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 January 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)
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 March 13 1998:
Class A Common Stock 10,504,780
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)
- --------------------------------------------------------------------------------
April 30, January 31,
1997 1998
(Restated) (Unaudited)
- --------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and Cash Equivalents $2,070 $2,305
Accounts Receivable-trade, net of allowance 14,107 18,143
for doubtful accounts of $722 and $1,331.
Other Current Assets 4,173 2,891
-------- --------
Total Current Assets 20,350 23,339
-------- --------
Property, Plant and Equipment, net of 67,983 75,486
accumulated depreciation and amortization
of $23,179 and $34,075.
Intangible Assets, net 49,322 72,378
Other Assets 3,949 4,123
-------- --------
$141,604 $175,326
======== ========
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 (DEFICIT)
(In Thousands)
- --------------------------------------------------------------------------------
April 30, January 31,
1997 1998
(Restated) (Unaudited)
- --------------------------------------------------------------------------------
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt $6,272 $2,539
Current Maturities of Capital Lease 392 540
Obligations
Accounts Payable 10,035 9,641
Other Accrued Liabilities 9,229 6,889
------ -----
Total Current Liabilities 25,928 19,609
------ -----
Long-Term Debt, Less Current Maturities 75,528 64,982
------ -----
Capital Lease Obligations, Less Current
Maturities 1,373 1,465
------ -----
Other Long-Term Liabilities 6,873 8,401
------ -----
COMMITMENTS AND CONTINGENCIES:
REDEEMABLE PREFERRED STOCK:
Series A Redeemable with warrants 3,638 0
exercisable for Class A Common Stock, $.01
par value (stated at redemption value)
Authorized - 616,620 Shares
Issued and Outstanding - 516,620
Shares at 4/30/97, none at 1/31/98.
Series B Redeemable with warrants 9,118 0
exercisable for Class A Common Stock, $.01
par value (stated at redemption value)
Authorized - 1,402,461 Shares
Issued and Outstanding - 1,294,579
Shares at 4/30/97, none at 1/31/98.
Series C Mandatorily Redeemable, $.01 par 2,221 0
value ($7.00 redemption value)
Authorized - 1,000,000 Shares
Issued and Outstanding - 424,307
Shares at 4/30/97, none at 1/31/98.
Series D Convertible Redeemable, $.01 par 16,449 0
value (stated at redemption value)
Authorized - 1,922,169 Shares
Issued and Outstanding - 1,922,169
Shares at 4/30/97, none at 1/31/98.
Redeemable Put Warrants to purchase 100,000 400 0
Shares of Class A Common Stock
------ -----
TOTAL REDEEMABLE PREFERRED STOCK
and PUT WARRANTS 31,826 0
------ -----
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 (DEFICIT)
(In Thousands)
- --------------------------------------------------------------------------------
April 30, January 31,
1997 1998
(Restated) (Unaudited)
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT):
Class A Common Stock -
Authorized - 30,000,000 Shares, 35 105
$.01 par value
Issued and Outstanding - 3,457,792
and 10,502,780 shares.
Class B Common Stock - 10 10
Authorized - 1,000,000 Shares,
$.01 par value;
10 Votes per Share.
Issued and Outstanding - 1,000,000
and 988,200 shares.
Additional Paid-In Capital 10,976 95,645
Accumulated Deficit (10,945) (14,891)
-------- --------
76 80,869
-------- --------
$141,604 $175,326
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except for per share information)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------------------------------------
January 31, January 31, January 31, January 31, January 31,
1997 1998 1997 1998 1998
(Proforma)
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $20,194 $28,769 $56,211 $87,321 $87,321
-------- -------- -------- -------- --------
Operating Expenses:
Cost of Operations 12,475 17,132 33,293 51,743 51,743
General and Administrative 3,303 4,314 8,867 12,729 12,729
Depreciation and Amortization 3,316 4,684 9,726 13,412 13,412
Merger Costs (Pooling) - 0 - 290 - 0 - 290 290
-------- -------- -------- -------- --------
19,094 26,420 51,886 78,174 78,174
-------- -------- -------- -------- --------
Operating Income 1,100 2,349 4,325 9,147 9,147
-------- -------- -------- -------- --------
Other (Income) Expenses
Interest Income (63) (50) (171) (178) (178)
Interest Expense 1,308 1,409 3,074 5,450 3,389
Other Expense (Income), net (31) (115) 105 2 2
-------- -------- -------- -------- --------
1,214 1,244 3,008 5,274 3,213
-------- -------- -------- -------- --------
Income Before Provision for Income
Taxes and Extraordinary Items (114) 1,105 1,317 3,873 5,934
Provision for Income Taxes 15 603 960 1,950 2,775
-------- -------- -------- -------- --------
Net Income (129) 502 357 1,923 3,159
======== ======== ======== ======== ========
Accretion of Preferred Stock and Put (424) 0 (6,004) (974) (225)
Warrants -------- -------- -------- -------- --------
Net Income (Loss) Applicable to Common
Stockholders ($553) $502 ($5,647) $949 $2,934
======== ======== ======== ======== ========
Basic Earnings per Share of Common Stock $0.04 $0.14 $0.26
======== ======== ========
Basic Weighted Average Common Stock
Shares Outstanding 11,303 6,755 11,293
======== ======== ========
Diluted Earnings per Share $0.04 $0.09 $0.24
======== ======== ========
Diluted Weighted Average Common Stock and
Common Stock Equivalent Shares Outstanding 12,549 10,445 12,467
======== ======== ========
</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
FOR THE NINE MONTHS ENDED JANUARY 31, 1997 and 1998
(In Thousands)
1997 1998
(Unaudited) (Unaudited)
-------- --------
Cash Flows from Operating Activities:
Net Income $357 $1,923
-------- --------
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities-
Depreciation and Amortization 9,726 13,412
(Gain) Loss on Sale of Equipment 145 (262)
Changes in Assets and Liabilities, net of
Effects of Acquisitions -
Accounts Receivable (3,253) (1,953)
Accounts Payable 2,914 (1,106)
Other Current Assets/Liabilities 1,224 (1,579)
-------- --------
10,756 8,512
-------- --------
Net Cash Provided by Operating Activities 11,113 10,435
-------- --------
Cash Flows from Investing Activities:
Acquisitions, net of Cash Acquired (33,605) (26,045)
Additions to Property and Equipment (13,400) (14,876)
Proceeds from Sale of Equipment 104 1,093
Other Assets/Liabilities (512) 503
-------- --------
Net Cash Used in Investing Activities (47,413) (39,325)
-------- --------
Cash Flows from Financing Activities:
Proceeds from Issuance of Common Stock 525 48,492
Proceeds from exercise of Stock 0 827
Warrants/Options
Call of redeemable put warrants 0 (525)
Redemption of Series C Preferred Stock 0 (2,970)
Proceeds from Long-Term Borrowings 45,876 113,665
Principal Payments on Long-Term Debt (9,617) (130,364)
-------- --------
Net Cash Provided by Financing Activities 36,784 29,125
-------- --------
Net Increase in Cash and Cash Equivalents 484 235
Cash and Cash Equivalents, Beginning of Period 1,788 2,070
-------- --------
Cash and Cash Equivalents, End of Period $2,272 $2,305
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 31, 1997 and 1998
(In Thousands)
1997 1998
(Unaudited) (Unaudited)
----------- -----------
Supplemental Disclosures of Cash Flow
Information:
Cash Paid During the Period for -
Interest $3,056 $5,729
======== ========
Income Taxes $599 $619
======== ========
Supplemental Disclosures of Noncash Investing and
Financing Activities:
Summary of Entities Acquired -
Fair Market Value of Assets Acquired $63,913 $31,965
Common Stock Issued (9,374) (1,352)
Cash Paid (33,605) (26,045)
-------- --------
Liabilities Assumed and Notes Payable to
Sellers $20,934 $4,568
======== ========
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 sheets of Casella Waste Systems, Inc. and
Subsidiaries (the "Company") as of January 31, 1998 and April 30, 1997, the
consolidated statements of operations for the three and nine months ended
January 31, 1998 and 1997, and the consolidated statements of cash flows for the
nine months ended January 31, 1998 and 1997 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
Company has restated the previously issued audited balance sheet dated April 30,
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, 1997 and
for the three months ended July 31, 1997. These were included as part of the
Company's registration statement filed on Form S-1/A on October 9, 1997 (the
`Registration Statement').
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
financial statements have been restated to include the accounts and operations
of All Cycle for all periods presented. 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 the pooling, the acquired companies' fiscal year ended December 31.
Subsequent to the pooling, the acquired companies changed their year-end to
April 30 to conform with that of Casella Waste Systems, Inc. During the four
months ended April 30, 1997, All Cycle Waste, Inc. had waste hauling and
disposal revenues of $2,754,877 and a net loss of $26,102. For the same period
Winters Brothers, Inc. had inter-company rental income of $53,000 and net income
of $5,265.
Changes to the previously reported April 30, 1997 stockholders' equity of
Casella Waste Systems, Inc. resulting from this transaction are as follows:
(Amounts in thousands, except for share data)
Common A Common A Paid in Accumulated
Number Capital Deficit
of Shares $ $ $
Balance at 4/30/97 2,854,445 $29 $ 9,982 ($ 10,331)
as previously reported
Adjustment in 603,347 6 994 (593)
connection with pooling
of interests
Adjustment to conform (21)
with pooled companies'
year ends
Balance at 4/30/97 3,457,792 $35 $10,976 ($ 10,945)
<PAGE>
Prior to December 19, 1997, Casella Waste Systems, Inc. and All Cycle Waste,
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 companies' facility in Williston,
Vermont. These transactions have been eliminated in the accompanying financial
statements.
Following is a reconciliation of the amounts (in thousands) of net sales and net
income previously reported for the three and nine months ended January 31, 1997,
for the year ended April 30, 1997, and for the six months ended October 31,
1997:
Three Nine
Months Months Year Six Months
ended ended ended ended
1/31/97 1/31/97 4/30/97 10/31/97
Revenues:
As previously reported $18,312 $51,518 $73,176 $54,850
Acquired companies 2,257 5,279 7,358 4,607
Elimination of
intercompany revenue (375) (586) (1,002) (905)
As restated $20,194 $56,211 $79,532 $58,552
Net income:
As previously reported $ 20 $ 770 $ (12) $ 1,603
Acquired companies (149) (413) (407) (182)
As restated $ (129) $ 357 $ (419) $ 1,421
Transactions Recorded as Purchases
During the year ended April 30, 1997, the Company completed 24 acquisitions,
including the 25-year capital lease of a landfill, for approximately $34.8
million in cash, $20.8 million in notes to sellers and liabilities assumed and
755,254 shares of class A common stock issued. These transactions were accounted
for as purchases.
During the nine months ended January 31, 1998, the Company acquired 22 solid
waste hauling operations, exclusive of the All Cycle Waste Inc. transaction
discussed above, in transactions accounted for as purchases. These transactions
were in exchange for consideration of approximately $26.0 million is cash, $4.6
million in notes to sellers and liabilities assumed, and 86,858 shares of class
A common stock issued. 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, 1996:
<PAGE>
Nine Months Ended Nine Months Ended
January 31, 1998 January 31, 1997
----------------- -------------------
Revenues $97,566 $97,191
Operating Income 9,875 7,994
Net Income (Loss) 1,827 594
Preferred Stock & Put Warrant Accretion (974) (6,004)
Net Income(Loss) Available to Common 853 (5,410)
Shareholders
Pro forma income (loss) per $.13
share of common stock
Weighted average common stock 6,755
shares outstanding
Pro forma income (loss) per share - $.08
assuming full dilution
Weighted average common stock 10,445
shares outstanding - assuming full
dilution
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, 1996 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. 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 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). The Company accrued a $215,000 reserve for this claim
during the quarter ended July 31, 1997.
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
<PAGE>
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.
4. CHANGES IN STOCKHOLDERS EQUITY
Initial Public Offering of Class A Common Stock
On November 3, 1997, the Company completed an initial public offering of
3,000,000 shares of its class A common stock, priced at $18.00 per share. The
Company raised proceeds of $48,492,267 net of underwriters' discount of
$3,780,000 and other issuance costs of $1,727,733. The proceeds of this offering
were used to repay debt and redeem the series C preferred mandatorily redeemable
preferred stock.
Under the terms of the Company's agreements with the holders of the series A and
B redeemable preferred stock with warrants exercisable for class A common stock,
the preferred stock was automatically redeemed and the redemption price was
applied to the exercise of the warrants upon the closing of the Company's
initial public offering on November 3, 1997. Under the terms of the Company's
agreements with the holders of the series D convertible preferred stock, the
preferred stock was converted automatically into shares of class A common stock
upon the closing of the Company's initial public offering.
In accordance with the terms of the Company's agreements with the holders of
the series C manditorily redeemable preferred stock, the preferred stock was
redeemed at its stated redemption price of $7.00 per share upon the closing of
the class A common public offering. During the quarter ended October 31, 1997
the series C manditorily redeemable preferred stock was accreted to its
redemption value.
The unaudited pro forma consolidated statement of operations gives effect to the
application of the net proceeds of the initial pubic offering as if it had
occurred on May 1, 1997.
5. PROVISION FOR INCOME TAXES
The Company records income tax expense on its estimated taxable income during
the year based on combined effective federal and state tax rates of 40%. The
difference in federal income taxes at the statutory rate and the provision for
income taxes for the three and nine month periods ended January 31, 1998 and
1997 is primarily due to non-deductible goodwill costs, state and local taxes,
and deferred tax provisions.
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. During the quarter ended January 31, 1998, the Company recorded a
charge of $97,376 to deferred income tax expense to reflect the effect of the
All Cycle pooling of interests, and the related loss of subchapter S tax status
by All Cycle Waste, Inc. and Winters Brothers, Inc.
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.
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
<PAGE>
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.
Historical net income (loss) per share information has not been presented, since
this information is not considered to be relevant or meaningful.
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):
Three months Nine months
ended ended
1/31/98 1/31/98
Number of shares outstanding, end of period:
Class A common stock 10,503 10,503
Class B common stock 988 988
Effect of weighting the average shares
outstanding during the period (188) (4,736)
Basic shares outstanding 11,303 6,755
Potentially dilutive shares 1,246 3,690
Fully diluted shares outstanding: 12,549 10,445
The pro forma number of basic and diluted shares outstanding for the nine months
ending January 31, 1998 gives weighting effect to the pro forma issuance of the
publicly offered shares of class A common stock and conversion of series A, B
and D preferred stock, as if these events had occurred on May 1, 1997.
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This 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 21E
of the Securities Exchange Act of 1934, as amended, with respect to, among other
things, the Company's future revenues, operating income, or earnings per share.
Without limiting the foregoing, 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. These factors include, without
limitation, those set forth below under the caption "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.
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statement and the related notes, included elsewhere in
this report.
RESULTS OF OPERATIONS
The Company is a regional, integrated solid waste services company providing
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.
During the fiscal year ended April 30, 1997, the Company acquired 24 solid waste
collection, transfer and landfill operations. During the nine months ended
January 31, 1998, the Company acquired another 22 similar operations in
<PAGE>
transactions recorded as purchases. 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 dates of the
acquisitions. The resulting growth in revenues and results of operations of the
Company will materially affect the period-to-period comparisons of this
financial information. In addition to these transactions, during the three
months ended January 31, 1998 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 and year to date
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.
REVENUES
The Company's revenues are attributable primarily to fees charged to customers
for solid 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 tire derived fuel. Other revenues consist primarily of revenue
from tipping fees charged at waste tire processing facilities and septic pumping
and portable toilet operations. 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.
During the periods presented on the Consolidated Statement of Operations,
revenue was comprised of the following lines of business:
Three months ended Nine months ended
---------------------- --------------------
1/31/98 1/31/97 1/31/98 1/31/97
------- ------- ------- -------
Collection 75.7% 70.5% 72.1% 67.3%
Landfill 11.5 15.3 13.3 17.0
Transfer 5.0 6.7 6.2 6.8
Recycling 6.1 6.5 6.4 7.7
Other 1.7 1.0 2.0 1.2
---- ---- ---- ----
Total Revenue 100% 100% 100% 100%
==== ==== ==== ====
Collection revenues increased as a percentage of total revenues because most of
the Company's acquisitions over the last 21 months were primarily collection
companies. Other revenue increased due to the acquisition of the Maine waste
tire processing operation in July 1996, and due to two portable
toilet/septic-pumping acquisitions in the first quarter of the current fiscal
year. The remaining revenue categories have decreased as a percentage of total
revenues due to fewer acquisitions being consummated in these lines of business.
Any increases in landfill or transfer revenues achieved by internalizing the
waste volumes of newly acquired collection businesses are eliminated in the
consolidated statements.
Revenues increased $8.6 million, or 42.5%, for the three months ended January
31, 1998 over the same period in 1997. Revenues increased $31.1 million, or
55.3% for the nine months ended January 31, 1998 over the comparable period in
1997. Of this increase, $7.3 million of the third quarter growth and $27.5
million of the year-to-date growth was due to the impact of businesses acquired
during the year ended April 30, 1997, and during the current fiscal year. The
balance of the increase was due to internal growth, comprised of net new
business, volume increases of existing customers, price increases, and changes
in recycled commodities pricing.
<PAGE>
OPERATING EXPENSES
The following table depicts for the periods presented on the Consolidated
Statement of Operations the relationship between revenues and certain expense
items:
Three months ended Nine months ended
---------------------- --------------------
1/31/98 1/31/97 1/31/98 1/31/97
------- ------- ------- -------
Revenues 100% 100% 100% 100%
Cost of operations 59.5 61.8 59.2 59.2
General and administrative 15.0 16.4 14.6 15.8
Depreciation and amortization 16.3 16.4 15.4 17.3
Merger Costs 1.0 -- 0.3 --
----- ----- ----- -----
Operating income 8.2 5.4 10.5 7.7
Interest expense, net 4.7 6.1 6.1 5.2
Other (income) expense (0.3) (0.2) -0- 0.2
Provision for income taxes 2.1 0.1 2.2 1.7
----- ----- ----- -----
Net Income 1.7 (0.6) 2.2 0.6
===== ===== ===== =====
EBITDA* 24.4 21.9 25.8 25.0
===== ===== ===== =====
*See discussion and computation of EBITDA below.
Cost of Operations
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 recyclable materials,
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 which the Company anticipates will be
incurred in the future, and leachate treatment and disposal costs.
As a percentage of revenue, cost of operations decreased for the three months
ending January 31, 1998 compared to the same period ending January 31, 1997.
This reflects both the efficiencies achieved from stressing `tuck-in' collection
acquisitions, and the emphasis placed this year on improved management of the
seasonal aspects of our operations. As noted in the `Seasonality' section below,
a number of factors can adversely impact Company revenues during the winter
months. During the quarter ending January 31, 1998, operating expenses were in
line with operating expenses year to date, which indicates improved success in
effectively managing variable costs during the winter when compared to the same
figures during the prior fiscal year.
General and Administrative
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.
As a percentage of revenue, general and administrative expenses have dropped
1.4% for the three-month period ending January 31, 1998 compared to the same
period during 1997. The decrease for the nine-month period ending January 31,
1998 compared to the same period in 1997 was 1.2%. This improvement is due to
improved economies of scale achieved subsequent to the acquisitions of the last
21 months, and to the leveraging off of our existing corporate overhead.
<PAGE>
Depreciation and Amortization
Depreciation and amortization expense includes depreciation of fixed assets over
the 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 site to site depending on the purchase
price and landfill site and cell development costs.
Depreciation and amortization expenses for the nine months ended January 31,
1998 were 15.4% of revenue compared to 17.3% during the same nine months ended
January 31, 1997. This change reflects the Company's increasing share of revenue
generated from collection operations, which have lower depreciation and
amortization costs as a percentage of revenues than the Company's other
operations. This trend was partially offset, beginning in the quarter ended
October 31, 1997, by increased landfill amortization due to the opening of a new
lined cell at the Company's leased disposal facility in Clinton County, NY.
Merger (Pooling) Costs
Merger related expenses consist of legal and professional fees associated with
the All Cycle pooling of interests, as well as bonus payments made to All Cycle
management personnel in consideration of the pending merger. This expense was
1.0% and 0.3% of revenue during the three-month and nine-month periods ended
January 31, 1998.
INTEREST EXPENSE (NET)
During the three months ended January 31, 1998, interest as a percent of revenue
decreased to 4.7% from 6.1% for the quarter ended January 31, 1997. Net interest
expense rose to 6.1% as a percent of revenue during the nine months ended
January 31, 1998 compared to 5.2% for the nine months ended January 31, 1997.
These fluctuations are the result of the increased debt incurred by the Company
as it continued to successfully implement its acquisition program during the
fiscal year ended April 30, 1997, and during the current fiscal year. The
Company's total debt (including capital leases) had risen from $29.4 million at
April 30, 1996 to $83.6 million at April 30, 1997 to $99.6 at October 31, 1997.
Effective with the Company's public offering of class A common stock on November
3, 1997, the Company repaid approximately $45 million in debt, resulting in a
decrease in interest expense as a percent of revenue for the third quarter of
1998 compared to 1997.
The decrease in interest expense resulting from the debt payoff was partially
offset by a $75,000 early payment charge related to the payoff of the BankBoston
series B term note, and by a $53,869 interest charge related to resolution of a
federal tax audit.
OTHER INCOME AND EXPENSE
This category was not material to total revenues or the results of operations
during the three and nine month periods ending January 31, 1997 and 1998.
PROVISION FOR INCOME TAXES
For interim periods of the fiscal year ended April 30, 1998, income taxes are
recorded at a combined federal and state rate of 40% based on estimated taxable
income, with effect given to certain non-deductible expenses. In addition, the
quarter ending January 31, 1998 includes a $97,376 deferred tax provision
related to the All Cycle merger and related termination of All Cycle's
subchapter S tax status.
EBITDA
EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization)
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.
<PAGE>
Amounts in $1,000's
Three months ended Nine months ended
---------------------- --------------------
1/31/98 1/31/97 1/31/98 1/31/97
------- ------- ------- -------
Operating income $2,349 $1,100 $ 9,147 $ 4,324
Depreciation and amortization 4,684 3,316 13,412 9,726
------ ------ ------- -------
EBITDA $7,033 $4,416 $22,559 $14,050
====== ====== ======= =======
EBITDA as a percentage of
revenue 24.4% 21.9% 25.8% 25.0%
Analysis of the factors contributing to the change in EBITDA is included in the
discussions above.
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. Because of
these needs the Company has in the past had working capital deficits. The
Company had positive net working capital of $3.7 million at January 31, 1998
compared to a $5.6 million working capital deficit at April 30, 1997.
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.
On November 3, 1997 the Company completed an initial public offering of its
class A common stock. The proceeds from this offering were $48.5 million, net of
underwriters discounts and issuance costs. A portion of the proceeds of this
offering, $45 million, was used to repay long term debt, and to pay down the
line of credit. Funds available to the Company under the line of credit were
$94.6 million at January 31, 1998.
The Company's 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 fiscal year.
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 due to (a)
decreased volumes of waste generated by construction and demolition activities
in the northeastern United States during these months, and (b) decreased volumes
of waste generated by commercial enterprises dependent on the tourism industry
in the Company's market area. Since certain of the Company's operating and fixed
costs remain constant throughout the fiscal year, operating income results can
be negatively affected by this seasonality. In addition, particularly harsh
weather conditions could result in increased operating costs to certain of the
Company's operations.
During the quarter ended January 31, 1998, a severe ice storm afflicted the
northeast, including the Company's operations in northern Vermont and New
Hampshire, and Western Maine.
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 on Form 10-Q 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 three of the last four years. 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 expand the landfills
it owns and leases and to develop new landfill sites. There can be no assurance
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).
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.
<PAGE>
Sales of Unregistered Securities
During the quarter ended January 31, 1998 the Company had the following sales of
unregistered securities:
On November 5, 1997, the Company acquired the Teelon group of solid waste
collection companies in western New York State in a transaction accounted for as
a purchase. The total purchase price was $4.9 million, including $1.5 million in
liabilities assumed and/or discharged, $2.8 million cash paid to sellers and
28,000 shares of class A common stock issued to the sellers. 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 December 1, 1997 the Company effected a merger with Pine Tree Waste, Inc. of
South Portland, Maine, in a transaction accounted for as a purchase. The total
purchase price was $4.4 million, including $2.9 million in liabilities assumed
and/or discharged, 81,131 shares of class A common stock issued to the sellers,
and a reserve of 16,274 shares of class A common stock to be issued pending the
results of a post-acquisition audit. 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 December 19, 1997 the Company effected a merger with All Cycle Waste, Inc.
and Winter Brothers, Inc. (commonly owned entities) of Williston, Vermont, in a
transaction accounted for as a pooling of interest. The Company issued 416,103
shares of class A common stock for all of the outstanding stock of All Cycle
Waste, Inc. and 187,244 shares of class A common stock for all of the
outstanding stock of Winters Brothers, Inc. As of the date of the merger, All
Cycle Waste, Inc. and Winters Brothers, Inc. had combined total assets of $6.7
million and combined total liabilities of $6.4 million. 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 December 11, 1997 Prudential Securities Group, Inc. exercised warrants to
purchase 32,902 shares of the Company's class A common stock. Prudential
Securities exercised these warrants in a cashless transaction, surrendering
50,654 warrants in exchange for 32,902 shares of class A common stock. The
shares of class A common stock were offered and issued in reliance upon the
exemption from registration set forth in section 3(a)(9) under the Securities
Act of 1933.
No underwriters were involved in the foregoing issuances of securities.
Use of Proceeds of Initial Public Offering
On October 28, 1997, the Company commenced the initial public offering of its
class A common stock pursuant to a Registration Statement on Form S-1
(Commission file number 333-33135, declared effective October 27, 1997). The
offering closed on November 3, 1997, resulting in the sale of all of the
4,000,000 shares offered (of which, 3,000,000 shares were sold by the Company
and 1,000,000 shares were sold for the account of certain shareholders) at an
offering price of $18.00 per share (constituting aggregate gross proceeds of
$54,000,000 for the account of the Company and $18,000,000 for the account of
the selling stockholders), and on November 6, 1997 the underwriters exercised in
full their overallotment option to purchase an additional 600,000 shares at
$18.00 per share (constituting additional aggregate gross proceeds of
$10,800,000), all of which were offered by certain stockholders of the Company.
The managing underwriters of the offering were Goldman, Sachs & Co., Donaldson,
Lufkin & Jenrette Securities Corporation and Oppenheimer & Co., Inc.
Through January 31, 1998, the following expenses were incurred for the Company's
account in connection with the offering:
<PAGE>
Underwriting discount $3,780,000
Expenses paid to or for underwriters --
Other expenses 1,727,733
--------------
Total expenses 5,507,733
--------------
Net offering proceeds $48,492,267
The amount shown as `Other expenses' includes management fees paid to BCI Growth
III, L.P., The North Atlantic Venture Fund, L.P. and The Vermont Venture Fund,
L.P. BCI Growth III, L.P. owned 10% of the class A common stock of the Company
immediately following the initial public offering (9.4% as of January 31, 1998).
Gregory B. Peters, a director of the Company, is a General Partner of The North
Atlantic Venture Fund, L.P. and is the Managing Partner of The Vermont Venture
Fund, L.P.
Management fees - BCI Growth III, L.P. $ 368,643
Management fees - The North Atlantic Venture Fund L.P. 75,967
Management fees - The Vermont Venture Fund, L.P. 50,611
Other payments 1,232,512
Total other expenses $1,727,733
The payments shown as `Other payments' were made to persons other than
directors, officers or their associates, persons owning ten percent or more of
any class of equity securities of the issuer, or affiliates of the issuer.
Through January 31, 1998 the proceeds of the offering were used as follows:
Repayment of indebtedness $44,988,767
Redemption of series C preferred stock 3,465,369
Other 38,131
Total use of proceeds $48,492,267
The amount shown as `Redemption of series C preferred stock' included payments
to BCI Growth III L.P., The North Atlantic Venture Fund, L.P. and The Vermont
Venture Fund, L.P., whose relationships to the Company are described in the
preceding section.
Redemption of series C preferred stock -
BCI Growth III, L.P. $ 2,579,621
Redemption of series C preferred stock -
The North Atlantic Venture Fund, L.P. 531,587
Redemption of series C preferred stock -
The Vermont Venture Fund, L.P. 354,161
Other use of proceeds 45,026,898
Total use of proceeds $48,492,267
The payments shown as `Other use of proceeds' were made to persons other than
directors, officers or their associates, persons owning ten percent or more of
any class of equity securities of the issuer, or affiliates of the issuer.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended January 31, 1998, no matters were submitted to a vote
of the Company's shareholders.
<PAGE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule for Period Ended January 31, 1998
Restated Financial Data Schedule for Period Ended October 31, 1997
(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: 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 January
31, 1998 Consolidated Balance Sheet and Consolidated Statement of Operations for
the nine-month period ended January 31, 1998, and is qualified in its entirety
by reference to such financial statements and the footnotes thereto.
</LEGEND>
<CIK> 0000911177
<NAME> Casella Waste Systems, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 2,305
<SECURITIES> 0
<RECEIVABLES> 19,474
<ALLOWANCES> (1,331)
<INVENTORY> 255
<CURRENT-ASSETS> 23,339
<PP&E> 109,561
<DEPRECIATION> 34,075
<TOTAL-ASSETS> 175,326
<CURRENT-LIABILITIES> 19,609
<BONDS> 0
0
0
<COMMON> 115
<OTHER-SE> 80,754
<TOTAL-LIABILITY-AND-EQUITY> 175,326
<SALES> 0
<TOTAL-REVENUES> 87,321
<CGS> 0
<TOTAL-COSTS> 51,743
<OTHER-EXPENSES> 26,431
<LOSS-PROVISION> 584
<INTEREST-EXPENSE> 5,450
<INCOME-PRETAX> 3,873
<INCOME-TAX> 1,950
<INCOME-CONTINUING> 1,923
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<EXTRAORDINARY> 0
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<NET-INCOME> 1,923
<EPS-PRIMARY> .14
<EPS-DILUTED> .09
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
October 31, 1997 Consolidated Balance Sheet and Consolidated Statement of
Operations for the six-month period ended October 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>
<CIK> 0000911177
<NAME> Casella Waste Systems, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
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<PERIOD-START> MAY-01-1997
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<RECEIVABLES> 18,662
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<EPS-PRIMARY> .10
<EPS-DILUTED> .05
</TABLE>
