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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ............... to ...............
Commission file number 000-23211
CASELLA WASTE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 03-0338873
- --------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
25 Greens Hill Lane, Rutland, VT 05701
- ---------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (802)-775-0325
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock, $.01 per share par value
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
The aggregate value of the voting stock held by non-affiliates of the
registrant, based on the last sale price of the registrant's Class A common
stock at the close of business on June 15, 1998 was $197,277,111 (reference is
made to Part II, Item 5 herein for a statement of assumptions upon which this
calculation is based).
There were 10,563,504 shares of class A common stock, $.01 per share par value,
of the registrant outstanding as of June 15, 1998. There were 988,200 shares of
class B common stock of the registrant outstanding as of June 15, 1998.
Documents Incorporated by Reference
Items 10, 11, 12 and 13 of Part III (except for information required with
respect to executive officers of the Company, which is set forth under Part I -
Business - "Executive Officers of the Company") have been omitted from this
report, since the Company will file with the Securities and Exchange Commission,
not later than 120 days after the close of its fiscal year, a definitive proxy
statement. The information required by Items 10, 11, 12 and 13 of Part III of
this report, which will appear in the definitive proxy statement, is
incorporated by reference into this report.
PART I
ITEM 1. 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. At of June 15, 1998, the Company owned and/or operated five
Subtitle D landfills, 35 transfer stations, nine recycling processing
facilities, 28 collection divisions, and two septic/liquid waste divisions,
which collectively serve over 180,000 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, 1998, the Company acquired ownership or long-term
operating rights to 77 solid waste businesses, including four landfills, and
between May 1, 1998 and June 15, 1998 the Company acquired an additional eight
such businesses, including a Subtitle D landfill in western upstate New York.
Recent Developments
Since the Company's initial public offering of Common Stock consummated in
November 1997 (the "November Offering"), the Company has expanded and
strengthened its market presence in its three geographic regions through the
acquisition of 28 solid waste management businesses, whose operations
collectively included one subtitle D landfill in western upstate New York (the
"Hyland Landfill"), 25 collection operations, four transfer stations and six
septic/liquid waste operations.
In November 1997, the Company completed the acquisition of BDS Sanitation, Inc.,
Vets Disposal, Inc. and Brookman Disposal, Inc. (collectively, the "Teelon
Group"), which provide solid waste collection and transfer services in various
counties in central New York. The Company believes that the acquisition of the
Teelon Group provides the Company with a new growth platform in central New York
and expands geographically the Company's existing operations in its Western
Region (which includes upstate New York and northern Pennsylvania). Subsequent
to the acquisition of the Teelon Group, the Company completed two "tuck-in"
acquisitions in central New York. See "Business - Service Area - Western
Region".
In December 1997, the Company completed the acquisition of All Cycle Waste, Inc.
and Winters Brothers, Inc. (collectively, the "All Cycle Acquisition"), which
provide solid waste collection and transfer services in Chittenden County,
Vermont. The Company believes that the acquisition of All Cycle further
strengthens the Company's market position in its Central Region (which includes
Vermont and certain areas of New Hampshire and upstate New York). See "Business
- - Service Area - Central Region".
In February 1998, the Company completed the acquisition of Atlantic Waste
Systems North, Inc., which provides solid waste collection to approximately
6,000 commercial, residential and industrial customers in Salem, New Hampshire
and surrounding counties. The Company believes that this acquisition provides
the Company with a new growth platform in southern New Hampshire and expands
geographically the Company's existing operations in its Eastern Region located
in Maine. See "Business - Service Area - Eastern Region".
In May, 1998, the Company acquired the Hyland landfill in Angelica, Allegany
County, New York. The Hyland landfill is the Company's first disposal facility
in its Western Region, and serves the western upstate New York waste shed. The
Company has received a permit from the State of New York Department of
Environmental Conservation for approximately 1,500,000 tons of disposal capacity
at this facility. The Hyland landfill may be subject to additional local
restrictions and permits. The Company has not yet begun accepting waste at the
Hyland landfill. See Part I, Item 3, "Legal Proceedings".
In January 1998, the Company increased its borrowing capacity, including its
ability to obtain letters of credit, to $150 million from $110 million with a
group of banks for which BankBoston, N.A. is acting as agent. See Part III, Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".
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 following are the
Company's three geographic regions that comprise the Company's service area:
Central Region
The Central Region consists of Vermont, portions of New Hampshire and eastern
upstate New York. The Company was founded in 1975 in Rutland, Vermont, and has
continued to grow its market presence in the Central Region. The portion of
upstate New York within the Company's Central Region as of June 15, 1998 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. 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, the Company operated 13
collection operations, 23 transfer stations and two septic/liquid waste pumping
operations in the Central Region as of June 15, 1998.
Eastern Region
The Company's Eastern Region consists of the central and southern portions of
Maine (including Bangor and Augusta) and southeastern New Hampshire. 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, at June
15, 1998 the Company operated six 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. In the fourth quarter of fiscal 1998, the Company wrote-down
the carrying value of the tire processing facility in the amount of $971,000.
There can be no assurance that the Company will not incur additional losses
relating to the continued operation of the waste tire processing facility,
including in the event of, among other reasons, a weakening of the market for
tire-derived fuel. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 3(j) of Notes to Consolidated
Financial Statements.
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, the Company believes that 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.
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. At June 15, 1998 the Company operated
six transfer stations and nine collection operations, and collects solid waste
from commercial, industrial and residential customers in the Western Region. In
May 1998, the Company acquired a Subtitle D landfill in Angelica, New York,
located in the Western Region. The Hyland landfill is the Company's first
disposal facility in its Western Region, and serves the western upstate New York
waste shed. See "Landfills - Hyland" and Part 1, Item 3, "Legal Proceedings".
Operations
The Company's operations include the ownership and/or operation of landfills,
solid waste collection services, transfer stations, recycling services,
septic/liquid waste operations, and tire processing and other services.
Landfills
The Company currently owns four Subtitle D landfill operations and operates a
fifth 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.
The following table provides certain information regarding the landfills that
the Company operates. All of such information is provided as of June 15, 1998.
Approximate Estimated
Estimated in Permitting
Total Remaining Process
Permitted Capacity Capacity
Landfill Location (Tons)(1) (Tons) (1)(2)
-------- -------- ------------------ -------------
Clinton County (3)..................... Schuyler Falls, NY 1,140,000 1,160,000
Waste USA (4).......................... Coventry, VT 1,424,000 600,000
SERF................................... Hampden, ME 162,000 3,200,000
NCES................................... Bethlehem, NH 46,000 1,500,000
Hyland ................................ Angelica, NY 1,500,000 - 0 -
(1) The Company converts estimated remaining permitted and permittable capacity
calculated in cubic yards to tons by assuming a compaction factor equal to the
historic average compaction factor applicable for the respective landfill. At
June 15, 1998 the Company had not begun accepting waste at the Hyland landfill.
Consequently, for the Hyland landfill, the Company has used a compaction factor
equal to the lowest compaction rate applicable to any existing facility (1,408
pounds per cubic yard). Actual compaction rates at the Company's landfills range
up to 1,550 pounds per cubic yard, which would translate into permitted capacity
at the Hyland landfill of 1,650,000 tons. See "Landfills - Hyland" and Part 1,
Item 3, "Legal Proceedings".
(2) Represents capacity for which the Company has begun the permitting process.
Does not include additional available capacity at the site for which permits
have not yet been sought.
(3) Operated pursuant to a capital lease expiring in 2021.
(4) 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.
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 seven-and-a-half-years of disposal. The
Company expects to file applications with state regulatory officials seeking to
further expand the permitted landfill capacity. See Item 2 - "Properties".
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. In the last quarter of fiscal 1998
the Company received a permit for an additional 1,300,000 tons of capacity. The
Company estimates, based on current usage levels, that the Waste USA landfill
has permitted air space capacity for approximately eight-and-a-half years of
disposal. In addition, the Company has applied for a variance, which, if
obtained, would enable the Company to amend its permit to add an additional
600,000 tons of permitted capacity. 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.
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 for
approximately one-and-a-half years of disposal. The Company has filed 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. 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 March 1998, and it is not anticipated that another vote would
take place until at least March 1999. In an effort to prolong the useful life of
the permitted capacity until March 1999, the Company is limiting the rate of
disposal at the facility and expects that the capacity at that restricted rate
will be filled no later than March 1999 at which time, if the Company does not
obtain local approval for additional air space capacity, the Company will be
required to initiate closure of the landfill. There can be no assurance that
another vote will take place or that in such a vote the zoning ordinance will be
approved by Bethlehem town voters prior to the time the estimated total
remaining permitted disposal capacity of the NCES landfill is exhausted. 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.
Hyland. The Hyland landfill, located in Angelica, New York in Allegany County,
serves the Company's Western Region. The Company has received a permit from the
State of New York Department of Environmental Conservation for approximately
1,500,000 tons of disposal capacity at the facility and is permitted to accept
500 tons of municipal solid waste per day. Prior to its acquisition by the
Company in May 1998, the first cell (with permitted capacity of 80,000 tons) of
the facility was fully constructed and had not accepted any waste for disposal.
The Company estimates that the Hyland landfill has permitted air space capacity
under the permit from the State of New York Department of Environmental
Conservation for 11 years of disposal. The Town of Angelica, New York has
adopted certain laws which would require the Company to obtain an additional
permit from the Town of Angelica for the operation of the Hyland landfill, would
prohibit the expansion of the landfill and would prevent the disposal of yard
waste and may preclude the disposal of industrial waste at that facility. The
Company has filed a lawsuit against the Town of Angelica seeking to set aside
enforcement of the law, and a temporary restraining order has been issued in
favor of the Company. If the Company is not successful in its lawsuit, and if
the Town of Angelica seeks to enforce the law by its terms, then the Company
would be required to obtain an additional permit from the Town of Angelica to
operate the Hyland landfill, the expansion of the landfill beyond the current
permitted capacity would be prohibited, and the Company would be unable to
dispose of yard waste and may be precluded from disposing of industrial waste at
the landfill. There can be no assurance that such limitations would not have a
material adverse effect on the Company's business, financial condition and
results of operations. At June 15, 1998, the Company had not yet begun accepting
waste at the Hyland landfill. See Part I, Item 3, "Legal Proceedings".
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. Governmental approval has been obtained
for closure of a fourth landfill and closure is expected to begin shortly. 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.
Once the permitted capacity of a particular landfill is reached, the landfill
must be closed and capped if additional capacity is not authorized. 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 28 solid waste collection divisions served over 180,000
commercial, industrial and residential customers at June 15, 1998. During fiscal
1998, approximately 52% of the solid waste collected by the Company was
delivered for disposal at its landfills. The Company's collection operations are
generally conducted within a 125-mile radius of its landfills. A majority of the
Company's 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.
Transfer Station Services
The Company operated 35 transfer stations as of June 15, 1998, of which 14 were
owned by the Company and 21 were operated under contracts with municipalities.
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.
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.
As of June 15, 1998 the Company operated nine recycling processing facilities.
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. At June 15,
1998, the Company employed one commodity sales manager to develop end markets,
and had 56 employees in the recycling facilities to support the processing of
approximately 65,000 tons of recyclable materials annually.
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. Because of continuing losses in the Company's waste tire
processing facility, in the fourth quarter of fiscal 1998 the Company wrote-down
the carrying value of the tire processing facility in the amount of $971,000.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 3(j) of Notes to Consolidated Financial Statements.
The Company's other services include two septic/liquid waste operations, located
in the Company's Central Region.
Competition
The solid waste services industry is highly competitive, undergoing a period of
consolidation, 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.
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 June 15, 1998, the Company had 29 division managers and 28
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.
Employees
At June 15, 1998, the Company employed approximately 1,043 full-time employees,
including approximately 63 professionals or managers, approximately 814
employees involved in collection, transfer and disposal operations, and
approximately 166 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, rejected a measure in the first half of fiscal
1998 to select a union to represent the employees in labor negotiations with
management. In addition, in the second half of fiscal 1998, the production
workers of the Company's tire recycling facility in Maine rejected a measure to
select a union to represent them in labor negotiations with management. An
unfair labor charge was filed against the Company with the Region 1 office of
the National Labor Relations Board in Boston, 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
reached an agreement resolving these charges, with no liability to the Company.
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 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
are intended to reduce 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. 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.
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:
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 modeled 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 and 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 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 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 promulgated 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.
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.
Executive Officers of the Company
The executive officers of the Company, their positions, and their ages as of
June 15, 1998 are as follows:
Name Age Position
---- --- --------
Executive Officers
John W. Casella (1) 47 President, Chief Executive Officer, Chairman of
the Board of Directors and Secretary
Douglas R. Casella 42 Vice Chairman of the Board of Directors
James W. Bohlig 52 Senior Vice President and Chief Operating
Officer, Director
Jerry S. Cifor 37 Vice President and Chief Financial Officer,
Treasurer
Michael P. Barrett 44 Vice President, Transportation and Recycling
Christopher M. DesRoches 40 Vice President, Sales and Marketing
Joseph S. Fusco 34 Vice President, Communications
James M. Hiltner 34 Regional Vice President
Michael Holmes 43 Regional Vice President
Larry B. Lackey 37 Vice President, Permits, Compliance and
Engineering
Alan N. Sabino 38 Regional Vice President
Gary Simmons 48 Vice President, Fleet Management
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 is also an executive officer and director of Casella
Construction, a company owned by Mr. Casella and Douglas R. Casella. 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. 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. 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. 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.
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.
James M. Hiltner has served as Regional Vice President of the Company since
March 1998. From 1990 to March 1998, Mr. Hiltner was employed by Waste
Management, Inc. as a region president (July 1996 through March 1998), where his
responsibilities included overseeing that company's waste management operations
in upstate New York and northwestern Pennsylvania, a division president (from
April 1992 through July 1996) and a general manager (from November 1990 through
April 1992.)
Michael Holmes has served as a 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 in
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 for
Waste Management, Inc. From 1989 to 1994, he served as Region 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.
ITEM 2. PROPERTIES
The principal fixed assets used by the Company in connection with its landfill
operations are its landfills which are described in Item 1.
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 generated in Clinton County is fixed for 25 years
subject to limited inflation increases during the term of the lease. During
fiscal 1998, approximately 18.4% (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 completed the closure and capping activities at this landfill in
September 1997. 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.
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. The
Company is required to pay the lessor at the end of the lease term the
difference between $6,000,000 and the actual amounts paid under the lease. In
addition, at the end of the lease term, the Company is obligated to exercise one
of the following 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 before January 25,
2001.
Other than the landfills, the principal fixed assets used by the Company in its
solid waste collection and landfill operations included, at June 15, 1998,
approximately 946 collection vehicles, 130 pieces of heavy equipment and 191
support vehicles. At June 15, 1998, transfer station operations included 35
transfer stations, 14 of which are owned and 21 of which are leased and/or
operated under agreements expiring between 1998 and 2021.
At June 15, 1998, the Company utilized nine recycling facilities in its service
areas, of which seven are owned and two are leased and/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.
ITEM 3. LEGAL PROCEEDINGS
Legal Proceedings
On or about October 30, 1997, Mr. Matthew M. Freeman commenced a civil lawsuit
against the Company and two of the Company's officers and directors in the
Rutland Superior Court, Rutland County, State of Vermont. In the complaint, Mr.
Freeman seeks compensation for services allegedly performed by him prior to
1995. Mr. Freeman is seeking a three percent equity interest in the Company or
the monetary equivalent thereof, as well as punitive damages. The Company and
the officers and directors have answered the complaint, denied Mr. Freeman's
allegations of wrongdoing, and asserted various defenses. In order to facilitate
the completion of the November Offering, certain stockholders of the Company,
including the two officers named as defendants, 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).
On May 12, 1998, the Company filed suit in New York Supreme Court, Allegany
County against the Town of Angelica, New York seeking a temporary restraining
order and preliminary injunctive relief against the Town's enforcement of a
recently-enacted local law which would prohibit the expansion of the Hyland
landfill, would require the landfill and the operator thereof to receive an
additional permit from the Town of Angelica to continue to operate, would
prevent the disposal of yard waste, may preclude the disposal of certain types
of industrial waste and would impose certain other restrictions on the landfill.
A temporary restraining order was granted by the court on May 14, 1998 in favor
of the Company. If the Company is not successful in its lawsuit, and if the Town
of Angelica seeks to enforce the law by its terms, then the Company would be
required to obtain an additional permit from the Town of Angelica to operate the
Hyland landfill, the expansion of the landfill beyond the current permitted
capacity would be prohibited, and the Company would be unable to dispose of yard
waste and may be precluded from disposing of industrial waste at the landfill.
There can be no assurance that such limitations would not have a material
adverse effect on the Company's business, financial condition and results of
operations. At June 15, 1998, the Company had not yet begun accepting waste at
the Hyland landfill.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders during the
fiscal quarter ended April 30, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Class A Common Stock began trading on the Nasdaq National Market
under the symbol "CWST" on October 29, 1997. Prior to such date, there was no
established public trading market for the Company's Class A Common Stock. The
following table sets forth the high and low sale prices of the Company's Class A
Common Stock for the periods indicated as quoted on the Nasdaq National Market.
Period High Low
- ------ ---- ---
Fiscal 1998
Second quarter (commencing October 29, 1997).......... $22.75 $20.25
Third quarter......................................... $26.375 $19.00
Fourth quarter........................................ $34.00 $23.75
Fiscal 1999
First quarter (through June 24, 1998) ................ $30.75 $24.50
On June 24, 1998, the high and low sale prices per share of the Company's Class
A Common Stock as quoted on the Nasdaq National Market were $25.25 and $24.625,
respectively. As of June 24, 1998 there were approximately 198 holders of record
of the Company's Class A Common Stock and two holders of record of the Company's
Class B Common Stock.
The closing price for the Class A Common Stock on June 24, 1998 was $24.75. For
purposes of calculating the aggregate market value of the shares of common stock
of the Company held by nonaffiliates, as shown on the cover page of this report,
it has been assumed that all the outstanding shares were held by nonaffiliates
except for the shares held by directors and executive officers of the Company.
However, this should not be deemed to constitute an admission that all such
persons are, in fact, affiliates of the Company, or that there are not other
persons who may be deemed to be affiliates of the Company.
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 revolving line of credit restricts the
payment of dividends.
Sales of Unregistered Securities
No unregistered securities of the Company were sold by the Company during the
fiscal year ended April 30, 1998 that were not previously reported by the
Company in its quarterly reports on Form 10-Q.
ITEM 6. 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 and cash
flows for the fiscal years ended April 30, 1996, 1997 and 1998, and the
consolidated balance sheets as of April 30, 1997 and 1998 are derived from the
Company's consolidated financial statements included elsewhere in this Annual
Report, and the consolidated statement of operations and cash flows data for the
fiscal years ended April 30, 1994 and 1995 and the consolidated balance sheet
data as of April 30, 1994, 1995 and 1996 are derived from the Company's
consolidated financial statements, all of which statements have been audited by
Arthur Andersen LLP. In December 1997, the Company completed the acquisition of
All Cycle in a transaction recorded as a pooling of interests. Accordingly,
financial statements of the Company have been restated for all prior years to
reflect the financial position, results of operations and cash flows of the
merged entities as if they had been one company for all periods presented. The
data set forth below should be read in conjunction with the "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 Annual Report.
Casella Waste Systems, Inc.
Selected Consolidated Financial and Operating Data
(In thousands, except per share data)
Fiscal Year Ended April 30,
-------------------------------------------------------------
Restated(1)
---------------------------------------------
1994 1995 1996 1997 1998
--------- ---------- ----------- ---------- ------------
Statement of Operations Data:
Revenues $13,491 $23,869 $42,829 $79,532 $118,067
Cost of operations 9,640 13,721 25,137 48,057 69,878
General and administrative 2,702 2,909 7,063 12,534 17,089
Merger-related costs 0 0 0 0 290
Depreciation and amortization 1,483 4,815 8,152 13,695 18,345
Loss on impairment of long-lived assets 0 0 0 0 971
-------------------------------------------------------------
Operating income (loss) (334) 2,424 2,477 5,246 11,494
Interest expense, net 613 1,826 2,617 4,290 6,532
Other expense (income), net 207 36 (90) 923 (80)
-------------------------------------------------------------
Income (loss) before provision
(benefit) for income taxes,
extraordinary items and
cumulative effect of change
in accounting principle (1,154) 562 (50) 33 5,042
Provision (benefit) for income
Taxes (441) 220 144 452 2,385
Extraordinary items 326
Change in accounting principle 124
-------------------------------------------------------------
Net income (loss) $(837) $342 $(520) $(419) $2,657
=============================================================
Accretion of preferred stock
and put warrants 0 (2,380) (2,967) (8,530) (5,738)
-------------------------------------------------------------
Net income (loss) applicable
to common shareholders $(837) $(2,038) $(3,487) $(8,949) $(3,081)
=============================================================
Basic net income (loss) per common share $(0.35) $(0.70) $(0.96) $(2.29) $(0.39)
Basic weighted average common
shares outstanding (2) 2,355 2,900 3,279 3,913 7,912
Diluted net income (loss) per common share $(0.35) $(0.70) $(0.96) $(2.29) $(0.39)
Diluted weighted average common
shares outstanding (2) 2,355 2,900 3,279 3,913 7,912
Other Operating Data:
EBITDA (3) $1,149 $7,239 $10,629 $18,941 $30,810
=============================================================
Capital Expenditures $843 $3,731 $10,750 $16,971 $24,652
=============================================================
Cash flows from operating activities $1,559 $4,978 $8,642 $14,765 $19,447
=============================================================
Cash flows from investing activities ($2,270) ($9,187) ($28,209) ($52,641) ($56,499)
=============================================================
Cash flows from financing activities $1,007 $4,547 $19,272 $38,755 $37,649
=============================================================
Balance Sheet Data:
Cash and cash equivalents $427 $765 $470 $1,349 $1,946
Working capital (deficit) (729) (1,393) (2,205) (5,577) 3,818
Property and equipment, net 6,394 23,203 37,955 67,983 81,684
Total assets 13,055 38,534 64,893 140,882 189,033
Long-term obligations, less
current maturities 7,331 22,998 24,103 76,901 74,833
Redeemable preferred stock 0 0 22,896 31,426 0
Redeemable put warrants (4) 62 3,142 400 400 0
Total stockholders' equity
(deficit) 738 2,338 (874) 76 81,860
(1) The Company has restated issued audited consolidated statements of
operations and consolidated statements of cash flows to reflect the merger with
All Cycle consummated on December 19, 1997, accounted for using the pooling of
interests method of accounting.
(2) Computed on the basis described in Note 3 of Notes to Consolidated
Financial Statements.
(3) EBITDA is defined as operating income plus depreciation and amortization and
loss on impairment of long-lived assets. 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 the
Consolidated Statement of Cash Flows in the Company's Consolidated Financial
Statements.
(4) 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.
ITEM 7. 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, and other financial Information included
elsewhere in this Annual Report.
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 $118.1 million for the fiscal year ended April 30,
1998. From May 1, 1994 through April 30, 1998, the Company acquired 77 solid
waste collection, transfer and disposal operations. Between May 1 and June 15,
1998, the Company acquired an additional eight such businesses, including the
Hyland landfill, a Subtitle D landfill in western upstate New York. All but one
of these acquisitions were accounted for under the purchase method of accounting
for business combinations. Under the rules of purchase accounting the acquired
companies' revenues and results of operations have been included together with
those of Casella Waste Systems, Inc. from the actual dates of the acquisitions
and will materially affect the period-to-period comparisons of the Company's
historical results of operations. In December 1997 the Company acquired a waste
collection and transfer operation in a transaction recorded as a pooling of
interests. Under the rules governing poolings of interest, the prior period and
year to date financial statements of the Company have been restated for all
prior years to reflect the financial position, results of operations and cash
flows of the merged entities as if they had been one company for all periods
presented in the accompanying financial statements.
This Annual Report and other reports, proxy statements, and other communications
to stockholders, as well as oral statements by the Company's officers or its
agents, may contain forward-looking statements within the meaning of Section 27A
of the Securities Act, with respect to, among other things, the Company's future
revenues, operating income, or earnings per share. Without limiting the
foregoing, any statements contained in this Annual Report that are not
statements of historical fact may be deemed to be forward-looking statements,
and the words "believes", "anticipates", "plans", "expects", and similar
expressions are intended to identify forward-looking statements. There are a
number of factors of which the Company is aware that may cause the Company's
actual results to vary materially from those forecast or projected in any such
forward-looking statement, certain of which are beyond the Company's control.
These factors include, without limitation, those outlined below in the section
entitled `Certain Factors That May Affect Future Results'. The Company's failure
to successfully address any of these factors could have a material adverse
effect on the Company's results of operations.
General
- -------
The Company's revenues 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 that are generally performed under
service agreements or pursuant to contracts with municipalities. The majority of
the Company's residential collection services are performed on a subscription
basis with individual households. Landfill and transfer customers are charged a
tipping fee on a per ton basis for disposing of their solid waste at the
Company's disposal facilities and transfer stations. The majority of the
Company's landfill and transfer customers are under one-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 and from the sale of tire derived fuel. Other revenues consist
primarily of revenue from waste tire tipping fees, and septic/liquid waste
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
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 decrease in the
Company's landfill revenues and in the Company's transfer revenues as a
percentage of revenues in fiscal 1997 and 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 or disposal
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 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 1997 and fiscal 1998 is
primarily due to the Company's acquisition and integration of tire processing
and septic/liquid waste operations during these periods.
% of Revenues
-------------
Year Ended April 30,
--------------------
1996 1997 1998
---- ---- ----
Collection........................... 68.7% 69.7% 73.4%
Landfill............................. 15.8 15.5 12.4
Transfer............................. 7.1 6.5 5.8
Recycling............................ 7.4 7.1 6.5
Other................................ 1.0 1.2 1.9
----- ----- ---
Total Revenues....................... 100.0% 100.0% 100%
====== ====== ====
Cost of operations includes labor, tipping fees paid to third party disposal
facilities, fuel, maintenance and repair of vehicles and equipment, worker's
compensation and vehicle insurance, the cost of purchasing materials to be
recycled, third party transportation expense, district and state taxes, host
community fees and royalties. Landfill operating expenses also include a
provision for closure and post-closure expenditures anticipated to be incurred
in the future, and leachate treatment and disposal costs.
General and administrative expenses include management, clerical and
administrative compensation and overhead, professional services and costs
associated with the Company's marketing and sales force and community relations
expense.
Depreciation and amortization expense includes depreciation of fixed assets over
the estimated useful life of the assets using the straight line method,
amortization of landfill airspace assets under the units-of-production method,
and the amortization of goodwill and other intangible assets using the straight
line method. The amount of landfill amortization expense related to airspace
consumption can vary materially from landfill to landfill depending upon the
purchase price and landfill site and cell development costs. The Company
depreciates all fixed and intangible assets, excluding non-depreciable land,
down to a $0 net book value, and does not apply a salvage value to any of its
fixed assets.
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.
Results of Operations
- ---------------------
The following table sets forth for the periods indicated the percentage
relationship that certain items from the Company's Consolidated Financial
Statements bear in relation to revenues.
% of Revenues
-------------
Year ended April 30,
--------------------
1996 1997 1998
---- ---- ----
Revenues....................................... 100.0% 100.0% 100.0%
Cost of operations............................. 58.5 60.4 59.2
General and administrative..................... 16.7 15.8 14.5
Merger related costs........................... 0.0 0.0 0.2
Depreciation and amortization.................. 19.0 17.2 15.6
Loss on impairment of long-lived assets........ 0.0 0.0 0.8
------ ------ ------
Operating income............................... 5.8 6.6 9.7
Interest expense, net.......................... 6.1 5.4 5.5
Other (income) expenses, net................... (0.2) 1.1 (0.1)
Provision for income taxes..................... 0.3 0.6 2.0
------ ------ ------
Net income (loss) before extraordinary items... (0.4) (0.5) 2.3
====== ====== ======
EBITDA*........................................ 24.8% 23.8% 26.1%
====== ====== ======
* See discussion and computation of EBITDA below.
Fiscal Year Ended April 30, 1998 versus April 30, 1997
- ------------------------------------------------------
Revenues. Revenues increased $38.5 million, or 48.5%, to $118.1 million in
fiscal 1998 from $79.6 million in fiscal 1997. Approximately $33.4 million of
the increase was attributable to the impact of businesses acquired throughout
fiscal 1997 and fiscal 1998. In addition, approximately $4.7 million of the
increase was attributable to internal volume and price growth. The balance of
the increase of approximately $400,000 was due to higher average recyclable
commodity prices in fiscal 1998 versus fiscal 1997.
Cost of Operations. Cost of operations increased approximately $21.8 million, or
45.4%, to $69.9 million in fiscal 1998 from $48.1 million in fiscal 1997, an
increase corresponding primarily to the Company's revenue growth described
above. Cost of operations as a percentage of revenues decreased to 59.2% in
fiscal 1998 from 60.4% in fiscal 1997. The decrease was primarily the result of:
(i) productivity improvements in the Company's collection operations as a result
of better route density from acquisitions, routing efficiencies through route
audits and front-end loader vehicle conversions completed throughout fiscal
1998; and (ii) margin improvements because of price increases in fiscal 1998.
General and Administrative. General and administrative expenses increased
approximately $4.6 million, or 36.3%, to $17.1 million in fiscal 1998 from $12.5
million in fiscal 1997. General and administrative expenses as a percentage of
revenues decreased to 14.5% in fiscal 1998 from 15.8% in fiscal 1997 due
primarily to improved economies of scale related to the significant increase in
revenues.
Merger-Related Costs. Merger-related costs consists of legal and professional
fees associated with the All Cycle pooling of interests, as well as bonus
payments made to All Cycle management personnel in consideration of the pending
merger.
Depreciation and Amortization. Depreciation and amortization expense increased
$4.7 million, or 34.0%, to $18.3 million in fiscal 1998 from $13.7 million in
fiscal 1997. As a percentage of revenues, depreciation and amortization expense
decreased to 15.6% in fiscal 1998 from 17.2% in fiscal 1997. The decrease in
depreciation and amortization expense as a percentage of revenues was primarily
the result of: (i) the increase as a percentage of the total revenues in fiscal
1998 of the Company's collection operations, which have lower depreciation and
amortization expenses than the Company's other operations; and (ii) lower
amortization expense at the Company's Waste USA landfill in Coventry, Vermont
due to the landfill receiving a permit for a significant expansion in fiscal
1998, which allows the Company to write off the landfill assets over a longer
period.
Loss on Impairment of Long-Lived Assets. The Company recognized a loss on
impairment of long-lived assets in the fourth quarter of fiscal 1998 in the
amount of $971,000. The impairment charge was a non-cash charge to write down
the assets of the Company's waste tire processing facility in Eliot, Maine to
fair market value as of April 30, 1998, because of continuing losses of that
facility. Due to pressures on the Company's tire derived fuel customers to meet
the requirements of the Clean Air Act, the Company believes that in the future
these customers will replace tire derived fuel with natural gas as a fuel, and,
therefore, the future undiscounted cash flows will be less than the carrying
value of the waste tire processing facility before the charge.
Interest expense, net. Net interest expense increased approximately $2.2
million, or 52.3% to $6.5 million in fiscal 1998 from $4.3 million in fiscal
1997. This increase primarily reflects increased average indebtedness in fiscal
1998 principally incurred in connection with acquisitions. The Company
capitalized a total of $137,535 in interest expense in fiscal 1998, down from a
total of $182,418 in fiscal 1997.
Other (income) expense, net. Net other (income) expense has not historically
been material to the Company's results of operations. However, during fiscal
1997, the Company settled a lawsuit for $450,000 and also paid approximately
$200,000 in attorneys' fees in connection with such settlement. Additionally,
the Company wrote off $283,000 in recycling assets that were deemed to have no
value in fiscal 1997.
Provision for income taxes. Provision for income taxes increased approximately
$1.9 million, or 427.7%, to $2.4 million in fiscal 1998 from $500,000 in fiscal
1997. This increase reflects the Company's increase in profits in fiscal 1998,
compared to losses in prior years. See Note 8 of Notes to Consolidated Financial
Statements.
Fiscal Year Ended April 30, 1997 versus April 30, 1996
Revenues. Revenues increased $36.7 million, or 85.6%, to $79.5 million in fiscal
1997 from $42.8 million in fiscal 1996. Approximately $33.6 million of the
increase was attributable to the impact of businesses acquired throughout fiscal
1996 and fiscal 1997. In addition, approximately $4.1 million of the increase
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 $22.9 million, or 91.1%, to
$48.1 million in fiscal 1997 from $25.1 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 60.4% in fiscal 1997 from
58.7% 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 $5.5 million, or 77.4%, to $12.5 million in fiscal 1997 from $7.1
million in fiscal 1996. General and administrative expenses as a percentage of
revenues decreased to 15.8% 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 $5.5 million, or 67.9%, to $13.7 million in fiscal 1997 compared
to $8.2 million in fiscal 1996. As a percentage of revenues, depreciation and
amortization expense decreased to 17.2% during fiscal 1997 from 19.0% 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 a percentage of total revenues in fiscal 1997, which generally
have lower depreciation and amortization expenses than other operations.
Interest expense, net. Net interest expense increased approximately $1.7
million, or 65.3%, to $4.3 million in fiscal 1997 from $2.6 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.
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 213.8%, 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.
Liquidity and Capital Resources
- -------------------------------
The Company's business is capital intensive. The Company's capital requirements
include acquisitions, fixed asset purchases and capital expenditures for
landfill development, cell construction, and site and cell closure. Because of
these needs the Company has in the past had working capital deficits. The
Company had positive net working capital of $3.8 million at April 30, 1998
compared to a $5.6 million working capital deficit at April 30, 1997.
The Company has a $150 million revolving line of credit with a group of banks
for which BankBoston, N.A. is acting as agent. This line of credit is secured by
all assets of the Company, including the Company's interest in the equity
securities of its subsidiaries. This revolving line of credit matures in
January, 2003.
The proceeds from the November offering were $48.4 million, net of underwriters'
discounts and issuance costs. A portion of the November Offering proceeds, $45
million, was used to repay long term debt, and to pay down the line of credit.
Subsequently, the Company re-borrowed under the line of credit to finance
acquisitions. Funds available to the Company under the line of credit were $86
million at April 30, 1998.
On June 24, 1998, the Company filed an S-1 Registration Statement (the
"Registration Statement") with the Securities and Exchange Commission to
register an aggregate of 5,500,949 shares for sale. Of these shares, 1,600,000
are expected to be sold by the Company and 1,444,304 shares are expected to be
sold by selling stockholders. In addition, the Company granted the underwriters
an option to purchase up to an additional 456,645 shares to cover
overallotments, if any. The Registration Statement also covers up to 2,000,000
shares which may be issued by the Company from time to time in connection with
acquisitions of businesses or assets. There can be no assurance that the
Registration Statement will be declared effective by the Securities and Exchange
Commission or that any of the shares offered pursuant to the Registration
Statement will be sold.
The Company believes that its cash provided internally from operations together
with the Company's available credit facilities and the proceeds of this offering
should enable it to meet its needs for working capital for the next fiscal year.
Net cash provided by operations for the fiscal years ended April 30, 1998 and
April 30, 1997 was $19.4 million and $14.8 million, respectively. The increase
was primarily due to the increase in the Company's net income for the 1998
fiscal year, together with an increase in depreciation and amortization and a
decrease in the Company's accrued closure and post closure costs. The decrease
in the closure/post closure accrual is due to the completion in the 1998 fiscal
year of work required to close an unlined cell at the Clinton County landfill
and at stage one of the Company's NCES landfill.
Net cash provided by operations in fiscal 1997 increased to $14.8 million from
$8.6 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.
For fiscal 1998 and fiscal 1997, cash used in investing activities was $56.5
million and $52.6 million, respectively. The increase in investing activities
reflects the Company's capital expenditure and capital needs for acquisitions
which have increased significantly, reflecting the Company's rapid growth by
acquisition and development of revenue producing assets. The Company's cash
needs to fund investing activities are expected to increase further as the
Company continues to complete acquisitions.
For fiscal 1998 and fiscal 1997, the Company's financing activities provided
cash of $37.6 million and $38.8 million, respectively. Net cash provided by
financing activities was $19.3 million in the fiscal year ended April 30, 1996.
The net cash provided by financing activities of $37.6 million in the fiscal
year ended April 30, 1998 reflects the net proceeds of the November Offering and
borrowings on the Company's credit facility, offset by repayments. 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, 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.
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 events, the Company's Class A Common Stock price would
likely be materially and adversely affected.
Inflation and Prevailing Economic Conditions
- --------------------------------------------
To date, inflation has not had a significant impact on the Company's operations.
Consistent with industry practice, most of the Company's contracts provide for a
pass through of certain costs, including increases in landfill tipping fees and,
in some cases, fuel costs. The Company therefore believes it should be able to
implement price increases sufficient to offset most cost increases resulting
from inflation. However, competitive factors may require the Company to absorb
at least a portion of these cost increases, particularly during periods of high
inflation.
The Company's business is 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.
Year 2000 Issues
- ----------------
The Company uses well-regarded nationally known software vendors for both its
general accounting applications and industry-specific customer information and
billing systems. The general accounting package which the Company uses is fully
year 2000 compatible, and the provider of the solid waste industry customer
information and billing system has made a commitment to be year 2000 compatible
by August, 1998.
The Company's banking arrangements are with an international banking institution
which is taking all necessary steps to insure its customers' uninterrupted
service throughout applicable Year 2000 time frames. The Company's payroll is
performed out-of-house by the largest provider of 3rd party payroll services in
the country, which has made a commitment of uninterrupted service to their
customers throughout applicable Year 2000 time frames.
None of the Company's customers represent a large enough share of the Company's
revenues to materially affect overall Company revenues in the event of an
individual customer experiencing year 2000 problems. The Company believes that
the same is true of any of the Company's suppliers of goods and services, aside
from those discussed above.
EBITDA
- ------
EBITDA represents operating income (earnings before interest and taxes, or
"EBIT") plus depreciation and amortization expense and loss on impairment of
long-lived assets. EBITDA is not a measure of financial performance under
generally accepted accounting principles, but is provided because the Company
understands that certain investors use this information when analyzing the
financial position and performance of the Company.
Fiscal Year Ended April 30,
------------------------------------
Restated
----------------------
1996 1997 1998
--------- ---------- ----------
(in thousands)
Operating income ...................... $ 2,477 $ 5,279 $11,494
Depreciation and amortization ......... 8,152 13,053 18,345
Loss on impairment of long-lived
assets (1) .......................... 0 0 971
------- ------- -------
EBITDA ................................ $10,629 $18,332 $30,810
======= ======= =======
EBITDA as a percentage of revenues .... 24.8% 25.1% 26.1%
- ------------------
(1) See Note 3 of Notes to Consolidated Financial Statements.
Analysis of the factors contributing to the change in EBITDA is included in the
discussions above.
Certain Factors That May Affect Future Results
- ----------------------------------------------
The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Annual Report and presented elsewhere by management from time to time.
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. Such growth, if it were to occur, could place a
significant strain on the Company's management and operational, financial and
other resources.
The Company has incurred net losses in fiscal 1996 and fiscal 1997. There can be
no assurance that the Company will be profitable in the future.
The Company's strategy envisions that a substantial part of the Company's future
growth will come from acquiring and integrating solid waste collection, transfer
and disposal 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.
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. In
addition, the Company's future success depends on its continuing ability to
identify, hire, train, motivate and retain highly trained personnel.
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. 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 its capital requirements.
The Company's operating program depends on its ability to operate and expand the
landfills it owns and leases and to develop new landfill sites. Several of the
Company's landfills are subject to local laws purporting to regulate their
expansion and other aspects of their operations. There can be no assurance that
the laws adopted by municipalities in which the Company's landfills are located
will not have a material adverse effect on the Company's utilization of its
landfills or 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
This item is not applicable to the Company for the fiscal year ended April 30,
1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 1997 and
1998, 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, 1998. 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, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years ended April 30, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Boston, Massachusetts
June 12, 1998
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
April 30, April 30,
1997 1998
ASSETS (Restated, See Note 1)
------ ---------------------- ---------
CURRENT ASSETS:
Cash and Cash Equivalents $ 1,349 $ 1,946
Restricted Cash - Closure Fund Escrow 1,532 304
Accounts Receivable-trade, less allowance 14,107 17,112
for doubtful accounts of $722 and $1,123.
Refundable Income Taxes 447 921
Prepaid Income Taxes 543 546
Prepaid Expenses 906 1,204
Other Current Assets 745 561
-------- ------
Total Current Assets 19,629 22,594
PROPERTY AND EQUIPMENT, at Cost:
Land and Land Held for Investment 3,293 4,390
Landfills 30,793 34,276
Landfill Development 1,332 3,319
Buildings and Improvements 12,353 15,019
Machinery and Equipment 10,420 12,770
Rolling Stock 21,666 32,611
Containers 11,305 16,079
-------- -------
91,162 118,464
Less - Accumulated Depreciation and
Amortization 23,179 36,780
-------- --------
Property and Equipment, net 67,983 81,684
-------- --------
OTHER ASSETS:
Intangible Assets, net 49,038 78,939
Restricted Funds - Closure Fund Escrow 3,335 3,865
Other Assets 897 1,951
-------- --------
53,270 84,755
-------- ---------
$140,882 $189,033
======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Per Share Data)
April 30, April 30,
LIABILITIES and 1997 1998
STOCKHOLDERS EQUITY (Restated, See Note 1)
------------------- ---------------------- ----------
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt $6,272 $2,595
Current Maturities of Capital Lease Obligations 392 481
Accounts Payable 9,034 10,141
Accrued Payroll and Related Expenses 1,222 625
Accrued Closure and Postclosure Costs, Current 3,417 374
Portion
Deferred Revenue 2,075 2,021
Other Accrued Expenses 2,794 2,539
------ ------
Total Current Liabilities 25,206 18,776
------ ------
Long-Term Debt, Less Current Maturities 75,528 73,748
------ ------
Capital Lease Obligations, Less Current Maturities 1,373 1,085