Filed pursuant to Rule 424(b)(4)
Registration No. 333-33135
4,000,000 Shares
[Casella logo]
Casella Waste Systems, Inc.
Class A Common Stock
(par value $0.01 per share)
--------------
Of the 4,000,000 shares of Class A Common Stock offered hereby, 3,000,000
shares are being sold by the Company and 1,000,000 shares are being sold by the
Selling Stockholders. See "Principal and Selling Stockholders". The Company
will not receive any of the proceeds from the sale of shares by the Selling
Stockholders.
Each share of Class A Common Stock entitles its holder to one vote,
whereas each share of Class B Common Stock entitles its holder to ten votes.
All of the shares of Class B Common Stock are held by John W. Casella, the
President, Chief Executive Officer and Chairman of the Board and Douglas R.
Casella, the Vice Chairman of the Board and trusts for the benefit of their
minor children. After consummation of the Offering, such stockholders will
beneficially own in the aggregate shares of Class B Common Stock and Class A
Common Stock having approximately 57% of the outstanding voting power of the
Company's Common Stock.
Prior to this Offering, there has been no public market for the Class A
Common Stock of the Company. For factors considered in determining the initial
public offering price, see "Underwriting".
See "Risk Factors" beginning on page 7 for certain considerations relevant
to an investment in the Class A Common Stock.
The Class A Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "CWST".
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Initial Public Underwriting Proceeds to Proceeds to
Offering Price Discount (1) Company(2) Selling Stockholders
---------------- -------------- ------------- ---------------------
Per Share ...... $ 18.00 $ 1.26 $ 16.74 $ 16.74
Total (3) ...... $72,000,000 $5,040,000 $50,220,000 $16,740,000
- -----------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(2) Before deducting estimated expenses of $1,000,000 payable by the Company.
(3) Certain Selling Stockholders have granted the Underwriters an option for 30
days to purchase up to an additional 600,000 shares of Class A Common
Stock at the initial public offering price per share, less the
underwriting discount, solely to cover over-allotments. If such option is
exercised in full, the total initial public offering price, underwriting
discount and proceeds to Selling Stockholders will be $82,800,000,
$5,796,000 and $26,784,000, respectively. See "Underwriting".
--------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York on
or about November 3, 1997, against payment therefor in immediately available
funds.
Goldman, Sachs & Co.
Donaldson, Lufkin & Jenrette
Securities Corporation
Oppenheimer & Co., Inc.
--------------
The date of this Prospectus is October 28, 1997.
[Inside Front Cover]
On the inside front cover of the Prospectus is a photograph of a waste
collection vehicle bearing the "Casella" logo with a reflection of a white
colonial-style house on the door of the cabin to the vehicle.
["Gatefold" Fold-out to appear inside the Inside Front Cover]
On the "gatefold" fold-out to appear inside the inside front cover of the
Prospectus, under the caption "Integrated Waste Management Services Region," is
a map of the Company's operations, by county, in the states of Vermont, New
Hampshire, Maine, New York and Pennsylvania. The areas covered by the Company's
operations are shaded, with the shaded areas each colored differently to
distinguish between the Central, Western and Eastern regions of the Company's
five-state operations. Symbols are spread throughout the shaded areas to
indicate the locations of the Company's recycling centers, transfer stations,
collection divisions, disposal facilities, waste tire processing facility and
corporate headquarters. Situated around the map are four photographs depicting
collection, disposal, recycling and transfer station facilities or operations,
and under each photograph is a list of each respective facility, by location.
This Prospectus contains registered service marks, trademarks and trade
names of the Company, including the Casella Waste Systems name and logo.
The Company intends to furnish to its stockholders annual reports
containing audited consolidated financial statements and quarterly reports
containing unaudited interim financial information for the first three fiscal
quarters of each fiscal year of the Company.
--------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK OF THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH CLASS A COMMON STOCK, AND THE IMPOSITION OF A PENALTY BID,
IN CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING".
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements, including the Notes
thereto, appearing elsewhere in this Prospectus. Except as otherwise noted
herein, all information in this Prospectus: (i) gives effect to the automatic
redemption upon the closing of this Offering of all outstanding shares of
Series A Preferred Stock and Series B Preferred Stock; (ii) gives effect to the
exercise upon the closing of this Offering of warrants to purchase 1,811,199
shares of Class A Common Stock with the redemption proceeds of the Series A
Preferred Stock and Series B Preferred Stock; (iii) gives effect to the
automatic conversion upon the closing of this Offering of all outstanding
shares of Series D Convertible Preferred Stock into 1,922,169 shares of Class A
Common Stock; (iv) assumes the issuance of 70,489 shares of Class A Common
Stock issuable to a director of the Company at or after the closing of this
Offering as additional purchase price related to the acquisition by the Company
of the business of which such director was the sole stockholder; (v) reflects
the filing upon the closing of this Offering of an Amended and Restated
Certificate of Incorporation of the Company; and (vi) assumes no exercise of
the Underwriters' over-allotment option. For purposes hereof, references to
"Common Stock" mean the Class A Common Stock and the Class B Common Stock. See
"Description of Capital Stock", "Underwriting" and Notes to Consolidated
Financial Statements. The Company's fiscal year ends on April 30. References to
a particular fiscal year are to the fiscal year ending on April 30 of that year
(e.g., the 1997 fiscal year ended on April 30, 1997). Unless otherwise
specified herein, all references to the "Company" or "Casella" mean Casella
Waste Systems, Inc. and its subsidiaries, and all references to "solid waste"
mean non-hazardous solid waste.
The Company
Casella Waste Systems, Inc. is a regional, integrated, non-hazardous solid
waste services company that provides collection, transfer, disposal and
recycling services in Vermont, New Hampshire, Maine, upstate New York and
northern Pennsylvania. As of September 30, 1997, the Company owned and/or
operated four Subtitle D landfills, 31 transfer stations, nine recycling
processing facilities, and 23 collection operations which together served over
73,000 commercial, industrial and residential customers. The Company was
founded in 1975 as a single-truck operation in Rutland, Vermont and
subsequently expanded its operations throughout the state of Vermont. In 1993,
the Company initiated an acquisition strategy to take advantage of anticipated
reductions in available landfill capacity in Vermont and surrounding states due
to increasing environmental regulation and other market forces driving
consolidation in the solid waste industry. From May 1, 1994 through April 30,
1997, the Company acquired ownership of or long-term operating rights to 44
solid waste businesses, including four landfills, and, between May 1, 1997 and
September 30, 1997, the Company acquired an additional 12 such businesses. The
Company believes that additional acquisition opportunities exist in the markets
it serves and in other prospective markets.
The Company's operating strategy is based on the integration of its
collection and disposal operations and the internalization of waste collected.
The Company believes that control of a substantial portion of the waste stream
and economies of scale provide it with advantages over non-integrated
competitors in its markets. During fiscal 1997, approximately 65% of the solid
waste collected by the Company was delivered for disposal at its landfills.
Additionally, approximately 53% of the solid waste disposed of at its landfills
was collected by the Company.
The Company's objective is to continue to grow by expanding its services
in markets where it can be one of the largest and most profitable
fully-integrated solid waste services companies. The Company intends to
continue to pursue this objective by: (i) expanding through acquisitions of
collection companies and disposal facilities in new markets and through
"tuck-in" acquisitions in existing markets; (ii) generating internal growth in
existing markets through increased sales penetration and the marketing of
additional services to existing customers; and (iii) implementing operating
enhancements and efficiencies.
The principal executive offices of the Company are located at 25 Greens
Hill Lane, Rutland, Vermont 05701. The Company's telephone number at such
address is (802) 775-0325. Casella Waste Systems, Inc. was incorporated as a
Delaware corporation in 1993 as a holding company for various operating
subsidiaries.
Risk Factors
Certain risk factors should be considered in evaluating the Company and
its business before purchasing the Class A Common Stock offered by this
Prospectus. Such factors include, among others, the Company's ability to manage
growth, a history of losses, the ability to identify, acquire and integrate
acquisition targets, dependence on management, the uncertain ability to finance
the Company's growth, limitations on landfill permitting and expansion and
geographic concentration. For a discussion of these and certain other factors,
see "Risk Factors".
3
The Offering
Class A Common Stock offered by the Company ......... 3,000,000 shares
Class A Common Stock offered by Selling Stockholders . 1,000,000 shares
Common Stock to be outstanding after this Offering (1):
Class A Common Stock .............................. 9,778,745 shares
Class B Common Stock .............................. 1,000,000 shares
Total ............................................. 10,778,745 shares
Nasdaq National Market symbol ..................... CWST
Use of Proceeds .................................... Reduction of existing indebtedness and
redemption of Series C Preferred Stock
(approximately $760,000 of which will be paid
to certain affiliates of a non-management
director of the Company), acquisitions and
other general corporate purposes. The
Company will not receive any proceeds from
the sale of shares of Class A Common Stock
by the Selling Stockholders. See "Use of
Proceeds".
Voting Rights ....................................... The holders of Class A Common Stock
generally have rights identical to holders of
Class B Common Stock, except that holders of
Class A Common Stock are entitled to one vote
per share and holders of Class B Common
Stock are entitled to ten votes per share.
Holders of all classes of Common Stock
generally will vote together as a single class on
all matters presented to the stockholders for
their vote or approval except that the holders
of Class A Common Stock will at all times be
entitled to elect at least one director. See
"Description of Capital Stock--Common
Stock--Voting Rights".
- ------------
(1) Consists of the number of shares of Class A Common Stock and Class B Common
Stock outstanding on July 31, 1997, and an additional 100,443 shares of
Class A Common Stock issued or issuable upon exercise of warrants exercised
or to be exercised between July 31, 1997 and the closing of this Offering.
Each share of Class B Common Stock is convertible into one share of Class A
Common Stock at the option of the holder and may not be transferred to
anyone other than a Class B Permitted Holder (as defined). See "Description
of Capital Stock". Excludes: (i) 1,377,635 shares of Class A Common Stock
issuable upon exercise of stock options outstanding on July 31, 1997 with a
weighted average exercise price of $6.23 per share (of which options to
purchase 20,000 shares at an exercise price of $0.60 per share were
exercised in September 1997); (ii) an additional 1,658,500 shares reserved
for issuance under the Company's 1997 Stock Incentive Plan, 1997 Employee
Stock Purchase Plan and 1997 Non-Employee Director Stock Option Plan
(collectively, the "Stock Plans"); and (iii) warrants to purchase 280,665
shares of Class A Common Stock at a weighted average exercise price of $5.03
per share. See "Management--Benefit Plans", "Description of Capital Stock"
and Note 7 of Notes to Consolidated Financial Statements.
4
Summary Historical and Pro Forma Consolidated Financial and Operating Data
Fiscal Year Ended April 30,
---------------------------------------------------------------------------------
Pro Forma
as adjusted(1)(2)
1993 1994 1995 1996 1997 1997
--------- ------------ ------------ ------------ ------------ -------------------
(in thousands, except per share data)
Statement of Operations Data:
Revenues ..................... $11,375 $ 13,491 $ 20,873 $ 38,109 $ 73,176 $103,257
Cost of operations ............ 7,222 9,640 11,615 21,654 43,504 64,517
General and
administrative ............... 2,276 2,702 2,456 6,302 11,340 15,332
Depreciation and
amortization ............... 1,352 1,483 4,511 7,643 13,053 17,480
------- -------- -------- --------- --------- ---------
Operating income (loss) ...... 525 (334) 2,291 2,510 5,279 5,928
Interest expense, net ......... 354 613 1,713 2,392 3,908 3,051
Other (income) expense,
net ........................ (142) 207 56 (78) 931 1,210
------- -------- -------- --------- --------- ---------
Income (loss) before
provision (benefit) for
income taxes,
extraordinary items and
cumulative effect of
change in accounting
principle .................. 313 (1,154) 522 196 440 1,667
Provision (benefit) for
income taxes ............... 155 (441) 220 144 452 855
Extraordinary items ......... -- -- -- 326 -- --
Change in accounting
principle .................. -- 124 -- -- -- --
------- -------- -------- --------- --------- ---------
Net income (loss) ............ $ 158 $ (837) $ 302 $ (274) $ (12) $ 812
======= ======== ======== ========= ========= =========
Accretion of Preferred
Stock and Put Warrants -- -- (2,380) (2,967) (8,530) --
------- -------- -------- --------- --------- ---------
Net Income (loss)
applicable to common
stockholders ............... $ 158 $ (837) $ (2,078) $ (3,241) $ (8,542) $ 812
======= ======== ======== ========= ========= =========
Net income per share ......... $ 0.07
Weighted average number
of shares(3) ............... 11,196
Other Operating Data:
EBITDA (4) .................. $1,877 $ 1,149 $ 6,802 $ 10,153 $ 18,332 $ 23,408
======= ======== ======== ========= ========= =========
Capital expenditures ......... $ 597 $ 843 $ 3,415 $ 10,081 $ 14,926
======= ======== ======== ========= =========
Cash flows from operating
activities .................. $1,632 $ 1,559 $ 4,511 $ 8,224 $ 14,726
======= ======== ======== ========= =========
Cash flows from investing
activities .................. $ (903) $ (2,270) $ (8,841) $ (27,485) $ (50,314)
======= ======== ======== ========= =========
Cash flows from financing
activities .................. $ (672) $ 1,007 $ 4,617 $ 19,022 $ 36,528
======= ======== ======== ========= =========
Three Months Ended July 31,
--------------------------------------------
Pro Forma
as adjusted(1)(2)
1996 1997 1997
------------ ------------ ------------------
Statement of Operations Data:
Revenues ..................... $ 15,217 $ 26,429 $27,712
Cost of operations ............ 8,717 15,662 16,691
General and
administrative ............... 2,302 3,680 3,921
Depreciation and
amortization ............... 3,007 3,851 3,965
-------- -------- --------
Operating income (loss) ...... 1,191 3,236 3,135
Interest expense, net ......... 678 1,634 803
Other (income) expense,
net ........................ (21) 200 360
-------- -------- --------
Income (loss) before
provision (benefit) for
income taxes,
extraordinary items and
cumulative effect of
change in accounting
principle .................. 534 1,402 1,972
Provision (benefit) for
income taxes ............... 508 643 887
Extraordinary items ......... -- -- --
Change in accounting
principle .................. -- -- --
-------- -------- --------
Net income (loss) ............ $ 26 $ 759 $ 1,085
======== ======== ========
Accretion of Preferred
Stock and Put Warrants (100) (2,115) --
-------- -------- --------
Net Income (loss)
applicable to common
stockholders ............... $ (74) $ (1,356) $ 1,085
======== ======== ========
Net income per share ......... $ 0.09
Weighted average number
of shares(3) ............... 11,568
Other Operating Data:
EBITDA (4) .................. $ 4,198 $ 7,087 $ 7,100
======== ======== ========
Capital expenditures ......... $ 2,806 $ 4,579
======== ========
Cash flows from operating
activities .................. $ 2,970 $ 3,079
======== ========
Cash flows from investing
activities .................. $ (8,026) $ (9,465)
======== ========
Cash flows from financing
activities .................. $ 4,925 $ 6,927
======== ========
July 31, 1997
---------------------------------
Pro Forma
Pro Forma(1) as adjusted(1)(5)
-------------- ------------------
Balance Sheet Data:
Cash and cash equivalents .............................. $ 1,955 $ 1,430
Working capital (deficit) .............................. (702) (1,227)
Total assets .......................................... 143,837 143,312
Long-term obligations, net of current maturities ...... 81,613 34,808
Total stockholders' equity (deficit) .................. 29,885 79,835
5
- ------------
(1) Pro forma to give effect to the automatic redemption upon the closing of
this Offering of the Series A Preferred Stock and Series B Preferred Stock
with the redemption price applied to the exercise of warrants to purchase
1,811,199 shares of Class A Common Stock and the automatic conversion upon
the closing of this Offering of outstanding shares of Series D Convertible
Preferred Stock into 1,922,169 shares of Class A Common Stock.
(2) Adjusted to give effect to: (i) the acquisitions completed during fiscal
1997; (ii) the acquisition of substantially all of the assets of H.C.
Gobin, Inc.; and (iii) the application of the estimated net proceeds from
the Offering, after deducting the underwriting discount and estimated
offering expenses payable by the Company, as if each had occurred on May
1, 1996. No pro forma adjustment has been made to (i) the historical
amounts for the three months ended July 31, 1997 to reverse the impact of
the loss incurred by H.C. Gobin, Inc. upon the sale of certain
unprofitable operations divested by H.C. Gobin, Inc. prior to its
acquisition by the Company, or (ii) the historical amounts for the year
ended April 30, 1997 and the three months ended July 31, 1997 to reduce
operating expenses to eliminate specific expenses that the Company
believes would not have been incurred had the Gobin acquisition occurred
as of May 1, 1996. See "Use of Proceeds" and "Unaudited Pro Forma
Consolidated Statement of Operations".
(3) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.
(4) EBITDA is defined as operating income plus depreciation and amortization.
EBITDA does not represent, and should not be considered as, an alternative
to net income or cash flows from operating activities, each as determined
in accordance with generally accepted accounting principles ("GAAP").
Moreover, EBITDA does not necessarily indicate whether cash flow will be
sufficient for such items as working capital or capital expenditures, or
to react to changes in the Company's industry or to the economy generally.
The Company believes that EBITDA is a measure commonly used by lenders and
certain investors to evaluate a company's performance in the solid waste
industry. The Company also believes that EBITDA data may help to
understand the Company's performance because such data may reflect the
Company's ability to generate cash flows, which is an indicator of its
ability to satisfy its debt service, capital expenditure and working
capital requirements. Because EBITDA is not calculated by all companies
and analysts in the same fashion, the EBITDA measures presented by the
Company may not be comparable to similarly-titled measures reported by
other companies. Therefore, in evaluating EBITDA data, investors should
consider, among other factors: the non-GAAP nature of EBITDA data; actual
cash flows; the actual availability of funds for debt service, capital
expenditures and working capital; and the comparability of the Company's
EBITDA data to similarly-titled measures reported by other companies. For
more information about the Company's cash flows, see page F-9.
(5) Adjusted to give effect to (i) the sale of the Class A Common Stock offered
by the Company pursuant to this Offering, after deducting the underwriting
discount and estimated offering expenses payable by the Company and the
application of the estimated net proceeds therefrom; (ii) the exercise of
warrants to purchase 100,443 shares of Class A Common Stock at a weighted
average exercise price of $5.53 per share and the application of the net
proceeds therefrom, which exercise occurred or will occur between July 31,
1997 and the closing of this Offering; and (iii) the call by the Company
in September 1997 of warrants to purchase 75,000 shares at a call price of
$7.00 per share. See "Use of Proceeds" and "Capitalization".
6
RISK FACTORS
In addition to the other information in this Prospectus, the following
risk factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Class A Common Stock offered by this
Prospectus. This Prospectus contains certain forward-looking statements that
involve risks and uncertainties. The cautionary statements contained in this
Prospectus should be read as being applicable to all related forward-looking
statements wherever they appear in this Prospectus. The Company's actual
results could differ materially from those discussed here. Important factors
that could cause or contribute to such differences include those discussed
below, as well as those discussed elsewhere in this Prospectus.
Ability to Manage Growth
The Company's objective is to continue to grow by expanding its services
in markets where it can be one of the largest and most profitable
fully-integrated solid waste services companies. Consequently, the Company may
experience periods of rapid growth. Such growth, if it were to occur, could
place a significant strain on the Company's management and on its operational,
financial and other resources. Any failure to expand its operational and
financial systems and controls or to recruit appropriate personnel in an
efficient manner at a pace consistent with such growth would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Strategy".
History of Losses
The Company has incurred net losses in three of the past four years. The
net loss was $11,786 in fiscal 1997 (including non-recurring expenses of
approximately $650,000 incurred in connection with the settlement of certain
litigation naming the Company), and $273,867 in fiscal 1996 (including the
write-off of unamortized issuance costs of $326,308 (net of $168,098 income tax
benefit) associated with certain subordinated debt). As of July 31, 1997, the
Company's accumulated deficit (including the accretion attributable to the
preferred stock and warrants in the amount of approximately $12.9 million, net
of issuance costs of $260,000) was approximately $11.7 million. Although the
Company was profitable in the quarter ended July 31, 1997, there can be no
assurance that the Company will be profitable in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Ability to Identify, Acquire and Integrate Acquisition Targets
To date, the Company has grown principally through acquiring and
integrating independent solid waste collection, transfer and disposal
operations. The Company's strategy envisions that a substantial part of the
Company's future growth will come from acquiring and integrating similar
operations. There can be no assurance that the Company will be able to identify
suitable acquisition candidates and, once identified, to negotiate successfully
their acquisition at a price or on terms and conditions favorable to the
Company, or to integrate the operations of such acquired businesses with the
Company. In addition, the Company competes for acquisition candidates with
other entities, some of which have greater financial resources than the
Company. Failure by the Company to implement successfully its acquisition
strategy would limit the Company's growth potential. See "Business--Strategy"
and "--Acquisition Program".
The consolidation and integration activity in the solid waste industry in
recent years, as well as the difficulties, uncertainties and expenses relating
to the development and permitting of solid waste landfills and transfer
stations, has increased competition for the acquisition of existing solid waste
collection, transfer and disposal operations. Increased competition for
acquisition candidates may result in fewer acquisition opportunities being made
available to the Company as well as less advantageous acquisition terms,
including increased purchase prices. The Company also believes that a
significant factor in its ability to consummate acquisitions after completion
of this Offering will be the relative attractiveness of shares of the Company's
Class A Common Stock as consideration for potential acquisition candidates.
This attractiveness may, in large part, be dependent upon the relative market
price and capital appreciation prospects of the Class A Common Stock compared
to the equity securities of the Company's competitors. If the market price of
the Company's Class A Common Stock were to decline, the Company's acquisition
program could be materially adversely affected.
7
The successful integration of acquired businesses is important to the
Company's future financial performance. The anticipated benefits from any
acquisition may not be achieved unless the operations of the acquired
businesses are successfully combined with those of the Company in a timely
manner. The integration of any of the Company's acquisitions requires
substantial attention from management. The diversion of the attention of
management, and any difficulties encountered in the transition process, could
have an adverse impact on the Company's business, financial condition and
results of operations. Although the Company has successfully identified and
closed acquisitions and integrated them into its organization and operations in
the past, there can be no assurance that it will be able to do so in the
future.
Dependence on Management
The Company is highly dependent upon the services of the members of its
senior management team, the loss of any of whom may have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company currently maintains "key man" life insurance with
respect to John W. Casella, the President, Chief Executive Officer and
Chairman, and James W. Bohlig, the Senior Vice President and Chief Operating
Officer, in the amount of $1.0 million each. See "Management--Executive
Officers, Directors and Certain Key Employees".
In addition, the Company's future success depends on its continuing
ability to identify, hire, train, motivate and retain highly qualified
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be able to attract, assimilate or retain highly
qualified personnel in the future. The inability to attract and retain the
necessary personnel could have a material adverse effect upon the Company's
business, financial condition and results of operations.
Uncertain Ability to Finance the Company's Growth
The Company anticipates that any future business acquisitions will be
financed through cash from operations, borrowings under its bank line of
credit, the issuance of shares of the Company's Class A Common Stock and/or
seller financing. If acquisition candidates are unwilling to accept, or the
Company is unwilling to issue, shares of the Company's Class A Common Stock as
part of the consideration for such acquisition, the Company would be required
to utilize more of its available cash resources or borrowings under its credit
facility in order to effect such acquisitions. To the extent that cash from
operations or borrowings under the Company's credit facility is insufficient to
fund such requirements, the Company will require additional equity and/or debt
financing in order to provide the cash to effect such acquisitions.
Additionally, growth through the development or acquisition of new landfills,
transfer stations or other facilities, as well as the ongoing maintenance of
such landfills, transfer stations or other facilities, may require substantial
capital expenditures. There can be no assurance that the Company will have
sufficient existing capital resources or will be able to raise sufficient
additional capital resources on terms satisfactory to the Company, if at all,
in order to meet any or all of the foregoing capital requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
The terms of the Company's credit facility require the Company to obtain
the consent of the lending banks prior to consummating acquisitions of other
businesses for cash consideration (including all liabilities assumed) in excess
of $5.0 million. Furthermore, the Company's credit facility contains various
financial covenants predicated on the Company's present and projected financial
condition. In the event future operations differ materially from that which is
anticipated, the Company may no longer be able to meet the tests provided in
the covenants contained in the credit facility. A failure to meet such
covenants or the occurrence of other events may result in a default under such
credit facility. A default under such credit facility could result in
acceleration of the repayment of the debt incurred thereunder which could have
a material adverse effect upon the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources".
The Company may file a shelf registration statement with the Securities
and Exchange Commission within the next six months or thereafter for purposes
of registering shares of Class A Common Stock to be issued in connection with
acquisitions which may be made by the Company. The Company has not made any
determination as to the number of shares which would be covered by any such
registration
8
statement; however, such shares, when issued, could be freely saleable in the
public market 180 days after the date of this Prospectus or earlier upon prior
written approval of the representatives. See "Underwriting". There can be no
assurance that the issuance of such shares will not have a dilutive effect on
stockholders of the Company or that the sale of such shares will not adversely
affect prevailing market prices of the Company's Class A Common Stock.
Limitations on Landfill Permitting and Expansion
The Company's operating program depends on its ability to expand the
landfills it owns and leases and to develop new landfill sites. As of September
30, 1997, the estimated total remaining permitted disposal capacity of the four
landfills operated by the Company was 1,950,733 tons, with approximately
5,572,000 additional tons of disposal capacity in various stages of permitting.
In some areas, suitable land for new sites or expansion of the Company's
existing landfill sites may be unavailable. There can be no assurance that the
Company will be successful in obtaining new landfill sites or expanding the
permitted capacity of any of its current landfills once its remaining disposal
capacity has been consumed. The Company's landfills in Vermont are subject to
state regulations and practices that generally do not allow permits for more
than five years of expected annual capacity. The process of obtaining required
permits and approvals to operate and expand solid waste management facilities,
including landfills and transfer stations, has become increasingly difficult
and expensive, often taking several years, requiring numerous hearings and
compliance with zoning, environmental and other requirements, and often being
subject to resistance from citizen, public interest or other groups. There can
be no assurance that the Company will succeed in obtaining or maintaining the
permits it requires to expand or that such permits will not contain onerous
terms and conditions. Even when granted, final permits to expand are often not
approved until the remaining permitted disposal capacity of a landfill is very
low. Furthermore, local laws and ordinances also may affect the Company's
ability to obtain permits to expand its landfills. The town of Bethlehem, New
Hampshire, where one of the landfills operated by the Company is located, has
an ordinance which prohibits the expansion of any landfills not operated by the
town of Bethlehem. A proposal to amend this ordinance was defeated by Bethlehem
voters in March 1997, and it is not anticipated that another vote will take
place until at least March 1998. In the event the Company exhausts its
permitted capacity at a landfill, in addition to limiting its ability to expand
internally, the Company would be required to cap and close that landfill and
the Company could be forced to dispose of collected waste at more distant
landfills or at landfills operated by its competitors. The resulting increased
cost could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Operations--Landfills".
Geographic Concentration Risks
The Company's operations and customers are located in Vermont, New
Hampshire, Maine, upstate New York and northern Pennsylvania. 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. In addition, as the Company expands in its 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 the Company to expand vertically in these markets.
There can be no assurance that the Company will complete a sufficient number of
acquisitions in other markets to lessen its geographic concentration. See
"Business--Service Area".
Seasonality of Business Impacts Quarterly Operating Results
The Company's revenues have historically been lower during the months of
November through March. This seasonality reflects the lower volume of solid
waste during the late fall, winter and early spring months primarily because:
(i) the volume of solid 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 solid 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 certain of the
Company's operations. There
9
can be no assurance that future seasonal and quarterly fluctuations will not
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Fluctuations in Quarterly Results; Potential Stock Price Volatility
The Company believes that period-to-period comparisons of its operating
results should not be relied upon as an indication of future performance. Due
to a variety of factors including general economic conditions, governmental
regulatory action, acquisitions, capital expenditures and other costs related
to the expansion of operations and services and pricing changes (including the
market price of commodities such as recycled materials), it is possible that in
some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the
Company's Class A Common Stock price could be materially adversely affected.
The market price of the Class A Common Stock may be highly volatile and is
likely to be affected by factors such as actual or anticipated fluctuations in
the Company's operating results, announcements of new acquisitions or contracts
by the Company, its competitors or their customers, government regulatory
action, general market conditions and other factors. Also, the market price of
the Class A Common Stock may be affected by factors affecting the waste
management industry in which the Company competes. In addition, the stock
market has from time-to-time experienced significant price and volume
fluctuations that have often been unrelated to the operating performance of
companies whose securities are publicly traded; yet, these broad market
fluctuations may also adversely affect the market price of the publicly traded
securities of such companies, including the Company's Class A Common Stock. In
the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been commenced against
such companies. There can be no assurance that such litigation will not occur
in the future with respect to the Company. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. Any adverse determination in such
litigation could also subject the Company to significant liabilities.
Highly Competitive Industry
The solid waste services industry is highly competitive and fragmented,
and requires substantial labor and capital resources. Certain of the markets in
which the Company competes or will likely compete are served by one or more of
the large national solid waste companies, as well as numerous regional and
local solid waste companies of varying sizes and resources. The Company also
competes with operators of alternative disposal facilities, including
incinerators, and with counties, municipalities, and solid waste districts that
maintain their own waste collection and disposal operations. These counties,
municipalities, and solid waste districts may have financial advantages due to
the availability to them of user fees, similar charges or tax revenues and the
greater availability to them of tax-exempt financing. Intense competition
exists not only to provide services to customers but also to acquire other
businesses within each market. Certain of the Company's competitors have
significantly greater financial and other resources than the Company. From time
to time, these or other 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 the Company to reduce the pricing
of its services or result in the Company's loss of business. In fiscal 1997,
the Company derived approximately 20% of its revenue from municipal customers.
As is generally the case in the industry, these contracts are subject to
periodic competitive bidding. There can be no assurance that the Company will
be the successful bidder to obtain or retain these contracts. The Company's
inability 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,
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Competition".
10
Comprehensive Government Regulation
The Company is subject to extensive and evolving environmental, zoning and
other laws and regulations which have become increasingly stringent in recent
years. These laws and regulations impose substantial costs on the Company and
affect the Company's business in many ways, including as set forth below and
under "Business--Regulation".
In connection with its ownership and operation of landfills, the Company
is required to obtain, comply with and maintain in effect one or more licenses
or permits as well as zoning, environmental and/or other land use approvals.
These licenses or permits and approvals are difficult and time consuming to
obtain and renew and are frequently opposed by public officials, groups of
private citizens, or both. There can be no assurance that the Company will
succeed in obtaining, complying with and maintaining in effect the permits and
approvals required for the continued operation and growth of its landfills, and
the failure by the Company to obtain, comply with or maintain in effect a
permit or approval significant to its landfills could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The design, construction, operation and closure of landfills is
extensively regulated. These include, among others, the regulations
establishing minimum Federal requirements promulgated by the U.S. Environmental
Protection Agency ("EPA") in October 1991 under Subtitle D (the "Subtitle D
Regulations") of the Resource Conservation and Recovery Act of 1976 (the
"RCRA"). Government assertions that the Company failed to comply with these
regulations has resulted in the payment by the Company of three civil penalties
(in the aggregate less than $100,000 in its 22-year operating history). Failure
to comply with these regulations could require the Company to undertake costly
and time consuming investigatory or remedial activities, to curtail operations,
to close a landfill temporarily or permanently, and to defend itself against
enforcement actions brought by and pay civil penalties imposed by EPA or state
regulatory agencies. Changes in these regulations could require the Company to
modify, supplement or replace equipment or facilities at costs which may be
substantial. The failure of regulatory agencies to enforce these regulations
vigorously or consistently may give an advantage to competitors of the Company
whose facilities do not comply with the Subtitle D Regulations or their state
counterparts. The Company's financial obligations arising from any failure to
comply with these regulations could have a material adverse effect on the
Company's business, financial condition and results of operations.
Certain licenses, permits and approvals may limit the types of waste the
Company may accept at a landfill or the quantity of waste it may accept at a
landfill during a given time period. In addition, certain licenses, permits and
approvals, as well as certain state and local regulations, may seek to limit a
landfill to accepting waste that originates only from specified geographic
areas or seek to prohibit the landfill from importing out-of-state waste or
otherwise discriminate against waste originating outside of a defined
geographic area. The Company's Clinton County landfill is not permitted to
receive waste from certain geographic regions in New York. Generally,
restrictions on importing out-of-state waste have not withstood judicial
challenge. However, from time to time, Federal legislation is proposed which
would allow individual states to prohibit the disposal of out-of-state waste or
to limit the amount of out-of-state waste that could be imported for disposal
and would require states, under certain circumstances, to reduce the amounts of
waste exported to other states. Although no such Federal legislation has been
enacted, if such Federal legislation should be enacted in the future, states in
which the Company operates landfills could act to limit or prohibit the Company
from importing out-of-state waste. Such actions could adversely affect any of
the Company's landfills that receive a significant portion of waste originating
from other states and thereby have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition, certain states and localities may for economic or other
reasons restrict the export of waste from their jurisdiction or require that a
specified amount of waste be disposed of at facilities within their
jurisdiction. In 1994, the United States Supreme Court held unconstitutional,
and therefore invalid, a local ordinance that sought to limit the amount of
waste that could be taken out of the locality. However, certain state and local
jurisdictions continue to seek to enforce such restrictions and, in certain
cases, the Company may elect not to challenge such restrictions. In addition,
the aforementioned Federal legislation that has from time to time been proposed
could, if enacted, allow states and localities to impose flow control
restrictions. These restrictions could reduce the volume of waste going to
landfills in certain areas, which
11
may adversely affect the Company's ability to operate its landfills at their
full capacity and/or affect the prices that the Company can charge for landfill
disposal services. These restrictions may also result in higher disposal costs
for the Company's collection operations. If the Company were unable to pass
such higher costs through to its customers, the Company's business, financial
condition and results of operations could be materially adversely affected.
Businesses that provide waste services, including the Company, are
frequently subject in the normal course of operations to judicial and
administrative proceedings involving Federal, state or local agencies or
citizens' groups. These government agencies may seek to impose fines or
penalties on the Company or to revoke, suspend, modify or deny renewal of the
Company's operating permits, approvals or licenses for violations or alleged
violations of environmental laws or regulations or require that the Company
make expenditures to remediate potential environmental problems relating to
waste transported, disposed of or stored by the Company or its predecessors, or
resulting from its or its predecessors' transportation, collection and disposal
operations. Any adverse outcome in these proceedings could have a material
adverse effect on the Company's business, financial condition and results of
operations and may subject the Company to adverse publicity. The Company may be
subject to actions brought by individuals or community groups in connection
with the permitting, approving or licensing of its operations, any alleged
violation of such permits, approvals or licenses or other matters. See
"--Potential Environmental Liability".
Potential Environmental Liability
The Company may be subject to liability for environmental damage,
including personal injury and property damage, that its solid waste 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 or commencing 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 arranged 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. See
"Business--Regulation".
The Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA"), imposes strict, joint and several liability on
the present owners and operators of facilities from which a release of
hazardous substances into the environment has occurred, as well as any party
that owned or operated the facility at the time of disposal of the hazardous
substances, regardless of when the hazardous substance was first detected.
Similar liability is imposed upon the generators of waste which contains
hazardous substances and upon hazardous substance transporters that select the
treatment, storage or disposal site. All such persons, who are referred to as
potentially responsible parties ("PRPs"), generally are jointly and severally
liable for the expense of waste site investigation, waste site cleanup costs
and natural resource damages, regardless of whether they exercised due care and
complied with all relevant laws and regulations. These costs can be very
substantial. Furthermore, such liability can be based upon the existence of
only very small amounts of "hazardous substances", as defined in CERCLA, which
is a much broader category of substances than "hazardous wastes", as defined in
RCRA. The states in which the Company operates have laws similar to CERCLA
which also impose environmental liability on broad classes of parties. Although
the Company is not in the business of transporting or disposing of hazardous
waste, it is possible that hazardous substances have in the past, or may in the
future, come to be located in landfills with which the Company has been
associated as a generator or transporter of waste or as an owner or operator of
the landfill. If EPA ever determines that remedial measures under CERCLA or
RCRA are appropriate at any of these sites or operations, if a state agency
makes such a finding under similar state law, or if a third party brings a
private cost-recovery or contribution action with respect to remedial costs
incurred, the Company could be subject to substantial liability which could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Regulation".
With respect to each business that the Company acquires or has acquired,
there may be liabilities that the Company fails to or is unable to discover,
including liabilities arising from waste transportation or disposal activities
or noncompliance with environmental laws by prior owners, and for which the
12
Company, as a successor owner, may be legally responsible. Representations,
warranties and indemnities from the sellers of such businesses, if obtained and
if legally enforceable, may not cover fully the resulting environmental or
other liabilities due to their limited scope, amount or duration, the financial
limitations of the warrantor or indemnitor or other reasons. Certain
environmental liabilities, even though expressly not assumed by the Company,
may nonetheless be imposed on the Company under certain legal theories of
successor liability, particularly under CERCLA. The Company's insurance program
does not cover liabilities associated with any environmental cleanup or
remediation of the Company's own sites. An uninsured claim against the Company,
if successful and of sufficient magnitude, could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business--Acquisition Program".
Potential Inadequacy of Accruals for Closure and Post-Closure 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. In addition to the four landfills
currently operated by the Company, the Company owns and/or operated five
unlined landfills which are not currently in operation. Three of these
landfills have been closed and environmentally capped by the Company, and a
fourth is in the final stages of obtaining governmental closure design
approval. The fifth unlined landfill, a municipal landfill which is adjacent to
the Subtitle D Clinton County landfill being operated by the Company, was
operated by the Company from July 1996 through July 1997. The Company completed
the closure and capping activities at this landfill in September 1997. Clinton
County has indemnified the Company for environmental liabilities arising from
such unlined landfill prior to its operation by the Company. The Company has
provided and will in the future provide accruals for future financial
obligations relating to closure and post-closure costs of its owned or operated
landfills (generally for a term of 30 years after final closure of a landfill)
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 closing or post-closing costs will not
exceed the amount accrued and reserved or amounts otherwise receivable pursuant
to trust funds established for such purpose. Such a circumstance could have a
material adverse effect on the Company's business, financial condition and
results of operation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Operations--Landfills".
Inability to Obtain Performance or Surety Bonds, Letters of Credit or Insurance
Municipal solid waste collection contracts and landfill closure
obligations may require performance or surety bonds, letters of credit, or
other means of financial assurance to secure contractual performance. If the
Company were unable to obtain performance or surety bonds or letters of credit
in sufficient amounts or at acceptable rates, it could be precluded from
entering into additional municipal solid waste collection contracts or
obtaining or retaining landfill operating permits. Any future difficulty in
obtaining insurance could also impair the Company's ability to secure future
contracts conditioned upon the contractor having adequate insurance coverage.
Accordingly, the failure of the Company to obtain performance or surety bonds,
letters of credit, or other means of financial assurance or to maintain
adequate insurance coverage could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Risk Management, Insurance and Performance or Surety Bonds".
Incurrence of Charges Related to Capitalized Expenditures
In accordance with generally accepted accounting principles, the Company
capitalizes certain expenditures and advances relating to acquisitions, pending
acquisitions and landfills. Indirect acquisition costs, such as executive
salaries, general corporate overhead, public affairs and other corporate
services, are expensed as incurred. The Company's policy is to charge against
earnings any unamortized capitalized expenditures and advances (net of any
portion thereof that the Company estimates will be recoverable, through sale or
otherwise) relating to any operation that is permanently shut down, any pending
acquisition that is not consummated and any landfill development project that
is not expected to be successfully completed. Therefore, the Company may be
required to incur a charge against earnings
13
in future periods, which charge, depending upon the magnitude thereof, could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Control by Casellas and Anti-takeover Effect of Class B Common Stock
The holders of Class B Common Stock of the Company are entitled to ten
votes per share, whereas the holders of Class A Common Stock are entitled to
one vote per share. As of September 30, 1997, an aggregate of 1,000,000 shares
of Class B Common Stock, representing 10,000,000 votes, were outstanding, all
of which were beneficially owned by John W. Casella, the President, Chief
Executive Officer and Chairman of the Board of Directors of the Company, and by
Douglas R. Casella, the Vice Chairman of the Board of Directors of the Company
or trusts for the benefit of their minor children (together, the "Casellas").
Upon the completion of this Offering, the Casellas together will beneficially
own shares of Common Stock representing approximately 57% of the aggregate
votes to be cast. As a result, the Casellas, if acting together, will be able
to control the election of all but one member of the Board of Directors and the
outcome of other matters submitted for stockholder consideration, including,
without limitation, matters involving the control of the Company, irrespective
of how other stockholders may vote. This concentration of ownership and voting
control may have the effect of delaying or preventing a change of control of
the Company which may be favored by the Company's other stockholders. There can
be no assurance that the Casellas' ability to prevent or cause a change in
control of the Company will not have a material adverse effect on the market
price of the Class A Common Stock. Shares of Class B Common Stock will
automatically convert into shares of Class A Common Stock in the event they
cease to be held by Class B Permitted Holders (as defined) and under certain
other circumstances. The Casellas have certain contractual relationships with
the Company. See "Certain Transactions" for a discussion of contractual
relations between the Casellas and the Company. See also "Principal and Selling
Stockholders" and "Description of Capital Stock".
Anti-Takeover Effect of Certain Charter and By-Law Provisions and Delaware Law
The Company's Amended and Restated Certificate of Incorporation (the
"Restated Certificate of Incorporation") and Amended and Restated By-Laws (the
"Restated By-Laws") provide for the Company's Board to be divided into three
classes of directors serving staggered three-year terms. As a result, beginning
in 1998, approximately one-third of the Company's Board will be elected each
year. The classified board is designed to ensure continuity and stability in
the board's composition and policies in the event of a hostile takeover attempt
or proxy contest. The classified board would extend the time required to effect
any changes in control of the Company's Board and may tend to discourage any
hostile takeover bid for the Company. Because only a minority of the directors
will be elected at each annual meeting, it would normally take at least two
annual meetings for holders of even a significant majority of the Company's
voting stock to effect a change in the composition of a majority of the
Company's Board, absent approval of the Company's Board. Because of the
additional time required to change the composition of the Company's Board, a
classified board may also make the removal of incumbent management more
difficult, even if such removal would be beneficial to stockholders generally,
and may tend to discourage certain tender offers.
The authorized capital of the Company includes 1,000,000 shares of "blank
check" Preferred Stock. The Board of Directors has the authority to issue
shares of Preferred Stock and to determine the price, designation, rights,
preferences, privileges, restrictions and conditions, including voting and
dividend rights, of these shares of Preferred Stock without any further vote or
action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could make it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue any Preferred Stock. See
"Description of Capital Stock".
The Company's Restated Certificate of Incorporation and Restated By-Laws
provide that any action required or permitted to be taken by stockholders of
the Company must be effected at a duly called annual or special meeting of
stockholders and may not be effected by written consent, and require reasonable
14
advance notice and other procedures to be followed by a stockholder in
connection with a proposal or director nomination which such stockholder
desires to present at any annual or special meeting of stockholders. Special
meetings of stockholders may be called only by the President of the Company or
by the Board of Directors. The Restated Certificate of Incorporation and
Restated By-Laws provide that members of the Board of Directors may be removed
only upon the affirmative vote of holders of shares representing at least 75%
of the votes entitled to be cast. The Company is subject to the anti-takeover
provision of Section 203 of the Delaware General Corporation Law, which will
prohibit the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 also could have the effect of delaying or preventing a change of
control of the Company. These provisions, and the provisions of the Restated
Certificate of Incorporation and Restated By-Laws, may have the effect of
deterring hostile takeovers or delaying or preventing changes in control or
management of the Company, including transactions in which stockholders might
otherwise receive a premium for their shares over then current market prices.
In addition, these provisions may limit the ability of stockholders to approve
transactions that they may deem to be in their best interests. See "Description
of Capital Stock--Preferred Stock" and "--Delaware Law and Certain Charter and
By-Law Provisions".
No Prior Public Market
Prior to this Offering, there has been no public market for the Company's
Class A Common Stock, and there can be no assurance that an active trading
market for the Company's Class A Common Stock will develop or be sustained
after completion of this Offering. The initial public offering price of the
Class A Common Stock was determined through negotiations between the Company
and the representatives of the Underwriters based on several factors and may
not be indicative of the market price of the Class A Common Stock after
completion of this Offering. See "Underwriting".
Potential Adverse Impact of Shares Eligible for Future Sale; Registration
Rights
The sale of substantial amounts of the Company's Class A Common Stock in
the public market following this Offering (including shares issued upon the
exercise of outstanding warrants and stock options), or the perception that
such sales could occur, could adversely affect prevailing market prices of the
Company's Class A Common Stock. All of the shares offered hereby will be freely
saleable in the public market after completion of this Offering, unless
acquired by affiliates of the Company. The remaining 6,778,745 shares of Common
Stock (including Class B Common Stock) held by existing stockholders upon
completion of the offering will be "restricted securities" as that term is
defined in Rule 144 under the Securities Act. Restricted securities may be sold
in the public market only if registered or if they qualify for an exemption
from registration under Rules 144 or 701 promulgated under the Securities Act.
The Company's directors and officers and stockholders have agreed that they
will not sell, directly or indirectly, any shares of Common Stock without the
prior consent of the representatives of the Underwriters for a period of 180
days from the date of this Prospectus. After this 180-day period expires,
2,044,775 of the currently outstanding shares will be saleable in the public
market without volume limitations under Rule 144(k) promulgated under the
Securities Act of 1933, as amended (the "Securities Act") and 4,569,491 shares
will be eligible for resale in the public market subject to certain volume
restrictions under Rules 144 or 701 promulgated under the Securities Act. In
addition, certain stockholders, representing approximately 6,031,057 shares of
Common Stock, have the right, subject to certain conditions, to include their
shares in future registration statements relating to the Company's securities
and to cause the Company to register certain shares of Common Stock owned by
them. See "Shares Eligible for Future Sale." After the completion of this
Offering, the Company intends to file a registration statement under the
Securities Act to register all shares issuable upon exercise of stock options
or other awards granted or to be granted under its stock plans. After the
filing of such registration statement and subject to certain restrictions under
Rule 144, these shares will be freely saleable in the public market immediately
following exercise of such options. See "Management--Stock Options",
"Description of Capital Stock", "Shares Eligible for Future Sale" and
"Underwriting".
15
Immediate and Substantial Dilution
Purchasers of shares of Class A Common Stock in this Offering will incur
an immediate and substantial dilution in the net tangible book value per share
of the Class A Common Stock from the initial public offering price. See
"Dilution".
No Dividends
The Company does not anticipate paying any cash dividends on the Common
Stock in the foreseeable future. The Company's credit facility restricts the
payment of dividends. See "Dividend Policy".
16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Class A
Common Stock offered by the Company pursuant to this Offering are estimated to
be $49.2 million, after deducting the underwriting discount and estimated
Offering expenses. The Company will not receive any proceeds from the sale of
shares of Class A Common Stock by the Selling Stockholders hereunder. See
"Principal and Selling Stockholders".
The Company intends to use approximately $3.0 million of such proceeds to
redeem the outstanding shares of its Series C Preferred Stock (approximately
25.6% of which is beneficially owned by affiliates of a non-management
director), which are required to be redeemed upon the closing of this Offering.
In connection with the exchange of certain subordinated debt of the Company for
preferred stock in December 1995, the Company issued the holders of such debt
one share of Series C Preferred Stock, having a redemption value of $7.00 per
share, for each $7.00 of interest due on such debt at the time of such
exchange. The Company intends to use the balance of such proceeds to reduce the
outstanding balance under its revolving line of credit.
The Company's $110.0 million credit facility, with a group of banks led by
BankBoston N.A., as agent, consists of an $85.0 million revolving line of
credit, subject to availability, and term loans aggregating $25.0 million. The
revolving line of credit matures in July 2002, and bears interest at varying
rates which at September 30, 1997 were equal to the agent bank's base rate plus
up to 0.25% per annum, or at the applicable Eurodollar rate plus up to 2.75%
per annum. BankBoston's base rate at September 30, 1997 was 8.75% per annum.
The term loans of $10.0 million and $15.0 million mature in July 2002 and July
2004, respectively. At September 30, 1997, an aggregate of $51.2 million was
outstanding under the revolving line of credit. The terms of the credit
facility permit the Company to re-borrow under the revolving credit facility
for acquisitions (subject to certain restrictions) and general corporate
purposes. The Company continually evaluates potential acquisition candidates
and intends to continue to pursue acquisition opportunities that may become
available. See "Risk Factors--Uncertain Ability to Finance the Company's
Growth" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources".
DIVIDEND POLICY
No dividends have ever been declared or paid on the Company's capital
stock and the Company does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future. The Company's credit facility contains
restrictions on the payment of dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
17
DILUTION
The pro forma net tangible deficit of the Company as of July 31, 1997 was
$(21.4) million, or $(2.79) per share of Common Stock. Pro forma net tangible
book value per share is determined by dividing the Company's pro forma tangible
net worth (tangible assets less liabilities) by the number of shares of Common
Stock outstanding on a pro forma basis. After giving effect to the sale of the
Class A Common Stock offered by the Company pursuant to this Offering, after
deducting the underwriting discount and estimated offering expenses, the pro
forma net tangible book value of the Company as of July 31, 1997 would have
been $28.5 million, or $2.65 per share of Common Stock. This represents an
immediate increase in such pro forma net tangible book value of $5.44 per share
to existing stockholders and an immediate dilution of $15.35 per share to new
investors purchasing shares of Class A Common Stock in this Offering. The
following table illustrates the per share dilution:
Initial public offering price per share ........................ $18.00
Pro forma net tangible deficit per share as of
July 31, 1997 ................................................ $ (2.79)
Increase per share attributable to this Offering ............... 5.44
Pro forma net tangible book value per share after this Offering . 2.65
--------
Dilution per share to new investors .............................. $15.35
========
The following table summarizes, on a pro forma basis as of July 31, 1997,
the total number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company (including the fair market value of
shares of Class A Common Stock issued in connection with acquisitions made by
the Company), and the average consideration paid per share by existing
stockholders and by new investors (before deducting the underwriting discount
and estimated offering expenses):
Shares Purchased Total Consideration
------------------------ ------------------------- Average
Price Per
Number Percent Amount Percent Share
------------ --------- ------------- --------- ----------
Existing stockholders(1)(2) ........ 7,778,745 72.2% $28,850,730 34.8% $ 3.71
New investors ..................... 3,000,000 27.8 54,000,000 65.2 $18.00
----------- ------- ------------ ------- -------
Total ........................ 10,778,745 100.0% $82,850,730 100.0% $ 7.69
=========== ======= ============ ======= =======
- ------------
(1) Sales by Selling Stockholders in this Offering will reduce the number of
shares of Common Stock held by existing stockholders to 6,778,745 shares,
or 62.9%, of the total number of shares of Common Stock to be outstanding
after this Offering (6,178,745 shares, or 57.3%, if the Underwriters'
over-allotment option is exercised in full), and will increase the number
of shares of Common Stock held by new investors to 4,000,000 shares, or
37.1% of the total number of shares to be outstanding (4,600,000 shares, or
42.7%, if the Underwriters' over-allotment option is exercised in full).
See "Principal and Selling Stockholders".
(2) Includes 100,443 shares of Class A Common Stock issued or issuable upon
exercise of warrants exercised or to be exercised between July 31, 1997
and the closing of this Offering, at a weighted average exercise price of
$5.53 per share. Excludes (i) 1,377,635 shares of Class A Common Stock
issuable upon exercise of stock options outstanding on July 31, 1997 with
a weighted average exercise price of $6.23 per share (of which options to
purchase 20,000 shares at an exercise price of $0.60 per share were
exercised in September 1997); (ii) an additional 1,658,500 shares reserved
for issuance under the Stock Plans; and (iii) warrants to purchase 280,665
shares of Class A Common Stock with a weighted average exercise price of
$5.03 per share. See "Management--Benefit Plans", "Description of Capital
Stock" and Note 7 of Notes to Consolidated Financial Statements.
18
CAPITALIZATION
The following table sets forth the capitalization of the Company pro forma
(i) to give effect to: (a) the automatic redemption upon the closing of this
Offering of the Series A Preferred Stock and Series B Preferred Stock with the
redemption price applied to the exercise of warrants to purchase 1,811,199
shares of Class A Common Stock; (b) the automatic conversion upon the closing
of this Offering of outstanding shares of Series D Convertible Preferred Stock
into 1,922,169 shares of Class A Common Stock; and (c) the filing upon the
closing of this Offering of the Restated Certificate of Incorporation, and (ii)
as adjusted to reflect (a) the issuance and sale of the shares of Class A
Common offered by the Company pursuant to this Offering, after deducting the
underwriting discount and estimated offering expenses, and the application of
the net proceeds therefrom; (b) the exercise of warrants to purchase 100,443
shares of Class A Common Stock at a weighted average exercise price of $5.53
per share and the application of the net proceeds therefrom, which exercise
will occur between July 31, 1997 and the closing of this Offering; and (c) the
call by the Company in September 1997 of warrants to purchase 75,000 shares at
a call price of $7.00 per share. See "Use of Proceeds". This table should be
read in conjunction with the Unaudited Pro Forma Consolidated Statement of
Operations and the Notes thereto and the Consolidated Financial Statements and
the Notes thereto included elsewhere in the Prospectus.
July 31, 1997
--------------------------
Pro Forma
Pro Forma as adjusted
----------- ------------
(in thousands)
Current maturities of long-term obligations .................. $ 4,295 $ 4,295
========= =========
Long-term obligations, net of current maturities ............... 81,613 34,808
--------- ---------
Series C Mandatorily Redeemable Preferred Stock, $0.01 par
value; $7.00 redemption value; 1,000,000 shares authorized;
424,307 shares issued and outstanding, none as adjusted ...... 2,970 --
--------- ---------
Redeemable put warrants ....................................... 700 --
--------- ---------
Stockholders' equity:
Preferred Stock, $0.01 par value; 1,000,000 shares authorized,
no shares issued or outstanding .............................. -- --
Class A Common Stock, $0.01 par value; 30,000,000 shares
authorized; 6,678,302 shares issued and outstanding, pro
forma; 9,778,745 shares issued and outstanding, pro forma as
adjusted(1) ................................................ 67 98
Class B Common Stock, $0.01 par value; 1,000,000 shares
authorized; 1,000,000 shares issued and outstanding, pro
forma and pro forma as adjusted; .............................. 10 10
Additional paid-in capital .................................... 42,493 92,412
Accumulated deficit .......................................... (12,685) (12,685)
--------- ---------
Total stockholders' equity .............................. 29,885 79,835
--------- ---------
Total capitalization .................................... $115,168 $ 114,643
========= =========
- ------------
(1) Excludes: (i) 1,377,635 shares of Class A Common Stock issuable upon
exercise of stock options outstanding on July 31, 1997 with a weighted
average exercise price of $6.23 per share (of which options to purchase
20,000 shares at an exercise price of $0.60 per share were exercised in
September 1997); (ii) an additional 1,658,500 shares reserved for issuance
under the Stock Plans; and (iii) warrants to purchase 280,665 shares of
Class A Common Stock with a weighted average exercise price of $5.03 per
share. See "Management--Benefit Plans", "Description of Capital Stock" and
Note 7 of Notes to Consolidated Financial Statements.
19
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated financial and operating data set forth
below with respect to the Company's consolidated statements of operations for
the fiscal years ended April 30, 1995, 1996 and 1997, and for the three months
ended July 31, 1997, and the consolidated balance sheets as of April 30, 1996
and 1997 and as of July 31, 1997 are derived from the financial statements of
the Company included elsewhere in this Prospectus, and the consolidated
statement of operations data for the fiscal year ended April 30, 1994 and the
consolidated balance sheet data as of April 30, 1994 and 1995 are derived from
the Company's consolidated financial statements, which statements have been
audited by Arthur Andersen LLP. The data presented as of and for the fiscal
year ended April 30, 1993 and as of and for the three months ended July 31,
1996 are derived from the Company's unaudited consolidated financial statements
not included herein, which have been prepared on the same basis as the audited
financial statements of the Company and, in the opinion of the Company, reflect
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of such data. The results for the three months ended July 31,
1997 are not necessarily indicative of results to be expected for the full
year. The data set forth below should be read in conjunction with the Unaudited
Pro Forma Consolidated Statement of Operations and Notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus.
Fiscal Year Ended April 30,
--------------------------------------------------------------------------------
Pro Forma
as adjusted(1)(2)
1993 1994 1995 1996 1997 1997
--------- ----------- ------------ ------------ ------------ -------------------
(in thousands)
Statement of Operations Data:
Revenues ..................... $11,375 $ 13,491 $ 20,873 $ 38,109 $ 73,176 $103,257
Cost of operations ............ 7,222 9,640 11,615 21,654 43,504 64,517
General and
administrative ............... 2,276 2,702 2,456 6,302 11,340 15,332
Depreciation and
amortization ............... 1,352 1,483 4,511 7,643 13,053 17,480
------- --------- -------- -------- -------- ---------
Operating income (loss) ...... 525 (334) 2,291 2,510 5,279 5,928
Interest expense, net ......... 354 613 1,713 2,392 3,908 3,051
Other expense (income),
net ........................ (142) 207 56 (78) 931 1,210
------- --------- -------- -------- -------- ---------
Income (loss) before
provision (benefit) for
income taxes,
extraordinary items and
cumulative effect of
change in accounting
principle .................. 313 (1,154) 522 196 440 1,667
Provision (benefit) for
income taxes ............... 155 (441) 220 144 452 855
Extraordinary items ......... -- -- -- 326 -- --
Change in accounting
principle .................. -- 124 -- -- -- --
------- --------- -------- -------- -------- ---------
Net income (loss) ............ $ 158 $ (837) $ 302 $ (274) $ (12) $ 812
======= ========= ======== ======== ======== =========
Accretion of Preferred
Stock and Put Warrants -- -- (2,380) (2,967) (8,530) --
------- --------- -------- -------- -------- ---------
Net Income (loss)
applicable to common
stockholders ............... $ 158 $ (837) $ (2,078) $ (3,241) $ (8,542) $ 812
======= ========= ======== ======== ======== =========
Net income per share ......... $ 0.07
Weighted average number
of shares (3) ............... 11,196
Three Months Ended July 31,
-----------------------------------------
Pro Forma
as adjusted(1)(2)
1996 1997 1997
--------- ------------ ------------------
Statement of Operations Data:
Revenues ..................... $15,217 $ 26,429 $27,712
Cost of operations ............ 8,717 15,662 16,691
General and
administrative ............... 2,302 3,680 3,921
Depreciation and
amortization ............... 3,007 3,851 3,965
------- -------- --------
Operating income (loss) ...... 1,191 3,236 3,135
Interest expense, net ......... 678 1,634 803
Other expense (income),
net ........................ (21) 200 360
------- -------- --------
Income (loss) before
provision (benefit) for
income taxes,
extraordinary items and
cumulative effect of
change in accounting
principle .................. 534 1,402 1,972
Provision (benefit) for
income taxes ............... 508 643 887
Extraordinary items ......... -- -- --
Change in accounting
principle .................. -- -- --
------- -------- --------
Net income (loss) ............ $ 26 $ 759 $ 1,085
======= ======== ========
Accretion of Preferred
Stock and Put Warrants (100) (2,115) --
------- -------- --------
Net Income (loss)
applicable to common
stockholders ............... $ (74) $ (1,356) $ 1,085
======= ======== ========
Net income per share ......... $ 0.09
Weighted average number
of shares (3) ............... 11,568
20
Fiscal Year Ended April 30,
----------------------------------------------------------------------------------
Pro Forma
as adjusted(1)(2)
1993 1994 1995 1996 1997 1997
-------- ------------ ------------ ------------- ------------- -------------------
(in thousands)
Other Operating Data:
EBITDA(4) .................. $1,877 $ 1,149 $ 6,802 $ 10,153 $ 18,332 $23,408
====== ======== ======== ========= ========= ========
Capital expenditures ...... $ 597 $ 843 $ 3,415 $ 10,081 $ 14,926
====== ======== ======== ========= =========
Cash flows from operating
activities ............... $1,632 $ 1,559 $ 4,511 $ 8,224 $ 14,726
====== ======== ======== ========= =========
Cash flows from investing
activities ............... $(903) $ (2,270) $ (8,841) $ (27,485) $ (50,314)
====== ======== ======== ========= =========
Cash flows from financing
activities ............... $(672) $ 1,007 $ 4,617 $ 19,022 $ 36,528
====== ======== ======== ========= =========
Three Months Ended July 31,
--------------------------------------------
Pro Forma
as adjusted(1)(2)
1996 1997 1997
------------ ------------ ------------------
Other Operating Data:
EBITDA(4) .................. $ 4,198 $ 7,087 $7,100
======== ======== =======
Capital expenditures ...... $ 2,806 $ 4,579
======== ========
Cash flows from operating
activities ............... $ 2,970 $ 3,079
======== ========
Cash flows from investing
activities ............... $ (8,026) $ (9,465)
======== ========
Cash flows from financing
activities ............... $ 4,925 $ 6,927
======== ========
Pro Forma
as adjusted (1)(5)
April 30, July 31, July 31,
------------------------------------------------------- ----------- -------------------
1993 1994 1995 1996 1997 1997 1997
--------- --------- ----------- ----------- ----------- ----------- -------------------
(in thousands)
Balance Sheet Data:
Cash and cash
equivalents .................. $ 132 $ 427 $ 714 $ 475 $ 1,415 $ 1,955 $ 1,430
Working capital (deficit) ... (961) (729) (1,277) (1,874) (4,629) (702) (1,227)
Property and equipment,
net ........................ 5,148 6,394 22,485 36,903 64,817 67,573 67,573
Total assets .................. 10,257 13,055 35,270 61,248 133,373 142,568 143,312
Long-term obligations,
less current maturities . 4,051 7,331 20,557 21,646 71,882 81,613 34,808
Redeemable preferred
stock ........................ -- -- -- 22,896 31,426 33,541 --
Redeemable put
warrants(6) .................. -- 62 3,142 400 400 400 --
Total stockholders' equity
(deficit) .................. 1,626 738 2,098 (1,142) (311) (1,654) 79,835
- ------------
(1) Pro forma to give effect to the automatic redemption upon the closing of
this Offering of the Series A Preferred Stock and Series B Preferred Stock
with the redemption price applied to the exercise of warrants to purchase
1,811,199 shares of Class A Common Stock and the automatic conversion upon
the closing of this Offering of outstanding shares of Series D Convertible
Preferred Stock into 1,922,169 shares of Class A Common Stock.
(2) Adjusted to give effect to: (i) the acquisitions completed during fiscal
1997; (ii) the acquisition of substantially all of the assets of H.C.
Gobin, Inc.; and (iii) the application of the estimated net proceeds from
the Offering, after deducting the underwriting discount and estimated
offering expenses payable by the Company, as if each had occurred on May
1, 1996. No pro forma adjustment has been made to (i) the historical
amounts for the three months ended July 31, 1997 to reverse the impact of
the loss incurred by H.C. Gobin, Inc. upon the sale of certain
unprofitable operations divested by H.C. Gobin, Inc. prior to its
acquisition by the Company, or (ii) the historical amounts for the year
ended April 30, 1997 and the three months ended July 31, 1997 to reduce
operating expenses to eliminate specific expenses that the Company
believes would not have been incurred had the Gobin acquisition occurred
as of May 1, 1996. See "Use of Proceeds" and "Unaudited Pro Forma
Consolidated Statement of Operations".
(3) Completed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.
(4) EBITDA is defined as operating income plus depreciation and amortization.
EBITDA does not represent, and should not be considered as, an alternative
to net income or cash flows from operating activities, each as determined
in accordance with GAAP. Moreover, EBITDA does not necessarily
21
indicate whether cash flow will be sufficient for such items as working
capital or capital expenditures, or to react to changes in the Company's
industry or to the economy generally. The Company believes that EBITDA is a
measure commonly used by lenders and certain investors to evaluate a
company's performance in the solid waste industry. The Company also believes
that EBITDA data may help to understand the Company's performance because
such data may reflect the Company's ability to generate cash flows, which is
an indicator of its ability to satisfy its debt service, capital expenditure
and working capital requirements. Because EBITDA is not calculated by all
companies and analysts in the same fashion, the EBITDA measures presented by
the Company may not be comparable to similarly-titled measures reported by
other companies. Therefore, in evaluating EBITDA data, investors should
consider, among other factors: the non-GAAP nature of EBITDA data; actual
cash flows; the actual availability of funds for debt service, capital
expenditures and working capital; and the comparability of the Company's
EBITDA data to similarly-titled measures reported by other companies. For
more information about the Company's cash flows, see page F-9.
(5) Adjusted to give effect to (i) the sale of the Class A Common Stock offered
by the Company pursuant to this Offering, after deducting the underwriting
discount and estimated offering expenses payable by the Company and the
application of the estimated net proceeds therefrom; (ii) the exercise of
warrants to purchase 100,443 shares of Class A Common Stock at a weighted
average exercise price of $5.53 per share and the application of the net
proceeds therefrom, which exercise occurred or will occur between July 31,
1997 and the closing of this Offering; and (iii) the call by the Company in
September 1997 of warrants to purchase 75,000 shares at a call price of
$7.00 per share. See "Use of Proceeds" and "Capitalization".
(6) Represents warrants to purchase 100,000 shares of Class A Common Stock
exercisable at $6.00 per share. Pursuant to the terms of these warrants,
in September 1997, warrants to purchase 25,000 shares were exercised by
the holder at $6.00 per share, and warrants to purchase 75,000 shares were
called by the Company at $7.00 per share.
22
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following Unaudited Pro Forma Consolidated Statements of Operations of
the Company have been prepared based upon the historical Consolidated Financial
Statements of the Company, and the Notes thereto included elsewhere in this
Prospectus and gives effect to (i) the acquisitions completed during fiscal
1997; (ii) the acquisition of substantially all of the assets of H.C. Gobin,
Inc.; and (iii) the application of the estimated net proceeds from the
Offering, as if each had occurred as of May 1, 1996. An unaudited pro forma
consolidated balance sheet has not been presented as the impact of the
post-July 31, 1997 acquisition of substantially all of the assets of H.C.
Gobin, Inc. on the Company's historical consolidated balance sheet is not
considered material. The Company paid approximately $1.4 million in cash and
assumed approximately $3.2 million in liabilities for tangible net assets of
approximately $1.4 million. See "Capitalization" for the impact of this
Offering on Casella's debt and equity accounts. See "Use of Proceeds".
The Unaudited Pro Forma Consolidated Statements of Operations should be
read in conjunction with "Capitalization" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and with the
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Prospectus. The Unaudited Pro Forma Consolidated Statements of Operations
are not necessarily indicative of the actual results of operations that would
have been reported if the events described above had occurred as of May 1,
1996, nor do they purport to indicate the results of future operations of the
Company. Furthermore, the pro forma as adjusted 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. In the opinion of
management, all adjustments necessary to present fairly such pro forma
financial results have been made.
Fiscal Year Ended April 30, 1997
---------------------------------------------------------------------------------
Casella Acquisitions
--------------- -------------------------------- Adjustments
Related to Pro Forma
Historical(1) Historical(2) Adjustments(3) This Offering as adjusted
--------------- --------------- ---------------- ------------------- ------------
(in thousands, except per share data)
Revenues ........................... $ 73,176 $30,081 $ -- $ -- $103,257
-------- ------- ----------- ------------- ---------
Cost of operations .................. 43,504 21,013 -- -- 64,517
General and administrative ......... 11,340 3,992 -- -- 15,332
Depreciation and amortization ...... 13,053 3,537 890(3A) -- 17,480
-------- ------- ----------- ------------- ---------
Operating income .................. 5,279 1,539 (890) -- 5,928
Interest expense, net ............... 3,908 1,544 1,443(3B) (3,844) (4) 3,051
Other (income) expense, net ......... 931 279 -- -- 1,210
-------- ------- ----------- ------------- ---------
Income (loss) before provision
(benefit) for income taxes ...... 440 (284) (2,333) 3,844 1,667
Provision (benefit) for income
taxes .............................. 452 (22) (1,093)(5) 1,518(5) 855
-------- ------- ----------- ------------- ---------
Net income (loss) ............... $ (12) $ (262) $ (1,240) $ 2,326 $ 812
======== ======= =========== ============= =========
Accretion of Preferred Stock and
put warrants ..................... (8,530) -- -- 8,530(6) --
-------- ------- ----------- ------------- ---------
Net income (loss) applicable to
common stockholders ............... (8,542) (262) (1,240) 10,856 812
======== ======= =========== ============= =========
Net income (loss) per share of
common stock ..................... $ 0.07
=========
Weighted average common
stock and common stock
equivalent shares
outstanding(7) .................. 11,196
=========
EBITDA(8) ........................... $ 18,332 $ 23,408
======== =========
23
Three Months Ended July 31, 1997
-----------------------------------------------------------------------------
(in thousands, except per share data)
Casella H.C. Gobin Adjustments
--------------- -------------------------------- Related to Pro Forma
Historical(1) Historical(9) Adjustments(3) This Offering as adjusted
--------------- --------------- ---------------- --------------- ------------
Revenues .............................. $ 26,429 $1,283 $ -- $ -- $27,712
-------- ------ --------- --------- -------
Cost of operations ..................... 15,662 1,029 -- -- 16,691
Selling, general & administrative ...... 3,680 241 -- -- 3,921
Depreciation and amortization ......... 3,851 96 18(3A) -- 3,965
-------- ------ --------- --------- -------
Operating income ........................ 3,236 (83) (18) -- 3,135
Interest expense, net .................. 1,634 56 98(3B) (985) (4) 803
Other expenses (income), net ............ 200 160 -- -- 360
-------- ------ --------- --------- -------
Income (loss) before provision (benefit)
for income taxes ..................... 1,402 (299) (116) 985 1,972
Provision (benefit) for income taxes ... 643 56 (201)(5) 389(5) 887
-------- ------ --------- --------- -------
Net income (loss) .................. $ 759 $ (355) $ 85 $ 596 $ 1,085
======== ====== ========= ========= =======
Accretion of Preferred Stock and
put warrants ........................... (2,115) -- -- 2,115(6) --
-------- ------ --------- --------- -------
Net income (loss) applicable to
common stockholders ..................... (1,356) (355) 85 2,711 1,085
======== ====== ========= ========= =======
Net income per share of common stock . $ 0.09
=======
Weighted average common stock
and common stock equivalent
shares outstanding(7) .................. 11,568
=======
EBITDA(8) .............................. $ 7,087 $ 7,100
======== =======
(1) No pro forma adjustment has been made (i) to the historical amounts for the
year ended April 30, 1997 to reverse the impact of a certain non-recurring
charge totalling $650,000 incurred with the settlement of certain litigation
naming the Company and brought derivatively in the name of the Meridian
Group, Inc. (see "Certain Transactions"); (ii) to the historical amounts for
the year ended April 30, 1997 to reduce operating expenses to eliminate
specific expenses that the Company believes would not have been incurred had
the acquisitions occurred as of May 1, 1996; and (iii) to the historical
amounts for the year ended April 30, 1997 to give effect to the savings
expected to be realized from the Company redirecting 8,000 tons of waste per
month from third party landfills to the Subtitle D Clinton County landfill.
(2) Consists of the combined historical statement of revenues and direct
operating expenses for the acquisitions completed after April 30, 1996 for
the period of May 1, 1996 through their respective dates of acquisition as
follows:
24
SCHEDULE OF COMPLETED ACQUISITIONS
Fiscal Year Ended April 30, 1997
------------------------------------------------------------------------
Completed Acquisitions
------------------------------------------------------------------------
(in thousands)
Clinton Vermont Superior H.C. Total
County(A) Waste(B) Disposal(C) Gobin(D) Other(E) Acquisitions
----------- ---------- ------------- ---------- ---------- -------------
Revenues .................................... $ 642 $1,251 $12,593 $4,872 $ 10,723 $30,081
------ ------ ------- ------ --------- -------
Cost of operations ........................... 449 524 9,136 3,808 7,096 21,013
General and administrative .................. 31 561 488 945 1,967 3,992
Depreciation and amortization ............... 90 12 2,358 309 768 3,537
------ ------ ------- ------ --------- -------
Operating income (loss) ..................... 72 154 611 (190) 892 1,539
Interest expense, net ........................ 88 50 634 244 528 1,544
Other expense (income), net .................. (5) (10) 69 136 89 279
------ ------ ------- ------ --------- -------
Income (loss) before provision for income taxes (11) 114 (92) (570) 275 (284)
Provision for income taxes .................. -- -- 20 (42) -- (22)
------ ------ ------- ------ --------- -------
Net income (loss) ........................... $ (11) $ 114 $ (112) $ (528) $ 275 $ (262)
====== ====== ======= ====== ========= =======
- ------------
(A) Acquisition completed on July 8, 1996.
(B) Acquisition completed on November 26, 1996.
(C) Acquisition completed on January 23, 1997.
(D) Acquisition completed on September 5, 1997.
(E) Includes other acquisitions completed by the Company as of April 30, 1997
for which sufficiently detailed historical financial information was
available.
(3) Pro forma adjustments have been made to the historical amounts for the
acquisitions noted in footnote (2). All of the acquisitions were accounted
for using the purchase method of accounting for business combinations.
(A) A pro forma adjustment has been made to reflect additional amortization
expense on the fair market value of the assets acquired as if the
acquisitions described in footnote (2) had occurred on May 1, 1996.
Landfill costs are amortized as permitted airspace of the landfill is
consumed. Goodwill is amortized over lives not exceeding 40 years, and
covenants not-to-compete and customer lists are amortized over lives
not exceeding 10 years.
Fiscal Year Ended Three Months Ended
April 30, 1997 July 31, 1997
------------------- -------------------
Incremental amortization of landfill costs
recorded in purchase accounting ......... $140 $--
Incremental intangibles amortization ...... 750 18
----- ----
Pro forma adjustment ..................... $890 $18
===== ====
(B) A pro forma adjustment has been made for the year ended April 30, 1997
and the three months ended July 31, 1997 to reflect the additional
interest expense on the incremental debt outstanding used to complete
the acquisitions described in footnote (2) as if all of those
acquisitions had occurred on May 1, 1996, assuming a weighted average
interest rate of 8.3% and 8.5%, respectively.
(4) A pro forma adjustment has been made for the year ended April 30, 1997 and
three months ended July 31, 1997 to reflect reduced interest expense
resulting from the application of net proceeds from this Offering to
reduce borrowings under the Company's credit facility as if such reduction
had occurred on May 1, 1996.
(5) A pro forma adjustment has been made to adjust the pro forma provision for
income taxes to a 39.5% rate on pro forma income before nondeductible
intangible amortization and other nondeductible expenses.
(6) A pro forma adjustment has been made for the year ended April 30, 1997 and
the three months ended July 31, 1997 to reflect the elimination of
accretion charges related to the Series Preferred Stock and warrants, none
of which will be outstanding after this Offering.
(7) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.
25
(8) EBITDA is defined as operating income plus depreciation and amortization.
EBITDA does not represent, and should not be considered as, an alternative
to net income or cash flows from operating activities, each as determined
in accordance with GAAP. Moreover, EBITDA does not necessarily indicate
whether cash flow will be sufficient for such items as working capital or
capital expenditures, or to react to changes in the Company's industry or
to the economy generally. The Company believes that EBITDA is a measure
commonly used by lenders and certain investors to evaluate a company's
performance in the solid waste industry. The Company also believes that
EBITDA data may help to understand the Company's performance because such
data may reflect the Company's ability to generate cash flows, which is an
indicator of its ability to satisfy its debt service, capital expenditure
and working capital requirements. Because EBITDA is not calculated by all
companies and analysts in the same fashion, the EBITDA measures presented
by the Company may not be comparable to similarly-titled measures reported
by other companies. Therefore, in evaluating EBITDA data, investors should
consider, among other factors: the non-GAAP nature of EBITDA data; actual
cash flows; the actual availability of funds for debt service, capital
expenditures and working capital; and the comparability of the Company's
EBITDA data to similarly-titled measures reported by other companies. For
more information about the Company's cash flows, see page F-9.
(9) Consists of the combined historical statement of revenues and direct
operating expenses for H.C. Gobin, Inc. for the period of May 1, 1997
through July 31, 1997.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto, the Company's Unaudited Pro Forma
Consolidated Statements of Operations and Notes thereto, and other financial
information included elsewhere in the Prospectus.
Overview
The Company is a regional, integrated solid waste services company that
provides collection, transfer, disposal and recycling services in Vermont, New
Hampshire, Maine, upstate New York and northern Pennsylvania. The Company's
objective is to continue to grow by expanding its services in markets where it
can be one of the largest and most profitable fully-integrated solid waste
services companies.
The Company's revenues have increased from $13.5 million for the fiscal
year ended April 30, 1994, to $73.2 million for the most recent fiscal year
ended April 30, 1997. From May 1, 1994 through April 30, 1997, the Company
acquired 44 solid waste collection, transfer and disposal operations. Between
May 1 and September 30, 1997, the Company acquired an additional 12 of such
businesses. All of these acquisitions were accounted for under the purchase
method of accounting for business combinations. Accordingly, the results of
operations of these acquired businesses have been included in the Company's
financial statements from the actual dates of acquisition and have materially
affected period-to-period comparisons of the Company's historical results of
operations.
General
The Company's revenues are attributable primarily to fees charged to
customers for solid waste collection, landfill, transfer and recycling
services. The Company derives a substantial portion of its collection revenues
from commercial, industrial and municipal services which are generally
performed under service agreements or pursuant to contracts with
municipalities. The majority of the Company's residential collection services
are performed on a subscription basis with individual households. Landfill and
transfer customers are charged a tipping fee on a per ton basis for disposing
of their solid waste at the Company's disposal facilities and transfer
stations. The majority of the Company's landfill and transfer customers are
under one-year to ten-year disposal contracts, with most having clauses for
annual cost of living increases. Recycling revenues consist of revenues from
the sale of recyclable commodities. Other revenues consist primarily of revenue
from waste tire processing operations and septic pumping and portable toilet
operations. The Company's revenues are shown net of intercompany eliminations.
The Company typically establishes its intercompany transfer pricing based upon
prevailing market rates.
The table below shows, for the periods indicated, the percentage of the
Company's revenues attributable to services provided. The increase in the
Company's collection revenues as a percentage of revenues in fiscal 1997 and
the first three months of fiscal 1998 is primarily attributable to the impact
of the Company's acquisition of collection businesses during fiscal 1996 and
fiscal 1997, as well as to internal growth through price and business volume
increases. The increase in the Company's landfill revenues as a percentage of
revenues in fiscal 1997 is attributable principally to a contract the Company
entered into in fiscal 1997 which resulted in significant additional volume at
one of the Company's landfills, and the increase in fiscal 1996 over fiscal
1995 was due principally to the acquisition of the Waste USA landfill in fiscal
1996. The decrease in the Company's transfer revenues as a percentage of
revenues in fiscal 1997 and the first three months of fiscal 1998 is mainly due
to a proportionately greater increase in collection and other revenues
occurring as the result of acquisitions in those areas; also, as the Company
acquires collection businesses from which it previously had derived transfer
revenues, the acquired revenues are recorded by the Company as collection
revenues. The decline in recycling revenues as a percentage of revenues in
fiscal 1997 and the first three months of fiscal 1998 principally reflects an
absence of acquisitions in this area coupled with a decline in recyclable
commodity prices. The increase in other revenues as a percentage of revenues in
fiscal 1996 and fiscal 1997 and the first three months of fiscal 1998 is
primarily due to the Company's acquisition and integration of tire processing
and septic businesses during these periods.
27
% of Revenues
--------------------------------------------------------------
Three Months Ended July
Fiscal Year Ended April 30, 31,
------------------------------------ -----------------------
1995 1996 1997 1996 1997
---------- ---------- ---------- ---------- ----------
Collection ......... 64.3% 62.6% 64.3% 61.0% 66.5%
Landfill ............ 17.2 19.9 20.4 21.8 15.5
Transfer ............ 7.5 8.0 6.3 7.8 7.1
Recycling ............ 10.8 8.3 4.9 7.8 6.5
Other ............... 0.2 1.2 4.1 1.6 4.4
------ ------ ------ ------ ------
Total Revenues ...... 100.0% 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 administrative expenses include management, clerical and
administrative compensation and overhead, professional services and costs
associated with the Company's marketing and sales force and community relations
expense.
Depreciation and amortization expense includes depreciation of fixed
assets over the estimated useful life of the assets using the straight line
method, amortization of landfill airspace assets under the units-of-production
method, and the amortization of goodwill and other intangible assets using the
straight line method. The amount of landfill amortization expense related to
airspace consumption can vary materially from landfill to landfill depending
upon the purchase price and landfill site and cell development costs.
Certain direct landfill development costs, such as engineering,
permitting, legal, construction and other costs directly associated with
expansion of existing landfills, are capitalized by the Company. Additionally,
the Company also capitalizes certain third party expenditures related to
pending acquisitions, such as legal and engineering. The Company will have
material financial obligations relating to closure and post-closure costs of
its existing landfills and any disposal facilities which it may own or operate
in the future. The Company has provided and will in the future provide accruals
for future financial obligations relating to closure and post-closure costs of
its landfills (generally for a term of 30 years after final closure of a
landfill) based on engineering estimates of consumption of permitted landfill
airspace over the useful life of any such landfill. There can be no assurance
that the Company's financial obligations for closure or post-closure costs will
not exceed the amount accrued and reserved or amounts otherwise receivable
pursuant to trust funds. The Company routinely evaluates all such capitalized
costs, and expenses those costs related to projects not likely to be
successful. Internal and indirect landfill development and acquisition costs,
such as executive and corporate overhead, public relations and other corporate
services, are expensed as incurred. See "Risk Factors--Incurrence of Charges
Related to Capitalized Expenditures".
Results of Operations
The following table sets forth for the periods indicated the percentage
relationship which certain items from the Company's Consolidated Financial
Statements bear in relation to revenues.
% of Revenues
------------------------------------------------------
Three Months Ended
Fiscal Year Ended April 30, July 31,
--------------------------------- ------------------
1995 1996 1997 1996 1997
----------- -------- -------- -------- -------
Revenues ........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of operations .................. 55.6 56.8 59.5 57.3 59.3
General and administrative ......... 11.8 16.5 15.5 15.1 13.9
Depreciation and amortization ...... 21.6 20.1 17.8 19.8 14.6
Operating income .................. 11.0 6.6 7.2 7.8 12.2
Interest expense, net ............... 8.2 6.3 5.3 4.5 6.2
Other (income) expenses, net ...... 0.3 (0.2) 1.3 (0.1) 0.7
Provision for income taxes ......... 1.1 0.4 0.6 3.4 2.4
------- ------ ------- ------ -------
Net income (loss) before
extraordinary items ............... 1.4 0.1 0.0 0.0 2.9
======= ====== ======= ====== =======
EBITDA .............................. 32.6% 26.6% 25.1% 27.6% 26.8%
======= ====== ======= ====== =======
28
Three Months Ended July 31, 1997 versus July 31, 1996
Revenues. Revenues increased $11.2 million, or 73.7%, to $26.4 million for
the three months ended July 31, 1997, from $15.2 million for the three months
ended July 31, 1996. Approximately $10.7 million of the increase was
attributable to the impact of businesses acquired throughout fiscal 1997 and
the three months ended July 31, 1997. In addition, approximately $0.4 million
of the increase, or 3.6%, was attributable to internal volume and price growth.
The balance of the increase of approximately $0.1 million in revenues was due
to higher recyclable commodity prices in the three months ended July 31, 1997
versus the three months ended July 31, 1996.
Cost of Operations. Cost of operations increased approximately $7.0
million, or 79.7%, to $15.7 million for the three months ended July 31, 1997,
from $8.7 million for the three months ended July 31, 1996, an increase
corresponding primarily to the Company's revenue growth described above. Cost
of operations as a percentage of revenues increased to 59.3% for the three
months ended July 31, 1997, from 57.3% for the three months ended July 31,
1996. The increase was primarily the result of: (i) an increase in collection
operations, which have higher operating costs than other operations, as a
percentage of the Company's total operations; and (ii) losses sustained in the
Company's waste tire processing operations in southern Maine for the three
months ended July 31, 1997. The Company expects the waste tire processing
operations to make a positive contribution for the balance of the current
fiscal year.
General and Administrative. General and administrative expenses increased
approximately $1.4 million, or 59.8%, to $3.7 million for the three months
ended July 31, 1997, from $2.3 million for the three months ended July 31,
1996. General and administrative expenses as a percentage of revenues decreased
to 13.9% for the three months ended July 31, 1997, from 15.1% for the three
months ended July 31, 1996, due primarily to improved economies of scale
related to the increase in revenues.
Depreciation and Amortization. Depreciation and amortization expense
increased approximately $0.9 million, or 28.1%, to $3.9 million for the three
months ended July 31, 1997, from $3.0 million for the three months ended July
31, 1996. As a percentage of revenues, depreciation and amortization expense
decreased to 14.6% for the three months ended July 31, 1997, from 19.8% for the
three months ended July 31, 1996. The decrease in depreciation and amortization
expense as a percentage of revenues was primarily the result of: (i) an
increase in the Company's collection operations as a percentage of the total
revenues for the three months ended July 31, 1997, which have lower
depreciation and amortization expenses than other operations; and (ii) the
higher proportion of the Company's internal waste volume disposed of at the
Company's Clinton County, New York landfill for the three months ended July 31,
1997 which has a lower rate of amortization expense than the Company's other
landfills (due to the large permitted capacity of the Clinton County landfill).
Net fixed assets increased to $67.6 million as of July 31, 1997, or 4.3%, from
$64.8 million as of April 30, 1997, and intangible assets, net of accumulated
amortization expense, increased to $50.0 million as of July 31, 1997, or 8.8%,
from $46.0 million as of April 30, 1997.
Interest Expense, Net. Interest expense increased approximately $0.9
million, or 140.8%, to $1.6 million for the three months ended July 31, 1997,
from $0.7 million for the three months ended July 31, 1996. This increase
primarily reflects increased indebtedness incurred in connection with
acquisitions and capital expenditures. The Company's total debt (including
capital leases) was $85.9 million at July 31,1997 versus $77.9 million at April
30, 1997 and $42.7 million at July 31, 1996.
Other (income) expense. Other (income) expense has not historically been
material to the Company's results of operations. However, during the three
months ended July 31, 1997, the Company recorded a provision relating to a
claim made by an individual seeking compensation for services provided in
previous years, which contributed to an increase in other (income) expense from
$(21,000) to $200,000 for the three months ended July 31, 1996 and July 31,
1997, respectively.
Provision for Income Taxes. Provisions for income taxes increased
approximately $135,000, or 26.7%, to $643,000 for the three months ended July
31, 1997, from $508,000 for the three months ended July 31, 1996, due
principally to a corresponding increase in pre-tax income of $900,000 for the
three months ended July 31, 1997.
29
Fiscal Year Ended April 30, 1997 versus April 30, 1996
Revenues. Revenues increased $35.1 million, or 92.0%, to $73.2 million in
fiscal 1997 from $38.1 million in fiscal 1996. Approximately $32.7 million of
the increase was attributable to the impact of businesses acquired throughout
fiscal 1996 and fiscal 1997. In addition, approximately $3.4 million of the
increase, or 9.7%, was attributable to internal growth, primarily through
volume increases. The effect of these revenue increases was partially offset by
a decrease of approximately $1.0 million due to lower recyclable commodity
prices in fiscal 1997 versus fiscal 1996.
Cost of operations. Cost of operations increased $21.8 million, or 100.1%,
to $43.5 million in fiscal 1997 from $21.7 million in fiscal 1996, an increase
corresponding primarily to the Company's revenue growth described above. Cost
of operations as a percentage of revenues increased to 59.5% in fiscal 1997
from 56.8% in fiscal 1996. The increase was primarily the result of: (i) an
increase in collection operations, which have higher operating costs than other
operations, as a percentage of the Company's total operations as a result of
acquisitions completed in fiscal 1996 and fiscal 1997; (ii) lower margins in
recycling services due to lower commodity prices in fiscal 1997; and (iii)
start-up and transitional expenses related to the acquisitions completed in
fiscal 1997. The Company has historically expensed all costs related to post
acquisition start-up and transitional expenditures.
General and administrative. General and administrative expenses increased
approximately $5.0 million, or 79.9%, to $11.3 million in fiscal 1997 from $6.3
million in fiscal 1996. General and administrative expenses as a percentage of
revenues decreased to 15.5% in fiscal 1997 from 16.5% in fiscal 1996 due to
improved economies of scale related to the significant increase in revenues,
and operating enhancements made to certain acquired operations.
Depreciation and amortization. Depreciation and amortization expense
increased approximately $5.4 million, or 70.8%, to $13.1 million in fiscal 1997
compared to $7.6 million in fiscal 1996. As a percentage of revenues,
depreciation and amortization expense decreased to 17.8% during fiscal 1997
from 20.1% in fiscal 1996. The decrease in depreciation and amortization
expense as a percentage of revenues was primarily the result of an increase in
the Company's collection operations as percentage of total revenues in fiscal
1997, which generally have lower depreciation and amortization expenses than
other operations. Depreciation and amortization expense is expected to decline
as a percentage of revenues in future periods as additional anticipated
landfill airspace capacity is permitted which would result in spreading this
expense over a longer anticipated life, and due to the expected increase in
collection revenues as a percentage of total acquired revenues. Net fixed
assets increased approximately $27.9 million, or 75.6%, to $64.8 million in
fiscal 1997 from $36.9 million in fiscal 1996, and intangible assets, net of
accumulated amortization expense, increased approximately $34.5 million, or
298.5%, to $46.0 million in fiscal 1997 from $11.5 million in fiscal 1996 due
primarily to acquisitions.
Interest expense, net. Interest expense increased approximately $1.5
million, or 63.3%, to $3.9 million in fiscal 1997 from $2.4 million in fiscal
1996. This increase primarily reflects increased indebtedness incurred in
connection with acquisitions and capital expenditures and was offset to a small
degree by slightly lower average interest rates. The Company's total debt
(including capital leases) was $77.9 million at April 30, 1997 versus $26.9
million at April 30, 1996, an increase of 189.9%.
Other (income) expense. Other (income) expense has not historically been
material to the Company's results of operations. However, during fiscal 1997,
the Company established a reserve of $650,000 related to a lawsuit that was
settled for $450,000 in the first quarter of fiscal 1998. The Company also paid
$200,000 in attorneys fees in connection with such settlement. Additionally,
the Company wrote off $283,000 for recycling facility assets that were deemed
to have no value in the year ended April 30, 1997.
Provision for income taxes. Provision for income taxes increased
approximately $308,000, or 215.1%, to $452,000 in fiscal 1997 from $144,000 in
fiscal 1996, due principally to an increase in the amount of amortization of
non-deductible goodwill and other non-deductible items in fiscal 1997 as
compared to fiscal 1996.
30
Fiscal Year Ended April 30, 1996 versus April 30, 1995
Revenues. Revenues increased $17.2 million, or 82.6%, to $38.1 million in
fiscal 1996 from $20.9 million in fiscal 1995. Approximately $15.4 million of
the increase was attributable to the impact of businesses acquired throughout
fiscal 1995 and fiscal 1996. In addition, approximately $2.4 million of the
increase, or 13.9%, was attributable to internal growth, primarily through
volume increases. The effect of these revenue increases was partially offset by
a decrease of approximately $0.6 million due to lower recyclable commodity
prices in fiscal 1996 versus fiscal 1995.
Cost of operations. Cost of operations increased $10.0 million, or 86.4%,
to $21.6 million in fiscal 1996 from $11.6 million in fiscal 1995. This
increase in costs was attributable primarily to increases in the Company's
revenues described above. Cost of operations as a percentage of revenues
increased to 56.8% in fiscal 1996 from 55.6% in fiscal 1995. This increase was
primarily due to lower margins in recycling services due to lower commodity
prices in fiscal 1996 versus fiscal 1995.
General and administrative. General and administrative expense increased
approximately $3.8 million, or 156.6%, to $6.3 million in fiscal 1996 from $2.5
million in fiscal 1995. As a percentage of revenues, general and administrative
expenses increased to 16.5% in fiscal 1996 from 11.8% in fiscal 1995. The
increase was primarily the result of: (i) the Company's increase in personnel
and other expenses related to the anticipated growth of the Company; and (ii)
the acquisition of the Sawyer Companies in January 1996, which from the date of
acquisition through the end of fiscal 1996 had a higher proportion of general
and administrative expenses to revenues (22.0%) than the balance of the
Company.
Depreciation and amortization. Depreciation and amortization expense
increased $3.1 million, or 69.4%, to $7.6 million from $4.5 million in fiscal
1995. As a percentage of revenues, depreciation and amortization expense
decreased to 20.1% in 1996 from 21.6% in fiscal 1995, primarily as a result of
increased collection revenues without a commensurate increase in depreciable
assets. Net fixed assets increased approximately $14.4 million, or 64.0%, to
$36.9 million in fiscal 1996 from $22.5 million in fiscal 1995, and intangible
assets, net of accumulated amortization expense, increased approximately $5.6
million, or 94.9%, to $11.5 million in fiscal 1996 from $5.9 million in fiscal
1995.
Interest expense, net. Interest expense increased approximately $679,000,
or 39.7%, to $2.4 million in fiscal 1996 from $1.7 million in fiscal 1995. This
increase primarily reflects increased indebtedness incurred in connection with
acquisitions. The Company's total debt (including capital leases) was $26.9
million at April 30, 1996 versus $24.2 million at April 30, 1995, an increase
of 10.7%.
Provision for income taxes. Provision for income taxes decreased
approximately $76,000, or 34.8%, to $144,000 in fiscal 1996 from $220,000 in
fiscal 1995, due principally to lower pre-tax income reported by the Company in
fiscal 1996 as compared to fiscal 1995.
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 cell construction, landfill development and landfill
closure activities. Principally due to these factors, the Company has incurred
working capital deficits in the past. At July 31, 1997, the Company had a
working capital deficit of $0.6 million. The Company plans to meet its capital
needs through various financing sources, including internally generated funds
and debt and equity financing. The Company has a $110.0 million credit facility
with a group of banks for which BankBoston, N.A. is acting as agent. This
credit facility includes an $85.0 million revolving line of credit, subject to
availability, and term loans aggregating $25.0 million, and is secured by all
assets of the Company, including the Company's interest in the equity
securities of its subsidiaries. The revolving line of credit matures in July
2002, and the term loans of $10.0 million and $15.0 million mature in July 2002
and July 2004, respectively. At September 30, 1997, an aggregate of $51.2
million was outstanding under the revolving line of credit. The Company
believes that, through a combination of internally generated funds, its credit
facility and the net proceeds of this Offering, it will be able to satisfy its
anticipated working capital needs for at least the next 12 months. See "Risk
Factors--Uncertain Ability to Finance the Company's Growth" and "Use of
Proceeds".
31
Net cash provided by operations for the three months ended July 31, 1997
and July 31, 1996 was $3.1 million and $3.0 million, respectively. Net cash
provided by operations remained relatively constant in the three months ended
July 31, 1997, notwithstanding higher revenue levels, due principally to the
increased costs associated with absorbing and integrating the operations of
acquired businesses.
Net cash provided by operations in fiscal 1997 increased to $14.7 million
from $8.2 million in fiscal 1996 primarily due to an increase in depreciation
and amortization of approximately $5.5 million in fiscal 1997 from fiscal 1996,
and improvement of the Company's working capital.
Net cash provided by operations in fiscal 1996 increased to $8.2 million
from $4.5 million in fiscal 1995 primarily due to an increase in depreciation
and amortization of approximately $3.1 million in fiscal 1996 from fiscal 1995.
For the three months ended July 31, 1997 and July 31, 1996, cash used in
investing activities was $9.5 million and $8.0 million, respectively. Investing
activities used net cash of $50.3 million in fiscal 1997. The Company's capital
expenditure and capital needs for acquisitions have increased significantly,
reflecting the Company's rapid growth by acquisition and development of revenue
producing assets and will increase further as the Company continues to complete
acquisitions. While capital expenditures for fiscal 1998 are currently expected
to be approximately $13.8 million with respect to the businesses that the
Company owned as of July 31, 1997, compared to total capital expenditures of
$14.9 million in fiscal 1997 and $10.1 million in fiscal 1996, total capital
expenditures are expected to further increase in fiscal 1998 due to
acquisitions. The decrease of $1.1 million in expected fiscal 1998 capital
expenditures from fiscal 1997 capital expenditures relating to businesses owned
by the Company as of June 30, 1997 is primarily due to the completion of
construction of two transfer stations in fiscal 1997 and a decrease in landfill
cell construction costs in fiscal 1998.
For the three months ended July 31, 1997 and July 31, 1996, the Company's
financing activities provided cash of $6.9 million and $4.9 million,
respectively. Net cash provided by financing activities was $36.5 million,
$19.0 million and $4.6 million in the fiscal years ended April 30, 1997, 1996
and 1995, respectively. The increased net cash provided by financing activities
of $2.2 million in the three months ended July 31, 1997 was due principally to
an increase in bank borrowings under the Company's credit facility. Net cash
provided by financing activities in fiscal 1997 reflects primarily bank
borrowings and seller subordinated notes, less principal payments on debt. In
fiscal 1996, the net cash provided by financing activities reflects the net
proceeds of approximately $12.5 million from the private placement of preferred
stock in December 1995.
At July 31, 1997, the Company had approximately $84.2 million of long-term
and short-term debt, $1.7 million in capital leases and $2.8 million in letters
of credit outstanding.
Seasonality
The Company's revenues have historically been lower during the months of
November through March. This seasonality reflects the lower volume of waste
during the late fall, winter and early spring months primarily because: (i) the
volume of waste relating to construction and demolition activities decreases
substantially during the winter months in the northeastern United States; and
(ii) decreased tourism in Vermont, Maine and eastern New York during the winter
months tends to lower the volume of waste generated by commercial and
restaurant customers, which is partially offset by the winter ski industry.
Since certain of the Company's operating and fixed costs remain constant
throughout the fiscal year, operating income results are therefore impacted by
a similar seasonality. In addition, particularly harsh weather conditions could
result in increased operating costs to certain of the Company's operations.
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. The Company establishes its expenditure levels based on
its expectations as to future revenues, and, if revenue levels are below
expectations, expenses can be disproportionately high. Due to a variety of
factors including general economic conditions, governmental regulatory action,
acquisitions, capital expenditures and other costs related to the expansion of
operations and services and pricing changes, it is possible that in some future
quarter, the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the Company's Class A
Common Stock price would likely be materially affected.
32
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 northeastern 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.
33
BUSINESS
The Company
Casella Waste Systems, Inc. is a regional, integrated, non-hazardous solid
waste services company that provides collection, transfer, disposal and
recycling services in Vermont, New Hampshire, Maine, upstate New York and
northern Pennsylvania. As of September 30, 1997, the Company owned and/or
operated four Subtitle D landfills, 31 transfer stations, nine recycling
processing facilities, and 23 collection operations which together served over
73,000 commercial, industrial and residential customers. The Company was
founded in 1975 as a single-truck operation in Rutland, Vermont and
subsequently expanded its operations throughout the state of Vermont. In 1993,
the Company initiated an acquisition strategy to take advantage of anticipated
reductions in available landfill capacity in Vermont and surrounding states due
to increasing environmental regulation and other market forces driving
consolidation in the solid waste industry. From May 1, 1994 through April 30,
1997, the Company acquired ownership or long-term operating rights to 44 solid
waste businesses, including four landfills, and, between May 1, 1997 and
September 30, 1997, the Company acquired an additional 12 such businesses. The
Company believes that additional acquisition opportunities exist in the markets
it serves and in other prospective markets.
The Company's operating strategy is based on the integration of its
collection and disposal operations and the internalization of waste collected.
The Company believes that control of a substantial portion of the waste stream
and economies of scale provide it with advantages over non-integrated
competitors in its markets. During fiscal 1997, approximately 65% of the solid
waste collected by the Company was delivered for disposal at its landfills.
Additionally, approximately 53% of the solid waste disposed of at its landfills
was collected by the Company.
Industry Overview
Based on information obtained from the May 1997 edition of Waste Age
magazine, the Company believes that the United States non-hazardous solid waste
services industry will generate estimated revenues of approximately $36 billion
in calendar 1997, of which approximately $26 billion will be generated by
publicly-traded or privately-owned waste companies and the remaining revenues
will be generated by municipal, county and district operators.
Currently, the solid waste services industry is experiencing significant
consolidation and integration. The Company believes that this consolidation and
integration has been driven primarily by four factors: (i) stringent
environmental regulation resulting in increased capital requirements; (ii) the
inability of many smaller operators to achieve the economies of scale necessary
to compete effectively with large integrated solid waste service providers;
(iii) the competitive advantages of integrated companies generated by providing
integrated collection, transfer and disposal capabilities; and (iv)
privatization of solid waste services by municipalities. Despite the
considerable consolidation and integration that has occurred in the solid waste
industry in recent years, the Company believes the industry remains highly
fragmented both within its target markets and nationally.
Stringent environmental regulations, such as the Subtitle D Regulations,
have resulted in rising costs for owners of landfills. Subtitle D specifies
design, siting, operating, monitoring, closure and financial security
requirements for landfill operations. The permits required for landfill
development, expansion or construction have also become increasingly difficult
to obtain. In addition, Subtitle D requires more stringent engineering of solid
waste landfills including the installation of liners and leachate and gas
collection and monitoring. These ongoing costs are coupled with increased
financial reserve requirements for closure and post-closure monitoring. Certain
of the smaller industry participants have found these costs and regulations
burdensome and have decided either to close their operations or to sell them to
larger operators. As a result, the number of operating landfills has decreased
while the size of landfills has increased.
Economies of scale, driven by the high fixed costs of landfill assets and
the associated profitability of each incremental ton of waste, have led to the
development of higher volume, regional landfills. Larger integrated operators
achieve economies of scale in the solid waste collection and disposal industry
34
through vertical integration of their operations that may generate a
significant waste stream for these high-volume landfills.
Integrated companies gain further competitive advantage over
non-integrated operators by being able to control the waste stream. The ability
of these companies to internalize the collected solid waste (i.e, collecting
the waste at the source, transferring it through their own transfer stations
and disposing of it at their own disposal facility), coupled with access to
significant capital resources to make acquisitions, has created an environment
in which large integrated companies can operate more cost effectively and
competitively than non-integrated operators.
The trend toward consolidation in the solid waste services industry is
further supported by the increasing tendency of a number of municipalities to
privatize their waste disposal operations. Privatization is often an attractive
alternative for municipalities due, among other reasons, to the ability of
integrated operators to leverage their economies of scale to provide the
community with a broader range of services while enabling the municipality to
reduce its own capital asset requirements. The Company believes that the
financial condition of municipal landfills in the northeastern United States
was adversely affected by the 1994 United States Supreme Court decision which
declared "flow control" laws unconstitutional. These laws had required waste
generated in counties or districts to be disposed of at the respective county
or district-owned landfills or incinerators. The reduction in the captive waste
stream to these facilities, resulting from the invalidation of such laws,
forced the counties that owned them to increase their per ton tipping fees to
meet municipal bond payments. The Company believes that these market dynamics
are factors causing municipalities throughout the northeastern states to
consider the privatization of public facilities.
Strategy
The Company's objective is to continue to grow by expanding its services
in markets where it can be one of the largest and most profitable
fully-integrated solid waste services companies. The Company is currently
operating in Vermont, New Hampshire, Maine, upstate New York and northern
Pennsylvania, and believes that these markets and other markets with similar
characteristics present significant opportunities for achieving its objectives.
The Company focuses its efforts on markets which are characterized by: (i) a
geographically dispersed population; (ii) disposal capacity which the Company
anticipates may be available for acquisition by the Company; (iii) significant
environmental regulation which has resulted in a decrease in the total number
of operating landfills; and (iv) a lack of significant competition from other
well-capitalized and established waste management companies. The Company
believes that these characteristics result in significant market opportunities
for the first fully-integrated, well-capitalized market entrant, and create
economic and regulatory barriers to entry by additional competitors in these
markets.
The Company's strategy for achieving its objective is: (i) to acquire
solid waste collection businesses and disposal capacity in new markets, and to
make "tuck-in" acquisitions in existing markets; (ii) to generate internal
growth through increased sales penetration and the marketing of additional
services to existing customers; and (iii) to implement operating enhancements
and efficiencies. The Company intends to implement this strategy as follows:
Expansion Through Acquisitions. The Company intends to continue to expand
by acquiring solid waste collection companies and disposal capacity in new
markets, and increasing its revenues and operational efficiencies in its
existing markets through "tuck-in" and other acquisitions of solid waste
collection operations. In considering new markets, the Company evaluates the
opportunities to acquire or otherwise control sufficient collection operations
and disposal facilities which would enable it to generate a captive waste
stream and achieve the disposal economies of scale necessary to meet its market
share and financial objectives. The Company has established criteria which
enable it to evaluate the prospective acquisition opportunity and the target
market. Historically, the Company has entered new markets which are adjacent to
its existing markets; however, the Company may consider new markets in
non-contiguous geographic areas which meet its criteria. The Company targets
additional "tuck-in" acquisitions within its current markets to allow the
Company to further improve its market penetration and density and to further
increase the internalization rate of its waste streams.
35
Internal Growth. In order to generate continued internal growth, the
Company has focused on increasing sales penetration in its current and adjacent
markets, soliciting new commercial, industrial, and residential customers,
marketing upgraded services to existing customers and, where appropriate,
raising prices. As customers are added in existing markets, the Company's
revenue per routed truck is improved, which generally increases the Company's
collection efficiencies and profitability. The Company uses transfer stations,
which serve to link disparate collection operations with Company-operated
landfills, as an important part of its internal growth strategy.
Operating Enhancements for Acquired and Existing Businesses. The Company
has implemented a system that establishes standards for each of its markets and
tracks operating criteria for its collection, transfer, disposal and other
operations to facilitate improved profitability in existing and acquired
operations. These measurement criteria include collection and disposal routing
efficiency, equipment utilization, cost controls, commercial weight tracking
and employee training and safety procedures. The Company believes that by
establishing standards and closely monitoring compliance, it is able to improve
existing and acquired operations. Moreover, where the Company is able to
internalize the waste stream of acquired operations, it is further able to
increase operating efficiencies and improve capacity utilization.
Acquisition Program
The Company's acquisition program is founded on strong management
capabilities, strict acquisition criteria, and defined integration procedures.
From May 1, 1994 through April 30, 1997, the Company acquired ownership or
long-term operating rights to 44 solid waste businesses, including four
landfills, and acquired an additional 12 such businesses between May 1, 1997
and September 30, 1997. The Company believes that additional acquisition
candidates meeting the Company's acquisition criteria, including "tuck-in"
opportunities, exist within its current and adjacent market areas.
The Company's three regional vice presidents, as well as the Chief
Executive Officer and Chief Operating Officer, are each responsible for
identifying acquisition candidates and consummating acquisitions. In addition
to three dedicated business development personnel, who focus exclusively on
acquisitions, each of the Company's 22 division managers is responsible for
identifying acquisition opportunities within his or her region.
The Company has developed a set of financial, geographic and management
criteria designed to assist management in the evaluation of acquisition
candidates engaged in solid waste collection and disposal. These criteria
consist of a variety of factors, including, but not limited to: (i) historical
and projected financial performance; (ii) internal rate of return, return on
assets and earnings accretion; (iii) experience and reputation of the
acquisition candidate's management and customer service reputation and
relationships with the local communities; (iv) composition and size of the
acquisition candidate's customer base; (v) opportunity to enhance and/or expand
the Company's market area and/or ability to attract other acquisition
candidates; (vi) whether the acquisition will augment or increase the Company's
market share and/or help protect the Company's existing customer base; and
(vii) internalization opportunities to be gained by combining the acquisition
candidate with the Company's existing operations.
The Company utilizes an established integration procedure for newly
acquired businesses designed to effect a prompt and efficient integration of
the acquired business and minimize disruption to the on-going business of both
the Company and the acquired business. Once a solid waste collection operation
is acquired, the Company implements programs designed to reduce disposal costs
and improve collection and disposal routing, equipment utilization, employee
productivity, operating efficiencies and overall profitability. The Company
typically seeks to retain the acquired company's qualified managers, key
employees and selected local operations, while consolidating purchasing and
other administrative functions through the Company's corporate offices.
36
The following table sets forth the acquisitions made by the Company from
May 1, 1994 through September 30, 1997:
Company Location Business Date Acquired
- ----------------------------------------- ---------------------- ---------------------- ---------------
Mansur & Sons Trucking, Inc. Canaan, NH Collection September 1997
Therrien Trucking St. Albans, VT Collection September 1997
Sanpietro Trucking Seneca Falls, NY Collection September 1997
H.C. Gobin, Inc. Claremont, NH Collection September 1997
Chittenden Recycling Services, Inc. Williston, VT Recycling June 1997
Reynells Company, Inc. Waitsfield, VT Septic June 1997
D. M. Lamothe Refuse St. Albans, VT Collection June 1997
Hinman Disposal Service Wellsboro, PA Collection June 1997
Rainbow Rubbish Cortland, NY Collection June 1997
Central Vermont Septic Services, Inc. Burlington, VT Septic June 1997
Metivier Trucking Burlington, VT Collection June 1997
Collins Garbage Service, Inc. Ithaca, NY Collection May 1997
Certain Vermont Routes of Browning Manchester, VT Collection April 1997
Ferris Industries of VT, Inc.
T & R Associates, Inc. Bath, ME Collection April 1997
Arlington Rubbish Arlington, VT Collection March 1997
Barnier Sons and Barnier's Trucking Burlington, VT Collection March 1997
Tri Mountain Trash S. Londonderry, VT Collection March 1997
Wade's Trucking, Inc. Penn Yan, NY Collection/Recycling February 1997
Food Waste Management S. Burlington, VT Collection February 1997
Superior Disposal Services, Inc. Newfield, NY; Transfer Station January 1997
Wellsboro, PA; Collection/Recycling
and Waverly, NY
Kerkim, Inc. Horsehead, NY Collection January 1997
Transfer Station
Young & Wilcox Lowville, NY Collection January 1997
Enviropac Windham, ME Collection November 1996
Vermont Waste and Recycling New Haven, VT Collection November 1996
Management, Inc.
Certain Maine Routes of Browning Brewer, ME Collection September 1996
Ferris Industries of Maine, Inc.
Warren County, New York Routes of Warren County, NY
United Waste Systems, Inc. Collection September 1996
First Service Rubbish Removal Crown Point, NY Transfer Station/ September 1996
Collection
C&B Sanitation, Inc. Saratoga Springs, NY Collection September 1996
Lake Placid Disposal Service, Inc. Lake Placid, NY Collection/Recycling August 1996
Bob's Rubbish Removal Bennington, VT Collection July 1996
Clinton County, NY Facilities (lease) Clinton County, NY Landfill/Transfer July 1996
Station/Recycling
Seaward T.I.R.E.S., Inc. Eliot, ME Waste Tire Recycling July 1996
Ray's Disposal Service Carmel, ME Collection June 1996
Jim Blair Trucking Alburg, Vermont Collection May 1996
Earth Waste Systems, Inc. West Rutland, VT Collection/Recycling May 1996
East Mountain Transport Sunderland, VT Collection/Transfer May 1996
Station
Residential Rubbish Service, Inc. Waterbury, VT Collection April 1996
Hiram Hollow Regeneration Corp. Wilton, NY Transfer Station March 1996
Chapin & Sons Hardwick, VT Collection February 1996
RJ's Trucking & Rubbish Removal Richford, VT Collection February 1996
37
Northeast Waste Services, LTD. White River Junction, VT Collection/Recycling January 1996
R.C. & Son Sanitation, Inc. Brant Lake, NY Collection January 1996
Sawyer Companies Bangor, ME Landfill/Collection/ January 1996
Recycling/Transfer
Station
Granville Refuse Company Granville, NY Collection September 1995
Warrensburg Sanitation Lake George, NY Collection September 1995
Downey's Rubbish Removal, Inc. Arlington, VT Collection August 1995
Green Mountain Sanitation, Inc. Morrisville, VT Collection/Recycling/ August 1995
Transfer Station
Dana H. Sweet Corp. Cambridge, VT Collection July 1995
M & R Rubbish, Inc. Cossayuna, NY Collection July 1995
Adirondack Refuse, Inc. Brant Lake, NY Collection June 1995
Central Vermont Quality Services, Inc. Rutland, VT Collection/Recycling May 1995
Springer Waste Management Service Glen Falls, NY Collection April 1995
Dix Rubbish Removal Plainfield, VT Collection March 1995
Waste USA, Inc. (NEWS of VT) Coventry, VT Transfer Station/ January 1995
Landfill
Consumat Sanco, Inc. Bethlehem, NH Transfer Station/ July 1994
(NCES Landfill) Landfill
Catamount Waste Services, Inc. Montpelier, VT Transfer Station/ June 1994
Collection
There can be no assurance the Company will continue to be successful in
executing its acquisition strategy. See "Risk Factors--Ability to Identify,
Acquire and Integrate Acquisition Targets".
Service Area
The Company is managed on a decentralized basis, with its operations
divided into three geographic regions: the Central, Eastern and Western
Regions. These three regions are further divided into divisions organized
around smaller market areas, known as "waste sheds", each of which contains the
complete cycle of activities in the solid waste service process, from "curb
control" (collection) to transfer stations to landfill (disposal facility). The
Company believes that it achieves a competitive advantage in its markets over
non-integrated competitors by acquiring components of the waste shed and
internalizing operations and activities with other owned or controlled
components of the waste shed.
The following are the Company's three geographic regions that comprise the
Company's service area:
Central Region
The Central Region consists of Vermont, northern and central New Hampshire
and eastern upstate New York, an area covering approximately 33,000 square
miles and a population of approximately 2.4 million residents. The Company was
founded in 1975 in Rutland, Vermont, and, through Casella Waste Management, has
continued to grow its market presence in the Central Region. The Company owns
and operates Subtitle D landfills in Bethlehem, New Hampshire; Coventry,
Vermont and, through a 25-year capital lease, operates the Clinton County
landfill located in Schuyler Falls, New York. In addition, Casella Waste
Management operated 23 transfer stations in the Central Region at September 30,
1997.
Vermont encompasses approximately 9,600 square miles and has a population
of approximately 560,000 residents. The Company owns the Waste USA landfill in
Coventry, Vermont, one of three Subtitle D landfills in Vermont (one of the
other two landfills is expected to close before the end of 1997), and leases
(with a right to purchase) the airspace above this landfill. The Company
provides services in substantially all of the markets in Vermont.
The Company estimates that its New Hampshire market area, consisting of
the northern and central portions of the state (including Lebanon, Hanover,
Concord and Plymouth), encompasses approximately 8,000 square miles and has a
population of approximately 423,000 residents. New Hampshire currently has five
Subtitle D landfills in operation, one of which is the NCES landfill in
Bethlehem, New Hampshire,
38
is owned by the Company. In addition, three incinerators service the New
Hampshire market. The Company believes that a majority of the disposal and
incineration capacity in New Hampshire serves the southeastern New Hampshire
and Boston markets and does not materially impact the Company's service area.
The portion of upstate New York within the Company's Central Region
extends from Interstate 90 north to the Canadian border and from the Vermont
border west to Interstate 81 and the eastern shore of Lake Ontario. This
portion of New York includes Lake Placid, Lake George and Potsdam and
encompasses approximately 15,500 square miles and a population of approximately
1.4 million residents. Four municipal Subtitle D landfills, including the
Clinton County landfill operated by the Company, and one large volume
incinerator are located in this area. The Company believes that certain
segments of the Central Region will present opportunities for acquisitions and
consolidations due to a trend toward privatization of landfills in this region.
Eastern Region
The Company's Eastern Region consists of the central and southern portions
of Maine (including Bangor and Augusta). The Eastern Region market area
encompasses approximately 15,000 square miles and has a population of
approximately 840,000 residents. The Company established a market presence in
Maine through the acquisition of the Sawyer Companies in December 1995. Through
its Sawyer operations, the Company owns the SERF landfill located in Hampden,
Maine, which processes ash, special waste and front end processing residue from
a regional incinerator. In addition, the Company operates three transfer
stations, and collects solid waste from commercial, industrial and residential
customers. The Company's waste tire processing facility, located in Eliot,
Maine, has the capacity to process approximately 3.5 million tires per year and
generates tire derived fuel, which the Company sells to paper mills for
consumption as a supplemental energy source for boiler fuel.
Unlike the other states in the Company's existing market area, Maine has
an aggressive incineration program and the Company believes that approximately
80% of the waste shed in the Company's market area is disposed of through
incineration. However, approximately 45% of the tonnage delivered to
incinerators is returned to landfills as ash and front end processing residue,
and the Company believes it is the largest disposer of incinerated waste
material in Maine. There are presently four incinerators and five Subtitle D
landfills operating in Maine, including the landfill owned and operated by the
Company. In addition, since 1989 Maine has had a moratorium on the development
of commercial landfills that prohibits additional capacity from being built.
Western Region
The Western Region is comprised of the south central, western and southern
tier of upstate New York (including Ithaca, Elmira, Horsehead, Corning and
Watkins Glen) and the northern tier of Pennsylvania. Through the acquisition of
the Superior Disposal Services companies in January 1997, the Company
established its market presence in the Western Region. The Company operates
five transfer stations and five collection operations, and collects solid waste
from commercial, industrial and residential customers in the Western Region.
The Company's Western Region encompasses approximately 27,000 square miles
and has a population of approximately 2.4 million residents. Six municipal
Subtitle D landfills and one privately-owned landfill are located in this area.
The Company does not operate a landfill in the Western Region. The Company
believes that municipal landfills in this region typically lack a sufficiently
large captive waste stream to adequately offset the high operating costs of
such landfills and, accordingly, that incentives exist for such landfills to be
privatized. Privatization of landfills favors well-capitalized integrated
operators, and creates opportunities for these operators to establish and
consolidate waste sheds.
Operations
The Company's operations include the ownership and/or operation of
landfills, solid waste collection services, transfer stations, recycling
services and tire processing and other services.
39
Landfills
The Company currently owns three Subtitle D landfill operations and
operates a fourth Subtitle D landfill under a long-term lease arrangement with
a county. All of the Company's operating landfills include leachate collection
systems, groundwater monitoring systems and, where required, active methane gas
extraction and recovery systems.
In fiscal 1997, approximately 53% of the solid waste disposed of at the
Company's landfills was delivered by the Company, and revenues from the
Company's disposal operations accounted for approximately 20% of the Company's
revenues.
The following table provides certain information, as of September 30,
1997, regarding the landfills that the Company operates:
Total Remaining Additional
Permitted Permittable
Capacity Capacity
Landfill Location (Tons) (Tons)(1)
- -------------------------- -------------------- ----------------- ------------
Clinton County (2) ...... Schuyler Falls, NY 1,294,802 1,160,000
Waste USA (3) ............ Coventry, VT 269,351 1,846,000
SERF ..................... Hampden, ME 220,895 2,360,000
NCES ..................... Bethlehem, NH 113,809 1,500,000
- ------------
(1) Permittable capacity is available capacity which cannot be utilized until a
necessary permit is obtained.
(2) Operated pursuant to a capital lease expiring in 2021.
(3) The Company leases the airspace above this landfill under a lease which
expires in 2001 and contains an option to renew.
The Company regularly monitors the available permitted in-place disposal
capacity at each of its landfills and evaluates whether to seek to expand this
capacity. In making this evaluation, the Company considers various factors,
including the volume of solid waste projected to be disposed of at the
landfill, the size of the unpermitted capacity included in the landfill, the
likelihood that the Company will be successful in obtaining the approvals and
permits required for the expansion and the costs that would be involved in
developing the expanded capacity. The Company also considers on an ongoing
basis the extent to which it is advisable, in light of changing market
conditions and/or regulatory requirements, to seek to expand or change the
permitted waste streams at a particular landfill or to seek other permit
modifications.
The permitting process is lengthy, difficult and expensive, and is subject
to substantial uncertainty and there can be no assurance that any such permits
or expansion requests will be granted. Often, even when permits are granted,
they are not granted until the landfill's remaining capacity is very low. There
can be no assurance that the Company will be able to add additional disposal
capacity when needed or, if added, that such capacity can be added on
satisfactory terms or at its landfills where expansion is most immediately
needed. If the Company is not able to add additional disposal capacity when and
where needed, it may need to dispose of its collected waste at its other
landfills or at landfills owned by others. Such a circumstance could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Limitations on Landfill Permitting
and Expansion" and "--Comprehensive Government Regulation" and "--Potential
Environmental Liability".
Set forth below is certain information concerning the Company's landfills.
Clinton County. The Clinton County landfill, located in Schuyler Falls,
New York, is leased by the Company from Clinton County, New York pursuant to a
25-year capital lease which expires in 2021. The Company estimates, based on
current usage levels, that the Clinton County landfill has permitted air space
capacity remaining for approximately ten years of disposal. By the fall of
1997, the Company expects to file applications with state and county regulatory
officials seeking to further expand the permitted landfill capacity. The
Company believes that its expansion request, if granted, will provide it with
up to ten additional years of permitted air space capacity. See "--Property and
Equipment".
40
Waste USA. The Waste USA landfill is located in Coventry, Vermont and
serves the northern two-thirds of Vermont. The Company owns the landfill and
leases the permitted air space capacity above the landfill through January 2001
with an option to renew the lease. The Company also has an option to purchase
the company from which it leases the air space. The Company estimates, based on
current usage levels, that the Waste USA landfill has permitted air space
capacity for approximately three years of disposal. The Company has filed an
application to increase its permitted air space capacity at the Waste USA
landfill. The Waste USA landfill is subject to state regulations and practices
that generally do not allow permits for more than five years of expected annual
capacity. See "--Property and Equipment".
SERF. The SERF landfill is located in Hampden, Maine. The SERF landfill
processes ash, special waste and front end processing residue (i.e., glass and
other material segregated and disposed of separately from solid waste prior to
incineration), for the Penobscot Energy Recovery Corporation's incinerator
under a contract expiring in 2003. The Company estimates, based on current
usage levels, that the SERF landfill has permitted air space capacity remaining
for approximately three and one-half years of disposal. In late 1997, the
Company expects to file an application for a permit to expand the capacity of
the landfill in three phases. The Company believes that most elements of the
first two of the three phases of its planned expansion are permittable under
the grandfather provisions of local ordinances. Approval for the third phase of
the Company's planned expansion will require the town of Hampden, Maine to
amend a local ordinance. The Company may not succeed in its effort to amend
that ordinance.
NCES. The NCES landfill, located in Bethlehem, New Hampshire, serves the
northern and central New Hampshire waste sheds and portions of the Maine and
Vermont waste sheds. The Company estimates, based on current usage levels, that
the NCES landfill has permitted airspace capacity remaining for approximately
two and one-half years of disposal. In 1992, the town of Bethlehem adopted a
zoning ordinance which precludes the "expansion of any existing landfills"
which are not operated by the town. A proposed zoning ordinance change was
defeated by town residents in March 1997, and it is not anticipated that
another vote would take place until at least March 1998. There can be no
assurance that the zoning ordinance changes will be approved by Bethlehem town
voters. The Company has obtained the necessary state permit to expand its air
space capacity, contingent on local approval. The Company believes that the
proximity of the Waste USA landfill to the NCES landfill would enable the
Company to redirect solid waste to the Waste USA landfill in the event that
permitting takes longer than expected or if no expansion is allowed at NCES. If
such redirection of solid waste is required, it may result in additional costs
to the Company's operations.
The Company also owns and/or operated five unlined landfills, which are
not currently in operation. Three of these landfills have been closed and
environmentally capped by the Company, and a fourth is in the final stages of
obtaining governmental closure design approval. The Company has applied for a
construction and demolition waste disposal permit at one of these sites. The
fifth unlined landfill, a municipal landfill which is adjacent to the Subtitle
D Clinton County landfill being operated by the Company, was operated by the
Company from July 1996 through July 1997. The Company completed the closure and
capping activities at this landfill in September 1997, and is indemnified by
Clinton County for environmental liabilities arising from such landfill prior
to the Company's operation. See "Risk Factors--Comprehensive Government
Regulation" and--Potential Environmental Liability".
Once the permitted capacity of a particular landfill is reached, the
landfill must be closed and capped if additional capacity is not authorized.
See "Risk Factors--Potential Inadequacy of Accruals for Closure and
Post-Closure Costs". The Company establishes reserves for the estimated costs
associated with such closure and post-closure costs over the anticipated useful
life of such landfill.
Solid Waste Collection
The Company's 23 solid waste collection operations served over 73,000
commercial, industrial and residential customers at September 30, 1997. In
fiscal 1997, 65% of the volume collected by the Company's collection operations
was disposed of at the Company's landfills. The Company's collection operations
are generally conducted within a 125-mile radius of its landfills. A majority
of the Company's
41
commercial and industrial collection services are performed under
one-to-three-year service agreements, and fees are determined by such factors
as collection frequency, type of equipment and containers furnished, the type,
volume and weight of the solid waste collected, the distance to the disposal or
processing facility and the cost of disposal or processing. The Company's
residential collection and disposal services are performed either on a
subscription basis (i.e., with no underlying contract) with individuals, or
under contracts with municipalities, homeowners associations, apartment owners
or mobile home park operators. Revenues from collection operations accounted
for approximately 64% of the Company's revenues in fiscal 1997. In fiscal 1997,
no single collection customer individually accounted for more than 1% of the
Company's revenues.
Transfer Station Services
The Company operated 31 transfer stations as of September 30, 1997, of
which ten are owned by the Company and 21 are operated under three-to-ten year
contracts with municipalities (except in the case of Clinton County, New York,
where the contract is for 25 years). The transfer stations receive, compact and
transfer solid waste collected primarily from the Company's various collection
operations to larger Company-owned vehicles for transport to landfills. The
Company believes that transfer stations benefit the Company by: (i) increasing
the size of the waste shed which has access to the Company's landfills; (ii)
reducing costs by improving utilization of collection personnel and equipment;
and (iii) building relationships with municipalities that may lead to future
business opportunities, including privatization of the municipality's waste
management services. Revenues from transfer station services accounted for
approximately 6% of the Company's revenues in fiscal 1997.
Recycling Services
The Company has positioned itself to provide recycling services to
customers who are willing to pay for the cost of the recycling service. The
proceeds generated from reselling the recycled materials are increasingly
shared between the Company and its customers. In addition, the Company has
adopted a pricing strategy of charging collection and processing fees for
recycling volume collected from third parties. By structuring its recycling
service program in this way, the Company has sought to reduce its exposure to
commodity price risk with respect to the recycled materials.
The Company currently operates nine recycling processing facilities,
located in Rutland, Burlington (two facilities), White River Junction and
Montpelier, Vermont, Lake Placid, Penn Yan and Schuyler Falls, New York and
Hampden, Maine. The Company processes more than 20 classes of recyclable
materials originating from the municipal solid waste stream, including
cardboard, office paper, containers and bottles. The Company's recycling
operations are concentrated principally in Vermont, as the public sector in
other states in the Company's service area has taken primary responsibility for
recycling efforts. As of September 30, 1997, the Company employed two commodity
sales managers to develop end markets, and had 63 employees in the recycling
facilities to support the processing of approximately 100,000 tons annually.
Revenues from the collection, processing and sale of recyclable waste materials
accounted for approximately 5% of the Company's revenues in fiscal 1997.
Waste Tire Processing and Other Services
The Company's waste tire processing facility, located in Eliot, Maine, has
the capacity to process approximately 3.5 million tires per year and generates
tire derived fuel, which the Company sells to paper mills for consumption as a
supplemental energy source for boiler fuel. In June 1997, the Company was
selected by the State of Maine to process an estimated 2.5 million tires over
an 18-month period. The Company believes that its waste tire processing
operation has benefitted from a favorable regulatory environment in Maine,
where the state has mandated, and created financial incentives for, the cleanup
of tire disposal centers, and from a strong market for tire derived fuel.
Revenues from waste tire processing and other special services (consisting
primarily of septic pumping and portable toilet services) accounted for
approximately 4% of the Company's revenues in fiscal 1997.
42
Competition
The solid waste services industry is highly competitive, fragmented, and
requires substantial labor and capital resources. The Company competes with
numerous solid waste management companies, many of which are significantly
larger and have greater access to capital and greater financial, marketing or
technical resources than the Company. Certain of the Company's competitors are
large national companies that may be able to achieve greater economies of scale
than the Company. The Company also competes with a number of regional and local
companies. In addition, the Company competes with operators of alternative
disposal facilities, including incinerators, and with certain municipalities,
counties and districts that operate their own solid waste collection and
disposal facilities. Public sector facilities may have certain advantages over
the Company due to the availability of user fees, charges or tax revenues and
the greater availability to them of tax-exempt financing. In addition,
recycling and other waste reduction programs may reduce the volume of waste
deposited in landfills.
The Company competes for collection and disposal volume primarily on the
basis of the price and quality of its services. 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 also lead to
reduced pricing for the Company's services or the loss of business.
Competition exists within the industry not only for collection,
transportation and disposal volume, but also for acquisition candidates. The
Company generally competes for acquisition candidates with publicly owned
regional and national waste management companies. See "Risk Factors--Highly
Competitive Industry".
Marketing and Sales
The Company has a coordinated marketing and sales strategy which is
formulated at the corporate level and implemented at the divisional level. The
Company markets its services locally through division managers and direct sales
representatives who focus on commercial, industrial, municipal and residential
customers. As of September 30, 1997, the Company had 22 division managers and
25 direct sales representatives. The Company also obtains new customers from
referral sources, its general reputation and local market print advertising.
Leads are also developed from new building permits, business licenses and other
public records. Additionally, each division generally advertises in the yellow
pages and other local business print media that cover its service area.
Maintenance of a local presence and identity is an important aspect of the
Company's marketing plan, and many of the Company's managers are involved in
local governmental, civic and business organizations. The Company's name and
logo, or, where appropriate, that of the Company's divisional operations, are
displayed on all Company containers and trucks. Additionally, the Company
attends and makes presentations at municipal and state conferences and
advertises in governmental associations' membership publications.
The Company markets its commercial, industrial and municipal services
through its sales representatives who visit customers on a regular basis and
make sales calls to potential new customers. These sales representatives
receive a significant portion of their compensation based upon meeting certain
incentive targets. The Company emphasizes providing quality services and
customer satisfaction and retention, and believes that its focus on quality
service will help retain existing and attract additional customers.
Property and Equipment
The principal fixed assets used by the Company in connection with its
landfill operations are its landfills which are described under
"--Operations--Landfills". The three operating landfills owned by the Company
are situated on sites owned by the Company.
The Clinton County landfill is operated under a capital lease scheduled to
expire in 2021. The Company is generally obligated under the lease to expand
the landfill at its own cost, subject to market forces and demand. The Clinton
County landfill is not permitted to receive waste from certain geographic
regions in New York and has a permitted capacity of 125,000 tons per year. The
tipping fee paid for waste
43
generated in Clinton County is fixed for 25 years subject to limited inflation
increases during the term of the lease. During fiscal 1997, approximately 29%
(by tonnage) of the solid waste disposed of at the Clinton County landfill was
generated in Clinton County.
Under the lease, the Company is responsible for operating the landfill in
compliance with all applicable environmental laws, including without
limitation, possessing and complying with all necessary permits and licenses.
The Company must indemnify the County for all liabilities resulting from any
violations of those laws (exclusive of violations based on pre-existing
conditions, which remain the responsibility of the County and with respect to
which the County indemnifies the Company). In addition, the Company is
responsible for the composition of waste deposited at the landfill during the
lease term, regardless of the Company's knowledge or monitoring efforts. The
lease gives the Company full physical and managerial control over an unlined
landfill on the site, which was operated by the Company from July 1996 through
July 1997, while the lined landfill was under construction. Clinton County has
agreed to indemnify the Company for environmental liabilities arising from the
unlined landfill prior to its operation by the Company. The Company is
responsible for the closure of the unlined landfill, and post-closure care is
the responsibility of the County. The Company is also responsible for
performing certain cleanup work with respect to the unlined landfill and has
agreed to absorb the resulting costs subject to satisfactory construction of
the lined portion. The Company is responsible for both closure and post-closure
care with respect to the lined landfill upon exhaustion of the corresponding
airspace. See "--Operations; Landfills; Clinton County".
The Company owns the Waste USA landfill and leases the permitted airspace
capacity above the landfill under a lease which is scheduled to expire in 2001
and which is extendable for an additional six years. The lease payments are
made quarterly in an amount equal to the greater of (a) the rate of $3.75 per
ton of all solid waste accepted at the landfill, as adjusted, or (b) $33,000.
In addition, the Company has been granted options: (i) to purchase all of the
stock of the lessor for $300,000; (ii) to purchase the leased airspace for
$300,000; or (iii) to extend the term of the lease for the remaining permitted
life of the landfill operation for $300,000. The Company may exercise the
option at any time between May 23, 1998 and January 25, 2001.
Other than the landfills, the principal fixed assets used by the Company
at June 30, 1997 in its solid waste collection and landfill operations include
approximately 511 collection vehicles, 65 pieces of heavy equipment and 62
support vehicles. Transfer station operations include 31 transfer stations, 10
of which are owned and 21 of which are leased under agreements expiring between
1998 and 2021.
The Company utilizes nine recycling processing facilities in its service
areas, of which seven are owned and two are leased or operated under agreements
expiring between 1999 and 2021.
The Company owns and operates a 46-acre tire processing facility located
in Eliot, Maine, consisting of storage facilities, tire shredding machines and
a scale and receiving area.
The Company's facility in Rutland, Vermont, consisting of approximately
10,000 square feet utilized for the Company's headquarters, and its recycling
processing facility and office, located in Montpelier, Vermont, consisting of
an aggregate of approximately 24,000 square feet, are leased from Casella
Associates, a company owned by John and Douglas Casella. See "Certain
Transactions".
Employees
At July 31, 1997, the Company employed 891 full-time employees, including
approximately 51 professionals or managers, approximately 769 employees
involved in collection, transfer and disposal operations, and 71 sales,
clerical, data processing or other administrative employees. None of the
Company's employees are represented by unions. The employees of SDS of PA,
Inc., located in Wellsboro, Pennsylvania, which the Company acquired in January
1997, recently rejected a measure to select a union to represent the employees
in labor negotiations with management. On October 9, 1997, the Company received
notice that a petition had been filed with the National Labor Relations Board
for an election to select a union to represent the production workers of the
Company's tire recycling facility in Maine in labor negotiations with
management. An election date of November 20, 1997 has been agreed upon by the
parties. In addition, an unfair labor charge has been filed against the Company
with the Region 1 office of the National Labor Relations Board in Boston,
44
Massachusetts alleging that on the day the petition was received at the tire
recycling facility, workers were improperly interrogated and/or threatened by
local management. The Company has investigated the charges, and is seeking to
resolve the charges. The Company is aware of no other organizational efforts
among its employees. Through a labor utilization agreement, the Company
utilizes the services of Clinton County employees at the Clinton County
landfill. The Clinton County employees are represented by a labor union. The
Company believes that its relations with its employees are good.
Risk Management, Insurance and Performance or Surety Bonds
The Company does not maintain insurance policies with respect to its
exposure for environmental liability. The Company actively maintains
environmental and other risk management programs which it believes are
appropriate for its business. The Company's environmental risk management
program includes evaluating existing facilities, as well as potential
acquisitions, for environmental law compliance and operating procedures. The
Company also maintains a worker safety program which encourages safe practices
in the workplace. Operating practices at all Company operations stress
minimizing the possibility of environmental contamination and litigation.
The Company carries a range of insurance intended to protect its assets
and operations, including a commercial general liability policy and a property
damage policy. A partially or completely uninsured claim against the Company
(including liabilities associated with cleanup or remediation at its own
facilities) if successful and of sufficient magnitude, could have a material
adverse effect on the Company's business, financial condition and results of
operations. Any future difficulty in obtaining insurance could also impair the
Company's ability to secure future contracts, which may be conditioned upon the
availability of adequate insurance coverage.
Municipal solid waste collection contracts and landfill closure
obligations may require performance or surety bonds, letters of credit or other
means of financial assurance to secure contractual performance. The Company has
not experienced difficulty in obtaining performance or surety bonds or letters
of credit for its current operations. Under the Company's credit facility, the
Company has access to up to $10.0 million in aggregate letters of credit. At
August 31, 1997, performance or surety bonds, letters of credit and restricted
cash of approximately $9.9 million were outstanding in favor of customers and
various regulatory authorities to secure the Company's obligations. If the
Company were unable to obtain performance or surety bonds or letters of credit
in sufficient amounts or at acceptable rates, it may be precluded from entering
into additional municipal solid waste collection contracts or obtaining or
retaining landfill operating permits. See "Risk Factors--Inability to Obtain
Performance or Surety Bonds, Letters of Credit or Insurance".
Regulation
Introduction
The Company is subject to extensive and evolving Federal, state and local
environmental laws and regulations which have become increasingly stringent in
recent years. The environmental regulations affecting the Company are
administered by the EPA and other Federal, state and local environmental,
zoning, health and safety agencies. The Company believes that it is currently
in substantial compliance with applicable Federal, state and local
environmental laws, permits, orders and regulations, and it does not currently
anticipate any material environmental costs to bring its operations into
compliance (although there can be no assurance in this regard). The Company
anticipates there will continue to be increased regulation, legislation and
regulatory enforcement actions related to the solid waste services industry. As
a result, the Company attempts to anticipate future regulatory requirements and
to plan accordingly to remain in compliance with the regulatory framework.
In order to transport solid waste, it is necessary for the Company to
possess and comply with one or more permits from state or local agencies. These
permits also must be periodically renewed and may be modified or revoked by the
issuing agency.
The principal Federal, state and local statutes and regulations applicable
to the Company's various operations are as follows:
45
The Resource Conservation and Recovery Act of 1976 ("RCRA")
RCRA regulates the generation, treatment, storage, handling,
transportation and disposal of solid waste and requires states to develop
programs to ensure the safe disposal of solid waste. RCRA divides solid waste
into two groups, hazardous and nonhazardous. Wastes are generally classified as
hazardous if they (i) either (a) are specifically included on a list of
hazardous wastes, or (b) exhibit certain characteristics defined as hazardous;
and (ii) are not specifically designated as nonhazardous. Wastes classified as
hazardous under RCRA are subject to much stricter regulation than wastes
classified as nonhazardous, and businesses that deal with hazardous waste are
subject to regulatory obligations in addition to those imposed on handlers of
nonhazardous waste.
Among the wastes that are specifically designated as nonhazardous are
household waste and "special" waste, including items such as petroleum
contaminated soils, asbestos, foundry sand, shredder fluff and most
nonhazardous industrial waste products.
The EPA regulations issued under Subtitle C of RCRA impose a comprehensive
"cradle to grave" system for tracking the generation, transportation,
treatment, storage and disposal of hazardous wastes. The Subtitle C Regulations
impose obligations on generators, transporters and disposers of hazardous
wastes, and require permits that are costly to obtain and maintain for sites
where such material is treated, stored or disposed. Subtitle C requirements
include detailed operating, inspection, training and emergency preparedness and
response standards, as well as requirements for manifesting, record keeping and
reporting, corrective action, facility closure, post-closure and financial
responsibility. Most states have promulgated regulations modelled on some or
all of the Subtitle C provisions issued by the EPA. Some state regulations
impose different, additional obligations.
The Company is currently not involved with transportation or disposal of
hazardous substances (as defined in CERCLA) in concentrations or volumes that
would classify those materials as hazardous wastes. However, the Company has
transported hazardous substances in the past and very likely will remain
involved with hazardous substance transportation and disposal in the future to
the extent that materials defined as hazardous substances under CERCLA are
present in consumer goods in the waste streams of its customers.
In October 1991, the EPA adopted the Subtitle D Regulations governing
solid waste landfills. The Subtitle D Regulations, which generally became
effective in October 1993, include location restrictions, facility design
standards, operating criteria, closure and post-closure requirements, financial
assurance requirements, groundwater monitoring requirements, groundwater
remediation standards and corrective action requirements. In addition, the
Subtitle D Regulations require that new landfill sites meet more stringent
liner design criteria (typically, composite soil and synthetic liners or two or
more synthetic liners) intended to keep leachate out of groundwater and have
extensive collection systems to carry away leachate for treatment prior to
disposal. Groundwater monitoring wells must also be installed at virtually all
landfills to monitor groundwater quality and, indirectly, the effectiveness of
the leachate collection system. The Subtitle D Regulations also require, where
certain regulatory thresholds are exceeded, that facility owners or operators
control emissions of methane gas generated at landfills in a manner intended to
protect human health and the environment. Each state is required to revise its
landfill regulations to meet these requirements or such requirements will be
automatically imposed by the EPA upon landfill owners and operators in that
state. Each state is also required to adopt and implement a permit program or
other appropriate system to ensure that landfills within the state comply with
the Subtitle D Regulations criteria. Various states in which the Company
operates or in which it may operate in the future have adopted regulations or
programs as stringent as, or more stringent than, the Subtitle D Regulations.
The Federal Water Pollution Control Act of 1972
The Federal Water Pollution Control Act of 1972, as amended ("Clean Water
Act"), regulates the discharge of pollutants from a variety of sources,
including solid waste disposal sites and transfer stations, into waters of the
United States. If run-off from the Company's transfer stations or if run-off or
collected leachate from the Company's owned or operated landfills is discharged
into streams, rivers or other surface waters, the Clean Water Act would require
the Company to apply for and obtain a discharge permit, conduct sampling and
monitoring and, under certain circumstances, reduce the quantity of pollutants
in
46
such discharge. Also, virtually all landfills are required to comply with the
EPA's storm water regulations issued in November 1990, which are designed to
prevent contaminated landfill storm water runoff from flowing into surface
waters. The Company believes that its facilities are in compliance in all
material respects with Clean Water Act requirements.
The Comprehensive Environmental Response, Compensation, and Liability Act
of 1980 ("CERCLA")
CERCLA established a regulatory and remedial program intended to provide
for the investigation and cleanup of facilities where or from which a release
of any hazardous substance into the environment has occurred or is threatened.
CERCLA's primary mechanism for remedying such problems is to impose strict
joint and several liability for cleanup of facilities on current owners and
operators of the site, former owners and operators of the site at the time of
the disposal of the hazardous substances, as well as the generators of the
hazardous substances and the transporters who arranged for disposal or
transportation of the hazardous substances. In addition, CERCLA also imposes
liability for the cost of evaluating and remedying any damage done to natural
resources. The costs of CERCLA investigation and cleanup can be very
substantial. Liability under CERCLA does not depend upon the existence or
disposal of "hazardous waste" as defined by RCRA, but can also be founded upon
the existence of even very small amounts of the more than 700 "hazardous
substances" listed by the EPA, many of which can be found in household waste.
In addition, the definition of "hazardous substances" in CERCLA incorporates
substances designated as hazardous or toxic under the federal Clean Water Act,
Clear Air Act and Toxic Substances Control Act. If the Company were found to be
a responsible party for a CERCLA cleanup, the enforcing agency could hold the
Company, or any other generator, transporter or the owner or operator of the
contaminated facility, responsible for all investigative and remedial costs
even if others may also be liable. CERCLA also authorizes the imposition of a
lien in favor of the United States upon all real property subject to, or
affected by, a remedial action for all costs for which a party is liable.
CERCLA provides a responsible party with the right to bring a contribution
action against other responsible parties for their allocable shares of
investigative and remedial costs. The Company's ability to get others to
reimburse it for their allocable shares of such costs would be limited by the
Company's ability to find other responsible parties and prove the extent of
their responsibility and by the financial resources of such other parties.
The Clean Air Act
The Clean Air Act generally, through state implementation of Federal
requirements, regulates emissions of air pollutants from certain landfills
based upon the date of the landfill construction and volume per year of
emissions of regulated pollutants. The EPA has proposed new source performance
standards regulating air emissions of certain regulated pollutants (methane and
non-methane organic compounds) from municipal solid waste landfills. Landfills
located in areas that do not comply with certain requirements of the Clean Air
Act may be subject to even more extensive air pollution controls and emission
limitations. In addition, the EPA has issued standards regulating the disposal
of asbestos-containing materials.
All of the Federal statutes described above contain provisions
authorizing, under certain circumstances, the institution of lawsuits by
private citizens to enforce the provisions of the statutes. In addition to a
penalty award to the United States, some of those statutes authorize an award
of attorney's fees to parties successfully advancing such an action.
The Occupational Safety and Health Act of 1970 ("OSHA")
OSHA establishes employer responsibilities and authorizes the promulgation
by the Occupational Safety and Health Administration of occupational health and
safety standards, including the obligation to maintain a workplace free of
recognized hazards likely to cause death or serious injury, to comply with
adopted worker protection standards, to maintain certain records, to provide
workers with required disclosures and to implement certain health and safety
training programs. Various of those promulgated standards may apply to the
Company's operations, including those standards concerning notices of hazards,
safety in excavation and demolition work, the handling of asbestos and
asbestos-containing materials, and worker training and emergency response
programs.
47
State and Local Regulations
Each state in which the Company now operates or may operate in the future
has laws and regulations governing the generation, storage, treatment,
handling, transportation and disposal of solid waste, water and air pollution
and, in most cases, the siting, design, operation, maintenance, closure and
post-closure maintenance of landfills and transfer stations. In addition, many
states have adopted statutes comparable to, and in some cases more stringent
than, CERCLA. These statutes impose requirements for investigation and cleanup
of contaminated sites and liability for costs and damages associated with such
sites, and some provide for the imposition of liens on property owned by
responsible parties. Some of those liens may take priority over previously
filed instruments. Furthermore, many municipalities also have local ordinances,
laws and regulations affecting Company operations. These include zoning and
health measures that limit solid waste management activities to specified sites
or conduct, flow control provisions that direct the delivery of solid wastes to
specific facilities or to facilities in specific areas, laws that grant the
right to establish franchises for collection services and then put out for bid
the right to provide collection services, and bans or other restrictions on the
movement of solid wastes into a municipality.
Certain permits and approvals may limit the types of waste that may be
accepted at a landfill or the quantity of waste that may be accepted at a
landfill during a given time period. In addition, certain permits and
approvals, as well as certain state and local regulations, may limit a landfill
to accepting waste that originates from specified geographic areas or seek to
restrict the importation of out-of-state waste or otherwise discriminate
against out-of-state waste. Generally, restrictions on importing out-of-state
waste have not withstood judicial challenge. However, from time to time Federal
legislation is proposed which would allow individual states to prohibit the
disposal of out-of-state waste or to limit the amount of out-of-state waste
that could be imported for disposal and would require states, under certain
circumstances, to reduce the amounts of waste exported to other states.
Although such legislation has not been passed by Congress, if this or similar
legislation is enacted, states in which the Company operates landfills could
limit or prohibit the importation of out-of-state waste. Such state actions
could materially adversely affect the business, financial condition and results
of operations of landfills within those states that receive a significant
portion of waste originating from out-of-state.
In addition, certain states and localities may for economic or other
reasons restrict the export of waste from their jurisdiction or require that a
specified amount of waste be disposed of at facilities within their
jurisdiction. In 1994, the U.S. Supreme Court held unconstitutional, and
therefore invalid, a local ordinance that sought to impose flow controls on
taking waste out of the locality. However, certain state and local
jurisdictions continue to seek to enforce such restrictions and, in certain
cases, the Company may elect not to challenge such restrictions. In addition,
the aforementioned proposed Federal legislation would allow states and
localities to impose certain flow control restrictions. These restrictions
could reduce the volume of waste going to landfills in certain areas, which may
materially adversely affect the Company's ability to operate its landfills
and/or affect the prices that can be charged for landfill disposal services.
These restrictions may also result in higher disposal costs for the Company's
collection operations. If the Company were unable to pass such higher costs
through to its customers, the Company's business, financial condition and
results of operations could be materially adversely affected.
There has been an increasing trend at the Federal, state and local levels
to mandate or encourage both waste reduction at the source and waste recycling,
and to prohibit or restrict the disposal in landfills of certain types of solid
wastes, such as yard wastes, leaves and tires. The enactment of regulations
reducing the volume and types of wastes available for transport to and disposal
in landfills could affect the Company's ability to operate its landfill
facilities.
Legal Proceedings
The Company received a notice of claim dated September 22, 1997 from
Matthew M. Freeman, seeking compensation for services allegedly performed by
Mr. Freeman prior to 1995. In such claim, Mr. Freeman has asserted that he is
seeking a three percent equity interest in the Company or the monetary
equivalent thereof. The Company intends to vigorously contest any effort by Mr.
Freeman in this regard. In order to facilitate the completion of this Offering,
certain stockholders of the Company have agreed to indemnify the Company for
any settlement by the Company or any award against the Company in excess of
$350,000 (but not including legal fees paid by or on behalf of the Company or
any other party).
48
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.
However, there is no current proceeding or litigation involving the Company
that it believes will have a material adverse effect upon the Company's
business, financial condition and results of operations.
49
MANAGEMENT
Executive Officers, Directors and Certain Key Employees
The executive officers, directors and certain key employees of the Company
and their ages as of September 30, 1997 are as follows:
Name Age Position
- ------------------------------------- ----- ------------------------------------------------
Executive Officers and Directors
John W. Casella (1) 46 President, Chief Executive Officer, Chairman of
the Board of Directors and Secretary
Douglas R. Casella 41 Vice Chairman of the Board of Directors
James W. Bohlig 51 Senior Vice President and Chief Operating
Officer, Director
Jerry S. Cifor 36 Vice President and Chief Financial Officer,
Treasurer
John F. Chapple III (2) 56 Director
Michael F. Cronin (1)(2) 43 Director
Kenneth H. Mead 39 Director
Gregory B. Peters (1)(2) 51 Director
C. Andrew Russell (1) 55 Director
Other Key Employees
Robert G. Banfield, Jr. 35 Vice President, Hauling Operations
Michael P. Barrett 43 Vice President, Transportation and Recycling
Christopher M. DesRoches 39 Vice President, Sales and Marketing
Joseph S. Fusco 33 Vice President, Communications
Michael Holmes 42 Regional Vice President
Larry B. Lackey 37 Vice President, Permits, Compliance and
Engineering
Alan N. Sabino 37 Regional Vice President
Gary Simmons 47 Vice President, Fleet Management
Patrick J. Strauch 39 Regional Vice President
Michael J. Viani 42 Vice President, Business Development
- ----------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
50
John W. Casella has served as President, Chief Executive Officer and
Chairman of the Board of Directors of the Company since 1993, and has been
Chairman of the Board of Directors of Casella Waste Management, Inc. since
1977. Mr. Casella has actively supervised all aspects of Company operations
since 1976, sets overall corporate policies, and serves as chief strategic
planner of corporate development. Mr. Casella has been a member of numerous
industry-related and community service-related state and local boards and
commissions including the Board of Directors of the Associated Industries of
Vermont, The Association of Vermont Recyclers, Vermont State Chamber of
Commerce and the Rutland Industrial Development Corporation. Mr. Casella has
also served on various state task forces, serving in an advisory capacity to
the Governor of Vermont on solid waste issues. Mr. Casella was an executive
officer and director of Meridian Group, Inc. See "Certain Transactions" for a
discussion of the Meridian bankruptcy. Mr. Casella holds an Associate of
Science in Business Management from Bryant & Stratton University and a Bachelor
of Science in Business Education from Castleton State College. Mr. Casella is
the brother of Douglas R. Casella.
Douglas R. Casella founded the Company in 1975, and has been a director of
the Company since that time. He has served as Vice Chairman of the Board of
Directors of the Company since 1993 and has been President of Casella Waste
Management, Inc. since 1975. Since 1989, Mr. Casella has been President of
Casella Construction, a company owned by Mr. Casella and John W. Casella which
specializes in general contracting, soil excavation and related heavy equipment
work. See "Certain Transactions". Mr. Casella attended the University of
Wisconsin's College of Engineering continuing education programs in sanitary
landfill design, ground water remediation, landfill gas and leachate management
and geosynthetics. Mr. Casella is the brother of John W. Casella.
James W. Bohlig joined the Company as Senior Vice President and Chief
Operating Officer in 1993 with primary responsibility for business development,
acquisitions and operations. Mr. Bohlig has served as a director of the Company
since 1993. From 1989 until he joined the Company, Mr. Bohlig was Executive
Vice President and Chief Operating Officer of Russell Corporation, a general
contractor and developer based in Rutland, Vermont. In addition, Mr. Bohlig was
the President and a director of Meridian Group, Inc. See "Certain Transactions"
for a discussion of the Meridian bankruptcy. Mr. Bohlig is a licensed
professional engineer. Mr. Bohlig holds a Bachelor of Science in Engineering
and Chemistry from the U.S. Naval Academy, and is a graduate of the Columbia
University Management Program in Business Administration.
Jerry S. Cifor joined the Company as Chief Financial Officer in January
1994. From 1992 to 1993, Mr. Cifor was Vice President and Chief Financial
Officer of Earthwatch Waste Systems, a waste management company based in
Buffalo, New York. From 1986 to 1991, Mr. Cifor was employed by Waste
Management of North America, Inc., a waste management company, in a number of
financial and operational management positions. Mr. Cifor is a certified public
accountant and was with KPMG Peat Marwick from 1983 until 1986. Mr. Cifor is a
graduate of Hillsdale College with a Bachelor of Arts in Accounting.
John F. Chapple III has served as a director of the Company since 1994.
From August 1989 to July 1994, Mr. Chapple was President and owner of Catamount
Waste Services, Inc., a central Vermont hauling and landfill operation, which
was purchased by the Company in May 1994. Mr. Chapple is a graduate of Denison
University and holds a Bachelor of Arts in Economics.
Michael F. Cronin has served as a director of the Company since December
1995. Mr. Cronin has been a general partner of Weston Presidio Management
Company, a venture capital management firm, since 1991. Mr. Cronin is a
graduate of Harvard College and holds an M.B.A. from the Harvard Graduate
School of Business Administration.
Kenneth H. Mead has served as a director of the Company since January
1997. Mr. Mead has served since January 1997 as President of Materials Exchange
Corporation, a consulting firm. From 1986 to January 1997, Mr. Mead was the
President and principal stockholder of Superior Disposal Services, Inc. and
certain related companies, the assets of which were acquired by the Company in
January 1997.
51
Gregory B. Peters has served as a director of the Company since 1993. Mr.
Peters has been a General Partner of Vermont Venture Capital Partners, L.P., a
venture capital fund, since April 1988, and a General Partner of North Atlantic
Capital Partners, L.P., a venture capital fund, since July 1987. Since June
1986, Mr. Peters has served as Vice President and Treasurer of North Atlantic
Capital Corporation, a venture capital management company. Mr. Peters is a
graduate of Harvard College and holds an M.B.A. from the Harvard Graduate
School of Business Administration.
C. Andrew Russell has served as a director of the Company since 1993.
Since 1987, Mr. Russell has been Vice Chairman of Russell, Rea, Zappala &
Gomulka Holdings, Inc. ("RRZ&G"), a Pittsburgh-based investment banking holding
company founded by Mr. Russell. RRZ&G is an affiliate of National Waste
Industries, Inc. which specializes in the project development and financing of
waste-related projects. Mr. Russell received a Bachelor of Science and an
M.B.A. from the University of Missouri.
Other Key Employees of the Company:
Robert G. Banfield, Jr. has served as Vice President, Hauling Operations
of the Company since 1988. Mr. Banfield is a graduate of Merrimack College.
Michael P. Barrett has served as Vice President, Transportation and
Recycling of the Company since January 1997. From June 1991 to January 1997,
Mr. Barrett served as the Company's Division Manager for Transfer Stations,
Recycling and Rutland Hauling.
Christopher M. DesRoches has served as Vice President, Sales and Marketing
of the Company since November 1996. From January 1989 to November 1996, he was
a regional vice president of sales of Waste Management, Inc., a solid waste
company. Mr. DesRoches is a graduate of Arizona State University.
Joseph S. Fusco has served as Vice President, Communications of the
Company since January 1995. From January 1991 through January 1995, Mr. Fusco
was self-employed as a corporate and political communications consultant. Mr.
Fusco is a graduate of the State University of New York at Albany.
Michael Holmes has served as Regional Vice President of the Company since
January 1997. From November 1995 to January 1997, Mr. Holmes was Vice President
of Superior Disposal Services, Inc., which was acquired by the Company on
January 1997. From November 1993 to November 1995, he was Superintendent of
Recycling and Solid Waste for the town of Weston, Massachusetts Solid Waste
Department where he managed all aspects of the town's recycling and solid waste
services. From June 1983 to October 1992, he served as the Division Manager of
all divisions in the Binghamton, N.Y. area and the Boston, Massachusetts area
for Laidlaw Waste Services, Inc. Mr. Holmes is a graduate of Broome Community
College.
Larry B. Lackey joined the Company in 1993 and has served as Vice
President, Permits, Compliance and Engineering since 1995. From 1984 to 1993,
Mr. Lackey was an Associate Engineer for Dufresne-Henry, Inc., an engineering
consulting firm. Mr. Lackey is a graduate of Vermont Technical College.
Alan N. Sabino has served as Regional Vice President of the Company since
July 1996. From 1995 to July 1996, Mr. Sabino served as a Division President of
Waste Management, Inc. From 1989 to 1994, he served as Regional Operations
Manager for Chambers Development Company, Inc., a waste management company. Mr.
Sabino is a graduate of Pennsylvania State University.
Gary Simmons joined the Company in May 1997 as Vice President, Fleet
Management. From 1995 to May 1997, Mr. Simmons served as National and Regional
Fleet Service Manager for USA Waste Services, Inc., a waste management company.
From 1977 to 1995, Mr. Simmons served in various fleet maintenance and
management positions for Chambers Development Company, Inc.
Patrick J. Strauch has served as Regional Vice President of the Company
since January 1996. From 1993 to January 1996, Mr. Strauch was General Manager
of the Transportation Division of Sawyer Environmental Services, which was
acquired by the Company in January 1996. From January 1991 to August 1993, Mr.
Strauch served as Bangor District Manager for Browning Ferris Industries and
was
52
responsible for the management of transportation and collection services. Mr.
Strauch is a graduate of the University of Maine.
Michael J. Viani joined the Company in 1994, and has served as Vice
President, Business Development since 1995. From 1990 to 1994, Mr. Viani served
as Manager of Business Development with Consumat Sanco, Inc., the owner of the
Company's NCES landfill, which the Company purchased in 1994. Mr. Viani is a
graduate of Middlebury College and of the University of Massachusetts.
See "Certain Transactions" and "Principal and Selling Stockholders" for
certain information concerning the Company's directors and executive officers.
Election of Directors
The holders of Class A Common Stock, voting separately as a class, will at
all times be entitled to elect at least one director. Mr. Michael F. Cronin is
the designee of the holders of Class A Common Stock.
Messrs. John W. Casella, Douglas R. Casella, James W. Bohlig, Gregory B.
Peters, C. Andrew Russell and John F. Chapple, III were elected to the Board of
Directors pursuant to the 1995 Stockholders Agreement between the Company and
certain of its stockholders. The 1995 Stockholders Agreement terminates upon
completion of this Offering. See "Risk Factors--Control by Casellas and
Anti-Takeover Effect of Class B Common Stock" and "Description of Capital
Stock".
Following this Offering, the Board of Directors will be divided into three
classes, each of whose members will serve for a staggered three-year term.
Messrs. Douglas R. Casella, Michael F. Cronin and Kenneth H. Mead will serve in
the class whose term expires in 1998; Messrs. James W. Bohlig, Gregory B.
Peters and C. Andrew Russell will serve in the class whose term expires in
1999; and Messrs. John W. Casella and John F. Chapple III will serve in the
class whose term expires in 2000. Upon the expiration of the term of a class of
directors, directors in such class will be elected for three-year terms at the
annual meeting of stockholders in the year in which such term expires.
Compensation of Directors
The Company reimburses non-employee directors for expenses incurred in
attending Board meetings. Non-employee directors of the Company will receive
stock options under the Company's 1997 Non-Employee Director Stock Option Plan
(the "Directors' Plan"), which will become effective upon the date of this
Prospectus. The Directors' Plan provides that each non-employee director will
receive an automatic grant of a nonqualified stock option to purchase 5,000
shares of Class A Common Stock upon initial election to the Board of Directors
(vesting in three equal installments on each of the three anniversaries
following the date of grant). An option to purchase 2,000 shares of Class A
Common Stock will be granted to each incumbent non-employee director on the
date of each annual meeting of stockholders beginning with the 1998 annual
meeting (vesting in three equal annual installments beginning on the first
anniversary of the date of grant). Options granted under the Directors' Plan
expire ten years from the date of grant. The option price for options granted
under the Directors' Plan is equal to the fair market value of a share of Class
A Common Stock as of the date of grant. The Company has reserved a total of
50,000 shares of Class A Common Stock for issuance under the Directors' Plan,
all of which are currently available for future grant.
Board Committees
The Board of Directors has established a Compensation Committee and an
Audit Committee. The Compensation Committee, which consists of Messrs. John W.
Casella, Michael F. Cronin, Gregory B. Peters and C. Andrew Russell, reviews
executive salaries, administers any bonus, incentive compensation and stock
option plans of the Company, and approves the salaries and other benefits of
the executive officers of the Company. In addition, the Compensation Committee
consults with the Company's management regarding pension and other benefit
plans and compensation policies and practices of the Company. The Stock Plan
Subcommittee of the Compensation Committee, consisting of Messrs. Cronin,
Peters and Russell will administer the issuance of stock options and other
awards under the Company's stock option plans to the Company's executive
officers. The Audit Committee, which consists of Messrs. Chapple, Cronin and
Peters, reviews the professional services provided by the Company's independent
auditors, the independence of such
53
auditors from management of the Company, the annual financial statements of the
Company and the Company's system of internal accounting controls. The Audit
Committee also reviews such other matters with respect to the accounting,
auditing and financial reporting practices and procedures of the Company as it
may find appropriate or as may be brought to its attention.
Executive Compensation
The following table sets forth, for the fiscal year ended April 30, 1997,
the cash compensation paid and shares underlying options granted to (i) the
Company's Chief Executive Officer, and (ii) each of the other executive
officers who received annual compensation in excess of $100,000 (collectively,
the "Named Executive Officers"):
Summary Compensation Table
Long-Term
Compensation
------------------
Annual Compensation Awards
--------------------------------------- ------------------
Other Annual Securities All Other
Salary Bonus Compensation Underlying Compensation
($) ($) ($) Options/SARs (#) ($)
---------- --------- -------------- ------------------ -------------
John W. Casella, President, Chief
Executive Officer and Chairman . $136,141 $45,000 $ 22,755(1) 20,000 $ 985(2)
James W. Bohlig, Senior Vice
President and Chief Operating
Officer ........................ $126,538 $45,000 -- 30,000 --
Jerry S. Cifor, Vice President and
Chief Financial Officer ......... $107,692 $38,000 -- 16,000 $ 838(2)
- ------------
(1) Consists of life insurance premiums paid by the Company on behalf of the
Named Executive Officer.
(2) Consists of amount paid by the Company to the Named Executive Officer's
account in the Company's 401(k) Plan.
Stock Options
The following table contains information concerning the grant of options
to purchase shares of the Company's Class A Common Stock to each of the Named
Executive Officers of the Company during the fiscal year ended April 30, 1997:
Option Grants in Last Fiscal Year
Potential Realizable
Value at Assumed
Annual Rates of
Stock Appreciation
Number of Percent of for Option
Securities Total Options Term($)(2)
Underlying Granted To --------------------
Options Employees in Exercise Price Expiration
Granted Fiscal Year ($/Share)(1) Date 5% 10%
------------ -------------- ---------------- ----------- ---------- ---------
John W. Casella, President,
Chief Executive Officer 10,000(3) 2.4% $ 5.08 5/1/2001 $ 14,035 $ 31,014
and Chairman ............... 10,000(4) 2.4% $13.75 2/1/2002 $ 37,989 $ 83,945
James W. Bohlig,
Senior Vice President and 15,000(3) 3.6% $ 4.61 5/1/2006 $ 43,488 $110,207
Chief Operating Officer ... 15,000(4) 3.6% $12.50 2/1/2007 $117,918 $298,827
Jerry S. Cifor,
Vice President and 8,000(3) 1.9% $ 4.61 5/1/2006 $ 23,194 $ 58,777
Chief Financial Officer ... 8,000(4) 1.9% $12.50 2/1/2007 $ 62,889 $159,374
- ------------
(1) All options were granted at or above fair market value as determined by the
Board of Directors on the date of grant.
54
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on
the Company's Class A Common Stock over the term of the options. The
potential realizable values set forth above do not take into account
applicable tax and expense payments that may be associated with such
option exercises. Actual realizable value, if any, will be dependent on
the future price of the Class A Common Stock on the actual date of
exercise, which may be earlier than the stated expiration date. The 5% and
10% assumed annualized rates of stock price appreciation over the exercise
period of the options used in the table above are mandated by the rules of
the Securities and Exchange Commission (the "Commission") and do not
represent the Company's estimate or projection of the future price of the
Class A Common Stock on any date. There is no representation either
express or implied that the stock price appreciation rates for the Class A
Common Stock assumed for purposes of this table will actually be achieved.
(3) Options vested immediately on date of grant.
(4) Each option vests one-third immediately, one-third on the first anniversary
of the grant date and one-third on the second anniversary of the grant date.
Fiscal Year-End Option Values
The following table sets forth information for each of the Named Executive
Officers with respect to the value of options outstanding as of April 30, 1997.
None of the Named Executive Officers exercised options in fiscal 1997.
Aggregated Fiscal Year-End Option Values
Number of Securities
Underlying Value of Unexercised
Unexercised Options at In-The-Money Options
April 30, 1997 (#) at April 30, 1997 ($)(1)
----------------------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------- --------------- ------------- --------------
John W. Casella, President, Chief
Executive Officer and Chairman ...... 148,334 6,666 $2,076,702 $14,999
James W. Bohlig, Senior Vice President
and Chief Operating Officer ......... 300,000 10,000 $4,381,350 $35,000
Jerry S. Cifor, Vice President and Chief
Financial Officer .................. 126,667 5,334 $1,772,452 $18,684
- ------------
(1) There was no public trading market for the Class A Common Stock as of April
30, 1997. Accordingly, as permitted by the rules of the Commission, these
values have been calculated on the basis of the fair market value of the
Company's Class A Common Stock as of April 30, 1997 of $16.00 per share,
as determined by the Board of Directors, less the aggregate exercise
price.
Compensation Committee Interlocks and Insider Participation
The current members of the Compensation Committee of the Company's Board
of Directors are Messrs. John W. Casella, Michael F. Cronin, Gregory B. Peters
and C. Andrew Russell. Mr. Casella will abstain from Compensation Committee
decisions regarding his own compensation. Mr. Casella has served as President
and Chief Executive Officer of the Company since 1993.
In connection with the sale by the Company of its Series D Convertible
Preferred Stock in December 1995, the Company entered into a Management
Services Agreement with BCI Growth III, L.P., North Atlantic Venture Fund, L.P.
and Vermont Venture Capital Fund, L.P., all of whom are stockholders of the
Company. Under the Management Services Agreement, the Company agreed to pay a
management fee of approximately $22,300 per month in consideration of certain
advisory services provided by such stockholders to the Company. Amounts due
under the agreement are not payable until the occurrence of a liquidity event,
including the closing of this Offering. As of July 31, 1997, the Company had
accrued approximately $427,000 related to such management fee. Gregory B.
Peters, a director of the Company, is affiliated with North Atlantic Venture
Fund, L.P. and The Vermont Venture Capital Fund, L.P.
The Company has from time to time engaged Casella Construction, Inc., a
company owned by John and Douglas Casella, both executive officers, directors
and significant stockholders of the Company, to
55
provide construction services for the Company. In each of the fiscal years
ended April 30, 1995, 1996 and 1997 and the three months ended July 31, 1997,
the Company paid Casella Construction, Inc. $339,138, $1,236,435, $2,155,618
and $840,500, respectively. The Company engaged Casella Construction, Inc. to
close and cap the municipal unlined landfill located adjacent to the Clinton
County landfill. The Company completed the closure and capping activities at
this landfill in September 1997. The amount to be paid to Casella Construction,
Inc. for this project is $2,465,000, of which $497,000 and $630,000 was paid in
the fiscal year ended April 30, 1997 and the three months ended July 31, 1997,
respectively. In addition, the Company has retained Casella Construction, Inc.
to close and cap a portion of the NCES landfill for a contract price of
$1,600,000 of which approximately $865,000 was paid through July 31, 1997.
In August 1993, the Company entered into three real estate leases with
Casella Associates, a Vermont partnership owned by John and Douglas Casella,
relating to facilities occupied by the Company. One of these leases was
terminated in fiscal 1997, for which the Company paid Casella Associates
$191,869. The remaining leases, relating to the Company's corporate
headquarters in Rutland, Vermont and its Montpelier, Vermont facility, call for
aggregate monthly payments of approximately $18,000 and expire in April 2003.
These leases have been classified by the Company as capital leases for
financial reporting purposes. The lease agreements relating to the Rutland and
Montpelier properties provide that if such agreements are terminated prior to
their respective lease terms, either Casella Associates or the Company must pay
to Albank, an amount which represents 41.9% and 42.9%, respectively, of the
then outstanding principal balance (which on July 31, 1997 was $968,864), on a
term loan made by Albank to Casella Associates. In fiscal 1997, the Company
purchased the land that is the site of the Company's current Middlebury,
Vermont facility from Casella Associates for $122,000. In addition, the Company
leases furniture and fixtures from Casella Associates pursuant to an operating
lease which bears rent at $950 per month and expires in 1999. In each of the
years ended April 30, 1995, 1996 and 1997 and the three months ended July 31,
1997, the Company paid Casella Associates an aggregate of $266,255, $263,400,
$558,380 and $56,250, respectively.
The Company operated an unlined landfill located in Whitehall, New York
owned by Bola, Inc., a corporation owned by John and Douglas Casella which
operated as a single-purpose real estate holding company. The Company paid the
cost of closing this landfill in 1992, and has agreed to pay all post-closure
obligations. In each of the years ended April 30, 1995, 1996 and 1997, the
Company paid $11,758, $14,502 and $9,605, respectively, pursuant to this
arrangement. The Company made no payments pursuant to this arrangement for the
three months ended July 31, 1997. The Company has accrued $107,791 for costs
associated with its post-closure obligations. There can be no assurance that
such accruals will be adequate to meet such obligations.
In connection with the settlement of certain litigation naming the
Company, four of its subsidiaries, Messrs. James W. Bohlig and John W. and
Douglas R. Casella and one unrelated person as defendants, the Company has
agreed to pay an aggregate of $450,000 plus approximately $200,000 in legal
expenses incurred by the defendants. The lawsuit was brought derivatively in
the name of Meridian Group, Inc. ("Meridian"), a Vermont corporation engaged in
alternative energy project development which has been inactive since 1993, of
which Messrs. Bohlig and John Casella were officers, directors and
stockholders, as well as individually in the names of the plaintiffs, who were
also stockholders of Meridian. In response to the lawsuit, in an effort to
expedite adjudication, a majority of Meridian's directors, including Messrs.
Bohlig and John Casella, voted to place Meridian into bankruptcy, and Meridian
filed a petition under Chapter 7 of the Federal Bankruptcy Code ("Chapter 7").
The lawsuit was subsequently removed to the United States Bankruptcy Court for
the District of Vermont. On July 14, 1997, the bankruptcy court approved the
settlement. Messrs. John Casella and Bohlig were officers and directors of
Meridian at the time Meridian filed the petition under Chapter 7.
Benefit Plans
1997 Stock Incentive Plan
The 1997 Stock Incentive Plan (the "1997 Incentive Plan") permits the
Company to grant incentive stock options, non-statutory stock options,
restricted stock awards and other stock-based awards, including the grant of
shares based on certain conditions, the grant of securities convertible into
Class A Common Stock and the grant of stock appreciation rights (collectively,
"Awards"). Awards consisting of stock options may not be granted at an exercise
price which is less than 100% of the fair market value
56
of the Class A Common Stock on the date of grant and may not be granted for a
term in excess of ten years. Subject to adjustment in the event of stock splits
and other similar events, awards may be made under the 1997 Incentive Plan for
up to the sum of (i) 1,308,500 shares of Class A Common Stock, plus (ii) such
additional number of shares of Class A Common Stock as is equal to the
aggregate number of shares which remain available subject to awards granted
under the Terminated Plans (as defined below) which are not actually issued
because such awards expire or otherwise result in shares not being issued.
Officers, employees, directors, consultants and advisors of the Company
and its subsidiaries will be eligible to receive Awards under the 1997
Incentive Plan. The maximum number of shares with respect to which an Award may
be granted to any participant under the 1997 Incentive Plan may not exceed
200,000 shares per calendar year.
The 1997 Incentive Plan is administered by the Compensation Committee of
the Board of Directors, provided that the Stock Plan Subcommittee will
administer the issuance of awards to the Company's executive officers. The
Committee has the authority to adopt, amend and repeal the administrative
rules, guidelines and practices relating to the 1997 Incentive Plan and to
interpret the provisions of the 1997 Incentive Plan. The Compensation Committee
selects the recipients of Awards and determines (i) the number of shares of
Class A Common Stock covered by options and the dates upon which such options
become exercisable; (ii) the exercise price of options (which may not be less
than 100% of fair market value on the date of grant); (iii) the duration of
options (which may not exceed ten years); and (iv) the number of shares of
Class A Common Stock subject to any restricted stock or other stock-based
Awards and the terms and conditions of such Awards, including conditions for
repurchase, issue price and repurchase price. The Board of Directors is
required to make appropriate adjustments in connection with the 1997 Incentive
Plan and any outstanding Awards to reflect stock dividends, stock splits and
certain other events. In the event of a merger, liquidation or other
Acquisition Event (as defined in the 1997 Incentive Plan), outstanding Awards
will be assumed unless the acquiring or succeeding corporation does not agree
to assume such options, in which case the Board of Directors is authorized to
provide for outstanding options to be substituted for, to accelerate the Awards
to make them fully exercisable prior to consummation of the Acquisition Event
or to provide for a cash-out of the value of any outstanding options. If any
Award expires or is terminated, surrendered, canceled or forfeited, the unused
shares of Common Stock covered by such Award will again be available for grant
under the 1997 Incentive Plan.
Other Stock Option Plans
The Company has previously granted options to purchase shares of Class A
Common Stock pursuant to the 1993 Incentive Stock Option Plan, the 1994
Nonstatutory Stock Option Plan and the 1996 Stock Option Plan (collectively,
the "Terminated Plans"). In connection with the adoption of the Company's 1997
Incentive Stock Option Plan, the Company has ceased granting options under
these plans; however, all stock options granted prior to the effectiveness of
the 1997 Incentive Stock Option Plan will remain outstanding in accordance with
their terms and the terms of the respective plans under which they were
granted.
As of July 31, 1997, options to purchase an aggregate of 1,377,635 shares
of Class A Common Stock, with a weighted average exercise price of $6.23 per
share, were outstanding under the Terminated Plans.
Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan")
is intended to allow eligible participating employees an opportunity to
purchase shares of Class A Common Stock at a discount. A maximum of 300,000
shares of Class A Common Stock will be available for issuance under the 1997
Purchase Plan. The 1997 Purchase Plan will be administered by the Compensation
Committee of the Board of Directors. All employees of the Company, except
employees who own five percent or more of the Company's stock, whose customary
employment is more than 20 hours per week and who have been employed by the
Company for at least six months, are eligible to participate in the 1997
Purchase Plan. To participate in the 1997 Purchase Plan, an employee must
authorize the Company to deduct an amount (up to ten percent of a participant's
regular pay) from his or her pay during six-month periods commencing on May 1
and November 1, or the first business day thereafter, of each year (each a
"Payment Period"), beginning twenty business days after the closing of this
Offering. The maximum number of shares
57
of Class A Common Stock that an employee may purchase in any Payment Period is
determined by applying the formula stated in the 1997 Purchase Plan. The
exercise price for the option for each Payment Period is 85% of the lesser of
the average market price of the Company's Class A Common Stock on the first or
last business day of the Payment Period. If an employee is not a participant on
the last day of the Payment Period, such employee is not entitled to exercise
his or her option, and the amount of his or her accumulated payroll deductions
will be refunded. An employee's rights under the 1997 Purchase Plan terminate
upon his or her voluntary withdrawal from the plan at any time or upon
termination of employment.
Non-Employee Director Stock Option Plan
The Directors' Plan provides for the grant of options to purchase a
maximum of 50,000 shares of Class A Common Stock of the Company to non-employee
directors of the Company. The Directors' Plan is administered by the Board of
Directors. The Directors' Plan provides that each non-employee director will
receive an automatic grant of a nonqualified stock option to purchase 5,000
shares of Class A Common Stock upon initial election to the Board of Directors
(vesting in three equal installments on each of the three anniversaries
following the date of grant). An option to purchase 2,000 shares of Class A
Common Stock will be granted to each incumbent non-employee director on the
date of each annual meeting of stockholders beginning with the 1998 annual
meeting (vesting in three equal annual installments beginning on the first
anniversary of the date of grant). Options granted under the Directors' Plan
expire ten years from the date of grant. The option price for options granted
under the Directors' Plan is equal to the fair market value of a share of Class
A Common Stock as of the date of grant.
401(k) Plan
Effective July 1996, the Company implemented a 401(k) Plan Savings and
Retirement Plan (the "401(k) Plan"), a tax-qualified plan covering all of its
employees who are at least 21 years of age and have completed six months of
service with the Company. Each employee may elect to reduce his or her current
compensation by up to 15%, subject to the statutory limit (a maximum of $9,500
in calendar 1997) and have the amount of the reduction contributed to the
401(k) Plan. Subject to Board approval, the Company may contribute an
additional amount to the 401(k) Plan, up to $500 per individual per calendar
year. Employees vest in Company contributions ratably over a three-year period.
58
CERTAIN TRANSACTIONS
In connection with the sale by the Company of its Series D Convertible
Preferred Stock in December 1995, the Company entered into a Management
Services Agreement with BCI Growth III, L.P., North Atlantic Venture Fund, L.P.
and Vermont Venture Capital Fund, L.P., all of whom are stockholders of the
Company. Under the Management Services Agreement, the Company agreed to pay a
management fee of approximately $22,300 per month in consideration of certain
advisory services provided by such stockholders to the Company. Amounts due
under the agreement are not payable until the occurrence of a liquidity event,
including the closing of this Offering. As of July 31, 1997, the Company had
accrued approximately $427,000 related to such management fee. Gregory B.
Peters, a director of the Company, is affiliated with North Atlantic Venture
Fund, L.P. and The Vermont Venture Capital Fund, L.P.
The Company has from time to time engaged Casella Construction, Inc., a
company owned by John and Douglas Casella, both executive officers, directors
and significant stockholders of the Company, to provide construction services
for the Company. In each of the three years ended April 30, 1995, 1996 and 1997
and the three months ended July 31, 1997, the Company paid Casella
Construction, Inc. $339,138, $1,236,435, $2,155,618 and $840,500, respectively.
The Company engaged Casella Construction, Inc. to close and cap the municipal
unlined landfill located adjacent to the Clinton County landfill. The Company
completed the closure and capping activities at this landfill in September
1997. The amount to be paid to Casella Construction, Inc. for this project is
$2,465,000, of which $497,000 and $630,000 was paid in the year ended April 30,
1997 and the three months ended July 31, 1997, respectively. In addition, the
Company has retained Casella Construction, Inc. to close and cap a portion of
the NCES landfill for a contract price of $1,600,000, of which approximately
$865,000 was paid through July 31, 1997.
In August 1993, the Company entered into three real estate leases with
Casella Associates, a Vermont partnership owned by John and Douglas Casella,
relating to facilities occupied by the Company. One of these leases was
terminated in fiscal 1997, for which the Company paid Casella Associates
$191,869. The remaining leases, relating to the Company's corporate
headquarters in Rutland, Vermont and its Montpelier, Vermont facility, call for
aggregate monthly payments of approximately $18,000 and expire in April 2003.
These leases have been classified by the Company as capital leases for
financial reporting purposes. The lease agreements relating to the Rutland and
Montpelier properties provide that if such agreements are terminated prior to
their respective lease terms, either Casella Associates or the Company must pay
to Albank an amount which represents 41.9% and 42.9%, respectively, of the then
outstanding principal balance (which on July 31, 1997 was $968,864), on a term
loan made by Albank to Casella Associates. In fiscal 1997, the Company
purchased the land that is the site of the Company's current Middlebury,
Vermont facility from Casella Associates for $122,000. In addition, the Company
leases furniture and fixtures from Casella Associates pursuant to an operating
lease which bears rent at $950 per month and expires in 1999. In each of the
three years ended April 30, 1995, 1996 and 1997 and the three months ended July
31, 1997, the Company paid Casella Associates an aggregate of $266,255,
$263,400, $558,380 and $56,250, respectively.
The Company operated an unlined landfill located in Whitehall, New York
owned by Bola, Inc., a corporation owned by John and Douglas Casella which
operated as a single-purpose real estate holding company. The Company paid the
cost of closing this landfill in 1992, and has agreed to pay all post-closure
obligations. In each of the three years ended April 30, 1995, 1996 and 1997 and
the three months ended July 31, 1997, the Company paid $11,758, $14,502, $9,605
and $0 pursuant to this arrangement. The Company has accrued $107,791 for costs
associated with its post-closure obligations. There can be no assurance that
such accruals will be adequate to meet such obligations.
In connection with the settlement of certain litigation naming the
Company, four of its subsidiaries, Messrs. James W. Bohlig and John W. and
Douglas R. Casella and one unrelated person as defendants, the Company has
agreed to pay an aggregate of $450,000 plus approximately $200,000 in legal
expenses incurred by the defendants. The lawsuit was brought derivatively in
the name of Meridian, a Vermont corporation which has been inactive since 1993,
of which Messrs. Bohlig and John Casella were officers, directors and
stockholders, as well as individually in the names of the plaintiffs, who were
also stockholders of Meridian. In response to the lawsuit, in an effort to
expedite adjudication, a majority of Meridian's directors, including Messrs.
Bohlig and John Casella, voted to place Meridian into bankruptcy, and
59
Meridian filed a petition under Chapter 7. The lawsuit was subsequently removed
to the United States Bankruptcy Court for the District of Vermont. On July 14,
1997, the bankruptcy court approved the settlement. Messrs. John Casella and
Bohlig were officers and directors of Meridian at the time Meridian filed the
petition under Chapter 7.
In connection with and at the time of the Company's acquisition of the
business of Catamount Waste Services, Inc., the Company entered into a lease in
June 1994 with CV Landfill, Inc., a Vermont corporation affiliated with
Catamount Waste Services, Inc., pursuant to which the Company agreed to lease a
transfer station for a term of 10 years. CV Landfill, Inc. is owned by John F.
Chapple III, who became a director of the Company at the time of the
acquisition of the business of Catamount Waste Services, Inc. Pursuant to the
lease agreement, the Company pays monthly rent for the first five years at a
rate of $5.00 per ton of waste disposed of at the transfer station, with a
minimum rent of $6,650 per month. Following the fifth anniversary of the lease
agreement, the Company pays monthly rent at a rate of $2.00 per ton, with a
minimum rent of $2,500 per month. In each of the three years ended April 30,
1995, 1996 and 1997 and the three months ended July 31, 1997, the Company paid
CV Landfill, Inc. $112,142, $139,687, $136,729 and $21,933, respectively.
As part of the acquisition by the Company of the assets of Superior
Disposal Service, Inc., Kerkim, Inc. and related companies in January 1997, the
Company engaged Kenneth H. Mead, the sole stockholder of such companies, as a
consultant for a five-year period ending in 2002. Upon such acquisition, Mr.
Mead became a director of the Company. The consulting agreement, which also
contains a non-competition covenant, provides that the Company will pay Mr.
Mead (i) a fee for acquisitions of collection businesses made by the Company
with Mr. Mead's active assistance within a defined geographic area, in an
amount equal to one month's net revenue of any such acquired business; (ii) a
fee of $500,000 for the acquisition by the Company with Mr. Mead's active
assistance of any enumerated landfill within a defined geographic area; and
(iii) a fee, in consideration of Mr. Mead's non-competition covenant, of
$600,000 paid in installments of $200,000 on each of the first and second
anniversaries of the date of the agreement and $100,000 on each of the third
and fourth anniversaries. For the year ended April 30, 1997 and the three
months ended July 31, 1997, the Company paid Mr. Mead an aggregate of $231,000
and $201,871, respectively, pursuant to this agreement.
Each of the transactions described above has been approved or ratified by
a disinterested majority of the Board of Directors. However, transactions
between the Company and affiliates of John W. Casella and Douglas R. Casella
were not negotiated, and accordingly the Company has no independent basis for
concluding whether or not the terms of such transactions were as favorable as
could have been negotiated with unaffiliated third parties.
The Company adopted a policy in June 1994 which required the Company to
obtain competitive bids for contracts with Casella Construction, Inc. in excess
of $100,000. During the period that such policy was in place, the Company
awarded two construction contracts greater than $100,000 in size to Casella
Construction, Inc. without soliciting third party bids. In July 1997, the
Company's Board of Directors adopted a policy for all related party
transactions. The policy establishes guidelines, including (i) requiring all
future transactions, including without limitation the purchase, sale or
exchange of property or the rendering of any service, between the Company and
its officers, directors, employees or other affiliates to (a) be approved by a
majority of the members of the Board of Directors and by a majority of the
disinterested members of the Board of Directors, and (b) be on reasonable terms
no less favorable to the Company than could be obtained from unaffiliated third
parties; and (ii) requiring a third party bid on all construction contracts in
excess of $100,000.
60
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock of the Company as of July 31, 1997,
and as adjusted for the sale of the shares of Class A Common Stock offered
hereby, by (i) each person or entity known to the Company to beneficially own
more than five percent of the Company's Common Stock, (ii) each director and
Named Executive Officer of the Company, (iii) all current directors and
executive officers of the Company as a group, and (iv) each Selling
Stockholder.
Total
Common
Class A Common Stock Class B Common Stock Stock
-------------------------------------------------- ----------------------------------- ----------
To be To be Voting
Owned To be Sold Owned Owned Owned Power
Prior to the in the After the Prior to the After the After the
Offering Offering Offering Offering Offering Offering
------------------ ------------ ------------------ ----------------- ----------------- ----------
Name of Beneficial
Owner(1) Number % Number Number % Number % Number % %
- ------------------------------- ----------- ------ ------------ ----------- ------ ----------- ----- ----------- ----- ----------
John W. Casella(2) ............ 726,833 10.5 -- 726,833 7.3 500,000 50 500,000 50 28.7
Douglas R. Casella(3) ......... 726,833 10.5 -- 726,833 7.3 500,000 50 500,000 50 28.7
James W. Bohlig(4) ............ 425,000 6.0 -- 425,000 4.2 -- -- -- -- 2.1
Jerry S. Cifor(5) ............ 126,667 1.8 -- 126,667 1.3 -- -- -- -- *
Gregory B. Peters (6) ......... 516,620 7.6 131,106 385,514 3.9 -- -- -- -- 1.9
C. Andrew Russell(7) ......... 350,547 5.2 88,960 261,587 2.7 -- -- -- -- 1.3
John F. Chapple III ......... 294,191 4.3 -- 294,191 3.0 -- -- -- -- 1.5
Kenneth H. Mead(8) ............ 704,889 10.4 50,000 654,889 6.7 -- -- -- -- 3.3
Michael F. Cronin(9) ......... 775,370 11.4 -- 775,370 7.9 -- -- -- -- 3.9
BCI Growth III, L.P.(10) ...... 1,635,795 24.1 390,549 1,245,246 12.7 -- -- -- -- 6.3
North Atlantic Venture
Fund, L.P. and
The Vermont Venture
Capital Fund, L.P.(11) ...... 516,620 7.6 131,106 385,514 3.9 -- -- -- -- 1.9
National Waste Industries,
Inc. (12) .................. 350,547 5.2 88,960 261,587 2.7 -- -- -- -- 1.3
Weston Presidio Capital II,
L.P.(13) ..................... 775,370 11.4 -- 775,370 7.9 -- -- -- -- 3.9
Norwest Equity Partners
V(14) ........................ 818,227 12.1 207,647 610,580 6.2 -- -- -- -- 3.1
Directors and executive
officers as a group
(9 people)(15) ............ 4,646,950 62.1 270,066 4,376,884 41.8 1,000,000 100 1,000,000 100 70.2
Other Selling
Stockholders
Prudential Securities(16) . 104,680 1.5 26,565 78,115 * -- -- -- -- *
FSC Corp.(17) ............... 71,429 1.1 18,127 53,302 * -- -- -- -- *
Thomas Shattan ............... 5,714 * 1,450 4,264 * -- -- -- -- *
Daniel C. Crane ............ 10,000 * 2,538 7,462 * -- -- -- -- *
Len Fosbrook ............... 25,000 * 11,342 13,658 * -- -- -- -- *
Steven Houghton(18) ......... 40,000 * 10,000 30,000 * -- -- -- -- *
Richard Lindgren(18) ......... 40,547 * 10,000 30,547 * -- -- -- -- *
Robert Lynch(18) ............ 40,547 * 3,500 37,047 * -- -- -- -- *
Harry Ryan(19) ............... 90,000 1.3 22,838 67,162 * -- -- -- -- *
De Novo Trust ............... 100,000 1.5 25,378 74,622 * -- -- -- -- *
- ------------
* Less than 1% of the outstanding Common Stock.
(1) Beneficial ownership is determined in accordance with rules of the
Commission, and includes generally voting power and/or investment power
with respect to securities. Shares of Common Stock subject to options
and/or warrants currently exercisable or exercisable within 60 days of the
date hereof ("Currently Exercisable Options") are deemed outstanding for
computing the percentage beneficially owned by the person holding such
options but are not deemed outstanding for purposes of computing the
percentage beneficially owned by any other person. Except as indicated by
footnote, the Company believes that the persons named in this table, based
on information provided by such persons, have sole voting and investment
power with respect to the shares of Common Stock indicated.
61
(2) Includes 161,833 shares issuable pursuant to Currently Exercisable
Options, including options for 85,000 shares which vest on the closing of
this Offering. Also includes 4,800 shares of Class B Common Stock held in
trust for the benefit of Mr. Casella's minor children. Mr. Casella
disclaims beneficial ownership of such shares. Mr. Casella's address is
c/o Casella Waste Systems, Inc., 25 Greens Hill Lane, Rutland, VT 05701.
(3) Includes 161,833 shares issuable pursuant to Currently Exercisable
Options, including options for 85,000 shares which vest on the closing of
this Offering. Also includes 1,600 shares of Class B Common Stock held in
trust for the benefit of Mr. Casella's minor children. Mr. Casella
disclaims beneficial ownership of such shares. Mr. Casella's address is
c/o Casella Waste Systems, Inc., 25 Greens Hill Lane, Rutland, VT 05701.
(4) Includes 300,000 shares issuable pursuant to Currently Exercisable
Options, including options for 85,000 shares which vest on the closing of
this Offering. Also includes 8,000 shares held in trust for the benefit of
Mr. Bohlig's minor children. Mr. Bohlig disclaims beneficial ownership of
such shares. Mr. Bohlig's address is c/o Casella Waste Systems, Inc., 25
Greens Hill Lane, Rutland, VT 05701.
(5) Includes 106,667 shares issuable pursuant to Currently Exercisable
Options, including options for 56,000 shares which vest on the closing of
this Offering.
(6) Consists of 516,620 shares held by North Atlantic Venture Fund, L.P., of
which Mr. Peters is a General Partner and The Vermont Venture Capital
Fund, L.P., of which Mr. Peters is the Managing General Partner. Mr.
Peters disclaims beneficial ownership of such shares except to the extent
of his pecuniary interest in such firms.
(7) Consists of 350,547 shares held by National Waste Industries, Inc., a
company that is an affiliate of RRZ&G, of which Mr. Russell is Vice
Chairman. Mr. Russell disclaims beneficial ownership of such shares except
to the extent of his pecuniary interest in such company. Mr. Russell's
address is c/o National Waste Industries, Inc., CNG Tower, Suite 3100, 625
Liberty Avenue, Pittsburgh, PA 15222.
(8) Consists of 570,960 shares held by Mr. Mead at July 31, 1997, 63,440
shares that the Company is required to issue Mr. Mead on January 22, 1998,
subject to adjustment pursuant to certain indemnification obligations of
Mr. Mead to the Company, and 70,489 shares that the Company is required to
issue to Mr. Mead upon completion of the Offering. Mr. Mead's address is
1669 N.W. Loop, Ocala, FL 34475.
(9) Consists of 775,370 shares held by Weston Presidio Capital II, L.P., of
which Mr. Cronin is a General Partner. Mr. Cronin disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest in
such firm. Mr. Cronin's address is c/o Weston Presidio Capital II, L.P.,
One Federal Street, Boston, MA 02110.
(10) The address of BCI Growth III, LP is Glenpointe Centre West, Teaneck, NJ
07666
(11) The address of North Atlantic Venture Fund L.P. is 70 Center Street,
Portland, ME 04140, and the address of The Vermont Venture Capital Fund,
L.P. is Corporate Plaza, Suite 600, 76 St. Paul Street, Burlington, VT
05401.
(12) The address of National Waste Industries, Inc. is CNG Tower, Suite 3100,
625 Liberty Avenue, Pittsburgh, PA 15222.
(13) The address of Weston Presidio Capital II, L.P. is One Federal Street,
Boston, MA 02110.
(14) The address of Norwest Equity Partners V is 40 William Street, Suite 305,
Wellesley, MA 02181.
(15) Includes 730,333 shares issuable pursuant to Currently Exercisable
Options, including options for 311,000 shares which vest on the closing of
this Offering.
(16) Includes 78,524 shares issuable pursuant to Currently Exercisable Options.
(17) FSC Corp. is affiliated with BankBoston N.A., which acts as the lead and
agent bank for the Company's $110.0 million credit facility. See "Use of
Proceeds."
(18) Includes 9,000 shares issuable pursuant to Currently Exercisable Options.
(19) Includes 12,000 shares held in trust for the benefit of Mr. Ryan's
children. Mr. Ryan disclaims beneficial ownership of such shares.
62
DESCRIPTION OF CAPITAL STOCK
The following summary of certain provisions of the Company's Common Stock,
Preferred Stock, Restated Certificate of Incorporation and Restated By-Laws
gives effect to the filing upon the closing of this Offering of the Restated
Certificate of Incorporation, and is not intended to be complete and is
qualified by reference to the provisions of applicable law and to the Company's
Restated Certificate of Incorporation and Restated By-Laws included as exhibits
to the Registration Statement. See "Additional Information".
Authorized, Issued and Outstanding Capital Stock
Effective upon the filing of the Restated Certificate of Incorporation,
the authorized capital stock of the Company will consist of 30,000,000 shares
of Class A Common Stock, $0.01 par value, 1,000,000 shares of Class B Common
Stock, $0.01 par value, and 1,000,000 shares of Preferred Stock, $0.01 par
value. As of July 31, 1997, there were 6,778,745 shares of Class A Common Stock
(including 100,443 shares of Class A Common Stock issued or issuable upon
exercise of warrants exercised or to be exercised between July 31, 1997 and the
closing of this Offering) issued and outstanding and held of record by 31
stockholders and 1,000,000 shares of Class B Common Stock issued and
outstanding and held of record by 10 stockholders.
Common Stock
The shares of Class A Common Stock and Class B Common Stock are identical
in all respects, except for voting rights and certain conversion rights and
transfer restrictions in respect of the shares of the Class B Common Stock, as
described below. The number of authorized shares of any class or classes of
capital stock of the Company may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote of the
holders of a majority of the voting power of the stock of the Company entitled
to vote generally in the election of directors irrespective of the provisions
of Section 242(b)(2) of the General Corporation Law of the State of Delaware
(the "Delaware Law") or any corresponding provision hereinafter enacted.
Voting Rights. The holders of Class A Common Stock are entitled to one
vote per share. Holders of Class B Common Stock are entitled to ten votes per
share. Holders of all classes of Common Stock entitled to vote will generally
vote together as a single class on all matters presented to the stockholders
for their vote or approval except that the holders of Class A Common Stock,
voting separately as a class, will at all times be entitled to elect at least
one director, and such director may be removed, with or without cause, only by
the holders of the Class A Common Stock. Mr. Michael F. Cronin is the designee
of the holders of Class A Common Stock.
Dividends. Holders of Class A Common Stock and Class B Common Stock are
entitled to receive dividends at the same rate if, as and when such dividends
are declared by the Board out of assets legally available therefor after
payment of any dividends required to be paid on shares of Preferred Stock, if
any. The Company may not make any dividend or distribution to any holder of any
class of Common Stock unless simultaneously with such dividend or distribution
the Company makes the same dividend or distribution with respect to each
outstanding share of Common Stock regardless of class. In the case of a
dividend or other distribution payable in shares of a class of Common Stock,
including distributions pursuant to stock splits or divisions of Common Stock,
only shares of Class A Common Stock may be distributed with respect to Class A
Common Stock, and only shares of Class B Common Stock may be distributed with
respect to Class B Common Stock. Whenever a dividend or distribution, including
distributions pursuant to stock splits or divisions of the Common Stock, is
payable in shares of a class of Common Stock, the number of shares of each
class of Common Stock payable per share of such class of Common Stock shall be
equal in number. In the case of dividends or other distributions consisting of
other voting securities of the Company or of voting securities of any
corporation which is a wholly-owned subsidiary of the Company, the Company
shall declare and pay such dividends in two separate classes of such voting
securities, identical in all respects except that (i) the voting rights of each
such security issued to the holders of Class A Common Stock shall be one-tenth
of the voting rights of each such security issued to holders of Class B Common
Stock; (ii) such security issued to holders of Class B Common Stock shall
convert into the security issued to the holders of Class A Common Stock upon
the same terms and conditions applicable to the conversion of Class B Common
Stock into Class A Common Stock and shall
63
have the same restrictions on transfer and ownership applicable to the transfer
and ownership of the Class B Common Stock; and (iii) with respect only to
dividends or other distributions of voting securities of any corporation which
is a wholly owned subsidiary of the Company, the respective voting rights of
each such security issued to holders of Class A Common Stock and Class B Common
Stock with respect to elections of directors shall otherwise be as comparable
as is practicable to those of the Class A Common Stock and Class B Common
Stock, respectively. In the case of dividends or other distributions consisting
of securities convertible into, or exchangeable for, voting securities of the
Company or of voting securities of any corporation which is a wholly owned
subsidiary of the Company, the Company shall provide that such convertible or
exchangeable securities and the underlying securities be identical in all
respects (including, without limitation, the conversion or exchange rate)
except that the underlying securities may have the same differences as they
would have if the Company issued voting securities of the Company or of a
wholly owned subsidiary rather than issuing securities convertible into, or
exchangeable for, such securities.
Restrictions on Additional Issuances And Transfer. The Company may not
issue or sell any shares of Class B Common Stock or any securities (including,
without limitation, any rights, options, warrants or other securities)
convertible into, or exchangeable or exercisable for, shares of Class B Common
Stock to any person who is not a Class B Permitted Holder. Additionally, shares
of Class B Common Stock may not be transferred, whether by sale, assignment,
gift, bequest, appointment or otherwise, to a person other than a Class B
Permitted Holder. Notwithstanding the foregoing, (i) any Class B Permitted
Holder may pledge his, her or its shares of Class B Common Stock to a financial
institution pursuant to a bona fide pledge of such shares as collateral
security for indebtedness due to the pledgee provided that such shares remain
subject to the transfer restrictions and that, in the event of foreclosure or
other similar action by the pledgee, such pledged shares of Class B Common
Stock may only be transferred to a Class B Permitted Holder or converted into
shares of Class A Common Stock, as the pledgee may elect; and (ii) the
foregoing transfer restrictions shall not apply in the case of a merger,
consolidation or business combination of the Company with or into another
corporation in which all of the outstanding shares of Common Stock and
Preferred Stock of the Company regardless of class are purchased by the
acquiror.
Conversion. Class A Common Stock has no conversion rights. Shares of Class
B Common Stock are convertible into Class A Common Stock, in whole or in part,
at any time and from time to time at the option of the holder, on the basis of
one share of Class A Common Stock for each share of Class B Common Stock
converted. Each share of Class B Common Stock will also automatically convert
into one share of Class A Common Stock if, on the record date for any meeting
of the stockholders of the Company, the number of shares of Common Stock held
by the Class B Permitted Holders is less than 10% of the aggregate number of
shares of Common Stock outstanding immediately upon the consummation of this
Offering (1,077,874 shares, subject to appropriate adjustment for stock splits,
reverse stock splits, stock dividends and similar transactions). Additionally,
at such time as a person ceases to be a Class B Permitted Holder, any share of
Class B Common Stock held by such person at such time shall automatically
convert into a share of Class A Common Stock. The Company covenants that (i) it
will at all times reserve and keep available out of its authorized but unissued
shares of Class A Common Stock, such number of shares of Class A Common Stock
issuable upon the conversion of all outstanding shares of Class B Common Stock;
(ii) it will cause any shares of Class A Common Stock issuable upon conversion
of a share of Class B Common Stock that require registration with or approval
of any governmental authority under federal or state law before such shares may
be issued upon conversion to be so registered or approved; and (iii) it will
use its best efforts to list the shares of Class A Common Stock required to be
delivered upon conversion prior to such delivery upon such national securities
exchange upon which the outstanding Class A Common Stock is listed at the time
of such delivery.
Reclassification and Merger. In the event of a reclassification or other
similar transaction as a result of which the shares of Class A Common Stock are
converted into another security, then a holder of Class B Common Stock will be
entitled to receive upon conversion the amount of such other security that the
holder would have received if the conversion occurred immediately prior to the
record date of such reclassification or other similar transaction. No
adjustments in respect of dividends will be made upon the conversion of any
share of Class B Common Stock; except if a share is converted subsequent to the
record date for the payment of a dividend or other distribution on shares of
Class B Common Stock but prior to
64
such payment, then the registered holder of such share at the close of business
on such record date will be entitled to receive the dividend or other
distribution payable on such date regardless of the conversion thereof or the
Company's default in payment of the dividend due on such date.
In the event the Company enters into any consolidation, merger,
combination or other transaction in which shares of Common Stock are exchanged
for or changed into other stock or securities, cash and/or any other property,
then, and in such event, the shares of each class of Common Stock will be
exchanged for or changed into either (i) the same amount of stock, securities,
cash and/or any other property, as the case may be, into which or for which
each share of any other class of Common Stock is exchanged or changed;
provided, however, that if shares of Common Stock are exchanged for or changed
into shares of capital stock, such shares so exchanged for or changed into may
differ to the extent and only to the extent that the Class A Common Stock and
the Class B Common Stock differ as provided in the Company's Restated
Certificate of Incorporation, or (ii) if holders of each class of Common Stock
are to receive different distributions of stock, securities, cash and/or any
other property, an amount of stock, securities, cash and/or property per share
having a value, as determined by an independent investment banking firm of
national reputation selected by the Board of Directors, equal to the value per
share into which or for which each share of any other class of Common Stock is
exchanged or changed.
Liquidation. In the event of liquidation of the Company, after payment of
the debts and other liabilities of the Company and after making provision for
the holders of Preferred Stock, if any, the remaining assets of the Company
will be distributable ratably among the holders of the Class A Common Stock and
Class B Common Stock treated as a single class.
Other Provisions. The holders of the Class A Common Stock and Class B
Common Stock are not entitled to preemptive rights. None of the Class A Common
Stock or Class B Common Stock may be subdivided or combined in any manner
unless the other classes are subdivided or combined in the same proportion. The
Company may not make any offering of options, rights or warrants to subscribe
for shares of Class B Common Stock. If the Company makes an offering of
options, rights or warrants to subscribe for shares of any other class or
classes of capital stock (other than Class B Common Stock) to all holders of a
class of Common Stock, then the Company is required to simultaneously make an
identical offering to all holders of the other classes of Common Stock other
than to any class the holders of which, voting as a separate class, agrees that
such offering need not be made to such class. All such options, rights or
warrants offerings shall offer the respective holders of Class A Common Stock
and Class B Common Stock the right to subscribe at the same rate per share.
As used in this Prospectus, the term "Class B Permitted Holder" includes
only the following persons: (i) John W. Casella or Douglas R. Casella and their
respective estates, guardians, conservators or committees; (ii) the spouses of
John Casella or Douglas Casella and their respective estates, guardians,
conservators or committees; (iii) each descendant of John Casella or Douglas
Casella (a "Casella Descendant") and their respective estates, guardians,
conservators or committees; (iv) each Family Controlled Entity (as defined
below); and (v) the trustees, in their respective capacities as such, of each
Casella Family Trust (as defined below). The term "Family Controlled Entity"
means (i) any not-for-profit corporation if at least a majority of its board of
directors is composed of John Casella or Douglas Casella, their spouses and/or
Casella Descendants; (ii) any other corporation if at least a majority of the
value of its outstanding equity is owned by Class B Permitted Holders; (iii)
any partnership if at least a majority of the economic interest of its
partnership interests are owned by Class B Permitted Holders; and (iv) any
limited liability or similar company if at least a majority of the economic
interest of the Company is owned by Class B Permitted Holders. The term
"Casella Family Trust" includes trusts the primary beneficiaries of which are
John Casella or Douglas Casella, their spouses, Casella Descendants, siblings,
spouses of Casella Descendants and their respective estates, guardians,
conservator or committees and/or charitable organizations, provided that if the
trust is a wholly charitable trust, at least a majority of the trustees of such
trust consist of John or Douglas Casella, their spouses and/or Class B
Permitted Holders.
65
Preferred Stock
The Board of Directors is authorized, subject to any limitations
prescribed by law, without stockholder approval, to issue up to 1,000,000
shares of Preferred Stock in one or more series. Each such series of Preferred
Stock shall have such rights, preferences, privileges and restrictions,
including voting rights, dividend rights, exchange rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by
the Board of Directors. The rights of the holders of shares of Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any shares of Preferred Stock that may be issued in the future. Preferred
Stock may, at the discretion of the Board of Directors, be entitled to
preference over the Common Stock with respect to the payment of dividends and
the distribution of assets in the event of liquidation, dissolution or winding
up. Additionally, the issuance of shares of Preferred Stock could also decrease
the amount of earnings and assets available for distribution to the holders of
the Common Stock. If any cumulative dividends or amounts payable on a return of
capital are not paid in full, shares of Preferred Stock of all issued series
would participate ratably in accordance with the amounts that would be payable
on such shares if all such dividends were declared and paid in full or the sums
which would be payable on such shares on the return of capital if all amounts
so payable were paid in full, as the case may be.
The purpose of authorizing the Board of Directors to issue Preferred Stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of Preferred Stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from acquiring,
a majority of the outstanding voting capital stock of the Company. The Company
has no present plans to issue any shares of Preferred Stock.
Delaware Law and Certain Charter and By-Law Provisions
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. In general, this statute prohibits a publicly-held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person becomes an interested stockholder, unless the
business combination is approved in a prescribed manner. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within the prior three years did own) 15% or more of the corporation's voting
stock.
The Company's Restated Certificate of Incorporation provides that
vacancies on the Board of Directors may only be filled by a majority of the
Board of Directors then in office. Furthermore, any director elected by the
stockholders, or by the Board of Directors to fill a vacancy, may be removed
only by a vote of 75% of the combined voting power of the shares of Common
Stock entitled to vote for the election of directors (provided that the
director elected by the holders of Class A Common Stock, voting separately as a
class, may be removed only by the holders of at least 75% of the outstanding
shares of Class A Common Stock).
The Company's Restated Certificate of Incorporation and Restated By-Laws
provide that, after the closing of this Offering, any action required or
permitted to be taken by the stockholders of the Company may be taken only at a
duly called annual or special meeting of stockholders. These provisions could
have the effect of delaying until the next stockholders meeting stockholder
actions which are favored by the holders of a majority of the outstanding
voting securities of the Company, especially since special meetings of
stockholders may be called only by the Board of Directors or President of the
Company. These provisions may also discourage another person or entity from
making a tender offer for the Company's Common Stock, because such person or
entity, even if it acquired a majority of the outstanding voting securities of
the Company, would be able to take action as a stockholder (such as electing
new directors or approving a merger) only at a duly called stockholders
meeting, and not by written consent. The Restated By-laws also establish
procedures, including advance notice procedures, with regard to the nomination,
other than by or at the direction of the Board of Directors, of candidates for
election as directors and other matters to be brought before stockholders
meetings.
The foregoing provisions, which may be amended only by a 75% vote of the
stockholders, could have the effect of making it more difficult for a third
party to effect a change in the control of the Board of Directors.
66
In addition, these provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, a majority of the outstanding voting stock of the Company and may
make more difficult or discourage a takeover of the Company.
The Company has also included in its Restated Certificate of Incorporation
provisions to eliminate the personal liability of its directors for monetary
damages resulting from breaches of their fiduciary duty to the extent permitted
by Delaware General Corporation Law and to indemnify its directors and officers
to the fullest extent permitted by Section 145 of the Delaware General
Corporation Law.
Transfer Agent and Registrar
The transfer agent and registrar for the Class A Common Stock is Boston
EquiServe, L.P., Boston, Massachusetts.
67
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 10,778,745 shares
of Common Stock outstanding (including 1,000,000 shares of Class B Common
Stock), assuming no exercise of the Underwriters' over-allotment option and no
exercise of outstanding options or warrants other than warrants to purchase
100,443 shares of Class A Common Stock to be exercised after July 31, 1997 and
prior to the closing of this Offering by certain Selling Stockholders. Of the
shares of Common Stock outstanding upon completion of this Offering, all of the
4,000,000 shares of Class A Common Stock sold in this Offering will be freely
tradable without restriction or further registration under the Securities Act,
except for any shares purchased by "affiliates" of the Company, as that term is
defined under the Securities Act and the regulations promulgated thereunder (an
"Affiliate").
The executive officers, directors and stockholders of the Company (holding
an aggregate of 6,778,745 shares of Common Stock) have agreed that, for a
period of 180 days after the date of this Prospectus, they will not sell,
consent to sell or otherwise dispose of any Common Stock, any options to
purchase Common Stock or any securities convertible into or exchangeable for
Common Stock, owned directly by such persons or with respect to which they have
the power of disposition, without the prior written consent of the
representatives of the Underwriters (the "Lock-Up Agreements"). Upon expiration
of the Lock-Up Agreements, approximately 6,614,266 additional shares of Common
Stock will be available for sale in the public market, subject to the
provisions of Rule 144 or Rule 701 under the Securities Act. The remaining
164,479 shares will be eligible for sale thereafter upon expiration of their
respective holding periods under Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of the Registration Statement of which this Prospectus is a
part, a stockholder, including an Affiliate, who has beneficially owned his or
her restricted securities (as that term is defined in Rule 144) for at least
one year from the later of the date such securities were acquired from the
Company or (if applicable) the date they were acquired from an Affiliate, is
entitled to sell, within any three-month period, a number of such shares that
does not exceed the greater of 1% of the then outstanding Common Stock
(approximately 107,800 shares immediately after this Offering) or the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding the date on which notice of such sale was filed under Rule 144,
provided certain requirements concerning availability of public information,
manner of sale and notice of sale are satisfied. In addition, under Rule
144(k), if a period of at least two years has elapsed between the later of the
date restricted securities were acquired from the Company or (if applicable)
the date they were acquired from an Affiliate of the Company, a stockholder who
is not an Affiliate of the Company at the time of sale and has not been an
Affiliate of the Company for at least three months prior to the sale is
entitled to sell the Stock immediately without compliance with the foregoing
requirements under Rule 144.
Securities issued in reliance on Rule 701 (such as shares of Common Stock
that may be acquired pursuant to the exercise of certain options granted under
the Company's stock option plans) are restricted securities and, beginning 90
days after the effective date of the Registration Statement of which this
Prospectus is a part, may be sold by stockholders other than Affiliates of the
Company subject only to the manner of sale provisions of Rule 144 and by
Affiliates under Rule 144 without compliance with its one-year holding period
requirement.
The Company may file a shelf registration statement with the Commission
within the next six months or thereafter for purposes of registering shares of
Class A Common Stock to be issued in connection with acquisitions which may be
made by the Company. The Company has not made any determination as to the
number of shares which may be covered by any such registration statement;
however, such shares, when issued, could be freely saleable in the public
market 180 days after the date of this Prospectus or earlier upon prior written
approval of the representatives. See "Underwriting". There can be no assurance
that the issuance of such shares will not have a dilutive effect on
stockholders of the Company or that the sale of such shares will not adversely
affect prevailing market prices of the Company's Class A Common Stock.
Options and Warrants
As of July 31, 1997, options and warrants to purchase 1,658,300 shares of
Common Stock were outstanding (not including shares to be sold by Selling
Stockholders in this Offering issued upon the
68
exercise of options or warrants outstanding as of July 31, 1997), of which
1,281,861 shares were vested as of the date of this Prospectus. Of these shares
of Common Stock, 1,188,041 shares are subject to Lock-Up Agreements.
The Company intends to file one or more registration statements on Form
S-8 under the Securities Act to register the shares of Class A Common Stock
subject to outstanding stock options and Class A Common Stock issuable pursuant
to the Company's stock option and purchase plans. Such registration statements
would become effective upon the filing thereof. Stock covered by these
registration statements will thereupon be eligible for sale in the public
markets, subject to the Rule 144 limitations applicable to Affiliates and
lock-up agreements.
Effect of Sales of Stock
Prior to this Offering, there has been no public market for the Common
Stock of the Company, and no prediction can be made as to the effect, if any,
that market sales of Common Stock or the availability of shares for sale will
have on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of significant numbers of Common Stock in the public market
could adversely affect the market price of the Common Stock and could impair
the Company's future ability to raise capital through an offering of its equity
securities.
Registration Rights
Following this Offering, the holders (the "Holders") of approximately
6,031,057 shares of the Company's Class A Common Stock (including shares of
Common Stock issuable upon the exercise of outstanding warrants and vested
options), or their assignees (collectively, the "Registrable Securities"), will
be entitled to certain rights with respect to the registration of such shares
under the Securities Act. Under the terms of an agreement between the Company
and the Holders, in the event the Company intends to register any of its
securities under the Securities Act, the Holders shall be entitled to include
Registrable Securities in such registration. However, the managing underwriter
of any such offering may, under certain circumstances, exclude some or all of
such Registrable Securities from such registration. The Holders also are
entitled, subject to certain conditions and limitations, to demand the Company
to register some or all of their Registrable Securities under the Securities
Act, provided that such demand may be made no earlier than 180 days after this
Offering, nor more than twice in the aggregate. The Company generally is
required to bear the expenses of all such registrations, except underwriting
discounts and commissions. If the Holders, by exercising their demand
registration rights, cause a large number of securities to be registered and
sold in the public market, such sales could have an adverse effect on the
market price of the Company's Class A Common Stock. Moreover, if the Company
were to include in a Company-initiated registration shares held by the Holders
pursuant to exercise of their piggyback registration rights, such sales may
have an adverse effect on the Company's ability to raise additional equity
capital.
LEGAL MATTERS
Certain legal matters in connection with this Offering will be passed upon
for the Company by Hale and Dorr LLP, Boston, Massachusetts, and for the
Underwriters by Morrison Cohen Singer & Weinstein, LLP, New York, New York.
EXPERTS
The audited financial statements of the Company included in this
Prospectus and elsewhere in this Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The audited financial statements of H.C. Gobin, Inc. included in this
Prospectus and elsewhere in this Registration Statement have been audited by
Barrett & Dattilio, P.C., independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
69
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (which
term shall include all amendments, exhibits, schedules and supplements thereto)
on Form S-1 under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission, to which Registration Statement
reference is hereby made. Statements made in this Prospectus as to the contents
of any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. The Registration
Statement and the exhibits thereto may be inspected and copied at prescribed
rates at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the regional offices of the Commission located at Seven World Trade Center,
13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, upon payment of certain fees prescribed by the
Commission. The Commission also maintains a World Wide Web site which provides
online access to reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
at the address "http://www.sec.gov."
70
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF APRIL 30, 1996, APRIL 30, 1997 AND JULY 31, 1997
TOGETHER WITH AUDITORS' REPORT
Index to Financial Statements
Page
-----
Consolidated financial statements of Casella Waste Systems, Inc. and Subsidiaries
Report of Independent Public Accountants ............................................. F-3
Consolidated balance sheets as of April 30, 1996 and 1997 and July 31, 1997 ............ F-4
Consolidated statements of operations for each of the three years ended April 30, 1997
and the three months ended July 31, 1996 (unaudited) and 1997 ........................ F-6
Consolidated statements of redeemable preferred stock, redeemable put warrants and
stockholders' equity (deficit) for each of the three years ended April 30, 1997 and the
three months ended July 31, 1997 ................................................... F-7
Consolidated statements of cash flows for each of the three years ended April 30, 1997
and the three months ended July 31, 1996 (unaudited) and 1997 ........................ F-9
Notes to consolidated financial statements ............................................. F-10
Financial statements of completed acquisitions (included pursuant to Regulation S-X,
Rule 3.05):
Sawyer Companies:
Report of Independent Public Accountants ............................................. F-27
Combined balance sheet as of December 31, 1995 ....................................... F-28
Combined statement of income and retained earnings for the year ended
December 31, 1995 .................................................................. F-29
Combined statement of cash flows for the year ended December 31, 1995 ............... F-30
Notes to combined financial statements ............................................. F-31
Vermont Waste and Recycling Management, Inc.:
Report of Independent Public Accountants ............................................. F-36
Balance sheet as of November 15, 1996 ................................................ F-37
Statement of operations for the ten and one-half months ended November 15, 1996 ...... F-38
Statement of stockholders' equity for the ten and one-half months ended November 15,
1996 ................................................................................. F-39
Statement of cash flows for the ten and one-half months ended November 15, 1996 ...... F-40
Notes to financial statements ...................................................... F-41
The Superior Disposal Companies:
Report of Independent Public Accountants ............................................. F-44
Combined balance sheets as of December 31, 1995 and 1996 ........................... F-45
Combined statements of operations for the years ended December 31, 1995 and 1996 ... F-46
Combined statements of stockholder's equity for the years ended December 31, 1995
and 1996 ........................................................................... F-47
Combined statements of cash flows for the years ended December 31, 1995 and 1996 ... F-48
Notes to combined financial statements ............................................. F-49
Clinton County, New York -- Solid Waste Department Enterprise Fund:
Report of Independent Public Accountants ............................................. F-55
Balance sheets as of December 31, 1995 and June 30, 1996 (unaudited) ............... F-56
Statements of operations for the year ended December 31, 1995 and the six months
ended June 30, 1996 (unaudited) ................................................... F-57
Statements of funds deficit for the year ended December 31, 1995 and the six months
ended June 30, 1996 (unaudited) ................................................... F-58
Statements of cash flows for the year ended December 31, 1995 and the six months
ended June 30, 1996 (unaudited) ................................................... F-59
Notes to financial statements ...................................................... F-60
F-1
H.C. Gobin, Inc.:
Report of Independent Public Accountants ............................................. F-64
Balance sheets as of December 31, 1995 and 1996 and June 30, 1997 (unaudited) ...... F-65
Statements of income (loss) and retained earnings for the years ended December 31, 1995
and 1996 and the six months ended June 30, 1997 (unaudited) ........................ F-67
Statements of cash flows for the years ended December 31, 1995 and 1996 and the six
months ended June 30, 1997 (unaudited) ............................................. F-68
Notes to financial statements ......................................................... F-69
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Casella Waste Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Casella
Waste Systems, Inc. (a Delaware corporation) and subsidiaries as of April 30,
1996 and 1997 and July 31, 1997, and the related consolidated statements of
operations, redeemable preferred stock, redeemable put warrants and
stockholders' equity (deficit) and cash flows for each of the three years ended
April 30, 1997 and the three months ended July 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Casella Waste Systems, Inc.
and subsidiaries as of April 30, 1996 and 1997 and July 31, 1997, and the
results of their operations and their cash flows for each of the three years
ended April 30, 1997 and the three months ended July 31, 1997, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
October 8, 1997
F-3
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, July 31,
---------------------------- ----------------------------
Pro Forma
1996 1997 1997 1997
------------- -------------- -------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .................. $ 474,587 $ 1,414,542 $ 1,955,499 $ 1,955,499
Restricted funds--closure fund escrow ...... 186,864 1,532,295 1,486,204 1,486,204
Accounts receivable--trade, less
allowance for doubtful accounts of
approximately $353,000, $710,000
and $684,000 .............................. 6,442,874 12,935,881 15,133,404 15,133,404
Refundable income taxes ..................... 258,114 447,184 -- --
Prepaid expenses ........................... 663,197 878,757 1,013,117 1,013,117
Prepaid income taxes ........................ 275,812 542,647 542,647 542,647
Other current assets ........................ 312,817 722,141 483,626 483,626
------------ ------------- ------------- -------------
Total current assets .................. 8,614,265 18,473,447 20,614,497 20,614,497
------------ ------------- ------------- -------------
Property and equipment, at cost:
Land and land held for investment ......... 2,122,225 3,093,501 3,170,269 3,170,269
Landfills ................................. 20,245,181 30,793,067 31,252,075 31,252,075
Landfill development ........................ 346,485 1,331,888 1,695,266 1,695,266
Buildings and improvements .................. 4,848,534 11,005,765 11,487,446 11,487,446
Machinery and equipment ..................... 6,440,981 10,071,416 10,876,516 10,876,516
Rolling stock .............................. 12,972,343 20,324,922 23,640,821 23,640,821
Containers ................................. 6,080,455 10,469,802 11,227,032 11,227,032
------------ ------------- ------------- -------------
53,056,204 87,090,361 93,349,425 93,349,425
Less--accumulated depreciation and
amortization .............................. 16,153,365 22,273,077 25,776,037 25,776,037
------------ ------------- ------------- -------------
Property and equipment, net ............ 36,902,839 64,817,284 67,573,388 67,573,388
------------ ------------- ------------- -------------
Other assets:
Intangible assets, net ..................... 11,536,656 45,968,549 50,018,876 51,287,678
Restricted funds--closure fund escrow ...... 3,604,644 3,334,686 3,080,846 3,080,846
Other assets .............................. 590,040 779,110 1,280,512 1,280,512
------------ ------------- ------------- -------------
15,731,340 50,082,345 54,380,234 55,649,036
------------ ------------- ------------- -------------
$61,248,444 $133,373,076 $142,568,119 $143,836,921
============ ============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
April 30,
--------------------------------
1996 1997
--------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ........................ $ 4,799,134 $ 5,584,415
Current maturities of capital lease obligations ............ 409,488 391,709
Accounts payable .......................................... 3,178,634 8,174,311
Accrued payroll and related expenses ........................ 616,203 1,221,861
Accrued closure and postclosure costs, current portion ...... 45,998 3,417,269
Deferred revenue .......................................... 443,131 1,729,405
Income taxes payable ....................................... -- --
Other accrued expenses .................................... 995,899 2,583,702
------------- --------------
Total current liabilities .............................. 10,488,487 23,102,672
------------- --------------
Long-term debt, less current maturities ..................... 19,732,652 70,508,900
------------- --------------
Capital lease obligations, less current maturities ............ 1,913,384 1,373,177
------------- --------------
Deferred income taxes ....................................... 1,216,129 1,598,598
------------- --------------
Accrued closure and postclosure costs, less current portion ... 5,225,191 4,909,983
------------- --------------
Other long-term liabilities ................................. 519,427 364,456
------------- --------------
Commitments and contingencies (Note 6)
Redeemable preferred stock:
Series A Redeemable with warrants exercisable for Class
A Common Stock, $.01 par value (stated at
redemption value)-- authorized--616,620 shares
issued and outstanding--516,620 shares (no shares
pro forma) ................................................ 2,376,452 3,638,481
Series B Redeemable with warrants exercisable for
Class A Common Stock, $.01 par value (stated at
redemption value)--authorized--1,402,461 shares
issued and outstanding--1,294,579 shares (no shares
pro forma) ................................................ 5,955,063 9,117,535
Series C Mandatorily Redeemable, $.01 par value
($7.00 redemption value)--
authorized--1,000,000 shares
issued and outstanding--424,307 shares (424,307
shares pro forma) .......................................... 2,016,872 2,221,146
Series D Convertible Redeemable, $.01 par value
(stated at redemption value)--
authorized--1,922,169 shares
issued and outstanding--1,922,169 shares (no shares
pro forma) ................................................ 12,547,260 16,448,854
Redeemable put warrants to purchase 100,000 Shares of
Class A Common Stock (100,000 warrants pro forma) ............ 400,000 400,000
------------- --------------
Total redeemable preferred stock and redeemable
put warrants .......................................... 23,295,647 31,826,016
------------- --------------
Stockholders' equity (deficit):
Class A Common Stock--
authorized--10,000,000 shares, $.01 par value
issued and outstanding--2,099,191, 2,854,445 and
2,874,445 shares (6,678,302 shares pro forma) ............ 20,992 28,544
Class B Common Stock--
authorized--1,000,000 shares, $.01 par value; 10
votes per share issued and outstanding--1,000,000
shares (1,000,000 shares pro forma) ........................ 10,000 10,000
Additional paid-in capital ................................. 615,567 9,981,917
Accumulated deficit ....................................... (1,789,032) (10,331,187)
------------- --------------
Total stockholders' equity (deficit) ..................... (1,142,473) (310,726)
------------- --------------
$ 61,248,444 $ 133,373,076
============= ==============
July 31,
---------------------------------
Pro Forma
1997 1997
---------------- ----------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ........................ $ 3,857,534 $ 3,857,534
Current maturities of capital lease obligations ............ 437,475 437,475
Accounts payable .......................................... 9,401,186 9,401,186
Accrued payroll and related expenses ........................ 604,789 604,789
Accrued closure and postclosure costs, current portion ...... 2,461,196 2,461,196
Deferred revenue .......................................... 2,061,561 2,061,561
Income taxes payable ....................................... 175,682 175,682
Other accrued expenses .................................... 2,317,198 2,317,198
-------------- --------------
Total current liabilities .............................. 21,316,621 21,316,621
-------------- --------------
Long-term debt, less current maturities ..................... 80,383,547 80,383,547
-------------- --------------
Capital lease obligations, less current maturities ............ 1,229,606 1,229,606
-------------- --------------
Deferred income taxes ....................................... 1,598,598 1,598,598
-------------- --------------
Accrued closure and postclosure costs, less current portion ... 5,248,022 5,248,022
-------------- --------------
Other long-term liabilities ................................. 505,284 505,284
-------------- --------------
Commitments and contingencies (Note 6)
Redeemable preferred stock:
Series A Redeemable with warrants exercisable for Class
A Common Stock, $.01 par value (stated at
redemption value)-- authorized--616,620 shares
issued and outstanding--516,620 shares (no shares
pro forma) ................................................ 3,953,988 --
Series B Redeemable with warrants exercisable for
Class A Common Stock, $.01 par value (stated at
redemption value)--authorized--1,402,461 shares
issued and outstanding--1,294,579 shares (no shares
pro forma) ................................................ 9,908,153 --
Series C Mandatorily Redeemable, $.01 par value
($7.00 redemption value)--
authorized--1,000,000 shares
issued and outstanding--424,307 shares (424,307
shares pro forma) .......................................... 2,272,214 2,970,149
Series D Convertible Redeemable, $.01 par value
(stated at redemption value)--
authorized--1,922,169 shares
issued and outstanding--1,922,169 shares (no shares
pro forma) ................................................ 17,406,566 --
Redeemable put warrants to purchase 100,000 Shares of
Class A Common Stock (100,000 warrants pro forma) ............ 400,000 700,000
-------------- --------------
Total redeemable preferred stock and redeemable
put warrants .......................................... 33,940,921 3,670,149
-------------- --------------
Stockholders' equity (deficit):
Class A Common Stock--
authorized--10,000,000 shares, $.01 par value
issued and outstanding--2,099,191, 2,854,445 and
2,874,445 shares (6,678,302 shares pro forma) ............ 28,744 66,783
Class B Common Stock--
authorized--1,000,000 shares, $.01 par value; 10
votes per share issued and outstanding--1,000,000
shares (1,000,000 shares pro forma) ........................ 10,000 10,000
Additional paid-in capital ................................. 9,993,717 42,493,187
Accumulated deficit ....................................... (11,686,941) (12,684,876)
-------------- --------------
Total stockholders' equity (deficit) ..................... (1,654,480) 29,885,094
-------------- --------------
$ 142,568,119 $ 143,836,921
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended April 30,
-----------------------------------------------------------------
Pro Forma
As Adjusted
1995 1996 1997 1997
---------------- ---------------- ---------------- --------------
(Unaudited)
Revenues .......................................... $ 20,873,075 $ 38,109,453 $ 73,175,843 $103,256,529
------------ ------------ ------------ ------------
Operating expenses:
Cost of operations ................................. 11,615,003 21,654,419 43,503,806 64,517,471
General and administrative ........................ 2,456,010 6,302,434 11,339,830 15,331,637
Depreciation and amortization ..................... 4,511,494 7,642,939 13,053,209 17,479,496
------------ ------------ ------------ ------------
18,582,507 35,599,792 67,896,845 97,328,604
------------ ------------ ------------ ------------
Operating income .................................... 2,290,568 2,509,661 5,278,998 5,927,925
------------ ------------ ------------ ------------
Other (income) expenses:
Interest income .................................... (267,056) (195,632) (252,120) (252,120)
Interest expense .................................... 1,980,112 2,587,916 4,159,738 3,303,116
Other expense (income), net ........................ 55,420 (78,491) 931,214 1,210,774
------------ ------------ ------------ ------------
1,768,476 2,313,793 4,838,832 4,261,770
------------ ------------ ------------ ------------
Income before provision for income taxes and
extraordinary items .............................. 522,092 195,868 440,166 1,666,155
Provision for income taxes ........................ 220,017 143,427 451,952 855,041
------------ ------------ ------------ ------------
Income (loss) before extraordinary loss ............ 302,075 52,441 (11,786) 811,114
Extraordinary items from extinguishment of debt
(net of $168,098 income tax benefit) (Note 7) ...... -- 326,308 -- --
------------ ------------ ------------ ------------
Net income (loss) .................................... $ 302,075 $ (273,867) $ (11,786) $ 811,114
============ ============ ============ ============
Accretion of Preferred Stock and Put Warrants . (2,380,296) (2,966,705) (8,530,369) --
------------ ------------ ------------ ------------
Net income (loss) applicable to common
stockholders .................................... $ (2,078,221) $ (3,240,572) $ (8,542,155) $ 811,114
============ ============ ============ ============
Pro forma (unaudited)
Accretion of Series C Preferred Stock to its
redemption value and put warrants to its call
value ............................................. -- --
Reverse accretion of Series A, B and D
Preferred Stock ................................. 8,326,095 --
------------ ------------
Net income (loss) applicable to common
stockholders .................................... $ (216,060) $ 811,114
============ ============
Net income (loss) per share of common stock . $ (0.03) $ 0.07
============ ============
Weighted average common stock and common
stock equivalent shares outstanding ............... 7,332,820 11,196,193
============ ============
Three Months Ended July 31,
----------------------------------------------
Pro Forma
As Adjusted
1996 1997 1997
------------- ---------------- ---------------
(Unaudited) (Unaudited)
Revenues .......................................... $15,216,819 $ 26,429,475 $27,711,611
----------- ------------ -----------
Operating expenses:
Cost of operations ................................. 8,716,729 15,662,123 16,690,640
General and administrative ........................ 2,302,368 3,679,632 3,921,310
Depreciation and amortization ..................... 3,006,526 3,851,585 3,965,197
----------- ------------ -----------
14,025,623 23,193,340 24,577,147
----------- ------------ -----------
Operating income .................................... 1,191,196 3,236,135 3,134,464
----------- ------------ -----------
Other (income) expenses:
Interest income .................................... (41,611) (48,383) (48,383)
Interest expense .................................... 720,261 1,682,707 850,210
Other expense (income), net ........................ (21,452) 199,794 360,217
----------- ------------ -----------
657,198 1,834,118 1,162,044
----------- ------------ -----------
Income before provision for income taxes and
extraordinary items .............................. 533,998 1,402,017 1,972,420
Provision for income taxes ........................ 507,565 642,866 887,589
----------- ------------ -----------
Income (loss) before extraordinary loss ............ 26,433 759,151 1,084,831
Extraordinary items from extinguishment of debt
(net of $168,098 income tax benefit) (Note 7) ...... -- -- --
----------- ------------ -----------
Net income (loss) .................................... $ 26,433 $ 759,151 $ 1,084,831
=========== ============ ===========
Accretion of Preferred Stock and Put Warrants . (100,639) (2,114,905) --
----------- ------------ -----------
Net income (loss) applicable to common
stockholders .................................... $ (74,206) $ (1,355,754) $ 1,084,831
=========== ============ ===========
Pro forma (unaudited)
Accretion of Series C Preferred Stock to its
redemption value and put warrants to its call
value ............................................. (997,935) --
Reverse accretion of Series A, B and D
Preferred Stock ................................. 2,063,837 --
------------ -----------
Net income (loss) applicable to common
stockholders .................................... $ (289,852) $ 1,084,831
============ ===========
Net income (loss) per share of common stock . $ (0.04) $ 0.09
============ ===========
Weighted average common stock and common
stock equivalent shares outstanding ............... 7,704,662 11,568,035
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK, REDEEMABLE PUT WARRANTS
AND STOCKHOLDERS' EQUITY (DEFICIT)
Redeemable Preferred Stock
-----------------------------------------------------------
Series A Redeemable with Series B Redeemable with
Warrants Exercisable for Warrants Exercisable for
Class A Common Stock Class A Common Stock
--------------------------- -------------------------------
Number of Liquidation Number of Liquidation
Shares Value Shares Value
----------- --------------- --------------- ---------------
Balance, April 30, 1994 -- $ -- -- $ --
Issuance of Class A
Common Stock and
warrants .................. -- -- -- --
Accretion of put
warrants .................. -- -- -- --
Net income .................. -- -- -- --
--------- ------------- ----------- -------------
Balance April 30, 1995 -- -- -- --
Issuance of preferred
stock and other
capital transactions ...... 516,620 2,376,452 1,294,579 5,955,063
Issuance costs ............... -- -- -- --
Accretion of preferred
stock ..................... -- -- -- --
Net loss ..................... -- -- -- --
--------- ------------- ----------- -------------
Balance, April 30, 1996 516,620 2,376,452 1,294,579 5,955,063
Issuance of Class A
Common Stock
in various
acquisitions ............... -- -- -- --
Accretion of preferred
stock and warrants ......... -- 1,262,029 -- 3,162,472
Net loss .................. -- -- -- --
--------- ------------- ----------- -------------
Balance April 30, 1997 516,620 3,638,481 1,294,579 9,117,535
Issuance of Class A
Common Stock ............... -- -- -- --
Accretion of preferred
stock and issuance
costs ..................... -- 315,507 -- 790,618
Net income .................. -- -- -- --
--------- ------------- ----------- -------------
Balance, July 31, 1997 . 516,620 3,953,988 1,294,579 9,908,153
--------- ------------- ----------- -------------
Pro forma adjustments
(unaudited) (see
Note 2(k)) ............... (516,620) (3,953,988) (1,294,579) (9,908,153)
--------- ------------- ----------- -------------
Pro Forma Balance,
July 31, 1997
(unaudited) ............... -- $ -- -- $ --
========= ============= =========== =============
Series C Series D
Mandatorily Convertible
Redeemable Redeemable
------------------------- --------------------------------
Number of Liquidation Number of Liquidation
Shares Value Shares Value
----------- ------------- --------------- ----------------
Balance, April 30, 1994 -- $ -- -- $ --
Issuance of Class A
Common Stock and
warrants .................. -- -- -- --
Accretion of put
warrants .................. -- -- -- --
Net income .................. -- -- -- --
-------- ----------- ----------- --------------
Balance April 30, 1995 -- -- -- --
Issuance of preferred
stock and other
capital transactions ...... 424,307 1,951,812 1,922,169 13,455,180
Issuance costs ............... -- -- -- (972,771)
Accretion of preferred
stock ..................... -- 65,060 -- 64,851
Net loss ..................... -- -- -- --
-------- ----------- ----------- --------------
Balance, April 30, 1996 424,307 2,016,872 1,922,169 12,547,260
Issuance of Class A
Common Stock
in various
acquisitions ............... -- -- -- --
Accretion of preferred
stock and warrants ......... -- 204,274 -- 3,901,594
Net loss .................. -- -- -- --
-------- ----------- ----------- --------------
Balance April 30, 1997 424,307 2,221,146 1,922,169 16,448,854
Issuance of Class A
Common Stock ............... -- -- -- --
Accretion of preferred
stock and issuance
costs ..................... -- 51,068 -- 957,712
Net income .................. -- -- -- --
-------- ----------- ----------- --------------
Balance, July 31, 1997 . 424,307 2,272,214 1,922,169 17,406,566
-------- ----------- ----------- --------------
Pro forma adjustments
(unaudited) (see
Note 2(k)) ............... -- 697,935 (1,922,169) (17,406,566)
-------- ----------- ----------- --------------
Pro Forma Balance,
July 31, 1997
(unaudited) ............... 424,307 $2,970,149 -- $ --
======== =========== =========== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK, REDEEMABLE PUT
WARRANTS AND STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)
Stockholders' Equity (Deficit)
-----------------------------------------------
Class A Class B
Common Stock Common Stock
----------------------- -----------------------
Redeemable Number $0.01 Par Number $0.01 Par
Put Warrants of Shares Value of Shares Value
--------------- ----------- ----------- ----------- -----------
Balance, April 30, 1994 $ 61,662 1,355,000 $13,550 1,000,000 $10,000
Issuance of Class A
Common Stock and
warrants ............... 700,000 744,191 7,442 -- --
Accretion of put
warrants ............... 2,380,296 -- -- -- --
Net income ............... -- -- -- -- --
------------- ---------- -------- ---------- --------
Balance, April 30, 1995 3,141,958 2,099,191 20,992 1,000,000 10,000
Issuance of preferred
stock and other
capital transactions . (2,741,958) -- -- -- --
Issuance costs ......... -- -- -- -- --
Accretion of preferred
stock .................. -- -- -- -- --
Net loss ............... -- -- -- -- --
------------- ---------- -------- ---------- --------
Balance, April 30, 1996 400,000 2,099,191 20,992 1,000,000 10,000
Issuance of Class A
Common Stock in
various acquisitions . -- 755,254 7,552 -- --
Accretion of preferred
stock and warrants . -- -- -- -- --
Net loss ............... -- -- -- -- --
------------- ---------- -------- ---------- --------
Balance, April 30, 1997 400,000 2,854,445 28,544 1,000,000 10,000
Issuance of Class A
Common Stock ............ -- 20,000 200 -- --
Accretion of preferred
stock and issuance
costs .................. -- -- -- -- --
Net income ............... -- -- -- -- --
------------- ---------- -------- ---------- --------
Balance, July 31, 1997 400,000 2,874,445 28,744 1,000,000 10,000
------------- ---------- -------- ---------- --------
Pro forma adjustments
(unaudited) (see
Note 2(k)) ............ 300,000 3,803,857 38,039 -- --
------------- ---------- -------- ---------- --------
Pro Forma Balance,
July 31, 1997
(unaudited) ............ $ 700,000 6,678,302 $66,783 1,000,000 $10,000
============= ========== ======== ========== ========
Retained Total
Additional Earnings Stockholders'
Paid-in (Accumulated Equity
Capital Deficit) (Deficit)
--------------- ----------------- ---------------
Balance, April 30, 1994 $ 21,400 $ 692,967 $ 737,917
Issuance of Class A
Common Stock and
warrants ............... 3,430,961 -- 3,438,403
Accretion of put
warrants ............... -- (2,380,296) (2,380,296)
Net income ............... -- 302,075 302,075
------------- ------------- -------------
Balance, April 30, 1995 3,452,361 (1,385,254) 2,098,099
Issuance of preferred
stock and other
capital transactions . (2,836,794) -- (2,836,794)
Issuance costs ......... -- -- --
Accretion of preferred
stock .................. -- (129,911) (129,911)
Net loss ............... -- (273,867) (273,867)
------------- ------------- -------------
Balance, April 30, 1996 615,567 (1,789,032) (1,142,473)
Issuance of Class A
Common Stock in
various acquisitions . 9,366,350 -- 9,373,902
Accretion of preferred
stock and warrants . -- (8,530,369) (8,530,369)
Net loss ............... -- (11,786) (11,786)
------------- ------------- -------------
Balance, April 30, 1997 9,981,917 (10,331,187) (310,726)
Issuance of Class A
Common Stock ............ 11,800 -- 12,000
Accretion of preferred
stock and issuance
costs .................. -- (2,114,905) (2,114,905)
Net income ............... -- 759,151 759,151
------------- ------------- -------------
Balance, July 31, 1997 9,993,717 (11,686,941) (1,654,480)
------------- ------------- -------------
Pro forma adjustments
(unaudited) (see
Note 2(k)) ............ 32,499,470 (997,935) 31,539,574
------------- ------------- -------------
Pro Forma Balance,
July 31, 1997
(unaudited) ............ $ 42,493,187 $ (12,684,876) $ 29,885,094
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
April 30,
--------------------------------------------------
1995 1996 1997
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income (loss) ................................. $ 302,075 $ (273,867) $ (11,786)
-------------- -------------- --------------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities--
Depreciation and amortization ..................... 4,511,494 7,642,939 13,053,209
(Gain) loss on sale of equipment .................. (61,429) (41,003) 313,039
Provision (benefit) for deferred income taxes ...... 186,017 568,585 138,913
Write-down of land under development ............... 240,079 -- --
Extraordinary item--loss on extinguishment
of debt .......................................... -- 326,308 --
Changes in assets and liabilities, net of effects
of acquisitions--
Accounts receivable--
Trade .......................................... (121,640) (1,615,995) (3,360,238)
Related parties ................................. 996,583 -- --
Other current assets .............................. (793,465) 312,991 (362,360)
Accounts payable--
Trade .......................................... (878,994) 146,702 5,275,654
Related parties ................................. (273,770) -- --
Accrued closure and postclosure costs ............... 272,194 732,242 227,963
Accrued and other liabilities ..................... 131,492 424,765 (548,403)
-------------- -------------- --------------
4,208,561 8,497,534 14,737,777
-------------- -------------- --------------
Net cash provided by operating
activities .................................... 4,510,636 8,223,667 14,725,991
-------------- -------------- --------------
Cash flows from investing activities:
Acquisitions, net of cash acquired .................. (8,289,000) (17,321,845) (34,824,629)
Additions to property and equipment ............... (3,414,593) (10,080,587) (14,926,135)
Proceeds from sale of equipment ..................... 193,228 65,939 165,643
Funds held by trustees for acquisitions and
other costs of acquisitions ..................... 1,473,874 -- --
Restricted funds--closure fund escrow ............... 1,203,784 (213,630) (625,473)
Other assets ....................................... (8,502) 65,277 (103,306)
-------------- -------------- --------------
Net cash used in investing activities ......... (8,841,209) (27,484,846) (50,313,900)
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock ............ -- -- --
Proceeds from issuance of preferred stock, net
of issuance costs ................................. -- 12,482,412 --
Payments to subordinated debtholders ............... -- (2,072,174) --
Deferred debt acquisition costs ..................... (513,083) (125,260) (388,607)
Payments on short-term debt, net .................. (1,000,721) -- --
Proceeds from long-term borrowings .................. 22,279,462 23,054,334 43,258,000
Principal payments on long-term debt ............... (14,999,195) (13,836,068) (5,752,471)
Principal payments on capital lease obligations (1,163,355) (481,348) (589,058)
Proceeds from issuance of warrants .................. 14,025 -- --
-------------- -------------- --------------
Net cash provided by financing
activities .................................... 4,617,133 19,021,896 36,527,864
-------------- -------------- --------------
Net increase (decrease) in cash and cash
equivalents .......................................... 286,560 (239,283) 939,955
Cash and cash equivalents, beginning of year ......... 427,310 713,870 474,587
-------------- -------------- --------------
Cash and cash equivalents, end of year ............... $ 713,870 $ 474,587 $ 1,414,542
============== ============== ==============
Supplemental disclosures of cash flow
information:
Cash paid during the year for--
Interest .......................................... $ 1,788,468 $ 2,255,260 $ 3,865,056
============== ============== ==============
Income taxes .................................... $ 217,159 $ 117,150 $ 598,190
============== ============== ==============
Supplemental disclosures of noncash investing and
financing activities:
During fiscal 1996, the Company converted
certain subordinated debt into redeemable
preferred stock (see Note 7).
Summary of entities acquired--
Fair value of assets acquired ..................... $ 25,668,000 $ 22,344,722 $ 65,072,296
Fair value of the issuance of the Company's
stock and warrants .............................. (3,821,000) -- (9,373,904)
Cash paid ....................................... (8,289,000) (17,321,845) (34,824,629)
-------------- -------------- --------------
Liabilities assumed and notes payable
to sellers .................................... $ 13,558,000 $ 5,022,877 $ 20,873,763
============== ============== ==============
Three Months Ended July 31,
-------------------------------
1996 1997
--------------- ---------------
(Unaudited)
Cash flows from operating activities:
Net income (loss) ................................. $ 28,004 $ 759,151
------------- -------------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities--
Depreciation and amortization ..................... 2,974,781 3,851,585
(Gain) loss on sale of equipment .................. (12,621) (5,655)
Provision (benefit) for deferred income taxes ...... -- --
Write-down of land under development ............... -- --
Extraordinary item--loss on extinguishment
of debt .......................................... -- --
Changes in assets and liabilities, net of effects
of acquisitions--
Accounts receivable--
Trade .......................................... (1,813,892) (1,875,926)
Related parties ................................. -- --
Other current assets .............................. 340,069 552,339
Accounts payable--
Trade .......................................... 1,540,652 1,226,875
Related parties ................................. -- --
Accrued closure and postclosure costs ............... (384,150) (618,034)
Accrued and other liabilities ..................... 297,340 (811,663)
------------- -------------
2,942,179 2,319,521
------------- -------------
Net cash provided by operating
activities .................................... 2,970,183 3,078,672
------------- -------------
Cash flows from investing activities:
Acquisitions, net of cash acquired .................. (5,345,726) (4,707,925)
Additions to property and equipment ............... (2,805,699) (4,578,903)
Proceeds from sale of equipment ..................... 82,000 22,966
Funds held by trustees for acquisitions and
other costs of acquisitions ..................... -- --
Restricted funds--closure fund escrow ............... (149,003) 299,931
Other assets ....................................... 192,708 (501,402)
------------- -------------
Net cash used in investing activities ......... (8,025,720) (9,465,333)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock ............ -- 12,000
Proceeds from issuance of preferred stock, net
of issuance costs ................................. -- --
Payments to subordinated debtholders ............... -- --
Deferred debt acquisition costs ..................... -- (94,342)
Payments on short-term debt, net .................. -- --
Proceeds from long-term borrowings .................. 6,382,000 8,620,000
Principal payments on long-term debt ............... (1,371,021) (1,512,234)
Principal payments on capital lease obligations (85,631) (97,806)
Proceeds from issuance of warrants .................. -- --
------------- -------------
Net cash provided by financing
activities .................................... 4,925,348 6,927,618
------------- -------------
Net increase (decrease) in cash and cash
equivalents .......................................... (130,189) 540,957
Cash and cash equivalents, beginning of year ......... 474,587 1,414,542
------------- -------------
Cash and cash equivalents, end of year ............... $ 344,398 $ 1,955,499
============= =============
Supplemental disclosures of cash flow
information:
Cash paid during the year for--
Interest .......................................... $ 496,108 $ 2,012,691
============= =============
Income taxes .................................... $ -- $ 20,000
============= =============
Supplemental disclosures of noncash investing and
financing activities:
During fiscal 1996, the Company converted
certain subordinated debt into redeemable
preferred stock (see Note 7).
Summary of entities acquired--
Fair value of assets acquired ..................... $ 19,236,764 $ 6,324,678
Fair value of the issuance of the Company's
stock and warrants .............................. -- --
Cash paid ....................................... (5,345,726) (4,707,925)
------------- -------------
Liabilities assumed and notes payable
to sellers .................................... $ 13,891,038 $ 1,616,753
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS
Casella Waste Systems, Inc. is a regional, integrated, non-hazardous solid
waste services company that provides collection, transfer, disposal and
recycling services in Vermont, New Hampshire, Maine, upstate New York and
northern Pennsylvania.
The consolidated financial statements of the Company include the accounts
of Casella Waste Systems, Inc. and its wholly owned subsidiaries: Casella Waste
Management, Inc., New England Waste Services, Inc., New England Waste Services
of Vermont, Inc., Bristol Waste Management, Inc., Sunderland Waste Management,
Inc., Newbury Waste Management, Inc., North Country Environmental Services,
Inc., Sawyer Environmental Recovery Facilities, Inc., Sawyer Environmental
Services, Casella T.I.R.E.S., Inc., New England Waste Services of N.Y., Inc.,
Casella Waste Management of N.Y., Inc. and Casella Waste Management of
Pennsylvania, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes and the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
(c) Revenue Recognition
The Company recognizes revenues as the services are provided. Certain
customers are billed in advance and, accordingly, recognition of the related
revenues is deferred until the services are provided.
(d) Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, trade receivables, investments in closure trust funds, trade
payables and debt instruments. The book values of cash and cash equivalents,
trade receivables, investments in closure trust funds and trade payables
approximate their respective fair values. The Company's debt instruments that
are outstanding as of July 31, 1997 have carrying values that approximate their
respective fair values. See Note 4 for the terms and carrying values of the
Company's various debt instruments.
(e) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
maturities of three months or less to be cash equivalents.
(f) Closure Fund Escrow
Restricted funds held in trust consist of amounts on deposit with various
banks that support the Company's financial assurance obligations for its
facilities' closure and postclosure costs.
F-10
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(g) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. The Company provides for depreciation using the straight-line
method by charges to operations in amounts that allocate the cost of the assets
over their estimated useful lives as follows:
Estimated
Useful Life
Asset Classification ------------
Buildings and improvements ...... 20-30 years
Machinery and equipment ......... 2-10 years
Rolling stock .................. 1-10 years
Containers ..................... 2-12 years
The cost of maintenance and repairs is charged to operations as incurred.
Depreciation expense for the years ended April 30, 1995, 1996 and 1997 and the
three months ended July 31, 1997 was $1,628,405, $2,908,092, and $6,498,346 and
$2,038,893, respectively.
Capitalized landfill costs include expenditures for land and related
airspace, permitting costs and preparation costs. Landfill permitting and
preparation costs represent only direct costs related to these activities,
including legal, engineering and construction. Interest is capitalized on
landfill permitting and construction projects and other projects under
development while the assets are undergoing activities to ready them for their
intended use. The interest capitalization rate is based on the Company's
weighted average cost of indebtedness. No interest was capitalized for the
years ended April 30, 1995 and 1996. Interest capitalized for the year ended
April 30, 1997 and the three months ended July 31, 1997 was $182,418 and
$35,893, respectively. Management routinely reviews its investment in operating
landfills, transfer stations and other significant facilities to determine
whether the costs of these investments are realizable.
Landfill permitting and acquisition costs, excluding the estimated
residual value of land, are typically amortized as permitted airspace of the
landfill is consumed. For many of the Company's landfills, preparation costs,
which include the costs of construction associated with excavation, liners,
site berms and the installation of leak detection and leachate collection
systems, are also typically amortized as total permitted airspace of the
landfill is consumed. In determining the amortization rate for these landfills,
preparation costs include the total estimated costs to complete construction of
the landfills' permitted capacity. For other landfills, the landfill
preparation costs are generally less significant and are amortized as the
airspace for the particular benefited phase is consumed. Units-of-production
amortization rates are determined annually for each of the Company's operating
landfills. The rates are based on estimates provided by the Company's engineers
and accounting personnel and consider the information provided by aerial
surveys which are generally performed annually.
(h) Accrued Closure and Postclosure Costs
Accrued closure and postclosure costs include the current and noncurrent
portion of accruals associated with obligations for closure and postclosure of
the Company's operating and closed landfills. The Company, based on input from
its engineers and accounting personnel, estimates its future cost requirements
for closure and postclosure monitoring and maintenance for solid waste
landfills based on its interpretation of the technical standards of the U.S.
Environmental Protection Agency's Subtitle D regulations and the air emissions
standards under the Clean Air Act as they are being applied on a state-by-state
basis. Closure and postclosure monitoring and maintenance costs represent the
costs related to cash expenditures yet to be incurred when a landfill facility
ceases to accept waste and closes.
F-11
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accruals for closure and postclosure monitoring and maintenance
requirements in the U.S. consider final capping of the site, site inspection,
groundwater monitoring, leachate management, methane gas control and recovery,
and operation and maintenance costs to be incurred during the period after the
facility closes. Certain of these environmental costs, principally capping and
methane gas control costs, are also incurred during the operating life of the
site in accordance with the landfill operation requirements of Subtitle D and
the air emissions standards. Reviews of the future cost requirements for
closure and postclosure monitoring and maintenance for the Company's operating
landfills by the Company's engineers and accounting personnel are performed at
least annually and are the basis upon which the Company's estimates of these
future costs and the related accrual rates are revised. The Company provides
accruals for these estimated costs as the remaining permitted airspace of such
facilities is consumed.
The states in which the Company operates require a certain portion of
these accrued closure and postclosure obligations to be funded at any point in
time. Accordingly, the Company has placed $3,790,458, $4,396,715 and $4,565,988
at April 30, 1996 and 1997 and July 31, 1997, respectively, in restricted
investment accounts to fund these future obligations.
In addition, the Company has been required to post a surety bond or bank
letter of credit to secure its obligations to close its landfills in accordance
with environmental regulations. At July 31, 1997, the Company had provided
letters of credit totaling $2,698,606 to secure the Company's landfill closure
obligations, expiring between April 1998 and June 1998.
(i) Intangible Assets
Goodwill is the cost in excess of fair value of identifiable assets of
acquired businesses and is amortized on the straight-line method over periods
not exceeding 40 years. Other intangible assets include covenants not to
compete and customer lists and are amortized on the straight-line method over
their estimated useful lives, typically no more than 10 years. The Company
continually evaluates whether events and circumstances have occurred subsequent
to an acquisition that indicate the remaining estimated useful life or carrying
value of these intangible assets may warrant revision. When factors indicate
that these assets should be evaluated for possible impairment, the Company uses
an estimate of the related business segment's undiscounted cash flows over the
remaining life of the asset in measuring recoverability.
Deferred debt acquisition costs are capitalized and amortized over the
life of the related debt using the effective interest method.
Intangible assets at April 30, 1996 and 1997 and July 31, 1997 consist of
the following:
April 30,
-----------------------------
1996 1997 July 31, 1997
------------- ------------- --------------
Goodwill ....................................... $ 8,217,155 $41,793,613 $45,279,403
Covenants not to compete ........................ 4,843,826 5,783,139 6,839,379
Customer lists ................................. 459,570 431,201 430,195
Deferred debt acquisition costs and other ...... 412,702 698,777 793,120
------------ ------------ ------------
13,933,253 48,706,730 53,342,097
Less--accumulated amortization .................. 2,396,597 2,738,181 3,323,221
------------ ------------ ------------
$11,536,656 $45,968,549 $50,018,876
============ ============ ============
F-12
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Effective May 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. In accordance
with SFAS No. 121, the Company evaluates the recoverability of its carrying
value of the Company's long-lived assets and certain intangible assets based on
estimated undiscounted cash flows to be generated from each of such assets as
compared to the original estimates used in measuring the assets. To the extent
impairment is identified, the Company reduces the carrying value of such
impaired assets. The change did not have a material impact on the Company's
financial statements.
(j) Income Taxes
The Company records income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS No. 109, deferred income taxes are
recognized based on the expected future tax consequences of differences between
the financial statement basis and the tax basis of assets and liabilities,
calculated using enacted tax rates in effect for the year in which the
differences are expected to be reflected in the tax return.
(k) Unaudited Pro Forma and Unaudited Pro Forma As Adjusted Presentation
Under the terms of the Company's agreements with the holders of the Series
A and Series B Redeemable Preferred Stock with warrants exercisable for Class A
Common Stock, the preferred stock will automatically be redeemed and the
redemption price applied to the exercise of the warrants upon the closing of
the Company's proposed initial public offering. Under the terms of the
Company's agreements with the holders of the Series D Convertible Redeemable
Preferred Stock, the preferred stock will be converted automatically into
shares of Class A Common Stock upon the closing of the Company's proposed
initial public offering. The unaudited pro forma consolidated balance sheet,
unaudited pro forma consolidated statement of operations and unaudited pro
forma consolidated statement of redeemable preferred stock, redeemable put
warrants and stockholders' equity (deficit) reflect (i) these transactions of
the preferred stock and warrants; (ii) the accretion of the Series C
Mandatorily Redeemable Preferred Stock to its redemption value and the
accretion of the redeemable put warrants to their call value and (iii) the
issuance of 70,489 Shares of Class A Common Stock issuable to a director of the
Company at or after the closing of this Offering as additional purchase price
related to the acquisition by the Company of the business of which such
director was the sole stockholder.
The unaudited pro forma as adjusted statement of operations gives effect
to (i) the acquisitions completed during fiscal 1997; (ii) the acquisition of
H.C. Gobin, Inc.; and (iii) the application of the estimated net proceeds from
the Offering, after deducting the underwriting discount and estimated offering
expenses payable by the Company, as if each had occurred on May 1, 1996.
(l) Unaudited Pro Forma Net Loss per Share of Common Stock and Pro
Forma, As Adjusted, Net Income per Share of Common Stock
Pro forma net loss per share of common stock is computed based on the
weighted average number of common shares outstanding and gives effect to the
following adjustments. For purposes of this calculation, dilutive stock options
and warrants that are considered common stock equivalents are not included, as
the effect of their inclusion would be dilutive except that pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, common and
common equivalent shares issued during the
F-13
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
12-month period prior to the date of the initial filing of the Company's
Registration Statement have been included in the calculation, using the
treasury stock method, as if they were outstanding for all periods presented.
Fair market value for the purpose of this calculation was assumed to be $18.00,
which is the initial public offering price. Also, all outstanding shares of
Redeemable Preferred Stock, including the Redeemable Preferred Stock with
warrants, which will automatically convert into Class A Common Stock upon the
closing of the Company's initial public offering, are assumed to be converted
to Class A Common Stock at the time of issuance.
Pro forma, as adjusted, net income per share of common stock includes the
effect of dilutive stock options and warrants, which are considered common
stock equivalents, using the treasury stock method. Pro forma, as adjusted, net
income per share of common stock also assumes the elimination of preferred
stock accretion and interest expense relating to the assumed preferred stock
redemption and debt reduction with the proceeds from the Company's initial
public offering. Additionally, pro forma, as adjusted, net income per share of
common stock gives effect to the acquisitions completed in fiscal 1997 as if
the acquisitions had occurred on May 1, 1996. Pro forma, as adjusted, weighted
average shares outstanding includes the shares to be issued by the Company in
the initial public offering, which will be used to redeem the Series C
Mandatorily Redeemable Preferred Stock and reduce certain outstanding debt.
Historical net income (loss) per share data have not been presented, as
such information is not considered to be relevant or meaningful.
(m) New Accounting Pronouncements not yet Adopted
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings per Share. This statement establishes standards for
computing and presenting earnings per share (EPS) and applies to entities with
publicly held common stock or potential common stock. This statement simplifies
the standards for computing earnings per share previously found in Accounting
Principles Board (APB) Opinion No. 15, Earnings per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. This statement is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier application is not permitted. This statement
requires restatement of all prior-period EPS data presented. The adoption of
this statement will not have a material impact on the Company's financial
statements.
3. BUSINESS ACQUISITIONS
During fiscal 1995 and 1996, the Company completed 5 and 15 acquisitions,
respectively, including two landfills in 1995 and one landfill in 1996. During
fiscal 1997, the Company completed 24 acquisitions, including the 25-year
capital lease of a landfill. During the three months ended July 31, 1997, the
Company completed 8 acquisitions.
The operating results of these businesses are included in the consolidated
statements of operations from the dates of acquisition. All of the Company's
acquisitions were accounted for as purchases and/or capital leases and,
accordingly, the purchase prices have been allocated to the net assets acquired
based on fair values at the dates of acquisition with the residual amounts
allocated to goodwill. The purchase prices allocated to the net assets acquired
were as follows (rounded to thousands):
F-14
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. BUSINESS ACQUISITIONS (Continued)
Fiscal Year Ended April 30,
----------------------------------------------- Three Months
Ended
1995 1996 1997 July 31, 1997
--------------- --------------- --------------- --------------
Accounts receivable and prepaid
expenses ..................... $ 1,085,000 $ 2,947,000 $ 3,918,000 $ 323,000
Investments--restricted ...... 3,335,000 1,240,000 450,000 --
Landfills ..................... 13,477,000 3,495,000 8,013,000 --
Property and equipment ...... 3,735,000 7,425,000 16,878,000 1,462,000
Covenants not to compete and
customer lists ............... 1,034,000 2,060,000 2,212,000 1,056,000
Goodwill ..................... 3,002,000 5,178,000 33,602,000 3,484,000
Deferred taxes ............... (329,000) (806,000) (73,000) --
Debt and notes payable ...... (9,641,000) (3,656,000) (5,075,000) (1,040,000)
Other liabilities assumed ... (3,588,000) (561,000) (15,726,000) (577,000)
------------ ------------ ------------- ------------
Total consideration ......... $ 12,110,000 $ 17,322,000 $ 44,199,000 $ 4,708,000
============ ============ ============= ============
The following unaudited pro forma combined information (rounded to
thousands) shows the results of the Company's operations for the years ended
April 30, 1996 and 1997, as though each of the completed acquisitions had
occurred as of May 1, 1995, and for the three months ended July 31, 1997, as
though each of the completed acquisitions had occurred as of May 1, 1996,
exclusive of the effects of this Offering.
Fiscal Year Ended April 30,
---------------------------- Three Months
Ended
1996 1997 July 31, 1997
------------- -------------- --------------
Revenues ....................................... $79,348,000 $103,257,000 $27,712,000
Operating income .............................. 6,915,000 5,928,000 3,135,000
Net income (loss) .............................. (873,000) (1,515,000) 489,000
Pro forma income (loss) per share of common stock (0.18) (0.21) 0.04
Weighted average common stock and common
stock equivalent shares outstanding ......... 4,783,000 7,333,000 11,568,000
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, 1995 for the years ended April 30, 1996
and 1997 and May 1, 1996 for the three months ended July 31, 1997 or the
results that may occur in the future. 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 companies.
4. LONG-TERM DEBT
Long-term debt as of April 30, 1996 and 1997 and July 31, 1997 consists of
the following:
April 30,
---------------------------- July 31,
1996 1997 1997
------------ ------------- -------------
Advances on a bank acquisition line, which
provides for advances of up to $85,000,000, due
July 31, 2002. Interest on outstanding advances
accrues at the bank's base rate (8.5% at July 31,
1997), payable monthly in arrears. The debt is
collateralized by all assets of the Company,
whether now owned or hereafter acquired ...... $9,200,686 $52,358,686 $60,978,686
F-15
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. LONG-TERM DEBT (Continued)
April 30,
----------------------------- July 31,
1996 1997 1997
------------- ------------- ------------
Term note payable to a bank, secured by all assets
of the Company (whether now owned or
hereafter acquired), bearing interest at the bank's
base rate plus .25% per annum, due in quarterly
installments of $302,083 (plus accrued interest)
through July 31, 2002 ........................... 9,166,667 6,666,667 6,041,667
Term note payable to a bank, secured by all assets
of the Company (whether now owned or
hereafter acquired), bearing interest at the bank's
base rate plus .25% per annum, due in annual
installments of $250,000 (plus accrued interest)
from July 31, 1999 to July 31, 2002 and quarterly
installments of $196,429 (plus accrued interest)
through July 31, 2004 .............................. 3,535,714 2,764,286 2,571,429
Notes payable in connection with businesses
acquired, bearing interest at rates of 7% to 10%,
due in monthly installments ranging from $939 to
$11,152, expiring November 1997 through
August 2006 ....................................... 2,628,719 6,507,460 7,135,891
Payments due to Clinton County, discounted at
4.75%, due in quarterly installments of $375,046
through March 2003 .............................. -- 7,796,216 7,513,408
------------ ------------ ------------
24,531,786 76,093,315 84,241,081
Less--current portion .............................. 4,799,134 5,584,415 3,857,534
------------ ------------ ------------
$19,732,652 $70,508,900 $80,383,547
============ ============ ============
On March 12, 1997, the Company entered into a three-year interest rate
swap agreement (the Swap Agreement) with a bank. The purpose was to effectively
convert a portion of the Company's interest rate exposure on advances under its
acquisition line from a floating rate to a fixed rate until the expiration of
the Swap Agreement. The Swap Agreement effectively fixes the Company's interest
rate on the notional amount of $35,000,000 to 6.2% per annum. Net monthly
payments or monthly receipts under the Swap Agreement are recorded as
adjustments to interest expense. In the event of nonperformance by the
counterparty, the Company would be exposed to interest rate risk if the
variable interest rate received were to exceed the fixed rate paid by the
Company under the terms of the Swap Agreement.
The acquisition line and term loans contain certain covenants that, among
other things, restrict dividends or stock repurchases, limit capital
expenditures and annual operating lease payments, and set minimum fixed charge,
interest coverage and leverage ratios and minimum consolidated adjusted net
worth requirements. As of July 31, 1997, the Company was in compliance with all
covenants.
F-16
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. LONG-TERM DEBT (Continued)
As of July 31, 1997, debt matures as follows:
Amount
------------
Year Ending July 31,
1998 ............ $ 3,857,534
1999 ............ 4,095,404
2000 ............ 4,000,779
2001 ............ 3,997,625
2002 ............ 64,578,902
Thereafter ...... 3,710,837
------------
$84,241,081
============
5. INCOME TAXES
The provision (benefit) for income taxes as of April 30, 1995, 1996 and
1997 and July 31, 1997 consists of the following:
April 30,
---------------------------------------- July 31,
1995 1996 1997 1997
---------- -------------- ---------- ---------
Federal--
Current ...... $ 9,000 $ (329,072) $305,937 $520,415
Deferred ...... 149,017 457,560 135,761 --
--------- ---------- --------- ---------
158,017 128,488 441,698 520,415
--------- ---------- --------- ---------
State--
Current ...... 25,000 (96,086) 7,102 122,451
Deferred ...... 37,000 111,025 3,152 --
--------- ---------- --------- ---------
62,000 14,939 10,254 122,451
--------- ---------- --------- ---------
Total ...... $220,017 $ 143,427 $451,952 $642,866
========= ========== ========= =========
The differences in the provisions for income taxes and the amounts
determined by applying the Federal statutory rate of 34% to income before
provision for income taxes and extraordinary loss for the years ended April 30,
1995, 1996 and 1997 and the three months ended July 31, 1997 are as follows:
Fiscal Year Ended April 30,
------------------------------------ Three Months
Ended
1995 1996 1997 July 31, 1997
---------- ---------- ---------- --------------
Tax at statutory rate ............ $177,511 $ 66,595 $149,656 $476,686
State income taxes, net of federal
benefit ........................ 28,454 10,675 23,989 85,379
Meals and entertainment
disallowance .................. 5,169 10,777 18,552 4,973
Nondeductible goodwill ......... 13,428 20,386 133,736 34,983
Other, net (mainly imputed interest
income for
tax purposes) .................. (4,545) 34,994 126,019 40,845
-------- --------- --------- ---------
$220,017 $143,427 $451,952 $642,866
======== ========= ========= =========
Deferred income taxes reflect the impact of temporary differences between
the amounts of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for income tax purposes.
F-17
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. INCOME TAXES (Continued)
Deferred tax assets and liabilities consist of the following at April 30,
1996 and 1997 and July 31, 1997:
April 30,
--------------------------------- July 31,
1996 1997 1997
--------------- --------------- ---------------
Deferred tax assets--
Allowance for doubtful accounts .................. $ 129,800 $ 176,961 $ 176,961
Treatment of lease obligations ..................... 65,403 64,558 64,558
Accrued expenses ................................. 158,603 343,952 343,952
Net operating loss carryforwards .................. 569,338 574,279 574,279
Alternative minimum tax credit carryforwards ...... -- 305,937 305,937
Other tax carryforwards ........................... 117,560 184,969 184,969
Amortization of intangibles ........................ 24,009 34,634 34,634
Other ............................................. 123,048 91,518 91,518
Deferred tax liabilities--
Accelerated depreciation of property and
equipment .......................................... (1,704,894) (2,244,797) (2,244,797)
Other ............................................. (423,184) (587,962) (587,962)
------------ ------------ ------------
Net deferred tax liability ..................... $ (940,317) $ (1,055,951) $ (1,055,951)
============ ============ ============
At April 30, 1997, the Company has net operating loss carryforwards and
other tax carryforwards for income tax purposes of approximately $1,436,000 and
$462,000, respectively, that expire principally through 2009. At April 30,
1997, the Company also has $305,937 of alternative minimum tax credit
carryforwards available indefinitely to reduce federal income taxes.
6. COMMITMENTS AND CONTINGENCIES
(a) Leases
The following is a schedule of future minimum lease payments, together
with the present value of the net minimum lease payments under capital leases,
as of July 31, 1997.
Operating Capital
Leases Leases
------------ -----------
Year Ended July 31,
1998 ......................................................... $ 511,977 $ 566,880
1999 ......................................................... 427,608 426,590
2000 ......................................................... 254,012 363,600
2001 ......................................................... 120,039 291,600
2002 ......................................................... 68,151 213,600
Thereafter ................................................... 53,113 160,200
----------- -----------
Total minimum lease payments .............................. $1,434,900 2,022,470
===========
Less--amount representing interest ........................... 355,389
-----------
1,667,081
Current maturities of capital lease obligations ............... 437,475
-----------
Present value of long-term capital lease obligations ...... $1,229,606
===========
F-18
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. COMMITMENTS AND CONTINGENCIES (Continued)
The Company leases real estate, containers and hauling vehicles under
leases that qualify for treatment as capital leases. The assets related to
these leases have been capitalized and are included in property and equipment
at April 30, 1996 and 1997 and July 31, 1997.
The Company leases operating facilities and equipment under operating
leases with monthly payments ranging from $119 to $3,903.
Total rent expense under operating leases charged to operations was
$202,931, $502,122, $933,294 and $250,612, for each of the three years ended
April 30, 1995, 1996 and 1997 and for the three months ended July 31, 1997,
respectively.
(b) Closure of a Municipal Unlined Landfill
In connection with the capital lease of Clinton County's New York Solid
Waste System Facilities, the Company has agreed that upon exhaustion of the
airspace of an unlined municipal landfill (which is adjacent to the Subtitle D
Clinton County landfill being operated by the Company), it will pay for the
closure of the landfill in accordance with the regulations of the New York
State Department of Environmental Conservation. The Company has initiated
closure and capping activities at this landfill, which it expects to complete
by September 1997. The total cost to close the unlined landfill is expected to
be approximately $3,350,000. The Company accrued for the costs relating to the
closure of the unlined landfill in purchase accounting. As of July 31, 1997,
$1,687,362 is classified as a current liability and included in accrued closure
and postclosure costs in the accompanying consolidated balance sheet.
(c) Legal Proceedings
In 1997, the Company was a defendant in a lawsuit regarding certain assets
of the Company. The suit was settled for $450,000, and the Company paid an
aggregate of $200,000 representing the legal fees of all defendants. The
settlement was accrued for and included in other accrued expenses in the
accompanying consolidated balance sheet at April 30, 1997.
The Company received a notice of claim in September 1997 from an
individual seeking compensation for services provided in previous years.
Although the Company intends to vigorously contest the amount of the total
compensation sought by this individual, preliminary discussions have taken
place to settle this claim and avoid future litigation. The Company has
recorded a provision in the period ended July 31, 1997 related to potential
settlement costs.
(d) Environmental Liability
The Company is subject to liability for any environmental damage,
including personal injury and property damage, that its solid waste 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 may have a material adverse
impact.
F-19
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. COMMITMENTS AND CONTINGENCIES (Continued)
(e) Other
In connection with an acquisition, the Company entered into an agreement
to pay 10% of gross revenues, as defined in the agreement, from the operation
of a landfill to the former owners until January 1999, subject to a cumulative
minimum of $1,592,000 and a cumulative maximum of $6,028,000. The Company has
recorded the present value of the guaranteed minimum as a cost of the
acquisition in the accompanying consolidated balance sheets. On January 25,
1999, any cumulative amounts not paid up to the maximum of $6,028,000 are due
and payable, subject to the successful permitting of an additional 1,000,000
tons of landfill capacity. The amount due is reduced pro rata for any capacity
below 1,000,000 tons. This additional obligation will be recognized as a cost
of the additional capacity, when and if the Company receives a permit for the
additional capacity.
7. REDEEMABLE PREFERRED STOCK, REDEEMABLE PUT WARRANTS AND
STOCKHOLDERS' EQUITY (DEFICIT)
(a) Preferred Stock
On December 22, 1995, the Company sold 1,922,169 shares of Series D
Convertible Redeemable Preferred Stock, raising proceeds of $12,482,412, net of
$972,771 in issuance costs. In addition, the Company extinguished certain
subordinated debt through proceeds raised in this Series D Preferred Stock
transaction, and by issuing certain subordinated debt holders 516,620 shares of
the Company's Series A Redeemable Preferred Stock, 1,294,579 shares of the
Company's Series B Redeemable Preferred Stock and 424,307 shares of the
Company's Series C Mandatorily Redeemable Preferred Stock. The Company has
recorded a charge of $2,963,317 based on the difference between the fair market
value of consideration (preferred stock and cash) issued to the subordinated
debt holders and the carrying value of the subordinated debt extinguished. The
charge, net of tax, was allocated to earnings as an extraordinary charge
($126,523) and equity ($2,836,794) based on the relative fair value of the debt
and warrants, respectively. The Company also wrote off the unamortized issuance
costs associated with certain subordinated debt. This write-off resulted in an
extraordinary charge, net of tax, of $199,785. The total extraordinary loss
from the extinguishment of debt amounted to $326,308 (net of $168,098 income
tax benefit).
Series A and B Redeemable Preferred Stock with Warrants Exercisable for Class A
Common Stock
The holders of the Series A and Series B Redeemable Preferred Stock with
warrants exercisable for Class A Common Stock shall have the right to require
the Company to purchase their shares together with the warrants after December
31, 2000 if a liquidity event, as defined, has not occurred prior to that date.
The redemption price payable by the Company shall be the higher of $1.50 per
share of Series A Redeemable Preferred Stock and $2.00 per share of Series B
Redeemable Preferred Stock, or the underlying fair market value of the
Company's Class A Common Stock ($16.00 at July 31, 1997). The difference
between the carrying value and the redemption value of the Series A and Series
B Redeemable Preferred Stock with warrants exercisable for Class A Common Stock
is being accreted using the effective interest method through the earliest
redemption date.
F-20
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. REDEEMABLE PREFERRED STOCK, REDEEMABLE PUT WARRANTS AND
STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
Series C Mandatorily Redeemable Preferred Stock
If a liquidity event, as defined, has not occurred on or prior to December
31, 2000, the Series C Mandatorily Redeemable Preferred Stock becomes
mandatorily redeemable by the Company. The redemption price shall be $7.00 per
share. The difference between the carrying value and the redemption value of
the Series C Mandatorily Redeemable Preferred Stock is being accreted using the
effective interest method through the earliest redemption date.
Series D Convertible Redeemable Preferred Stock
On or after January 1, 2001, each of the holders of Series D Convertible
Redeemable Preferred Stock shall have the option to tender all or any portion
of such shares held to the Company. The redemption price for each share shall
be the greater of $7.00 or the underlying fair market value of the Company's
Class A Common Stock ($16.00 at July 31, 1997). The difference between the
carrying value and the redemption value of the Series D Convertible Redeemable
Preferred Stock is being accreted using the effective interest method through
the earliest redemption date.
Liquidation Preference
Preferred stockholders have a preference in liquidation over other
stockholders equal to $1.50 per share of Series A Preferred Stock, $2.00 per
share of Series B Preferred Stock, $7.00 per share of Series C and D Preferred
Stock, plus any accrued and unpaid dividends, declared and unpaid. The
aggregate preference in liquidation was $19,789,420 at July 31, 1997.
Conversion
Each share of Series A Preferred Stock and Series B Preferred Stock
through the exercise of warrants and redemption of preferred stock in tandem
and Series D Preferred Stock and Class B Common Stock is convertible into one
share of the Company's Class A Common Stock. Conversion is at the option of the
holder, but becomes automatic for Series A, Series B and Series D Preferred
Stock immediately prior to the closing of a qualified public offering, as
defined.
Voting
The holders of the Class A Common Stock, Series A Preferred Stock, Series
B Preferred Stock and Series D Preferred Stock are entitled to one vote for
each share held. The holders of the Class B Common Stock are entitled to 10
votes for each share of Class B Common Stock held. The Series C Preferred Stock
is nonvoting.
(b) Stock Warrants
At July 31, 1997, the Company had outstanding warrants to purchase 356,108
shares of the Company's Class A Common Stock at exercise prices between $0.01
and $7.25 per share, the then fair market value of the underlying common stock.
The warrants become exercisable upon vesting and notification and expire
between July 1998 and October 2003.
(c) Put Warrants
In connection with an acquisition in April 1995, the Company issued
100,000 warrants to purchase one share each of Class A Common Stock exercisable
at $6.00 per share. These warrants are putable to the Company at $4.00 per
share or callable by the Company at $7.00 per share beginning in April 1997.
These warrants are stated at their put price per share in the accompanying
consolidated balance sheets.
F-21
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. REDEEMABLE PREFERRED STOCK, REDEEMABLE PUT WARRANTS AND
STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
d) Stock Option Plans
During 1993, the Company adopted an incentive stock option plan for
officers and other key employees. The 1993 Incentive Stock Option Plan (the
1993 Option Plan) provides for the issuance of a maximum of 300,000 shares of
Class A Common Stock. A committee of not fewer than three directors of the
Company (the Option Committee), none of whom is an officer or other salaried
employee of the Company who shall participate in the Option Plans, has the
authority to select the optionees and determine the terms of the options
granted. As of July 31, 1997, options to purchase 300,000 shares of Class A
Common Stock at an average exercise price of $0.60 were outstanding under the
1993 Option Plan. However, no options have been exercised under the 1993 Option
Plan as of July 31, 1997.
During 1994, the Company adopted a nonstatutory stock option for officers
and other key employees. The 1994 Stock Option Plan (the 1994 Option Plan)
provides for the issuance of a maximum of 150,000 shares of Class A Common
Stock. The Board of Directors and/or the Option Committee has the authority to
select the optionees and determine the terms of the options granted. As of July
31, 1997, options to purchase 130,000 shares of Class A Common Stock at an
average exercise price of $3.19 were outstanding under the 1994 Option Plan.
20,000 options have been exercised under the 1994 Option Plan as of July 31,
1997.
In connection with the May 1994 Senior Note and Warrant Purchase Agreement
(the Purchase Agreement), the Company established a nonqualified stock option
pool for certain key employees. The purchase agreement established 338,000
stock options to purchase Class A Common Stock at $2.00 per share, the then
fair market value. The options vest on December 31, 2000, and are subject to
accelerated vesting upon an initial public offering or a liquidation event, as
defined, on or before July 1, 1998.
During 1996, the Company adopted a stock option plan for employees,
officers and directors of, and consultants and advisors to, the Company. The
1996 Stock Option Plan (the 1996 Option Plan) provides for the issuance of a
maximum of 418,135 shares of Class A Common Stock pursuant to the grant of
either incentive stock options or nonstatutory options. The Board of Directors
has the authority to select the optionees and determine the terms of the
options granted. As of July 31, 1997, options to purchase 418,135 shares of
Class A Common Stock at an average exercise price of $10.15 were outstanding
under the 1996 Option Plan. However, as of July 31, 1997, no options have been
exercised under the 1996 Option Plan.
On May 6, 1997, the Company amended the 1996 Option Plan to provide for
the issuance of an additional 500,000 shares of Class A Common Stock. The Board
of Directors has the authority to select the optionees and determine the terms
of the options granted. On May 6, 1997, options to purchase 191,500 shares of
Class A Common Stock at an exercise price of $16.00 were granted under the 1996
Option Plan.
F-22
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. REDEEMABLE PREFERRED STOCK, REDEEMABLE PUT WARRANTS AND
STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
Stock option activity for each of the three years ended April 30, 1995,
1996, 1997 and July 31, 1997 is as follows:
Weighted
Number Average
of Shares Exercise Price
----------- ---------------
Outstanding, April 30, 1994 145,000 $ 0.60
Granted ........................ 528,000 1.50
Terminated ..................... -- --
Exercised ........................ -- --
---------- -------
Outstanding, April 30, 1995 673,000 1.30
Granted ........................ 115,000 3.53
Terminated ..................... -- --
Exercised ........................ -- --
---------- -------
Outstanding, April 30, 1996 788,000 1.63
Granted ........................ 418,135 10.15
Terminated ..................... -- --
Exercised ........................ -- --
---------- -------
Outstanding, April 30, 1997 ...... 1,206,135 4.58
Granted ........................ 191,500 16.00
Terminated ..................... -- --
Exercised ........................ 20,000 0.60
---------- -------
Outstanding, July 31, 1997 ...... 1,377,635 $ 6.23
========== =======
Exercisable, July 31, 1997 ......... 604,592 $ 4.36
========== =======
Set forth is a summary of options outstanding and exercisable as of July
31, 1997:
Options Outstanding Options Exercisable
--------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Shares Life (Years) Price Options Price
- ------------------------ ------------- -------------- ---------- ------------- ---------
$ 0.60-$ 2.00... 693,000 5.14 $ 1.33 355,000 $ 0.70
4.61- 7.00 ...... 199,000 8.10 4.78 126,381 4.87
12.00- 16.00 ...... 485,635 9.33 13.81 123,211 14.37
------------------------ ---------- ---- ------- -------- -------
$ 0.60-$16.00... 1,377,635 7.05 $ 6.23 604,592 $ 4.36
======================== ========== ==== ======= ======== =======
During fiscal 1996, the FASB issued SFAS No. 123, Accounting for
Stock-Based Compensation, which defines a fair value based method of accounting
for stock-based employee compensation and encourages all entities to adopt that
method of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation costs for
those plans using the intrinsic method of accounting prescribed by APB Opinion
No. 25. Entities electing to remain with the accounting in APB Opinion No. 25
must make pro forma disclosures of net income and earnings per share as if the
fair value based method of accounting defined in SFAS No. 123 had been applied.
The Company has elected to account for its stock-based compensation plans
under APB Opinion No. 25. However, the Company has computed, for pro forma
disclosure purposes, the value of all options granted during the years ended
April 30, 1996 and 1997 and the three months ended July 31, 1997 using
F-23
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. REDEEMABLE PREFERRED STOCK, REDEEMABLE PUT WARRANTS AND
STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
the Black-Scholes option pricing model as prescribed by SFAS No. 123, using the
following weighted average assumptions for grants in the years ended April 30,
1996 and 1997 and the three months ended July 31, 1997:
April 30,
-----------------------
1996 1997 July 31, 1997
---------- ---------- --------------
Risk-free interest rate ...... 5.69% 6.45% 6.67%
Expected dividend yield ...... N/A N/A N/A
Expected life ............... 10 years 10 years 10 years
Expected volatility ......... N/A N/A N/A
The total value of options granted during the years ended April 30, 1996
and 1997 and the three months ended July 31, 1997 would be amortized on a pro
forma basis over the vesting period of the options. Options generally vest
equally over three years. Because the method of accounting prescribed by SFAS
No. 123 has not been applied to options granted prior to May 1, 1995, the
resulting pro forma compensation costs may not be representative of that to be
expected in future years. If the Company had accounted for these plans in
accordance with SFAS No. 123, the Company's net loss and net loss per share
would have decreased as reflected in the following pro forma amounts:
April 30,
------------------------------
1996 1997 July 31, 1997
-------------- ------------- --------------
Net income (loss)
As reported .............................. $ (273,867) $ (11,786) $759,151
Pro forma ................................. (309,390) (309,923) 425,024
Net income (loss) per share of common stock--
As reported .............................. (0.06) -- 0.09
Pro forma ................................. (0.06) (0.04) 0.05
The weighted-average grant-date fair value of options granted during the
years ended April 30, 1996 and 1997 and the three months ended July 31, 1997 is
$0.51, $1.04 and $2.60, respectively.
(e) Reserved Shares
At April 30, 1996 and 1997 and July 31, 1997, shares of Class A Common
Stock were reserved for the following reasons:
April 30,
-------------------------
1996 1997 July 31, 1997
----------- ----------- --------------
Exercise of stock warrants related to Series A and
Series B Preferred Stock .............................. 1,811,199 1,811,199 1,811,199
Exercise of Series D Convertible Preferred Stock ...... 1,922,169 1,922,169 1,922,169
Exercise of stock warrants/put warrants ............... 456,108 456,108 456,108
Exercise of management stock options .................. 788,000 1,206,135 1,377,635
---------- ---------- ----------
4,977,476 5,395,611 5,567,111
========== ========== ==========
8. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan that covers substantially all
employees with one-half or more years of service. Contributions to the plan are
made at the discretion of the Board of Directors. The Company made no
contributions for the years ended April 30, 1996 and 1997. The profit sharing
plan was terminated on June 30, 1997.
F-24
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. EMPLOYEE BENEFIT PLANS (Continued)
On May 1, 1996, the Company adopted the Casella Waste Systems, Inc. 401(k)
Plan and appointed the First National Bank of Boston as trustee to the plan.
The plan went into effect on July 1, 1996 and has a December 31 year end.
Pending board approval, the Company may contribute up to $500 per individual
per calendar year. Participants vest in employer contributions ratably over a
three-year period. Employer contributions for the year ended April 30, 1997 and
the three months ended July 31, 1997 amounted to $149,469 and $29,523,
respectively.
9. RELATED PARTY TRANSACTIONS
(a) Management Services Agreement
As part of the Series D Preferred Stock transaction described in Note
7(a), the Company entered into a Management Services Agreement with certain
shareholders of the Series A, Series B and Series C Preferred Stock. In
consideration for certain advisory services to the Company, as defined, a
management fee of approximately $22,300 per month is due. However, amounts due
under this agreement are not payable until a liquidity event, as defined,
occurs. As of July 31, 1997, the Company had accrued approximately $427,000
related to such management fee.
(b) Services
During 1996 and 1997, the Company retained the services of a related
party, a company wholly owned by two of the Company's stockholders, as a
contractor in closing the landfills owned by the Company. Total purchased
services charged to operations for each of the three years ended April 30,
1995, 1996 and 1997 and the three months ended July 31, 1997 were $339,138,
$1,291,435, $2,125,606 and $840,500, respectively, of which $0, $55,000,
$24,988 and $24,988 were outstanding and included in accounts payable at April
30, 1995, 1996 and 1997 and July 31, 1997, respectively. In 1997, the Company
entered into agreements with this company, totaling $4,065,000, to close the
unlined municipal landfill which is adjacent to the Subtitle D Clinton County
landfill (see Note 6) and to close a portion of another of the Company's lined
landfills.
(c) Leases and Land Purchase
The Company leases furniture and fixtures from a partnership in which two
of the Company's stockholders are the general partners. This operating lease
requires a monthly payment of $950 and expires in 1999.
On August 1, 1993, the Company entered into three leases for operating
facilities with the same partnership. The leases call for monthly payments
ranging from $3,200 to $9,000 and expire in April 2003. During 1997, one of the
leases was terminated early for $191,869. The remaining leases are classified
as capital leases in the accompanying consolidated balance sheets. Total
interest and amortization expense charged to operations for the years ended
April 30, 1995, 1996 and 1997 and the three months ended July 31, 1997 under
these agreements was $263,400, $252,000, $249,379 and $56,634, respectively.
On November 8, 1996, the Company purchased a certain plot of land from the
same related party for $122,000.
F-25
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. RELATED PARTY TRANSACTIONS (Continued)
(d) Postclosure Landfill
The Company has agreed to pay the cost of postclosure on a landfill owned
by certain principal stockholders. The Company paid the cost of closing this
landfill in 1992, and the postclosure maintenance obligations are expected to
last until 2012. In each of the three years ended April 30, 1995, 1996 and 1997
and the three months ended July 31, 1997, the Company paid $11,758, $14,502,
$9,605 and $0, respectively, pursuant to this agreement. The Company has
accrued $107,791 for costs associated with its postclosure obligations.
10. SUBSEQUENT EVENTS
Subsequent to July 31, 1997, the Company acquired substantially all of the
assets of one company. The acquisition has been accounted for using the
purchase method of accounting and, accordingly, the results of its operations
will be included in the Company's results of operations from its respective
acquisition date. Total consideration paid for this acquisition was
approximately $4,566,000.
F-26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Sawyer Companies:
We have audited the accompanying combined balance sheet of Sawyer
Companies as of December 31, 1995 and the related combined statement of income
and retained earnings and cash flows for the year ended December 31, 1995.
These financial statements are the responsibility of the Companies' management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Sawyer Companies
at December 31, 1995, and the combined results of their operations and their
cash flows for the year ended December 31, 1995, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 19, 1996
F-27
SAWYER COMPANIES
COMBINED BALANCE SHEET
December 31,
-------------
1995
-------------
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 395,649
Accounts receivable, net of allowance for doubtful accounts of $216,254 941,903
Inventories ......................................................... 85,399
Other current assets ................................................ 162,854
Note receivable ...................................................... 90,240
Deferred income taxes ................................................ 178,900
-----------
Total current assets ............................................. 1,854,945
-----------
Property, plant and equipment, at cost:
Land .................................................................. 132,978
Land improvements ................................................... 151,538
Buildings ............................................................ 830,019
Machinery and equipment ............................................. 7,190,939
Office furniture and equipment ....................................... 410,607
Other ............................................................... 45,961
-----------
8,762,042
Less--accumulated depreciation ....................................... 5,031,642
-----------
Net property, plant and equipment ................................. 3,730,400
-----------
Landfill, at cost:
Landfill and landfill development .................................... 6,770,768
Less--accumulated amortization ....................................... 4,621,857
-----------
2,148,911
-----------
Other assets:
Investment in land ................................................... 170,000
Landfill closure trust, excluding current portion ..................... 1,240,332
Other miscellaneous assets .......................................... 187,290
-----------
Total other assets ................................................ 1,597,622
-----------
Total assets ...................................................... $9,331,878
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Equipment revolving line of credit .................................... $1,337,186
Other notes payable ................................................... 65,726
Note payable to stockholder .......................................... 973,092
Current portion of long-term debt .................................... 251,443
Accounts payable ...................................................... 594,481
Accrued expenses ...................................................... 215,601
-----------
Total current liabilities .......................................... 3,437,529
-----------
Long-term debt, excluding current portion .............................. 1,815,037
Deferred income taxes ................................................... 440,700
Accrued closure and postclosure costs .................................... 1,802,005
Commitments and contingencies ..........................................
Stockholders' equity:
Common stock ......................................................... 38,800
Additional paid-in capital .......................................... 300,000
Retained earnings ................................................... 1,497,807
-----------
Total stockholders' equity ....................................... 1,836,607
-----------
Total liabilities and stockholders' equity ........................ $9,331,878
===========
The accompanying notes are an integral part of these combined financial
statements.
F-28
SAWYER COMPANIES
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
Fiscal Year Ended
December 31,
------------------
1995
------------------
Revenue .................................... $11,527,162
-----------
Costs and expenses:
Cost of operations ........................ 7,640,502
General and administrative expenses ...... 2,909,696
Depreciation and amortization ............ 1,146,967
-----------
Total costs and expenses ............... 11,697,165
-----------
Operating loss ........................ (170,003)
-----------
Other income (expense):
Interest income ........................... 63,895
Interest expense ........................ (476,937)
Loss on sale of assets .................. (29,880)
Other .................................... 5,722
-----------
Total other expense .................. (437,200)
-----------
Loss before income taxes ............... (607,203)
Provision for income taxes .................. 261,800
-----------
Net loss .............................. (869,003)
Retained earnings, beginning of year ......... 2,550,332
Stockholder distributions .................. (183,522)
-----------
Retained earnings, end of year ............... $ 1,497,807
===========
The accompanying notes are an integral part of these combined financial
statements.
F-29
SAWYER COMPANIES
COMBINED STATEMENT OF CASH FLOWS
Fiscal Year Ended
December 31,
------------------
1995
------------------
Cash flows from operating activities:
Net loss ..................................................................... $ (869,003)
Adjustments to reconcile net loss to net cash provided by operating activities--
Depreciation and amortization ................................................ 1,146,967
Loss on sale of assets ...................................................... 29,880
Deferred income taxes ...................................................... 261,800
Decrease (increase) in--
Accounts receivable ......................................................... 248,737
Inventories ............................................................... 17,544
Other current assets ...................................................... 51,654
Increase (decrease) in--
Accounts payable ............................................................ (667,748)
Accrued expenses ............................................................ 16,335
Deferred closure costs ...................................................... 433,634
------------
Net cash provided by operating activities ................................. 669,800
------------
Cash flows from investing activities:
Additions to property and equipment .......................................... (609,181)
Proceeds from sale of assets ................................................ 46,108
Net contributions to landfill closure trust ................................. (223,089)
Advances to stockholders ...................................................... --
Other, net .................................................................. (312,140)
------------
Net cash used by investing activities .................................... (1,098,302)
------------
Cash flows from financing activities:
Net proceeds from short-term borrowings ....................................... 2,627
Principal payments on long-term borrowings .................................... (250,454)
Stockholder distributions ................................................... (183,522)
------------
Net cash used by financing activities .................................... (431,349)
------------
Decrease in cash and cash equivalents .......................................... (859,851)
Cash and cash equivalents, beginning of year .................................... 1,255,500
------------
Cash and cash equivalents, end of year .......................................... $ 395,649
============
Supplemental disclosure of cash flow information:
Cash paid during the year for--
Interest ..................................................................... $ 477,000
============
Income tax .................................................................. $ --
============
The accompanying notes are an integral part of these combined financial
statements.
F-30
SAWYER COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
SES collects, transports, and recycles waste from industrial, commercial,
and residential customers in northern New England (primarily Maine).
Sawyer Environmental Recovery Facilities, Inc. (SERF) operates and
maintains commercial landfill facilities in Hampden, Maine. The secure landfill
facilities are currently licensed by the Maine Department of Environmental
Protection (MDEP) for the disposal of special wastes. Services provided include
disposal of incinerator and boiler ash, other non-hazardous special wastes, and
non-burnable waste from municipal waste-to-energy plants. In addition, SERF
provides the recycling markets and facilities for scrap tires, paper, and
construction/demolition debris.
TSI leased specialized waste industry machinery, equipment and vehicles to
its affiliated companies.
Principles of Combination
The combined financial statements include the following companies (herein
after referred to as the Companies), all of which are incorporated under the
laws of the State of Maine and owned solely by W. Tom Sawyer, Jr.:
Sawyer Environmental Services
Sawyer Environmental Recovery Facilities, Inc.
All significant intercompany accounts and transactions have been
eliminated in the combined financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with a
maturity of three months or less.
Receivables
Current receivables of $941,903 at December 31, 1995 are net of reserves
of $216,254. The estimated fair value of current receivables approximates their
recorded value.
Notes receivable of $90,240 at December 31, 1995, approximate fair value.
Fair Value of Financial Instruments
The Companies' financial instruments consist of cash, accounts receivable,
notes receivable, accounts payable, notes payable and long-term debt. The
carrying amount of the Companies' cash, accounts receivable, notes receivable,
accounts payable and notes payable approximates their fair value due to the
short-term nature of these instruments. The carrying value of long-term debt
also approximates the fair value.
Inventory
Inventory is stated at the lower of cost or market and consists primarily
of equipment parts, materials and supplies.
Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost, less
accumulated depreciation. Depreciation is provided for using the straight-line
method over the estimated useful lives of buildings (25 to 40 years), machinery
and equipment (5 to 15 years) and vehicles and equipment (5 to 15 years).
F-31
SAWYER COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Expenditures for major renewals and betterments are capitalized, and
expenditures for maintenance and repairs are charged to expense as incurred.
Landfills
Landfills include expenditures for land and related airspace, permitting
costs and preparation costs. Landfill permitting and development costs include
legal, engineering, construction and cell development costs.
Landfill costs are amortized on a per-cubic-yard basis as permitted
airspace of the landfill is filled.
Accrued Closure and Postclosure Costs
Accrued closure and postclosure costs include estimated costs associated
with obligations for closure and postclosure of the Companies' landfills, based
on interpretations of the U.S. Environmental Protection Agency (EPA) Subtitle D
regulations and on applicable MDEP regulations. Estimated closure and
postclosure costs are accrued on a per-cubic-yard basis as permitted air space
of the landfill is filled.
SERF is required by the MDEP to fund a certain portion of these accrued
closure and postclosure costs as landfill airspace is utilized. Accordingly,
SERF has entered into trust agreements with a bank and makes monthly
contributions to restricted investment accounts to maintain minimum funding
requirements. Such amounts are included in the landfill closure trust account
on the accompanying combined financial statements.
Income Taxes
The Companies recorded income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
Under SFAS No. 109, deferred income taxes are recognized based on the expected
future tax consequences of differences between the financial statement bases
and the tax bases of assets and liabilities, calculated using enacted income
tax rates in effect for the year in which the differences are expected to be
reflected in the income tax return.
Prior to July 1995, the Companies had elected to be recognized as an S
Corporation under the appropriate Federal and state tax codes. In lieu of
corporate income taxes, the stockholders of an S Corporation are taxed on their
proportionate share of the Companies' taxable income. Accordingly, no corporate
income taxes were recorded in 1993 and 1994.
Revenue Recognition
Revenues are recorded in the combined financial statements when the
services are performed. SES and SERF provide most services on a contract basis.
Contract terms are between one and fifteen years and are billed on a monthly
basis.
Credit Risk
Credit is extended to customers without collateral.
The Companies maintain their cash in bank deposit accounts, which at times
may exceed federally insured limits. The Companies have not experienced any
losses in such accounts. The Companies believe they are not exposed to any
significant risk on cash and cash equivalents.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-32
SAWYER COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. INDEBTEDNESS
Long-term debt consists of the following:
Notes payable to Fleet Bank of Maine, variable monthly payments including
interest at prime plus 1.5%, (10% at December 31, 1995) through 1999 ... $2,053,153
Other notes payable ...................................................... 13,327
-----------
2,066,480
Less--expected current portion .......................................... 251,443
-----------
Long-term notes, excluding expected current portion ..................... $1,815,037
===========
Notes payable to stockholder and stockholder trust consist of the following:
Prime plus 2% note payable ............................................. $ 873,092
14% note payable, interest paid monthly ................................. 100,000
-----------
$ 973,092
===========
The equipment revolving line of credit with Fleet Bank of Maine is payable
in monthly installments of $35,000 ($50,000 if balance exceeds $1,200,000),
including interest at prime plus 0.75% (9.25% at December 31, 1995). The line
of credit is subject to renewal at July 1, 1996 and is recorded as a current
liability.
The notes to Fleet Bank of Maine are collateralized by substantially all
assets, waste disposal contracts and a negative stock pledge.
Aggregate future maturities of long-term debt outstanding as of December
31, 1995 for the next five years are expected to be as follows:
December 31,
- ----------------------
1996 ............ $ 251,000
1997 ............ 291,000
1998 ............ 335,000
1999 ............ 1,189,000
Thereafter ...... --
3. COMMON STOCK
Capital stock of the Companies is as follows:
Shares
--------------------------------------
Common Par
Stock Value Authorized Issued Outstanding
Company --------- ------- ------------ -------- ------------
Sawyer Environmental Services ...... $38,000 $ -- 10,000 331 331
Sawyer Environmental Recovery
Facilities, Inc. .................. 800 100 1,000 8 8
--------
$38,800
========
F-33
SAWYER COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
4. PROFIT SHARING PLAN
The Companies maintain a qualified profit sharing plan covering
substantially all of their employees. The plan is a defined contribution plan
with contributions determined annually at the discretion of Sawyer Companies'
management committee. Contributions of $200,000 were made in 1995.
5. SIGNIFICANT CUSTOMER
A significant portion of both disposal and transportation revenue is from
one significant customer, a municipality. The services are provided under
long-term contracts. Revenue from this customer was approximately 35% of net
sales in 1995.
6. INCOME TAXES
The provision for income taxes as of December 31, 1995 consists of the
following:
Federal--
Current ...... $ --
Deferred ...... 211,900
---------
211,900
---------
State--
Current ...... --
Deferred ...... 49,900
---------
49,900
---------
$261,800
=========
At December 31, 1995, the Companies' total deferred tax asset of $327,700
related to nondeductible reserves and net operating loss carryforwards while
the total deferred tax liability of $589,500 primarily related to differing
depreciation methods for tax and book purposes for property, plant and
equipment.
At December 31, 1995, the Companies had approximately $134,000 of net
operating loss carryforwards available to reduce taxable income through 2010.
The provision for income taxes differs from the amounts calculated by
applying the statutory federal income tax rate of 34% to income before taxes
due primarily to state income taxes and the effect of recognizing the
Companies' change in tax status in accordance with SFAS No. 109. The Companies'
net deferred tax liabilities that had to be reinstated on the balance sheet
when the S corporation status was terminated were charged to the deferred tax
provision in 1995.
7. COMMITMENTS AND CONTINGENCIES
The Companies lease certain office and maintenance space as well as
various operating motor vehicles. Future minimum lease payments under
noncancelable operating leases with terms in excess of one year are as follows:
Fiscal Year Ended April 30,
- -----------------------------
1995 .................. $ --
1996 .................. 372,000
1997 .................. 353,000
1998 .................. 353,000
1999 .................. 257,000
2000 ..................... 78,000
Thereafter ............... 22,000
-----------
$1,435,000
===========
F-34
SAWYER COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
7. COMMITMENTS AND CONTINGENCIES (Continued)
Rental expense under operating leases was $487,676 in 1995.
The Companies lease certain office space from the stockholder. Rental
expense under this lease was $27,456 for 1995.
The Companies carry a broad range of insurance coverage for protection of
their assets and operations from certain risks; however, consistent with other
entities in the industry, the Companies have elected not to obtain
environmental impairment liability insurance to cover possible environmental
damage. Instead, the Companies have funded multiple, irrevocable trusts in
concert with state and local officials, which would provide substantial funds
to respond to either sudden and accidental, or non-sudden occurrences
potentially impacting the environment.
Operation of the Companies' landfill requires certain regulatory permits
that need to be renewed from time to time. Management is confident that such
renewals will be obtained.
Effective November 27, 1993, the Companies joined the Construction
Services Group Trust, which includes a group of unrelated companies formed to
self-insure most of their workers' compensation costs. The group purchases
stop-loss insurance coverage for claims in excess of $400,000. The premiums
paid are based on prior years' rates and experiences.
8. SUBSEQUENT EVENT
On January 1, 1996, all of the issued and outstanding shares of capital
stock of the companies were acquired by Casella Waste Systems, Inc. (CWS) for
consideration of $2,202,000 in cash and warrants exercisable for 40,000 shares
of Casella Class A Common Stock at $7.00 per share. Additionally the agreement
also provides for additional consideration based on royalties from existing
customer disposal agreements and landfill expansion payments contingent on
additional permitted landfill capacity.
F-35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Vermont Waste and Recycling Management, Inc.:
We have audited the accompanying balance sheet of Vermont Waste and
Recycling Management, Inc. (an S corporation incorporated in the State of
Vermont) as of November 15, 1996, and the related statements of operations,
stockholders' equity and cash flows for the ten and one-half months then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Vermont Waste and Recycling
Management, Inc. as of November 15, 1996, and the results of their operations
and their cash flows for the ten and one-half months then ended, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
June 20, 1997
F-36
VERMONT WASTE AND RECYCLING MANAGEMENT, INC.
BALANCE SHEET
November 15,
1996
-------------
ASSETS
Current assets:
Cash ..................................................................... $ 29,771
Accounts receivable--trade, less allowance for doubtful accounts of $19,033 383,597
Prepaid expenses and other current assets ................................. 57,500
----------
Total current assets ................................................... 470,868
----------
Property, plant and equipment, at cost:
Land ..................................................................... 9,830
Buildings and improvements ................................................ 131,434
Machinery and equipment ................................................... 534,933
Vehicles .................................................................. 416,011
----------
1,092,208
Less--accumulated depreciation .......................................... (617,831)
----------
474,377
----------
Other assets:
Due from stockholders ................................................... 307,007
Goodwill, net of accumulated amortization of $3,243 ........................ 7,757
Customer lists, net of accumulated amortization of $133,936 ............... 287,367
Covenants not-to-compete, net of accumulated amortization of $318,943 ...... 51,056
----------
653,187
----------
$1,598,432
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ....................................... $ 704,161
Current portion of capital lease obligations .............................. 14,034
Accounts payable and accrued liabilities ................................. 253,942
Revolving line of credit ................................................ 488,000
----------
Total current liabilities ............................................. 1,460,137
----------
Capital lease obligations, less current maturities ........................... 17,038
----------
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock--
Authorized--5,000 shares, $1 par value
Issued and outstanding--200 shares ....................................... 200
Additional paid-in capital ................................................ 180,010
Accumulated deficit ...................................................... (58,953)
----------
Total stockholders' equity ............................................. 121,257
----------
$1,598,432
==========
The accompanying notes are an integral part of these financial statements.
F-37
VERMONT WASTE AND RECYCLING MANAGEMENT, INC.
STATEMENT OF OPERATIONS
Ten and One-Half
Months Ended
November 15, 1996
------------------
Revenues ................................. $2,254,271
Cost of sales ........................... 1,818,244
----------
Gross profit ........................ 436,027
General and administrative expense ...... 431,824
----------
Operating income .................. 4,203
Other (income) expense:
Interest expense ..................... 101,324
Interest income ..................... (16,904)
----------
Net loss ........................... $ (80,217)
==========
The accompanying notes are an integral part of these financial statements.
F-38
VERMONT WASTE AND RECYCLING MANAGEMENT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
Retained
Common Additional Earnings Total
Stock, Paid-in (Accumulated Stockholders'
$1 Par Capital Deficit) Equity
-------- ------------ -------------- --------------
Balance, December 31, 1995 ...... $200 $180,010 $ 21,264 $ 201,474
Net loss ..................... -- -- (80,217) (80,217)
----- --------- --------- ---------
Balance, November 15, 1996 ...... $200 $180,010 $ (58,953) $ 121,257
===== ========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-39
VERMONT WASTE AND RECYCLING MANAGEMENT, INC.
STATEMENT OF CASH FLOWS
Ten and One-Half
Months Ended
November 15, 1996
------------------
Cash flows from operating activities:
Net loss ..................................................................... $ (80,217)
Adjustments to reconcile net loss to net cash provided by operating activities--
Depreciation and amortization ................................................ 178,037
Changes in current assets and liabilities--
Accounts receivable ......................................................... (28,485)
Notes receivable--stockholders ............................................. (45,135)
Other assets ............................................................... (31,775)
Accounts payable ............................................................ 127,753
Accrued and other liabilities ............................................. (12,456)
---------
Net cash provided by operating activities ................................. 107,722
---------
Cash flows from investing activities:
Additions to property and equipment .......................................... (57,963)
---------
Net cash used in investing activities .................................... (57,963)
---------
Cash flows from financing activities:
Borrowings under line of credit ............................................. 48,000
Principal payments on long-term debt .......................................... (22,771)
Principal payments on capital lease obligations .............................. (46,614)
---------
Net cash used in financing activities .................................... (21,385)
---------
Net increase in cash ......................................................... 28,374
Cash, beginning of year ...................................................... 1,397
---------
Cash, end of year ............................................................ $ 29,771
=========
Supplemental disclosure of cash flow information:
Cash paid during the year for--
Interest ..................................................................... $ 95,717
=========
Income taxes ............................................................... $ 150
=========
Supplemental schedule of noncash operating and investing activities:
Vehicles acquired in exchange for forgiveness of debt ........................ $ 11,711
=========
The accompanying notes are an integral part of these financial statements.
F-40
VERMONT WASTE AND RECYCLING MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
1. OPERATIONS
Vermont Waste and Recycling Management, Inc. (the Company), an S
Corporation incorporated in the State of Vermont, is a waste hauling business
located in Williston, Vermont. On November 20, 1996, Casella Waste Systems,
Inc. and subsidiaries (CWS) acquired all of the assets and assumed all of the
liabilities of the Company. The purchase price of approximately $3,082,803
consisted of $1,450,248 in Casella stock (120,854 shares of Class A common
stock at a price of $12 per share) issued to the seller and $1,632,555 in
liabilities and closing costs paid/assumed at closing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes and the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
(b) Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated
depreciation. The Company provides for depreciation using the straight-line
method by charges to operations in amounts that allocate the cost of the assets
over their estimated useful lives as follows:
Estimated
Useful Life
Asset Classification ------------
Vehicles ........................ 5 years
Machinery and equipment ......... 3-12 years
Buildings and improvements ...... 40 years
The cost of maintenance and repairs is charged to operations as incurred.
(c) Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, trade receivables, trade payables and debt instruments. The book
values of cash and cash equivalents, trade receivables and trade payables
approximate their respective fair values. The Company's debt instruments
outstanding as of November 15, 1996 have carrying values that approximate their
respective fair values. See Note 3 for the terms and carrying values of the
Company's various debt instruments.
(d) Intangible Assets
The Company amortizes intangible assets on a straight-line basis over
their estimated useful lives, which generally do not exceed the following:
Goodwill ..................... 15 years
Covenants not to compete ...... 5-15 years
Customer lists ............... 10-15 years
(e) Revenue Recognition
The Company recognizes collection and recycling services revenues as the
services are provided.
F-41
VERMONT WASTE AND RECYCLING MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f) Income Taxes
The stockholders of the Company have elected to be treated as an S
Corporation for Federal income tax purposes, and as such, the stockholders of
the Company are responsible for reporting their proportionate share of the
Company's Federal taxable income to the Internal Revenue Service. Therefore,
the Company does not provide for Federal or state income taxes.
3. LONG-TERM DEBT
Long-term debt as of November 15, 1996 consists of the following:
Howard Bank--
Note payable in monthly installments of $6,496 including interest at 10.875%,
due 2009. Secured by accounts receivable, real estate and other property. The
U.S. Small Business Administration has guaranteed 75% of the note. The note
is also personally guaranteed by the stockholders .............................. $ 528,069
Note payable in monthly installments of $2,045 including interest at Wall Street
Journal prime plus 1.5%, adjusted quarterly, due 2009. This interest rate was
9.75% as of November 15, 1996. Secured by accounts receivable, real estate
and other property. The U.S. Small Business Administration has guaranteed
75% of the note. The note is also personally guaranteed by the stockholders ... 176,092
---------
704,161
Principal payments due within one year ....................................... (28,216)
---------
$ 675,945
=========
As of November 15, 1996, the Company has a $488,000 line-of-credit
agreement with The Howard Bank, expiring on November 15, 1996. The terms
provide for interest at 1% above the bank's prime rate (8.25% at November 15,
1996), adjusted daily. The line of credit is secured by accounts receivable,
real estate and other property. The line of credit is also guaranteed by an
affiliate company and personally guaranteed by the stockholders. As of November
15, 1996, the balance outstanding under this line was $488,000.
As of November 15 1996, debt matures as follows:
Amount
---------
Fiscal Year Ended November 15,
1997 ..................... $ 28,216
1998 ..................... 31,397
1999 ..................... 34,933
2000 ..................... 38,865
2001 ..................... 43,255
Thereafter ............... 527,495
---------
$704,161
=========
In connection with the acquisition of the Company on November 20, 1996,
all current and long-term debt was paid off. Therefore, all debt has been
classified as current in the accompanying financial statements.
F-42
VERMONT WASTE AND RECYCLING MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. COMMITMENTS AND CONTINGENCIES
(a) Leases
The following is a schedule of future minimum lease payments, together
with the present value of the net minimum lease payments under a capital lease,
as of November 15, 1996:
Operating Capital
Leases Lease
----------- --------
Fiscal Year Ended November 15,
1997 ...................................................... $ 7,586 $16,277
1998 ...................................................... 4,069 17,726
1999 ...................................................... 2,034 --
-------- --------
Total minimum lease payments .............................. $13,689 34,003
========
Less--Amount representing interest ........................... 2,931
--------
31,072
Current maturities of capital lease obligation ............... 14,034
--------
Present value of long-term capital lease obligation ...... $17,038
========
The Company leases containers under a lease that qualifies for treatment
as a capital lease. The lease is personally guaranteed by a stockholder. The
assets related to these leases (carrying value of $32,650 at November 15, 1996)
have been capitalized and are included in property and equipment at November
15, 1996.
The Company leases operating facilities and equipment under operating
leases with monthly payments ranging from $175 to $376.
Total rent expense under operating leases charged to operations was
$13,900, which includes related party leases (see Note 5), during the ten and
one-half months ended November 15, 1996.
5. RELATED PARTY TRANSACTIONS
The stockholders of the Company are also the majority stockholders of
Chittenden Recycling Services, Inc. (CRS), a Vermont corporation. The following
significant transactions occurred during the ten and one-half months ended
November 15, 1996:
[bullet] The management fee income of $106,903 represents expenses incurred
by the Company for management and other expenses allocable to CRS. The
amount represents labor and related costs as well as some administrative
expenses. The Company's remaining balance due from CRS at November 15,
1996 was $106,903. This amount is included in accounts receivable.
[bullet] During the ten and one-half months ended November 15, 1996, the
division purchased $62,462 of recyclable material from CRS. At November
15, 1996, the Company owed $30,684 to CRS. This amount is included in
accounts payable.
The Company's stockholders received advances from the Company. No notes
have been issued for these advances and there are no fixed repayment terms.
Interest income accrued on the stockholders' loans totaled $16,904 for 1996.
The advances totaled $307,007 at November 15, 1996. This amount is included in
notes receivable--stockholders' in the accompanying financial statements.
The Company leases an automobile from one of its stockholders. The lease
expires in June 1999 and the monthly payment is $339. The lease is treated as
an operating lease.
F-43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Superior Disposal Companies:
We have audited the accompanying combined balance sheets of the companies
identified in Note 1 (the Companies) as of December 31, 1995 and 1996, and the
related combined statements of operations, stockholder's equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Companies as of
December 31, 1995 and 1996, and the results of their operations and their cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
May 23, 1997
F-44
THE SUPERIOR DISPOSAL COMPANIES
COMBINED BALANCE SHEETS
December 31,
-------------------------------
1995 1996
------------- ---------------
ASSETS
Current assets:
Cash ............................................................... $ 766,280 $ 9,254
Accounts receivable--trade, less allowance for doubtful accounts of
approximately $408,000 and $213,000 in 1995 and 1996, respectively 1,878,228 1,696,172
Prepaid expenses and other current assets ........................ 127,433 207,011
Deferred tax asset ................................................ 13,095 --
----------- -----------
Total current assets .......................................... 2,785,036 1,912,437
----------- -----------
Property and equipment, at cost:
Land and improvements ............................................. 275,871 275,871
Buildings and improvements ....................................... 1,219,684 1,413,609
Furniture, fixtures and office equipment ........................... 109,164 212,838
Machinery and containers .......................................... 2,776,144 3,038,770
Vehicles ......................................................... 2,911,890 3,511,088
Equipment under capital leases .................................... 391,486 391,486
----------- -----------
7,684,239 8,843,662
Less--accumulated depreciation and amortization .................. 2,821,839 3,619,523
----------- -----------
4,862,400 5,224,139
----------- -----------
Other assets:
Intangible assets, net ............................................. 4,350,531 4,412,523
Miscellaneous deposits ............................................. -- 53,700
----------- -----------
4,350,531 4,466,223
----------- -----------
$11,997,967 $11,602,799
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term loans ................................................... $ -- $ 1,200,000
Accounts payable ................................................... 1,357,675 1,072,378
Accrued liabilities ................................................ 169,520 321,950
Current maturities of long-term debt .............................. 1,359,861 1,748,264
Current maturities of capital lease obligations .................. 61,916 68,352
Income taxes payable ............................................. 30,341 30,341
Deferred revenue ................................................... 411,268 368,809
----------- -----------
Total current liabilities ....................................... 3,390,581 4,810,094
----------- -----------
Long-term debt, less current maturities ........................... 7,221,518 6,377,697
----------- -----------
Capital lease obligations, less current maturities .................. 261,422 193,070
----------- -----------
Due to stockholder ................................................ -- 52,000
----------- -----------
Commitments and contingencies (Note 6)
Stockholder's equity:
Common stock--
Authorized--300 shares, no par value
Issued and outstanding--12 shares ................................. 2,500 2,500
Additional paid-in capital ....................................... 116,635 116,635
Retained earnings ................................................ 1,284,726 330,218
Less--treasury stock, at cost .................................... (279,415) (279,415)
----------- -----------
Total stockholder's equity .................................... 1,124,446 169,938
----------- -----------
$11,997,967 $11,602,799
=========== ===========
The accompanying notes are an integral part of these combined financial
statements.
F-45
THE SUPERIOR DISPOSAL COMPANIES
COMBINED STATEMENTS OF OPERATIONS
Year Ended December 31,
---------------------------
1995 1996
------------ ------------
Revenues ....................................... $9,240,996 $15,130,702
----------- ------------
Costs and expenses:
Cost of services .............................. 5,945,827 10,361,812
General and administrative .................. 1,124,517 2,429,623
Depreciation and amortization ............... 855,548 1,192,065
----------- ------------
7,925,892 13,983,500
----------- ------------
Operating income .............................. 1,315,104 1,147,202
----------- ------------
Other expenses:
Interest expense .............................. 437,633 818,950
Loss on sale of equipment ..................... -- 17,347
----------- ------------
437,633 836,297
----------- ------------
Income before provision for income taxes ...... 877,471 310,905
Provision for income taxes ..................... 29,346 32,724
----------- ------------
Net income .................................... $ 848,125 $ 278,181
=========== ============
The accompanying notes are an integral part of these combined financial
statements.
F-46
THE SUPERIOR DISPOSAL COMPANIES
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
Additional Total
Common Paid-in Retained Treasury Stockholder's
Stock Capital Earnings Stock Equity
-------- ------------ --------------- -------------- --------------
Balance, December 31, 1994 ......... $2,000 $116,635 $ 1,142,041 $ (279,415) $ 981,261
Net income ........................ -- -- 848,125 -- 848,125
Issuance of common stock ......... 500 -- -- -- 500
Distributions to stockholder ...... - -- (705,440) -- (705,440)
------- --------- ------------ ---------- ------------
Balance, December 31, 1995 ......... 2,500 116,635 1,284,726 (279,415) 1,124,446
Net income ........................ -- -- 278,181 -- 278,181
Distributions to stockholder ...... - -- (1,232,689) -- (1,232,689)
------- --------- ------------ ---------- ------------
Balance, December 31, 1996 ......... $2,500 $116,635 $ 330,218 $ (279,415) $ 169,938
======= ========= ============ ========== ============
The accompanying notes are an integral part of these combined financial
statements.
F-47
THE SUPERIOR DISPOSAL COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------
1995 1996
--------------- --------------
Cash flows from operating activities:
Net income ...................................................... $ 848,125 $ 278,181
------------ ------------
Adjustments to reconcile net income to net cash provided by
operating activities--
Provision for bad debts, net of writeoffs ........................ 333,288 (195,280)
Depreciation and amortization .................................... 855,548 1,192,065
Loss on sale of equipment ....................................... -- 17,347
Deferred income tax ............................................. (13,095) 13,095
Changes in assets and liabilities, net of effects of acquisitions--
Accounts receivable ............................................. (1,570,719) 377,336
Other current assets .......................................... (92,201) (79,578)
Accounts payable ................................................ 978,772 (285,297)
Accrued and other liabilities ................................. (95,524) 152,430
Income taxes payable .......................................... 30,341 --
Deferred revenue ................................................ 223,536 (42,459)
------------ ------------
649,946 1,149,659
------------ ------------
Net cash provided by operating activities ..................... 1,498,071 1,427,840
------------ ------------
Cash flows from investing activities:
Acquisitions, net of cash acquired .............................. (3,007,296) (460,000)
Additions to property and equipment .............................. (636,912) (1,110,656)
Proceeds from sale of property and equipment ..................... -- 52,074
Decrease (increase) in other assets .............................. 60,884 (33,261)
------------ ------------
Net cash used in investing activities ........................ (3,583,324) (1,551,843)
------------ ------------
Cash flows from financing activities:
Due to stockholder ................................................ -- 52,000
Proceeds from short-term borrowings .............................. -- 1,200,000
Proceeds from long-term borrowings .............................. 5,934,083 930,000
Principal payments on long-term debt .............................. (2,542,323) (1,520,418)
Principal payments on capital lease obligations .................. (51,001) (61,916)
Proceeds from issuance of common stock ........................... 500 --
Distributions to stockholder .................................... (705,440) (1,232,689)
------------ ------------
Net cash provided by (used in) financing activities ......... 2,635,819 (633,023)
------------ ------------
Net increase (decrease) in cash .................................... 550,566 (757,026)
Cash, beginning of year .......................................... 215,714 766,280
------------ ------------
Cash, end of year ................................................ $ 766,280 $ 9,254
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for--
Interest ......................................................... $ 411,525 $ 827,059
============ ============
Income taxes ................................................... $ 8,820 $ 32,724
============ ============
Supplemental disclosure of noncash investing and financing activities--
Acquisition of property and equipment under capital leases ...... $ 141,441 $ --
============ ============
Summary of acquisitions--
Fair value of assets acquired .................................... $ 6,629,006 $ 595,000
Cash paid ...................................................... (3,007,296) (460,000)
------------ ------------
Liabilities assumed and notes payable to sellers ............ $ 3,621,710 $ 135,000
============ ============
The accompanying notes are an integral part of these combined financial
statements.
F-48
THE SUPERIOR DISPOSAL COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
The Superior Disposal Companies (the Companies), represents the combined
accounts of Superior Disposal Service, Inc. (Superior) (a New York
corporation), Kerkim, Inc. (Kerkim) (a New York corporation) and Kensue, Inc.
(Kensue) (a Pennsylvania corporation). These companies are owned by the same
stockholder. Kensue's financial statements are the consolidation of Kensue and
its two subsidiaries: Claws Refuse, Inc. (Claws) (a Pennsylvania corporation)
and S.D.S. at PA, Inc. (SDS at PA) (a Pennsylvania corporation), which have a
March 31 fiscal year end.
These companies are engaged in non-hazardous waste collection, recycling,
transportation and transfer station businesses. The Companies service
residential, commercial and municipal customers in the states of New York and
Pennsylvania.
For the purpose of the combined financial statements, all material
intercompany balances and transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements reflect the application of certain
accounting policies as described in this note and elsewhere in the financial
statements and notes.
(a) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes and the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
(b) Revenue Recognition
The Company recognizes revenue as the related services are provided.
Certain customers are billed in advance and, accordingly, recognition of the
related revenues is deferred until the services are provided.
(c) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. The Company provides for depreciation and amortization using
the straight-line method by charges to operations in amounts that allocate the
cost of the assets over their estimated useful lives as follows:
Estimated
Useful Life
Asset Classification ------------
Buildings and improvements ..................... 28-40 years
Furniture, fixtures and office equipment ...... 4-8 years
Vehicles ....................................... 2-10 years
Machinery and containers ..................... 7-10 years
The cost of maintenance and repairs is charged to operations as incurred.
(d) Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, trade
receivables, trade payables and debt instruments. The book values of cash,
trade receivables and trade payables approximate their respective fair values.
The Company's debt instruments that are outstanding as of December 31, 1995
F-49
THE SUPERIOR DISPOSAL COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
and 1996 have carrying values that approximate their respective fair values.
See Note 5 for the terms and carrying values of the Company's various debt
instruments.
(e) Intangible Assets
Goodwill is the cost in excess of fair value of identifiable assets of
acquired businesses and is amortized on the straight-line method over periods
not exceeding 40 years. Other intangible assets include covenants not to
compete and organization costs and are amortized on the straight-line method
over their estimated useful lives, typically no more than 15 and 5 years,
respectively. The Companies continually evaluate whether events and
circumstances have occurred subsequent to an acquisition that indicate the
remaining estimated useful life or carrying value of these intangible assets
may warrant revision. When factors indicate that these assets should be
evaluated for possible impairment, the Companies use an estimate of the related
business segment's undiscounted cash flows over the remaining life of the asset
in measuring recoverability.
Intangible assets at December 31, 1995 and 1996 consist of the following:
December 31,
--------------------------
1995 1996
------------ -----------
Goodwill ........................... $4,171,080 $4,393,480
Covenants not-to-compete ............ 519,167 539,167
Organization costs .................. 27,225 27,225
----------- -----------
4,717,472 4,959,872
Less--accumulated amortization ...... 366,941 547,349
----------- -----------
$4,350,531 $4,412,523
=========== ===========
(f) Income Taxes
Superior and Kerkim elected S corporation status under the Internal
Revenue Code. Therefore, the tax effect of each company's operations will be
reflected in the individual tax returns of the stockholder.
Kensue has elected C corporation status under the Internal Revenue Code
and files consolidated federal and state income tax returns. Kensue records
income taxes in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred
income taxes are recognized based on the expected future tax consequences of
differences between the financial statement basis and the tax basis of assets
and liabilities, calculated using enacted tax rates in effect for the year in
which the differences are expected to be reflected in the tax return.
(g) Accounting Principles
Effective May 1, 1996, the Companies adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed
Of. In accordance with SFAS No. 121, the Companies evaluate the recoverability
of its carrying value of the Companies' long-lived assets and certain
intangible assets based on estimated undiscounted cash flows to be generated
from each of such assets as compared to the original estimates used in
measuring the assets. To the extent impairment is identified, the Companies
reduce the carrying value of such impaired assets. The change did not have a
material impact on the Companies' financial statements.
F-50
THE SUPERIOR DISPOSAL COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
3. ACQUISITIONS OF NEW BUSINESSES
During March 1995, Superior acquired the assets of two companies, Valley
Disposal, Inc. and Doane's Disposal, Inc., for a total purchase price of
approximately $1,008,000. The assets purchased included fixed assets totaling
$659,000 and covenants not-to-compete totaling $19,000. The excess of the
purchase price over the assets acquired was assigned to goodwill.
Kerkim acquired the assets of W.M. Speigel Sons, Inc. in September 1995
for a total purchase price of $2,400,000. The fair value assigned to fixed
assets acquired and covenants not-to-compete were approximately $300,000 and
$200,000, respectively. The excess purchase price over the assets acquired was
assigned to goodwill.
In June 1995, Kensue acquired all of the outstanding common stock of Claws
for a total purchase price of approximately $594,000. Net assets acquired
totaled approximately $243,000. The excess of the purchase price over the net
assets acquired was allocated to goodwill in the amount of $351,000.
The subsidiaries of Kensue also completed several acquisitions during
1995. In November 1995, SDS at PA acquired the assets of WW Disposal Service,
Inc. and G-Disposal Service, Inc. for a total purchase price of $2,229,000. The
fair value of fixed assets acquired and covenants not-to-compete totaled
$805,000 and $60,000, respectively. The excess purchase price over the assets
acquired was allocated to goodwill.
In January 1996, Claws acquired the assets of A.C. Hamm for a total
purchase price of $195,000. The fair value of fixed assets acquired and
covenants not-to-compete totaled $143,000 and $10,000, respectively.
In July 1996, Superior also acquired the assets of Gar-Kim, Inc. for a
total purchase price of $400,000. The fair value of fixed assets acquired and
covenants not-to-compete totaled $184,000 and $10,000, respectively.
The acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the purchase prices have been allocated to the
assets acquired based on the estimated fair values at the date of acquisition.
The excess of purchase price over the estimated fair values of the net assets
acquired has been recorded as goodwill, which is being amortized over 40 years.
4. SHORT-TERM LOANS
The short-term loans bear interest at rates ranging from 8% to 9.125% per
annum and are secured by all assets of Superior and a certain loan by a
personal guarantee of the sole stockholder.
5. LONG-TERM DEBT
Long-term debt as of December 31, 1995 and 1996 consists of the following:
December 31,
--------------------------
1995 1996
------------ -----------
Term loans and line of credit with banks .................. $4,950,562 $4,981,219
Notes payable in connection with businesses acquired ...... 3,384,181 2,976,109
Other notes payable ....................................... 246,636 168,633
----------- -----------
8,581,379 8,125,961
Less--current portion .................................... 1,359,861 1,748,264
----------- -----------
$7,221,518 $6,377,697
=========== ===========
F-51
THE SUPERIOR DISPOSAL COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
5. LONG-TERM DEBT (Continued)
The term loans and line of credit with banks bear interest at rates
ranging from 9% to 9.625% per annum and are secured by all assets of the
Companies, and certain loans by a personal guarantee of the sole stockholder.
The loans are due on dates ranging from January 1997 to September 2002 and are
payable in monthly installments ranging from $520 to $25,000.
Notes payable in connection with businesses acquired bear interest at
rates ranging from 7% to 10% and are secured by all the assets of the
Companies. The notes are due on dates ranging from January 1997 to December
2005, and are payable in monthly installments ranging from $1,000 to $12,215.
As of December 31, 1996, debt matures as follows (rounded to thousands):
Amount
-----------
Fiscal Year Ended December 31,
1997 ........................ $1,748,000
1998 ........................ 1,238,000
1999 ........................ 1,206,000
2000 ........................ 1,512,000
2001 ........................ 944,000
Thereafter .................. 1,478,000
-----------
$8,126,000
===========
In January 1997, a substantial portion of the Companies' debt was paid off
by Casella Waste Systems in connection with the acquisition described in Note
9.
6. COMMITMENTS AND CONTINGENCIES
(a) Leases
The following is a schedule of future minimum lease payments, together
with the present value of the net minimum lease payments under capital leases,
as of December 31, 1996.
Operating Leases Capital Leases
------------------ ---------------
Fiscal Year Ended December 31,
1997 ................................................... $ 39,627 $ 91,296
1998 ................................................... 40,206 91,296
1999 ................................................... 39,416 104,404
2000 ................................................... 37,816 20,655
--------- ---------
Total minimum lease payments ........................ $157,065 307,651
=========
Amount representing interest ........................... 46,229
---------
261,422
Current maturities of capital lease obligations ......... 68,352
---------
Present value of long-term capital lease obligations $193,070
=========
The Companies lease hauling vehicles under leases that qualify for
treatment as capital leases. The assets related to these leases have been
capitalized and are included in property and equipment.
The Companies lease operating facilities and equipment under operating
leases with monthly payments ranging from $170 to $2,900.
F-52
THE SUPERIOR DISPOSAL COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
6. COMMITMENTS AND CONTINGENCIES (Continued)
Total rent expense under operating leases charged to operations was
$16,000 and $33,600 during the years ended 1995 and 1996, respectively.
(b) Litigation
In the normal course of conducting its operations, the Companies may
become involved in certain legal and administrative proceedings. Some of these
actions may result in fines, penalties or judgments against the Companies,
which may have an impact on earnings for a particular period. Management
expects that such matters in process at December 31, 1996 will not have a
material adverse effect on the Companies' financial position, including its
liquidity or its results of operations.
7. INCOME TAXES
The provision for income taxes as of December 31, 1995 and 1996 consists
of the following:
December 31,
-----------------------
1995 1996
------------ --------
Federal--
Current ...... $ 30,341 $ --
Deferred ...... (13,095) 13,095
--------- --------
17,246 13,095
State ......... 12,100 19,629
--------- --------
Total ...... $ 29,346 $32,724
========= ========
The provision for income taxes differs from the amounts determined by
applying the federal statutory rate of 40% to income before provision for
income taxes due mainly to the S corporation status of Superior and Kerkim and
state income taxes.
The components of the deferred tax asset at December 31, 1995 and 1996 are
as follows:
December 31,
------------------------
1995 1996
--------- ------------
Net operating loss carryforwards ........................ $ -- $ 41,187
Allowance for doubtful accounts ........................ -- 39,783
Accelerated depreciation of property and equipment ...... 4,000 8,000
Deferred revenue ....................................... 9,095 (11,482)
-------- ---------
13,095 77,488
Less--valuation allowance .............................. -- 77,488
-------- ---------
$13,095 $ --
======== =========
In 1996, the Companies recorded a 100% valuation allowance against the
deferred tax asset, as realization of the asset is uncertain.
8. RELATED PARTY TRANSACTIONS
Superior leases its office and garage facility in Newfield, New York, from
its sole stockholder. Rental payments for the years ended December 31, 1995 and
1996 totaled $30,000 and $64,000, respectively. The lease is on a
month-to-month basis.
F-53
THE SUPERIOR DISPOSAL COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
8. RELATED PARTY TRANSACTIONS (Continued)
The sole stockholder is guarantor on several outstanding loans of the
Companies. In addition, one loan is collateralized by the personal residence of
the sole stockholder.
9. SUBSEQUENT EVENTS
On January 2, 1997, Casella Waste Systems, Inc. (CWS) acquired
substantially all of the assets of Superior Disposal Services, Inc., Claws
Refuse Inc. and S.D.S. at PA, Inc., accounted for as an asset purchase. On
January 23, 1997, CWS acquired substantially all of the assets of Kerkim, Inc.,
which it also accounted for as an asset purchase.
F-54
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Chairman and Members of the Board of Legislators of
Clinton County, New York:
We have audited the accompanying balance sheet of Clinton County, New
York--Solid Waste Department Enterprise Fund as of December 31, 1995, and the
related statements of operations, fund deficit and cash flows for the year then
ended. These financial statements are the responsibility of the County's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Clinton County, New
York--Solid Waste Department Enterprise Fund as of December 31, 1995, and the
results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
July 25, 1997
F-55
CLINTON COUNTY, NEW YORK--
SOLID WASTE DEPARTMENT ENTERPRISE FUND
BALANCE SHEET
December 31, 1995 June 30, 1996
------------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 7,271,096 $ 5,296,980
Accounts receivable--trade ....................................... 415,547 591,185
State and federal aid receivable ................................. 946,418 840,603
Prepaid expenses ................................................ -- 67,011
------------ ------------
Total current assets .......................................... 8,633,061 6,795,779
------------ ------------
Property, plant and equipment, at cost:
Land ............................................................ 223,861 235,561
Landfills ...................................................... 5,252,146 5,741,167
Land improvements ................................................ 698,830 698,830
Buildings ...................................................... 2,642,443 2,694,693
Machinery and equipment .......................................... 3,994,023 3,998,733
------------ ------------
12,811,303 13,368,984
Less--accumulated depreciation and amortization .................. 1,928,116 2,142,468
------------ ------------
10,883,187 11,226,516
------------ ------------
$ 19,516,248 $18,022,295
============ ============
LIABILITIES AND FUND DEFICIT
Current liabilities:
Bond anticipation notes payable ................................. $ 11,758,648 $11,361,098
Current maturities of long-term debt ........................... 322,800 326,000
Accounts payable ................................................ 717,755 75,193
Accrued liabilities ............................................. 371,621 499,871
Accrued closure and postclosure costs, current portion ......... 366,531 122,640
------------ ------------
Total current liabilities .................................... 13,537,355 12,384,802
------------ ------------
Long-term debt, less current maturities ........................... 4,831,600 4,505,600
------------ ------------
Accrued closure and postclosure costs, less current portion ...... 7,773,402 7,794,081
------------ ------------
Other long-term liabilities ....................................... 127,926 118,961
------------ ------------
Fund deficit:
Contributed capital ............................................. 909,790 909,790
Accumulated deficit ............................................. (7,663,825) (7,690,939)
------------ ------------
Total fund deficit .......................................... (6,754,035) (6,781,149)
------------ ------------
$ 19,516,248 $18,022,295
============ ============
The accompanying notes are an integral part of these financial statements.
F-56
CLINTON COUNTY, NEW YORK--
SOLID WASTE DEPARTMENT ENTERPRISE FUND
STATEMENT OF OPERATIONS
Six Months
Year Ended Ended
December 31, 1995 June 30, 1996
------------------- --------------
(Unaudited)
Service revenues ..................... $4,184,317 $1,539,321
State and federal aid ............... 871,004 --
---------- ----------
Net revenues ..................... 5,055,321 1,539,321
---------- ----------
Operating expenses:
Cost from operations ............... 3,373,310 1,076,742
General and administrative ......... 213,134 74,047
Depreciation and amortization ...... 447,401 214,352
---------- ----------
4,033,845 1,365,141
---------- ----------
Income from operations ............ 1,021,476 174,180
---------- ----------
Other (income) expenses:
Interest income ..................... (334,258) (140,924)
Interest expense .................. 577,526 353,072
Loss on sale of equipment ......... 16,855 --
Other income ........................ (110,169) (10,854)
---------- ----------
149,954 201,294
---------- ----------
Net income (loss) ............... $ 871,522 $ (27,114)
========== ==========
The accompanying notes are an integral part of these financial statements.
F-57
CLINTON COUNTY, NEW YORK--
SOLID WASTE DEPARTMENT ENTERPRISE FUND
STATEMENT OF FUNDS DEFICIT
Contributed Accumulated Total Fund
Capital Deficit Deficit
------------- ---------------- ----------------
Balance, December 31, 1994 ............... $909,790 $ (8,535,347) $ (7,625,557)
Net income ........................... -- 871,522 871,522
--------- ------------ ------------
Balance, December 31, 1995 ............... 909,790 (7,663,825) (6,754,035)
Net loss (unaudited) .................. -- (27,114) (27,114)
--------- ------------ ------------
Balance, June 30, 1996 (unaudited) ...... $909,790 $ (7,690,939) $ (6,781,149)
========= ============ ============
The accompanying notes are an integral part of these financial statements.
F-58
CLINTON COUNTY, NEW YORK--
SOLID WASTE DEPARTMENT ENTERPRISE FUND
STATEMENT OF CASH FLOWS
Six Months
Year Ended Ended
December 31, 1995 June 30, 1996
------------------- --------------
(Unaudited)
Cash flows from operating activities:
Net income (loss) ................................................ $ 871,522 $ (27,114)
------------ ------------
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities--
Depreciation and amortization .................................... 447,401 214,352
Loss on sale of equipment ....................................... 16,855 --
Changes in assets and liabilities--
Accounts receivable ............................................. 157,083 (175,638)
State and federal aid receivable .............................. (790,263) 105,815
Prepaid expenses ................................................ -- (67,011)
Accounts payable ................................................ 428,814 (642,562)
Accrued closure and postclosure costs ........................... (1,050,610) (223,212)
Accrued liabilities ............................................. 124,778 119,285
------------ ------------
(665,942) (668,971)
------------ ------------
Net cash provided by (used in) operating activities ......... 205,580 (696,085)
------------ ------------
Cash flows from investing activities:
Additions to property and equipment .............................. (6,030,603) (557,681)
Proceeds from sale of equipment ................................. 67,366 --
------------ ------------
Net cash used in investing activities ........................ (5,963,237) (557,681)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of bond anticipation notes ............... 6,690,000 --
Principal payments on bond anticipation notes ..................... (402,320) (397,550)
Principal payments on long-term debt .............................. (292,800) (322,800)
------------ ------------
Net cash provided by (used in) financing activities ......... 5,994,880 (720,350)
------------ ------------
Net increase (decrease) in cash and cash equivalents ............... 237,223 (1,974,116)
Cash and cash equivalents, beginning of period ..................... 7,033,873 7,271,096
------------ ------------
Cash and cash equivalents, end of period ........................... $ 7,271,096 $ 5,296,980
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest ........................... $ 531,983 $ 191,412
============ ============
The accompanying notes are an integral part of these financial statements.
F-59
CLINTON COUNTY, NEW YORK--
SOLID WASTE DEPARTMENT ENTERPRISE FUND
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1. OPERATIONS
The Clinton County, New York--Solid Waste Department Enterprise Fund (the
Fund) is engaged in nonhazardous waste collection, recycling, transportation
and transfer station and landfill disposal facility businesses. The Fund
services residential, commercial and municipal customers throughout Clinton
County, New York (the County).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition
The Fund recognizes collection and recycling services revenues as the
services are provided. State aid consists of funds granted by the State of New
York to the Fund to subsidize costs associated with the closure of the County's
landfills.
(b) Cash and Cash Equivalents
The Fund considers all highly liquid investments purchased with maturities
of three months or less to be cash equivalents.
(c) Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated
depreciation. The Fund provides for depreciation using the straight-line method
by charges to operations in amounts that allocate the cost of the assets over
their estimated useful lives as follows:
Estimated
Asset Classification Useful Life
- ---------------------------------- ------------
Buildings ..................... 30 years
Machinery and equipment ...... 5-20 years
Land improvements ............ 6-15 years
Depreciation expense for the year ended December 31, 1995 and the six
months ended June 30, 1996 was $447,401 and $214,352, respectively. The cost of
maintenance and repairs is charged to operations as incurred.
Capitalized landfill costs include expenditures for land and related
airspace, permitting costs and preparation costs. Landfill permitting and
preparation costs represent only direct costs related to these activities
including legal, engineering and construction. Management routinely reviews its
investment in operating landfills, transfer stations and other significant
facilities to determine whether the costs of these investments are realizable.
Landfill permitting and acquisition costs, excluding the estimated
residual value of land, are typically amortized as permitted airspace of the
landfill is consumed. For many of the Fund's landfills, preparation costs,
which include the costs of construction associated with excavation, liners and
the installation of leak detection and leachate collection systems, are also
typically amortized as total permitted airspace of the landfill is consumed. In
determining the amortization rate for these landfills, preparation costs
include the total estimated costs to complete construction of the landfills'
permitted capacity.
(d) Accrued Closure and Postclosure Costs
New York state laws and regulations require the Fund to place a final
cover on all sites when it stops accepting waste and to perform certain
maintenance and monitoring functions at the sites for thirty years after
closure. Although closure and postclosure care costs will be paid only near or
after the date the landfills stop accepting waste, the Fund reports a portion
of these closure and postclosure care costs as
F-60
CLINTON COUNTY, NEW YORK--
SOLID WASTE DEPARTMENT ENTERPRISE FUND
NOTES TO FINANCIAL STATEMENTS--(Continued)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
an operating expense in each period based on landfill capacity used as of each
balance sheet date. The $8,139,933 and $7,916,721 reported as accrued closure
and postclosure care liability at December 31, 1995 and June 30, 1996,
respectively, represents the cumulative amount recorded to date, less amounts
previously paid, based on the estimated capacity used. As of June 30, 1996, 97
percent of the capacity at the Schuyler Falls landfill and 100 percent at the
AuSable and Mooers landfill site had been used. The Fund will recognize the
remaining estimated cost of closure and postclosure care of $138,267 as the
remaining estimated capacity is filled. These amounts are based on what it
would cost to perform all closure and postclosure care in 1996. Actual cost may
be higher due to inflation, changes in technology or changes in regulations.
The County plans to finance the landfill closures through the issuance of
County bonds and debt service expected to be paid primarily through user fees
charged at the landfills and future lease payments from privatization of the
landfills' management and operations (see Note 5).
(e) General and Administrative Expenses
Included in general and administrative expenses are allocations of general
County expenses in the amounts of $180,000 and $67,000 for the year ended
December 31, 1995 and the six months ended June 30, 1996, respectively.
(f) Income Taxes
The Fund is a department of Clinton County, New York, a municipal
corporation, and is therefore exempt from state and federal income taxes.
(g) Fair Value of Financial Instruments
The Fund's financial instruments consist primarily of cash and cash
equivalents, trade receivables, trade payables and debt instruments. The book
values of cash and cash equivalents, trade receivables and trade payables
approximate their respective fair values. The Fund's debt instruments that are
outstanding as of December 31, 1995 and June 30, 1996 have carrying values that
approximate their respective fair values. See Note 3 for the terms and carrying
values of the Fund's various debt instruments.
(h) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes and the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
(i) Impairment of Long-Lived Assets
Effective January 1, 1996, the Fund adopted Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. This statement
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The statement also requires that certain long-lived assets and
identifiable intangibles to be disposed of be reported at the lower of the
carrying amount or fair value less cost to sell. The adoption of this statement
did not impact the Fund's financial statements.
F-61
CLINTON COUNTY, NEW YORK--
SOLID WASTE DEPARTMENT ENTERPRISE FUND
NOTES TO FINANCIAL STATEMENTS--(Continued)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
3. LONG-TERM DEBT
Long-term debt as of December 31, 1995 and June 30, 1996 consisted of the
following:
December 31, June 30,
1995 1996
-------------- ------------
(unaudited)
Bond anticipation notes payable ...... $11,758,648 $11,361,098
Serial bond payable .................. 5,154,400 4,831,600
------------ ------------
16,913,048 16,192,698
Less--current portion ............... 12,081,448 11,687,098
------------ ------------
$ 4,831,600 $ 4,505,600
============ ============
Bond anticipation notes must be renewed annually. As of December 31, 1995,
the Fund had eight notes outstanding with principal amounts ranging from
$23,000 to $6.4 million. These notes bear interest at rates ranging from 3.85
percent to 4.59 percent.
As of June 30, 1996, the Fund had six notes outstanding with principal
amounts ranging from $75,000 to $6.4 million. These notes bear interest at
rates ranging from 3.62 percent to 4.00 percent.
The Serial Bonds were issued in 1994 in the amount of $5.4 million. As of
December 31, 1995 and June 30, 1996, approximately $5.1 million and $4.8
million, respectively, remains outstanding bearing interest at rates ranging
from 5.1 percent to 5.7 percent. These notes are due to mature in 2012.
As of June 30, 1996, debt matures as follows:
Amount
------------
(unaudited)
Fiscal Year Ended June 30,
1997 .................. $11,687,098
1998 .................. 326,000
1999 .................. 354,000
2000 .................. 357,200
2001 .................. 384,200
Thereafter ............ 3,084,200
------------
$16,192,698
============
4. RETIREMENT BENEFITS
The Fund participates in the New York State and Local Employees'
Retirement System and the Public Employees' Group Life Insurance Plan. These
are cost sharing multiple-employer retirement plans. These plans provide
retirement benefits as well as death and disability benefits. The Fund is
required to contribute at an actuarially determined rate. The contributions
made for the year ended December 31, 1995 and the six months ended June 30,
1996 were $17,304 and $7,334, respectively, and were equal to 100% of the
required contributions.
In addition to providing pension benefits, the Fund provides health
insurance benefits, in accordance with its Civil Service Employees Association,
Inc. contract, to retired employees and their spouses. These benefits are
funded and accounted for by the Fund as paid, which is not materially different
from the accrual method required by SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions. The total cost of providing these
benefits during the year ended December 31, 1995 and the six months ended June
30, 1996 was not material.
F-62
CLINTON COUNTY, NEW YORK--
SOLID WASTE DEPARTMENT ENTERPRISE FUND
NOTES TO FINANCIAL STATEMENTS--(Continued)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
5. SUBSEQUENT EVENT
On July 10, 1996, the Fund entered into a 25-year operation, management
and lease agreement with Casella Waste Systems, Inc. (Casella). Under this
agreement, Casella will lease all of the Fund's non-hazardous solid waste
system facilities, which includes the fully permitted Subtitle D lined
landfill, one transfer station, one recycling facility, 11 convenience stations
and all of the equipment associated with these facilities. As part of this
agreement, Casella will pay the Fund the total sum of $10,501,284 payable in 28
equal quarterly installments, commencing with the closing date. In addition, in
accordance with the agreement, Casella will be responsible for, and pay for,
the capping and closing of the Fund's Schuyler Falls, New York, unlined
landfill in 1997. The Fund will be responsible for postclosure care of the
unlined landfill. The total cost of this landfill closure project is currently
estimated at $3,200,000.
F-63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of:
H.C. Gobin, Inc.
Claremont, NH
We have audited the accompanying balance sheets of H.C. Gobin, Inc. (a
Delaware Corporation) as of December 31, 1996 and 1995, and the related
statement of income and retained earnings and cash flows for the years then
ended. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of H.C. Gobin, Inc. as of
December 31, 1996 and 1995 and the results of operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/ Barrett & Dattilio, P.C.
Barrett & Dattilio, P.C.
Registration #440
September 26, 1997
Quechee, VT
F-64
H.C. GOBIN, INC.
BALANCE SHEETS
December 31,
--------------------------- June 30,
1995 1996 1997
------------ ------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 40,773 $ 81,460 $ 156,423
Accounts receivable--trade, less allowance for
doubtful accounts of approximately $5,000,
$45,000 and $10,000 ................................. 442,085 642,585 567,109
Accounts receivable--employee ........................ 360 800 --
Deferred income taxes .............................. -- 33,236 --
Inventory .......................................... 65,005 61,332 56,383
Prepaid expenses .................................... 62,245 47,500 51,322
Prepaid insurance .................................... 24,259 25,904 26,535
Note receivable--stockholder ........................ -- 24,535 24,535
Deposits ............................................. 5,000 -- --
----------- ----------- -----------
Total current assets .............................. 639,727 917,352 882,307
----------- ----------- -----------
Property and equipment, at cost:
Rolling stock ....................................... 484,163 2,601,229 2,443,433
Buildings .......................................... -- 148,053 149,053
Leasehold improvements .............................. 40,089 45,877 45,877
Machinery and equipment .............................. 598,219 1,581,021 1,542,968
Assets under capital lease ........................... 2,183,793 18,255 18,255
Construction in progress .............................. 20,559 -- --
----------- ----------- -----------
3,326,823 4,394,435 4,199,586
Less--accumulated depreciation ..................... 1,299,097 1,521,185 1,587,185
----------- ----------- -----------
Property and equipment, net ..................... 2,027,726 2,873,250 2,612,401
----------- ----------- -----------
Other assets:
Customer list, net of accumulated amortization ...... 11,043 358,727 204,815
Goodwill, net of accumulated amortization ............ 40,985 48,762 46,920
Covenant, net of accumulated amortization ............ 11,528 119,025 10,273
Loan fees, net of accumulated amortization ......... 2,700 63,648 61,160
Management systems ................................. 32,838 37,679 35,585
Deposits, net of current ........................... 600 6,150 15,850
----------- ----------- -----------
99,694 633,991 374,603
----------- ----------- -----------
$2,767,147 $4,424,593 $3,869,311
=========== =========== ===========
See independent auditor's report and accompanying notes to financial
statements.
F-65
H.C. GOBIN, INC.
BALANCE SHEETS
(Continued)
December 31,
---------------------------- June 30,
1995 1996 1997
------------- ------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit ....................................... $ 65,000 $ 249,952 $ 215,417
Current maturities of long-term debt, capital lease
obligations and due to stockholders .................. 365,249 328,196 328,196
Accounts payable ....................................... 272,850 860,544 1,099,260
Accrued payroll and related expenses .................. 16,059 54,788 25,300
State income tax payable .............................. 1,410 1,903 3,587
Deferred revenue .................................... 6,174 31,739 36,829
401K pension plan .................................... 476 678 400
Accrued interest .................................... 3,861 23,539 20,687
Deferred income taxes ................................. 12,188 -- --
Other accrued expenses .............................. -- 1,392 --
---------- ---------- ----------
Total current liabilities ........................ 743,267 1,552,731 1,729,676
---------- ---------- ----------
Long-term debt, less current maturities .................. 437,864 2,267,469 2,093,227
---------- ---------- ----------
Capital lease obligations, less current maturities ...... 461,820 10,737 6,767
---------- ---------- ----------
Deferred income taxes .................................... -- -- 31,138
---------- ---------- ----------
Due to stockholders, less current maturities ............ 7,388 5,395 2,766
---------- ---------- ----------
Stockholders' equity:
Common stock, no par value
Authorized--3,000 shares
Issued and outstanding--240 shares .................. 124,800 124,800 124,800
Additional paid-in capital ........................... 50,422 50,422 50,422
Treasury stock--cost ................................. (377,585) (377,585) (377,585)
Retained earnings .................................... 1,319,171 790,624 208,100
---------- ---------- ----------
Total stockholders' equity ........................ 1,116,808 588,261 5,737
---------- ---------- ----------
$2,767,147 $4,424,593 $3,869,311
========== ========== ==========
See independent auditor's report and accompanying notes to financial
statements.
F-66
H.C. GOBIN, INC.
STATEMENTS OF INCOME (LOSS) AND RETAINED EARNINGS
Fiscal Year Ended Six Months Ended
December 31, June 30,
------------------------- -----------------
1995 1996 1997
------------ ------------ -----------------
(Unaudited)
Net revenues ................................. $3,676,850 $4,871,867 $2,567,416
---------- ---------- ----------
Operating expenses:
Cost from operations ........................ 2,528,881 3,808,637 2,070,017
General and administrative ............... 517,811 860,264 473,338
Depreciation and amortization ............ 245,993 393,652 203,917
---------- ---------- ----------
3,292,685 5,062,553 2,747,272
---------- ---------- ----------
Income from operations ........................ 384,165 (190,686) (179,856)
---------- ---------- ----------
Other (income) expenses:
Interest income ........................... (4,403) (6,873) --
Interest expense ........................... 172,000 250,521 138,797
Sale of assets ........................... (20,397) 17,990 157,935
Loss on investment ........................ -- -- 29,451
Penalty on capital lease conversion ...... -- 118,330 --
---------- ---------- ----------
147,200 379,968 326,183
---------- ---------- ----------
Income before provision for income taxes ...... 236,965 (570,654) (506,039)
Provision for income taxes .................. 9,523 (42,107) 76,485
---------- ---------- ----------
Net income (loss) ..................... $ 227,442 $(528,547) $ (582,524)
========== ========== ==========
Retained earnings, beginning of year ......... 1,091,729 1,319,171 790,624
---------- ---------- ----------
Retained earnings, end of period ............... $1,319,171 $ 790,624 $ 208,100
========== ========== ==========
See independent auditor's report and accompanying notes to financial
statements.
F-67
H.C. GOBIN, INC.
STATEMENTS OF CASH FLOWS
Fiscal Year Ended Six Months Ended
December 31, June 30,
---------------------------- -----------------
1995 1996 1997
------------- -------------- -----------------
(Unaudited)
Cash flows from operating activities:
Net income (loss) ................................. $ 227,442 $ (528,547) $ (582,524)
---------- ------------ ----------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities--
Depreciation and amortization ..................... 245,993 393,652 203,917
(Gain) loss on sale of equipment .................. (20,397) 17,990 157,935
Provision (benefit) for deferred income taxes ... 6,413 (45,424) 74,878
Changes in assets and liabilities--
Accounts receivable .............................. (128,923) (200,940) 76,276
Notes receivable ................................. 13,829 (24,535) --
Prepaid expenses ................................. (10,180) 18,100 (4,453)
Inventories ....................................... (7,521) 3,673 4,949
Other current assets .............................. (16,939) (611,148) (9,699)
Accounts payable ................................. 77,038 587,694 197,135
Accrued expenses and other liabilities ............ 13,245 86,059 3,842
---------- ------------ ----------
172,558 225,321 704,780
---------- ------------ ----------
Net cash provided by (used in) operating
activities .................................... 400,000 (303,426) 122,256
---------- ------------ ----------
Cash flows from investing activities:
Additions to property and equipment ............... (698,197) (1,190,187) (17,832)
Proceeds from sale of equipment .................. 7,275 14,845 185,918
---------- ------------ ----------
Net cash provided by (used in) investing
activities .................................... (690,922) (1,175,342) 168,086
---------- ------------ ----------
Cash flows from financing activities:
Proceeds from issuance debt ........................ 962,899 2,429,483 --
Principal payment on line of credit ............... -- 184,952 (34,535)
Principal payments on long-term debt ............... (304,680) (1,094,980) (180,844)
Purchase of treasury stock ........................ (377,585) -- --
---------- ------------ ----------
Net cash provided by (used in) financing
activities .................................... 280,634 1,519,455 (215,379)
---------- ------------ ----------
Net increase (decrease) in cash and cash equivalents (10,288) 40,687 74,963
Cash and cash equivalents, beginning of period ...... 51,061 40,773 81,460
---------- ------------ ----------
Cash and cash equivalents, end of period ............ $ 40,773 $ 81,460 $ 156,423
========== ============ ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for--
Interest .......................................... $ 168,139 $ 230,843 $ 135,167
========== ============ ==========
Income taxes .................................... $ 1,935 $ 2,824 $ --
========== ============ ==========
Cash and Cash Equivalents--For purposes of the Statements of Cash Flows, the
Company considers all investment instruments purchased with a maturity of three
months or less to be cash equivalents.
See independent auditor's report and accompanying notes to financial
statements.
F-68
H.C. GOBIN, INC.
NOTES TO FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)
1. Summary of Significant Accounting Policies
Operations--H.C. Gobin, Inc. (the Company) was incorporated in 1982 in the
State of Delaware and operates from five locations within New Hampshire. The
Company provides waste services to municipal, industrial and commercial
customers.
Basis of Accounting--The Company uses the accrual basis of accounting for
financial statement purposes and the income tax basis of accounting for tax
purposes.
Depreciation--The Company follows the policy of charging to costs and
expenses annual amounts of depreciation which allocate the cost of the
property, plant and equipment over their estimated useful lives. The Company
employs the straight-line method for determining the annual charge for
depreciation. The ranges of estimated useful lives are:
Years
------
Vehicles ..................... 5-10
Trailers ..................... 3-10
Office Equipment ............ 3-10
Leasehold Improvements ...... 10-40
Income Taxes--No provision for federal income taxes has been made since
under an election previously filed with the Internal Revenue Service, the
Company's income or loss is reported on the tax return of the stockholders.
For state income tax purposes effective December 1, 1994, the Company
changed from the deferred method of accounting for income taxes to an asset and
liability method in accordance with Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes."
Under the asset and liability method, deferred tax assets and liabilities
are determined based on the differences between the financial statement and tax
basis of assets and liabilities and are measured using enacted tax rates.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
Provision for state income taxes as of December 31, 1995 and 1996 and June
30, 1997 are as follows:
December 31,
-----------------------
1995 1996 June 30, 1997
-------- ------------ --------------
(Unaudited)
Current .................................... $3,110 $ 3,317 $ 1,607
Deferred ................................. 6,413 (45,424) 74,878
------- --------- --------
Provision (Benefit) for income taxes ...... $9,523 $ (42,107) $76,485
======= ========= ========
F-69
H.C. GOBIN, INC.
NOTES TO FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
1. Summary of Significant Accounting Policies (Continued)
Net deferred tax liabilities in the accompanying balance sheets include
the following components:
December 31,
-----------------------------
June 30,
1995 1996 1997
------------- ------------- ------------
(Unaudited)
Deferred tax liabilities arising from:
Temporary differences--principally
Cash to accrual adjustment ............ $ (70,937) $ (33,236) $ 115,564
Capital leases ........................ 83,125 -- --
Deferred tax assets arising from:
Net operating loss carryforward ...... -- -- (84,426)
--------- --------- ---------
Net deferred tax liability (asset) ...... $ 12,188 $ (33,236) $ 31,138
========= ========= =========
Taxes paid to the State of Vermont were $150, $150 and $0 during the years
ended December 31, 1995 and 1996 and the six months ended June 30, 1997,
respectively. New Hampshire taxes were $1,935, $3,167 and $(77) during the
years ended December 31, 1995 and 1996 and the six months ended June 30, 1997,
respectively. State of New York taxes were $0 during the years ended December
31, 1995 and 1996 and the six months ended June 30, 1997.
Amortization--The Company is currently amortizing the following intangible
costs over various years using the straight line method.
Items Years
- ----------------------------------- ------
Loan Fees ..................... 15
Customer List ............... 15
Organizational cost ......... 5
Covenant Not to Compete ...... 15
Goodwill ..................... 15
The amortization expense was $4,874, $76,851 and $834,496 for the years
ended December 31, 1995 and 1996 and the six months ended June 30, 1997,
respectively.
Inventories--Inventories consist of service parts. Inventory is stated at
the lower of cost or market on the first-in, first-out, (FIFO) basis.
Allowance for Doubtful Accounts--Allowance for doubtful accounts of
$5,150, $45,000 and $10,000 for the years ended December 31, 1995 and 1996 and
the six months ended June 30, 1997, respectively, have been offset against
accounts receivable for financial statement purposes.
F-70
H.C. GOBIN, INC.
NOTES TO FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
2. Long-Term Debt and Due to Stockholders
Long-term debt and due to stockholders at December 31, 1995 and 1996 and
June 30, 1997, consisted of the following:
December 31,
-------------------------
June 30,
1995 1996 1997
---------- ------------ ------------
(Unaudited)
Non-interest bearing demand note due individuals,
unsecured. Payable September, 1996. ............... $ 37,500 $ -- $ --
10.5% note to First NH Bank. Secured by assets of
the Company. Monthly payments of $1,927,
principal and interest. Due March, 1999. ......... 61,684 -- --
13% note due shareholder. Secured by vehicle.
Monthly payments of $505, principal and interest.
Due 1998. ....................................... 12,150 7,389 4,766
11.4% note due individual. Secured by assets of the
Company. Monthly payments of $4,000, principal
and interest. Due 2012 ........................... 353,995 346,021 341,821
Variable note at 1.5% over prime to First NH Bank
secured by assets of the Company. Monthly
payments of $1,600, principal and interest. Due
1997. .......................................... 32,394 -- --
Non-interest bearing note due individual. Unsecured.
Monthly payments of $1,000, principal only. Due
1999. .......................................... 36,000 31,000 25,000
9.2% note due to First Essex Bank. Secured by
assets of the Company and shareholder. Monthly
payments of $32,708, principal and interest. Due
February, 2003. ................................. -- 1,838,743 1,737,194
9.25% note due to First Essex Bank. Secured by
assets purchased. Monthly payments of $5,925,
principal and interest. Due April, 2001. ......... -- 252,479 205,434
Note due Ford Motor Credit. Secured by asset
purchased. Monthly payments of $298, principal
and interest. Due January, 1999. ............... -- 12,213 11,372
8.99% note due to First Essex Bank. Secured by
assets purchased. Monthly payments of $2,435,
principal and interest. Due June, 2001. ......... -- 109,213 94,603
--------- ----------- -----------
533,723 2,597,058 2,420,190
Less Current Portion .............................. 88,471 324,194 324,197
--------- ----------- -----------
$445,252 $2,272,864 $2,095,993
========= =========== ===========
The notes payable were extinguished as part of the acquisition of H.C.
Gobin, Inc. by Casella Waste Systems, Inc. See Note 16. No long-term debt
maturity has been presented.
F-71
H.C. GOBIN, INC.
NOTES TO FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
3. Related Party Transactions
The Company has entered into a lease arrangement for office space and
equipment with a related party. The lease is on a month to month basis
cancelable by either party. Present monthly rent has been set at $1,300. During
the years ended December 31, 1995 and 1996 and the six months ended June 30,
1997, the Company paid the lessor $15,600, $15,600 and $7,800, respectively.
4. Line of Credit
At December 31, 1995 the Company had a line of credit from First NH Bank
with a maximum borrowing limit of $100,000. Borrowings on this line of credit
were $65,000 on December 31, 1995. This line was guaranteed by various assets
of the Company and personally by the majority stockholder.
In February, 1996, the First NH Bank line of credit was repaid and closed.
It was replaced with a line of credit at the First Essex Bank with a maximum
borrowing limit of $250,000. Borrowings on this line were $249,952 and $215,417
at December 31, 1996 and June 30, 1997, respectively. This line is guaranteed
by various assets of the Company and personally by the majority stockholder.
The note matures in April, 2001.
The line of credit was extinguished as part of the acquisition of H.C.
Gobin, Inc. by Casella Waste Systems, Inc. See note 16. No future minimum
payments have been presented.
5. Notes Receivable
Notes receivable at December 31, 1995 and 1996 and June 30, 1997,
consisted of the following:
December 31,
----------------------
June 30,
1995 1996 1997
---------- --------- ------------
(Unaudited)
Unsecured note from shareholders. No stated interest or
repayment terms. .................................... $ -- $24,535 $24,535
--------- -------- --------
Less Current Portion ................................. -- 24,535 24,535
--------- -------- --------
$ -- $ -- $ --
========= ======== ========
6. Performance Bonding
The Company has been approved by Frontier Insurance Company for
performance bonding coverage not to exceed $3.5 million including bid bonds at
an annual usage rate of 1.65% of any portion of the coverage used. The Company
had drawn down on the available coverage in the amount of $430,290 as of
December 31, 1995 to secure various projects. During 1996 the Company did not
have a pre-approved limit for performance bonding coverage. As of June 30,
1997, the Company had drawn down on the available coverage in the amount of
$185,000 to secure various projects.
7. Stock Redemption
The Company's majority stockholders of record on December 31, 1994 entered
into a stock redemption plan with the Company. The agreement was executed on
January 1, 1995.
The Company entered into a loan agreement with the stockholders redeeming
their stock under the following terms:
Principal loan amount ...... $363,415
Interest rate ............... 11.4%
Term of loan ............... 207 payments
The loan is secured by various equipment of the Company. See the long-term
debt footnote for additional details.
F-72
H.C. GOBIN, INC.
NOTES TO FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
8. Business Development
The Company is currently involved in various business development projects
within New Hampshire and Vermont. These projects are in the research and
development stages. Expenses related to these development projects are included
as current year expenses within the income statement line items. Costs incurred
during the years ended December 31, 1995 and 1996 and the six months ended June
30, 1997 were approximately $14,000, $13,000 and $1,000, respectively.
9. Prepaid Expenses
The Company has elected to prepay various expenses in order to more
effectively manage its operating affairs. Prepaid items as of December 31, 1995
and 1996 and June 30, 1997 are as follows:
December 31,
---------------------
June 30,
1995 1996 1997
--------- --------- ------------
(Unaudited)
Licenses ......... $ 8,230 $12,132 $19,995
Insurance ......... 24,259 30,079 26,535
Legal fees ...... 15,753 -- --
Other ............ -- 2,087 7,330
-------- -------- --------
$48,242 $44,298 $53,860
======== ======== ========
10. Contract Costs
The Company incurs various costs related to preparation and implementation
of long-term contracts. Management has elected to amortize these initial costs
over the term of the contract. As of December 31, 1995 and 1996 and June 30,
1997, prepaid contract costs were $38,262, $29,106 and $23,997 respectively.
These costs relate to contracts entered into in 1995, 1996, 1997 and future
years.
11. Business Acquisition
During March of 1996 the Company acquired a commercial hauling business.
The acquisition price was $1,270,665 subject to adjustment based on a formula
outlined in the purchase and sales agreement. The acquisition was financed
through First Essex Bank, with various credit facilities which included
retirement of First NH Bank debt, and capital lease obligations.
12. Obligations Under Capital Leases
The Company is the lessee of vehicles and equipment under capital leases
expiring in various years through 2000. The assets and liabilities under
capital leases are recorded at the lower of the present values of the minimum
lease payments or the fair values of the assets. The assets are included in
property and equipment and are depreciated over their estimated useful lives.
As of June 30, 1997, minimum future lease payments under capital leases
are:
Year Ended June 30, (Unaudited)
- -------------------------------------
1998 ........................... $ 3,970
1999 ........................... 3,970
2000 ........................... 2,826
--------
Total minimum lease payments ...... $10,766
========
The capital lease obligations as of December 31, 1996 were extinguished as
part of the acquisition of H.C. Gobin, Inc. by Casella Waste Systems, Inc. See
Note 16.
F-73
H.C. GOBIN, INC.
NOTES TO FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
13. 401(k) Pension Plan
The Company has a 401(k) type pension and profit sharing plan for eligible
employees. Employees are eligible to participate in the plan if they have been
employed by the Company for one year. Generally, employees can defer up to 15%
of their salary into the plan, not to exceed $9,500. The employer can make a
discretionary contribution for the employees based on profit.
14. Contingent Liabilities
The Company was contingently liable on two (2) employment contracts as of
December 31, 1996:
1) Liable to an employee for severance pay of $7,500 upon employee
voluntary termination at any time prior to August 1, 2000. No amount has been
recorded in the financial statements.
2) Liable to an employee for severance pay equal to 15 weeks full
compensation including salary and medical/dental insurance. This liability is
approximately $24,596 and has been recorded as a liability in the financial
statements.
15. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
16. Subsequent Events
16A) During February 1997 the Company became in technical default of its
loan covenants with First Essex Bank. The default provisions were mitigated
upon the asset sale in August 1997 to Casella Waste Systems, Inc.
16B) During March 1997 the Company lost an investment of $29,451 due to
poor market conditions related to various option investments in Hampton-Rhodes,
LTD.
16C) On August 1, 1997, Casella Waste Systems, Inc., and subsidiaries
(CWS) acquired all of the assets of the Company. The purchase price of
approximately $4,880,000 consisted of $1,421,397 in cash, a $300,000
subordinated note to the seller and $3,158,603 in liabilities and closing costs
paid/assumed at closing.
17. Retained Earnings--Restatement
The retained earnings of the Company have been restated as of January 1,
1995. The restatement is a result of a change in the accounting for capital
lease obligation related to deferred taxes.
Retained Earnings--12/31/94 (As previously reported) ...... $1,020,939
Correction of deferred tax Calculation--12/31/94 ......... 70,790
-----------
Retained Earnings--1/1/95 (Restated) ..................... $1,091,729
===========
18. Legal Matters
The Company was involved in several pending legal matters during the audit
period and subsequently through the date of the audit report.
18A) NH/VT Solid Waste Project v. H.C. Gobin, Inc.--The Company has
escrowed approximately $185,000 with the Clerk of the Superior Court for
Sullivan County, New Hampshire. According to the Company's legal council,
evaluation of the likelihood of an unfavorable outcome appears to be unlikely
to exceed the funds held on deposit.
F-74
H.C. GOBIN, INC.
NOTES TO FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
18. Legal Matters (Continued)
18B) Paul Blann v. H.C. Gobin, Inc.--An employee of the Corporation
terminated in February 1997 has brought a claim for wrongful termination in
both Vermont and New Hampshire courts. The case in New Hampshire was concluded
with a judgement for the Company. The case in Vermont is pending. According to
the Company's legal counsel, in the unlikely event the Company were to lose, a
judgement between $25,000 and $100,000 could be anticipated.
18C) The Company has commenced an arbitration proceeding against Rose
Disposal Services, Inc. and Anco Leasing Corporation based on a claim of
indemnification pursuant to the Company's purchase of assets from those two
corporations in February 1996. Pursuant to that indemnification right, the
Company has set off indemnification payments against two promissory notes given
by it in that asset purchase transaction. The principals of Anco Leasing
Corporation and Rose Disposal Services, Inc. have threatened but have not
brought proceedings to collect amounts due under the promissory note.
F-75
[THIS PAGE INTENTIONALLY LEFT BLANK]
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters for whom Goldman, Sachs
& Co., Donaldson, Lufkin & Jenrette Securities Corporation and Oppenheimer &
Co., Inc. are acting as representatives, has severally agreed to purchase from
the Company and the Selling Stockholders the respective number of shares of
Class A Common Stock set forth opposite its name below:
Shares of Class A
Underwriter Common Stock
- ---------------------------------------------------------------- ------------------
Goldman, Sachs & Co. .................................... 1,008,334
Donaldson, Lufkin & Jenrette Securities Corporation ...... 1,008,333
Oppenheimer & Co., Inc. ................................. 1,008,333
BT Alex. Brown Incorporated .............................. 87,000
PaineWebber Incorporated ................................. 87,000
Smith Barney Inc. .......................................... 87,000
Wasserstein Perella Securities, Inc. ..................... 87,000
Moors & Cabot, Inc. ....................................... 87,000
Advest, Inc. ............................................. 60,000
Robert W. Baird & Co. Incorporated ........................ 60,000
First Analysis Securities Corporation ..................... 60,000
GS2 Securities, Inc. .................................... 60,000
Gruntal & Co., L.L.C. .................................... 60,000
Interstate/Johnson Lane Corporation ..................... 60,000
Raymond James & Associates, Inc. ........................ 60,000
Tucker Anthony Incorporated .............................. 60,000
Van Kasper & Company .................................... 60,000
----------
Total ................................................ 4,000,000
==========
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares of Class A
Common Stock offered hereby, if any are taken.
The Underwriters propose to offer the shares of Class A Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $0.74 per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $0.10 per share to
certain other brokers and dealers. After the shares of Class A Common Stock are
released for sale to the public, the offering price and other selling terms may
from time to time be varied by the representatives.
In connection with the Offering, the Underwriters may purchase and sell
the Class A Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions in connection with the Offering. Stabilizing transactions
consist of certain bids or purchases for the purpose of preventing or retarding
a decline in the market price of the Class A Common Stock; and syndicate short
positions involve the sale by the Underwriters of a greater number of shares of
Class A Common Stock than they are required to purchase from the Company in the
Offering. The Underwriters also may impose a penalty bid, whereby selling
concessions allowed to syndicate members or other broker-dealers in respect of
the securities sold in the Offering for their account may be reclaimed by the
syndicate if such shares of Class A Common Stock are repurchased by the
syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Class A Common
Stock, which may be higher than the price that might otherwise prevail in the
open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
0
Certain Selling Stockholders have granted the Underwriters an option
exercisable for 30 days after the date of this Prospectus to purchase up to an
aggregate of 600,000 additional shares of Class A
U-1
Common Stock solely to cover over-allotments, if any. If the Underwriters
exercise their over-allotment option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of shares of Class A Common Stock to be purchased by
each of them bears to the 4,000,000 shares of Class A Common Stock offered
hereby.
The Company, its directors and executive officers and certain of its
stockholders have agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 180 days after the
date of this Prospectus, they will not offer, sell, contract to sell or
otherwise dispose of any securities of the Company (other than pursuant to
employee stock option plans existing on the date of this Prospectus and other
than to issue shares upon the exercise of outstanding warrants) which are
substantially similar to the shares of Class A Common Stock or which are
convertible or exchangeable into securities which are substantially similar to
the shares of Class A Common Stock, without the prior written consent of the
representatives except for the Class A Common Stock offered in connection with
this Offering. In addition, the Company may issue shares of Class A Common
Stock in connection with any acquisition of another company if the terms of
such issuance provide that such Class A Common Stock shall not be resold prior
to the expiration of the 180-day period referenced in the preceding sentence.
The representatives of the Underwriters have informed the Company that
they do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Class A Common Stock offered by them.
Prior to this Offering, there has been no public market for the Class A
Common Stock. The initial public offering price was negotiated among the
Company and the representatives. Among the factors considered in determining
the initial public offering price of the Class A Common Stock, in addition to
prevailing market conditions, were the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
The Class A Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "CWST."
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
U-2
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having
been authorized. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy
such securities in any circumstances in which such offer or solicitation is
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
--------------------------------
TABLE OF CONTENTS
Page
-----------
Prospectus Summary ..................... 3
Risk Factors ........................... 7
Use of Proceeds ........................ 17
Dividend Policy ........................... 17
Dilution ................................. 18
Capitalization ........................... 19
Selected Consolidated Financial and
Operating Data ........................ 20
Unaudited Pro Forma Consolidated
Statements of Operations ............ 23
Management's Discussion and Analysis
of Financial Condition and Results of
Operations ........................... 27
Business ................................. 34
Management .............................. 50
Certain Transactions ..................... 59
Principal and Selling Stockholders ...... 61
Description of Capital Stock ............ 63
Shares Eligible for Future Sale ......... 68
Legal Matters ........................... 69
Experts ................................. 69
Additional Information .................. 70
Index to Financial Statements ............ F-1
Underwriting .............................. U-1
Through and including November 22, 1997 (the 25th day after the date of this
Prospectus), all dealers effecting transactions in the Common Stock, whether or
not participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
4,000,000 Shares
Casella Waste Systems, Inc.
Class A Common Stock
($0.01 par value)
--------------------------------
[Casella Logo]
--------------------------------
Goldman, Sachs & Co.
Donaldson, Lufkin & Jenrette
Securities Corporation
Oppenheimer & Co., Inc.
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
