, the FASB issued SFAS No.143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes the
cost by increasing the carrying amount of the related long-lived asset. The
liability is accreted to its present value each period and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, the entity either settles the obligation for the amount recorded or
incurs a gain or loss. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. Management is evaluating the effect of this statement on
the Company's results of operations and financial position.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Casella Waste Systems, Inc. the ("Company") is a regional, integrated solid
waste services company that provides collection, transfer, disposal and
recycling services, primarily throughout the eastern portion of the United
States. The Company markets recyclable metals, aluminum, plastics, paper and
corrugated cardboard which has been processed at its facilities as well as
recyclables purchased from third parties. The Company also generates electricity
under its contracts at its wholly owned subsidiary, Maine Energy Recovery
Company LP ("Maine Energy"), a waste-to-energy facility. As of September 5,
2001, the Company owned and/or operated five Subtitle D landfills, two landfills
permitted to accept construction and demolition materials, 30 transfer stations,
43 recycling processing facilities, 38 solid and liquid waste collection
divisions and one power generation facility, as well as a 50% interest in a
cellulose insulation joint venture.
The Company's revenues have decreased from $141.1 million for the three months
ended July 31, 2000 to $112.3 million for the three months ended July 31, 2001.
From May 1, 2000 through April 30, 2001, the Company acquired 13 solid waste
collection, transfer and disposal operations, all of which were accounted for
under the purchase method of accounting for business combinations. Under the
rules of purchase accounting the acquired companies' revenues and results of
operations have been consolidated from the actual dates of the acquisitions and
materially affect the period-to-period comparisons of the Company's historical
results of operations. Between May 1, 2001 and July 31, 2001, the Company
acquired no such businesses.
This Form 10-Q and other reports, proxy statements, and other communications to
stockholders, as well as oral statements by the Company's officers or its
agents, may contain forward-looking statements within the meaning of Section 27A
of the Securities Act and section 21E of the Securities Exchange Act, with
respect to, among other things, the Company's future revenues, operating income,
or earnings per share. Without limiting the foregoing, any statements contained
in this Quarterly Report that are not statements of historical fact may be
deemed to be forward-looking statements, and the words "believes",
"anticipates", "plans", "expects", and similar expressions are intended to
identify forward-looking statements. There are a number of factors of which the
Company is aware that may cause the Company's actual results to vary materially
from those forecasted or projected in any such forward-looking statement,
certain of which are beyond the Company's control. These factors include,
without limitation, those outlined below in the section entitled "Certain
Factors That May Affect Future Results". The Company's failure to successfully
address any of these factors could have a material adverse effect on the
Company's results of operations.
General
- -------
The Company's revenues in the Eastern, Central and Western regions are
attributable primarily to fees charged to customers for solid waste disposal and
collection, landfill, waste-to-energy, transfer and recycling services. The
Company derives a substantial portion of its collection revenues from
commercial, industrial and municipal services that are generally performed under
service agreements or pursuant to contracts with municipalities. The majority of
the Company's residential collection services are performed on a subscription
basis with individual households. Landfill, waste-to-energy facility and
transfer customers are charged a tipping fee on a per ton basis for disposing of
their solid waste at the Company's disposal facilities and transfer stations.
The majority of the Company's disposal and transfer customers are under one to
ten year disposal contracts, with most having clauses for annual cost of living
increases. Recycling revenues consist of revenues from the sale of recyclable
commodities, operations and maintenance contracts of recycling facilities for
municipal customers and recyclable brokering operations.
The Company, through its Recycling segment, provides integrated waste handling
services, including processing and recycling of wood, paper, metals, aluminum,
plastics and glass, municipal solid waste processing and disposal, and brokerage
of recycled materials. The Company emphasizes the use of low-cost processing to
add value to the waste products delivered. Effective August 1, 2000, the Company
contributed its cellulose insulation assets to a joint venture with
Louisiana-Pacific, and accordingly, has recognized half of the joint venture's
net income/(loss) in the Company's results of operations since that date. In the
Other segment, the Company has ancillary assets including specialty waste
disposal, ash residue recycling and the generation of electric power and steam.
The Company's revenues are shown net of inter-company eliminations. The Company
typically establishes its inter-company transfer pricing based upon prevailing
market rates.
15
The table below shows, for the periods indicated, the percentage of the
Company's revenues attributable to services provided. The increase in the
Company's collection and transfer revenues as a percentage of revenues during
the three months ending July 31, 2001 is primarily attributable to the effects
of price and volume increases. The decrease in the Company's landfill/disposal
revenues as a percentage of revenues during the three months ending July 31,
2001 is primarily attributable to the divestiture of its majority interest in
Penobscot Energy Recovery Company LP. The decrease in the Company's brokerage
revenues as a percentage of revenues during the three months ending July 31,
2001 is primarily attributable to the overall effects of commodity prices. The
decrease in the Company's other revenues as a percentage of revenues during the
three months ending July 31, 2001 is primarily attributable to divestitures made
during the period.
Percentage of Revenues
----------------------
Three Months Ended July 31,
---------------------------
2000 2001
------ ------
Collection....................................... 42.0% 51.8%
Landfill/Disposal Facilities..................... 14.7 13.4
Transfer......................................... 6.6 11.4
Recycling........................................ 6.8 7.3
Brokerage........................................ 17.8 13.2
Other............................................ 12.1 2.9
------ ------
Total Revenues 100.0% 100.0%
====== ======
Cost of operations includes labor, tipping fees paid to third party disposal
facilities, fuel, maintenance and repair of vehicles and equipment, worker's
compensation and vehicle insurance, the cost of purchasing materials to be
recycled, third party transportation expense, district and state taxes, host
community fees and royalties. Landfill operating expenses also include a
provision for closure and post-closure expenditures anticipated to be incurred
in the future, and leachate treatment and disposal costs.
General and administrative expenses include management, clerical and
administrative compensation and overhead, professional services and costs
associated with the Company's marketing and sales force and community relations
expense.
Depreciation and amortization expense includes depreciation of fixed assets over
the estimated useful life of the assets using the straight-line method,
amortization of landfill airspace assets under the units-of-production method,
and the amortization of goodwill and other intangible assets using the
straight-line method. The amount of landfill amortization expense related to
airspace consumption can vary materially from landfill to landfill depending
upon the purchase price and landfill site and cell development costs. The
Company depreciates all fixed and intangible assets, excluding non-depreciable
land, down to a zero net book value, and does not apply a salvage value to any
of its fixed assets.
The Company capitalizes certain direct landfill development costs, such as
engineering, permitting, legal, construction and other costs directly associated
with expansion of existing landfills. Additionally, the Company also capitalizes
certain third party expenditures related to pending acquisitions, such as legal
and engineering costs. The Company will have material financial obligations
relating to closure and post-closure costs of its existing landfills and any
disposal facilities, which it may own or operate in the future. The Company has
provided and will in the future provide accruals for future financial
obligations relating to closure and post-closure costs of its landfills
(generally for a term of 30 years after final closure of a landfill) based on
engineering estimates of consumption of permitted landfill airspace over the
useful life of any such landfill. There can be no assurance that the Company's
financial obligations for closure or post-closure costs will not exceed the
amount accrued and reserved or amounts otherwise receivable pursuant to trust
funds. The Company routinely evaluates all such capitalized costs, and expenses
those costs related to projects not likely to be successful. Internal and
indirect landfill development and acquisition costs, such as executive and
corporate overhead, public relations and other corporate services, are expensed
as incurred.
16
Results of Operations
- ---------------------
The following table sets forth for the periods indicated the percentage
relationship that certain items from the Company's Consolidated Financial
Statements bear in relation to revenues.
Percentage of Revenues
----------------------
Three Months Ended July 31,
---------------------------
2000 2001
------ ------
Revenues 100.0% 100.0%
Cost of Operations 69.0 66.3
General and Administration 11.3 12.2
Depreciation and Amortization 9.7 11.2
------ ------
Operating Income 10.0 10.3
Interest Expense, net 7.0 7.6
Equity Loss (Gain) on Equity Method Investments 0.3 (0.5)
Minority Interest 0.1 (0.1)
Other (Income)/Expense 0.0 (0.8)
Provision for Income Taxes 1.4 1.8
------ ------
Income from Continuing Operations 1.2 2.2
Discontinued Operations 1.2 0.0
Cumulative Effect of Accounting Changes 0.0 0.3
------ ------
Net Income 2.4% 1.9%
====== ======
Adjusted EBITDA* 19.6% 21.6%
====== ======
* See discussion and computation of adjusted EBITDA below.
REVENUES:
Revenues decreased $28.7 million, or (20.4)% to $112.3 million in the quarter
ended July 31, 2001 from $141.1 million in the quarter ended July 31, 2000.
Approximately $18.2 million of the decrease in the quarter was attributable to
the impact of businesses divested during fiscal 2001. This decrease was
partially offset by the rollover effect of acquisitions amounting to
approximately $1.6 million. The remaining decrease of $12.1 million was mainly
attributable to the negative impact of lower average recyclable commodity prices
and volumes, partially offset by price and volume increases in the solid waste
businesses amounting to approximately $7.6 million.
COST OF OPERATIONS:
Cost of operations decreased $22.9 million or (23.5)% to $74.5 million in the
quarter ended July 31, 2001 from $97.4 million in the quarter ended July 31,
2000. This decrease mainly arises from lower volumes of recyclable material
purchases and divestitures. Cost of operations as a percentage of revenues
decreased to 66.3% in the quarter ended July 31, 2001 from 69.0% in the prior
year. The decrease in cost of operations as a percentage of revenues was
primarily the result of recyclable brokerage operations, which carry a high cost
of operations as a percentage of revenues (approximately 90%). Brokerage
comprised approximately 13.2% of the Company's revenues in the current quarter,
versus 17.8% in the prior year.
GENERAL AND ADMINISTRATION:
General and administration expenses decreased $2.2 million, or (13.6)% to $13.7
million in the quarter ended July 31, 2001 from $15.9 million in the quarter
ended July 31, 2000, but increased as a percentage of revenues to 12.2% in the
quarter ended July 31, 2001 from 11.3% in the quarter ended July 31, 2000. The
decrease in general and administrative expenses was primarily the result of
divestitures. The increase in general and administrative expenses as a
percentage of revenues was primarily the result of recyclable brokerage
operations, which could not lower its fixed general and administrative costs in
concert with lower commodity prices (revenue).
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization expenses decreased $1.1 million, or (8.2)%, to
$12.6 million in the quarter
17
ended July 31, 2001 from $13.7 million in the quarter ended July 31, 2000. The
decrease was attributable to lower intangible amortization due to the impairment
charge taken in fiscal year 2001 and the impact of divested entities.
Depreciation and amortization expenses as a percentage of revenue increased to
11.2% in the quarter ended July 31, 2001 from 9.7% in the quarter ended July 31,
2000. The increase in depreciation and amortization expenses as a percentage of
revenues resulted primarily from a lower level of revenue.
INTEREST EXPENSE, NET:
Net interest expense decreased $1.5 million, or (15.2)% to $8.4 million in the
quarter ended July 31, 2001 from $9.9 million in the quarter ended July 31,
2000. This decrease is primarily attributable to lower average debt balances and
lower interest rates on variable debt in the current fiscal quarter, versus last
year. Interest expense, as a percentage of revenues increased to 7.6% in the
quarter ended July 31, 2001 from 7.0% in the quarter ended July 31, 2000
primarily due to a lower level of revenue.
(GAIN)/LOSS FROM EQUITY METHOD INVESTMENTS:
During the quarter ending July 31, 2001 the Company recorded its 50% equity
interest in GreenFiber under the equity method of accounting. The prior period
also reflected the Company's 35% ownership of Oakhurst Company, Inc., which was
acquired as part of KTI. Oakhurst Company, Inc. owned 37.5% of New Heights
Recovery and Power LLC ("New Heights"). The Company also had a direct ownership
interest in New Heights of 12.5%.
Effective July 3, 2001 the Company acquired Oakhurst Company, Inc.'s 37.5%
interest in New Heights and transferred back to Oakhurst the 35% ownership of
Oakhurst owned by KTI.
MINORITY INTEREST:
This amount now represents the minority owners' interest in the Company's
majority owned subsidiary American Ash Recycling of Tennessee, Ltd. The prior
period also reflected the minority owners' interest in the Company's majority
owned subsidiaries Maine Energy Recovery Company and Penobscot Energy Recovery
Company. Effective March 1, 2001, the Company acquired the remaining 16.25%
minority interest in Maine Energy and sold its majority interest in the
Penobscot Energy Recovery Company.
OTHER (INCOME)/EXPENSE:
Other (income)/expense increased $1.0 million in the quarter ended July 31, 2001
to $(0.9) from $(0.1) million in the quarter ended July 31, 2000, primarily
attributable to gains on sale of assets.
PROVISION FOR INCOME TAXES:
Provision for income taxes remained largely unchanged, but as a percentage of
revenues, increased to 1.8% from 1.4%. The effective tax rate decreased to 47.6%
in the quarter ended July 31, 2001 from 53.8% in the quarter ended July 31,
2000. The decrease is primarily due to the Company's increase in profitability
in the first quarter of 2001, and lower amortization of non-deductible goodwill.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's business is capital intensive. The Company's capital requirements
include acquisitions, fixed asset purchases and capital expenditures for
landfill development and cell construction, as well as site and cell closure.
The Company had positive net working capital of $55.0 million and $33.6 million
at April 30, 2001 and at July 31, 2001, respectively. The main factors
accounting for the decrease were lower cash balances and the sale of assets held
for sale.
The Company has a $417.5 million revolving line of credit with a group of banks
for which Fleet Bank, N.A. is acting as agent. This line of credit consists of a
$280 million Senior Secured Revolving Credit Facility ("Revolver") and a $137.5
million Senior Secured Delayed Draw Term "B" Loan ("Term Loan"). This line of
credit is secured by all assets of the Company, including the Company's interest
in the equity securities of its subsidiaries. The Revolver matures in December
2004 and the Term Loan matures in December 2006. Funds available to the Company
under the line of credit were approximately $66 million at July 31, 2001.
Net cash provided by operating activities amounted to $22.1 million for the
quarter ended July 31, 2001 compared to $23.2 million for the same period of the
prior fiscal year. The decrease was primarily due to the change in the Company's
working capital, together with a decrease in depreciation and amortization.
18
Net cash used in investing activities was $3.9 million for the three
months ended July 31, 2001 compared to $25.9 million cash used for the same
period last year. The decrease in investing activities reflected mainly the
Company's lower capital expenditures, the Company did not make any acquisitions,
and the proceeds from divestitures.
Net cash used by financing activities was $31.6 million for the three months
ended July 31, 2001 compared to $12.2 million cash provided by financing
activities for the same period of the prior fiscal year. This decrease was
primarily due to the Company paying down debt from the utilization of working
capital, mainly cash, and the proceeds from divestitures.
SEASONALITY
- -----------
The Company's transfer and disposal revenues have historically been lower during
the months of November through March. This seasonality reflects the lower volume
of waste during the late fall, winter and early spring months primarily because:
(i) the volume of waste relating to construction and demolition activities
decreases substantially during the winter months in the northeastern United
States; and (ii) decreased tourism in Vermont, Maine and eastern New York during
the winter months tends to lower the volume of waste generated by commercial and
restaurant customers, which is partially offset by the winter ski industry.
Since certain of the Company's operating and fixed costs remain constant
throughout the fiscal year, operating income results are therefore impacted by a
similar seasonality. In addition, particularly harsh weather conditions
typically result in increased operating costs to certain of the Company's
operations.
The recycling segment experiences increased volumes of newspaper in November and
December due to increased newspaper advertising and retail activity during the
holiday season. Additionally, the facilities located in Florida experience
increased volumes of recyclable materials during the winter months, followed by
decreases in the summer months in connection with seasonal changes in
population.
The insulation business experiences lower sales in November and December because
of lower production of manufactured housing due to plant shutdowns for the
holidays.
INFLATION AND PREVAILING ECONOMIC CONDITIONS
- --------------------------------------------
To date, inflation has not had a significant impact on the Company's operations.
Consistent with industry practice, most of the Company's contracts provide for a
pass through of certain costs, including increases in landfill tipping fees and,
in some cases, fuel costs. The Company therefore believes it should be able to
implement price increases sufficient to offset most cost increases resulting
from inflation. However, competitive factors may require the Company to absorb
at least a portion of these cost increases, particularly during periods of high
inflation.
The Company's business is located in the eastern United States. Therefore, the
Company's business, financial condition and results of operations are
susceptible to downturns in the general economy in this geographic region and
other factors affecting the region such as state regulations and severe weather
conditions. The Company is unable to forecast or determine the timing and/or the
future impact of a sustained economic slowdown.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets".
These standards, among other things, significantly modify the current accounting
rules related to accounting for business acquisitions, amortization of
intangible assets and the method of accounting for impairments. The Company has
not completed an analysis as to the magnitude of the impact of these new
pronouncements on the Company's financial statements. However, the Company
believes that the impact, when ultimately determined, could have a significant
adverse effect on the Company's carrying value of certain long-term assets
(mainly goodwill). The Company will adopt SFAS No. 141 and SFAS No. 142 as of
the beginning of its fiscal year 2003.
In July 2001, the FASB issued SFAS No.143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes the
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, the entity either settles the obligation for the
amount recorded or incurs a gain or loss. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. Management is evaluating the effect of this
statement on the Company's results of operations and financial position.
19
ADJUSTED EBITDA
- ---------------
Adjusted EBITDA represents operating income (earnings before interest and taxes,
or "EBIT") plus depreciation and amortization expense less minority interest.
Adjusted EBITDA is not a measure of financial performance under generally
accepted accounting principles, but is provided because the Company understands
that certain investors use this information when analyzing the financial
position and performance of the Company.
Three Months Ended July 31,
---------------------------
Adjusted EBITDA: 2000 2001
-------- --------
Operating Income $ 14,056 $ 11,517
Depreciation and Amortization 13,755 12,631
Minority Interest (190) 72
-------- --------
Adjusted EBITDA $ 27,621 $ 24,220
======== ========
EBITDA as a percentage of revenues 19.6% 21.6%
======== ========
Noted below is Adjusted EBITDA as reported by each of the Company's key
operating groups.
Three Months Ended July 31,
---------------------------
Adjusted EBITDA by Group: 2000 2001
-------- --------
Solid Waste Operations $ 22,579 $ 22,490
Recycling 4,088 1,193
Other 954 537
-------- --------
Adjusted EBITDA $ 27,621 $ 24,220
======== ========
Analysis of the factors contributing to the change in EBITDA is included in the
discussions above.
INTEREST RATE VOLATILITY
- ------------------------
The interest rate on $250 million of long-term debt has been fixed through six
interest rate swaps. The company has interest rate risk relating to
approximately $75 million of long-term debt at July 31, 2001. The average
interest rate on the variable rate portion of long-term debt was 9.51% for the
first fiscal quarter. Should the average interest rate on the variable rate
portion of long-term debt change by 100 basis points, it would have an
approximate interest expense change of $0.2 million for the quarter reported.
The remainder of the Company's debt is at fixed rates and not subject to
interest rate risk.
COMMODITY PRICE VOLATILITY
The Company is subject to commodity price fluctuations related to the portion of
its sales of recyclable commodities that are not under floor or flat pricing
arrangements. To minimize the Company's commodity exposure, the Company enters
into hedging transactions that have been authorized pursuant to the Company's
policies and procedures. The Company does not use financial instruments for
trading purposes and is not a party to any leveraged derivatives. If commodity
prices were to change by 10%, the impact on the company's revenue is estimated
at $6.6 Million.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Form 10-Q and presented elsewhere by management from time to time.
20
WE HAVE EXPERIENCED DIFFICULTIES INTEGRATING KTI'S OPERATIONS AND ASSETS.
We acquired KTI on December 14, 1999. Since that time, we have experienced
difficulties in integrating the operations of KTI and these difficulties have
caused us to revise our publicly disclosed projections on several occasions.
Although we are divesting of a number of operations we acquired from KTI, there
can be no assurance that we will not continue to experience difficulties in
integrating KTI's operations effectively.
OUR INCREASED LEVERAGE MAY IMPACT OUR ABILITY TO MAKE FUTURE ACQUISITIONS.
As a result of the acquisition of KTI and the increase in our credit facility,
our indebtedness has increased substantially. This increased indebtedness has
resulted in increased borrowing costs, which have adversely impacted our
operating results. In addition, the aggregate amount of indebtedness has limited
and may continue to limit the Company's ability to incur additional
indebtedness, and thereby may limit the acquisition program.
WE MAY NOT BE SUCCESSFUL IN MAKING ACQUISITIONS, WHICH COULD LIMIT OUR FUTURE
GROWTH.
Our strategy envisions that a substantial part of our future growth will come
from making acquisitions. There can be no assurance that we will be able to
identify suitable acquisition candidates and, once identified, to negotiate
successfully their acquisition at a price or on terms and conditions favorable
to us, or to integrate the operations of such acquired businesses with our
operations. Any of these acquisitions may be of significant size and may include
assets that are outside our geographic territories or businesses that are
ancillary to our core business strategy. In addition, due to the increased
consolidation of the solid waste industry and our current size, we cannot assure
you that we will be able to make acquisitions in the future at a rate consistent
with our historical growth rate.
WE ARE DEPENDENT ON THE MEMBERS OF OUR SENIOR MANAGEMENT TEAM.
We are highly dependent upon the services of the members of our senior
management team, the loss of any of whom may have a material adverse effect on
our business, financial condition and results of operations. In addition, our
future success depends on our continuing ability to identify, hire, train,
motivate and retain highly trained personnel. We may be in default under our
credit facility if both John Casella and James Bohlig cease to be employed by
us.
OUR ABILITY TO MAKE ACQUISITIONS IS DEPENDENT ON THE AVAILABILITY OF ADEQUATE
CASH AND THE ATTRACTIVENESS OF OUR STOCK PRICE.
We anticipate that any future business acquisitions will be financed through
cash from operations, borrowings under our bank line of credit, the issuance of
shares of our Class A common stock and/or seller financing. There can be no
assurance that we will have sufficient existing capital resources, that our
stock price will be sufficiently attractive for use in an acquisition or that we
will be able to raise sufficient additional capital resources on terms
satisfactory to us, if at all, in order to meet our capital requirements.
We also believe that a significant factor in our ability to close acquisitions
will be the attractiveness of our Class A common stock as consideration for
potential acquisition candidates. This attractiveness may, in large part, be
dependent upon the relative market price and capital appreciation prospects of
our Class A common stock compared to the equity securities of our competitors.
The recent volatility in the market price of our Class A common stock could
materially adversely affect our acquisition program.
ENVIRONMENTAL REGULATIONS COULD SUBJECT US TO FINES, PENALTIES AND LIMITATIONS
ON OUR ABILITY TO EXPAND.
We are subject to potential liability and restrictions under environmental laws.
Our waste-to-energy and manufacturing facilities are subject to regulations
limiting discharges of pollution into the air and water, and the solid waste
operations are subject to a wide range of Federal, state and, in some cases,
local environmental and land use restrictions. If we are not able to comply with
the requirements that apply to a particular facility, we could be subject to
fines and penalties, and we may be required to spend large amounts to bring an
operation into compliance or to temporarily or permanently stop an operation
that is not permitted under the law. Those costs or actions could have a
material adverse effect upon our business, financial condition and results of
operations.
21
Environmental and land use laws also can have an impact on whether our
operations can expand and, in the case of our solid waste operations, may
dictate those geographic areas from which we must, or, from which we may not,
accept waste. The waste management industry has been and likely will continue to
be subject to regulation, as well as to attempts to regulate the industry
through new legislation. Those regulations and laws also may limit the overall
size and daily waste volume that may be accepted by a solid waste operation. If
we are not able to expand or otherwise operate one or more of our facilities
profitably because of limits imposed under environmental laws, we may be
required to increase our utilization of disposal facilities owned by third
parties, and if so, our business, financial condition and results of operations
could suffer a material adverse effect.
We have grown through acquisitions, and we have tried to evaluate and address
environmental risks and liabilities presented by newly acquired businesses as we
have identified them. It is possible that some liabilities, including ones that
may exist only because of the past operations of an acquired business, may prove
to be more difficult or costly to address than we anticipate. It is also
possible that government officials responsible for enforcing environmental laws
may believe an issue is more serious than we would expect, or that we will fail
to identify or fully appreciate an existing liability before we become legally
responsible to address it. Some of the legal sanctions to which we could become
subject could cause us to lose a needed permit, or prevent us from or delay us
in obtaining or renewing permits to operate our facilities. The number, size and
nature of those liabilities could have a material adverse effect on our
business, financial condition and results of operations.
Our operating program depends on our ability to operate and expand the landfills
we own and lease and to develop new landfill sites. Several of our landfills are
subject to local laws purporting to regulate their expansion and other aspects
of their operations. There can be no assurance that the laws adopted by
municipalities in which our landfills are located will not have a material
adverse effect on our utilization of our landfills or that we will be successful
in obtaining new landfill sites or expanding the permitted capacity of any of
our current landfills once their remaining disposal capacity has been consumed.
OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED BY CHANGING PRICES OR
MARKET REQUIREMENTS FOR RECYCLABLE MATERIALS.
Our results of operations may be materially adversely affected by changing
purchase or resale prices or market requirements for recyclable materials. Our
recycling business involves the purchase and sale of recyclable materials, some
of which are priced on a commodity basis. The resale and purchase prices of, and
market demand for, recyclable materials, particularly waste paper, plastic and
ferrous and aluminum metals, can be volatile due to numerous factors beyond our
control. These changes have in the past contributed, and may continue to
contribute, to significant variability in our period-to-period results of
operations.
Some of our subsidiaries involved in the recycling business use long-term supply
contracts with customers with floor price arrangements to minimize the commodity
risk for recyclable materials, particularly waste paper and aluminum metals.
Under these contracts, our subsidiaries obtain a guaranteed minimum floor price
for the recyclable materials along with a commitment to receive additional
amounts if the current market price rises above the minimum price. These
contracts are generally with large domestic companies, which use the recyclable
materials in their manufacturing processes. Any failure to continue to secure
long-term supply contracts with minimum price arrangements, or a breach by
customers of one or more of these contracts could reduce our recycling revenues
and have a material adverse effect on our business, financial condition and
results of operations.
THE SEASONALITY OF OUR REVENUES COULD ADVERSELY IMPACT OUR FINANCIAL
CONDITION.
The Company's transfer and disposal revenues have historically been lower during
the months of November through March. This seasonality reflects the lower volume
of waste during the late fall, winter and early spring months primarily because:
(i) the volume of waste relating to construction and demolition activities
decreases substantially during the winter months in the northeastern United
States; and (ii) decreased tourism in Vermont, Maine and eastern New York during
the winter months tends to lower the volume of waste generated by commercial and
restaurant customers, which is partially offset by the winter ski industry.
Since certain of the Company's operating and fixed costs remain constant
throughout the fiscal year, operating income is therefore impacted by a similar
seasonality. In addition, particularly harsh weather conditions could result in
increased operating costs to some of the Company's operations.
22
The recycling segment experiences increased volumes of newspaper in November and
December due to increased newspaper advertising and retail activity during the
holiday season. Additionally, the facilities located in Florida experience
increased volumes of recyclable materials during the winter months, followed by
decreases in the summer months in connection with seasonal changes in
population.
The insulation business experiences lower sales in November and December because
of lower production of manufactured housing due to holiday plant shut downs.
OUR BUSINESS IS GEOGRAPHICALLY CONCENTRATED AND IS THEREFORE SUBJECT TO
REGIONAL ECONOMIC DOWNTURNS.
Our operations and customers are principally located in the eastern United
States. Therefore, our business, financial condition and results of operations
are susceptible to regional economic downturns and other regional factors,
including state regulations and severe weather conditions. In addition, as we
expand in our existing markets, opportunities for growth within these regions
will become more limited. The costs and time involved in permitting and the
scarcity of available landfills will make it difficult for us to expand
vertically in these markets. We cannot assure you that we will complete enough
acquisitions in other markets to lessen our regional geographic concentration.
MAINE ENERGY MAY BE REQUIRED TO MAKE A PAYMENT IN CONNECTION WITH THE PAYOFF OF
THE MAINE ENERGY BONDS WHICH EXCEEDS THE AMOUNT OF THE LIABILITY WE RECORDED IN
CONNECTION WITH THE KTI AQUISITION.
Under the terms of a waste handling agreement among the Biddeford-Saco Waste
Handling Committee, Biddeford, Saco and Maine Energy, Maine Energy may be
required, following the date on which the bonds financing Maine Energy and
certain limited partner loans to Maine Energy are paid in full, to pay an
aggregate of 18% of the fair market value of the equity of the partners in Maine
Energy to the respective municipalities party to that agreement. In connection
with the acquisition of KTI, the Company estimated the fair market value of
Maine Energy as of the date the bonds are assumed to be paid in full, and
recorded a liability equal to 18% of such amount. We cannot assure you that our
estimate of the fair market value of Maine Energy will prove to be accurate, and
in the event we have underestimated the value of Maine Energy, we could be
required to recognize unanticipated charges, in which case our financial
condition, results of operations and liquidity could be materially adversely
affected.
WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE IN THE HIGHLY COMPETITIVE SOLID WASTE
SERVICES INDUSTRY.
The solid waste services industry is highly competitive, is undergoing a period
of increasingly rapid consolidation, and requires substantial labor and capital
resources. Some of the markets in which we compete or will likely compete are
served by one or more of the large national or multinational solid waste
companies, as well as numerous regional and local solid waste companies. Intense
competition exists not only to provide services to customers, but also to
acquire other businesses within each market. Some of our competitors have
significantly greater financial and other resources than us. From time to time,
competitors may reduce the price of their services in an effort to expand market
share or to win a competitively bid municipal contract. These practices may
either require us to reduce the pricing of our services or result in our loss of
business. As is generally the case in the industry, municipal contracts are
subject to periodic competitive bidding. There can be no assurance that we will
be the successful bidder to obtain or retain these contracts. If we are unable
to compete with larger and better capitalized companies, or to replace municipal
contracts lost through the competitive bidding process with comparable contracts
or other revenue sources within a reasonable time period, our business,
financial condition and results of operations could be materially adversely
affected.
In our solid waste disposal markets, we also compete with operators of
alternative disposal and recycling facilities and with counties, municipalities
and solid waste districts that maintain their own waste collection, recycling
and disposal operations. These entities may have financial advantages because
user fees or similar charges, tax revenues and tax-exempt financing may be more
available to them than to us.
Our insulation manufacturing joint venture with Louisiana-Pacific competes with
other parties, some of which have substantially greater resources than we do,
which they could use for product development, marketing or other purposes to our
detriment.
23
OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION MAY BE NEGATIVELY AFFECTED IF
WE INADEQUATELY ACCRUE FOR CLOSURE AND POST-CLOSURE COSTS.
We have material financial obligations relating to closure and post-closure
costs of our existing landfills and will have material financial obligations
with respect to any disposal facilities which we may own or operate in the
future. In addition to the landfills we currently operate, we own four unlined
landfills which are not currently in operation. We have provided and will in the
future provide accruals for financial obligations relating to closure and
post-closure costs of our owned or operated landfills, generally for a term of
30 years after final closure of a landfill. We cannot assure you that our
financial obligations for closure or post-closure costs will not exceed the
amount accrued and reserved or amounts otherwise receivable pursuant to trust
funds established for this purpose. Such a circumstance could result in
unanticipated charges and have a material adverse effect on our financial
condition and results of operations.
WE COULD BE PRECLUDED FROM ENTERING INTO CONTRACTS OR OBTAINING PERMITS IF WE
ARE UNABLE TO OBTAIN THIRD PARTY FINANCIAL ASSURANCE TO SECURE OUR CONTRACTUAL
OBLIGATIONS.
Municipal solid waste collection and recycling contracts, obligations associated
with landfill closure and the operation and closure of waste-to-energy
facilities may require performance or surety bonds, letters of credit or other
means of financial assurance to secure our contractual performance. If we are
unable to obtain the necessary financial assurance in sufficient amounts or at
acceptable rates, we could be precluded from entering into additional municipal
solid waste collection contracts or from obtaining or retaining landfill
operating permits. Any future difficulty in obtaining insurance could also
impair our ability to secure future contracts conditioned upon the contractor
having adequate insurance coverage. Accordingly, our failure to obtain financial
assurance bonds, letters of credit or other means of financial assurance or to
maintain adequate insurance could have a material adverse effect on our
business, financial condition and results of operations.
WE MAY BE REQUIRED TO WRITE-OFF CAPITALIZED CHARGES IN THE FUTURE, WHICH COULD
ADVERSELY AFFECT OUR EARNINGS.
Any charge against earnings could have a material adverse effect on our earnings
and the market price of our Class A common stock. In accordance with generally
accepted accounting principles, we capitalize certain expenditures and advances
relating to our acquisitions, pending acquisitions, landfills and development
projects. From time to time in future periods, we may be required to incur a
charge against earnings in an amount equal to any unamortized capitalized
expenditures and advances, net of any portion thereof that we estimate will be
recoverable, through sale or otherwise, relating to (a) any operation that is
permanently shut down or has not generated or is not expected to generate
sufficient cash flow, (b) any pending acquisition that is not consummated and
(c) any landfill or development project that is not expected to be successfully
completed. We have incurred such charges in the past.
OUR CLASS B COMMON STOCK HAS TEN VOTES PER SHARE AND IS HELD
EXCLUSIVELY BY JOHN W. CASELLA AND DOUGLAS R. CASELLA.
The holders of our Class B common stock are entitled to ten votes per share and
the holders of our Class A common stock are entitled to one vote per share. At
September 4, 2001, an aggregate of 988,200 shares of our Class B common stock,
representing 9,882,000 votes, were outstanding, all of which were beneficially
owned by John W. Casella, our chairman and chief executive officer, or by his
brother, Douglas R. Casella, a director. Based on the number of shares of common
stock outstanding at September 4, 2001, the shares of our Class A common stock
and Class B common stock held by John W. Casella and Douglas R. Casella
represent approximately 34.2% of the aggregate voting power of our stockholders.
Consequently, John W. Casella and Douglas R. Casella will be able to
substantially influence all matters for stockholder consideration.
24
Part II. OTHER INFORMATION
- -----------------------------
Item 1. LEGAL PROCEEDINGS
- -----------------------------
The Company's wholly owned subsidiary, North Country Environmental Services,
Inc. ("NCES"), was a party to an appeal against the Town of Bethlehem, New
Hampshire ("Town") before the New Hampshire Supreme Court. The appeal arose from
cross actions for declaratory and injunctive relief filed by NCES and the Town
to determine the permitted extent of NCES's landfill in the Town. The Grafton
Superior Court ruled on February 1, 1999 that the Town could not enforce an
ordinance purportedly prohibiting expansion of the landfill, at least within 51
acres of NCES's 87-acre parcel, based upon certain existing land-use approvals.
As a result, NCES was able to construct and operate "Stage II, Phase II" of the
landfill. In May 2001, the Supreme Court denied the Town's appeal.
Notwithstanding the Supreme Court's ruling, the Town has continued to assert
jurisdiction to conduct unqualified site plan review with respect to Stage II,
Phase II. Additionally, the Town has asserted such jurisdiction with respect to
Stage III and has further stated that the Town's height ordinance and building
permit process may apply to Stage III. The Company is discussing the matters
with the Town and expects to file an action for declaratory relief.
On April 1, 1999, William F. Kaiser, a former Executive Vice President and
Treasurer of KTI, filed a lawsuit against KTI in the U.S. District Court for the
District of New Jersey. The suit alleged breach of contract, wrongful
termination, breach of the implied covenant of good faith and fair dealing,
misrepresentation of employment terms and failure to pay wages, all arising out
of Mr. Kaiser's employment agreement with KTI. The suit also alleged that KTI
inaccurately reported its financial results for the first nine months of 1998
and failed to properly disclose the change of control provision in Mr. Kaiser's
employment agreement. Mr. Kaiser was seeking a declaratory judgment that, upon
closing of the merger, the change of control provision entitles him to receive a
severance payment of two years' salary, in the amount of $320,000, and to
exercise 132,000 unvested options for KTI common stock. Mr. Kaiser was also
seeking damages in the amount of $40,000 for an additional severance payment, as
well as undisclosed damages for outstanding salary, bonus and other payments and
from his sale of approximately 20,000 shares of KTI common stock resulting from
KTI's allegedly inaccurate financial reports. A settlement conference took place
in March 2001 and the parties have reached a settlement in principal in the
amount of $295,000.
On or about April 26, 1999, Salvatore Russo filed an action in the U.S. District
Court, District of New Jersey against KTI and two of its principal officers,
Ross Pirasteh and Martin J. Sergi, purportedly on behalf of all shareholders who
purchased KTI common stock from May 4, 1998 through August 14, 1998. Melanie
Miller filed an identical complaint on May 14, 1999. The complaints allege that
the defendants made material misrepresentations in KTI's nine month report on
Form 10-Q for the period ended March 31, 1998 in violation of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, as amended, concerning KTI's
allowance for doubtful accounts and net income. The Plaintiffs are seeking
undisclosed damages. The Company believes it has meritorious defenses to these
complaints. The Court has consolidated the Russo and Miller complaints, and
plaintiffs filed a consolidated amended complaint on June 15, 2000. By papers
dated August 31, 2000, KTI and the other defendants moved to dismiss the Russo
Complaint for failure to state a claim. Following full briefing, on March 12,
2001, the District Court denied defendants' motion without prejudice and
directed plaintiffs to file an amended complaint within thirty days. On April
21, 2001, the plaintiffs filed the Second Consolidated Amended Class Action
Complaint. By papers served May 31, 2001, the defendants moved to dismiss that
latest Complaint. The parties have agreed to delay the deadline for plaintiffs'
responsive papers pending a one day mediation currently scheduled for October
12, 2001.
On May 11, 2000, the Company was granted a permit modification by the New
Hampshire Department of Environmental Services to increase the volume of solid
waste processed and stored at its GDS transfer station in Newport, New
Hampshire. On or about June 12, 2000, a local environmental activist appealed
the permit modification to the New Hampshire Waste Management Council. The
appeal claims that the modification will lead to adverse environmental impacts
through higher waste flows and increased levels of incineration at a nearby
waste-to-energy facility, that the Company has been the subject of "complaints"
arising from its New England and New York operations, and that the Company has
failed to demonstrate that the modification is consistent with the waste
management plan of the local waste management district. On August 23, 2001 the
New Hampshire Waste Management Council dismissed the appeal due to the
appellant's lack of standing.
25
On January 7, 2000, the City of Saco, Maine filed a notice of claims with the
Company and Maine Energy claiming entitlement to certain "residual cancellation"
payments from Maine Energy under the waste handling agreement dated June 7, 1991
among the Biddeford-Saco Waste Handling Committee, Biddeford, Saco and Maine
Energy on the basis of the satisfaction of certain conditions, including the
acquisition of KTI by the Company. The notice of claims alleges that the
payments due to Saco exceed $33 million, claims damages in such amounts for
breach of contract, breach of fiduciary duties and fraud and also claims treble
damages of $100 million based on alleged fraudulent transfer of Maine Energy's
assets. The notice also reserves the right to seek punitive damages. Although
the City of Biddeford, Maine has not filed a notice of claims, it has given
notice that it will be initiating a suit to receive the residual cancellation
payments. Under the agreement, the aggregate amount to be paid upon the exercise
of the put right is 18% of the fair market value of the equity of the partners
in Maine Energy, and such amount is required to be paid within 120 days after
the exercise of the put by the respective parties entitled thereto. The Company
believes it has meritorious defenses to these claims.
On or about March 24, 2000, a complaint was filed in the United States District
Court, District of New Jersey against the Company, KTI, and three of KTI's
principal officers, Ross Pirasteh, Martin J. Sergi, and Paul A. Garrett. The
complaint purported to be on behalf of all shareholders who purchased KTI common
stock from January 1, 1998 through April 14, 1999. The Complaint alleged that
the defendants made unspecified misrepresentations regarding KTI's financial
condition during the class period in violation of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, as amended. The plaintiffs seek undisclosed
damages. On or about April 6, 2000, the plaintiffs filed an amended class action
complaint, which changes the class period covered by the complaint to the period
including August 15, 1998 through April 14, 1999. The Company has filed a motion
to dismiss, which remains pending. The Company is reviewing the claims made by
the plaintiffs.
On or about December 19, 2000, a complaint was filed in the Superior Court of
New Jersey against the Company, Seaglass, Inc., KTI Recycling of New Jersey,
Inc., Oakhurst Company, Inc., and Marty Sergi. The complaint alleges that Fred
Devlin was not paid his "Tagalong Payment" when KTI, Inc. sold its 80% interest
in Seaglass, Inc. to New Heights Power & Recovery, LLC and that his employment
agreement was breached when he was terminated. The Company has filed a motion to
compel arbitration, which resulted in dismissal of the complaint and the
initiation of arbitration proceedings. In an effort to settle the matter prior
to arbitration, the parties engaged in third party mediation on September 5,
2001. The mediation resulted in a settlement of the dispute whereby the Company
will pay the Tagalong Payment plus interest (total payment of $700,000) in
return for the delivery to the Company of the 20% interest in Seaglass, Inc.
During the period of November 21, 1996 to October 9, 1997, the Company performed
certain closure activities and installed a cut-off wall at the Clinton County
Landfill, located in Clinton County, New York. On or about April 1999, the New
York State Department of Labor alleged that the Company should have paid
prevailing wages in connection with the labor associated with such activities.
The Company has disputed the allegations and is exploring settlement
possibilities with the State. The Company believes that it has meritorious
defenses to these claims.
On or about June 18, 2001, the Company received a demand for damages from Daniel
and Douglas Clark related to the merger agreement between the Company and
Corning Community Disposal Service, Inc., alleging that the Company breached the
agreement by failing to timely register the shares of stock for sale promptly
upon receipt of written request. The Clarks allege, that but for the delay of
the Company, they would have had an opportunity to sell their stock before the
market value declined and that they suffered damages as a result of such delay.
The Company believes that it has meritorious defenses to these claims.
On or about July 2, 2001, the Company was served with a complaint as one of over
twenty defendants named in a toxic tort lawsuit filed by residents surrounding
three sites in Cheektowaga, NY known as the Buffalo Crushed Stone limestone
quarry, the Old Land Reclamation inactive landfill and the Schultz landfill. The
Company is alleged to have liability as a result of its airspace agreement at
the Schultz landfill. The Company believes that it has meritorious defenses to
these claims.
The Company is a defendant in certain other lawsuits alleging various claims
incurred in the ordinary course of business, none of which, either individually
or in the aggregate, the Company believes are material to its financial
condition, results of operations or cash flows.
The Company offers no prediction of the outcome of any of the proceedings
described above.
26
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Casella Waste Systems, Inc.
Date: September 12, 2001 By: /s/ Richard A Norris
-----------------------------------
Richard A Norris
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
27