UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2004
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES 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 ofincorporation or organization)
(I.R.S. Employer Identification No.)
25 Greens Hill Lane, Rutland, Vermont
05701
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (802) 775-0325
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act) Yes ý No o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 30, 2004:
Class A Common Stock
23,729,388
Class B Common Stock
988,200
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
April 30,
October 31,
ASSETS
2004
CURRENT ASSETS:
Cash and cash equivalents
$
8,007
4,772
Restricted cash
12,419
12,475
Accounts receivable—trade, net of allowance for doubtful accounts of $583 and $718
49,462
54,382
Notes receivable—officers/employees
1,105
1,005
Refundable income taxes
623
––
Prepaid expenses
4,164
5,717
Inventory
1,848
2,045
Deferred income taxes
4,328
5,501
Other current assets
854
968
Total current assets
82,810
86,865
Property, plant and equipment, net of accumulated depreciation and amortization of $268,019 and $299,302
372,038
402,437
Goodwill
157,230
159,370
Intangible assets, net
3,578
3,245
5,631
104
Investments in unconsolidated entities
37,914
37,590
Net assets under contractual obligation
2,148
1,489
Other non-current assets
14,928
15,191
593,467
619,426
676,277
706,291
The accompanying notes are an integral part of these consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except for share and per share data)
LIABILITIES AND STOCKHOLDERS ‘ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt
5,542
4,527
Current maturities of capital lease obligations
602
695
Accounts payable
40,034
40,127
Accrued payroll and related expenses
7,425
6,184
Accrued interest
6,024
5,805
Accrued capping, closure and post-closure costs, current portion
2,471
5,576
Other accrued liabilities
25,273
27,737
Total current liabilities
87,371
90,651
Long-term debt, less current maturities
349,163
372,013
Capital lease obligations, less current maturities
1,367
1,797
Accrued capping, closure and post-closure costs, less current maturities
22,752
20,393
Other long-term liabilities
18,493
17,588
COMMITMENTS AND CONTINGENCIES
Series A redeemable, convertible preferred stock, 55,750 and 53,750 shares authorized, issued and outstanding as of April 30, 2004 and October 31, 2004, respectively, liquidation preference of $1,000 per share plus accrued but unpaid dividends
67,076
66,297
STOCKHOLDERS’ EQUITY:
Class A common stock -
Authorized - 100,000,000 shares, $0.01 par value; issued and outstanding - 23,496,000 and 23,707,000 shares as of April 30, 2004 and October 31, 2004, respectively
235
237
Class B Common Stock -
Authorized - 1,000,000 shares, $0.01 par value, 10 votes per share, issued and outstanding - 988,000 shares
10
Accumulated other comprehensive income
408
441
Additional paid-in capital
272,993
274,218
Accumulated deficit
(143,591
)
(137,354
Total stockholders’ equity
130,055
137,552
3
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months EndedOctober 31,
Six Months EndedOctober 31,
2003
Revenues
111,548
126,381
224,996
250,053
Operating expenses:
Cost of operations
71,641
79,385
145,647
157,663
General and administration
14,786
16,370
29,157
31,885
Depreciation and amortization
14,952
17,575
29,704
34,798
Deferred costs
295
101,379
113,625
204,508
224,641
Operating income
10,169
12,756
20,488
25,412
Other expense/(income), net:
Interest income
(87
(112
(139
(170
Interest expense
6,020
7,352
12,258
14,497
Income from equity method investments
(863
(994
(898
(927
Other expense/(income)
(221
220
(380
751
Other expense, net
4,849
6,466
10,841
14,151
Income from continuing operations before income taxes, discontinued operations and cumulative effect of change in accounting principle
5,320
6,290
9,647
11,261
Provision (benefit) for income taxes
(384
2,805
478
5,014
Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle
5,704
3,485
9,169
6,247
Discontinued Operations:
Income (loss) from discontinued operations (net of income tax (provision) benefit of $5, ($40), $0 and ($96))
(10
59
(4
140
Loss on disposal of discontinued operations (net of income taxes of $645)
(150
Cumulative effect of change in accounting principle (net of income taxes of $1,856)
2,723
Net income
5,694
3,394
11,888
6,237
Preferred stock dividend
808
832
1,606
1,670
Net income available to common stockholders
4,886
2,562
10,282
4,567
4
Earnings Per Share:
Basic:
Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle available to common stockholders
0.20
0.11
0.32
0.19
Income (loss) from discontinued operations, net
0.01
Loss on disposal of discontinued operations, net
(0.01
Cumulative effect of change in accounting principle, net
Net income per common share available to common stockholders
0.10
0.43
Basic weighted average common shares outstanding
23,933
24,614
23,848
24,553
Diluted:
0.31
0.18
0.42
Diluted weighted average common shares outstanding
29,159
25,003
24,252
25,040
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities:
Adjustments to reconcile net income to net cash provided by operating activities
Depletion of landfill operating lease obligations
2,588
Loss on disposal of discontinued operations
150
(2,723
Loss (gain) on sale of equipment
(189
113
296
3,701
Changes in assets and liabilities, net of effects of acquisitions and divestitures
Accounts receivable
(6,001
(5,112
(2,193
93
Other assets and liabilities
(6,864
(6,090
11,132
29,609
Net Cash Provided by Operating Activities
23,020
35,846
Cash Flows from Investing Activities:
Acquisitions, net of cash acquired
(6,098
(5,040
Additions to property, plant and equipment
(28,683
(42,433
Payments on landfill operating lease contracts
(17,326
Proceeds from divestitures
3,050
Proceeds from sale of equipment
279
887
Advances to unconsolidated entities
(1,348
Proceeds from assets under contractual obligation
354
659
Net Cash Used In Investing Activities
(35,496
(60,203
Cash Flows from Financing Activities:
Proceeds from long-term borrowings
60,950
83,950
Principal payments on long-term debt
(62,569
(63,052
Proceeds from exercise of stock options
2,037
224
Net Cash Provided by Financing Activities
418
21,122
Net decrease in cash and cash equivalents
(12,058
(3,235
Cash and cash equivalents, beginning of period
15,652
Cash and cash equivalents, end of period
3,594
6
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for—
Interest
11,834
13,940
Income taxes, net of refunds
568
709
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
Summary of entities acquired in purchase business combinations—
Fair value of assets acquired
6,284
5,698
Cash paid, net
Liabilities assumed and notes payable to seller
186
658
7
(In thousands, except for per share data)
1. ORGANIZATION
The consolidated balance sheets of Casella Waste Systems, Inc. (the "Parent") and Subsidiaries (the “Company”) as of April 30, 2004 and October 31, 2004, the consolidated statements of operations for the three and six months ended October 31, 2003 and 2004 and the consolidated statements of cash flows for the six months ended October 31, 2003 and 2004 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 the financial position, results of operations, and cash flows for the periods presented. 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, 2004. These were included as part of the Company’s Annual Report on Form 10-K for the year ended April 30, 2004 (the “Annual Report”). The results for the three and six months ended October 31, 2004 may not be indicative of the results that may be expected for the fiscal year ending April 30, 2005.
2. RECLASSIFICATIONS
The Company divested the assets of Data Destruction Services, Inc. (Data Destruction) during the quarter ended October 31, 2004. The transaction required discontinued operations treatment under SFAS No. 144, therefore the operating results of Data Destruction have been reclassified from continuing to discontinued operations for the three and six months ended October 31, 2003.
3. BUSINESS COMBINATIONS
During the six months ended October 31, 2004, the Company acquired six solid waste hauling operations in transactions accounted for as purchases. These transactions were in exchange for consideration of $5,540 in cash and other consideration to the sellers. The Company completed four such acquisitions during the six months ended October 31, 2003. The operating results of these businesses are included in the consolidated statements of operations from the dates of acquisition. The purchase prices have been allocated to the net assets acquired based on their fair values at the dates of acquisition with the residual amounts allocated to goodwill. Management does not believe the final purchase price allocation will produce materially different results than reflected herein.
The following unaudited pro forma combined information shows the results of the Company’s operations as though each of the acquisitions made in the six months ended October 31, 2003 and 2004 had been completed as of May 1, 2003.
8
Revenue
112,898
126,594
227,976
250,825
5,846
3,507
9,485
6,325
5,836
3,416
12,204
6,315
Diluted net income per common share
0.44
The foregoing 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, 2003 or the results of future operations of the Company. Furthermore, such 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.
4. GOODWILL AND INTANGIBLE ASSETS
The following table shows the activity and balances related to goodwill from April 30, 2004 through October 31, 2004:
Balance , April 30, 2004
Acquisitions
3,962
Divestitures
(1,822
Balance, October 31, 2004
Intangible assets at April 30, 2004 and October 31, 2004 consist of the following:
Covenants not to compete
Customer lists
Total
April 30, 2004
Intangible assets
16,402
688
17,090
Less accumulated amortization
(12,995
(517
(13,512
3,407
171
October 31, 2004
16,759
17,447
(13,640
(562
(14,202
3,119
126
Amortization expense for the three and six months ended October 31, 2004 was $385 and $786. The intangible amortization expense estimated as of October 31, 2004, for the five years following 2004 is as follows:
2005
2006
2007
2008
2009
1,490
1,176
633
361
178
5. ADOPTION OF NEW ACCOUNTING STANDARDS
FASB Interpretation No. 46 (Revised), Consolidation of Variable Interest Entities, an Interpretation of APB No. 51 was issued by the FASB in December 2003. In January 2003, the FASB issued FIN 46, which requires variable interest entities to be consolidated by their primary beneficiaries. A primary beneficiary is the party that absorbs a majority of the entity’s expected losses or receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. In December 2003, the FASB revised FIN 46 to provide companies with clarification of key terms, additional exemptions for application and an extended initial application period. FIN 46 is currently effective for all variable interest entities created or modified after January 31, 2003 and special purpose entities created on or before January 31, 2003. The FASB’s December 2003 revision to FIN 46 makes the Interpretation effective for all other variable interest entities beginning March 31, 2004. The adoption of FIN 46 had no impact on the Company’s consolidated financial statements.
SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity was issued by the FASB in May 2003. The statement changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The new statement requires that those instruments be classified as liabilities in statements of financial position. SFAS No. 150 is effective for all financial instruments entered into or modified after June 14, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We adopted SFAS No. 150 effective August 1, 2003. In November 2003, a FASB Staff Position was issued delaying the effective date for certain instruments and entities. SFAS No. 150 had no impact on the Company’s consolidated financial statements.
6. LEGAL PROCEEDINGS
In the normal course of its business and as a result of the extensive governmental regulation of the waste industry, the Company may periodically become subject to various judicial and administrative proceedings involving Federal, state or local agencies. In these proceedings, an agency may seek to impose fines on the Company or to revoke, or to deny renewal of, an operating permit held by the Company. In addition, the Company may become party to various claims and suits 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.
9
During the period of November 21, 1996 to October 9, 1997, the Company performed certain closure activities and installed a cut-off wall at the Clinton County landfill, located in Clinton County, New York. On or about April 1999, the New York State Department of Labor alleged that the Company should have paid prevailing wages in connection with the labor associated with such activities. The Company has disputed the allegations and a hearing on the liability issue was held on September 16, 2002. In November 2002, both sides submitted proposed findings of fact and conclusions of law. On May 12, 2004, the Commissioner of Labor issued an order finding that the closure activities and the cut-off wall project were “public works” projects that were subject to prevailing wage requirements. On June 10, 2004 the Company filed a Judicial challenge to the Commissioner’s decision, which has been stayed for a 9-month period during which time the Company will continue to explore settlement possibilities with the State in lieu of a hearing on damages, which is not yet scheduled. Although a loss as a result of these claims is probable, the Company cannot estimate a range of probable losses at this time. A charge incurred by the Company related to these claims will not have an immediate impact on operations but will be capitalized as part of the related landfill asset and amortized over the life of the landfill as tons are placed at the site.
The Company is a defendant in certain other lawsuits alleging various claims, none of which, either individually or in the aggregate, the Company believes are material to its financial condition, results of operations or cash flows.
7. ENVIRONMENTAL LIABILITIES
The Company is subject to liability for any environmental damage, including personal injury and property damage, that its solid waste, recycling and power generation facilities may cause to neighboring property owners, particularly as a result of the contamination of drinking water sources or soil, possibly including damage resulting from conditions existing before the Company acquired the facilities. The Company may also be subject to liability for similar claims arising from off-site environmental contamination caused by pollutants or hazardous substances if the Company or its predecessors arrange to transport, treat or dispose of those materials. Any substantial liability incurred by the Company arising from environmental damage could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company is not presently aware of any situations that it expects would have a material adverse impact on the results of operations or financial condition.
8. EARNINGS PER SHARE
The following table sets forth the numerator and denominator used in the computation of earnings per share:
Numerator:
Less: Preferred stock dividends
(808
(832
(1,606
(1,670
Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle available to common stockholders—Basic
4,896
2,653
7,563
4,577
Plus: Preferred stock dividends
—
Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle available to common stockholders—Diluted
Denominator:
Number of shares outstanding, end of period:
Class A common stock
23,032
23,707
Class B common stock
988
Effect of weighted average shares outstanding during period
(81
(172
(142
Weighted average number of common shares used in basic EPS
Impact of potentially dilutive securities:
Dilutive effect of options, convertible preferred stock and contingent stock
5,226
389
404
487
Weighted average number of common shares used in diluted EPS
For the three and six months ended October 31, 2003, 2,065 and 7,070 common stock equivalents related to options and redeemable convertible preferred stock, respectively, were excluded from the calculation of dilutive shares since the inclusion of such shares would be anti-dilutive.
For the three and six months ended October 31, 2004, 6,951 and 6,456 common stock equivalents related to options and redeemable convertible preferred stock, respectively, were excluded from the calculation of dilutive shares since the inclusion of such shares would be anti-dilutive.
9. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in net assets of a business enterprise during a period from transactions generated from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Accumulated other comprehensive income included in the accompanying balance sheets consists of changes in the fair value of the Company’s interest rate swap and commodity hedge agreements as well as the cumulative effect of the change in accounting principle due to the adoption of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. Comprehensive income for the three and six months ended October 31, 2003 and 2004 is as follows:
Other comprehensive income (loss)
274
(76
465
33
Comprehensive income
5,968
3,318
12,353
6,270
The components of other comprehensive income for the three and six months ended October 31, 2003 and
11
2004 are shown as follows:
Three Months Ended
October 31, 2003
Tax
Net of
Gross
effect
Change in fair value of interest rate swaps and commodity hedges during period
460
(130
(54
Six Months Ended
782
317
57
24
10. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company’s strategy to hedge against fluctuations in the commodity prices of recycled paper is to enter into hedges to mitigate the variability in cash flows generated from the sales of recycled paper at floating prices, resulting in a fixed price being received from these sales. The Company is party to twenty-five commodity hedge contracts as of October 31, 2004. These contracts expire between April 2005 and October 2006. The Company has evaluated these hedges and believes that these instruments qualify for hedge accounting pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. As of October 31, 2004 the fair value of these hedges was an obligation of $1,331, with the net amount (net of taxes of $526) recorded as an unrealized loss in accumulated other comprehensive income.
The Company is party to two interest swap agreements as of October 31, 2004 for an aggregate notional amount of $53,000 expiring in February 2006. The Company has evaluated these swaps and believes these instruments qualify for hedge accounting pursuant to SFAS No. 133. As of October 31, 2004, the fair value of these swaps was $97, with the net amount (net of taxes of $37) recorded as an unrealized gain in other comprehensive income. The estimated net amount of the existing gains as of October 31, 2004 included in accumulated other comprehensive income expected to be reclassified into earnings as payments are either made or received under the terms of the interest rate swaps within the next 12 months is approximately $73. The actual amounts reclassified into earnings are dependent on future movements in interest rates.
11. STOCK BASED COMPENSATION PLANS
The Company has elected to account for its stock-based compensation plans under APB Opinion No. 25, Accounting for Stock Issued to Employees, for which no compensation expense is recorded in the statements of operations for the estimated fair value of stock options issued with an exercise price equal to the fair value of the underlying common stock on the grant date.
During fiscal 1996, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation, which defines a fair value based method of accounting for stock-based employee compensation and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation costs for those plans using the intrinsic method of accounting prescribed by APB Opinion No. 25. Entities electing to remain with the accounting in APB Opinion No. 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in SFAS No. 123 had been applied. In addition, the Company has adopted the disclosure requirements of SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure.
12
In accordance with SFAS No. 123 and SFAS No. 148, the Company has computed, for pro forma disclosure purposes, the value as of the grant date of all options granted using the Black-Scholes option pricing model as prescribed by SFAS No. 123, using the following weighted average assumptions for grants in the six months ended October 31, 2003 and 2004.
Six Months EndedOctober 31, 2003
Six Months EndedOctober 31, 2004
Risk free interest rate
2.34 - 3.23%
3.39 - 3.97%
Expected dividend yield
N/A
Expected life
5 Years
Expected volatility
45.88%
The total value of options granted would be amortized on a pro forma basis over the vesting period of the options. Options generally vest over a one to three year period. If the Company had accounted for these plans in accordance with SFAS No. 123, the Company’s net income and net income per share would have changed as reflected in the following pro forma amounts:
Net income available to common stockholders, as reported
Deduct: Total stock-based compensation expense determined under fair value based method, net of income taxes
443
461
574
837
Net income available to common stockholders , pro forma
4,443
2,101
9,708
3,730
Basic income per common share:
As reported
Pro forma
0.09
0.41
0.15
Diluted income per common share:
0.08
0.40
12. SEGMENT REPORTING
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments in financial statements. In general, SFAS No. 131 requires that business entities report selected information about operating segments in a manner consistent with that used for internal management reporting.
The Company classifies its operations into Eastern, Central, Western and FCR Recycling. The Company’s revenues in the Eastern, Central and Western segments are derived mainly from one industry segment, which includes the collection, transfer, recycling and disposal of non-hazardous solid waste. The Eastern Region also includes Maine Energy, which generates electricity from non-hazardous solid waste. The Company’s revenues in the FCR Recycling segment are derived from integrated waste handling services, including processing and recycling of wood, paper, metals, aluminum, plastics and glass and brokerage of recycled materials. In June 2003 the Company transferred its domestic brokerage operation and a commercial recycling business to former employees who had managed those businesses. Included in Other are ancillary operations, mainly major customer accounts and earnings from equity method investees.
13
Eastern
Central
Western
Region
Recycling
Other
Three Months Ended October 31, 2003
Outside Revenues
43,856
26,878
18,822
17,549
Inter-segment Revenues
13,333
13,149
4,233
114
(1,152
5,504
451
663
Total Assets
242,037
115,131
111,542
65,956
72,571
Eliminations
(30,829
5,703
607,237
Three Months Ended October 31, 2004
48,404
29,143
24,703
20,246
3,885
14,200
14,423
5,411
120
(3,648
5,847
1,733
2,650
(3,097
308,701
122,213
146,976
55,112
73,289
(34,154
14
Six Months Ended October 31, 2003
87,513
52,847
39,427
36,598
8,611
26,565
25,700
7,603
902
2,394
(2,521
10,946
1,432
955
(1,643
(63,164
Six Months Ended October 31, 2004
95,700
57,835
48,682
39,845
7,991
29,522
28,659
10,871
258
(7,883
12,199
3,664
4,685
(6,418
(69,310
15
Amounts of the Company’s total revenue attributable to services provided are as follows:
Collection
55,286
58,765
110,838
117,287
Landfill/disposal facilities
22,091
35,376
42,525
Transfer
14,413
14,911
28,660
29,675
24,300
30,614
46,827
60,566
Brokerage
3,295
Total revenues
13. NET ASSETS UNDER CONTRACTUAL OBLIGATION
Effective June 30, 2003, the Company transferred its domestic brokerage operations as well as a commercial recycling business to former employees who had been responsible for managing those businesses. Consideration for the transaction was in the form of two notes receivable amounting up to $6,925. These notes are payable within twelve years of the anniversary date of the transaction to the extent of free cash flow generated from the operations.
The Company has not accounted for this transaction as a sale based on an assessment that the risks and other incidents of ownership have not sufficiently transferred to the buyer. The net assets of the operations are disclosed in the balance sheet as “net assets under contractual obligation”, and are being reduced as payments are made.
Net assets under contractual obligations amounted to $2,148 and $1,489 at April 30, 2004 and October 31, 2004, respectively.
14. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company’s senior subordinated notes due 2013 are guaranteed jointly and severally, fully and unconditionally by the Company’s significant wholly-owned subsidiaries. The Parent is the issuer and non-guarantor of the senior subordinated notes. The information which follows presents the condensed consolidating financial position as of April 30, 2004 and October 31, 2004, and the condensed consolidating results of operations for the three and six months ended October 31, 2003 and 2004 and the condensed consolidating statements of cash flows for the six months ended October 31, 2003 and 2004 of (a) the parent company only (“the Parent”), (b) the combined guarantors (“the Guarantors”), each of which is 100% wholly-owned by the Parent, (c) the combined non-guarantors (“the Non-Guarantors”), (d) eliminating entries and (e) the Company on a consolidated basis.
16
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF APRIL 30, 2004
(In thousands)
Parent
Guarantors
Non-Guarantors
Elimination
Consolidated
1,794
5,815
398
Accounts receivable—trade, net of allowance for doubtful accounts
83
48,096
1,283
1,504
3,457
(797
5,436
2,494
13,247
21,177
8,817
59,862
Property, plant and equipment, net of accumulated depreciation and amortization
2,764
367,589
1,685
Investment in subsidiaries
(35,115
35,115
13,105
29,188
(4,379
Assets under contractual obligation
11,849
6,537
18,506
(1,766
562,692
1,805
30,736
Intercompany receivable
559,165
(561,476
(2,069
4,380
566,216
61,078
14,664
34,319
Non - Guarantors
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current maturities of long term debt
1,500
1,942
2,100
1,780
37,516
738
6,022
Accrued closure and post-closure costs, current portion
1,928
543
Other current liabilities
4,787
18,354
10,956
33,300
14,089
59,742
14,337
347,957
1,206
Accrued closure and post closure costs, less current portion
21,453
1,299
7,039
10,040
1,414
Series A redeemable, convertible preferred stock, 55,750 shares authorized, issued and outstanding, liquidation preference of $1,000 per share plus accrued but unpaid dividends
Class A common stock—
Authorized—100,000,000 shares, $0.01 par value; issued and outstanding—23,496,000 shares
101
100
(201
Class B common stock—
Authorized—1,000,000 shares, $0.01 par value, 10 votes per share, issued and outstanding—988,000 shares
1,933
(1,933
48,270
2,595
(50,865
(83,034
(5,081
88,115
(32,730
(2,386
35,116
17
AS OF OCTOBER 31, 2004
(1,446
5,865
353
2,181
4,342
6,523
Deferred taxes
4,582
919
1,469
54,618
13,982
70,069
6,786
64,825
15,254
2,815
399,922
(300
(23,342
23,342
24,444
35,945
56,130
3,917
596,726
(180
18,963
587,324
(589,659
(2,044
4,379
598,027
71,892
13,030
Non -Guarantors
5,020
556
15,721
55,296
14,058
85,075
60,316
14,614
371,113
900
305
1,492
28,062
2,880
37,981
Series A redeemable, convertible preferred stock, 53,750 shares authorized, issued and outstanding, liquidation preference of $1,000 per share plus accrued but unpaid dividends
Authorized—100,000,000 shares, $0.01 par value; issued and outstanding—23,707,000 shares
1,187
(1,187
48,038
2,651
(50,689
(68,204
(7,215
75,419
(18,878
(4,464
18
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 2003
109,338
4,478
(2,268
70,319
3,584
325
14,090
371
12,787
1,687
809
97,196
5,642
Operating income (loss)
(809
12,142
(1,164
(5,958
(340
(23
6,234
6,131
6,080
43
(6,234
(Income) loss from equity method investments
(6,275
6,275
Other income
(6
(190
(25
Other expense/(income), net
(6,108
4,687
(5
Income (loss) from continuing operations before discontinued operations and income taxes
5,299
7,455
(1,159
(Benefit) provision for income taxes
(395
Income (loss) from continuing operations before discontinued operations
(1,170
Loss from discontinued operations, net
Net income (loss)
7,445
Net income (loss) available to common stockholders
19
THREE MONTHS ENDED OCTOBER 31, 2004
125,619
(3,402
(195
80,007
2,975
207
15,872
291
415
15,203
1,957
Impairment charge
427
111,377
5,223
(427
14,242
(1,059
(7,247
(92
7,227
463
14,080
36
(7,227
(7,099
7,099
Other expense, net:
38
181
1
(6,598
(55
Income (loss) from continuing operations before income taxes and discontinued operations
6,171
8,222
(1,004
Provision for income taxes
2,777
28
(1,032
Discontinued operations:
Income from discontinued operations, net
8,131
20
SIX MONTHS ENDED OCTOBER 31, 2003
221,043
8,701
(4,748
210
143,786
6,399
28,382
927
25,600
3,177
1,344
197,768
10,144
(1,344
23,275
(1,443
(11,885
(677
(48
12,471
12,468
12,149
112
(12,471
(14,263
14,263
(12
(314
(13,692
10,260
Income (loss) from continuing operations before income taxes, discontinued operations and cumulative effect of change in accounting principle
12,348
13,015
(1,453
Income (loss) from continuing operations before discontinued operations operations and cumulative effect of change in accounting principle
(1,471
2,518
205
15,529
(1,266
21
SIX MONTHS ENDED OCTOBER 31, 2004
248,260
8,038
(6,245
(98
158,112
5,894
34
31,306
545
856
30,189
3,753
792
219,902
10,192
(792
28,358
(2,154
(14,245
(131
14,210
836
27,797
74
(14,210
(12,900
12,900
64
689
(2
(12,004
13,314
(59
11,212
15,044
(2,095
4,975
39
(2,134
15,034
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(1,579
22,884
1,715
(504
(26,952
(1,227
(715
(1,852
(32,417
(61,480
(463
(626
Intercompany borrowings
(8,773
9,142
(369
(7,266
8,679
(995
(10,697
(854
(507
12,188
2,686
778
1,491
1,832
271
22
S IX MONTHS ENDED OCTOBER 31, 2004
(124
33,686
2,128
35,690
(907
(39,758
(1,768
1,546
(57,528
(60,833
(1,564
(655
380
(31,717
31,467
250
(8,220
29,903
(405
21,278
(9,251
6,061
(45
7,805
(196
23
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Casella Waste Systems, Inc. and Subsidiaries (the “Company”) is a vertically integrated regional solid waste services company that provides collection, transfer, disposal and recycling services to residential, industrial and commercial customers, primarily throughout the eastern region of the United States. As of November 30, 2004, the Company owned and/or operated eight Subtitle D landfills, two landfills permitted to accept construction and demolition materials, 38 solid waste collection operations, 34 transfer stations, 38 recycling facilities and one waste-to-energy facility, as well as a 50% interest in a joint venture that manufactures, markets and sells cellulose insulation made from recycled fiber.
The Company’s revenues increased from $111.5 million for the quarter ended October 31, 2003 to $126.4 million for the quarter ended October 31, 2004. From May 1, 2003 through April 30, 2004, the Company acquired eleven solid waste collection, transfer, disposal and recycling operations. Between May 1, 2004 and October 31, 2004 the Company acquired six solid waste collection, transfer, disposal and recycling operations. Under the rules of purchase accounting, the acquired companies’ revenues and results of operations have been included from the date of acquisition and affect the period-to-period comparisons of the Company’s historical results of operations. Effective September 30, 2002, the Company transferred our export brokerage operations to former employees, who had been responsible for managing that business. The domestic brokerage operations, and a recycling business, constituting the remainder of the Company’s brokerage revenues, were transferred effective June 30, 2003 to the employees of that unit. Due to the structure of these transactions, the transfers were not initially recorded as a sale. Effective April 1, 2004, the Company completed the sale of the export brokerage operations for total consideration of approximately $5.0 million. The gain on the sale amounted to approximately $1.1 million. For the six months ended October 31, 2003, the transferred domestic brokerage and recycling businesses accounted for $3.3 million of the Company’s revenues.
This Form 10-Q and other reports, proxy statements, and other communications to stockholders, as well as oral statements by the Company’s officers or its agents, may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act, with respect to, among other things, the Company’s future revenues, operating income, or earnings per share. Without limiting the foregoing, any statements contained in this Form 10-Q 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 important factors of which the Company is aware that may cause the Company’s actual results to vary materially from those forecasted or projected in any such forward-looking statement, certain of which are beyond the Company’s control. These factors include, without limitation, those outlined below in the section entitled “Certain Factors That May Affect Future Results”. The Company’s failure to successfully address any of these factors could have a material adverse effect on the Company’s results of operations.
The Company’s revenues in the Eastern, Central and Western regions are primarily attributable to fees charged to customers for solid waste disposal and collection, landfill, waste-to-energy, transfer and recycling
services. The Company derives a substantial portion of its collection revenues from commercial, industrial and municipal services that are generally performed under service agreements or pursuant to contracts with municipalities. The majority of residential collection services are performed on a subscription basis with individual households. Landfill, waste-to-energy facility and transfer customers are charged a tipping fee on a per ton basis for disposing of their solid waste at disposal facilities and transfer stations. The majority of the Company’s disposal and transfer customers are under one to ten year disposal contracts, with most having clauses for annual cost of living increases. Recycling revenues, which are included in FCR Recycling and in the Eastern, Central and Western regions, consist of revenues from the sale of recyclable commodities and providing services under operations and maintenance contracts of recycling facilities for municipal customers. FCR Recycling revenues included revenues from commercial brokerage and recycling operations through June 30, 2003, when those operations were sold.
In “Other”, the Company has ancillary revenues including major customer accounts and earnings from equity method investees. The Company’s cellulose insulation business is conducted through a 50/50 joint venture with Louisiana-Pacific, and accordingly, the Company recognizes half of the joint venture’s net income on the equity method in our results of operations.
The Company’s revenues are shown net of inter-company eliminations. The Company typically establishes its inter-company transfer pricing based upon prevailing market rates. The table below shows, for the periods indicated, the percentage of our revenues attributable to services provided. For the six months ended October 31, 2003, the percentages of revenues shown below reflect revenues from the domestic brokerage and recycling operations through June 30, 2003. The domestic brokerage operation was transferred effective June 30, 2003 to the employees of that unit. Excluding the effect of brokerage revenues, collection and transfer revenues as a percentage of total revenue were lower in the quarter and six months ended October 31, 2004 compared to the prior year, despite an increase in the absolute dollar amounts, mainly because of the large increase in recycling revenue dollars. Net of brokerage revenues, landfill/disposal revenues as a percentage of total revenues increased in the quarter and six months ended October 31, 2004 due to the incremental volumes associated with recently acquired landfill facilities. The increase in the quarter and six months ended October 31, 2004 in recycling revenues as a percentage of total revenues is mainly due to higher commodity prices. The decrease in brokerage revenues as a percentage of revenues in the six months ended October, 31, 2004 is due to the transfer of the domestic brokerage business to employees of that unit.
49.6
%
46.5
49.3
46.9
15.7
17.5
17.0
12.9
11.8
12.7
11.9
21.8
24.2
20.8
0.0
1.5
100.0
Operating Expenses
Cost of operations includes labor, tipping fees paid to third party disposal facilities, fuel, maintenance and repair of vehicles and equipment, worker’s compensation and vehicle insurance, the cost of purchasing materials to be recycled, third party transportation expense, district and state taxes, host community fees and royalties. Cost of operations also includes accretion expense related to landfill capping, closure and post closure, leachate treatment and disposal costs and depletion of landfill operating lease obligations.
25
General and administration expenses include management, clerical and administrative compensation and overhead, professional services and costs associated with marketing, sales force and community relations efforts.
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 intangible assets (other than goodwill) using the straight-line method. Effective May 1, 2003, the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations. Under SFAS No. 143, except for accretion expense, the Company no longer accrues for landfill retirement obligations through a charge to cost of operations, but rather as an increase to landfill assets which are amortized using a straight-line rate per ton as landfill airspace is utilized. 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, other than goodwill, to a zero net book value, and does not apply a salvage value to any fixed assets.
The Company capitalizes certain direct landfill development costs, such as engineering, permitting, legal, construction and other costs associated directly with the expansion of existing landfills. Additionally, the Company also capitalizes certain third party expenditures related to pending acquisitions, such as legal and engineering costs. The Company routinely evaluates all such capitalized costs, and expenses those costs related to projects not likely to be successful. Internal and indirect landfill development and acquisition costs, such as executive and corporate overhead, public relations and other corporate services, are expensed as incurred.
The Company will have material financial obligations relating to capping, closure and post-closure costs of our existing landfills and any disposal facilities which the Company may own or operate in the future. The Company has provided and will in the future provide accruals for these future financial obligations based on engineering estimates of consumption of permitted landfill airspace over the useful life of any such landfill. There can be no assurance that our financial obligations for capping, closure or post-closure costs will not exceed the amount accrued and reserved or amounts otherwise receivable pursuant to trust funds.
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.
64.2
62.8
64.7
63.1
13.3
13.0
12.8
13.4
13.9
13.2
0.2
0.1
9.1
10.1
Interest expense, net
5.3
5.7
5.4
(0.8
(0.4
(0.2
0.3
(0.3
2.2
2.0
5.1
2.8
4.1
2.5
26
Three Months Ended October 31, 2004 versus October 31, 2003
Revenues. Revenues increased $14.9 million, or 13.4% to $126.4 million in the quarter ended October 31, 2004 from $111.5 million in the quarter ended October 31, 2003. The revenue increase in the quarter is attributable to an increase in solid waste revenues of $4.2 million, due primarily to volume increases, and higher recycling prices which resulted in an increase in recycling revenues of $2.3 million. Revenues from the rollover effect of acquired businesses accounted for $8.4 million in the quarter.
Cost of operations. Cost of operations increased $7.8 million or 10.9% to $79.4 million in the quarter ended October 31, 2004 from $71.6 million in the quarter ended October 31, 2003. As a percentage of revenues, cost of operations decreased to 62.8% in the quarter ended October 31, 2004 compared to 64.2% in the prior year period. The dollar increase in cost of operations expenses is primarily due to the effect of acquired businesses and higher fuel costs.
General and administration. General and administration expenses increased $1.6 million, or 10.8% to $16.4 million in the quarter ended October 31, 2004 from $14.8 million in the quarter ended October 31, 2003, and decreased as a percentage of revenues to 13.0% in the quarter ended October 31, 2004 from 13.3% in the prior year comparable period. The dollar increase in general and administration expenses was due to higher bonus accruals, travel expenses, communications and training costs as well as expenses related to compliance with the Sarbanes Oxley Act.
Depreciation and amortization. Depreciation and amortization expense increased $2.6 million, or 17.3%, to $17.6 million in the quarter ended October 31, 2004 from $15.0 million in the quarter ended October 31, 2003. Depreciation expense was up $0.5 million between periods and landfill amortization expense increased $2.1 million which was primarily attributable to recently acquired landfill operations. Depreciation and amortization expense as a percentage of revenue increased to 13.9% in the quarter ended October 31, 2004 from 13.4% in the quarter ended October 31, 2003 which resulted mainly from the increase in landfill amortization expense.
Deferred costs. A charge of $0.3 million was recorded in the quarter to reflect the write-off of deferred development costs associated with unsuccessful negotiations to operate and develop a landfill located in McKean County, Pennsylvania.
Interest expense, net. Net interest expense increased $1.3 million, or 22.0% to $7.2 million in the quarter ended October 31, 2004 from $5.9 million in the quarter ended October 31, 2003. This increase is attributable to higher average debt balances due to higher capital expenditures and payments on landfill operating lease contracts as well as higher average interest rates in the current fiscal quarter compared to the prior year period. Net interest expense, as a percentage of revenues, increased to 5.7% in the quarter ended October 31, 2004 from 5.3% in the quarter ended October 31, 2003.
Income from equity method investments. Income of $1.0 million and $0.9 million for the quarters ended October 31, 2004 and 2003, respectively, was solely from our 50% joint venture interest in GreenFiber.
Other expense/(income), net. Other expense in the quarter ended October 31, 2004 was $0.2 million compared to other income of $0.2 million in the quarter ended October 31, 2003. Other expense in the quarter ended October 31, 2004 consisted of the cost of winding down the operations of the New Heights power plant, partially offset by gains on the sale of equipment. Other income in the quarter ended October 31, 2003 was mainly due to a gain on sale of equipment.
Provision (benefit) for income taxes. Provision for income taxes increased $3.2 million to $2.8 million for the quarter ended October 31, 2004 from a benefit of $0.4 million for the quarter ended October 31, 2003. The effective tax rate increased to 44.6% in the quarter ended October 31, 2004 from a credit of 7.2% in the quarter ended
27
October 31, 2003. The lower tax rate in the prior year comparable quarter was due to a decrease in the valuation allowance for loss carryforwards.
Income (loss) from discontinued operations/Loss on disposal of discontinued operations. In the second quarter, the Company completed the sale of the assets of Data Destruction for cash sale proceeds of $3.0 million. This shredding operation had been historically accounted for as a component of continuing operations up until its sale. The business’ historical income (loss) from operations results has been reclassified from continuing operations to discontinued operations for the quarters ended October 31, 2004 and 2003. Also in connection with the discontinued accounting treatment, the loss (net of tax) from the sale has been recorded and classified as a loss on disposal of discontinued operations.
Six Months Ended October 31, 2004 versus October 31, 2003
Revenues. Revenues increased $25.1 million, or 11.2% to $250.1 million in the six months ended October 31, 2004 from $225.0 million in the six months ended October 31, 2003. The revenue increase is attributable to an increase in solid waste revenues of $6.5 million, due primarily to volume increases, and higher recycling prices which resulted in an increase in recycling revenues of $5.9 million. Revenues from the rollover effect of acquired businesses accounted for $16.0 million, partially offset by the loss of revenues from businesses divested amounting to $3.3 million.
Cost of operations. Cost of operations increased $12.1 million or 8.3% to $157.7 million in the six months ended October 31, 2004 from $145.6 million in the six months ended October 31, 2003. Cost of operations as a percentage of revenues decreased to 63.1% in the six months ended October 31, 2004 from 64.7% in the prior year. The dollar increase in cost of operations expenses in the quarter is primarily due to the effect of acquired businesses and higher fuel costs.
General and administration. General and administration expenses increased $2.7 million, or 9.2% to $31.9 million in the six months ended October 31, 2004 from $29.2 million in the six months ended October 31, 2003, and decreased as a percentage of revenues to 12.8% in the six months ended October 31, 2004 from 13.0% in the six months ended October 31, 2003. The dollar increase in general and administration expenses was due to higher bonus accruals, travel expenses, communications and training costs as well as expenses related to compliance with the Sarbanes Oxley Act.
Depreciation and amortization. Depreciation and amortization expense increased $5.1 million, or 17.1%, to $34.8 million in the six months ended October 31, 2004 from $29.7 million in the six months ended October 31, 2003. While depreciation expense increased by $1.3 million between periods, landfill amortization expense increased by $3.8 million primarily due to recently acquired landfill operations. Depreciation and amortization expense as a percentage of revenue increased to 13.9% for the six months ended October 31, 2004 from 13.2% for the six months ended October 31, 2003 which resulted from the increase in landfill amortization expense.
Deferred costs. A charge of $0.3 million was recorded in the six months ended October 31, 2004 to reflect the write-off of deferred development costs associated with unsuccessful negotiations to operate and develop a landfill located in McKean County, Pennsylvania.
Interest expense, net. Net interest expense increased $2.2 million, or 18.2% to $14.3 million in the six months ended October 31, 2004 from $12.1 million in the six months ended October 31, 2003. This increase is attributable to higher average debt balances due to higher capital expenditures and payments on landfill operating lease contracts as well as higher average interest rates in the six months ended October 31, 2004 compared to the prior year period. Net interest expense, as a percentage of revenues, increased to 5.7% for the six months ended October 31, 2004 from 5.4% for the six months ended October 31, 2003.
Income from equity method investments. Income of $0.9 million for both the six month periods ended October 31, 2004 and 2003, was solely from our 50% joint venture interest in GreenFiber.
Other expense/(income), net. Other expense in the six months ended October 31, 2004 was $0.8 million compared to other income of $0.4 million in the six months ended October 31, 2003. Other expense in the six months ended October 31, 2004 consisted of the costs of winding down the operations of the New Heights power plant and a loss on retirement of fixed assets, partially offset by gains on the sale of equipment. Other income of $0.4 million in the six months ended October 31, 2003 consisted primarily of gains on sales of equipment.
Provision (benefit) for income taxes. Provision for income taxes increased $4.5 million in the six months ended October 31, 2004 to $5.0 million from $0.5 million in the six months ended October 31, 2003. The effective tax rate increased to 44.5% in the six months ended October 31, 2004 from 0.5% in the six months ended October 31, 2003 primarily due to a prior year decrease in the valuation for loss carryforwards of $3.9 million as utilization of the Company’s tax losses became more certain.
Income (loss) from discontinued operations/Loss on disposal of discontinued operations. In the second quarter, the Company completed the sale of the assets of Data Destruction for cash sale proceeds of $3.0 million. This shredding operation had been historically accounted for as a component of continuing operations up until its sale. The business’ historical income (loss) from operations has been reclassified from continuing operations to discontinued operations for the six months ended October 31, 2004 and 2003. Also in connection with the discontinued accounting treatment, the loss (net of tax) from the sale has been recorded and classified as a loss on disposal of discontinued operations.
Cumulative effect of change in accounting principle, net. Effective May 1, 2003, the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations. The primary modification to the Company’s methodology required by SFAS No. 143 is to require that capping, closure and post-closure costs be discounted to present value. Upon adoption of SFAS No. 143 the Company recorded a cumulative effect of change in accounting principle of $2.7 million (net of taxes of $1.9 million) in the six months ended October 31, 2003 in order to reflect the cumulative change in accounting for landfill obligations retroactive to the date of the inception of the respective landfills.
The Company’s business is capital intensive. The Company’s capital requirements include acquisitions, fixed asset purchases and capital expenditures for landfill development and cell construction, as well as site and cell closure. The Company had a net working capital deficit of $8.6 million at October 31, 2004 compared to a net working capital deficit of $12.6 million at April 30, 2004. Net working capital comprises current assets, excluding cash and cash equivalents, minus current liabilities. The main factor accounting for the working capital increase was a higher level of trade receivables.
The Company has a $323.5 million credit facility with a group of banks for which Bank of America, N.A. is acting as agent. This credit facility consists of a $175.0 million senior secured revolving credit facility and a senior secured term “B” loan, which had an outstanding balance of $148.5 million at October 31, 2004. The Company has the right to increase the amount of the revolver and/or the term loan by an aggregate amount of up to $50.0 million at the Company’s discretion, provided that the Company is not in default at the time of the increase, and subject to the receipt of commitments from lenders for such additional amount.
The term loan and revolving credit facility agreement contains covenants that may limit our activities, including covenants that restrict dividends and stock repurchases, limit capital expenditures, and set minimum net worth and profitability requirements and interest coverage and leverage ratios. As of October 31, 2004, the Company considered the profitability covenant, which requires our cumulative adjusted net
29
income for any two consecutive quarters to be positive, to be the most restrictive. As of October 31, 2004, the Company was in compliance with this covenant. Consolidated adjusted net income is defined by the credit facility agreement. In accordance with this definition, consolidated net income, determined in accordance with generally accepted accounting principles, is adjusted for elimination of certain nonrecurring charges, extraordinary gains, income from discontinued operations and non-cash income attributable to equity investments. On June 14, 2004, the Company amended the terms of the senior credit facility to clarify the definition of certain non-recurring charges excluded from the covenant calculations.
As of October 31, 2004, the Company had available borrowing capacity under our $175.0 million revolving credit facility of up to $120.7 million, subject to our ability to meet certain borrowing conditions. The available capacity of $120.7 million is net of outstanding irrevocable letters of credit of $30.9 million. This credit facility is secured by all of our assets, including our interest in the equity securities of our subsidiaries. The revolving credit facility matures in January 2008 and the term loan matures in January 2010.
As of October 31, 2004, the Company had outstanding $195.0 million of 9.75% senior subordinated notes (the ‘‘notes’’) which mature in January 2013. The senior subordinated note agreement contains covenants that restrict dividends, stock repurchases and other payments, and limits the incurrence of debt and issuance of preferred stock. The notes are guaranteed jointly and severally, fully and unconditionally by our significant wholly-owned subsidiaries.
Net cash provided by operating activities amounted to $35.8 million for the six months ended October 31, 2004 compared to $23.0 million for the same period of the prior fiscal year. The increase was mainly due to higher landfill amortization and depreciation expense, an increase in deferred income taxes and depletion of landfill operating lease obligations, as well as changes in the Company’s working capital.
Net cash used in investing activities was $60.2 million for the six months ended October 31, 2004 compared to $35.5 million used in investing activities in the same period of the prior fiscal year. The increase in cash used in investing activities was due to a higher level of capital expenditures and payments under landfill operating lease contracts.
Net cash provided by financing activities was $21.1 million for the six months ended October 31, 2004 compared to $0.4 million in the same period of the prior fiscal year. The increase in cash provided by financing activities is primarily due to higher net borrowings.
Inflation and Prevailing Economic Conditions
To date, inflation has not had a significant impact on the Company’s operations. Consistent with industry practice, most of the Company’s contracts provide for a pass-through of certain costs, including increases in landfill tipping fees and, in some cases, fuel costs. The Company therefore believes it should be able to implement price increases sufficient to offset most cost increases resulting from inflation. However, competitive factors may require the Company to absorb at least a portion of these cost increases, particularly during periods of high inflation.
The Company’s business is located mainly 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.
The following important factors, among others, could cause actual results to differ materially from those
30
indicated by forward-looking statements made in this Form 10-Q and presented elsewhere by management from time to time.
The Company’s increased leverage may restrict its future operations and impact its ability to make future acquisitions.
The Company’s indebtedness has substantially increased. The payment of interest and principal due under this indebtedness has reduced, and may continue to reduce, funds available for other business purposes, including capital expenditures and acquisitions. In addition, the aggregate amount of indebtedness has limited and may continue to limit the Company’s ability to incur additional indebtedness, and thereby may limit its acquisition program.
The Company may not be successful in making acquisitions of solid waste assets, including developing additional disposal capacity, or in integrating acquired businesses or assets, which could limit the Company’s future growth.
The Company’s strategy envisions that a substantial part of the Company’s future growth will come from making acquisitions of traditional solid waste assets or operations and acquiring or developing additional disposal capacity. These acquisitions may include ‘‘tuck-in’’ acquisitions within the Company’s existing markets, assets that are adjacent to or outside the Company’s existing markets, or larger, more strategic acquisitions. In addition, from time to time the Company may acquire businesses that are complementary to the Company’s core business strategy. The Company may not be able to identify suitable acquisition candidates. If the Company identifies suitable acquisition candidates, the Company may be unable to negotiate successfully their acquisition at a price or on terms and conditions favorable to the Company. Furthermore, the Company may be unable to obtain the necessary regulatory approval to complete potential acquisitions.
The Company’s ability to achieve the benefits the Company anticipates from acquisitions, including cost savings and operating efficiencies, depends in part on the Company’s ability to successfully integrate the operations of such acquired businesses with the Company’s operations. The integration of acquired businesses and other assets may require significant management time and company resources that would otherwise be available for the ongoing management of the Company’s existing operations.
In addition, the process of acquiring, developing and permitting additional disposal capacity is lengthy, expensive and uncertain. For example, the Company is currently involved in litigation with the Town of Bethlehem, New Hampshire relating to the expansion of a landfill owned by the Company’s wholly owned subsidiary, North Country Environmental Services, Inc. Moreover, the disposal capacity at the Company’s existing landfills is limited by the remaining available volume at the Company’s landfills and annual, quarterly and/or daily disposal limits imposed by the various governmental authorities with jurisdiction over the Company’s landfills. The Company typically reaches or approximates the Company’s daily, quarterly and annual maximum permitted disposal capacity at the majority of the Company’s landfills. If the Company is unable to develop or acquire additional disposal capacity, the Company’s ability to achieve economies from the internalization of the Company’s waste stream will be limited and the Company may be required to increase the Company’s utilization of disposal facilities owned by third parties, which could reduce the Company’s revenues and/or the Company’s operating margins. Although the Company has recently entered into several landfill operating lease contracts, there can be no assurance that any or all of these landfill management contracts will result in successful operations at the respective sites or that the landfill projects will receive all necessary permits. As an example, after the Company signed a Construction, Operation and Management Agreement with the Town of Templeton, Massachusetts for the development of the Templeton Landfill, the Town adopted by-laws prohibiting the acceptance of out-of-town waste.
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The Company’s ability to make acquisitions is dependent on the availability of adequate cash and the attractiveness of the Company’s stock price.
The Company anticipates that any future business acquisitions will be financed through cash from operations, borrowings under the Company’s senior secured credit facilities, the issuance of shares of the Company’s Class A common stock and/or seller financing. The Company may not have sufficient existing capital resources and may be unable to raise sufficient additional capital resources on terms satisfactory to the Company, if at all, in order to meet the Company’s capital requirements for such acquisitions.
The Company also believes that a significant factor in the Company’s ability to close acquisitions will be the attractiveness to the Company and to persons selling businesses to the Company of the Company’s 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 the Company’s Class A common stock compared to the equity securities of the Company’s competitors. The trading price of the Company’s Class A common stock on the NASDAQ National Market has limited the Company’s willingness to use the Company’s equity as consideration and the willingness of sellers to accept the Company’s shares and as a result has limited, and could continue to limit, the size and scope of the Company’s acquisition program.
Environmental regulations and litigation could subject the Company to fines, penalties, judgments and limitations on the Company’s ability to expand.
The Company is subject to potential liability and restrictions under environmental laws, including those relating to transport, recycling, treatment, storage and disposal of wastes, discharges to air and water, and the remediation of contaminated soil, surface water and groundwater. The waste management industry has been and will continue to be subject to regulation, including permitting and related financial assurance requirements, as well as to attempts to further regulate the industry through new legislation. The Company’s waste-to-energy facility is subject to regulations limiting discharges of pollution into the air and water, and the Company’s solid waste operations are subject to a wide range of federal, state and, in some cases, local environmental, odor and noise and land use restrictions. For example, the Company’s waste-to-energy facility in Biddeford, Maine is affected by zoning restrictions and air emissions limitations in its efforts to implement a new odor control system. If the Company is not able to comply with the requirements that apply to a particular facility or if the Company operates without necessary approvals, the Company could be subject to civil, and possibly criminal, fines and penalties, and the Company may be required to spend substantial capital to bring an operation into compliance or to temporarily or permanently discontinue, and/or take corrective actions, possibly including removal of landfilled materials, regarding an operation that is not permitted under the law. The Company may not have sufficient insurance coverage for the Company’s environmental liabilities. Those costs or actions could be significant to the Company and impact the Company’s results of operations, as well as the Company’s available capital.
Environmental and land use laws also impact the Company’s ability to expand and, in the case of the Company’s solid waste operations, may dictate those geographic areas from which the Company must, or, from which the Company may not, accept waste. Those laws and regulations may limit the overall size and daily waste volume that may be accepted by a solid waste operation. If the Company is not able to expand or otherwise operate one or more of the Company’s facilities because of limits imposed under environmental laws, the Company may be required to increase the Company’s utilization of disposal facilities owned by third parties, which could reduce the Company’s revenues and/or operating margins.
The Company has historically grown and intends to continue to grow through acquisitions, and the Company has tried and will continue to try to evaluate and address environmental risks and liabilities presented by newly acquired businesses as the Company has 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
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difficult or costly to address than the Company anticipates. It is also possible that government officials responsible for enforcing environmental laws may believe an issue is more serious than the Company would expect, or that the Company will fail to identify or fully appreciate an existing liability before the Company becomes legally responsible to address it. Some of the legal sanctions to which the Company could become subject could cause the Company to lose a needed permit, or prevent the Company from or delay the Company in obtaining or renewing permits to operate the Company’s facilities or harm the Company’s reputation.
The Company’s operating program depends on the Company’s ability to operate and expand the landfills the Company owns and leases and to develop new landfill sites. Localities where the Company operates generally seek to regulate some or all landfill operations, including siting and expansion of operations. The laws adopted by municipalities in which the Company’s landfills are located may limit or prohibit the expansion of the landfill as well as the amount of waste that the Company can accept at the landfill on a daily, quarterly or annual basis and any effort to acquire or expand landfills typically involves a significant amount of time and expense. For example, expansion at the Company’s North County Environmental Services landfill, outside the original 51 acres, will be prohibited as a result of a recent decision by the New Hampshire Supreme Court unless the Company prevails in certain remanded issues under zoning laws or the Town revises its local ordinance prohibiting expansions. In addition, operation of the Templeton landfill will require repeal of a town by-law prohibiting the acceptance of out-of-town waste. The Company may not be successful in obtaining new landfill sites or expanding the permitted capacity of any of the Company’s current landfills once their remaining disposal capacity has been consumed. If the Company is unable to develop additional disposal capacity, the Company’s ability to achieve economies from the internalization of the Company’s wastestream will be limited and the Company will be required to utilize the disposal facilities of the Company’s competitors.
In addition to the costs of complying with environmental laws and regulations, the Company incurs costs defending against environmental litigation brought by governmental agencies and private parties. The Company is, and also may be in the future, a defendant in lawsuits brought by parties alleging environmental damage, personal injury, and/or property damage.
The Company’s operations would be adversely affected if the Company does not have access to sufficient capital.
The Company’s ability to remain competitive and sustain the Company’s operations depends in part on cash flow from operations and the Company’s access to capital. The Company currently funds the Company’s cash needs primarily through cash from operations and borrowings under the Company’s senior secured credit facilities. However, the Company may require additional equity and/or debt financing for debt repayment obligations and to fund the Company’s growth and operations. In addition, if the Company undertakes more acquisitions or further expands the Company’s operations, the Company’s capital requirements may increase. The Company may not have access to the amount of capital that the Company requires from time to time, on favorable terms or at all.
The Company’s results of operations could continue to be affected by changing prices or market requirements for recyclable materials.
The Company’s results of operations have been and may continue to be affected by changing purchase or resale prices or market requirements for recyclable materials. The Company’s recycling business involves the purchase and sale of recyclable materials, some of which are priced on a commodity basis. The resale and purchase prices of, and market demand for, recyclable materials, particularly waste paper, plastic and ferrous and aluminum metals, can be volatile due to numerous factors beyond the Company’s control. Although the Company seeks to limit the Company’s exposure to fluctuating commodity prices through the use of hedging
agreements and long-term supply contracts with customers, these changes have in the past contributed, and may continue to contribute, to significant variability in the Company’s period-to-period results of operations.
The Company’s business is geographically concentrated and is therefore subject to regional economic downturns.
The Company’s operations and customers are principally located in the eastern United States. Therefore, the Company’s business, financial condition and results of operations are susceptible to regional economic downturns and other regional factors, including state regulations and budget constraints and severe weather conditions. In addition, as the Company expands in the Company’s existing markets, opportunities for growth within these regions will become more limited and the geographic concentration of the Company’s business will increase.
Maine Energy may be required to make a payment in connection with the payoff of certain obligations and limited partner loans earlier than the Company had anticipated and which may exceed the amount of the liability the Company recorded in connection with the KTI acquisition.
Under the terms of waste handling agreements among the Biddeford-Saco Waste Handling Committee, the cities of Biddeford and Saco, Maine, and the Company’s subsidiary Maine Energy, Maine Energy will be required, following the date on which the bonds that financed Maine Energy and certain limited partner loans to Maine Energy are paid in full, to pay a residual cancellation payment to the respective municipalities party to those agreements equal to a certain percentage of the fair market value of the equity of the partners in Maine Energy. In connection with the Company’s merger with KTI, the Company estimated the fair market value of Maine Energy as of the date the limited partner loans are anticipated to be paid in full, and recorded a liability equal to the applicable percentage of such amount. The Company’s estimate of the fair market value of Maine Energy may not prove to be accurate, and in the event the Company has underestimated the value of Maine Energy, the Company could be required to recognize unanticipated charges, in which case the Company’s operating results could be harmed.
In connection with these waste handling agreements, the cities of Biddeford and Saco have lawsuits pending in the State of Maine seeking the residual cancellation payments and alleging, among other things, the Company’s breach of the waste handling agreement for the Company’s failure to pay the residual cancellation payments in connection with the KTI merger, failure to pay off limited partner loans in accordance with the terms of the agreement and processing amounts of waste above contractual limits without issuance of proper notice. The complaint seeks damages for breach of contract and a court order requiring the Company to provide an accounting of all relevant transactions since May 3, 1996. The Company is currently engaged in settlement negotiations with the cities of Biddeford and Saco, however, at this stage it is impossible to predict whether a settlement will be reached. If the plaintiffs are successful in their claims against the Company and damages are awarded, the Company’s operating income in the period in which such a claim is paid would be impacted.
The Company may not be able to effectively compete in the highly competitive solid waste services industry.
The solid waste services industry is highly competitive, has undergone a period of rapid consolidation and requires substantial labor and capital resources. Some of the markets in which the Company competes 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 the Company’s competitors have significantly greater financial and other resources than the Company. 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 contract. These practices may either require the Company to reduce the pricing of the Company’s services or result in the Company’s loss of business.
As is generally the case in the industry, some municipal contracts are subject to periodic competitive bidding. The Company may not be the successful bidder to obtain or retain these contracts. If the Company is 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 the Company’s revenues would decrease and the Company’s operating results would be harmed.
In the Company’s solid waste disposal markets the Company also competes 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 the Company.
The Company’s GreenFiber insulation manufacturing joint venture with Louisiana-Pacific Corporation competes with other parties, principally national manufacturers of fiberglass insulation, which have substantially greater resources than GreenFiber does, which they could use for product development, marketing or other purposes to the Company’s detriment.
The Company’s results of operations and financial condition may be negatively affected if the Company inadequately accrues for capping, closure and post-closure costs.
The Company has material financial obligations relating to capping, closure and post-closure costs of the Company’s existing landfills and will have material financial obligations with respect to any disposal facilities which the Company may own or operate in the future. Once the permitted capacity of a particular landfill is reached and additional capacity is not authorized, the landfill must be closed and capped, and post-closure maintenance started. The Company establishes reserves for the estimated costs associated with such capping, closure and post-closure obligations over the anticipated useful life of each landfill on a per ton basis. In addition to the landfills the Company currently operates, the Company owns four unlined landfills, which are not currently in operation. The Company has provided and will in the future provide accruals for financial obligations relating to capping, closure and post-closure costs of the Company’s owned or operated landfills, generally for a term of 30 years after final closure of a landfill. The Company’s financial obligations for capping, closure or post-closure costs could exceed the amount accrued and reserved or amounts otherwise receivable pursuant to trust funds established for this purpose. Such a circumstance could result in significant unanticipated charges.
Fluctuations in fuel costs could affect the Company’s operating expenses and results.
The price and supply of fuel is unpredictable and fluctuates based on events beyond the Company’s control, including among others, geopolitical developments, supply and demand for oil and gas, actions by OPEC and other oil and gas producers, war and unrest in oil producing countries and regional production patterns. Because fuel is needed to run the Company’s fleet of trucks, price escalations for fuel increase the Company’s operating expenses. During fiscal 2004, the Company used approximately 6.8 million gallons of diesel fuel in the Company’s solid waste operations. Although many of the Company’s customer contracts permit the Company to pass on some or all fuel increases to the Company’s customers, the Company may choose not to do so for competitive reasons.
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The Company could be precluded from entering into contracts or obtaining permits if the Company is unable to obtain third party financial assurance to secure the Company’s contractual obligations.
Public solid waste collection, recycling and disposal 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 the Company’s contractual performance. If the Company is unable to obtain the necessary financial assurance in sufficient amounts or at acceptable rates, the Company could be precluded from entering into additional municipal solid waste collection contracts or from obtaining or retaining landfill management contracts or operating permits. Any future difficulty in obtaining insurance could also impair the Company’s ability to secure future contracts conditioned upon the contractor having adequate insurance coverage.
The Company may be required to write-off capitalized charges or intangible assets in the future, which could harm the Company’s earnings.
Any write-off of capitalized costs or intangible assets reduces the Company’s earnings and, consequently, could affect the market price of the Company’s Class A common stock. In accordance with generally accepted accounting principles, the Company capitalizes certain expenditures and advances relating to the Company’s acquisitions, pending acquisitions, landfills and development projects. From time to time in future periods, the Company 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 the Company estimates will be recoverable, through sale or otherwise, relating to (1) any operation that is permanently shut down or has not generated or is not expected to generate sufficient cash flow, (2) any pending acquisition that is not consummated, (3) any landfill or development project that is not expected to be successfully completed, and (4) any goodwill or other intangible assets that are determined to be impaired. The Company has incurred such charges in the past.
The Company’s revenues and the Company’s operating income experience seasonal fluctuations.
The Company’s transfer and disposal revenues have historically been lower during the months of November through March. This seasonality reflects the lower volume of waste during the late fall, winter and early spring months primarily because:
• the volume of waste relating to construction and demolition activities decreases substantially during the winter months in the northeastern United States; and
• decreased tourism in Vermont, Maine and eastern New York during the winter months tends to lower the volume of waste generated by commercial and restaurant customers, which is partially offset by increased volume from the winter ski industry.
The Company’s recycling business experiences increased volumes of newspaper in November and December due to increased newspaper advertising and retail activity during the holiday season. The Company’s cellulose insulation joint venture experiences lower sales in March and April due to lower retail activity.
Efforts by labor unions to organize the Company’s employees could divert management attention and increase the Company’s operating expenses.
Labor unions regularly make attempts to organize the Company’s employees, and these efforts will likely continue in the future. Certain groups of the Company’s employees have chosen to be represented by unions, and the Company has negotiated collective bargaining agreements with these groups. Additional groups of employees may seek union representation in the future, and the negotiation of collective bargaining agreements could divert management attention and result in increased operating expenses and lower net income. If the Company is unable to negotiate acceptable collective bargaining agreements, the Company might have to wait through ‘‘cooling off’’ periods, which are often followed by union-initiated work stoppages, including strikes. Depending on the type and duration of any labor disruptions, the Company’s
revenues could decrease and the Company’s operating expenses could increase, which could adversely affect the Company’s financial condition, results of operations and cash flows. As of November 30, 2004, approximately 4.4% of the Company’s employees involved in collection, transfer, disposal, recycling or other operations, including the Company’s employees at the Company’s Maine Energy waste-to-energy facility, were represented by unions.
The Company’s Class B common stock has ten votes per share and is held exclusively by John W. Casella and Douglas R. Casella.
The holders of the Company’s Class B common stock are entitled to ten votes per share and the holders of the Company’s Class A common stock are entitled to one vote per share. At November 30, 2004, an aggregate of 988,200 shares of the Company’s Class B common stock, representing 9,882,000 votes, were outstanding, all of which were beneficially owned by John W. Casella, the Company’s Chairman and Chief Executive Officer, or by his brother, Douglas R. Casella, a member of the Company’s Board of Directors. Based on the number of shares of common stock and Series A redeemable convertible preferred stock outstanding on November 30, 2004, the shares of the Company’s Class A common stock and Class B common stock beneficially owned by John W. Casella and Douglas R. Casella represent approximately 29.8% of the aggregate voting power of the Company’s stockholders. Consequently, John W. Casella and Douglas R. Casella are able to substantially influence all matters for stockholder consideration.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The interest rate on $53.0 million of long term debt has been fixed through two interest rate swaps. The Company had interest rate risk relating to approximately $118.9 million of long-term debt at October 31, 2004. The interest rate on the variable rate portion of long-term debt was approximately 4.85% at October 31, 2004. Should the average interest rate on the variable rate portion of long-term debt change by 100 basis points, it would have an approximate interest expense change of $0.3 million for the quarter reported.
The remainder of the Company’s long-term debt is at fixed rates and not subject to interest rate risk.
The Company is subject to commodity price fluctuations related to the portion of our sales of recyclable commodities that are not under floor or flat pricing arrangements. As of October 31, 2004, to minimize the Company’s commodity exposure, the Company was party to twenty-five commodity hedging agreements. The Company does not use financial instruments for trading purposes and is not a party to any leveraged derivatives. If commodity prices were to change by 10%, the impact on our operating margin is estimated at $0.6 million for the quarter ended October 31, 2004, without considering our hedging agreements. The effect of the hedge position would reduce the impact by approximately $0.2 million.
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ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures. The Company’s management, with the participation of its chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of October 31, 2004. Based on this evaluation, the Company’s chief executive officer and chief financial officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are (i) designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is made known to the Company’s Chief Executive Officer and Chief Financial Officer; and (ii) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
b) Changes in internal controls. During the period covered by this Quarterly Report on Form 10-Q, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f)) that have materially affected or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Pursuant to the applicable rules of the Securities and Exchange Commission, information as to material legal proceedings is presented in the Company’s Annual Report on Form 10-K, and information as to such legal proceedings is only included in this Quarterly Report on Form 10-Q and in any other Quarterly Report on Form 10-Q to the extent there have been material developments with respect to such proceedings during the period covered by such Quarterly Report.
The New Hampshire Superior Court in Grafton, NH ruled on February 1, 1999 that the Town could not enforce an ordinance purportedly prohibiting expansion of the Company’s NCES landfill, at least with respect to 51 acres of NCES’s 87 acre parcel, based upon certain existing land-use approvals. As a result, NCES was able to construct and operate “Stage II, Phase II” of the landfill. In May 2001, the Supreme Court denied the Town’s appeal. Notwithstanding the Supreme Court’s 2001 ruling, the Town continued to assert jurisdiction to conduct unqualified site plan review with respect to Stage III and has further stated that the Town’s height ordinance and building permit process may apply to Stage III. On September 12, 2001, the Company filed a petition for, among other things, declaratory relief. On December 4, 2001, the Town filed an answer to the Company’s petition asserting counterclaims seeking, among other things, authorization to assert site plan review over Stage III, which commenced operation in December 2000, as well as the methane gas utilization/leachate handling facility operating in Stage III, and also an order declaring that an ordinance prohibiting landfills applies to Stage IV expansion. The trial related to the Town’s jurisdiction was held in December 2002 and on April 24, 2003, the Grafton Superior Court upheld the Town’s 1992 ordinance preventing the location or expansion of any landfill, ruling that the ordinance may be applied to any part of Stage IV that goes beyond the 51 acres; ruling that the Town’s height ordinance is valid within the 51 acres; upholding the Town’s right to require Site Plan Review, except that there are certain areas within the Town’s Site Plan Review regulation that are preempted; ruling that the methane gas utilization/leachate handling facility is not subject to the Town’s ordinance forbidding incinerators. On May 27, 2003, NCES appealed the Court ruling to the New Hampshire Supreme Court. On March 1, 2004, the Supreme Court issued an opinion affirming that NCES has all of the local approvals that it needs to operate within the 51 acres. If successful in obtaining state permits for development and operation within the 51 acres, NCES expects to be able to provide from three to five years of disposal capacity. The Supreme Court’s opinion left open for further review the question of whether the Town’s 1992 ordinance can prevent expansion of the facility outside the 51 acres, remanding to the Superior Court two legal claims raised by NCES as grounds for invalidating the 1992 ordinance. The trial court hearing on the remanded issues has been stayed, pending an interlocutory appeal to the Supreme Court by NCES regarding a Superior Court judge’s denial of a motion to recuse herself.
On or about November 7, 2001, the Company’s subsidiary New England Waste Services of Maine, Inc. was served with a complaint filed in Massachusetts Superior Court on behalf of Daniel J. Quirk, Inc. and 14 citizens against The Massachusetts Department of Environmental Protection (“MADEP”), Quarry Hill Associates, Inc. and New England Waste Services of ME, Inc. dba New England Organics, et al. The complaint seeks injunctive relief related to the use of MADEP-approved wastewater treatment sludge in place of naturally occurring topsoil as final landfill cover material at the site of the Quarry Hills Recreation Complex Project in Quincy, Massachusetts (the “Project”), including removal of the material, or placement of an additional “clean” cover. On February 21, 2002, the MADEP filed a motion for stay pending a litigation control schedule. Plaintiffs have filed a cross-motion to consolidate the case with 11 other cases they filed related to the Project. Additionally, the Company has cross-claimed against other named defendants seeking indemnification and contribution. In September 2002, the court granted a stay of all proceedings pending the filing of summary judgment motions by all defendants on the issue of whether the plaintiffs are barred from suing the defendants as a result of a covenant not to sue that was signed by
plaintiffs in 1998. On December 17, 2002, the court granted certain summary judgment motions filed by the defendants, the effect of which was the dismissal of all claims against all defendants in all cases where New England Waste Services of ME, Inc. was a defendant. On or about February 12, 2003, plaintiffs filed an appeal. On September 24, 2004, the Massachusetts State Appeals court reversed the Superior Court and reinstated the dismissed cases. The Company believes that it has meritorious defenses to these claims.
The Company offers no prediction on the outcome of any of the proceedings described above. The Company is vigorously defending each of these lawsuits. However, there can be no guarantee the Company will prevail or that any judgments against the Company, if sustained on appeal, will not have a material adverse effect on the Company’s business, financial condition or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On September 22, 2004, the Company issued an aggregate of 174,974 shares of its Class A Common stock upon conversion of 2,000 shares of its Series A Convertible Preferred Stock.
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 stockholders held on October 5, 2004, two proposals were submitted to a vote of the Company’s stockholders. The proposals and results of voting were as follows:
PROPOSAL I.
Proposal to elect, as Class I directors, Messrs. James F. Callahan, Jr., Douglas R. Casella and D. Randolph Peeler.
James F. Callahan, Jr.
Votes For:
30,292,301
Withheld:
56,772
Douglas R. Casella:
29,989,770
359,303
D. Randolph Peeler:
30,055,101
293,972
Other directors whose terms of office continued in effect after the annual meeting are John W. Casella, James W. Bohlig, John F. Chapple III, Joseph G. Doody, Gregory B. Peters and John J. Zillmer.
PROPOSAL II.
Proposal to ratify the selection of PricewaterhouseCoopers LLP as the Company’s auditors for the fiscal year ending April 30, 2004.
30,288,557
Votes Against:
47,863
Abstentions:
12,653
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ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
The exhibits that are filed as part of this Quarterly Report on Form 10-Q or that are incorporated by reference herein are set forth in the Exhibit Index hereto.
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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: December 10, 2004
By:
/s/ Richard A. Norris
Richard A. NorrisChief Financial Officer(Principal Financial and AccountingOfficer and Duly Authorized Officer)
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Exhibit Index
Amendment No. 4 to Second Amended and Restated Revolving Credit and Term Loan Agreement.
31.1
Certification of John W. Casella, Chairman of the Board of Directors and Chief Executive Officer required by Rule 13a-14(a) or Rule 15(d)-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes – Oxley Act of 2002.
31.2
Certification of Richard A. Norris, Senior Vice President and Chief Financial Officer required by Rule 13a-14(a) or Rule 15(d)-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes – Oxley Act of 2002.
32.1
Certification pursuant to 18 U.S.C. S 1350 of John W. Casella, Chairman of the Board of Directors and Chief Executive Officer, as adopted pursuant to section 906 of the Sarbanes – Oxley Act of 2002.
32.2
Certification pursuant to 18 U.S.C. S 1350 of Richard A. Norris, Senior Vice President and Chief Financial Officer, as adopted pursuant to section 906 of the Sarbanes – Oxley Act of 2002.