================================================================================
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 January 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 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 10, 2000:
Class A Common Stock 22,569,065
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
ASSETS
(Unaudited)
(In thousands)
April 30,
1999 January 31,
(Restated) 2000
-------- --------
CURRENT ASSETS:
Cash and Cash Equivalents $ 4,232 $ 10,183
Restricted Cash - Closure Fund Escrow 626 25,154
Accounts Receivable-trade, net of allowance
for doubtful accounts of $1,381 and $2,115 22,814 88,592
Other Current Assets 5,689 23,253
Net Assets of Discontinued Business 2,932 --
-------- --------
Total Current Assets 36,293 147,182
-------- --------
Property, Plant and Equipment, net of
accumulated depreciation and amortization of
$67,023 and $89,088 131,077 366,839
Intangible Assets, net 104,199 226,447
Restricted Funds - Closure Fund Escrow 4,834 2,545
Other Assets 5,725 14,282
-------- --------
$282,128 $757,295
======== ========
The accompanying notes are an integral part of theses consolidated financial
statements.
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS EQUITY
(Unaudited)
(In thousands, except for share and per share data)
April 30,
1999 January 31,
(Restated) 2000
--------- ---------
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt $ 5,489 $ 11,073
Current Maturities of Capital Lease Obligations 402 3,557
Accounts Payable 17,883 35,706
Other Accrued Liabilities 6,546 28,884
--------- ---------
Total Current Liabilities 30,320 79,220
--------- ---------
Long-Term Debt, Less Current Maturities 86,594 371,467
Capital Lease Obligations, Less Current Maturities 1,454 2,659
Other Long-Term Liabilities 15,782 34,688
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY
Class A Common Stock -
Authorized - 100,000,000 Shares, $.01 par value
Issued and Outstanding - 14,868,739 and
22,219,663 148 222
Authorized - 1,000,000 Shares, $.01 par value;
10 Votes per Share. Issued and
Outstanding - 988,200 shares 10 10
Additional Paid-In Capital 154,733 267,274
(Accumulated Deficit)/Retained Earnings (6,913) 1,755
--------- ---------
147,978 269,261
--------- ---------
$ 282,128 $ 757,295
========= =========
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 share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ------------------------
January 31, January 31,
1999 January 31, 1999 January 31,
(Restated) 2000 (Restated) 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 44,109 $ 93,004 $ 136,204 $ 203,428
--------- --------- --------- ---------
Operating Expenses:
Cost of Operations 26,351 61,452 81,560 122,824
General and Administrative 7,060 11,413 20,093 26,296
Depreciation and Amortization 6,481 10,193 19,064 25,763
Merger Costs (Poolings) 468 0 1,165 1,490
--------- --------- --------- ---------
40,360 83,058 121,882 176,373
--------- --------- --------- ---------
Operating Income 3,749 9,946 14,322 27,055
--------- --------- --------- ---------
Other (Income)/Expense:
Interest Income (74) (778) (299) (881)
Interest Expense 1,359 5,553 4,466 8,865
Other Expenses/(Income) (65) (120) (256) (625)
--------- --------- --------- ---------
1,220 4,655 3,911 7,359
--------- --------- --------- ---------
Income from Continuing Operations Before
Income Taxes and Extraordinary Item 2,529 5,291 10,411 19,696
Provision for Income Taxes 1,689 2,433 5,266 8,733
--------- --------- --------- ---------
Income from Continuing Operations Before
Extraordinary Item 840 2,858 5,145 10,963
--------- --------- --------- ---------
Discontinued Operations:
Income/(Loss) from Discontinued
Operations net of income taxes 39 (79) 64 (269)
Estimated Loss on Disposal of
Discontinued Operations,
net of income taxes 0 (1,393) 0 (1,393)
--------- --------- --------- ---------
39 (1,472) 64 (1,662)
--------- --------- --------- ---------
</TABLE>
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except for share data and per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -------------------------
January 31, January 31,
1999 January 31, 1999 January 31,
(Restated) 2000 (Restated) 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Extraordinary Item - Early
Extinguishment of Debt, net
of income taxes 0 (631) 0 (631)
---------- ---------- ---------- ----------
Net Income $ 879 $ 755 $ 5,209 $ 8,670
========== ========== ========== ==========
Earnings Per Share:
Basic:
Income from Continuing
Operations Before
Extraordinary Item $ 0.05 $ 0.14 $ 0.34 $ 0.64
Income/(Loss) from
Discontinued Segment 0.01 (0.07) 0.01 (0.10)
Extraordinary Item 0.00 (0.03) 0.00 (0.04)
---------- ---------- ---------- ----------
Net Income $ 0.06 $ 0.04 $ 0.35 $ 0.50
========== ========== ========== ==========
Basic Weighted Average Common
Shares Outstanding 15,809 19,777 14,915 17,264
========== ========== ========== ==========
Diluted:
Income from Continuing
Operations Before
Extraordinary Item $ 0.05 $ 0.14 $ 0.32 $ 0.62
Income/(Loss) from
Discontinued Segment 0.00 (0.07) 0.01 (0.09)
Extraordinary Item 0.00 (0.03) 0.00 (0.04)
---------- ---------- ---------- ----------
Net Income $ 0.05 $ 0.04 $ 0.33 $ 0.49
========== ========== ========== ==========
Diluted Weighted Average Common
Shares Outstanding 16,687 20,264 15,890 17,758
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 31, 1999 and 2000
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
1999
(Restated) 2000
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income/(Loss) $ 5,209 $ 8,670
Income from Continuing Operations
Adjustments To Reconcile Net Income to
Net Cash Provided by Operating Activities;
(Gain)/Loss on Discontinued Operations (64) 1,662
Loss on Extraordinary Item 0 631
Depreciation and Amortization 19,193 25,876
(Gain)/Loss on Sale of Equipment (32) (300)
Changes in Assets and Liabilities, net of
Effects of Acquisition -
Accounts Receivable (3,942) (12,878)
Accounts Payable 1,136 (10,615)
Other Current Assets/Liabilities 3,812 17,790
--------- ---------
20,167 19,873
--------- ---------
Net Cash Provided by Operating Activities 25,312 30,836
--------- ---------
Cash Flows from Investing Activities:
Acquisitions, net of Cash Acquired (26,388) (34,848)
Additions to Property and Equipment (43,938) (53,301)
Proceeds from Sale of Equipment 244 1,107
Other Assets/Liabilities (8,925) (3,718)
--------- ---------
Net Cash Used in Investing Activities (79,007) (90,760)
--------- ---------
Cash Flows from Financing Activities:
Distributions to Shareholders - Pooled Entities (131) 0
Proceeds from Contributed Capital 100 0
Proceeds from Issuance of Common Stock 56,678 754
Proceeds from Long-Term Borrowings 62,589 354,290
Principal Payments on Long-Term Debt (65,638) (284,683)
Principal Payments on Capital Leases (1,670) (4,486)
--------- ---------
Net Cash Provided by Financing Activities 51,928 65,875
--------- ---------
Net Increase/(Decrease) in Cash and Cash Equivalents (1,767) 5,951
Net Cash and Cash Equivalents, Beginning of Period 3,117 4,232
--------- ---------
Net Cash and Cash Equivalents, End of Period $ 1,350 10,183
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 31, 1999 and 2000
(UNAUDITED)
(In thousands)
1999
(Restated) 2000
--------- ---------
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period for -
Interest $ 4,204 $ 7,984
========= =========
Income Taxes $ 2,856 $ 1,057
========= =========
Supplemental Disclosures of Noncash Investing and
Financing Activities:
Summary of Entities Acquired:
Fair Market Value of Assets Acquired $ 29,868 $ 427,340
Common Stock Issued 0 (111,860)
Cash Paid - Net of Cash Acquired (26,388) (34,848)
--------- ---------
Liabilities assumed and Notes Payable to Sellers $ 3,480 $ 280,632
========= =========
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 April 30, 1999 and January 31, 2000, the
consolidated statements of operations for the three months and nine months ended
January 31, 1999 and 2000, and the condensed consolidated statements of cash
flows for the nine months ended January 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 audited
balance sheet dated April 30, 1999 to reflect the mergers with Resource Waste
Systems, Inc., and Corning Community Disposal Services, Inc. (see note 1)
consummated on July 1, 1999 and June 4, 1999, respectively, accounted for using
the pooling-of-interests method of accounting. The Company has also restated the
previously issued consolidated statements of operations for the three months and
nine months ended January 31, 1999 and consolidated statement of cash flows for
the nine months ended January 31, 1999 to reflect the mergers with NEI,
Westfield Disposal, Resource Recovery Systems, Inc. and Corning Community
Disposal, Inc. (see note 1). 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, 1999. These
were included as part of the Company's Annual Report on Form 10-K (the "Annual
Report").
1. BUSINESS COMBINATIONS
Transactions Recorded as Poolings-of-Interests
During fiscal year 1999, and during the first three quarters of fiscal year
2000, the Company completed several mergers in business combinations recorded as
poolings-of-interests. Accordingly, the accompanying financial statements have
been restated to include these businesses for all periods presented. The Company
issued the following shares of Class A Common Stock in connection with the
mergers:
Shares
Merger Date Issued
- ------ ---- ------
NEI April 30, 1999 105,052 (1)
Westfield April 30, 1999 244,082
Corning Community Disposal June 4, 1999 59,375
Resource Waste Systems July 1, 1999 303,598
(1) 59,450 shares are subject to an indemnification obligation.
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revenue and net income have been restated for these acquisitions accounted for
as poolings of interest, as presented in the following table:
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
January January January January
31, 1999 31, 2000 31, 1999 31, 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Casella, before Pooling $ 39,526 $ 93,004 $ 122,461 $ 201,384
Poolings 4,583 0 13,743 2,044
--------- --------- --------- ---------
Casella, as Restated $ 44,109 $ 93,004 $ 136,204 $ 203,428
========= ========= ========= =========
Net Income:
Casella, before Pooling $ 2,312 $ 755 $ 7,310 $ 8,877
Poolings (1,433) 0 (2,101) (207)
--------- --------- --------- ---------
Casella, as Restated $ 879 $ 755 $ 5,209 $ 8,670
========= ========= ========= =========
</TABLE>
All of the pooled entities had fiscal year ends of December 31 and, subsequent
to the poolings, changed their year ends to conform with that of the Company.
For the month ended January 31, 1999, $209 in revenues and $124 in net losses
were excluded from the Results of Operations. Cash flows resulting from the
periods excluded from the Results of Operations discussed above are immaterial
and have been included in the Statement of Cash Flows.
Transactions Recorded as Purchases
During the three and nine months ended January 31, 2000, the Company acquired 7
and 30 solid and liquid waste hauling operations respectively, in transactions
accounted for as purchases. These transactions were in exchange for
consideration of approximately $1.9 and $19.7 million in cash to sellers,
respectively. Additionally, the KTI transaction was in exchange for
consideration of approximately 7,152,157 shares of common stock. 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.
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, 1998:
Nine months ended Nine months ended
January 31, 1999 January 31, 2000
---------------- ----------------
Revenues $394,080 $401,971
======== ========
Operating Income $ 15,660 $ 43,971
======== ========
Net Income $ 5,163 $ 11,497
======== ========
Diluted income per share - $ 0.23 $ 0.54
======== ========
Weighted average diluted
shares outstanding 22,119 21,282
======== ========
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, 1998 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 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
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. However, there is no current
proceeding or litigation involving the Company that it believes will have a
material adverse effect upon the Company's business, financial condition and
results of operations.
3. ENVIRONMENTAL LIABILITIES
The continuing business in which the Company is engaged is intrinsically
connected with the protection of the environment. As such, a significant portion
of the Company's operating costs and capital expenditures could be characterized
as costs of environmental protection. While the Company is faced, in the normal
course of business, with the need to expend funds for environmental protection
and remediation, it does not expect such expenditures to have a material adverse
effect on its financial condition or results of operations because its business
is based upon compliance with environmental laws and regulations and its
services are priced accordingly. In addition, as part of its ongoing operations,
the Company provides for estimated closure and post-closure monitoring costs
over the life of disposal sites as airspace is consumed. While all these costs
may increase in the future as a result of legislation or regulation, the Company
believes that in general it tends to benefit when government regulation
increases, since this may increase the demand for its services. Furthermore, the
Company believes it has the resources and experience to manage environmental
risk.
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. DISCONTINUED OPERATIONS
Discontinued Operations:
During the third quarter, the Company adopted a formal plan to dispose of its
construction and emergency response business (herein discontinued business). The
Company has accounted for this planned disposition in accordance with APB
Opinion No. 30, accordingly the results of operations of the discontinued
business have been segregated from continuing operations and reported as a
separate line in its consolidated statements of operations. Additionally, the
estimated loss on the disposal of the discontinued operations of $2,284 (before
income tax benefit of $891) represents the estimated loss on the disposal of the
assets of discontinued operations and a provision of $141 for expected operating
losses during the phase-out period from November 30, 1999 through June 2000. The
estimated loss is reported separately from the results of the Company's
continuing operations.
A summary of the operating results of the discontinued business are as follows.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ------------------------
January January January January
31, 1999 31, 2000 31, 1999 31, 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 694 % 64 $ 1,496 $ 795
--------- --------- --------- ---------
Operating Expenses 481 135 936 795
General and Administrative 102 39 317 321
Depreciation and Amortization 44 16 129 113
--------- --------- --------- ---------
Operating Income/(loss) 67 (126) 114 (434)
Other Expenses 3 3 9 7
Provision for Income Taxes/
(benefit) 25 (50) 41 (172)
--------- --------- --------- ---------
Net Income $ 39 $ (79) $ 64 $ (269)
========= ========= ========= =========
</TABLE>
A summary of the net assets reported as Discontinued Business for the year ended
April 30, 1999 are as follows:
Accounts Receivable - net 264
Other Current Assets 8
Equipment 355
Intangible Assets net 2,478
-----
Total Assets 3,105
Accounts Payable 20
Other Accrued Liabilities 8
Note Payable 145
-----
Total Liabilities 173
-----
Net Assets 2,932
=====
<PAGE>
5. LONG-TERM DEBT
In conjunction with the acquisition of KTI, Inc., the Company obtained a new
credit facility comprised of (i) a $300,000 Senior Secured Revolving Credit
Facility (the "Revolver") due December 14, 2004, bearing interest at LIBOR plus
2.75%, (currently at 8.95%), and decreasing by $25,000 in years 3 and 4; and
(ii) a $150,000 Senior Secured Delayed Draw Term "B" Loan ("Term Loan"), due
December 14, 2006, bearing interest at LIBOR plus 3.5%, (currently at 9.7%),and
calling for principal payments of 1% on notational amount ($1,500) per year with
the remaining principal balance due at maturity. As of January 31, 2000, the
Company has $158.9 million available under these agreements.
During the third quarter ended January 31, 2000 the Company paid off its old
credit facility. Accordingly, the Company wrote off deferred financing fees
related to the previous credit facility. It recorded an extraordinary loss of
$631 (net of tax benefit of $448) resulting from the write-off of related debt
acquisition costs of $1,704 less related accumulated amortization of $625.
6. EARNINGS PER SHARE
The following table reconciles the number of common shares outstanding at
January 31 of each year indicated to the weighted average number of common
shares outstanding and the weighted average number of common and dilutive
potential common shares outstanding for the respective three and nine month
periods for the purpose of calculating basic and dilutive earnings per common
share (in thousands):
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended January Ended January Ended January Ended January
31, 1999 31, 2000 31, 1999 31, 2000 .
------- ------- ------- -------
<S> <C> <C> <C> <C>
Number of shares outstanding, end of period:
Class A Common Stock 14,863 22,213 14,863 22,213
Class B Common Stock 988 988 988 988
Effect of Weighted Average Shares
Outstanding During the Period (42) (3,424) (936) (5,937)
------- ------- ------- -------
Basic Shares Outstanding 15,809 19,777 14,915 17,265
Impact of Potentially Dilutive
Securities 878 487 975 493
------- ------- ------- -------
Diluted Shares Outstanding 16,687 20,246 15,890 17,758
======= ======= ======= =======
</TABLE>
For the three months and nine months ended January 31, 2000, options to purchase
2,045 and 1,774 common shares, respectively, were excluded from the calculation
of potential dilutive securities because their impact was anti-dilutive.
7. SEGMENT REPORTING
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("Statement 131"). Statement 131 establishes standards for
reporting information about operating segments in financial statements. In
general, Statement 131 requires that business entities report selected
information about operating segments in a manner consistent with that used for
internal management reporting.
The Company classified its operations into three segments: Eastern, Central and
Western for the three and nine month periods ending January 31, 1999. The
acquisition of KTI, for the three and nine months ended January 31, 2000,
necessitated the addition of four new segments: Waste-to-Energy, 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 Waste-to-Energy,
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. (In thousands)
8. SUBSEQUENT EVENTS
On February 1, 2000, Casella purchased a large amount of assets from Allied
Waste Industries in the eastern Massachusetts area for a purchase price that
will be determined based upon the operating results of these assets for the
months of February and March of 2000. An upfront payment of $21 million was paid
to Allied at the closing.
<PAGE>
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE><CAPTION>
Eastern Central Western Corporate Eliminations Total
------- ------- ------- --------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended January 31, 1999:
Outside Revenue $ 7,046 $ 21,830 $ 15,233 $ 0 $ 0 $ 44,109
=========== ============ =========== ======== ======== ========
Intercompany Revenue $ 454 $ 6,522 $ 1,870 $ 0 $ (8,846) $ 0
=========== ============ =========== ======== ======== ========
Net Income/(Loss) $ 368 $ 795 $ 354 $ (638) $ 0 $ 879
=========== ============ =========== ======== ======== ========
Total Assets $ 37,488 $ 129,004 $ 92,619 $ 6,626 $ 0 $265,737
=========== ============ =========== ======== ======== ========
Nine Months Ended January 31, 1999:
Outside Revenue $ 21,280 $ 68,046 $ 46,820 $ 58 $ 0 $136,204
=========== ============ =========== ======== ======== ========
Intercompany Revenue $ 1,653 $ 21,506 $ 4,283 $ 0 $(27,442) $ 0
=========== ============ =========== ======== ======== ========
Net Income/(Loss) $ 1,173 $ 4,994 $ 1,416 $ (2,374) $ 0 $ 4,329
=========== ============ =========== ======== ======== ========
Total Assets $ 37,488 $ 129,004 $ 92,619 $ 6,626 $ 0 $265,737
=========== ============ =========== ======== ======== ========
</TABLE>
<TABLE><CAPTION>
Waste Residential
Eastern Central Western to Energy Recycling
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Three Months Ended January 31, 2000:
Outside Revenue $ 17,998 $ 23,089 $ 14,659 $ 9,731 $ 6,637
======== ======== ======== ======== ========
Intercompany Revenue $ 2,583 $ 9,016 $ 2,764 $ 393 $ 0
======== ======== ======== ======== ========
Net Income/(Loss) $ 1,135 $ 2,978 $ 1,162 $ 484 $ 925
======== ======== ======== ======== ========
Total Assets $ 77,227 $116,897 $111,596 $271,528 $ 45,731
======== ======== ======== ======== ========
</TABLE>
<TABLE><CAPTION>
Finished Commercial
Products Recycling Corporate Eliminations Total
-------- --------- --------- ------------ -----
<S> <C> <C> <C> <C> <C>
Three Months Ended January 31, 2000:
Outside Revenue $ 6,977 $ 16,067 $ 203 $ (2,357) $ 93,004
======== ======== ======== ======== ========
Intercompany Revenue $ 89 $ 4,135 $ 225 $(19,205) $ 0
======== ======== ======== ======== ========
Net Income/(Loss) $ (531) $ 681 $ (6,079) $ 0 $ 755
======== ======== ======== ======== ========
Total Assets $ 39,644 $ 41,270 $ 53,402 $ 0 $757,295
======== ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE><CAPTION>
Waste Residential
Eastern Central Western to Energy Recycling
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Nine Months Ended January 31, 2000:
Outside Revenue $ 43,460 $ 74,915 $ 47,314 $ 9,731 $ 6,637
======== ======== ======== ======== ========
Intercompany Revenue $ 5,318 $ 27,800 $ 9,717 $ 393 $ 0
======== ======== ======== ======== ========
Net Income/(Loss) $ 1,783 $ 14,171 $ 4,465 $ 484 $ 925
======== ======== ======== ======== ========
Total Assets $ 77,227 $116,897 $111,596 $271,528 $ 45,731
======== ======== ======== ======== ========
</TABLE>
<TABLE><CAPTION>
Finished Commercial
Products Recycling Corporate Eliminations Total
-------- --------- --------- ------------ -----
<S> <C> <C> <C> <C> <C>
Nine Months Ended January 31, 2000:
Outside Revenue $ 6,977 $ 16,067 $ 684 $ (2,357) $203,428
======== ======== ======== ======== ========
Intercompany Revenue $ 89 $ 4,135 $ 225 $(47,677) $ 0
======== ======== ======== ======== ========
Net Income/(Loss) $ (531) $ 681 $(13,308) $ 0 $ 8,670
======== ======== ======== ======== ========
Total Assets $ 39,644 $ 41,270 $ 53,402 $ 0 $757,295
======== ======== ======== ======== ========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company is a regional, integrated solid waste services company that provides
collection, transfer, disposal and recycling services, generation of electricity
and steam and the manufacture of finished products utilizing recyclable
materials primarily throughout the eastern portion of the United States and
parts of Canada. The Company also markets recyclable metals, plastics, paper and
corrugated processed at its facilities and by third parties. 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.
On December 14, 1999 the Company consumated its acquisition with KTI, a publicly
traded solid waste handling company (NASDAQ: KTI). KTI specializes in solid
waste disposal and recycling, and operates manufacturing facilities utilizing
recycled materials. The Company believes the acquisition will give it additional
growth opportunities in its existing and adjacent markets in the northwestern
U.S., and the ability to enter new markets, as well as achieve operational
efficiencies as a result of the combination. Pursuant to the merger agreement,
each share of KTI common stock was exchanged for 0.51 shares of the Company's
class A common stock. The stockholders of both companies approved the merger
transaction on December 8, 1999. Total deferred acquisition costs related to the
KTI merger were approximately $25 million dollars. All of these acquisition
costs were capitalized upon the consummation of the purchase transaction.
The Company's revenues have increased from $44.1 million for the three months
ended January 31, 1999 to $93.0 million for the three months ended January 31,
<PAGE>
2000 and from $136.2 million for the nine months ended January 31, 1999 to
$203.4 million for the nine months ended January 31, 2000. From May 1, 1998
through April 30, 1999, the Company acquired 55 solid waste collection, transfer
and disposal operations. Between May 1, 1999 and January 31, 2000, the Company
acquired an additional 30 such businesses. All but two of these acquisitions
were accounted for under the purchase method of accounting for business
combinations. Under the rules of purchase accounting, the acquired companies'
revenues and results of operations have been included together with those of
Casella Waste Systems, Inc. from the actual dates of the acquisitions and will
materially affect the period-to-period comparisons of the Company's historical
results of operations.
This Quarterly Report and other reports, proxy statements, and other
communications to stockholders, as well as oral statements by the Company's
officers or its agents, may contain forward-looking statements within the
meaning of Section 27A of the Securities Act, with respect to, among other
things, the Company's future revenues, operating income, or earnings per share.
Without limiting the foregoing, any statements contained in this Quarterly
Report that are not statements of historical fact may be deemed to be
forward-looking statements, and the words "believes", "anticipates", "plans",
"expects", and similar expressions are intended to identify forward-looking
statements. There are a number of factors of which the Company is aware that may
cause the Company's actual results to vary materially from those forecast or
projected in any such forward-looking statement, certain of which are beyond the
Company's control. These factors include, without limitation, those outlined
below in the section entitled `Certain Factors That May Affect Future Results'.
The Company's failure to successfully address any of these factors could have a
material adverse effect on the Company's results of operations.
General
The Company's revenues in the Eastern, Central and Western regions are
attributable primarily to fees charged to customers for solid and disposal 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 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, recyclable brokering
operations and from the sale of tire derived fuel. Other revenues consist
primarily of revenue from septic/liquid waste operations and other sources. The
Company's revenues are shown net of intercompany eliminations. The Company
typically establishes its intercompany transfer pricing based upon prevailing
market rates.
The KTI acquisition closed on December 14, 1999. KTI's results of operations are
included in the Company's results of operations from December 15, 1999 and
forward. KTI provides 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
recyclable materials. KTI's business 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. KTI operates its business under four reportable
segments: Waste-to-energy, residential recycling, commercial recycling and
finished products. KTI's four lines of business are reflected in the Company's
revenues as follows: Waste-to-Energy is reflected under disposal, Residential
Recycling is reflected under "recycling". Commercial Recycling is reflected
under "recycling" and "brokerage", and Finished Goods is reflected under its
own line.
The table below shows, for the periods indicated, the percentage of the
Company's revenues attributable to services provided. Change in percentages are
mainly attributable to the acquisition of KTI which have businesses that have
classifications that are different from Casella's lines of businesses.
<PAGE>
<TABLE><CAPTION>
Percentage of Revenue Percentage of Revenue
Three Months Ended Nine Months Ended
------------------ -----------------
January 31, January 31, January 31, January 31,
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Collection 74.9% 40.7% 76.5% 56.7%
Disposal 7.5% 17.0% 7.7% 13.1%
Transfer 6.4% 5.0% 6.6% 7.0%
Recycling 7.6% 7.7% 6.0% 7.2%
Finished Goods 0.0% 6.7% 0.0% 3.1%
Brokerage 0.0% 18.7% 0.0% 8.6%
Other 3.6% 4.2% 3.2% 4.3%
------ ------ ------ ------
Total Revenue 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
</TABLE>
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, royalties, ash residue disposal, and repairs and maintenance of
waste processing facilities, landfill operating expenses also include a
provision for closure and post-closure expenditures anticipated to be incurred
in the future, and leachate treatment and disposal costs.
General and administrative expenses include management, clerical and
administrative compensation and overhead, professional services and costs
associated with the Company's marketing and sales force and community relations
expense.
Depreciation and amortization expense includes depreciation of fixed assets over
the estimated useful life of the assets using the straight-line method,
amortization of landfill airspace assets under the units-of-production method,
and the amortization of goodwill and other intangible assets using the
straight-line method. The amount of landfill amortization expense related to
airspace consumption can vary materially from landfill to landfill depending
upon the purchase price and landfill site and cell development costs. The
Company depreciates all fixed and intangible assets, excluding non-depreciable
land, down to a $0 net book value, and does not apply a salvage value to any of
its fixed assets.
The Company capitalizes certain direct landfill development costs, such as third
party 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
<PAGE>
development and acquisition costs, such as executive and corporate overhead,
public relations and other corporate services, are expensed as incurred.
Results of Operations
The following table sets forth for the periods indicated the percentage
relationship that certain items from the Company's Consolidated Financial
Statements bear in relation to revenues.
<TABLE><CAPTION>
Three Months Ended Nine Months Ended
----------------------------- ---------------------------
January 31, January 31, January 31, January 31,
1999 2000 1999 2000
(Restated) (Unaudited) (Restated) (Unaudited)
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of Operations 59.7 66.1 59.9 60.4
General and Administrative 16.0 12.3 14.8 12.9
Depreciation and Amortization 14.7 10.9 14.0 12.7
Merger Costs - Poolings 1.1 0.0 0.8 0.7
----- ----- ----- -----
Operating Income 8.5 10.7 10.5 13.3
Interest Expense, Net 2.9 5.1 3.1 3.9
Other (Income)/Expense 0.0 0.0 (0.2) (0.3)
Provision for Income Taxes 3.7 2.6 3.8 4.3
----- ----- ----- -----
Income from Continuing Operations 1.9 3.0 3.8 5.4
----- ----- ----- -----
(Gain)/Loss on Discontinued Operations (0.1) 0.0 0.0 0.1
Estimated Loss on Disposal of Business
Segment 0.0 1.5 0.0 0.7
Extraordinary Item 0.0 0.7 0.0 0.3
----- ----- ----- -----
Net Income 2.0% 0.8% 3.8% 4.3%
===== ===== ===== =====
EBITDA* 20.2% 21.6% 24.5% 26.0%
===== ===== ===== =====
</TABLE>
* See discussion and computation of EBITDA below
Revenues:
For the three months ended January 31, 2000, revenues increased approximately
$48.9 million, or 110.8%, to $93 million from $44.1 million for the three months
ended January 31, 1999. For the nine months ended January 31, 1999 and 2000,
revenue increased approximately $67.2 million, or 49.4%, to $203.4 million from
$136.2 million. Of these increases, $44.6 million and $55.2 million,
respectively, was due to the impact of businesses acquired during fiscal year
1999 and the first nine months of fiscal year 2000. The balance of the increase
was due to internal volume and pricing growth.
Cost of Operations:
For the three months ended January 31, 2000, cost of operations increased
approximately $35.1 million, or 133.2%, to $61.5 million from $26.4 million for
the three months ended January 31, 1999. Cost of operations, as a percentage of
revenues increased 6.4% to 66.1% from 59.7%. For the nine months ended January
31, 1999, cost of operations increased approximately $41.3 million, or 50.6%, to
$122.8 million
<PAGE>
from $81.6 million for the nine months ended January 31, 1999. Cost of
operations, as a percentage of revenues increased by 0.5% to 60.4% from 59.9%.
The increase was primarily the result of (i) recyclable brokerage operations
acquired through the KTI acquisition, which carry a very high purchased
materials cost (approximately 88% of revenue) in relation to its revenues, and
(ii) the Company's Finished Products division, acquired through the KTI
acquisition, which carries a higher cost of operations, as a percentage of
revenue, than the Company's other core operations.
General and Administrative:
For the three months ended January 31, 1999, general and administrative expenses
increased approximately $4.3 million, or 61.7%, to $11.4 million from $7.1
million for the three months ended January 31, 1999. General and administrative
expenses, as a percentage of revenues decreased to 12.3% from 16.0%. For the
nine months ended January 31, 1999, general and administrative expenses
increased approximately $6.2 million, or 30.9%, to $26.3 million from $20.1
million for the nine months ended January 31, 1999. General and administrative
expenses, as a percentage of revenues, decreased to 12.9% from 14.8%. This
decrease is due in part to (i) the acquisition of KTI's recyclable brokerage
operations which have relatively low general and administrative costs, as a
percentage of revenues, and (ii) improved economies of scale achieved subsequent
to the acquisitions of the last twenty-one months, and to the leveraging of our
existing corporate overhead.
Depreciation and Amortization:
For the three months ended January 31, 2000, depreciation and amortization
increased approximately $3.7 million, or 57.3%, to $10.2 million from $6.5
million for the three months ended January 31, 1999. As a percentage of revenue,
depreciation and amortization decreased to 10.9% from 14.7%. For the nine months
ended January 31, 1999 and 2000, depreciation and amortization increased
approximately $6.7 million, or 35.1%, to $25.8 million from $19.1 million. As a
percentage of revenue, depreciation and amortization decreased to 12.7% from
14.0%. Depreciation and Amortization as a percentage of revenues decreased
primarily due to the acquisition of KTI's recyclable brokerage operations which
have very low depreciation and amortization costs as a percentage of revenues
(approximately 1%).
Merger Costs:
The merger related costs of $1.5 million recorded in the nine months ended
January 31, 1999 were incurred in association with the Resource Waste Systems,
Inc. and Corning Community Disposal, Inc. mergers accounted for as poolings of
interests. The transactions are discussed above under "Notes to Consolidated
Financial Statements".
Interest Expense, Net:
For the three months ended January 31, 2000, interest expense, net increased
approximately $3.5 million, or 272%, to $4.8 million from $1.3 million for the
three months ended January 31, 1999. As a percentage of revenue, interest
expense, net increased to 5.1% from 2.9%. This reflects the increase in the
outstanding balance under the Company's acquisition line of credit and the
effects of the new $450 million credit facility closed on December 14, 1999,
which carries higher interest rates than the old facility. For the nine months
ended January 31, 1999 and 2000, interest expense, net increased approximately
$3.8 million, or 91.6%, to $8.0 million from $4.2 million. As a percentage of
revenue, interest expense, net increased to 3.6% from 2.9%.
Other (income) expense, net:
Other (income) expense, net has not historically been material to the Company's
results of operations.
Provision for Income Taxes:
For the three months ended January 31, 2000, provision for income taxes
increased approximately $0.7 million, or 44.0%, to $2.4 million from $1.7
million for the three months ended January 31, 1999. As a percentage of revenue,
provision for income taxes decreased to
<PAGE>
2.6% from 3.7%. For the nine months ended January 31, 1999 and 2000, provision
for income taxes increased approximately $3.5 million, or 65.8%, to $8.7 million
from $5.3 million. As a percentage of revenue, provision for income taxes
increased to 4.3% from 3.8%. The increase reflects the Company's increase in
profits in the quarter and nine month period ended January 31, 2000 over the
same periods in the prior fiscal year and nondeductible Goodwill acquired
through the KTI Acquisition. The combined effective tax rate used by the Company
in recording taxes for interim periods has decreased from 46.5% in the quarter
ended October 31, 1998 to 43.8% in the same quarter of the current fiscal year.
Liquidity and Capital Resources
The Company's business is capital intensive. The Company's capital requirements
include acquisitions, fixed asset purchases and capital expenditures for
landfill development, cell construction, and site and cell closure. The Company
had positive net working capital of $3.3 million at April 30, 1999 and positive
net working capital of $68.0 million at January 31, 2000.
In connection with the acquisition of KTI, the Company has obtained a new $450
million credit facility with a number of banks, for which BankBoston, N.A. is
acting as agent. The revolving line of credit consists of a $300 million Senior
Secured Revolving Credit Facility, with a maturity date of December 14, 2004 and
a $150 million Senior Secured Delayed Draw Term Loan B facility, with a maturity
date of December 14, 2006. This line of credit is secured by all assets of the
Company, including the Company's interest in the equity securities of its
subsidiaries. Funds available to the Company under this line of credit were
$158.9 million at January 31,2000.
Net cash provided by operating activities was $19.9 million for the nine months
ended January 31, 2000 compared to $20.2 million for the same period of the
prior fiscal year.
Cash used in investing activities increased $11.7 million from $79.0 million to
$90.7 million in the nine months ended January 31, 2000 over the same period of
the prior fiscal year. The increase in investing activities reflects
acquisitions for the three quarters ended January 31, 2000 accounted for as
purchases, increased capital expenditures. The Company's cash needs to fund
investing activities are expected to increase further as the Company continues
to complete acquisitions, and continues to expend capital in order to service
internal growth.
Net cash provided by financing activities was $65.9 million in the nine months
ended January 31, 2000 compared to $51.9 million for the same period of the
prior year. The net cash provided by financing activities in the current fiscal
year reflects the borrowings on the Company's new credit facility, offset by
repayments. Net cash provided by financing activities in the comparable period
of the prior year reflects the net proceeds of the follow-on offering and
borrowings on the Company's credit facility, offset by repayments.
Seasonality
The Company's revenues for the Eastern, Central and Western regions 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,
New Hampshire, 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
<PAGE>
constant throughout the fiscal year, operating income results are therefore
impacted by a similar seasonality. In addition, particularly harsh weather
conditions could result in increased operating costs to certain of the Company's
operations.
The Company's quarterly revenues and operating results have varied significantly
in the past and are likely to vary substantially from quarter to quarter in the
future. The Company establishes its expenditure levels based on its expectations
as to future revenues, and, if revenue levels are below expectations, expenses
can be disproportionately high. Due to a variety of factors including general
economic conditions, governmental regulatory action, acquisitions, capital
expenditures and other costs related to the expansion of operations and services
and pricing changes, it is possible that in some future quarter, the Company's
operating results will be below the expectations of public market analysts and
investors. In such events, the Company's Stock price would likely be materially
and adversely affected.
Inflation and Prevailing Economic Conditions
To date, inflation has not had a significant impact on the Company's operations.
Consistent with industry practice, most of the Company's contracts provide for a
pass through of certain costs, including increases in landfill tipping fees and,
in some cases, fuel costs. The Company therefore believes it should be able to
implement price increases sufficient to offset most cost increases resulting
from inflation. However, competitive factors may require the Company to absorb
at least a portion of these cost increases, particularly during periods of high
inflation.
The Company's business is primarily located in the eastern United States.
Therefore, the Company's business, financial condition and results of operations
are susceptible to downturns in the general economy in this geographic region
and other factors affecting the region such as state regulations and severe
weather conditions. The Company is unable to forecast or determine the timing
and/or the future impact of a sustained economic slowdown.
Year 2000 Issues
The approach of the year 2000 has raised concerns about the ability of
information technology systems and non-information technology systems, primarily
computer software programs, to properly recognize and process date-sensitive
information with respect to the Year 2000.
The Company undertook a Year 2000 project, comprised of four phases, to address
these concerns. Phase one, which has been completed, consisted of awareness,
Year 2000 planning, preparing a written plan, management approval and support.
Phase two involved the evaluation of all systems and equipment, including
hardware, software, security and voice mail, with respect to Year 2000
compliance. The completion date for phase two was June 30, 1999. Phase three
involved addressing any deficiencies identified in Phase two. Phase three was
completed on July 31, 1999. Phase four involved the validation and testing of
all systems and equipment, and has been completed. Casella has performed, and
continues to perform routine updates of all software and hardware systems to
facilitate Year 2000 compliance. The passing of the new year did not identify
any material deficiencies regarding Year 2000 compliance.
The Company had completed numerous acquisitions in the months prior to January
1, 2000, and the information systems of a limited number of these acquired
operations, including KTI, have been fully integrated with Casella's information
systems. Casella continues to make acquisitions as an integral component of its
growth strategy. No significant Year 2000 compliance problems occurred as a
result of these acquisitions.
Casella experienced no significant adverse effects from Year 2000 compliance
problems with third party vendors. Casella uses well-regarded nationally known
<PAGE>
software vendors for both its general accounting applications and
industry-specific customer information and billing systems, and all internal
productivity software.
Casella, in preparation for December 31, 1999, replaced all older personal
computers and servers. Casella acquired a Year 2000 compliant weight-measurement
system. Casella has incurred approximately $1.5 million over the past twenty
months to address hardware and software-related Year 2000 compliance issues,
principally through the implementation of a new frame network system. A portion
of this investment is attributable to integrating information systems of
companies that the Company has acquired. Casella utilized funds from current
operations and Casella's line of credit to meet Year 2000 remediation expenses.
No single customer represents more than one percent of Casella's revenues, and
we have not and do not expect any material adverse effect on Casella's revenues
in the event an individual customer experiences Year 2000 problems.
EBITDA
EBITDA represents operating income (earnings before interest and taxes, or
"EBIT") plus depreciation and amortization expense. EBITDA is not a measure of
financial performance under generally accepted accounting principles, but is
provided because the Company understands that certain investors use this
information when analyzing the financial position and performance of the
Company.
<TABLE><CAPTION>
Amounts in Thousands
--------------------
Three Months Ended Nine Months Ended
------------------ -----------------
01/31/99 01/31/00 01/31/99 01/31/00
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Income $ 3,749 $ 9,946 $14,322 $27,055
Depreciation and Amortization 6,481 10,193 19,064 25,763
------- ------- ------- -------
EBITDA $10,230 $20,139 $33,386 $52,818
======= ======= ======= =======
</TABLE>
Analysis of the factors contributing to the change in EBITDA is included in the
discussions above.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Quarterly Report and presented elsewhere by management from time to time.
WE MAY EXPERIENCE DIFFICULTIES INTEGRATING KTI'S OPERATIONS AND ASSETS.
We acquired with KTI, Inc. on December 14, 1999. There can be no assurance that
management will be able to integrate KTI's operations effectively and that the
<PAGE>
acquisition will result in the synergies and other benefits anticipated by the
two companies.
OUR INCREASED LEVERAGE MAY IMPACT OUR ABILITY TO MAKE FUTURE ACQUISITIONS.
As a result of the acquisition with KTI and the increase in its credit facility,
the Company's indebtedness has increased substantially. This increased
indebtedness may limit the Company's ability to incur additional indebtedness,
and thereby limit the Company's ongoing acquisition program.
OUR CONTINUED GROWTH MAY PLACE A STRAIN ON OUR RESOURCES.
Our objective is to continue to grow by expanding our services in markets where
we 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 our management and operational, financial and other resources.
WE HAVE INCURRED OPERATING LOSSES IN THE PAST AND MAY DO SO IN THE FUTURE.
We have incurred net losses in the past. There can be no assurance that we will
be profitable in the future.
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 consistent with our strategy. 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.
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 either John Casella or James Bohlig ceases 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.
<PAGE>
OUR GROWTH RATE MAY BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO CONTINUE TO
IMPLEMENT OUR ACQUISITION STRATEGY
Our failure to implement successfully our acquisition strategy would limit our
growth potential. We may not be able to implement our acquisition strategy, on
which our future growth is substantially based, due to the consolidation and
integration activity in the solid waste industry in recent years, as well as the
difficulties and expenses relating to the development and permitting of solid
waste landfills and transfer stations. These factors may result in fewer
acquisition opportunities for us as well as less advantageous acquisition terms,
including increased purchase prices. In addition, it may be difficult initially
to integrate the operations of any acquired businesses with our business.
ENVIRONMENTAL REGULATIONS COULD SUBJECT US TO FINES, PENALTIES AND LIMITATIONS
ON OUR ABILITY TO EXPAND
We will be subject to potential liability and restrictions under environmental
laws. The 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 regulate the industry
through new legislation. Those regulations and laws also may limit the overall
size and daily waste volume that may be accepted by a solid waste operation. If
we are not able to expand or otherwise operate one or more of our facilities
profitably because of limits imposed under environmental laws, we may be
required to increase our utilization of disposal facilities owned by third
parties, and if so, our business, financial condition and results of operation
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
they 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 the 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.
<PAGE>
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 wastepaper, 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 wastepaper 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 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.
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.
OUR BUSINESS IS GEOGRAPHICALLY CONCENTRATED AND IS THEREFORE SUBJECT TO REGIONAL
ECONOMIC DOWNTURNS
Our operations and customers are principally located in the eastern United
States. Therefore, our business, financial condition and results of operations
are susceptible to regional economic downturns and other regional factors,
including state regulations and severe weather conditions. In addition, as we
expand in our existing markets, opportunities for growth within these regions
will become more limited. The costs and time involved in permitting and the
scarcity of available landfills will make it difficult for us to expand
vertically in these markets. We cannot assure you that we will complete enough
acquisitions in other markets to lessen our regional geographic concentration.
<PAGE>
WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE IN THE HIGHLY COMPETITIVE SOLID WASTE
SERVICES INDUSTRY
The solid waste services industry is highly competitive, is undergoing a period
of increasingly rapid consolidation, and requires substantial labor and capital
resources. Some of the markets in which we compete or will likely compete are
served by one or more of the large national or multinational solid waste
companies, as well as numerous regional and local solid waste companies. Intense
competition exists not only to provide services to customers but also to acquire
other businesses within each market. Some of our competitors have significantly
greater financial and other resources than us. From time to time, competitors
may reduce the price of their services in an effort to expand market share or to
win a competitively bid municipal contract. These practices may either require
us to reduce the pricing of our services or result in our loss of business. As
is generally the case in the industry, municipal contracts are subject to
periodic competitive bidding. There can be no assurance that we will be the
successful bidder to obtain or retain these contracts. If we are unable to
compete with larger and better capitalized companies, or to replace municipal
contracts lost through the competitive bidding process with comparable contracts
or other revenue sources within a reasonable time period, our business,
financial condition and results of operations could be materially adversely
affected.
In our solid waste disposal markets, we also compete with operators of
alternative disposal and recycling facilities and with counties, municipalities
and solid waste districts that maintain their own waste collection, recycling
and disposal operations. These entities may have financial advantages because
user fees or similar charges, tax revenues and tax-exempt financing may be more
available to them than to us.
Our insulation manufacturing operations compete primarily with large
manufacturers of fiberglass insulation, including Owens Corning, Certainteed and
Johns Manville Corp. and with Louisiana Pacific Corporation, a manufacturer of
cellulose insulation. These companies 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 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 that may be produced by 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 are in the process of closing a
third steam generating plant operated by a subsidiary of ours which has 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.
<PAGE>
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 its 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 the operation and closure of waste-to-energy
facilities may require performance or surety bonds, letters of credit or other
means of financial assurance to secure our contractual performance. If we are
unable to obtain the necessary financial assurance in sufficient amounts or at
acceptable rates, we could be precluded from entering into additional municipal
solid waste collection contracts or from obtaining or retaining landfill
operating permits. Any future difficulty in obtaining insurance could also
impair our ability to secure future contracts conditioned upon the contractor
having adequate insurance coverage. Accordingly, our failure to obtain financial
assurance bonds, letters of credit or other means of financial assurance or to
maintain adequate insurance could have a material adverse effect on our
business, financial condition and results of operations.
WE MAY BE REQUIRED TO WRITE-OFF CAPITALIZED CHARGES IN THE FUTURE, WHICH COULD
ADVERSELY AFFECT OUR EARNINGS
Any charge against earnings could have a material adverse effect on our earnings
and the market price of our Class A common stock. In accordance with generally
accepted accounting principles, we capitalize certain expenditures and advances
relating to our acquisitions, pending acquisitions, landfills and development
projects. From time to time in future periods, we may be required to incur a
charge against earnings in an amount equal to any unamortized capitalized
expenditures and advances, net of any portion thereof that we estimate will be
recoverable, through sale or otherwise, relating to (a) any operation that is
permanently shut down or has not generated or is not expected to generate
sufficient cash flow, (b) any pending acquisition that is not consummated and
(c) any landfill or development project that is not expected to be successfully
completed. We have incurred such charges in the past.
OUR CLASS B COMMON STOCK HAS TEN VOTES PER SHARE AND IS HELD EXCLUSIVELY BY JOHN
W. CASELLA AND DOUGLAS R. CASELLA
The holders of our Class B common stock are entitled to ten votes per share and
the holders of our Class A common stock are entitled to one vote per share. At
September 1, 1999, an aggregate of 988,200 shares of our Class B common stock,
representing 9,882,000 votes, were outstanding, all of which were beneficially
owned by John W. Casella, our 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 1, 1999, the shares of our Class A common stock
and Class B common stock held by John W. Casella and Douglas R. Casella
represent approximately 35.4% 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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about January 30, 1997, Mr. Matthew M. Freeman commenced a civil lawsuit
against Casella and two of Casella's officers and directors in the Rutland
Superior Court, Rutland County, and 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 Casella or the
monetary equivalent thereof, as well as punitive damages. Casella 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 Casella agreed to indemnify
Casella for any settlement by Casella or any award against Casella in excess of
350,000 (but not legal fees paid by or on behalf of Casella or any other third
arty). Casella accrued a $215,000 reserve for this claim during the year ended
April 30, 1998.
On May 12, 1998, Casella filed suit in New York Supreme Court, Allegany County
against the Town of Angelica, New York seeking a temporary restraining order and
preliminary injunctive relief against the Town's enforcement of a recently-
enacted local law which would prohibit the expansion of the Hyland landfill,
would require the landfill and the operator thereof to receive an additional
permit from the Town of Angelica to continue to operate, would prevent the
disposal of yard waste, may preclude the disposal of certain types of industrial
waste and would impose certain other restrictions on the landfill. A temporary
restraining order was granted by the court on May 14, 1998 in favor of Casella,
and by a decision dated July 13, 1998, the court granted Casella's motion for a
preliminary injunction. On September 9, 1998, the Town of Angelica filed a
Notice of Appeal but has not yet perfected that appeal. If Casella is not
successful in its lawsuit, and if the Town of Angelica seeks to enforce the law
by its terms, then Casella would be required to obtain an additional permit from
the Town of Angelica to operate the Hyland landfill, the expansion of the
landfill beyond the current permitted capacity would be prohibited, and Casella
would be unable to dispose of yard waste and may be precluded from disposing of
<PAGE>
certain industrial wastes at the landfill. There can be no assurance that such
limitations would not have a material adverse effect on Casella's business,
financial condition and results of operations. Casella began accepting waste at
the Hyland facility on July 22, 1998, and is in active settlement negotiations
with the town.
Casella's wholly owned subsidiary, North Country Environmental Services, Inc.
("NCES"), is a party to consolidated civil actions (Case Nos. 98-E-141 and
98-E-151) against the Town of Bethlehem, New Hampshire (the "Town"), before the
Grafton Superior Court in North Haverhill, New Hampshire. On January 16, 1998,
NCES commenced an action for declaratory relief against the Town seeking, on a
variety of grounds, to invalidate a Town zoning ordinance which purports to
prohibit the expansion of NCES's landfill beyond its currently permitted
capacity. The Town has taken the position that NCES may not expand the landfill
beyond Stage II, Phase I, which has reached capacity. NCES sought a declaration
that it requires no further approvals from the Town to expand the landfill
throughout its 87-acre parcel and that certain financial exactions imposed by a
1986 Town land-use approval are invalid. In the alternative, NCES sought
compensation under state law for the inverse condemnation of its property.
On January 23, 1998, the Town filed a petition for injunctive and declaratory
relief against NCES. The Town's petition sought to enjoin NCES's construction of
Stage II, Phase II of the landfill and to prevent any further expansion as
violative of the above-noted Town zoning ordinance. The construction of Stage
II, Phase II was proceeding at that time pursuant to a construction permit
issued by the New Hampshire Department of environmental Services (NHDES) on
September 15, 1998. On January 30, 1998, the court entered a preliminary
injunction requiring NCES to suspend construction of Stage II, Phase II. When
the Town failed to post an injunction bond, however, the court permitted NCES to
complete and cover the liner system in Stage II, Phase II, before the onset of
winter.
On November 30, 1998, NCES and the Town proceeded to trial on eight of NCES's
eleven claims for relief and on the Town's claims for permanent injunctive and
declaratory relief. Earlier, the remaining three NCES claims were bifurcated for
later trial, if needed. On the day of trial, the Town filed two counterclaims
seeking to establish the lawfulness of the financial exactions challenged by
NCES's January 16, 1998 petition.
The Grafton Superior Court issued its order on NCES's first eight claims and the
Town's request for a permanent injunction and declaratory relief on February 1,
1999. The court declined to decide whether the Town's zoning ordinance is valid;
rather, the court held that NCES had appropriated a 51-acre tract of land
comprised of a 10-acre and a 41-acre parcel for landfilling purposes. Stage II,
Phase II is within the 51-acre tract. The court also found that NCES had
obtained permission to operate its landfill facility on this 51-acre tract prior
to the enactment of the challenged zoning ordinance and held that the ordinance
did not apply to NCES's operation of its landfill facility on this tract.
Consequently, the court held that the Town lacked authority to enforce the
zoning ordinance against NCES with respect to the 51-acre tract and denied the
Town's petition in its entirety. The court did not decide the validity of the
zoning ordinance as it relates to 36 acres adjoining the 51-acre tract after
finding that NCES had not demonstrated a present intent to develop this property
for landfilling. Consequently, NCES's ability to use these 36 acres for
landfilling remains unresolved.
On February 10, 1999, the Town moved the Grafton Superior Court to clarify and
reconsider its order. On March 22, 1999, the court denied reconsideration but
offered some clarification, which did not result in any substantive change in
its earlier order. On April 20, 1999, the Town filed a notice of appeal with the
New Hampshire Supreme Court seeking review of the superior court's order. NCES
filed a notice of cross-appeal on April 29, 1999.
Concurrently, on March 24, 1999, a special interest group, Environmental Action
for Northern New Hampshire, Inc. ("EANNH") sought to intervene before the
<PAGE>
superior court. The reason EANNH gave for seeking intervention was to introduce
evidence which it claimed showed that there were size limitations on the
landfill implicit in the land-use approvals obtained by NCES's predecessors in
1976 and 1986. The superior court denied EANNH intervention on April 22, 1999,
and on May 24, 1999, EANNH appealed the denial of intervention to the New
Hampshire Supreme Court.
The Town's notice of appeal centers on its argument that there were implied
limitations upon the size of the landfill that could be operated by NCES and its
predecessors under the land-use approvals granted by the Town in 1976 and 1986.
NCES's cross-appeal seeks a determination that it has all local approvals
necessary to landfill throughout the entire 87-acre parcel, that the Town's
restrictive zoning ordinance is unlawful for several reasons, and that the
Town's attempted enforcement of the zoning ordinance was in bad faith, entitling
NCES to its attorney's fees.
The New Hampshire Supreme Court has yet to accept any of the appeals. NCES has
filed a motion for summary disposition of EANNH's appeal, but there has yet to
be a ruling on that motion. NCES has also learned that a second special interest
group, AWARE, Inc., intends to seek AMICUS CURIAE status so it may submit briefs
to the Supreme Court in support of the Town's appeal.
In summer 1999, the superior court found that the financial exactions imposed in
1986 by the Town as a condition of land-use approval were unlawful. These
exactions consist of a discounted tipping fee for Town solid waste and a per-
ton payment to the Town for all solid waste originating from outside the Town
and deposited at the landfill. NCES stopped complying with the exactions in
January of 1998. NCES and the Town have filed cross-motions for summary judgment
respecting the enforceability of the exactions and are awaiting a ruling.
Whatever the court's decision, NCES expects an appeal.
In a separate but related matter, the Waste Management Division of NHDES ("WMD")
issued operating approval to NCES for Stage II, Phase II of the landfill on
March 25, 1999. NCES has been landfilling in Stage II, Phase II since that time.
On April 23, 1999, EANNH appealed the operating approval to the Waste Management
Council, an appellate administrative body with jurisdiction to review certain
decisions of the WMD. EANNH has contended on its appeal that the operating
approval should be suspended because the superior court's order in NCES's favor
is on appeal and hence not final. EANNH has also argued that NCES misled the WMD
into issuing the operating approval by certifying that it had all local
approvals necessary to operate Stage II, Phase II when the order establishing
this proposition was on appeal.
NCES has filed a motion to dismiss EANNH's appeal to the Waste Management
Council on the ground that the Council lacks jurisdiction over the appeal and
that EANNH lacks standing to assert it. The Office of the Attorney General of
the State of New Hampshire has joined in that motion. In the alternative, NCES
has sought a stay of the Council proceedings pending the outcome of the Supreme
Court appeal. EANNH has agreed to a stay provided there is a suspension of the
operating approval during the pendency of the Supreme Court appeal. NCES has
objected to any such suspension.
Following the announcement of the merger, Casella received a request for certain
information and documents from the Maine Attorney General related to its
existing operations in the State of Maine, and to the competitive impact of the
proposed merger with KTI. In response to this request, Casella made available
certain responsive information and documents. Since that time, without an
admission of any liability, Casella has entered into an agreement resolving the
Attorney General's competitive concerns. The agreement, formally contained in a
Consent Order, was submitted to the Maine Superior Court and approved on
September 28, 1999, to become effective upon the date of the consummation of the
merger with KTI. In summary, the Order requires Casella to modify its existing
small containerized hauling contracts in northern Maine to permit termination
upon thirty days written notice and to limit the charge for early termination to
<PAGE>
a certain amount. It also requires Casella to operate (to the extent it controls
such operation) the gate, scale house and disposal area of the Penobscot
waste-to-energy facility in Orrington, Maine, under terms and conditions no less
favorable than those provided to it an to be recused from participation in the
bid process for contracts relating to the transportation or disposal or residue
from that facility.
Casella has brought an action against the Town of Hampden, Maine to set aside
the Town's efforts to block Casella's construction of approximately 3,300,00
tons of capacity, for which Casella has been granted a permit by the State of
Maine. The action is pending in the Penobscot County Superior Court in Bangor,
Maine.
In addition, 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 $2,000,000.00. The Company intends to vigorously defend the
lawsuit and has filed its Answer and Counterclaim, along with extensive
discovery requests.
On February 9, 2000, So. Cal. Soft-Pak, Inc. ("Soft-Pak") sued Casella Waste
Management, Inc., a wholly owned subsidiary of the Company, in the Superior
Court of California, County of San Diego No. GIC 743123 for breach of contract,
fraud, and negligent misrepresentation concerning the parties 1995 software
licensing agreement. Soft-Pak is seeking undisclosed damages for an alleged
failure to pay site license fees from 1997 to the present. Casella Waste
Management, Inc. expects that Soft-Pak will seek damages of no more than
$650,000. On March 8, 2000, the parties met to discuss potential settlement
terms and subsequently agreed to extend the date by which an answer to the
complaint is due by Casella Waste Management, Inc. until April 16, 2000.
On May 11, 1994, Maine Energy filed a suit in a Maine state court against United
Steel Structures, Inc. under a warranty to recover the costs which were, or will
be incurred to replace the roof and walls of the Maine Energy tipping and
processing building. The judge in the case entered an order awarding Maine
Energy tipping and processing building. The judge in the case entered an order
awarding Maine Energy approximately $3.3 million plus interest from May 10,
1994, to the date of the filing of the lawsuit, and court costs. The defendant
filed an appeal on December 19, 1997. In February 1999, the appellate court
reversed the trial court's verdict in favor of KTI and returned the case to the
trial court, which ordered a new trial.
On September 30, 1997 and March 6, 1998, Capital Recycling of Connecticut filed
two suits in a Connecticut state court against K-C International, certain
officers of K-C International and other parties. The suits allege fraud,
tortuous interference with business expectancy and violations of the Connecticut
Unfair Trade Practices Act. The actions were based on two contracts between
Capital and K-C International. The contracts required all disputes to be
resolved by arbitration in Portland, Oregon. Pursuant to this requirement, K-C
International initiated the arbitration process in Portland, Oregon.
Subsequently, the parties agreed to arbitrate the dispute in Hartford,
Connecticut. The plaintiffs were seeking approximately $1.9 million in damages.
On October 20, 1999, KTI paid Capital $350,000 in final settlement of these
claims.
On September 30, 1998, the Equal Employment Opportunity Commission filed a
lawsuit against FCR Tennessee, Inc. in the United States District Court for the
Western District of Tennessee, alleging sexual harassment by two managers and a
sexually hostile work environment. The complainants sought compensation for past
and future pecuniary and non-pecuniary losses as well as punitive damages and
potential reinstatement of employment for Valerie L. Jacobs. KTI's insurance
carrier has settled the matter for approximately $75,000.
<PAGE>
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 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, upo0n
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 50,000 shares of KTI common stock resulting from
KTI's allegedly inaccurate financial reports.
On April 6, 1999, Dennis McDonnell filed a lawsuit in a Florida state court
against U.S. Fiber, Inc., a subsidiary of FCR. Mr. McDonnell, a former employee
of U.S. Fiber, seeks a declaratory judgment regarding his rights and obligations
under an employment non-competition agreement and an employment agreement that
he previously had signed with two corporations that subsequently were merged
with and into U.S. Fiber. KTI is defending the suit and believes it has
meritorious defenses.
On April 15, 1999, C.H. Lee, a former employee of FCR and a former majority
shareholder of Resource Recycling, Inc., commenced arbitration proceedings with
the American Arbitration Association in Charlotte, North Carolina against KTI,
FCR and FCR Plastics, Inc. in connection with the acquisition of Resource
Recycling by FCR. Mr. Lee alleges that FCR and FCR Plastics acted to fr4ustrate
the "earn-out" provisions of the acquisition agreement and thereby precluded Mr.
Lee from receiving, or alternatively, reduced, the sums to which he was entitled
to under the agreement. He also alleges that FCR and FCR Plastics wrongfully
terminated his employment agreement. The claim for arbitration alleges direct
charges in excess of $5.0 million and requests punitive damages, treble damages
and attorneys fees. KTI, FCR and FCR Plastics responded to the demand, denying
liability and filed a counterclaim for $1.0 million for misrepresentations. KTI
believes it has meritorious defenses to these claims. If, however, the damages
and charges claimed by Mr. Lee are awarded, KTI's business, financial condition
and results of operation could be materially adversely affected. An arbitration
date of May 8, 2000 has been scheduled.
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
allowance for doubtful accounts and net income. The Plaintiffs are seeking
undisclosed damages. KTI 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 July 1, 1999, Michael P. Kuruc filed a demand for arbitration with the
American Arbitration Association in Charlotte, North Carolina, seeking
approximately $1.0 million for compensation due under an employment agreement
that he alleges he has with KTI and losses allegedly suffered in connection with
his sale of KTI common stock. KTI believes that it has meritorious defenses, has
<PAGE>
retained counsel to defend this suit and has filed an action to stay the
arbitration in Mecklenburg County Superior Court in North Carolina. On October
11, 1999, the Superior Court denied KTI's request to stay the arbitration. If
the damages claimed by Mr. Kuruc are awarded, KTI's business, financial
condition and results of operation could be materially adversely affected. The
arbitration hearing is scheduled for April 10, 2000.
On October 22, 1999, Kyle Trayner filed an action in Putnam Superior Court in
Connecticut against K-C International seeking approximately $400,000 allegedly
due for compensation under an employment agreement and for payment on a
promissory note issued by K-C International to Mr. Trayner. KTI believes that it
has meritorious defenses to these claims and intends to retain counsel to defend
this suit.
Casella and its subsidiaries are defendants in certain other lawsuits alleging
various claims incurred in the ordinary course of business, none of which,
either individually or in the aggregate, KTI believes are material to its
financial condition, results of operations or cash flows.
Casella 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
None.
Sales of Unregistered Securities
None
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of shareholders held on December 8, 1999, six
proposals were submitted to a vote of the Company's stockholders. The proposals
and results of voting were as follows:
Proposal I.
A proposal to issue shares of Casella Class A common stock as contemplated by
the merger agreement among KTI, Inc., Casella and our wholly-owned subsidiary.
The merger agreement provides that our wholly-owned subsidiary will be merged
into KTI. As a result of the merger, KTI will become a wholly-owned subsidiary
of Casella, and each shareholder will receive 0.51 of a share of Casella Class A
common stock for each share of KTI common stock held by them;
<PAGE>
Votes For: 20,363,619
Votes Against: 128,148
Abstentions: 4,005
Broker Non-Votes: 928,064
Proposal II.
A proposal to elect, as class one directors, Messrs. James W. Bohlig and Gregory
B. Peters for a term of three years;
James W. Bohlig Votes For: 21,284,583
Votes Withheld 139,253
Gregory B. Peters Votes For: 21,296,379
Votes Withheld 127,457
The other directors whose terms as director continued after the meeting are:
John W. Casella, Douglas R. Casella and John Chapple III. In addition, as a
result of the merger with KTI, Inc., the following persons became directors of
the Registrant: Ross Pirasteh, Martin J. Sergi, George J. Mitchell and Wilbur L.
Ross Jr.
Proposal III.
A proposal to approve an amendment to our Amended and Restated 1997 Stock
Incentive Plan increasing the aggregate number of shares of Casella Class A
common stock that may be issued under the plan from 3,328,125 shares to
5,328,135 shares;
Votes For: 16,809,923
Votes Against: 3,649,610
Abstentions: 36,239
Broker Non-Votes 928,064
Proposal IV.
A proposal to approve amendments to our 1997 Non-Employee Director Stock Option
Plan increasing the aggregate number of shares of Casella Class A common stock
that may be issued under the plan from 50,000 shares to 100,000 shares and
increasing the number of shares subject to stock options granted to non-employee
directors upon initial election to the Casella board and on the date of each
annual meeting to 75,00 shares;
Votes For: 19,323,443
Votes Against: 1,135,249
Abstentions: 37,080
Broker Non-Votes: 928,064
Proposal V.
A proposal to approve an amendment to our Amended and Restated 1997 Employee
Stock Purchase Plan increasing the aggregate number of shares that may be issued
under the plan from 300,000 shares to 600,000 shares;
Votes For: 20,433,380
Votes Against: 34,095
Abstentions: 28,297
Broker Non-Votes: 928,064
Proposal VI.
A proposal to ratify the selection of Arthur Andersen LLP as our independent
auditors for the current fiscal year;
Votes For: 21,393,551
Votes Against: 3,018
Abstentions: 27,267
ITEM 5. OTHER INFORMATION
None.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Amendments No. 2 and 3 to Agreement and Plan of Merger among
registrant, Rutland Acquisition Sub., Inc. and KTI, Inc.(incorporated by
reference from Exhibit 2.1 to the registration statement on Form S-4 of Casella,
as filed on November 12, 1999).
27.1 Financial Data Schedule for Period Ended January 31, 1999
27.2 Restated Financial Data Schedule for Period Ended January 31,
1998
(b) Reports on Form 8-K:
On December 22, 1999 the Company filed a report on 8-K announcing the completion
of the acquisition of KTI, Inc.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Casella Waste Systems, Inc.
Date: March 21, 2000 By: /s/ Jerry Cifor
-----------------------------------
Jerry Cifor
Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JANUARY
31, 2000 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR
THE NINE-MONTH PERIOD ENDED JANUARY 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINACIAL STATEMENTS AND THE FOOTNOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-START> MAY-01-1999
<PERIOD-END> JAN-31-2000
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<SECURITIES> 0
<RECEIVABLES> 93,381
<ALLOWANCES> 4,789
<INVENTORY> 12,010
<CURRENT-ASSETS> 147,181
<PP&E> 451,716
<DEPRECIATION> 86,088
<TOTAL-ASSETS> 757,295
<CURRENT-LIABILITIES> 79,220
<BONDS> 0
0
0
<COMMON> 232
<OTHER-SE> 269,029
<TOTAL-LIABILITY-AND-EQUITY> 757,295
<SALES> 0
<TOTAL-REVENUES> 203,428
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<TOTAL-COSTS> 122,824
<OTHER-EXPENSES> 53,549
<LOSS-PROVISION> 1,402
<INTEREST-EXPENSE> 7,984
<INCOME-PRETAX> 19,696
<INCOME-TAX> 8,733
<INCOME-CONTINUING> 10,963
<DISCONTINUED> (1,662)
<EXTRAORDINARY> (631)
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<EPS-BASIC> 0.50
<EPS-DILUTED> 0.49
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JANUARY
31, 1999 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR
THE NINE-MONTH PERIOD ENDED JANUARY 31, 1999, AS RESTATED TO REFLECT
ACQUISITIONS ACCOUNTED FOR AS POOLINGS OF INTERESTS, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE FOOTNOTES THERETO.
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<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 1,351
<SECURITIES> 0
<RECEIVABLES> 25,367
<ALLOWANCES> 2,060
<INVENTORY> 780
<CURRENT-ASSETS> 31,897
<PP&E> 186,834
<DEPRECIATION> 62,846
<TOTAL-ASSETS> 265,737
<CURRENT-LIABILITIES> 28,282
<BONDS> 0
0
0
<COMMON> 159
<OTHER-SE> 145,669
<TOTAL-LIABILITY-AND-EQUITY> 265,737
<SALES> 0
<TOTAL-REVENUES> 136,204
<CGS> 0
<TOTAL-COSTS> 81,560
<OTHER-EXPENSES> 40,332
<LOSS-PROVISION> 1,278
<INTEREST-EXPENSE> 4,167
<INCOME-PRETAX> 10,411
<INCOME-TAX> 5,266
<INCOME-CONTINUING> 5,145
<DISCONTINUED> 64
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<EPS-BASIC> 0.35
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