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 AND EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND 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)
<TABLE>
<S> <C>
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)
</TABLE>
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 August 21, 1998:
Class A Common Stock 12,922,027
Class B Common Stock 988,200
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
April 30, July 31,
1998 1998
(Unaudited)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 1,946 $ 2,471
Accounts Receivable-trade, net of allowance
for doubtful accounts of $1,123 and $1,261 17,112 19,925
Other Current Assets 3,536 3,622
---------------------------------
Total Current Assets 22,594 26,018
---------------------------------
Property, Plant and Equipment, net of
accumulated depreciation and amortization of
$36,780 and $41,206 81,684 92,709
Intangible Assets, net 78,939 83,125
Other Assets 5,816 5,431
---------------------------------
$189,033 $207,283
=================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES and STOCKHOLDERS' EQUITY
(In thousands, except for share data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
April 30, July 31,
1998 1998
(Unaudited)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt $ 2,595 $ 2,290
Current Maturities of Capital Lease Obligations 481 374
Accounts Payable 10,141 14,150
Other Accrued Liabilities 5,559 8,028
---------------------------------------
Total Current Liabilities 18,776 24,842
---------------------------------------
Long-Term Debt, Less Current Maturities 73,748 27,557
---------------------------------------
Capital Lease Obligations, Less Current Maturities 1,085 1,097
---------------------------------------
Other Long-Term Liabilities 13,564 14,076
---------------------------------------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY (DEFICIT):
Class A Common Stock - 105 129
Authorized - 30,000,000 Shares, $.01 par value
Issued and Outstanding - 10,523,387 and
12,908,049 shares
Class B Common Stock - 10 10
Authorized - 1,000,000 Shares, $.01 par value;
10 Votes per Share
Issued and Outstanding - 988,200 and
988,200 shares
Additional Paid-In Capital 95,901 151,595
Accumulated Deficit (14,156) (12,023)
----------------------------------------
Total Stockholders' Equity 81,860 139,711
----------------------------------------
$189,033 $207,283
========================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share information)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
July 31, July 31,
1997 1998
(Restated) (Unaudited)
----------------------------
<S> <C> <C>
Revenues $28,298 $36,717
----------------------------
Operating Expenses:
Cost of Operations 16,907 20,851
General and Administrative 3,970 5,361
Depreciation and Amortization 4,014 5,323
----------------------------
24,891 31,535
----------------------------
Operating Income 3,407 5,182
----------------------------
Other (Income) Expenses
Interest Income (49) (55)
Interest Expense 1,824 1,572
Other Expense (Income), net 205 (44)
----------------------------
1,980 1,473
----------------------------
Income Before Provision for Income Taxes and
Extraordinary Items 1,427 3,709
Provision for Income Taxes 643 1,576
----------------------------
Net Income $784 $ 2,133
============================
Accretion of Preferred Stock and Put Warrants (2,115) 0
----------------------------
Net Income (Loss) Applicable to Common
Stockholders ($1,331) $ 2,133
============================
Basic Earnings (Loss) per Share of Common Stock ($0.30) $0.18
============================
Basic Weighted Average Common Stock
Shares Outstanding 4,461 11,653
============================
Diluted Earnings (Loss) per Share ($0.30) $0.17
============================
Diluted Weighted Average Common Stock and
Common Stock Equivalent Shares Outstanding 4,461 12,717
============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
July 31, July 31,
1997 1998
(Restated) (Unaudited)
-------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 784 $ 2,133
-------------------------------
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities-
Depreciation and Amortization 4,014 5,323
(Gain) Loss on Sale of Equipment (6) 7
Changes in Assets and Liabilities, net of
Effects of Acquisitions -
Accounts Receivable (2,006) (2,776)
Accounts Payable 1,427 4,009
Other Current Assets/Liabilities (898) 4,072
-------------------------------
2,531 10,635
-------------------------------
Net Cash Provided by Operating Activities 3,315 12,768
-------------------------------
Cash Flows from Investing Activities:
Acquisitions, net of Cash Acquired (4,708) (10,088)
Additions to Property and Equipment (4,626) (9,857)
Proceeds from Sale of Equipment 23 134
Other Assets/Liabilities (139) 374
-------------------------------
Net Cash Used in Investing Activities (9,450) (19,437)
-------------------------------
Cash Flows from Financing Activities:
Proceeds from Issuance of Common Stock 12 54,209
Deferred Debt Acquisition Costs (94) 0
Proceeds from Long-Term Borrowings 8,686 11,565
Principal Payments on Long-Term Debt (1,791) (58,580)
-------------------------------
Net Cash Provided by Financing Activities 6,813 7,194
-------------------------------
Net Increase in Cash and Cash Equivalents 678 525
Cash and Cash Equivalents, Beginning of Period 1,349 1,946
-------------------------------
Cash and Cash Equivalents, End of Period $ 2,027 $ 2,471
===============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three months ended
--------------------------------
July 31, July 31,
1997 1998
(Restated) (Unaudited)
--------------------------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period for -
Interest $2,013 $ 1,734
================================
Income Taxes $ 20 $ 59
================================
Supplemental Disclosures of Noncash Investing and
Financing Activities:
Summary of Entities Acquired -
Fair Market Value of Assets Acquired $6,325 $10,856
Cash Paid (4,708) (10,088)
--------------------------------
Liabilities Assumed and Notes Payable to
Sellers $1,617 $ 768
================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The condensed consolidated balance sheet of Casella Waste Systems, Inc. and
Subsidiaries (the "Company") as of July 31, 1998, the consolidated statement of
operations for the three months ended July 31, 1998, and the consolidated
statement of cash flows for the three months ended July 31, 1998 are unaudited.
In the opinion of management, such financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of financial position, results of operations, and cash flows for
the periods presented. The condensed consolidated balance sheet of the Company
as of April 30, 1998 is based on audited financial statements that have been
condensed in accordance with Article 10 of Regulation S-X governing interim
financial reporting. The Company has restated the previously issued audited
consolidated statement of operations and audited consolidated statement of cash
flows for the three months ended July 31, 1997 to reflect the merger with All
Cycle Waste, Inc. and Winters Brothers, Inc. ("All Cycle") consummated on
December 19, 1997, accounted for using the pooling of interests method of
accounting. The consolidated financial statements presented herein should be
read in connection with the Company's audited consolidated financial statements
for the twelve months ended April 30, 1998. These were included as part of the
Company's Annual Report on Form 10-K (the "Annual Report").
1. BUSINESS COMBINATIONS
Transaction Recorded as a Pooling of Interests
On December 19, 1997, the Company completed its merger with All Cycle Waste,
Inc. and Winters Brothers, Inc. (together - "All Cycle") in a business
combination recorded as a pooling of interests and accordingly the accompanying
consolidated statements of operations and cash flows for the three months ended
July 31, 1997 have been restated to include the accounts and operations of All
Cycle. The two businesses acquired were under common control, and the
transaction was considered to be and accounted for as a single acquisition. All
Cycle Waste, Inc. is a solid waste collection and transfer operation in
Chittenden County, Vermont. Winters Brothers, Inc. owns the real estate that All
Cycle Waste Inc. operates out of in Williston, Vermont. The Company issued
416,103 shares of its Class A Common Stock for all of the outstanding stock of
All Cycle Waste, Inc. and 187,244 shares of its Class A Common Stock for all of
the outstanding stock of Winters Brothers, Inc.
Prior to December 19, 1997, Casella Waste Systems, Inc. incurred disposal
expense and All Cycle Waste, Inc. earned disposal revenue through the normal
operations of the acquired company's waste transfer station. In addition,
Winters Brothers, Inc. earned rental income and All Cycle Waste, Inc. incurred
rental expense on the acquired company's facility in Williston, Vermont. These
transactions have been eliminated in the accompanying financial statements.
Following is a reconciliation of the amounts (in thousands) of revenues and net
income previously reported for the three months ended July 31, 1997:
<PAGE>
Three Months
ended 7/31/97
Revenues:
As previously reported $26,429
Acquired companies 3,097
Elimination of intercompany
revenue (1,228)
As restated $28,298
Net income:
As previously reported $ 759
Acquired companies 25
As restated $ 784
Transactions Recorded as Purchases
During the year ended April 30, 1998, the Company completed 33 acquisitions of
solid and liquid waste hauling operations, exclusive of the All Cycle
transaction described above, for approximately $35.8 million in cash, $5.2
million in notes to sellers and liabilities assumed and 103,132 shares of class
A common stock issued. These transactions were accounted for as purchases.
During the three months ended July 31, 1998, the Company acquired nine solid and
liquid waste hauling operations and one private solid waste landfill in
transactions accounted for as purchases. These transactions were in exchange for
consideration of approximately $10.1 million in cash, and $0.8 million in notes
to sellers and liabilities assumed. 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 (rounded to thousands
except for per share data) shows the results of the Company's operations as
though each of the completed acquisitions had occurred as of May 1, 1997:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
July 31, 1997 July 31, 1998
----------------------- -----------------------
<S> <C> <C>
Revenues $37,184 $37,291
Operating Income 3,817 5,096
Net Income 488 2,014
Pro forma income (loss) per share -
diluted $ 0.05 $ 0.16
Weighted average common stock
shares outstanding - diluted 9,230 12,717
</TABLE>
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, 1997 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.
<PAGE>
2. COMMITMENTS AND CONTINGENCIES
On or about October 30, 1997, Mr. Matthew M. Freeman commenced a civil lawsuit
against the Company and two of the Company's officers and directors in the
Rutland Superior Court, Rutland County, State of Vermont. In the Complaint, Mr.
Freeman seeks compensation for services allegedly performed by him prior to
1995. Mr. Freeman is seeking a three-percent equity interest in the Company or
the monetary equivalent thereof, as well as punitive damages. The Company and
the officers and directors have answered the Complaint, denied Mr. Freeman's
allegations of wrongdoing, and asserted various defenses. In order to facilitate
the completion of the initial public offering of the Company's Class A Common
Stock in November, 1997, certain stockholders of the Company agreed to indemnify
the Company for any settlement by the Company or any award against the Company
in excess of $350,000 (but not legal fees paid by or on behalf of the Company or
any other third party). The Company accrued a $215,000 reserve for this claim
during the year ended April 30, 1998.
On May 12, 1998, the Company filed suit in New York Supreme Court, Allegany
County against the Town of Angelica, New York seeking a temporary restraining
order and preliminary injunctive relief against the Town's enforcement of a
recently-enacted local law which would prohibit the expansion of the Hyland
landfill, would require the landfill and the operator thereof to receive an
additional permit from the Town of Angelica to continue to operate, would
prevent the disposal of yard waste, may preclude the disposal of certain types
of industrial waste and would impose certain other restrictions on the landfill.
A temporary restraining order was granted by the court on May 14, 1998 in favor
of the Company, and by a decision dated July 13, 1998, the court granted the
Company's motion for a preliminary injunction. If the Company is not successful
in its lawsuit, and if the Town of Angelica seeks to enforce the law by its
terms, then the Company would be required to obtain an additional permit from
the Town of Angelica to operate the Hyland landfill, the expansion of the
landfill beyond the current permitted capacity would be prohibited, and the
Company would be unable to dispose of yard waste and may be precluded from
disposing of industrial waste at the landfill. There can be no assurance that
such limitations would not have a material adverse effect on the Company's
business, financial condition and results of operations. The Company began
accepting waste at the Hyland facility on July 22, 1998.
The Company is a party to various other litigation matters arising in the
ordinary course of business. Management believes that the ultimate resolution of
these matters will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
In the normal course of business and as a result of the extensive government
regulation of the solid waste industry, the Company periodically may become
subject to various judicial and administrative proceedings and investigations
involving federal, state, or local agencies. To date, the Company has not been
required to pay any material fine or had a judgment entered against it for
violation of any environmental law. From time to time, the Company also may be
subjected to actions brought by citizens groups in connection with the
permitting of landfills or transfer stations, or alleging violations of the
permits pursuant to which the Company operates. From time to time, the Company
is also subject to claims for personal injury or property damage arising out of
accidents involving its vehicles or other equipment.
3. ENVIRONMENTAL LIABILITIES
The continuing business in which the Company is engaged is intrinsically
connected with the protection of the environment. As such, a significant portion
of the Company's operating costs and capital expenditures could be characterized
as costs of environmental protection. While the Company is faced, in the normal
course of business, with the need to expend funds for environmental protection
and remediation, it does not expect such expenditures to have a material adverse
effect on its financial condition or results of operations because its business
is based upon compliance with environmental laws and regulations and its
services are priced accordingly. In addition, as part of its ongoing operations,
the Company provides for estimated closure and post-closure monitoring costs
over the life of disposal sites as airspace is consumed. While all these costs
may increase in the future as a result of legislation or regulation, the Company
believes that in general it tends to benefit when government regulation
increases, since this may increase the demand for its services. Furthermore, the
Company believes it has the resources and experience to manage environmental
risk.
<PAGE>
4. CHANGES IN STOCKHOLDERS EQUITY
In July 1998 the Company completed a follow-on public offering of 2,060,587
shares of its Class A Common Stock at $27.25 per share. In addition, as part of
this same offering, 1,470,580 shares of the Company's Class A Common Stock were
sold by certain selling shareholders at $27.25 per share. The Company's proceeds
of the offering, net of underwriters' discounts and issuance costs were
$52,704,356. The proceeds were used for debt reduction, acquisitions and other
general corporate purposes. As part of the registration statement relating to
this offering, the Company registered 2,000,000 shares of its Class A Common
Stock to be issued at a later date, in connection with its acquisition program.
5. PROVISION FOR INCOME TAXES
The difference in federal income taxes at the statutory rate of 34% and the
provision for income taxes for the three month periods ended July 31, 1998 and
1997 is primarily due to non-deductible goodwill costs and state and local
taxes.
The Company records non-current deferred tax liabilities for the excess of
depreciation expense recorded for income taxes purposes over that recognized for
financial accounting purposes. In addition, adjustments are made in the deferred
tax liability for business combinations that are accorded a different treatment
under the Internal Revenue Code than under generally accepted accounting
principles.
6. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share". This
statement supersedes Accounting Principal Board Opinion No. 15. SFAS No. 128 is
effective for interim and annual periods ending after December 15, 1997 and
requires restatement of previously recorded amounts.
Primary EPS is replaced by Basic EPS, which is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Basic common shares no longer include common
equivalents such as convertible preferred shares. In addition, Fully Diluted EPS
is replaced with Diluted EPS, which gives effect to all common shares that would
have been outstanding if all dilutive potential common shares (relating to such
things as the exercise of stock warrants and convertible preferred stock) had
been issued. The treasury stock method used to compute the number of
potentially-dilutive shares that would be repurchased with the proceeds of
potential stock issuances has been changed. The treasury stock method now
requires use of the average share price for the period instead of the greater of
the ending share price or the average share price.
The following is a reconciliation of the ending number of shares outstanding
with the number of shares used in the calculation of basic and diluted earnings
per share (in thousands):
<TABLE>
<CAPTION>
Three months Three months
ended 7/31/97 ended 7/31/98
<S> <C> <C>
Number of shares outstanding, end of period:
Class A common stock 3,477 12,908
Class B common stock 1,000 988
Effect of weighting the average shares
outstanding during the period (16) (2,243)
Basic shares outstanding 4,461 11,653
Potentially dilutive shares -0- 1,064
Fully diluted shares outstanding: 4,461 12,717
</TABLE>
<PAGE>
Diluted earnings per share are not presented for the three months ended July 31,
1997 because they are anti-dilutive. The number of potentially dilutive shares
excluded from the earnings per share calculation for this period was 4,768,504.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("Statement 130").
Statement 130 establishes standards for reporting and presentation of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources and includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. The Company adopted Statement 130 effective May 1, 1998
and there was no effect on the Company's financial statements upon adoption.
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information ("Statement 131"). Statement 131 establishes standards for
reporting information about operating segments in annual financial statements
that requires that those enterprises report selected information about operating
segments in the interim financial reports issued to shareholders. Statement 131
is effective for fiscal years beginning after December 15, 1997. Adoption is not
required for interim periods in the initial year of application. The Company
believes that the adoption of Statement 131 will not have a material effect on
the Company's Financial Statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("Statement 133"). Statement 133 establishes accounting,
and reporting 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.
Statement 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Statement 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement Statement 133 as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). The Company has yet to quantify the impacts of adopting Statement
133 on its financial statements and has not determined the timing or method of
adoption. However, Statement 133 could increase volatility in earnings and other
comprehensive income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company is a regional, integrated solid waste services company that provides
collection, transfer, disposal and recycling services in Vermont, New Hampshire,
Maine, upstate New York and northern Pennsylvania. The Company's objective is to
continue to grow by expanding its services in markets where it can be one of the
largest and most profitable fully-integrated solid waste services companies.
The Company's revenues have increased from $28.3 million for the three months
ended July 31, 1997 to $36.7 million for the three months ended July 31, 1998.
From May 1, 1997 through April 30, 1998, the Company acquired 34 solid waste
collection, transfer and disposal operations. Between May 1 and July 31, 1998,
the Company acquired an additional 10 such businesses, including the Hyland
landfill, a Subtitle D landfill in western upstate New York. All but one of
these acquisitions 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 included together with
those of Casella Waste Systems, Inc. from the actual dates of the acquisitions
and will materially affect the period-to-period comparisons of the Company's
historical results of operations. In December 1997 the Company acquired a waste
collection and transfer operation in a transaction recorded as a pooling of
interests. Under the rules governing poolings of interest, the prior period
financial statements of the Company have been restated to reflect the financial
position, results of operations and cash flows of the merged entities as if they
had been one company for all periods presented in the accompanying financial
statements.
<PAGE>
This Quarterly Report 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, 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 forecast 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 are attributable primarily to fees charged to customers
for solid and liquid waste collection, landfill, 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 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 landfill and transfer customers are under one-year 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 and from the sale of tire derived fuel. Other revenues consist
primarily of revenue from septic/liquid waste operations and other sources. The
Company's revenues are shown net of intercompany eliminations. The Company
typically establishes its intercompany transfer pricing based upon prevailing
market rates.
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 revenues as a percentage of revenues in the current fiscal
quarter is primarily attributable to the impact of the Company's acquisition of
collection businesses during fiscal 1998 and during the first quarter of fiscal
1999, as well as to internal growth through price and business volume increases.
The decrease in the Company's landfill revenues and in the Company's transfer
revenues as a percentage of revenues in the current fiscal year is mainly due to
a proportionately greater increase in collection revenues occurring as the
result of acquisitions in that area; also, as the Company acquires collection
businesses from which it previously had derived transfer or disposal revenues,
the acquired revenues are recorded by the Company as collection revenues. The
increase in recycling revenue is due primarily to an increase in revenue from
tire-derived fuel at the Company's T.I.R.E.S. facility. The increase in liquid
waste and other revenues as a percentage of revenues in the current fiscal year
is primarily due to the impact of acquisitions of septic/liquid waste operations
since the first quarter of fiscal 1998.
% of Revenue
Three months ended
-------------------------
7/31/97 7/31/98
------- -------
Collection 69.2% 74.4%
Landfill 14.5 9.9
Transfer 7.5 5.3
Recycling 6.0 6.5
Liquid Waste & Other 2.8 3.9
------ ------
Total Revenue 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
<PAGE>
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 $0 net book value, and does not apply a salvage value to any of its
fixed assets.
Certain direct landfill development costs, such as engineering, permitting,
legal, construction and other costs directly associated with expansion of
existing landfills, are capitalized by the Company. Additionally, the Company
also capitalizes certain third party expenditures related to pending
acquisitions, such as legal and engineering. 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.
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.
% of Revenue
Three months ended
-------------------------
7/31/97 7/31/98
------- -------
Revenues 100.0% 100.0%
Cost of operation 59.8 56.8
General and administrative 14.0 14.6
Depreciation and amortization 14.2 14.5
------ ------
Operating income 12.0 14.1
Interest expense, net 6.3 4.1
Other (income) expense 0.7 (0.1)
Provision for income taxes 2.2 4.3
------ ------
Net income 2.8 5.8
EBITDA* 26.2 28.6
* See discussion and computation of EBITDA below.
<PAGE>
Revenues. Revenues increased $8.4 million, or 29.8%, to $36.7 million in fiscal
1999 from $28.3 million in fiscal 1998. Approximately $6.3 million of the
increase was attributable to the impact of businesses acquired throughout fiscal
1997 and the first quarter of fiscal 1998. The balance of the increase of
approximately $2.1 million was attributable to internal volume and price growth.
Cost of Operations. Cost of operations increased approximately $3.9 million, or
23.3%, to $20.9 million in the quarter ended July 31, 1998 from $16.9 million in
the same quarter of the prior fiscal year, an increase corresponding primarily
to the Company's revenue growth described above. Cost of operations as a
percentage of revenues decreased to 56.8% in the current fiscal year from 59.8%
in the prior year. The decrease was primarily the result of: (i) productivity
improvements in the Company's collection operations as a result of better route
density from acquisitions, routing efficiencies through route audits and
front-end loader vehicle conversions completed throughout fiscal 1998 and the
first quarter of fiscal 1999; and (ii) margin improvements because of price
increases in fiscal 1998 and the first quarter of fiscal 1999.
General and Administrative. General and administrative expenses increased
approximately $1.4 million, or 35.1%, to $5.4 million in the first quarter of
fiscal 1999 from $4.0 million in the same quarter of fiscal 1998. General and
administrative expenses as a percentage of revenues increased from 14.0% in
fiscal 1998 to 14.6% in fiscal 1999. Certain general and administrative expenses
were previously classified by the Company as costs of operations in fiscal 1998.
This amounted to approximately $234,000 of reclassified expenses during the
first quarter of fiscal 1999. If the Company had not made this reclassification,
general and administrative expense as a percentage of revenues would have been
flat at 14.0% during the first quarter of fiscal 1999.
Depreciation and Amortization. Depreciation and amortization expense increased
$1.3 million, or 32.6%, to $5.3 million in the first quarter of fiscal 1999 from
$4.0 million in the same quarter of the prior fiscal year. As a percentage of
revenues, depreciation and amortization expense increased from 14.2% in fiscal
1998 to 14.5% in fiscal 1999. The Company benefited from low cost landfill
airspace at Clinton County's unlined landfill during the first quarter of last
year (fiscal 1998) which significantly lowered landfill amortization expense in
the first quarter of fiscal 1998. Clinton County's unlined landfill was
permanently closed on July 15, 1997.
Interest expense, net. Net interest expense decreased approximately $259
thousand, or 14.6% to $1.5 million in the quarter ended July 31, 1998 from $1.8
million in the same quarter of the prior fiscal year. This decrease primarily
reflects the reduction of the outstanding balance under the Company's
acquisition line of credit and other notes payable from the proceeds of the
Company's public stock offerings in November, 1997 and July, 1998.
Other (income) expense, net. Net other (income) expense has not historically
been material to the Company's results of operations.
Provision for income taxes. Provision for income taxes increased approximately
$0.9 million, or 145.2%, to $1.6 million in the current fiscal year from $643
thousand in fiscal 1998. This increase reflects the Company's increase in
profits in the current fiscal year over to the prior year. The combined
effective tax rate used by the Company in recording taxes for interim periods
has been decreased from 45% for the quarter ended July 31, 1997 to 42.5% for the
same quarter of the current fiscal year. This reflects the decreased relative
effect of various fixed non-deductible expenses compared to the Company's
increased pre-tax income.
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, cell construction, and site and cell closure. The Company
had positive net working capital of $3.8 million at April 30, 1998 and positive
net working capital of $1.2 million at July 31, 1998.
The Company has a $150 million revolving line of credit with a group of banks
for which BankBoston, N.A. is acting as agent. This line of credit is secured by
all assets of the Company, including the Company's interest in the equity
securities of its subsidiaries. This revolving line of credit matures in
January, 2003. Funds available to the Company under this line of credit were
$124.9 million at July 31, 1998.
<PAGE>
In July 1998 the Company completed a follow-on public offering of 2,060,587
shares of its Class A Common Stock at $27.25 per share. In addition, as part of
this same offering, 1,470,580 shares of the Company's Class A Common Stock were
sold by certain selling shareholders at $27.25 per share. The Company's proceeds
of the offering, net of underwriters' discounts and issuance costs were
$52,704,356. The proceeds were used for debt reduction, acquisitions and other
general corporate purposes. As part of the registration of this offering, the
Company registered 2,000,000 shares of its Class A Common Stock to be issued at
a later date, in connection with its acquisition program.
The Company believes that its cash provided internally from operations together
with the Company's available credit facilities should enable it to meet its
needs for working capital for the next twelve months.
Net cash provided by operating activities for the first quarters of fiscal 1998
and fiscal 1999 was $3.3 million and $12.8 million, respectively. The increase
was primarily due to the increase in the Company's net income for the quarter
ended July 31, 1998 over the prior fiscal year, together with an increase in
depreciation and amortization and increases in accrued payroll taxes and
deferred revenues.
Cash used in investing activities increased $10.0 million from $9.5 million to
$19.4 million in the quarter ended July 31, 1998 over the same quarter of the
prior fiscal year. The increase in investing activities reflects the Company's
capital expenditure and capital needs for acquisitions, reflecting the Company's
rapid growth by acquisition and development of revenue producing assets. The
Company's cash needs to fund investing activities are expected to increase
further as the Company continues to complete acquisitions.
Net cash provided by financing activities was $7.2 million in the quarter ended
July 31, 1998 compared to $6.8 million for the same quarter of the prior year.
The net cash provided by financing activities in the current fiscal year
reflects the net proceeds of the follow-on offering and borrowings on the
Company's credit facility, offset by repayments. Net cash provided by financing
activities in the comparable period of the prior year reflects primarily bank
borrowings and seller subordinated notes, less principal payments on debt.
Seasonality
The Company's 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 could result in increased
operating costs to certain of the Company's operations.
The Company's quarterly revenues and operating results have varied significantly
in the past and are likely to vary substantially from quarter to quarter in the
future. The Company establishes its expenditure levels based on its expectations
as to future revenues, and, if revenue levels are below expectations, expenses
can be disproportionately high. Due to a variety of factors including general
economic conditions, governmental regulatory action, acquisitions, capital
expenditures and other costs related to the expansion of operations and services
and pricing changes, it is possible that in some future quarter, the Company's
operating results will be below the expectations of public market analysts and
investors. In such events, the Company's Class A Common Stock price would likely
be materially and adversely affected.
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.
<PAGE>
The Company's business is located in the northeastern 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.
Year 2000 Issues
The Company uses well-regarded nationally known software vendors for both its
general accounting applications and industry-specific customer information and
billing systems. The Company has been informed that the general accounting
package which the Company uses is fully year 2000 compatible, and the provider
of the solid waste industry customer information and billing system has made
available a year-2000 compatible version of its software which the Company has
installed and tested.
The Company's banking arrangements are with an international banking institution
which has informed the Company that it is taking all necessary steps to insure
its customers' uninterrupted service throughout applicable Year 2000 time
frames. The Company's payroll is performed out-of-house by the largest provider
of 3rd party payroll services in the country, which has made a commitment of
uninterrupted service to their customers throughout applicable Year 2000 time
frames.
The Company is currently in the early stages of reviewing and evaluating the
potential effect of this issue on its personal computer applications, including
weight-measurement applications, and on its equipment and suppliers of data
communications and other services.
None of the Company's customers individually represents a large enough share of
the Company's revenues to materially affect overall Company revenues in the
event of an individual customer experiencing year 2000 problems. The Company
believes that the same is true of any of the Company's suppliers of goods and
services, aside from those discussed above. However, the Company is continuing
to evaluate its exposure to year 2000 issues, including on its information
technologies and non-information technology systems.
EBITDA
EBITDA represents operating income (earnings before interest and taxes, or
"EBIT") plus depreciation and amortization expense. 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.
Amounts in thousands:
Three months ended
-------------------------
7/31/97 7/31/98
------- -------
Operating income $3,407 $ 5,182
Depreciation and amortization 4,014 5,323
------- --------
EBITDA $7,422 $10,505
EBITDA as a percentage of revenue 26.2% 28.6%
Analysis of the factors contributing to the change in EBITDA is included in the
discussions above.
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 Quarterly Report and presented elsewhere by management from time to time.
<PAGE>
The Company's objective is to continue to grow by expanding its services in
markets where it can be one of the largest and most profitable fully-integrated
solid waste services companies. Such growth, if it were to occur, could place a
significant strain on the Company's management and operational, financial and
other resources.
The Company has incurred net losses in the past. There can be no assurance that
the Company will be profitable in the future.
The Company's strategy envisions that a substantial part of the Company's future
growth will come from acquiring and integrating solid waste collection, transfer
and disposal operations. There can be no assurance that the Company 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 the Company, or to integrate the operations of such acquired businesses with
the Company.
The Company is highly dependent upon the services of the members of its senior
management team, the loss of any of whom may have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, the Company's future success depends on its continuing ability to
identify, hire, train, motivate and retain highly trained personnel.
The Company anticipates that any future business acquisitions will be financed
through cash from operations, borrowings under its bank line of credit, the
issuance of shares of the Company's Class A Common Stock and/or seller
financing. There can be no assurance that the Company will have sufficient
existing capital resources or will be able to raise sufficient additional
capital resources on terms satisfactory to the Company, if at all, in order to
meet its capital requirements.
The Company's operating program depends on its ability to operate and expand the
landfills it owns and leases and to develop new landfill sites. Several of the
Company's 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 the Company's landfills are located
will not have a material adverse effect on the Company's utilization of its
landfills or that the Company will be successful in obtaining new landfill sites
or expanding the permitted capacity of any of its current landfills once its
remaining disposal capacity has been consumed.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about October 30, 1997, Mr. Matthew M. Freeman commenced a civil lawsuit
against the Company and two of the Company's officers and directors in the
Rutland Superior Court, Rutland County, State of Vermont. In the Complaint, Mr.
Freeman seeks compensation for services allegedly performed by him prior to
1995. Mr. Freeman is seeking a three-percent equity interest in the Company or
the monetary equivalent thereof, as well as punitive damages. The Company and
the officers and directors have answered the Complaint, denied Mr. Freeman's
allegations of wrongdoing, and asserted various defenses. In order to facilitate
the completion of the recent initial public offering of the Company's Class A
Common Stock, certain stockholders of the Company have agreed to indemnify the
Company for any settlement by the Company or any award against the Company in
excess of $350,000 (but not legal fees paid by or on behalf of the Company or
any other third party).
On May 12, 1998, the Company filed suit in New York Supreme Court, Allegany
County against the Town of Angelica, New York seeking a temporary restraining
order and preliminary injunctive relief against the Town's enforcement of a
recently-enacted local law which would prohibit the expansion of the Hyland
landfill, would require the landfill and the operator thereof to receive an
additional permit from the Town of Angelica to continue to operate, would
prevent the disposal of yard waste, may preclude the disposal of certain types
of industrial waste and would impose certain other restrictions on the landfill.
A temporary restraining order was granted by the court on May 14, 1998 in favor
of the Company, and by a decision dated July 13, 1998, the court granted the
Company's motion for a preliminary injunction. If the Company is not successful
in its lawsuit, and if the Town of Angelica seeks to enforce the law by its
terms, then the Company would be required to obtain an additional permit from
the Town of Angelica to operate the Hyland landfill, the expansion of the
landfill beyond the current permitted capacity would be prohibited, and the
Company would be unable to dispose of yard waste and may be precluded from
<PAGE>
disposing of industrial waste at the landfill. There can be no assurance that
such limitations would not have a material adverse effect on the Company's
business, financial condition and results of operations. The Company began
accepting waste at the Hyland facility on July 22, 1998.
The Company is not aware of any other non-routine or incidental material legal
proceedings.
ITEM 2. CHANGES IN SECURITIES
Changes in Rights and Classes of Stock
None.
Sales of Unregistered Securities
During the quarter ended July 31, 1998 the Company had the following sales of
unregistered securities:
On May 7, 1998, Robert Lynch exercised warrants to purchase 200 shares of the
Company's Class A Common Stock in exchange for cash consideration of $300. The
shares of Class A Common Stock were offered and issued in reliance upon the
exemption from registration set forth in section 4(2) under the Securities Act
of 1933.
On May 22, 1998, Stephen Houghton exercised warrants to purchase 4,892 shares of
the Company's Class A Common Stock in exchange for cash consideration of $7,338.
The shares of Class A Common Stock were offered and issued in reliance upon the
exemption from registration set forth in section 4(2) under the Securities Act
of 1933.
No underwriters were involved in the foregoing issuances of securities.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended July 31, 1998, no matters were submitted to a vote of
the Company's shareholders.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule for Period Ended July 31, 1998
27.2 Restated Financial Data Schedule for Period Ended July 31, 1997
(b) Reports on Form 8-K: None.
<PAGE>
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 4, 1998 By: /s/ Jerry Cifor
Jerry Cifor
Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
JULY 31, 1998 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE THREE-MONTH PERIOD ENDED JULY 31, 1998, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE FOOTNOTES
THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 2,471
<SECURITIES> 0
<RECEIVABLES> 19,924
<ALLOWANCES> 1,261
<INVENTORY> 351
<CURRENT-ASSETS> 26,018
<PP&E> 92,709
<DEPRECIATION> 41,206
<TOTAL-ASSETS> 207,283
<CURRENT-LIABILITIES> 24,865
<BONDS> 0
0
0
<COMMON> 139
<OTHER-SE> 140
<TOTAL-LIABILITY-AND-EQUITY> 207,283
<SALES> 0
<TOTAL-REVENUES> 36,717
<CGS> 0
<TOTAL-COSTS> 20,851
<OTHER-EXPENSES> 10,724
<LOSS-PROVISION> 412
<INTEREST-EXPENSE> 1,572
<INCOME-PRETAX> 3,669
<INCOME-TAX> 1,559
<INCOME-CONTINUING> 2,110
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,110
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.17
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
JULY 31, 1997 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE THREE-MONTH PERIOD ENDED JULY 31, 1997, AS RESTATED TO
REFLECT AN ACQUISITION ACCOUNTED FOR AS A POOLING OF INTERESTS, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE FOOTNOTES
THERETO.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JUL-31-1997
<CASH> 2,027
<SECURITIES> 0
<RECEIVABLES> 17,153
<ALLOWANCES> (696)
<INVENTORY> 325
<CURRENT-ASSETS> 22,286
<PP&E> 97,467
<DEPRECIATION> 26,776
<TOTAL-ASSETS> 150,416
<CURRENT-LIABILITIES> 23,640
<BONDS> 0
0
33,541
<COMMON> 39
<OTHER-SE> (1,282)
<TOTAL-LIABILITY-AND-EQUITY> 150,416
<SALES> 0
<TOTAL-REVENUES> 28,298
<CGS> 0
<TOTAL-COSTS> 16,907
<OTHER-EXPENSES> 7,984
<LOSS-PROVISION> 152
<INTEREST-EXPENSE> 1,824
<INCOME-PRETAX> 1,427
<INCOME-TAX> 643
<INCOME-CONTINUING> 784
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 784
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
