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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
---------- ----------
Commission file number 000-23211
CASELLA WASTE SYSTEMS, INC.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 03-0338873
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 Greens Hill Lane, Rutland, Vermont 05701
------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (802) 775-0325
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 5, 2000:
Class A Common Stock 22,196,971
Class B Common Stock 988,200
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands except per share amounts)
<TABLE><CAPTION>
ASSETS April 30, July 31,
------ 2000 2000
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 8,864 $ 15,600
Restricted Cash 17,609 16,434
Accounts Receivable - Trade, net of allowance for
doubtful accounts of $6,247 and $6,136 80,720 95,375
Accounts Receivable - Other 14,429 1,146
Notes Receivable - Officers/Employees 2,095 1,362
Prepaid Expenses 5,929 5,681
Inventory 10,986 8,666
Investments 5,156 10,584
Deferred Income Taxes 12,730 13,088
Other Current Assets 10,299 12,268
-------- --------
Total Current Assets 168,817 180,204
-------- --------
Property, Plant and Equipment, net of accumulated
depreciation and amortization of $97,152 and $108,122 379,086 391,156
Intangible Assets, net 294,283 306,609
Restricted Cash 10,881 10,932
Investment in Unconsolidated Subsidiaries 14,695 16,298
Other Non-Current Assets 4,415 8,025
-------- --------
703,360 733,020
-------- --------
$872,177 $913,224
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands except per share amounts)
<TABLE><CAPTION>
LIABILITIES AND April 30, July 31,
STOCKHOLDERS' EQUITY 2000 2000
-------------------- --------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt $ 8,367 $ 7,998
Current Maturities of Capital Lease Obligations 788 788
Accounts Payable 43,335 51,150
Accrued Payroll and Related Expenses 5,536 4,988
Accrued Interest 3,994 7,421
Accrued Income Taxes 3,766 2,603
Accrued Closure and Post-Closure Costs, Current Portion 259 --
Deferred Revenue 3,317 6,377
Other Current Liabilities 15,153 19,274
--------- ---------
Total Current Liabilities 84,515 100,599
--------- ---------
Long-Term Debt, Less Current Maturities 440,804 453,050
--------- ---------
Capital Lease Obligations, Less Current Maturities 3,748 3,531
--------- ---------
Deferred Income Taxes 30,948 33,349
--------- ---------
Accrued Closure and Post-Closure Costs,
Less Current Maturities 12,017 12,969
--------- ---------
Minority Interest 16,378 16,683
--------- ---------
Other Long-Term Liabilities 9,049 9,022
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Class A Common Stock -
Authorized - 100,000 Shares, $0.01 par value
Issued and Outstanding - 22,215 and 22,233
Shares as of April 30, 2000 and July, 31 2000, respectively 222 222
Class B Common Stock -
Authorized - 1,000 Shares, $0.01 par value 10 Votes per
Share, Issued and Outstanding -988 10 10
Accumulated Other Comprehensive Income/(Loss) (305) 5,123
Additional Paid-In Capital 270,655 271,212
Retained Earnings 4,136 7,454
--------- ---------
Total Stockholders' Equity 274,718 284,021
--------- ---------
$ 872,177 $ 913,224
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share data)
<TABLE><CAPTION>
Three Months Ended
--------------------
July 31,
1999 July 31,
(Restated) 2000
-------- --------
<S> <C> <C>
Revenues $ 54,676 $157,067
-------- --------
Operating Expenses:
Cost of Operations 30,636 108,848
General and Administration 7,644 17,430
Depreciation and Amortization 7,573 14,331
Merger Related Costs 1,490 --
-------- --------
47,343 140,609
-------- --------
Operating Income 7,333 16,458
-------- --------
Other (Income)/Expense:
Interest Income (73) (640)
Interest Expense 1,676 10,551
Equity in Loss of OCI/New Heights -- 298
Minority Interest -- 190
Other Income (58) (145)
-------- --------
Other Expenses, net 1,545 10,254
-------- --------
Income from Continuing Operations Before
Income Taxes and Discontinued Operations 5,788 6,204
Provision for Income Taxes 2,652 2,885
-------- --------
Net Income from Continuing Operations Before
Discontinued Operations 3,136 3,319
-------- --------
Discontinued Operations:
Loss from Discontinued Operations,
net of Income Taxes (95) --
-------- --------
Net Income 3,041 3,319
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share data)
<TABLE><CAPTION>
Three Months Ended
------------------------
July 31,
1999 July 31,
(Restated) 2000
---------- ----------
<S> <C> <C>
Earnings Per Share:
Basic:
Income from Continuing Operations Before
Discontinued Operations $ 0.20 $ 0.14
Loss from Discontinued Operations $ (0.01) $ --
---------- ----------
Net Income per Common Share $ 0.19 $ 0.14
========== ==========
Basic Weighted Average Common
Shares Outstanding 15,979 23,211
========== ==========
Diluted:
Income from Continuing Operations Before
Discontinued Operations $ 0.19 $ 0.14
Loss from Discontinued Operations $ (0.01) $ --
---------- ----------
Net Income per Common Share $ 0.18 $ 0.14
========== ==========
Diluted Weighted Average Common
Shares Outstanding 16,539 23,889
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE><CAPTION>
Three Months Ended
--------------------
July 31, July, 31
1999 2000
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 3,041 $ 3,319
-------- --------
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities -
Depreciation and Amortization 7,573 14,331
Loss from Discontinued Operations 95 --
Gain on Sale of Fixed Assets (8) (169)
Minority Interest -- 190
Changes in Assets and Liabilities, net of
Effects of Acquisitions -
Accounts Receivable (6,383) (13,922)
Accounts Payable 40 7,815
Other Current Assets and Liabilities 4,795 10,056
-------- --------
6,112 18,301
-------- --------
Net Cash Provided by Operating Activities 9,153 21,620
-------- --------
Cash Flows from Investing Activities:
Acquisitions, Net of Cash Acquired (1,611) (3,761)
Additions to Property and Equipment (16,069) (21,830)
Proceeds from Sale of Equipment 21 568
Advances to Unconsolidated Subsidiaries -- (1,603)
Other (2,043) (475)
-------- --------
Net Cash Used in Investing Activities (19,702) (27,101)
-------- --------
Cash Flows from Financing Activities:
Proceeds from Issuance of Common Stock -- 88
Proceeds from Equity Transactions of Majority-
Owned Subsidiary -- 469
Proceeds from Exercise of Stock Options 219 --
Proceeds from Long-Term Borrowings 22,600 18,920
Principal Payments on Long-Term Debt (11,584) (7,260)
-------- --------
Net Cash Provided by Financing Activities 11,235 12,217
-------- --------
Net Increase in Cash and Cash Equivalents 686 6,736
Cash and Cash Equivalents, Beginning of Period 4,232 8,864
-------- --------
Cash and Cash Equivalents, End of Period $ 4,918 $ 15,600
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE><CAPTION>
Three Months Ended
--------------------
July 31, July, 31
1999 2000
-------- --------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period for -
Interest $ 1,605 $ 7,125
======== ========
Income Taxes $ -- $ 861
======== ========
Supplemental Disclosures of Non-Cash Investing
and Financing Activities:
Summary of Entities Acquired in Purchase
Business Combinations
Fair Market Value of Assets Acquired $ 1,611 $ 17,044
Cash Paid, net (1,611) (3,761)
-------- --------
Exchange of Note Receivable $ -- $ 13,283
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in thousands, except per share amounts)
The condensed consolidated balance sheets of Casella Waste Systems, Inc. and
Subsidiaries (the "Company") as of April 30, 2000 and July 31, 2000, the
consolidated statements of operations for the three months ended July 31, 1999
and 2000 and the condensed consolidated statements of cash flows for the three
months ended July 31, 1999 and 2000 are unaudited. In the opinion of management,
such financial statements include all adjustments (which include normal
recurring and nonrecurring adjustments) necessary for a fair presentation of
financial position, results of operations, and cash flows for the periods
presented. The Company has restated the previously issued consolidated
statements of operations for the three months ended July 31, 1999 and the
condensed consolidated statement of cash flows for the three months ended July
31, 1999 to reflect the effects of discontinued operations. The consolidated
financial statements presented herein should be read in connection with the
Company's audited consolidated financial statements as of and for the twelve
months ended April 30, 2000. These were included as part of the Company's Annual
Report on Form 10-K (the "Annual Report").
1. BUSINESS COMBINATIONS
During the three months ended July 31, 2000, the Company acquired six solid
waste hauling operations in transactions accounted for as purchases. These
transactions were in exchange for consideration of approximately $3.8 million in
cash to sellers and the partial settlement of a receivable in the amount of
$13.3 million. The operating results of these businesses are included in the
Consolidated Statement of Operations from the dates of acquisition. The purchase
prices have been allocated to the net assets acquired based on fair values at
the dates of acquisition with the residual amounts allocated to goodwill.
The following unaudited pro forma combined information shows the results of the
Company's operations as though each of the acquisitions had been completed as of
May 1, 1999.
Three Months Ended Three Months Ended
July 31, 1999 July 31, 2000
------------- -------------
Revenues $ 139,980 $ 158,494
============= =============
Operating Income $ 4,364 $ 16,761
============= =============
Net Income $ (971) $ 3,363
============= =============
Diluted Income per Share $ (0.04) $ 0.14
============= =============
Weighted Average Diluted
Shares Outstanding 23,691 23,889
============= =============
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, 1999 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
In the normal course of its business and as a result of the extensive
governmental regulation of the waste industry, the Company may periodically
become subject to various judicial and administrative proceedings involving
Federal, state or local agencies. In these proceedings, an agency may seek to
impose fines on the Company or to revoke, or to deny renewal of, an operating
permit held by the Company. In addition, the Company may become party to various
claims and suits pending for alleged damages to persons and property, alleged
violation of certain laws and for alleged liabilities arising out of matters
occurring during the normal operation of the waste management business.
<PAGE>
On or about October 30, 1997, Mr. Matthew M. Freeman commenced a civil lawsuit
against the Company and two of its officers and directors in Vermont Superior
Court. Mr. Freeman claims to have performed services for the Company prior to
1995 and in his lawsuit 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 for 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 January 7, 2000, the City of Saco, Maine filed a notice of claims with the
Company and Maine Energy Recovery Company LP ("Maine Energy") claiming
entitlement to certain "residual cancellation" payments from Maine Energy under
the waste handling agreement dated June 7, 1991 among the Biddeford-Saco Waste
Handling Committee, Biddeford, Saco and Maine Energy on the basis of the
satisfaction of certain conditions, including the acquisition of KTI, Inc.
("KTI") by the Company. The notice of claims alleges that the payments due to
Saco exceed $33 million, and claims damages in such amounts for breach of
contract, breach of fiduciary duties and fraud and also claims treble damages of
$100 million based on alleged fraudulent transfer of Maine Energy's assets. The
notice also reserves the right to seek punitive damages. Although the City of
Biddeford, Maine has not filed a notice of claims, it has given notice that it
will be initiating a suit to receive the residual cancellation payments. Under
the agreement, the aggregate amount to be paid upon the exercise of the put
right is 18% of the fair market value of the equity of the partners in Maine
Energy, and such amount is required to be paid within 120 days after the
exercise of the put by the respective parties entitled thereto. The Company
believes it has meritorious defenses to these claims.
On or about April 26, 1999, Salvatore Russo filed an action in the U.S. District
Court, District of New Jersey against KTI and two of its principal officers,
Ross Pirasteh and Martin J. Sergi, purportedly on behalf of all shareholders who
purchased KTI common stock from May 4, 1998 through August 14, 1998. Melanie
Miller filed an identical complaint on May 14, 1999. The complaints allege that
the defendants made material misrepresentations in KTI's quarterly report on
form 10-Q for the period ended March 31, 1998 in violation of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, as amended, concerning KTI's
allowance for doubtful accounts and net income. The Plaintiffs are seeking
undisclosed damages. The Company believes it has meritorious defenses to these
complaints. On June 15, 1999, Mr. Russo and Ms. Miller, together with Fransisco
Munero, Timothy Ryan and Steve Storch, moved to consolidate the two complaints.
This motion is currently pending in the District Court of New Jersey.
On or about March 24, 2000, a complaint was filed in the United States District
Court, District of New Jersey against the Company, KTI, and three of KTI's
principal officers, Ross Pirasteh, Martin J. Sergi, and Paul A. Garret. The
complaint purported to be behalf of all shareholders who purchased KTI common
stock from January 1, 1998 through April 14, 1999. The Complaint alleged that
the defendants made unspecified misrepresentations regarding KTI's financial
condition during the class period in violation of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, as amended. The plaintiffs seek undisclosed
damages. On or about April 6, 2000, the plaintiffs filed an amended class action
complaint, which changes the class period covered by the complaint on behalf of
all the defendants on July 21, 2000.
The Company is a defendant in certain other lawsuits alleging various claims
incurred in the ordinary course of business, none of which, either individually
or in the aggregate, the Company believes are material to its financial
condition, results of operations or cash flows.
The Company offers no prediction of the outcome of any of the proceedings
described above.
Under the terms of a Waste Handling Agreement between certain municipalities and
the Company's majority owned subsidiary, Maine Energy, Maine Energy is obligated
to make a payment either at the point in time that Maine Energy pays off its
debt (as defined), which is currently estimated to occur between 2003 and 2005,
or upon the consummation of an outright sale of Maine Energy. The estimated
obligation has been recorded in other long-term liabilities as of July 31, 2000.
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
<PAGE>
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. EARNINGS PER SHARE
The following table reconciles the number of common shares outstanding at July
31 of each year indicated to the weighted average number of common shares
outstanding and the weighted average number of common and potentially dilutive
common shares outstanding for the respective three month periods for the purpose
of calculating basic and dilutive earnings per common share:
Three Months Three Months
Ended Ended
July 31, 1999 July 31, 2000
------- -------
Number of Shares Outstanding, End of Period:
Class A Common Stock 15,039 22,233
Class B Common Stock 988 988
Effect of Weighted Average Shares
Outstanding for the Period (48) (10)
------- -------
Basic Shares Outstanding 15,979 23,211
Impact of Potentially Dilutive Securities 560 678
------- -------
Diluted Shares Outstanding 16,539 23,889
======= =======
For the three months ended July 31, 1999 and 2000, options to purchase 866 and
4,100 common shares, respectively, were excluded from the calculation of
potentially dilutive securities because their impact was anti-dilutive.
5. SEGMENT REPORTING
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for reporting information about operating
segments in financial statements. In general, SFAS No. 131 requires that
business entities report selected information about operating segments in a
manner consistent with that used for internal management reporting.
The Company classifies its operations into Eastern, Central, Western, Power
Generation, Residential Recycling, Finished Products and Commercial Recycling.
The Company's revenues in the Eastern, Central and Western segments are derived
mainly from one industry segment, which includes the collection, transfer,
recycling and disposal of non-hazardous solid waste. The Company's revenues in
the Power Generation, Residential Recycling, Finished Products and Commercial
Recycling segments are derived from integrated waste handling services,
including processing and recycling of wood, paper, metals, plastics and glass,
municipal solid waste processing and disposal, specialty waste disposal, ash
residue recycling, brokerage of recycled materials and the manufacturing of
finished products using recycled materials. Any other activities in which the
Company is engaged are not material to the total results of operations of the
Company; these activities are reflected within the reporting structure outlined
above.
<PAGE>
Power Residential
Eastern Central Western Generation Recycling
-------- -------- -------- -------- --------
Three Months Ended July 31, 2000:
Outside Revenue $ 40,662 $ 30,717 $ 17,502 $ 7,680 $ 9,566
======== ======== ======== ======== ========
Intersegment Revenue $ 10,956 $ 10,137 $ 3,599 $ 289 $ 6,343
======== ======== ======== ======== ========
Net Income/(Loss) $ 1,664 $ 5,355 $ 1,986 $ (608) $ 847
======== ======== ======== ======== ========
Total Assets $389,628 $133,958 $127,566 $ 59,644 $ 60,184
======== ======== ======== ======== ========
Finished Commercial
Products Recycling Corporate Eliminations Total
-------- -------- -------- -------- --------
Outside Revenue $ 15,773 $ 37,747 $ 1,085 $ (3,665) $157,067
======== ======== ======== ======== ========
Intersegment Revenue $ 360 $ 9,402 $ 555 $(41,641) $ --
======== ======== ======== ======== ========
Net Income/(Loss) $ (1,810) $ 1,159 $ (5,652) $ 378 $ 3,319
======== ======== ======== ======== ========
Total Assets $ 46,795 $ 57,852 $ 47,517 $ (9,920) $913,224
======== ======== ======== ======== ========
Three Months Ended July 31, 1999:
Outside Revenue $ 9,550 $ 26,214 $ 18,819 $ -- $ --
======== ======== ======== ======== ========
Intersegment Revenue $ 794 $ 8,854 $ 3,505 $ -- $ --
======== ======== ======== ======== ========
Net Income/(Loss) $ 1,074 $ 2,420 $ 1,251 $ -- $ --
======== ======== ======== ======== ========
Total Assets $ 42,562 $132,639 $104,751 $ -- $ --
======== ======== ======== ======== ========
Finished Commercial
Products Recycling Corporate Eliminations Total
-------- -------- -------- -------- --------
Outside Revenue $ -- $ -- $ 93 $ -- $ 54,676
======== ======== ======== ======== ========
Intersegment Revenue $ -- $ -- $ -- $(13,153) $ --
======== ======== ======== ======== ========
Net Income/(Loss) $ -- $ -- $ (1,704) $ -- $ 3,041
======== ======== ======== ======== ========
Total Assets $ -- $ -- $ 20,687 $ -- $300,639
======== ======== ======== ======== ========
<PAGE>
6. SUBSEQUENT EVENTS
The Company has entered into an agreement in July 2000 with Louisiana-Pacific
Corp. to combine their respective cellulose insulation businesses into a single
operating entity under a joint venture agreement effective August 1, 2000. The
Company will contribute the operating assets of its cellulose insulation
manufacturing business together with $2,500 in cash. The new Company, to be
known as U.S. Green Fiber LLC, is an equally owned joint venture formed through
the combination of Louisiana-Pacific's GreenStone Industries, Inc. and Casella
Waste Systems' U.S. Fiber, Inc.'s operations. The new entity will supply
cellulose insulation to existing residential construction, retail and
manufactured housing supply channels.
On June 28, 2000, the Company entered into an agreement with Berkshire Partners
pursuant to which it agreed to sell Berkshire preferred stock, convertible into
the Company's Class A Common Stock at $14.00 per share. The transaction closed
August 11, 2000, when the Company received net proceeds of $55.2 million.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Casella Waste Systems, Inc. (" the Company") is a regional, integrated solid
waste services company that provides collection, transfer, disposal and
recycling services, generates steam and manufactures finished products utilizing
recyclable materials primarily throughout the eastern portion of the United
States and parts of Canada. The Company also markets recyclable metals,
aluminum, plastics, paper and corrugated cardboard both processed at its
facilities as well as recyclables purchased from third parties. The Company also
generates electricity under its contracts with its two majority owned
subsidiaries, Maine Energy Recovery Company LP ("Maine Energy") and Penobscot
Energy Recovery Company LP ("PERC"), and through its wholly owned subsidiary,
Timber Energy Recovery, Inc. ("TERI"). As of September 5, 2000, the Company
owned and/or operated five Subtitle D landfills, two landfills permitted to
accept construction and demolition materials, 39 transfer stations, 40 recycling
processing facilities, 40 solid and liquid waste collection divisions, 5 power
generation facilities, three finished products processing facilities and its
interest in a cellulose insulation joint venture.
The Company's revenues have increased from $54.7 million for the three months
ended July 31, 1999 to $157.1 million for the three months ended July 31, 2000.
From May 1, 1999 through April 30, 2000, the Company acquired 38 solid waste
collection, transfer and disposal operations, as well as KTI, Inc ("KTI") in
December 1999. Between May 1, 2000 and July 31, 2000, the Company acquired an
additional six such businesses, all of which were accounted for under the
purchase method of accounting for business combinations. Under the rules of
purchase accounting the acquired companies' revenues and results of operations
have been consolidated from the actual dates of the acquisitions and materially
affect the period-to-period comparisons of the Company's historical results of
operations.
This Form 10-Q and other reports, proxy statements, and other communications to
stockholders, as well as oral statements by the Company's officers or its
agents, may contain forward-looking statements within the meaning of Section 27A
of the Securities Act and section 21E of the Securities Exchange Act, with
respect to, among other things, the Company's future revenues, operating income,
or earnings per share. Without limiting the foregoing, any statements contained
in this Quarterly Report that are not statements of historical fact may be
deemed to be forward-looking statements, and the words "believes",
"anticipates", "plans", "expects", and similar expressions are intended to
identify forward-looking statements. There are a number of factors of which the
Company is aware that may cause the Company's actual results to vary materially
from those forecasted or projected in any such forward-looking statement,
certain of which are beyond the Company's control. These factors include,
without limitation, those outlined below in the section entitled "Certain
Factors That May Affect Future Results". The Company's failure to successfully
address any of these factors could have a material adverse effect on the
Company's results of operations.
General
-------
The Company's revenues are attributable primarily to fees charged to customers
for solid waste collection and disposal, landfill, waste-to-energy, transfer and
recycling services. The Company derives a substantial portion of its collection
revenues from commercial, industrial and municipal services that are generally
performed under service agreements or pursuant to contracts with municipalities.
The majority of the Company's residential collection services are performed on a
subscription basis with individual households. Landfill, waste- to-energy
facility and transfer customers are charged a tipping fee on a per ton basis for
disposing of their solid waste at the Company's disposal facilities and transfer
stations. The majority of these customers are under one to three-year disposal
contracts, with most having clauses for annual cost of living increases.
Recycling revenues include the sale of recyclable commodities, operating and
maintenance contracts of recycling facilities for municipal customers,
recyclable brokering operations and revenue from the sale of tire derived fuel.
The Company, as a result of the KTI acquisition, provides integrated waste
handling services, including the processing and recycling of wood, paper,
metals, aluminum, plastics and glass, municipal solid waste processing and
disposal, specialty waste disposal, ash residue recycling, brokerage of recycled
materials and the manufacturing of finished products, primarily cellulose
insulation, using recyclable materials. Effective August 1, 2000, the Company
contributed its cellulose insulation assets to a joint venture with
Louisiana-Pacific, and accordingly, will recognize half of the joint venture's
income/(loss) from that date forward. The Company emphasizes the use of low-cost
processing to add value to the waste products delivered and, in some cases, the
generation of electric power and steam. The Company operates these non-core
businesses under four reportable lines of business segments: Power Generation,
Residential Recycling, Commercial Recycling and Finished Products. These line of
business segments are reflected in the Company's revenues as follows: Power
Generation is
<PAGE>
reflected under "disposal", Residential Recycling is reflected under
"recycling", Commercial Recycling is reflected under "recycling and "brokerage",
and Finished Products is reflected under its own line. 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 decrease in the
Company's collection revenues as a percentage of revenues in the current fiscal
year is primarily attributable to the effects of the KTI acquisition.
Significant recycling, finished products and brokerage revenues were added
through that acquisition. The increase in the Company's landfill/disposal
facilities revenues as a percentage of revenue in the first quarter of fiscal
2001 is primarily attributable to the effects of the KTI acquisition.
Percentage of Revenues
--------------------
Three Months Ended July 31,
--------------------
1999 2000
------ ------
Collection.................................... 71.2% 42.8%
Landfill/Disposal Facilities.................. 9.5 16.5
Transfer...................................... 8.7 5.5
Recycling..................................... 6.1 8.1
Finished Products............................. 0.0 8.6
Brokerage..................................... 0.0 13.6
Other......................................... 4.5 4.9
------ ------
Total Revenues................................ 100.0% 100.0%
====== ======
Cost of operations includes labor, tipping fees paid to third party disposal
facilities, fuel, maintenance and repair of vehicles and equipment, worker's
compensation and vehicle insurance, the cost of purchasing materials to be
recycled, third party transportation expense, district and state taxes, host
community fees and royalties. Landfill operating expenses also include a
provision for closure and post-closure expenditures anticipated to be incurred
in the future, and leachate treatment and disposal costs.
General and administrative expenses include management, clerical and
administrative compensation and overhead, professional services and costs
associated with the Company's marketing and sales force and community relations
expense.
Depreciation and amortization expense includes depreciation of fixed assets over
the estimated useful life of the assets using the straight-line method,
amortization of landfill airspace assets under the units-of-production method,
and the amortization of goodwill and other intangible assets using the
straight-line method. The amount of landfill amortization expense related to
airspace consumption can vary materially from landfill to landfill depending
upon the purchase price and landfill site and cell development costs. The
Company depreciates all fixed and intangible assets, excluding non-depreciable
land, down to a zero net book value, and does not apply a salvage value to any
of its fixed assets.
The Company capitalizes certain direct landfill development costs, such as
engineering, permitting, legal, construction and other costs directly associated
with expansion of existing landfills. Additionally, the Company also capitalizes
certain third party expenditures related to pending acquisitions, such as legal
and engineering. 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.
<PAGE>
Results of Operations
---------------------
The following table sets forth for the periods indicated the percentage
relationship that certain items from the Company's Consolidated Financial
Statements bear in relation to revenues.
Percentage of Revenues
--------------------
Three Months Ended July 31,
--------------------
1999 2000
------ ------
Revenues 100.0% 100.0%
Cost of Operations 56.0 69.3
General and Administration 14.0 11.1
Depreciation and Amortization 13.9 9.1
Merger Related Costs 2.7 0.0
------ ------
Operating Income 13.4 10.5
Interest Expense, net 2.9 6.3
Equity Loss on Investment 0.0 0.2
Minority Interest 0.0 0.1
Other (Income)/Expense (0.1) (0.1)
Provision for Income Taxes 4.9 1.9
------ ------
Net Income Before Discontinued Operations 5.7 2.1
Discontinued Operations 0.2 0.0
------ ------
Net Income 5.5 2.1
====== ======
Adjusted EBITDA* 27.3 19.5
====== ======
* See discussion and computation of adjusted EBITDA below.
REVENUES:
Revenues increased $102.4 million, or 187.2% to $157.1 million in the quarter
ended July 31, 2000 from $54.7 million in the quarter ended July 31, 1999.
Approximately $97.4 million of the increase was attributable to the impact of
businesses acquired throughout fiscal 1999 and fiscal 2000, including KTI, which
was acquired in December 1999. The balance of the increase of $5.0 million was
attributable to internal volume and price growth, including the positive impact
of higher average recyclable commodity prices in the current quarter compared to
1999.
COST OF OPERATIONS:
Cost of operations increased $78.2 million or 255.6% to $108.8 million in the
quarter ended July 31, 2000 from $30.6 million in the quarter ended July 31,
1999. Cost of operations as a percentage of revenues increased to 69.3% in the
quarter ended July 31, 2000 from 56.0% in the prior year. The increase in cost
of operations as a percentage of revenues was primarily the result of acquiring
KTI's recyclable brokerage operations, which carry high cost of operations as a
percentage of revenues (approximately 90%). Brokerage comprised approximately
13.6% of the Company's revenues in the current quarter, versus 0% in the prior
year. Additionally, the finished products line of business carries a much lower
operating margin than the Company's core solid waste business operations.
GENERAL AND ADMINISTRATION:
General and administration expenses increased $9.8 million, or 128.0% to $17.4
million in the quarter ended July 31, 2000 from $7.6 million in the quarter
ended July 31, 1999, but decreased as a percentage of revenues to 11.1% in the
quarter ended July 31, 2000 from 14.0% in the quarter ended July 31, 1999. The
decrease in general and administrative expenses as a percentage of revenues was
primarily the result of acquiring KTI's recyclable brokerage operations, which
carry low general and administrative costs as a percentage of revenues
(approximately 4%). The general and administrative cost savings from acquiring
KTI also contributed to the lower general and administrative expenses as a
percentage of revenues in fiscal 2000.
<PAGE>
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization expenses increased $6.8 million, or 89.2%, to
$14.3 million in the quarter ended July 31, 2000 from $7.6 million in the
quarter ended July 31, 1999. Depreciation and amortization expenses as a
percentage of revenue decreased to 9.1% in the quarter ended July 31, 2000 from
13.9% in the quarter ended July 31, 1999. The decrease in depreciation and
amortization expenses as a percentage of revenues resulted from the Company's
acquisition of KTI. KTI operations carry lower depreciation expense as a
percentage of revenues (approximately 7%) than the Company (approximately
14.0%).
MERGER-RELATED COSTS:
Merger-related costs are comprised of legal, engineering, accounting and other
costs associated with the two poolings of interests transactions consummated
during the quarter ended July 31, 1999. No pooling transactions were closed in
the quarter ended July 31, 2000, resulting in a decrease of $1.5 million, or
2.7% as a percentage of revenues.
INTEREST EXPENSE, NET:
Net interest expense increased $8.3 million, or 518.3% to $9.9 million in the
quarter ended July 31, 2000 from $1.6 million in the quarter ended July 31,
1999. Interest expense, as a percentage of revenues increased to 6.3% in the
quarter ended July 31, 2000 from 2.9% in the quarter ended July 31, 1999. This
increase is primarily attributable to three factors: (i) a higher average debt
balance in the current fiscal quarter, versus last year; (ii) the Company closed
a new $450 million senior credit facility in December 1999 that raised the
Company's borrowing cost by approximately 250 basis points; and (iii) the
Company entered into new interest rate swap agreements that increased current
rates in order to fix the interest rates on a portion of our debt.
EQUITY LOSS ON INVESTMENT:
This amount arises from the Company's investment in Oakhurst Company, Inc. of
35%, the initial interest in which was acquired as part of KTI. Oakhurst
Company, Inc. owns 37.5% of New Heights Recovery and Power LLC ("New Heights").
The Company also has a direct ownership in New Heights of 12.5%.
MINORITY INTEREST:
This amount represents the minority owners' interest in the Company's majority
owned subsidiaries, Maine Energy Recovery Company LP, Penobscot Energy Recovery
Company LP and American Ash Recycling of Tennessee, Ltd.
OTHER (INCOME)/EXPENSE:
Other (income)/expense remained constant at $(0.1) million in the quarter ended
July 31, 2000 unchanged from $(0.1) million in the quarter ended July 31, 1999.
The other expense in fiscal 2000 is primarily attributable to gains on sale of
fixed assets.
PROVISION FOR INCOME TAXES:
Provision for income taxes increased $0.2 million, or 8.8%, to $2.9 million in
the quarter ended July 31, 2000 from $2.7 million in the quarter ended July 31,
1999, but as a percentage of revenues, decreased to 1.9% from 4.9%. The
effective tax rate increased to 46.5% in the quarter ended July 31, 2000 from
45.8% in the quarter ended July 31, 1999. The increase is primarily due to the
Company's increase in profitability in the first quarter of 2001. Additional
factors causing the provision for income taxes, as a percentage of pre-tax
income to vary, were the increase in nondeductible goodwill and the equity loss
in Oakhurst, poolings of interest resulting in prior period restatements of
entities not liable for federal income tax due to Subchapter S Status, as well
as non-deductibility of merger costs that were incurred in 1999.
Liquidity and Capital Resources
-------------------------------
The Company's business is capital intensive. The Company's capital requirements
include acquisitions, fixed asset purchases and capital expenditures for
landfill development and cell construction, as well as site and cell closure.
The Company had positive net working capital of $84.3 million and $79.6 million
at April 30, 2000 and at July 31, 2000, respectively.
The Company has a $450 million revolving line of credit with a group of banks
for which FleetBoston is acting as agent. This line of credit consists of a $300
million Senior Secured Revolving Credit Facility ("Revolver") and a $150 million
Senior Secured Delayed Draw Term "B" Loan ("Term Loan"). This line
<PAGE>
of credit is secured by all assets of the Company, including the Company's
interest in the equity securities of its subsidiaries. The Revolver matures in
December 2004 and the Term Loan matures in December 2006. Funds available to the
Company under the line of credit were $54.1 million at July 31, 2000.
On June 28, 2000, the Company entered into an agreement with Berkshire Partners
pursuant to which it agreed to sell Berkshire preferred stock, convertible into
the Company's Class A Common Stock at $14.00 per share. The transaction closed
August 11, 2000, when the Company received net proceeds of $55.2 million.
Net cash provided by operating activities amounted to $21.6 million for the
quarter ended July 31, 2000 compared to $9.2 million for the same period of the
prior fiscal year. The increase was primarily due to the increase in the
Company's working capital, together with an increase in depreciation.
Net cash used in investing activities was $27.1 million for the three months
ended July 31, 2000 compared to $19.7 million for the same period last year. The
increase in investing activities reflects mainly the Company's capital needs for
acquisitions and fixed asset additions, reflecting the Company's continued
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 $12.2 million for the three months
ended July 31, 2000 compared to $11.2 million for the same period of the prior
fiscal year. These increases primarily reflect net borrowings on the Company's
credit facility.
Seasonality
-----------
The Company's transfer and disposal revenues have historically been lower during
the months of November through March. This seasonality reflects the lower volume
of waste during the late fall, winter and early spring months primarily because:
(i) the volume of waste relating to construction and demolition activities
decreases substantially during the winter months in the northeastern United
States; and (ii) decreased tourism in Vermont, Maine and eastern New York during
the winter months tends to lower the volume of waste generated by commercial and
restaurant customers, which is partially offset by the winter ski industry.
Since certain of the Company's operating and fixed costs remain constant
throughout the fiscal year, operating income results are therefore impacted by a
similar seasonality. In addition, particularly harsh weather conditions could
result in increased operating costs to certain of the Company's operations.
The residential recycling segment experiences increased volumes of newspaper in
November and December due to increased newspaper advertising and retail activity
during the holiday season. Additionally, the facilities located in Florida
experience increased volumes of recyclable materials during the winter months,
followed by decreases in the summer months in connection with seasonal changes
in population.
The commercial recycling segment experiences increased quantities of newspaper
and corrugated containers in November and December, followed by reduced
quantities in January and decreased quantities of newspaper and corrugated
containers in July and August, followed by increased quantities in September,
due to increased newspaper advertising and retail activity during the holiday
season.
The insulation business experiences lower sales in November and December because
of lower production of manufactured housing due to holiday plant shutdowns.
Inflation and Prevailing Economic Conditions
--------------------------------------------
To date, inflation has not had a significant impact on the Company's operations.
Consistent with industry practice, most of the Company's contracts provide for a
pass through of certain costs, including increases in landfill tipping fees and,
in some cases, fuel costs. The Company therefore believes it should be able to
implement price increases sufficient to offset most cost increases resulting
from inflation. However, competitive factors may require the Company to absorb
at least a portion of these cost increases, particularly during periods of high
inflation.
The Company's business is located in the eastern United States. Therefore, the
Company's business, financial condition and results of operations are
susceptible to downturns in the general economy in this geographic region and
other factors affecting the region such as state regulations and severe weather
<PAGE>
conditions. The Company is unable to forecast or determine the timing and/or the
future impact of a sustained economic slowdown.
Year 2000 Issues
----------------
As of the date of this filing, the Company has not incurred any significant
business disruptions as a result of Year 2000 issues.
New Accounting Pronouncements
-----------------------------
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133". SFAS No. 137 amends FASB Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", by deferring the effective date of SFAS No. 133 to fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. The Company will
adopt SFAS No. 133 beginning May 1, 2001. The Company has yet to quantify the
impacts of adopting SFAS No. 133 on its financial statements and has not
determined the method of adoption. However, SFAS No. 133 could increase
volatility in earnings and other comprehensive income.
Adjusted EBITDA
---------------
Adjusted EBITDA represents operating income (earnings before interest and taxes,
or "EBIT") plus depreciation and amortization expense less minority interest.
Adjusted EBITDA is not a measure of financial performance under generally
accepted accounting principles, but is provided because the Company understands
that certain investors use this information when analyzing the financial
position and performance of the Company.
Three Months Ended July 31,
----------------------
(Restated)
1999 2000
----------------------
Operating Income $ 7,333 $ 16,458
Depreciation and Amortization 7,573 14,331
Minority Interest 0 (190)
--------- ---------
Adjusted EBITDA $ 14,906 $ 30,599
========= =========
EBITDA as a percentage of revenues 27.3% 19.5%
========= =========
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 Form 10-Q and presented elsewhere by management from time to time.
WE MAY EXPERIENCE DIFFICULTIES INTEGRATING KTI'S OPERATIONS AND ASSETS.
We acquired KTI on December 14, 1999. Since that time, we have experienced
difficulties in integrating the operations of KTI and these difficulties have
caused us to revise our publicly disclosed projections. There can be no
assurance that we will not continue to experience difficulties in integrating
KTI's operations effectively and that the acquisition will result in the
synergies and other benefits anticipated by the two companies. Among other
matters, in connection with the KTI acquisition we assumed certain obligations
to finance and support a tire recycling joint venture. We cannot assure you that
the joint venture will achieve projected financial results or not divert
management resources.
<PAGE>
OUR INCREASED LEVERAGE MAY IMPACT OUR ABILITY TO MAKE FUTURE ACQUISITIONS.
As a result of the acquisition of KTI and the increase in our credit facility,
our indebtedness has increased substantially. This increased indebtedness has
resulted in increased borrowing costs, which have adversely impacted our
operating results. In addition, the aggregate amount of indebtedness has limited
and may continue to limit the Company's ability to incur additional
indebtedness, and thereby may limit the Company's ongoing acquisition program.
WE MAY NOT BE SUCCESSFUL IN MAKING ACQUISITIONS, WHICH COULD AFFECT OUR FUTURE
GROWTH.
Our strategy envisions that a substantial part of our future growth will come
from making acquisitions. There can be no assurance that we will be able to
identify suitable acquisition candidates and, once identified, to negotiate
successfully their acquisition at a price or on terms and conditions favorable
to us, or to integrate the operations of such acquired businesses with our
operations. Certain of these acquisitions may be of significant size and may
include assets that are outside our geographic territories or are ancillary to
our core business strategy. In addition, due to the increased consolidation of
the solid waste industry and our current size, we cannot assure you that we will
be able to make acquisitions in the future at a rate consistent with our
historical growth rate.
WE ARE DEPENDENT ON THE MEMBERS OF OUR SENIOR MANAGEMENT TEAM.
We are highly dependent upon the services of the members of our senior
management team, the loss of any of whom may have a material adverse effect on
our business, financial condition and results of operations. In addition, our
future success depends on our continuing ability to identify, hire, train,
motivate and retain highly trained personnel. We may be in default under our
credit facility if both John Casella and James Bohlig cease to be employed by
us.
OUR ABILITY TO MAKE ACQUISITIONS IS DEPENDENT ON THE AVAILABILITY OF ADEQUATE
CASH AND THE ATTRACTIVENESS OF OUR STOCK PRICE.
We anticipate that any future business acquisitions will be financed through
cash from operations, borrowings under our bank line of credit, the issuance of
shares of our Class A Common Stock and/or seller financing. There can be no
assurance that we will have sufficient existing capital resources, that our
stock price will be sufficiently attractive for use in an acquisition or that we
will be able to raise sufficient additional capital resources on terms
satisfactory to us, if at all, in order to meet our capital requirements.
We also believe that a significant factor in our ability to close acquisitions
will be the attractiveness of our Class A common stock as consideration for
potential acquisition candidates. This attractiveness may, in large part, be
dependent upon the relative market price and capital appreciation prospects of
our Class A common stock compared to the equity securities of our competitors.
The recent declines in the market price of our Class A common stock could
materially adversely affect our acquisition program.
ENVIRONMENTAL REGULATIONS COULD SUBJECT US TO FINES, PENALTIES AND
LIMITATIONS ON OUR ABILITY TO EXPAND
We are subject to potential liability and restrictions under environmental laws.
Our waste-to-energy and manufacturing facilities are subject to regulations
limiting discharges of pollution into the air and water, and the solid waste
operations are subject to a wide range of Federal, state and, in some cases,
local environmental and land use restrictions. If we are not able to comply with
the requirements that apply to a particular facility, we could be subject to
fines and penalties, and we may be required to spend large amounts to bring an
operation into compliance or to temporarily or permanently stop an operation
that is not permitted under the law. Those costs or actions could have a
material adverse effect upon our business, financial condition and results of
operations.
Environmental and land use laws also can have an impact on whether our
operations can expand and, in the case of our solid waste operations, may
dictate those geographic areas from which we must, or, from which we may not,
accept waste. The waste management industry has been and likely will continue to
be subject to regulation, as well as to attempts to further regulate the
industry through new legislation. Those regulations and laws also may limit the
overall size and daily waste volume that may be accepted by a solid waste
operation. If we are not able to expand or otherwise operate one or more of our
facilities profitably
<PAGE>
because of limits imposed under environmental laws, we may be required to
increase our utilization of disposal facilities owned by third parties, and if
so, our business, financial condition and results of operations could suffer a
material adverse effect.
We have grown through acquisitions, and we have tried to evaluate and address
environmental risks and liabilities presented by newly acquired businesses as we
have identified them. It is possible that some liabilities, including ones that
may exist only because of the past operations of an acquired business, may prove
to be more difficult or costly to address than we anticipate. It is also
possible that government officials responsible for enforcing environmental laws
may believe an issue is more serious than we would expect, or that we will fail
to identify or fully appreciate a historic liability before we become legally
responsible to address it. Some of the legal sanctions to which we could become
subject could cause us to lose a needed permit, or prevent us from or delay us
in obtaining or renewing permits to operate our facilities. The number, size and
nature of those liabilities could have a material adverse effect on our
business, financial conditions and results of operations.
Our operating program depends on our ability to operate and expand the landfills
we own and lease and to develop new landfill sites. Several of our landfills are
subject to local laws purporting to regulate their expansion and other aspects
of their operations. There can be no assurance that the laws adopted by
municipalities in which our landfills are located will not have a material
adverse effect on our utilization of our landfills or that we will be successful
in obtaining new landfill sites or expanding the permitted capacity of any of
our current landfills once their remaining disposal capacity has been consumed.
OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED BY CHANGING PRICES OR
MARKET REQUIREMENTS FOR RECYCLABLE MATERIALS
Our results of operations may be materially adversely affected by changing
purchase or resale prices or market requirements for recyclable materials. Our
recycling business involves the purchase and sale of recyclable materials, some
of which are priced on a commodity basis. The resale and purchase prices of, and
market demand for, recyclable materials, particularly waste paper, plastic and
ferrous and aluminum metals, can be volatile due to numerous factors beyond our
control. These changes have in the past contributed, and may continue to
contribute, to significant variability in our period-to-period results of
operations.
Some of our subsidiaries involved in the recycling business use long-term supply
contracts with customers with floor price arrangements to minimize the commodity
risk for recyclable materials, particularly waste paper and aluminum metals.
Under these contracts, our subsidiaries obtain a guaranteed minimum floor price
for the recyclable materials along with a commitment to receive additional
amounts if the current market price rises above the minimum price. These
contracts are generally with large domestic companies, which use the recyclable
materials in their manufacturing processes. Any failure to continue to secure
long-term supply contracts with minimum price arrangements, or a breach by
customers of one or more of these contracts could reduce our recycling revenues
and have a material adverse effect on our business, financial condition and
results of operations.
THE SEASONALITY OF OUR REVENUES COULD ADVERSELY IMPACT OUR FINANCIAL CONDITION
Future seasonal fluctuations in our revenues could have a material adverse
effect on our business, financial condition and results of operations. Our
revenues have historically been lower during the months of November through
March. This seasonality reflects the lower volume of solid waste during the late
fall, winter and early spring months resulting primarily from:
- the volume of solid waste relating to construction and demolition
activities decreasing substantially during the winter months in the northeastern
United States; and
- decreased tourism in Vermont, Maine, New Hampshire and eastern New York
during the winter months, which tends to lower the volume of solid waste
generated by commercial and restaurant customers, which is only partially offset
by the winter ski industry.
The residential recycling segment experiences increased volumes of newspaper in
November and December due to increased newspaper advertising and retail activity
during the holiday season. Additionally, the facilities located in Florida
experience increased volumes of recyclable materials during the winter months,
followed by decreases in the summer months in connection with seasonal changes
in population.
The commercial recycling segment experiences increased quantities of newspaper
and corrugated containers in November and December, followed by reduced
quantities in January and decreased quantities of newspaper and corrugated
containers in July and August, followed by increased quantities in September,
due to increased newspaper advertising and retail activity during the holiday
season.
The insulation business experiences lower sales in November and December because
of lower production of manufactured housing due to holiday plant shutdowns.
Since some of our operating and fixed costs remain constant throughout the
fiscal year, our operating income is seasonally impacted. In addition,
particularly harsh weather conditions could result in increased operating costs
for some of our operations.
<PAGE>
OUR BUSINESS IS GEOGRAPHICALLY CONCENTRATED AND IS THEREFORE SUBJECT TO REGIONAL
ECONOMIC DOWNTURNS
Our operations and customers are principally located in the eastern United
States. Therefore, our business, financial condition and results of operations
are susceptible to regional economic downturns and other regional factors,
including state regulations and severe weather conditions. In addition, as we
expand in our existing markets, opportunities for growth within these regions
will become more limited. The costs and time involved in permitting and the
scarcity of available landfills will make it difficult for us to expand
vertically in these markets. We cannot assure you that we will complete
acquisitions in other markets to lessen our regional geographic concentration.
MAINE ENERGY MAY BE REQUIRED TO MAKE A PAYMENT IN CONNECTION WITH THE PAYOFF OF
THE MAINE ENERGY BONDS WHICH EXCEEDS THE AMOUNT OF THE LIABILITY WE RECORDED IN
CONNECTION WITH THE KTI ACQUISITION
Under the terms of the waste handling agreement dated June 7, 1991 among the
Biddeford-Saco Waste Handling Committee, Biddeford, Saco and Maine Energy, Maine
Energy may be required, following the date on which the bonds financing Maine
Energy and certain limited partner loans to Maine Energy are paid in full, to
pay an aggregate of 18% of the fair market value of the equity of the partners
in Maine Energy to the respective municipalities party to that agreement. In
connection with the acquisition of KTI, the Company estimated the fair market
value of Maine Energy as of the date the bonds are assumed to be paid in full,
and recorded a liability equal to 18% of such amount. We cannot assure you that
our estimate of the fair market value of Maine Energy will prove to be accurate,
and in the event we have underestimated the value of Maine Energy, we could be
required to recognize unanticipated charges, in which case our business,
financial condition, results of operations and liquidity could be materially
adversely affected.
WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE IN THE HIGHLY COMPETITIVE SOLID WASTE
SERVICES INDUSTRY
The solid waste services industry is highly competitive, is undergoing a period
of increasingly rapid consolidation, and requires substantial labor and capital
resources. Some of the markets in which we compete or will likely compete are
served by one or more of the large national or multinational solid waste
companies, as well as numerous regional and local solid waste companies. Intense
competition exists not only to provide services to customers, but also to
acquire other businesses within each market. Some of our competitors have
significantly greater financial and other resources than us. From time to time,
competitors may reduce the price of their services in an effort to expand market
share or to win a competitively bid municipal contract. These practices may
either require us to reduce the pricing of our services or result in our loss of
business. As is generally the case in the industry, municipal contracts are
subject to periodic competitive bidding. There can be no assurance that we will
be the successful bidder to obtain or retain these contracts. If we are unable
to compete with larger and better capitalized companies, or to replace municipal
contracts lost through the competitive bidding process with comparable contracts
or other revenue sources within a reasonable time period, our business,
financial condition and results of operations could be materially adversely
affected.
In our solid waste disposal markets, we also compete with operators of
alternative disposal and recycling facilities and with counties, municipalities
and solid waste districts that maintain their own waste collection, recycling
and disposal operations. These entities may have financial advantages because
user fees or similar charges, tax revenues and tax-exempt financing may be more
available to them than to us.
Our finished products divisions and our insulation manufacturing joint venture
with Louisiana-Pacific compete with other parties, some of which have
substantially greater resources than we do, which they could use for product
development, marketing or other purposes to our detriment.
ONE OF OUR SUBSIDIARIES SELLS ITS ENTIRE OUTPUT TO A FEW CUSTOMERS AND LACKS THE
CAPACITY TO MEET ALL OF ITS COMMITMENTS
One of our subsidiaries operates three steam generating plants, one of which
produces steam for a facility owned by E. I. du Pont de Nemours and Company
under a five-year contract expiring on May 30, 2003. Du Pont has significantly
reduced operations at this facility, and has the option to terminate the
contract upon
<PAGE>
payment of a termination fee. The second plant produces steam for an industrial
park. Approximately 85% of the steam produced by the plant is purchased by one
customer under a contract that may not be terminated by the customer except for
cause, and the balance is sold to ten customers under contracts, which provide
that our subsidiary may elect not to supply steam. Currently, maximum contracted
capacity for all customers for steam exceeds the maximum rated capacity of this
plant. Actual demand, however, has not exceeded the maximum rated capacity. If
actual demand grows, the plant may need to install equipment to respond to peak
demands, as well as equipment, which may be necessary to allow the plant to meet
stricter air quality standards, which may be adopted in the near future. The
cost of this air quality equipment, not including the equipment necessary to
respond to peak demands, is expected to be approximately $1.2 million. We have
closed the third steam generating plant, which sold all of its output to a
customer which has filed for bankruptcy. The termination of the contract with du
Pont or any of the significant customers who purchase steam from our subsidiary
or its subsidiary could have a material adverse effect on our business,
financial condition and results of operations.
OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION MAY BE NEGATIVELY AFFECTED IF
WE INADEQUATELY ACCRUE FOR CLOSURE AND POST-CLOSURE COSTS
We have material financial obligations relating to closure and post-closure
costs of our existing landfills and will have material financial obligations
with respect to any disposal facilities, which we may own or operate in the
future. In addition to the landfills we currently operate, we own four unlined
landfills, which are not currently in operation. We have provided and will in
the future provide accruals for financial obligations relating to closure and
post-closure costs of our owned or operated landfills, generally for a term of
30 years after final closure of a landfill. We cannot assure you that our
financial obligations for closure or post-closure costs will not exceed the
amount accrued and reserved or amounts otherwise receivable pursuant to trust
funds established for this purpose. Such a circumstance could result in
unanticipated charges and have a material adverse effect on our business,
financial condition and results of operations.
WE COULD BE PRECLUDED FROM ENTERING INTO CONTRACTS OR OBTAINING PERMITS IF WE
ARE UNABLE TO OBTAIN THIRD PARTY FINANCIAL ASSURANCE TO SECURE OUR CONTRACTUAL
OBLIGATIONS
Municipal solid waste collection and recycling contracts, obligations associated
with landfill closure and post closure and the operation and closure of
waste-to-energy facilities may require performance or surety bonds, letters of
credit or other means of financial assurance to secure our contractual
performance. If we are unable to obtain the necessary financial assurance in
sufficient amounts or at acceptable rates, we could be precluded from entering
into additional municipal solid waste collection contracts or from obtaining or
retaining landfill operating permits. Any future difficulty in obtaining
insurance could also impair our ability to secure future contracts conditioned
upon the contractor having adequate insurance coverage. Accordingly, our failure
to obtain financial assurance bonds, letters of credit or other means of
financial assurance or to maintain adequate insurance could have a material
adverse effect on our business, financial condition and results of operations.
WE MAY BE REQUIRED TO WRITE-OFF CAPITALIZED CHARGES IN THE FUTURE, WHICH COULD
ADVERSELY AFFECT OUR EARNINGS
Any charge against earnings could have a material adverse effect on our earnings
and the market price of our Class A common stock. In accordance with generally
accepted accounting principles, we capitalize certain expenditures and advances
relating to our acquisitions, pending acquisitions, landfills and development
projects. From time to time in future periods, we may be required to incur a
charge against earnings in an amount equal to any unamortized capitalized
expenditures and advances, net of any portion thereof that we estimate will be
recoverable, through sale or otherwise, relating to (a) any operation that is
permanently shut down or has not generated or is not expected to generate
sufficient cash flow, (b) any pending acquisition that is not consummated and
(c) any landfill or development project that is not expected to be successfully
completed. We have incurred such charges in the past.
OUR CLASS B COMMON STOCK HAS TEN VOTES PER SHARE AND IS HELD EXCLUSIVELY BY JOHN
W. CASELLA AND DOUGLAS R. CASELLA
The holders of our Class B common stock are entitled to ten votes per share and
the holders of our Class A common stock are entitled to one vote per share. At
July 21, 2000, an aggregate of 988,200 shares of our
<PAGE>
Class B common stock, representing 9,882,000 votes, were outstanding, all of
which were beneficially owned by John W. Casella, our president and chief
executive officer, or by his brother, Douglas R. Casella, a director. Based on
the number of shares of common stock outstanding at September 5, 2000, the
shares of our Class A common stock and Class B common stock held by John W.
Casella and Douglas R. Casella represent approximately 34.4% of the aggregate
voting power of our stockholders. Consequently, John W. Casella and Douglas R.
Casella will be able to substantially influence all matters for stockholder
consideration.
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 its officers and directors in Vermont Superior
Court. Mr. Freeman claims to have performed services for the Company prior to
1995 and in his lawsuit 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 for 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.
The Company's wholly owned subsidiary, North Country Environmental Services,
Inc. ("NCES"), is a party to an appeal against the Town of Bethlehem, New
Hampshire ("Town") before the New Hampshire Supreme Court. The appeal arises
from cross actions for declaratory and injunctive relief filed by NCES and the
Town to determine the permitted extent of NCES's landfill in the Town. The
Grafton Superior Court ruled on February 1, 1999 that the Town could not enforce
an ordinance purportedly prohibiting expansion of the landfill, at least within
51 acres of NCES's 87-acre parcel, based upon certain existing land-use
approvals. As a result, NCES was able to construct and operate "Stage II, Phase
II" of the landfill. If the Town were to prevail on appeal, the range of
possible outcomes includes, without limitation, a new trial, closure of the
landfill, or remediation (i.e., removal) of Stage II, Phase II. A separate
appeal by two citizens groups of the construction and operating approvals issued
by the New Hampshire Department of Environmental Services to NCES for Stage II,
Phase II has been stayed by the New Hampshire Waste Management Council pending
the resolution of the appeal before the Supreme Court
On or about December 7, 1999, Earth Waste Systems, Inc., Kevin Elnicki and Frank
Elnicki filed a civil lawsuit against the Company, two of the Company's officers
and directors, and a former employee in Vermont State Court, Rutland County. The
plaintiffs allege that the Company and the individual defendants breached
contractual obligations and engaged in other wrongdoing related to, among other
things, a now terminated scrap metal agreement. Plaintiffs are seeking monetary
damages, including punitive damages, in an unspecified amount. On May 12, 2000,
the Company filed a motion to dismiss the case on jurisdictional grounds, on
which the Court has not yet ruled. The Company believes it has meritorious
defenses to this lawsuit.
The Company has brought an action against the Town of Hampden, Maine to set
aside the Town's efforts to block the Company's construction of approximately
3,100,000 tons of capacity, for which the Company has been granted a permit by
the State of Maine. The action is pending in the Penobscot County Superior Court
in Bangor, Maine.
The Company is a defendant in a lawsuit brought by Woodstock '99, LLC seeking
damages for breach of two service contracts entered into by the Company for the
servicing of portable chemical toilets during the Woodstock Concert held in
Rome, N.Y. in late July 1999. Woodstock '99, LLC is seeking damages of up to
$2,000,000. The Company intends to vigorously defend the lawsuit and has filed
its Answer and Counterclaim, along with extensive discovery requests.
On April 1, 1999, William F. Kaiser, a former Executive Vice President and
Treasurer of KTI, filed a lawsuit against KTI in the U.S. District Court for the
District of New Jersey. The suit alleges breach of contract, wrongful
termination, breach of the implied covenant of good faith and fair dealing,
misrepresentation of employment terms and failure to pay wages, all arising out
of Mr. Kaiser's employment agreement with KTI. The suit also alleges that KTI
inaccurately reported its financial results
<PAGE>
for the first quarter of 1998 and failed to properly disclose the change of
control provision in Mr. Kaiser's employment agreement. Mr. Kaiser is seeking a
declaratory judgment that, upon closing of the merger, the change of control
provision entitles him to receive a severance payment of two years' salary, in
the amount of $320,000, and to exercise 132,000 unvested options for KTI common
stock. Mr. Kaiser is also seeking damages in the amount of $40,000 for an
additional severance payment, as well as undisclosed damages for outstanding
salary, bonus and other payments and from his sale of approximately 20,000
shares of KTI common stock resulting from KTI's allegedly inaccurate financial
reports.
On or about April 26, 1999, Salvatore Russo filed an action in the U.S. District
Court, District of New Jersey against KTI and two of its principal officers,
Ross Pirasteh and Martin J. Sergi, purportedly on behalf of all shareholders who
purchased KTI common stock from May 4, 1998 through August 14, 1998. Melanie
Miller filed an identical complaint on May 14, 1999. The complaints allege that
the defendants made material misrepresentations in KTI's quarterly report on
form 10-Q for the period ended March 31, 1998 in violation of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, as amended, concerning KTI's
allowance for doubtful accounts and net income. The Plaintiffs are seeking
undisclosed damages. The Company believes it has meritorious defenses to these
complaints. On June 15, 1999, Mr. Russo and Ms. Miller, together with Fransisco
Munero, Timothy Ryan and Steve Storch, moved to consolidate the two complaints.
This motion is currently pending in the District Court of New Jersey.
On May 11, 2000, The Company was granted a permit modification by the New
Hampshire Department of Environmental Services to increase the volume of solid
waste processed and stored at its GDS transfer station in Newport, New
Hampshire. On or about June 12, 2000, a local environmental activist appealed
the permit modification to the New Hampshire Waste Management Council. The
appeal claims that the modification will lead to adverse environmental impacts
through higher waste flows and increased levels of incineration at a nearby
waste-to-energy facility, that the Company has been the subject of "complaints"
arising from its New England and New York operations, and that the Company has
failed to demonstrate that the modification is consistent with the waste
management plan of the local waste management district. The Company expects to
seek a dismissal of the appeal for the appellant's lack of standing.
On January 7, 2000, the City of Saco, Maine filed a notice of claims with the
Company and Maine Energy claiming entitlement to certain "residual cancellation"
payments from Maine Energy under the waste handling agreement dated June 7, 1991
among the Biddeford-Saco Waste Handling Committee, Biddeford, Saco and Maine
Energy on the basis of the satisfaction of certain conditions, including the
acquisition of KTI by the Company. The notice of claims alleges that the
payments due to Saco exceed $33 million, and claims damages in such amounts for
breach of contract, breach of fiduciary duties and fraud and also claims treble
damages of $100 million based on alleged fraudulent transfer of Maine Energy's
assets. The notice also reserves the right to seek punitive damages. Although
the City of Biddeford, Maine has not filed a notice of claims, it has given
noticed that it will be initiating a suit to receive the residual cancellation
payments. Under the agreement, the aggregate amount to be paid upon the exercise
of the put right is 18% of the fair market value of the equity of the partners
in Maine Energy, and such amount is required to be paid within 120 days after
the exercise of the put by the respective parties entitled thereto. The Company
believes it has meritorious defenses to these claims.
On or about March 24, 2000, a complaint was filed in the United States District
Court, District of New Jersey against the Company, KTI, and three of KTI's
principal officers, Ross Pirasteh, Martin J. Sergi, and Paul A. Garret. The
complaint purported to be behalf of all shareholders who purchased KTI common
stock from January 1, 1998 through April 14, 1999. The Complaint alleged that
the defendants made unspecified misrepresentations regarding KTI's financial
condition during the class period in violation of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, as amended. The plaintiffs seek undisclosed
damages. On or about April 6, 2000, the plaintiffs filed an amended class action
complaint, which changes the class period covered by the complaint on behalf of
all the defendants on July 21, 2000.
The Company is a defendant in certain other lawsuits alleging various claims
incurred in the ordinary course of business.
The Company offers no prediction of the outcome of any of the proceedings
described above.
ITEM 2. CHANGES IN SECURITIES
Changes in Rights and Classes of Stock
<PAGE>
On August 11, 2000, the Company completed the sale of 55,750 shares of its
Series A Convertible Preferred Stock ("the "Series A Preferred Stock") for
approximately $55.2 million of net proceeds. The Company sold the Series A
Preferred Stock pursuant to that certain Preferred Stock Purchase Agreement,
dated as of June 28, 2000, by and among the Company and the Purchasers
identified therein (the "Agreement").
Each share of Series A Preferred Stock issued in the transaction is convertible,
at any time and from time to time, into shares of the Company's Class A Common
Stock, at an initial conversion price of $14 per share. The conversion price is
subject to adjustment if the Company (i) subdivides its common stock by
effecting a stock split or stock dividend, or (ii) subject to certain
exceptions, issues or sells additional shares of common stock or securities
convertible into common stock for less than $14 per share. The Series A
Preferred Stock accrues preferential dividends daily and on a cumulative basis
at an annual rate of five percent (5%) of its liquidation value, as defined in
the Agreement, payable quarterly in arrears in additional shares of Series A
Preferred Stock through August 11, 2003 and thereafter, at the option of the
Company, in either cash or additional shares of Series A Preferred Stock. At any
time on or after the occurrence of a change of control and for a period of 30
days thereafter, holders of Series A Preferred Stock will have the right to
require the Company to redeem all or a portion of their stock at a redemption
price equal to its liquidation value. All outstanding shares of Series A
Preferred Stock are subject to mandatory redemption by the Company on August 11,
2007 pursuant to the terms of the Agreement.
The Purchasers are entitled to nominate one person who shall be included among
the Company's nominees for election to the Board of Directors as the Purchaser
Director for so long as they hold at least 20% of the Class A Common Stock
issued or issuable upon conversion of the Preferred Shares (the "Underlying
Common Stock") and, so long as they own at least 20% of the Preferred Shares,
the Purchasers shall have the right to designate one person to serve as
Purchaser Observer. The holders of the Preferred Shares also are entitled to
vote, as a class, with holders of common stock on each matter submitted to a
vote of the Company's stockholders. Each share of Series A Convertible Preferred
Stock has a number of votes equal to the number of shares of Class A Common
Stock issuable upon conversion of a share of Series A Convertible Preferred
Stock.
Pursuant to the terms of the Agreement, the Company filed a Certificate of
Designation with the Secretary of State of Delaware, creating the Series A
Convertible Preferred Stock.
Sales of Unregistered Securities
See the disclosure under the immediately preceding heading ("Changes in Rights
and Classes of Stock"). The shares were offered and issued in reliance upon the
exemption from registration set forth in Rule 506 of the Securities Act and, in
the alternative, under the exemption from the registration requirements of the
Securities Act set forth in Section 4(2) thereof.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule for Period Ended July 31, 2000
27.2 Restated Financial Data Schedule for Period Ended
July 31, 1999
(b) Reports on Form 8-K:
<PAGE>
On July 6, 2000, the Company filed a Report on Form 8-K announcing a preferred
stock purchase agreement with Berkshire Partners of Boston, Massachusetts and
attaching the press release issued in conjunction with such agreement.
On August 18, 2000, the Company filed a report on Form 8-K announcing the
closing of the preferred stock transaction and attaching various agreements and
other documents delivered in connection with the closing.
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 13, 1999 By: /s/ Jerry Cifor
---------------------------
Jerry Cifor
Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
