================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2002
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ---------------
Commission file number 000-23211
CASELLA WASTE SYSTEMS, INC.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 03-0338873
---------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
25 Greens Hill Lane, Rutland, Vermont 05701
-------------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (802) 775-0325
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 4, 2002:
Class A Common Stock 22,822,702
Class B Common Stock 988,200
================================================================================
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
April 30, January 31,
ASSETS 2001 2002
--------- ---------
CURRENT ASSETS:
Cash and Cash Equivalents $ 22,001 $ 9,405
Restricted Cash 7,175 7,556
Accounts Receivable - Trade, net of allowance
for doubtful accounts of $4,904 and $3,092 51,776 43,423
Notes Receivable - Officers/Employees 1,953 1,105
Prepaid Expenses 5,669 5,275
Inventory 3,017 2,626
Investments 3,641 62
Deferred Income Taxes 8,015 9,076
Net Assets Held for Sale 8,041 --
Net Assets of Discontinued Operations 11,534 3,381
Other Current Assets 2,763 1,473
--------- ---------
Total Current Assets 125,585 83,382
Property, Plant and Equipment, net of accumulated depreciation
and amortization of $125,160 and $153,359 290,537 284,599
Intangible Assets, net 237,573 230,812
Restricted Cash 2,902 2,092
Deferred Income Taxes 5,259 5,819
Investments in Unconsolidated Entities 21,844 26,761
Other Non-Current Assets 2,593 1,903
--------- ---------
Total Non-Current Assets 560,708 551,986
$ 686,293 $ 635,368
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except for share and per share data)
LIABILITIES AND April 30, January 31,
STOCKHOLDERS' EQUITY 2001 2002
--------- ---------
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt $ 6,690 $ 4,483
Current Maturities of Capital Lease Obligations 1,429 1,538
Accounts Payable 29,158 27,543
Accrued Payroll and Related Expenses 2,542 4,053
Accrued Interest 4,880 1,642
Accrued Income Taxes 3,388 5,802
Other Current Liabilities 22,441 27,344
--------- ---------
Total Current Liabilities 70,528 72,405
Long-Term Debt, Less Current Maturities 350,511 286,625
Capital Lease Obligations, Less Current Maturities 4,593 3,431
Accrued Closure and Post-Closure Costs,
Less Current Maturities 17,153 22,253
Minority Interest 677 675
Other Long-Term Liabilities 12,160 12,262
COMMITMENTS AND CONTINGENCIES
Series A Redeemable, Convertible Preferred Stock, 55,750 Shares
Authorized, Issued and Outstanding as of April 30, 2001 and January 31,
2002, Liquidation Preference of $1,000 per Share 57,720 59,987
STOCKHOLDERS' EQUITY
Class A Common Stock -
Authorized - 100,000,000 Shares, $0.01 par value
Issued and Outstanding - 22,198,000 and 22,790,000
Shares as of April 30, 2001 and January 31, 2002, respectively 222 228
Class B Common Stock -
Authorized - 1,000,000 Shares, $0.01 par value 10 Votes per
Share, Issued and Outstanding -988,000 shares 10 10
Accumulated Other Comprehensive (Loss) Income 586 (5,449)
Additional Paid-In Capital 271,502 277,771
Accumulated Deficit (99,369) (94,830)
--------- ---------
Total Stockholders' Equity 172,951 177,730
--------- ---------
$ 686,293 $ 635,368
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
Three Months Ended Nine Months Ended
------------------------------------------------------
January 31, January 31, January 31, January 31,
2001 2002 2001 2002
--------- --------- --------- ---------
Revenues $ 112,705 $ 101,189 $ 380,233 $ 323,315
Operating Expenses:
Cost of Operations 75,148 66,142 255,838 211,549
General and Administration 13,726 13,994 45,100 41,188
Depreciation and Amortization 13,043 12,825 40,316 38,390
--------- --------- --------- ---------
101,917 92,961 341,254 291,127
--------- --------- --------- ---------
Operating Income 10,788 8,228 38,979 32,188
Other (Income)/Expense, net:
Interest Income (1,049) (110) (2,271) (801)
Interest Expense 11,212 7,740 32,173 24,580
(Income) Loss from Equity Method Investments, net 15,493 (1,857) 16,525 (1,349)
Minority Interest 287 29 949 (2)
Other Expense (Income) (1,736) 1,543 (1,709) (4,960)
--------- --------- --------- ---------
Other Expense, net 24,207 7,345 45,667 17,468
Income (Loss) from Continuing Operations Before
Income Taxes and Discontinued Operations (13,419) 883 (6,688) 14,720
Provision (Benefit) for Income Taxes (2,891) 233 1,080 5,524
--------- --------- --------- ---------
Net Income (Loss) from Continuing Operations (10,528) 650 (7,768) 9,196
Discontinued Operations
Income From Discontinued Operations (net
of income taxes of $8 and $866) 13 -- 1,524 --
Loss on Disposal of Discontinued Operations (net of
income tax benefit of $678, $350, $678 and $924) (2,403) (521) (2,403) (2,146)
Cumulative Effect of Change in Accounting Principle
(net of income tax benefit of $170) -- -- -- (250)
--------- --------- --------- ---------
Net Income (Loss) (12,918) 129 (8,647) 6,800
Accretion of Preferred Stock Dividend 702 861 1,290 2,267
--------- --------- --------- ---------
Net (Loss) Income available to Common Stockholders $ (13,620) $ (732) $ (9,937) $ 4,533
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except for per share data)
Three Months Ended Nine Months Ended
------------------------------------------------------
January 31, January 31, January 31, January 31,
2001 2002 2001 2002
--------- --------- --------- ---------
Earnings Per Share:
Basic:
(Loss) Income from Continuing Operations $ (0.48) $ (0.01) $ (0.39) $ 0.30
Discontinued Operations
Income from Discontinued Operations -- -- 0.06 --
Loss on Disposal of Discontinued Operations (0.10) (0.02) (0.10) (0.09)
Cumulative Effect of Change in Accounting Principle -- -- -- (0.01)
--------- --------- --------- ---------
Net (Loss) Income per Common Share $ (0.58) $ (0.03) $ (0.43) $ 0.20
========= ========= ========= =========
Basic Weighted Average Common
Shares Outstanding 23,182 23,565 23,190 23,414
--------- --------- --------- ---------
Diluted:
(Loss) Income from Continuing Operations $ (0.48) $ (0.01) $ (0.39) $ 0.29
Discontinued Operations
Income from Discontinued Operations -- -- 0.06 --
Loss on Disposal of Discontinued Operations (0.10) (0.02) (0.10) (0.09)
Cumulative Effect of Change in Accounting Principle -- -- -- (0.01)
--------- --------- --------- ---------
Net (Loss) Income per Common Share $ (0.58) $ (0.03) $ (0.43) $ 0.19
========= ========= ========= =========
Diluted Weighted Average Common
Shares Outstanding 23,182 23,565 23,190 24,091
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
------------------------
January 31, January 31,
2001 2002
--------- ---------
Cash Flows from Operating Activities:
Net Income (Loss) $ (8,647) $ 6,800
--------- ---------
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities -
Depreciation and Amortization 40,316 38,390
Loss on Disposal of Discontinued Operations 2,403 2,146
Income from Discontinued Operations (1,524) --
(Income) Loss from Equity Method Investments 16,525 (1,349)
Loss from Commodity Hedge Contract, net -- 1,289
Gain on Sale of Bangor Hydro Warrants (1,526) (1,654)
Gain on Sale of Equipment (318) (296)
Gain on Sale of Assets -- (4,698)
Non Cash Directors Compensation 30 20
Minority Interest 949 (2)
Deferred Income Taxes (3,490) 1,847
Changes in Assets and Liabilities, net of
Effects of Acquisitions and Divestitures -
Accounts Receivable 5,835 7,879
Accounts Payable (11,787) (1,727)
Other Assets and Liabilities (2,899) 4,113
--------- ---------
44,514 45,958
--------- ---------
Net Cash Provided by Operating Activities 35,867 52,758
Cash Flows from Investing Activities:
Acquisitions, Net of Cash Acquired (7,811) (1,505)
Proceeds from Divestitures, Net of Cash Divested 5,832 28,646
Additions to Property and Equipment (53,783) (28,395)
Proceeds from Sale of Equipment 1,951 1,186
Proceeds from Sale of Bangor Hydro Warrants 3,319 3,530
Advances to Unconsolidated Subsidiaries (3,493) (4,388)
Other 3,857 2,985
--------- ---------
Net Cash (Used In) Provided by Investing Activities (50,128) 2,059
Cash Flows from Financing Activities:
Proceeds from Long-Term Borrowings 48,090 53,290
Principal Payments on Long-Term Debt (62,703) (117,230)
Proceeds from Issuance of Common Stock 1,018 217
Proceeds from Equity Transactions of Majority-
Owned Subsidiary 1,506 --
Proceeds from Exercise of Stock Options 256 3,173
Proceeds from the Issuance of Series A
Redeemable, Convertible Preferred Stock, Net 54,741 --
--------- ---------
Net Cash Provided by (Used In) Financing Activities 42,908 (60,550)
Cash Used in Discontinued Operations (8,871) (6,863)
Net Increase (Decrease) in Cash and Cash Equivalents 19,776 (12,596)
Cash and Cash Equivalents, Beginning of Period 7,788 22,001
--------- ---------
Cash and Cash Equivalents, End of Period $ 27,564 $ 9,405
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
January 31, January 31,
2001 2002
--------- ---------
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for -
Interest $ 33,257 $ 26,346
Income Taxes, net of refunds $ 1,100 $ 312
Supplemental Disclosures of Non-Cash Investing
and Financing Activities:
Summary of Entities Acquired
in Purchase Business Combinations
Fair Market Value of Assets Acquired $ 21,078 $ 1,749
Notes Receivable Exchanged for Assets (13,263) (25)
Cash Paid, net $ (7,811) $ (1,505)
--------- ---------
Liabilities Assumed and Notes Receivable
Forgiven to Seller $ 4 $ 219
========= =========
Summary of Long Term Debt Converted to
Common Stock
Long Term Debt Converted $ -- $ 3,206
Exchange of Notes Receivable -- (750)
--------- ---------
Issuance of Common Stock Upon Conversion $ -- $ 2,454
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in thousands, except for per share data)
The condensed consolidated balance sheets of Casella Waste Systems, Inc. and
Subsidiaries (the "Company") as of April 30, 2001 and January 31, 2002, the
consolidated statements of operations for the three and nine months ended
January 31, 2001 and 2002 and the condensed consolidated statements of cash
flows for the nine months ended January 31, 2001 and 2002 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 previously issued consolidated statements of
operations for the three and nine months ended January 31, 2001 and the
condensed consolidated statement of cash flows for the nine months ended January
31, 2001 have been changed to reflect the effects of discontinued operations.
The consolidated financial statements presented herein should be read in
connection with the Company's audited consolidated financial statements as of
and for the twelve months ended April 30, 2001. These were included as part of
the Company's Annual Report on Form 10-K (the "Annual Report"). The results of
the nine months ended January 31, 2002 may not be indicative of the results that
may be expected for the fiscal year ending April 30, 2002.
1. BUSINESS COMBINATIONS
During the nine months ended January 31, 2002, the Company acquired three solid
waste hauling operations in transactions accounted for as purchases. These
transactions were in exchange for consideration of approximately $1.5 million in
cash to the sellers. During the nine months ended January 31, 2001, the Company
acquired 11 solid waste hauling operations accounted for as purchases. These
transactions were in exchange for consideration of approximately $7.8 million in
cash to the sellers and the partial settlement of a receivable in the amount of
$13.3 million. The operating results of these businesses are included in the
consolidated 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.
The following unaudited pro forma combined information shows the results of the
Company's operations as though each of the acquisitions had been completed as of
May 1, 2000.
Nine Months Ended Nine Months Ended
January 31, 2001 January 31, 2002
-------- --------
Revenues $384,079 $324,080
======== ========
Operating Income $ 39,697 $ 32,377
======== ========
Net (Loss) Income available to Common Stockholders $ (9,751) $ 4,603
======== ========
Diluted Net Income (Loss) per Common Share $ (0.42) $ 0.19
======== ========
Diluted Weighted Average
Common Shares Outstanding 23,190 24,091
======== ========
The pro forma results have been prepared for comparative purposes only and are
not necessarily indicative of the actual results of operations had the
acquisitions taken place as of May 1, 2000 or the results of future operations
of the Company. Furthermore, the pro forma results do not give effect to all
cost savings or incremental costs that may occur as a result of the integration
and consolidation of the completed acquisitions.
2. ADOPTION OF NEW ACCOUNTING STANDARD
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 137, Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective
Date of FASB Statement No. 133. SFAS No. 137 amends SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, by deferring the effective date
of SFAS No. 133 to fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The Company adopted SFAS No. 133 on May 1,
2001. The Company's objective for utilizing derivative instruments is to reduce
its exposure to fluctuations in cash flows due to changes in the variable
interest rates under its credit facility and changes in the commodity prices of
recycled paper.
The Company's strategy to hedge against fluctuations in variable interest rates
involves entering into interest rate swaps that are specifically designated to
existing interest payments under our credit facility and accounted for as cash
flow hedges pursuant to SFAS No. 133. The Company has six interest rate swaps
outstanding, expiring at various times between January and April 2003 with an
aggregate notional amount of $250 million. The Company has evaluated these swaps
and believes these instruments qualify for hedge accounting pursuant to SFAS No.
133. Upon adoption of SFAS No. 133, the Company recorded the fair value of these
interest rate swaps as an obligation of $6.9 million, with the offset (net of
taxes of $2.8 million) recorded as an unrealized loss in other comprehensive
income (loss) (see Note 6). Because the relevant terms of the interest rate
swaps and the specific debts they have been designated to hedge are not
identical, the swaps are not perfectly effective, and could result in
ineffectiveness being recorded in earnings.
Accordingly, the ineffective portion of the hedge was recorded as a cumulative
effect of change in accounting principle in the accompanying financial
statements. The ineffectiveness recorded in earnings for the nine months ended
January 31, 2002 was approximately $420 and is reflected as a reduction in
interest expense in the accompanying financial statements. No ineffectiveness
was recorded in the quarter ended January 31, 2002, in accordance with the
recognition guidance under SFAS No. 133. As of January 31, 2002, the fair value
of these swaps was an obligation of $10.1 million, with the net amount (net of
taxes of $4.1 million) recorded as an unrealized loss in other comprehensive
(loss) income. The estimated net amount of the existing losses as of January 31,
2002 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 $9.2
million. The actual amounts reclassified into earnings are dependent on future
movements in interest rates.
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 had entered into 10
commodity hedges, which expired at various times between December 2001 and
February 2003. The Company had evaluated these hedges and believed that these
instruments qualified for hedge accounting pursuant to SFAS No. 133. Because the
relevant terms of the hedges and the transactions they were designated to hedge
were identical, there was no ineffectiveness required to be recognized into
earnings. Upon adoption of SFAS No. 133, the Company recorded the fair value of
these hedges as an asset of $1.8 million, with the net amount (net of taxes of
$0.7 million) recorded as an unrealized gain in other comprehensive income
(loss) (see Note 6).
On December 2, 2001, Enron Corporation (Enron), the counterparty for all of the
Company's commodity hedges, filed for Chapter 11 bankruptcy protection. As a
result of the filing, the Company executed the early termination provisions
provided under the forward contracts, and filed a claim with the bankruptcy
court. Additionally, the Company agreed with its equity method investee, US
Green Fiber LLC (Green Fiber), to include Green Fiber in its claim (as allowed
under the applicable affiliate provisions) in exchange for entering into
commodity contracts between Green Fiber and the Company on terms identical to
those with Enron. The Company recorded a charge of $1.6 million in other expense
to recognize the change in fair value of its commodity contracts. Subsequent
changes in the fair value of these commodity contracts (currently $0.4 million)
will be reflected in earnings until their March 2003 termination.
Deferred gains of approximately $1.0 million, net of tax, related to the
Company's terminated contracts with Enron are included in accumulated other
comprehensive income, and will be reclassified into earnings as the original
hedged transactions settle.
3. 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
pending for alleged damages to persons and property, alleged violation of
certain laws and for alleged liabilities arising out of matters occurring during
the normal operation of the waste management business.
During the quarter ended January 31, 2002, the Company settled one lawsuit,
which had no effect on the Company's financial position.
For the nine months ended January 31, 2002, the Company settled four lawsuits,
which had no effect on the Company's financial position.
The Company is a defendant in certain lawsuits alleging various claims incurred
in the ordinary course of business, none of which, either individually or in the
aggregate, the Company believes are material to its financial condition, results
of operations or cash flows.
4. 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.
5. EARNINGS PER SHARE
The following table sets forth the numerator and denominator used in the
computation of earnings per share on a basic and diluted basis for the three and
nine months ended January 31, 2001 and 2002:
Three Months Ended Nine Months Ended
January 31 January 31
---------------------- ----------------------
2001 2002 2001 2002
-------- -------- -------- --------
Numerator:
Net Income (Loss) from Continuing Operations Before Discontinued
Operations $(10,528) $ 650 $ (7,768) $ 9,196
Less: Preferred Dividends (702) (861) (1,290) (2,267)
-------- -------- -------- --------
Net (Loss) Income from Continuing Operations Before Discontinued
Operations Available to Common Stockholders Used in Basic and
Diluted EPS $(11,230) $ (211) $ (9,058) $ 6,929
======== ======== ======== ========
Denominator:
Number of Shares Outstanding, End of Period:
Class A Common Stock 22,196 22,790 22,196 22,790
Class B Common Stock 988 988 988 988
Effect of Weighted Average Shares Outstanding during period (2) (213) 6 (364)
-------- -------- -------- --------
Weighted Average Number of Common Shares used in Basic EPS 23,182 23,565 23,190 23,414
-------- -------- -------- --------
Impact of Potentially Dilutive Securities:
Dilutive Effect of Options, Warrants and Contingent Stock -- -- -- 677
-------- -------- -------- --------
Weighted Average Number of Common Shares used in Diluted EPS 23,182 23,565 23,190 24,091
======== ======== ======== ========
For the three and nine months ended January 31, 2001, 9,677 and 7,835 common
stock equivalents related to options, convertible debt, 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 nine months ended January 31, 2002, 9,187 and 7,038 common
stock equivalents related to options, convertible debt, and redeemable
convertible preferred stock, respectively, were excluded from the calculation of
dilutive shares since the inclusion of such shares would be anti-dilutive.
6. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents the change in the Company's equity from
transactions and other events and circumstances from non-owner sources and
includes all changes in equity except those resulting from investments by owners
and distributions to owners.
Comprehensive income (loss) for the three and nine months ended January 31, 2002
is as follows:
Three Months Ended Nine Months Ended
January 31, January 31,
2002 2002
------- -------
Net Income $ 129 $ 6,800
Other Comprehensive Income (Loss) 1,267 (6,035)
------- -------
Comprehensive Income $ 1,396 $ 765
======= =======
The components of other comprehensive loss for the three and nine months ended
January 31, 2002 are shown as follows (in thousands):
Three Months Ended January 31, 2002
-------------------------------------------
Gross Tax effect Net of Tax
------- ------- -------
Changes in fair value of marketable securities
during the period, net ($ 25) ($ 10) ($ 15)
Change in fair value of interest rate swaps
and commodity hedges during period, net 2,311 1,029 1,282
------- ------- -------
$ 2,286 $ 1,019 $ 1,267
======= ======= =======
Nine Months Ended January 31, 2002
-------------------------------------------
Gross Tax effect Net of Tax
------- ------- -------
Cumulative effect of change in accounting
principle, beginning of period ($4,650) ($1,885) (2,765)
Changes in fair value of marketable securities
during the period, net of reclassification
adjustment (1,704) (691) (1,013)
Change in fair value of interest rate swaps
and commodity hedges during period, net (3,637) (1,380) (2,257)
------- ------- -------
($9,991) ($3,956) ($6,035)
======= ======= =======
7. 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
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 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. Ancillary operations, mainly residue recycling and major
customer accounts, are included in Other.
Eastern Central Western
Region Region Region Recycling Other
--------------------------------------------------------------------------------
Three Months Ended January 31, 2002:
Outside Revenue $ 35,899 $ 22,669 $ 15,651 $ 23,449 $ 3,521
========= ========= ========= ========= =========
Intersegment Revenue $ 6,754 $ 10,752 $ 3,118 $ 701 $ --
========= ========= ========= ========= =========
(Loss)/Income
from Continuing Operations $ (482) $ 3,729 $ 57 $ (3,427) $ 773
========= ========= ========= ========= =========
Total Assets $ 262,405 $ 115,397 $ 107,963 $ 74,149 $ 75,454
========= ========= ========= ========= =========
Eliminations Total
---------------------------
Outside Revenue $ -- $ 101,189
========= =========
Intersegment Revenue $ (21,325) $ --
========= =========
Income/(Loss)
from Continuing Operations $ -- $ 650
========= =========
Total Assets $ -- $ 635,368
========= =========
Eastern Central Western
Region Region Region Recycling Other
--------------------------------------------------------------------------------
Three Months Ended January 31, 2001:
Outside Revenue $ 41,571 $ 20,890 $ 15,635 $ 27,203 $ 7,406
========= ========= ========= ========= =========
Intersegment Revenue $ 8,804 $ 9,429 $ 3,705 $ 4,853 $ 133
========= ========= ========= ========= =========
Income/(Loss)
from Continuing Operations $ 1,398 $ 3,090 $ 561 $ (50) $ (15,527)
========= ========= ========= ========= =========
Total Assets $ 393,298 $ 128,856 $ 115,533 $ 135,460 $ 120,715
========= ========= ========= ========= =========
Eliminations Total
---------------------------
Outside Revenue $ -- $ 112,705
========= =========
Intersegment Revenue $ (26,924) $ --
========= =========
Income/(Loss)
from Continuing Operations $ -- $ (10,528)
========= =========
Total Assets $ -- $ 893,862
========= =========
Eastern Central Western
Region Region Region Recycling Other
--------------------------------------------------------------------------------
Nine Months Ended January 31, 2002:
Outside Revenue $ 114,490 $ 73,843 $ 50,736 $ 70,272 $ 13,974
========= ========= ========= ========= =========
Intersegment Revenue $ 23,583 $ 35,160 $ 11,302 $ 5,691 $ 58
========= ========= ========= ========= =========
Income/(Loss)
from Continuing Operations $ 1,836 $ 14,107 $ 1,835 $ (7,377) $ (1,205)
========= ========= ========= ========= =========
Total Assets $ 262,405 $ 115,397 $ 107,963 $ 74,149 $ 75,454
========= ========= ========= ========= =========
Eliminations Total
---------------------------
Outside Revenue $ -- $ 323,315
========= =========
Intersegment Revenue $ (75,794) $ --
========= =========
Income/(Loss)
from Continuing Operations $ -- $ 9,196
========= =========
Total Assets $ -- $ 635,368
========= =========
Eastern Central Western
Region Region Region Recycling Other
--------------------------------------------------------------------------------
Nine Months Ended January 31, 2001:
Outside Revenue $ 128,251 $ 70,254 $ 50,777 $ 92,172 $ 38,779
========= ========= ========= ========= =========
Intersegment Revenue $ 27,842 $ 30,256 $ 11,405 $ 18,900 $ 1,045
========= ========= ========= ========= =========
Income/(Loss)
from Continuing Operations $ 2,993 $ 12,035 $ 3,166 $ 1,836 $ (27,798)
========= ========= ========= ========= =========
Total Assets $ 393,298 $ 128,856 $ 115,533 $ 135,460 $ 120,715
========= ========= ========= ========= =========
Eliminations Total
---------------------------
Outside Revenue $ -- $ 380,233
========= =========
Intersegment Revenue $ (89,448) $ --
========= =========
Income/(Loss)
from Continuing Operations $ -- $ (7,768)
========= =========
Total Assets $ -- $ 893,862
========= =========
8. RESTRUCTURING
In April 2001, the Company's Board of Directors approved a reorganization of
certain of the Company's operations. This reorganization consisted of the
elimination of various positions and the closure of certain facilities. The
following items were charged to earnings during 2001:
Severance $3,786
Facility closures 365
------
$4,151
======
Severance relates to the termination of 19 employees, primarily in management
and administration, as well as three officers of the Company. Facility closures
include the costs of closing two transfer stations.
During the nine months ended January 31, 2002, $3,317 was charged against the
accrual. The remaining balance in the accompanying balance sheet, included in
other current liabilities, amounted to $834.
9. DISCONTINUED OPERATIONS, ASSETS HELD FOR SALE AND OTHER DIVESTITURES
Discontinued Operations:
- ------------------------
At the end of fiscal year 2001, the Company adopted a formal plan to dispose of
its Tire Processing, Commercial Recycling and Mulch Recycling businesses (herein
"discontinued businesses"). The Company is accounting for these planned
dispositions in accordance with APB Opinion No. 30, and accordingly the
discontinued businesses are carried at estimated net realizable value less costs
to be incurred through date of disposition.
The Mulch Recycling business was sold effective June 30, 2001 for its carrying
value.
A majority interest (80.1%) of the Tire Processing business was sold in
September 2001 for cash consideration of $13.8 million. The company retained a
19.9% interest in the new venture, which was valued at $3.1 million. Prior to
the sale, the Company incurred costs in excess of those estimated at April 30,
2001, which were expensed in the accompanying financial statements. The Company
is accounting for its retained investment under the cost method.
The Company further wrote down its Commercial recycling center in Newark, N.J.
to net realizable value due to final negotiations resulting in a delay in the
sale of the facility. This expense was recognized, net of tax, in each of the
quarters ended October 31, 2001 and January 31, 2002.
Net Assets Held for Sale:
- -------------------------
The Company had identified for sale certain other businesses which were
classified as Net Assets Held for Sale as of April 30, 2001. These included its
Timber Energy business and its one remaining plastics recycling facility.
On May 17, 2001, the plastics recycling business was sold for approximately $998
in total consideration. The consideration consisted of $406 in cash and $592 in
notes.
On July 31, 2001, the Timber Energy business was sold for approximately $15.0
million in total consideration. The consideration comprised the buyer's
assumption of debt, reimbursement of restricted cash funds, and a working
capital adjustment, resulting in $10.7 million cash.
Other Divestitures:
- -------------------
A majority interest (80.1%) in New Heights Recovery and Power LLC ("New
Heights") was sold in September 2001 for consideration of $0.3 million and
contingent consideration of up to $9.0 million. The company will record the
contingent consideration when the contingency is removed. The Company retained
an interest (19.9%) in the New Heights project, as well as certain financial
obligations related solely to the power plant. The Company is accounting for its
retained investment under the equity method.
10. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS No.
142, Goodwill and Other Intangible Assets. These standards, among other things,
significantly modify the current accounting rules related to accounting for
business acquisitions, amortization of intangible assets and the method of
accounting for impairments. SFAS No. 142 requires that any goodwill recorded in
connection with an acquisition consummated on or after July 1, 2001 not be
amortized. The effective date for SFAS No. 142 is fiscal years beginning after
December 15, 2001. The Company has not completed an analysis as to the magnitude
of the impact of these new pronouncements on the Company's financial statements.
However, the Company believes that the impact, when ultimately determined, could
have a significant adverse effect on the Company's carrying value of certain
long-term assets (mainly goodwill). The Company will adopt SFAS No. 141 and SFAS
No. 142 as of the beginning of its fiscal year 2003.
In July 2001, the FASB issued SFAS No.143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes the
cost by increasing the carrying amount of the related long-lived asset. The
liability is accreted to its present value each period and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, the entity either settles the obligation for the amount recorded or
incurs a gain or loss. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. Management is evaluating the effect of this statement on
the Company's results of operations and financial position as well as related
disclosures.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long Lived Assets. SFAS No. 144 supercedes SFAS No. 121, Accounting
for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed
of. SFAS No. 144 addresses financial accounting and reporting for the impairment
of long lived assets held for use and for long-lived assets that are to be
disposed of by sale (including discontinued operations). SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. Management is
evaluating the effect of this statement on the Company's results of operations
and financial position as well as related disclosures.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Casella Waste Systems, Inc. the ("Company") is a regional, integrated solid
waste services company that provides collection, transfer, disposal and
recycling services, primarily throughout the eastern portion of the United
States. The Company markets recyclable metals, aluminum, plastics, paper and
corrugated cardboard which has been processed at its facilities as well as
recyclables purchased from third parties. The Company also generates electricity
under its contracts at its wholly owned subsidiary, Maine Energy Recovery
Company LP ("Maine Energy"), a waste-to-energy facility. As of March 3, 2002,
the Company owned and/or operated five Subtitle D landfills, two landfills
permitted to accept construction and demolition materials, 30 transfer stations,
41 recycling processing facilities, 38 solid and liquid waste collection
divisions and one power generation facility, as well as a 50% interest in a
cellulose insulation joint venture.
The Company's revenues have decreased from $112.7 million for the three months
ended January 31, 2001 to $101.2 million for the three months ended January 31,
2002. From May 1, 2000 through April 30, 2001, the Company acquired 13 solid
waste collection, transfer and disposal operations. Between May 1, 2001 and
January 31, 2002 the Company acquired three such businesses, all of which were
accounted for under the purchase method of accounting for business combinations.
Under the rules of purchase accounting the acquired companies' revenues and
results of operations have been consolidated from the actual dates of the
acquisitions and materially affect the period-to-period comparisons of the
Company's historical results of operations.
This Form 10-Q and other reports, proxy statements, and other communications to
stockholders, as well as oral statements by the Company's officers or its
agents, may contain forward-looking statements within the meaning of Section 27A
of the Securities Act and section 21E of the Securities Exchange Act, with
respect to, among other things, the Company's future revenues, operating income,
or earnings per share. Without limiting the foregoing, any statements contained
in this Quarterly Report that are not statements of historical fact may be
deemed to be forward-looking statements, and the words "believes",
"anticipates", "plans", "expects", and similar expressions are intended to
identify forward-looking statements. There are a number of factors of which the
Company is aware that may cause the Company's actual results to vary materially
from those forecasted or projected in any such forward-looking statement,
certain of which are beyond the Company's control. These factors include,
without limitation, those outlined below in the section entitled "Certain
Factors That May Affect Future Results". The Company's failure to successfully
address any of these factors could have a material adverse effect on the
Company's results of operations.
General
- -------
The Company's revenues in the Eastern, Central and Western regions are
attributable primarily 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
the Company's residential collection services are performed on a subscription
basis with individual households. Landfill, waste-to-energy facility and
transfer customers are charged a tipping fee on a per ton basis for disposing of
their solid waste at the Company's disposal facilities and transfer stations.
The majority of 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 consist of revenues from the sale of recyclable
commodities, operations and maintenance contracts of recycling facilities for
municipal customers and recyclable brokering operations.
The Company, through its Recycling segment, provides integrated waste handling
services, including processing and recycling of wood, paper, metals, aluminum,
plastics and glass and brokerage of recycled materials. The Company emphasizes
the use of low-cost processing to add value to the waste products delivered.
Effective August 1, 2000, the Company contributed its cellulose insulation
assets to a joint venture with Louisiana-Pacific, and accordingly, has
recognized half of the joint venture's net income/(loss) in the Company's
results of operations since that date. In the Other segment, the Company has
ancillary assets including residue recycling and major customer accounts.
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 the
Company's revenues attributable to services
provided. The increase in the Company's collection and transfer revenues as a
percentage of revenues for the current fiscal year is primarily attributable to
the effects of price and volume increases. The decrease in the Company's
landfill/disposal revenues as a percentage of revenues during the current fiscal
year is primarily attributable to the divestiture of its majority interest in
Penobscot Energy Recovery Company LP. The increase in the Company's recycling
revenues as a percentage of revenue during the current fiscal year is primarily
attributable to volume increases. The decrease in the Company's brokerage
revenues as a percentage of revenues during the current fiscal year is primarily
attributable to the overall effects of commodity prices. The decrease in the
Company's other revenues as a percentage of revenues during the current fiscal
year is primarily attributable to divestitures made during the period.
Percentage of Revenues
----------------------
Three Months Ended Nine Months Ended
January 31, January 31,
-------------- --------------
2001 2002 2001 2002
---- ---- ---- ----
Collection ..................... 42.9% 46.6% 40.7% 46.7%
Landfill/Disposal Facilities ... 18.0 14.1 16.8 13.8
Transfer ....................... 7.6 10.1 7.4 11.0
Recycling ...................... 13.4 17.4 12.3 15.8
Brokerage ...................... 15.0 11.1 15.6 11.4
Other .......................... 3.1 0.7 7.2 1.3
----- ----- ----- -----
Total Revenues ................. 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Cost of operations includes labor, tipping fees paid to third party disposal
facilities, fuel, maintenance and repair of vehicles and equipment, worker's
compensation and vehicle insurance, the cost of purchasing materials to be
recycled, third party transportation expense, district and state taxes, host
community fees and royalties. Landfill operating expenses also include a
provision for closure and post-closure expenditures anticipated to be incurred
in the future, and leachate treatment and disposal costs.
General and administration expenses include management, clerical and
administrative compensation and overhead, professional services and costs
associated with the Company's marketing and sales force and community relations
expense.
Depreciation and amortization expense includes depreciation of fixed assets over
the estimated useful life of the assets using the straight-line method,
amortization of landfill airspace assets under the units-of-production method,
and the amortization of goodwill and other intangible assets using the
straight-line method. The amount of landfill amortization expense related to
airspace consumption can vary materially from landfill to landfill depending
upon the purchase price and landfill site and cell development costs. The
Company depreciates all fixed and intangible assets, excluding non-depreciable
land, down to a zero net book value, and does not apply a salvage value to any
of its fixed assets.
The Company capitalizes certain direct landfill development costs, such as
engineering, permitting, legal, construction and other costs directly associated
with expansion of existing landfills. Additionally, the Company also capitalizes
certain third party expenditures related to pending acquisitions, such as legal
and engineering costs. The Company will have material financial obligations
relating to closure and post-closure costs of its existing landfills and any
disposal facilities which it may own or operate in the future. The Company has
provided and will in the future provide accruals for future financial
obligations relating to closure and post-closure costs of its landfills
(generally for a term of 30 years after final closure of a landfill) based on
engineering estimates of consumption of permitted landfill airspace over the
useful life of any such landfill. There can be no assurance that the Company's
financial obligations for closure or post-closure costs will not exceed the
amount accrued and reserved or amounts otherwise receivable pursuant to trust
funds. The Company routinely evaluates all such capitalized costs, and expenses
those costs related to projects not likely to be successful. Internal and
indirect landfill development and acquisition costs, such as executive and
corporate overhead, public relations and other corporate services, are expensed
as incurred.
Results of Operations
- ---------------------
The following table sets forth for the periods indicated the percentage
relationship that certain items from the
Company's Consolidated Financial Statements bear in relation to revenues.
Percentage of Revenues
----------------------
Three Months Ended January 31, Nine Months Ended January 31,
--------------------- ---------------------
2001 2002 2001 2002
---- ---- ---- ----
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of Operations 66.7 65.4 67.3 65.4
General and Administration 12.2 13.8 11.9 12.7
Depreciation and Amortization 11.6 12.7 10.6 11.9
----- ----- ----- -----
Operating Income 9.5 8.1 10.2 10.0
Interest Expense, net 9.0 7.5 7.9 7.4
(Income) Loss from Equity Method Investments 13.7 (1.8) 4.3 (0.4)
Minority Interest 0.3 0.0 0.2 0.0
Other Expenses/ (Income) (1.5) 1.6 (0.4) (1.5)
Provision (Benefit) for Income Taxes (2.6) 0.2 0.3 1.7
----- ----- ----- -----
Income (Loss) from Continuing Operations (9.4) 0.6 (2.1) 2.8
Discontinued Operations (2.1) (0.5) (0.2) (0.6)
Cumulative Effect of Change in Accounting Principle 0.0 0.0 0.0 (0.1)
----- ----- ----- -----
Net Income (Loss) (11.5)% 0.1% (2.3)% 2.1%
===== ===== ===== =====
Adjusted EBITDA * 20.9% 20.8% 20.6% 21.8%
===== ===== ===== =====
* See discussion and computation of Adjusted EBITDA below.
Three Months Ended January 31, 2002:
REVENUES:
Revenues decreased $11.5 million, or (10.2)% to $101.2 million in the quarter
ended January 31, 2002 from $112.7 million in the quarter ended January 31,
2001. The decrease in the quarter is attributable to several factors: the impact
of businesses divested accounted for approximately $13.0 million while lower
average recyclable commodity prices and volumes amounted to $5.6 million. These
decreases were partially offset by volume and price increases in the core solid
waste business amounting to $6.5 million and the positive rollover effect of
acquisitions amounting to approximately $0.6 million.
COST OF OPERATIONS:
Cost of operations decreased $9.0 million or (12.0)% to $66.1 million in the
quarter ended January 31, 2002 from $75.1 million in the quarter ended January
31, 2001. This decrease mainly arose from lower volumes of recyclable material
purchases and divestitures. Cost of operations as a percentage of revenues
decreased to 65.4% in the quarter ended January 31, 2002 from 66.7% in the prior
year. The decrease in cost of operations as a percentage of revenues was
primarily the result of a decreased contribution from recyclable brokerage
operations, which carry a high cost of operations as a percentage of revenues
(approximately 90%).
GENERAL AND ADMINISTRATION:
General and administration expenses increased $0.3 million, or (2.0)% to $14.0
million in the quarter ended January 31, 2002 from $13.7 million in the quarter
ended January 31, 2001, and increased as a percentage of revenues to 13.8% in
the quarter ended January 31, 2002 from 12.2% in the quarter ended January 31,
2001. The increase in general and
administration expenses was primarily the result of bad debt expenses associated
with the write-off of receivables with Enron amounting to $0.7 million in the
quarter ended January 31, 2002.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization expense decreased $0.2 million, or (1.7)%, to
$12.8 million in the quarter ended January 31, 2002 from $13.0 million in the
quarter ended January 31, 2001. The decrease was attributable to lower
intangible amortization due to the impairment charge taken in fiscal year 2001
and the impact of divested entities. Depreciation and amortization expense as a
percentage of revenue increased to 12.7% in the quarter ended January 31, 2002
from 11.6% in the quarter ended January 31, 2001. The increase in depreciation
and amortization expense as a percentage of revenues resulted primarily from a
lower level of revenue.
INTEREST EXPENSE, NET:
Net interest expense decreased $2.5 million, or (24.9)% to $7.6 million in the
quarter ended January 31, 2002 from $10.2 million in the quarter ended January
31, 2001. This decrease is primarily attributable to lower average debt balances
and lower interest rates on variable debt in the current fiscal quarter, versus
last year. Interest expense, as a percentage of revenues decreased to 7.5% in
the quarter ended January 31, 2002 from 9.0% in the quarter ended January 31,
2001.
(INCOME) LOSS FROM EQUITY METHOD INVESTMENTS, NET:
Income from equity method investments in the quarter ended January 31, 2002 is
due primarily to income recorded at Green Fiber, the Company's 50-50 joint
venture. In the quarter ended January 31, 2001, the Company recorded its share
of a loss recorded at Green Fiber due to significant transitional and
restructuring expenses. The quarter ended January 31, 2001 also includes an
impairment charge to reduce the Company's investment in Oakhurst Company, Inc.
("Oakhurst") and New Heights.
A majority interest (80.1%) in New Heights was sold in September 2001 for
consideration of $0.3 million and contingent consideration of up to $9.0
million. The Company will record the contingent consideration when the
contingency is removed. The Company retained an interest (19.9%) in the New
Heights project, as well as financial obligations related solely to the power
plant. The Company is accounting for its retained investment under the equity
method.
MINORITY INTEREST:
At January 31, 2002, this amount represented the minority owners' interest in
the Company's majority owned subsidiary American Ash Recycling of Tennessee,
Ltd. At January 31, 2001, minority interest also reflected the minority owners'
interest in the Company's majority owned subsidiaries Maine Energy Recovery
Company ("Maine Energy") and Penobscot Energy Recovery Company. Effective March
1, 2001, the Company acquired the remaining 16.25% minority interest in Maine
Energy and sold its majority interest in the Penobscot Energy Recovery Company.
OTHER EXPENSE (INCOME):
Other expense (income) decreased $3.3 million in the quarter ended January 31,
2002 to ($1.5) million from $1.7 million in the quarter ended January 31, 2001.
This change is attributable to the write off of the Commodity Hedges arising
from the bankruptcy of Enron in the third quarter 2002 and the sale of Bangor
Hydro warrants in the quarter ended January 31, 2001.
PROVISION (BENEFIT) FOR INCOME TAXES:
Provision for income taxes increased $3.1 million in the quarter ended January
31, 2002 to $0.2 million from a benefit of ($2.9) million in the quarter ended
January 31, 2001. The increase, as well as the change in the effective tax rate
to 26.3% from 21.5%, is primarily due to the increase in pretax income.
Nine Months Ended January 31, 2002:
REVENUES:
Revenues decreased $56.9 million, or (15.0)% to $323.3 million in the nine
months ended January 31, 2002 from $380.2 million in the nine months ended
January 31, 2001. The decrease in the nine months is attributable to several
factors: the impact of businesses divested accounted for approximately $49.0
million while lower average recyclable
commodity prices and volumes amounted to $32.5 million. These decreases were
partially offset by price and volume increases in the core solid waste business
amounting to $21.7 million and the positive rollover effect of acquisitions
amounting to approximately $2.9 million.
COST OF OPERATIONS:
Cost of operations decreased $44.3 million or (17.3)% to $211.5 million in the
nine months ended January 31, 2002 from $255.8 million in the nine months ended
January 31, 2001. This decrease mainly arises from lower volumes of recyclable
material purchases and divestitures. Cost of operations as a percentage of
revenues decreased to 65.4% in the nine months ended January 31, 2002 from 67.3%
in the prior year. The decrease in cost of operations as a percentage of
revenues was primarily the result of a decreased contribution from recyclable
brokerage operations, which carry a high cost of operations as a percentage of
revenues (approximately 90%).
GENERAL AND ADMINISTRATION:
General and administration expenses decreased $3.9 million, or (8.7)% to $41.2
million in the nine months ended January 31, 2002 from $45.1 million in the nine
months ended January 31, 2001, but increased as a percentage of revenues to
12.7% in the nine months ended January 31, 2002 from 11.9% in the nine months
ended January 31, 2001. The decrease in general and administration expenses was
primarily the result of divestitures as well as lower legal expenses. The
increase in general and administration expenses as a percentage of revenues was
primarily the result of recyclable brokerage operations, which had a decrease in
revenue in concert with fixed general and administration expenses.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization expense decreased $1.9 million, or (4.8)%, to
$38.4 million in the nine months ended January 31, 2002 from $40.3 million in
the nine months ended January 31, 2001. The decrease was attributable to lower
intangible amortization due to the impairment charge taken in fiscal year 2001
and the impact of divested entities. Depreciation and amortization expense as a
percentage of revenue increased to 11.9% in the nine months ended January 31,
2002 from 10.6% in the nine months ended January 31, 2001. The increase as a
percentage of revenues resulted primarily from a lower level of revenue.
INTEREST EXPENSE, NET:
Net interest expense decreased $6.1 million, or (20.5)% to $23.8 million in the
nine months ended January 31, 2002 from $29.9 million in the nine months ended
January 31, 2001. This decrease is primarily attributable to lower average debt
balances and lower interest rates on variable debt in the current period, versus
the prior period. Interest expense, as a percentage of revenues decreased to
7.4% in the nine months ended January 31, 2002 from 7.9% in the nine months
ended January 31, 2001.
(INCOME) LOSS FROM EQUITY METHOD INVESTMENTS, NET:
Income from equity method investments in the nine months ended January 31, 2002
is due primarily to income recorded at Green Fiber, the Company's 50-50 joint
venture. In the nine months ended January 31, 2001, the Company recorded its
share of a loss recorded at Green Fiber due to significant transitional and
restructuring expenses. The nine months ended January 31, 2001 also includes an
impairment charge to reduce the Company's investment in Oakhurst and New
Heights.
A majority interest (80.1%) in New Heights was sold in September 2001 for
consideration of $0.3 million and contingent consideration of up to $9.0
million. The Company will record the contingent consideration when the
contingency is removed. The Company retained an interest (19.9%) in the New
Heights project, as well as financial obligations related solely to the power
plant. The Company is accounting for its retained investment under the equity
method.
MINORITY INTEREST:
At January 31, 2002, this amount represented the minority owners' interest in
the Company's majority owned subsidiary American Ash Recycling of Tennessee,
Ltd. At January 31, 2001 minority interest also reflected the minority owners'
interest in the Company's majority owned subsidiaries Maine Energy and Penobscot
Energy Recovery Company. Effective March 1, 2001, the Company acquired the
remaining 16.25% minority interest in
Maine Energy and sold its majority interest in the Penobscot Energy Recovery
Company.
OTHER INCOME:
Other income increased $3.3 million in the nine months ended January 31, 2002 to
$5.0 from $1.7 million in the nine months ended January 31, 2001. This increase
is attributable to the divestiture of Multitrade, which resulted in a gain of
$4.0 million, partially offset by the write off of the Commodity Hedges arising
from the bankruptcy of Enron.
PROVISION FOR INCOME TAXES:
Provision for income taxes increased $4.4 million in the nine months ended
January 31, 2002 to $5.5 million from $1.1 million in the nine months ended
January 31, 2001. This increase, as well as the change in the effective tax rate
to 37.5%, is primarily due to the increase in pretax income and the tax benefit
from the sale of 80.1% of the Company's equity interest in New Heights in the
nine months ended January 31, 2002 and the recognition of losses on investments
in New Heights in the nine months ended January 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's business is capital intensive. The Company's capital requirements
include acquisitions, fixed asset purchases and capital expenditures for
landfill development and cell construction, as well as site and cell closure.
The Company had positive net working capital of $55.0 million and $11.0 million
at April 30, 2001 and at January 31, 2002, respectively. The main factors
accounting for the decrease were lower cash balances, lower trade receivable
balances, recognition of current portion of Interest Rate Swaps, and the sale of
Assets of Discontinued Operations and Net Assets Held for Sale.
The Company has a $401.9 million revolving line of credit with a group of banks
for which Fleet Bank, N.A. is acting as agent. This line of credit consists of a
$280 million Senior Secured Revolving Credit Facility ("Revolver") and a $121.9
million Senior Secured Delayed Draw Term "B" Loan ("Term Loan"). This line of
credit is secured by all assets of the Company, including the Company's interest
in the equity securities of its subsidiaries. The Revolver matures in December
2004 and the Term Loan matures in December 2006. Funds available to the Company
under the line of credit were approximately $78 million at January 31, 2002.
Net cash provided by operating activities amounted to $52.8 million for the nine
months ended January 31, 2002 compared to $35.9 million for the same period of
the prior fiscal year. The increase was primarily due to the change in the
Company's working capital: primarily lower trade receivables and increased
payables together with an increase in net income.
Net cash provided by investing activities was $2.1 million for the nine months
ended January 31, 2002 compared to $50.1 million used in investing activities
for the same period last year. The decrease in cash used in investing activities
reflected mainly the Company's lower capital expenditures, fewer acquisitions,
and the proceeds from divestitures.
Net cash used in financing activities was $60.6 million for the nine months
ended January 31, 2002 compared to $42.9 million cash provided by financing
activities for the same period of the prior fiscal year. This decrease was
primarily due to the Company paying down debt from the proceeds from
divestitures and the utilization of working capital, mainly cash.
SEASONALITY
- -----------
The Company's transfer and disposal revenues have historically been lower during
the months of November through March. This seasonality reflects the lower volume
of waste during the late fall, winter and early spring months primarily because:
(i) the volume of waste relating to construction and demolition activities
decreases substantially during the winter months in the northeastern United
States; and (ii) decreased tourism in Vermont, Maine and eastern New York during
the winter months tends to lower the volume of waste generated by commercial and
restaurant customers, which is partially offset by the winter ski industry.
Since certain of the Company's operating and fixed costs remain constant
throughout the fiscal year, operating income results are therefore impacted by a
similar seasonality. In addition, particularly harsh weather conditions
typically result in increased operating costs to certain of the Company's
operations.
INFLATION AND PREVAILING ECONOMIC CONDITIONS
- --------------------------------------------
To date, inflation has not had a significant impact on the Company's operations.
Consistent with industry practice,
most of the Company's contracts provide for a pass through of certain costs,
including increases in landfill tipping fees and, in some cases, fuel costs. The
Company therefore believes it should be able to implement price increases
sufficient to offset most cost increases resulting from inflation. However,
competitive factors may require the Company to absorb at least a portion of
these cost increases, particularly during periods of high inflation.
The Company's business is located in the eastern United States. Therefore, the
Company's business, financial condition and results of operations are
susceptible to downturns in the general economy in this geographic region and
other factors affecting the region such as state regulations and severe weather
conditions. The Company is unable to forecast or determine the timing and/or the
future impact of a sustained economic slowdown.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In July 2001, the FASB issued SFAS No. 141, Business Combinations and No. 142,
Goodwill and Other Intangible Assets. These standards, among other things,
significantly modify the current accounting rules related to accounting for
business acquisitions, amortization of intangible assets and the method of
accounting for impairments. SFAS No. 142 requires that any goodwill recorded in
connection with an acquisition consummated on or after July 1, 2001 not be
amortized. The Company has not completed an analysis as to the magnitude of the
impact of these new pronouncements on the Company's financial statements.
However, the Company believes that the impact, when ultimately determined, could
have a significant adverse effect on the Company's carrying value of certain
long-term assets (mainly goodwill). The Company will adopt SFAS No. 141 and SFAS
No. 142 as of the beginning of its fiscal year 2003.
In July 2001, the FASB issued SFAS No.143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes the
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, the entity either settles the obligation for the
amount recorded or incurs a gain or loss. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. Management is evaluating the effect of this
statement on the Company's results of operations and financial position.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long Lived Assets. SFAS No. 144 supercedes SFAS No. 121, Accounting
for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed
of. SFAS No. 144 addresses financial accounting and reporting for the impairment
of long lived assets held for use and for long lived assets that are to be
disposed of by sale (including discontinued operations). SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. Management is
evaluating the effect of this statement on the Company's results of operations
and financial position as well as related disclosures.
ADJUSTED EBITDA
- ---------------
Adjusted EBITDA represents operating income (earnings before interest and taxes,
or "EBIT") plus depreciation and amortization expense less minority interest.
Adjusted EBITDA is not a measure of financial performance under generally
accepted accounting principles, but is provided because the Company understands
that certain investors use this information when analyzing the financial
position and performance of the Company.
Three Months Ended January 31, Nine Months Ended January 31,
------------------------------ -----------------------------
(In Thousands) (In Thousands)
Adjusted EBITDA: 2001 2002 2001 2002
-------- -------- -------- --------
Operating Income $ 10,788 $ 8,228 $ 38,979 $ 32,188
Depreciation and Amortization 13,043 12,825 40,316 38,390
Minority Interest (287) (29) (949) 2
-------- -------- -------- --------
Adjusted EBITDA $ 23,544 $ 21,024 $ 78,346 $ 70,580
======== ======== ======== ========
EBITDA as a percentage of revenues 20.9% 20.8% 20.6% 21.8%
======== ======== ======== ========
Noted below is Adjusted EBITDA as reported by each of the Company's key operating groups.
Three Months Ended January 31, Nine Months Ended January 31,
------------------------------ -----------------------------
(In Thousands) (In Thousands)
Adjusted EBITDA by Group: 2001 2002 2001 2002
-------- -------- -------- --------
Solid Waste Operations $ 20,102 $ 18,700 $ 65,364 $ 64,761
Recycling 2,733 1,854 10,715 4,874
Other 709 470 2,267 945
-------- -------- -------- --------
Adjusted EBITDA $ 23,544 $ 21,024 $ 78,346 $ 70,580
======== ======== ======== ========
Analysis of the factors contributing to the change in adjusted EBITDA is included in the discussions above.
INTEREST RATE VOLATILITY
- ------------------------
The interest rate on $250 million of long-term debt has been fixed through six
interest rate swaps. The Company has interest rate risk relating to
approximately $37 million of long-term debt (not including current maturities)
at January 31, 2002. The average interest rate on the variable rate portion of
long-term debt was 4.48% for the third fiscal quarter. 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 $0.1 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.
COMMODITY PRICE VOLATILITY
- --------------------------
The Company is subject to commodity price fluctuations related to the portion of
its sales of recyclable commodities that are not under floor or flat pricing
arrangements. To minimize the Company's commodity exposure, the Company had
entered into ten commodity hedging agreements that had been authorized pursuant
to the Company's policies and procedures. 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 the
Company's operating margin is estimated at $1.8 million for the quarter
reported.
On December 2, 2001, Enron, the counterparty for all of the Company's commodity
hedges, filed for Chapter 11 bankruptcy protection. As a result of the filing,
the Company executed the early termination provisions provided under the forward
contracts, and filed a claim with the bankruptcy court. Additionally, the
Company agreed with its equity method investee, Green Fiber, to include Green
Fiber in its claim (as allowed under the applicable affiliate provisions) in
exchange for entering into commodity contracts between Green Fiber and the
Company on terms identical to those with Enron. The Company recorded a charge of
$1.6 million in other expense to recognize the change in fair value of its
commodity contracts. Subsequent changes in the fair value of these commodity
contracts (currently $0.4 million) will be reflected in earnings until their
March 2003 termination.
Deferred gains of approximately $1.0 million, net of tax, related to the
Company's terminated contracts with Enron are included in accumulated other
comprehensive income, and will be reclassified into earnings as the original
hedged transactions settle.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Form 10-Q and presented elsewhere by management from time to time.
OUR INCREASED LEVERAGE MAY IMPACT OUR ABILITY TO MAKE FUTURE ACQUISITIONS.
As a result of the acquisition of KTI and the increase in our credit facility,
our indebtedness has increased substantially. This increased indebtedness has
resulted in increased borrowing costs, which have adversely impacted our
operating results. In addition, the aggregate amount of indebtedness has limited
and may continue to limit the Company's ability to incur additional
indebtedness, and thereby may limit the acquisition program.
WE MAY NOT BE SUCCESSFUL IN MAKING ACQUISITIONS, WHICH COULD LIMIT OUR FUTURE
GROWTH.
Our strategy envisions that a substantial part of our future growth will come
from making acquisitions. There can be no assurance that we will be able to
identify suitable acquisition candidates and, once identified, to negotiate
successfully their acquisition at a price or on terms and conditions favorable
to us, or to integrate the operations of such acquired businesses with our
operations. Any of these acquisitions may be of significant size and may include
assets that are outside our geographic territories or businesses that are
ancillary to our core business strategy. In addition, due to the increased
consolidation of the solid waste industry and our current size, we cannot assure
you that we will be able to make acquisitions in the future at a rate consistent
with our historical growth rate.
WE ARE DEPENDENT ON THE MEMBERS OF OUR SENIOR MANAGEMENT TEAM.
We are highly dependent upon the services of the members of our senior
management team, the loss of any of who may have a material adverse effect on
our business, financial condition and results of operations. In addition, our
future success depends on our continuing ability to identify, hire, train,
motivate and retain highly trained personnel. We may be in default under our
credit facility if both John Casella and James Bohlig cease to be employed by
us.
OUR ABILITY TO MAKE ACQUISITIONS IS DEPENDENT ON THE AVAILABILITY OF ADEQUATE
CASH AND THE ATTRACTIVENESS OF OUR STOCK PRICE.
We anticipate that any future business acquisitions will be financed through
cash from operations, borrowings under our bank line of credit, the issuance of
shares of our Class A common stock and/or seller financing. There can be no
assurance that we will have sufficient existing capital resources, that our
stock price will be sufficiently attractive for use in an acquisition or that we
will be able to raise sufficient additional capital resources on terms
satisfactory to us, if at all, in order to meet our capital requirements.
We also believe that a significant factor in our ability to close acquisitions
will be the attractiveness of our Class A common stock as consideration for
potential acquisition candidates. This attractiveness may, in large part, be
dependent upon the relative market price and capital appreciation prospects of
our Class A common stock compared to the equity securities of our competitors.
The recent levels of the market price of our Class A common stock has affected
and could in the future materially adversely affect our acquisition program.
ENVIRONMENTAL REGULATIONS COULD SUBJECT US TO FINES, PENALTIES AND LIMITATIONS
ON OUR ABILITY TO EXPAND.
We are subject to potential liability and restrictions under environmental laws.
Our waste-to-energy and manufacturing
facilities are subject to regulations limiting discharges of pollution into the
air and water, and the solid waste operations are subject to a wide range of
Federal, state and, in some cases, local environmental and land use
restrictions. If we are not able to comply with the requirements that apply to a
particular facility, we could be subject to fines and penalties, and we may be
required to spend large amounts to bring an operation into compliance or to
temporarily or permanently stop an operation that is not permitted under the
law. Those costs or actions could have a material adverse effect upon our
business, financial condition and results of operations.
Environmental and land use laws also can have an impact on whether our
operations can expand and, in the case of our solid waste operations, may
dictate those geographic areas from which we must, or, from which we may not,
accept waste. The waste management industry has been and likely will continue to
be subject to regulation, as well as to attempts to regulate the industry
through new legislation. Those regulations and laws also may limit the overall
size and daily waste volume that may be accepted by a solid waste operation. If
we are not able to expand or otherwise operate one or more of our facilities
profitably because of limits imposed under environmental laws, we may be
required to increase our utilization of disposal facilities owned by third
parties, and if so, our business, financial condition and results of operations
could suffer a material adverse effect.
We have grown through acquisitions, and we have tried to evaluate and address
environmental risks and liabilities presented by newly acquired businesses as we
have identified them. It is possible that some liabilities, including ones that
may exist only because of the past operations of an acquired business, may prove
to be more difficult or costly to address than we anticipate. It is also
possible that government officials responsible for enforcing environmental laws
may believe an issue is more serious than we would expect, or that we will fail
to identify or fully appreciate an existing liability before we become legally
responsible to address it. Some of the legal sanctions to which we could become
subject could cause us to lose a needed permit, or prevent us from or delay us
in obtaining or renewing permits to operate our facilities. The number, size and
nature of those liabilities could have a material adverse effect on our
business, financial condition and results of operations.
Our operating program depends on our ability to operate and expand the landfills
we own and lease and to develop new landfill sites. Several of our landfills are
subject to local laws purporting to regulate their expansion and other aspects
of their operations. There can be no assurance that the laws adopted by
municipalities in which our landfills are located will not have a material
adverse effect on our utilization of our landfills or that we will be successful
in obtaining new landfill sites or expanding the permitted capacity of any of
our current landfills once their remaining disposal capacity has been consumed.
OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED BY CHANGING PRICES OR
MARKET REQUIREMENTS FOR RECYCLABLE MATERIALS.
Our results of operations may be materially adversely affected by changing
purchase or resale prices or market requirements for recyclable materials. Our
recycling business involves the purchase and sale of recyclable materials, some
of which are priced on a commodity basis. The resale and purchase prices of, and
market demand for, recyclable materials, particularly waste paper, plastic and
ferrous and aluminum metals, can be volatile due to numerous factors beyond our
control. These changes have in the past contributed, and may continue to
contribute, to significant variability in our period-to-period results of
operations.
Some of our subsidiaries involved in the recycling business use long-term supply
contracts with customers with floor price arrangements to minimize the commodity
risk for recyclable materials, particularly waste paper and aluminum metals.
Under these contracts, our subsidiaries obtain a guaranteed minimum floor price
for the recyclable materials along with a commitment to receive additional
amounts if the current market price rises above the minimum price. These
contracts are generally with large domestic companies, which use the recyclable
materials in their manufacturing processes. Any failure to continue to secure
long-term supply contracts with minimum price arrangements, or a breach by
customers of one or more of these contracts could reduce our recycling revenues
and have a material adverse effect on our business, financial condition and
results of operations.
THE SEASONALITY OF OUR REVENUES COULD ADVERSELY IMPACT OUR FINANCIAL
CONDITION.
The Company's transfer and disposal revenues have historically been lower during
the months of November through March. This seasonality reflects the lower volume
of waste during the late fall, winter and early spring months primarily because:
(i) the volume of waste relating to construction and demolition activities
decreases substantially during the winter months in the northeastern United
States; and (ii) decreased tourism in Vermont, Maine and eastern New York during
the winter months tends to lower the volume of waste generated by commercial and
restaurant
customers, which is partially offset by the winter ski industry. Since certain
of the Company's operating and fixed costs remain constant throughout the fiscal
year, operating income is therefore impacted by a similar seasonality. In
addition, particularly harsh weather conditions could result in increased
operating costs to some of the Company's operations.
OUR BUSINESS IS GEOGRAPHICALLY CONCENTRATED AND IS THEREFORE SUBJECT TO
REGIONAL ECONOMIC DOWNTURNS.
Our operations and customers are principally located in the eastern United
States. Therefore, our business, financial condition and results of operations
are susceptible to regional economic downturns and other regional factors,
including state regulations and severe weather conditions. In addition, as we
expand in our existing markets, opportunities for growth within these regions
will become more limited. The costs and time involved in permitting and the
scarcity of available landfills will make it difficult for us to expand
vertically in these markets. We cannot assure you that we will complete enough
acquisitions in other markets to lessen our regional geographic concentration.
MAINE ENERGY MAY BE REQUIRED TO MAKE A PAYMENT IN CONNECTION WITH THE PAYOFF OF
THE MAINE ENERGY BONDS, WHICH EXCEEDS THE AMOUNT OF THE LIABILITY WE RECORDED IN
CONNECTION WITH THE KTI AQUISITION.
Under the terms of a waste handling agreement among the Biddeford-Saco Waste
Handling Committee, Biddeford, Saco and Maine Energy, Maine Energy may be
required, following the date on which the bonds financing Maine Energy and
certain limited partner loans to Maine Energy are paid in full, to pay an
aggregate of 18% of the fair market value of the equity of the partners in Maine
Energy to the respective municipalities party to that agreement. In connection
with the acquisition of KTI, the Company estimated the fair market value of
Maine Energy as of the date the bonds are assumed to be paid in full, and
recorded a liability equal to 18% of such amount. We cannot assure you that our
estimate of the fair market value of Maine Energy will prove to be accurate, and
in the event we have underestimated the value of Maine Energy, we could be
required to recognize unanticipated charges, in which case our financial
condition, results of operations and liquidity could be materially adversely
affected.
WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE IN THE HIGHLY COMPETITIVE SOLID WASTE
SERVICES INDUSTRY.
The solid waste services industry is highly competitive, is undergoing a period
of increasingly rapid consolidation, and requires substantial labor and capital
resources. Some of the markets in which we compete or will likely compete are
served by one or more of the large national or multinational solid waste
companies, as well as numerous regional and local solid waste companies. Intense
competition exists not only to provide services to customers, but also to
acquire other businesses within each market. Some of our competitors have
significantly greater financial and other resources than us. From time to time,
competitors may reduce the price of their services in an effort to expand market
share or to win a competitively bid municipal contract. These practices may
either require us to reduce the pricing of our services or result in our loss of
business. As is generally the case in the industry, municipal contracts are
subject to periodic competitive bidding. There can be no assurance that we will
be the successful bidder to obtain or retain these contracts. If we are unable
to compete with larger and better capitalized companies, or to replace municipal
contracts lost through the competitive bidding process with comparable contracts
or other revenue sources within a reasonable time period, our business,
financial condition and results of operations could be materially adversely
affected.
In our solid waste disposal markets, we also compete with operators of
alternative disposal and recycling facilities and with counties, municipalities
and solid waste districts that maintain their own waste collection, recycling
and disposal operations. These entities may have financial advantages because
user fees or similar charges, tax revenues and tax-exempt financing may be more
available to them than to us.
Our Green Fiber insulation manufacturing joint venture with Louisiana-Pacific
competes with other parties, some of which have substantially greater resources
than we do, which they could use for product development, marketing or other
purposes to our detriment.
OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION MAY BE NEGATIVELY AFFECTED IF
WE INADEQUATELY ACCRUE FOR CLOSURE AND POST-CLOSURE COSTS.
We have material financial obligations relating to closure and post-closure
costs of our existing landfills and will have material financial obligations
with respect to any disposal facilities which we may own or operate in the
future. In addition to the landfills we currently operate, we own four unlined
landfills, which are not currently in operation. We
have provided and will in the future provide accruals for financial obligations
relating to closure and post-closure costs of our owned or operated landfills,
generally for a term of 30 years after final closure of a landfill. We cannot
assure you that our financial obligations for closure or post-closure costs will
not exceed the amount accrued and reserved or amounts otherwise receivable
pursuant to trust funds established for this purpose. Such a circumstance could
result in unanticipated charges and have a material adverse effect on our
financial condition and results of operations.
WE COULD BE PRECLUDED FROM ENTERING INTO CONTRACTS OR OBTAINING PERMITS IF WE
ARE UNABLE TO OBTAIN THIRD PARTY FINANCIAL ASSURANCE TO SECURE OUR CONTRACTUAL
OBLIGATIONS.
Municipal solid waste collection and recycling contracts, obligations associated
with landfill closure and the operation and closure of waste-to-energy
facilities may require performance or surety bonds, letters of credit or other
means of financial assurance to secure our contractual performance. If we are
unable to obtain the necessary financial assurance in sufficient amounts or at
acceptable rates, we could be precluded from entering into additional municipal
solid waste collection contracts or from obtaining or retaining landfill
operating permits. Any future difficulty in obtaining insurance could also
impair our ability to secure future contracts conditioned upon the contractor
having adequate insurance coverage. Accordingly, our failure to obtain financial
assurance bonds, letters of credit or other means of financial assurance or to
maintain adequate insurance could have a material adverse effect on our
business, financial condition and results of operations.
WE MAY BE REQUIRED TO WRITE-OFF CAPITALIZED CHARGES IN THE FUTURE, WHICH COULD
ADVERSELY AFFECT OUR EARNINGS.
Any charge against earnings could have a material adverse effect on our earnings
and the market price of our Class A common stock. In accordance with generally
accepted accounting principles, we capitalize certain expenditures and advances
relating to our acquisitions, pending acquisitions, landfills and development
projects. From time to time in future periods, we may be required to incur a
charge against earnings in an amount equal to any unamortized capitalized
expenditures and advances, net of any portion thereof that we estimate will be
recoverable, through sale or otherwise, relating to (a) any operation that is
permanently shut down or has not generated or is not expected to generate
sufficient cash flow, (b) any pending acquisition that is not consummated and
(c) any landfill or development project that is not expected to be successfully
completed. We have incurred such charges in the past.
OUR CLASS B COMMON STOCK HAS TEN VOTES PER SHARE AND IS HELD
EXCLUSIVELY BY JOHN W. CASELLA AND DOUGLAS R. CASELLA.
The holders of our Class B common stock are entitled to ten votes per share and
the holders of our Class A common stock are entitled to one vote per share. At
March 4, 2002, an aggregate of 988,200 shares of our Class B common stock,
representing 9,882,000 votes, were outstanding, all of which were beneficially
owned by John W. Casella, our chairman and chief executive officer, or by his
brother, Douglas R. Casella, a director. Based on the number of shares of common
stock outstanding on March 4, 2002, the shares of our Class A common stock and
Class B common stock held by John W. Casella and Douglas R. Casella represent
approximately 33.75% of the aggregate voting power of our stockholders.
Consequently, John W. Casella and Douglas R. Casella will be able to
substantially influence all matters for stockholder consideration.
Part II. OTHER INFORMATION
- -----------------------------
Item 1. LEGAL PROCEEDINGS
- -----------------------------
On January 7, 2000, the City of Saco, Maine filed a notice of claims with the
Company and Maine Energy claiming entitlement to certain "residual cancellation"
payments from Maine Energy under the waste handling agreement dated June 7, 1991
among the Biddeford-Saco Waste Handling Committee, Biddeford, Saco and Maine
Energy on the basis of the alleged satisfaction of certain conditions, including
the City's right to require the Company to purchase the City's right to receive
future residual cancellation payments as a result of the Company's merger with
KTI, Inc.. The notice of claims alleges that the payments due to Saco exceed $33
million, claims damages in such amounts for breach of contract, breach of
fiduciary duties and fraud and also claims treble damages of $100 million based
on alleged fraudulent transfer of Maine Energy's assets. The notice also
reserves the right to seek punitive damages. On January 10, 2002, the City of
Biddeford, Maine filed a lawsuit in York County Superior Court in Maine alleging
breach of the waste handling agreement for (i) failure to pay the residual
cancellation payments in connection with the KTI merger and (ii) processing
amounts of waste above contractual limits without notice to the City. The
Company believes it has meritorious defenses to these claims.
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 the State has scheduled a hearing
for March 19, 2002 on the liability issue, the result of which will determine if
a hearing on damages is warranted. The company continues to explore settlement
possibilities with the State. The Company believes that it has meritorious
defenses to these claims.
On or about June 18, 2001, the Company received a demand for damages from Daniel
and Douglas Clark related to the merger agreement between the Company and
Corning Community Disposal Service, Inc., alleging that the Company breached the
agreement by failing to timely register the shares of stock for sale promptly
upon receipt of written request. The Clarks allege, that but for the delay of
the Company, they would have had an opportunity to sell their stock before the
market value declined and that they suffered damages as a result of such delay.
On January 4, 2002, the parties settled the matter, with the Company paying the
Clarks the amount of $323,068 in return for full releases.
The Company is engaged in discussions with the Vermont Attorney General's Office
relating to the terms of its commercial small container hauling contracts
entered into with customers in Vermont and anticipates that, as a result of
these discussions, it will make modifications to its commercial small container
hauling contracts used within the State of Vermont. The Company does not believe
that any required modifications will have a material adverse effect on its
results of operations or financial condition. The Company is a defendant in
certain other lawsuits alleging various claims incurred in the ordinary course
of business, none of which, either individually or in the aggregate, the Company
believes are material to its financial condition, results of operations or cash
flows.
The Company offers no prediction of the outcome of any of the proceedings
described above.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Casella Waste Systems, Inc.
Date: March 13, 2002 By: /s/ Richard A Norris
-----------------------------------
Richard A Norris
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
