Back to GetFilings.com
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, 1999
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 July 15, 1999 was $326,323,582 (reference is
made to Part II, Item 5 herein for a statement of assumptions upon which this
calculation is based).
There were 15,031,904 shares of class A common stock, $.01 per share par value,
of the registrant outstanding as of July 15, 1999. There were 988,200 shares of
class B common stock of the registrant outstanding as of July 15, 1999.
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 expects to 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, Massachusetts, upstate New York and
northern Pennsylvania. As of July 15, 1999, the Company owned and/or operated
five Subtitle D landfills, two landfills permitted to accept construction and
demolition materials, 51 transfer stations, 16 recycling processing facilities,
and 40 solid and liquid waste collection divisions, which collectively served
over 500,000 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, 1999, the Company
acquired ownership or long-term operating rights to 132 solid waste businesses,
including 7 landfills, and between May 1, 1999 and July 15, 1999 the Company
acquired an additional nine such businesses.
Recent Developments
On January 12, 1999 the Company signed a definitive merger agreement with KTI, a
publicly traded solid waste handling company operating in 21 states throughout
the United States. KTI specializes in solid waste disposal and recycling, and
operates manufacturing facilities utilizing recycled materials. The Company
believes the merger will give it additional growth opportunities in its existing
and adjacent markets, and the ability to enter new markets, as well as achieve
operational efficiencies as a result of the combination. On April 13, 1999, the
Company notified KTI of its intent to terminate the merger agreement upon the
expiration of a 30-day cure period as a result of breaches by KTI of the merger
agreement. On May 12, 1999, the Company announced that it and KTI had revised
and amended the terms of the merger agreement. Pursuant to the amended merger
agreement, each share of KTI common stock will be exchanged for 0.59 shares of
the Company's class A common stock.
In July 1998 the Company completed a second public offering of 2,060,587 shares
of its class A common stock at $27.25 per share. Proceeds of approximately
$52,231,490 after underwriters discounts and issuance expenses were used for
debt reduction, acquisitions and other general corporate purposes.
During the fiscal year ended April 30, 1999, the Company expanded and
strengthened its market presence throughout its three geographic regions by
acquiring 55 solid and liquid waste management businesses totaling approximately
$54.5 million in revenues, including the following:
On September 4, 1998 the Company completed a merger with Hakes C & D Disposal,
Inc. This facility is a permitted landfill in western New York State designed to
accept construction and demolition material. As of July 15, 1999 the facility
was under construction and had not begun accepting waste. The Company believes
this facility will allow it to realize the financial and operational benefits of
disposing of construction and demolition debris collected by its own operations
in its own facility in a key market for the Company.
On October 29, 1998, the Company completed a merger with Waste Stream Inc., B&C
Sanitation Corporation, North Country Trucking, Inc., Better Bedding Corp., R.A.
Bronson, Inc., BBC LLC, NTC LLC and Grasslands, Inc., (together - "Waste
Stream"), which provide solid waste and recycling collection services in
northern New York State. The Company believes the acquisition of Waste Stream
further strengthens the Company's market position in upstate New York.
On December 23, 1998, the Company completed a merger with Northern Sanitation,
Inc and Northern Properties Corp. of Plattsburgh, Inc. (together - "Northern
Sanitation"), a solid waste collection company in Clinton County, New York. The
Company believes the proximity of Northern Sanitation to the Company's Clinton
County landfill gives it a stronger market presence in that region.
On April 30, 1999 the Company completed a merger with Natural Environmental,
Inc., Schultz Landfill, Inc. and Blasdell Development Group, Inc. (together -
"NEI"), a collection, transfer and construction & demolition debris disposal
company serving the Buffalo, New York region. Also on April 30, 1999, the
Company completed a merger with Westfield Disposal Service, Inc. and Portland C
& D Landfill, Inc. (together - "Westfield Disposal"), a collection company,
transfer station, and construction and demolition debris landfill serving
Chautauqua County, New York and Erie, Pennsylvania. The Company believes that
these acquisitions provide the Company with a new growth platform in western New
York and expand geographically the Company's existing operations in its Western
Region.
Since the end of the Company's 1999 fiscal year on April 30, 1999, the Company
entered the eastern Massachusetts market with the acquisition of Resource Waste
Systems, Inc., Resource Recovery of Cape Cod, Inc., and Resource Transfer, Inc.
(collectively, "Resource Waste Systems, Inc."), which provide solid waste
collection and transfer services, and construction and demolition debris
processing in eastern Massachusetts. The Company believes that the acquisition
of Resource Waste Systems provides the Company with a new growth platform in a
market contiguous to its existing markets, particularly when matched with the
assets and operations in southern Maine expected to be acquired in the merger
with KTI, Inc.
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 collection to transfer
stations to disposal. 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 July 15, 1999 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 (See Part I, Item 3,
`Legal Proceedings'); 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 21 collection operations and 24 transfer stations
in the Central Region as of July 15, 1999.
Eastern Region
The Company's Eastern Region consists of the State of Maine and southeastern New
Hampshire. The Company established a market presence in Maine through the
acquisition of the Sawyer Companies in January 1996. The Company owns the SERF
landfill located in Hampden, Maine, which disposes of ash, construction and
demolition debris, special waste and front end processing residue primarily from
throughout the State of Maine. In addition, at July 15, 1999 the Company
operated five collection operations and nine transfer stations, and collected
solid waste from commercial, industrial and residential customers in the Eastern
Region. The Company's waste tire processing facility, located in Eliot, Maine,
has the capacity to process approximately 3.5 million tires per year and
generates tire derived fuel, which the Company sells to paper mills for
consumption as a supplemental energy source for boiler fuel.
Unlike the other states in the Company's existing market area, Maine has an
aggressive incineration program and the Company believes that approximately 80%
of the waste shed in the Company's market area is disposed of through
incineration. However, the Company believes that approximately 35% of the
tonnage delivered to incinerators is returned to landfills as ash and front end
processing residue, and the Company 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 July 15, 1999 the
Company operated 18 transfer stations and 14 collection operations, and
collected solid waste from commercial, industrial and residential customers.
During fiscal 1999 the Company acquired a Subtitle D permitted landfill, the
Hyland facility, in Angelica, New York, which serves the western upstate
portion of our New York waste shed (See Part I, Item 3, `Legal Proceedings').
The Company also acquired two landfills in fiscal 1999 permitted to accept
construction and demolition materials, the Hakes and Portland facilities.
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 25-year lease arrangement with a county. All
of the Company's operating Subtitle D landfills include leachate collection
systems, groundwater monitoring systems and, where required, active methane gas
extraction and recovery systems. In addition to these landfills the Company owns
two landfills permitted to accept only construction and demolition materials.
These types typically, depending on the state in which they are located, are
constructed in accordance with lower environmental standards than Subtitle D
landfills, reflecting the inert nature of the materials deposited in them.
During the year ended April 30, 1999, approximately 71% of the waste volumes
received by the Company's landfills were from internal sources such as the
Company's hauling divisions or transfer stations.
The following table provides certain information regarding the landfills that
the Company operates. All of such information is provided as of July 15, 1999.
Approximate Estimated
Estimated in Permitting
Total Remaining Process
Permitted Capacity Capacity
Landfill Location (Tons)(1) (Tons) (1)(2)
-------- -------- --------- -------------
Clinton County (3)............................ Schuyler Falls, NY 788,000 990,000
Waste USA .................................... Coventry, VT 2,241,400 - 0 -
SERF (4)...................................... Hampden, ME 53,000 3,500,000
NCES.......................................... Bethlehem, NH 150,000 544,000
Hyland........................................ Angelica, NY 1,615,000 - 0 -
Hakes (5)..................................... Campbell, NY 825,000 - 0 -
Portland (6).................................. Portland, NY 20,250 - 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.
(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) Of the 3,500,000 additional in-process tonnage, 3,300,000 has received all
required permits from the State of Maine; however the town of Hampden, Maine,
where the site is located, has not issued the required construction permits for
work to begin on the expansion. If these permits are not received in a
reasonable time the Company may pursue legal remedies. The remaining 200,000
tons meets all state and local requirements.
(5) First cell under construction. Projected opening September 1999.
(6) Facility currently under construction.
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. As noted above, the Town of Hampden has delayed the
construction of the newest permitted cell of this site by failing to issue a
construction permit in a timely manner. Although the Company will consider legal
remedies in the event the Town continues to obstruct expansion, there can be no
assurance the Company will prevail. The Penobscot Energy Recovery Corporation's
incinerator is owned by a limited partnership in which KTI holds a 70.36%
ownership interest.
NCES. The NCES landfill, located in Bethlehem, New Hampshire, serves the
northern and central New Hampshire waste sheds and portions of the Maine and
Vermont waste sheds. The Town of Bethlehem has adopted a zoning ordinance
which precludes the `expansion of any existing landfills'. The Company has
contested this ordinance vigorously. See Part I, Item 3, `Legal Proceedings'
for details of these proceedings.
Waste USA. The Waste USA landfill is located in Coventry, Vermont and serves the
northern two-thirds of Vermont.
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. Under the lease, the Company is
generally obligated to expand the landfill at its own cost. Under the terms of
the lease, the Clinton County landfill cannot receive waste from certain
geographic regions in New York. The facility has a permitted capacity of 140,000
tons per year. 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 was
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.
Hyland. The Hyland landfill, located in Angelica, New York in Allegany County,
serves the Company's Western Region. The Town of Angelica has adopted a local
ordinance seeking to restrict the manner in which the Company may operate or
expand this facility. For a full explanation, see Part I, Item 3, "Legal
Proceedings".
Hakes. This facility is located in Campbell, New York. The first cell of this
facility is currently under construction and is projected to be open in
September 1999.
Portland. This facility, acquired on April 30, 1999 as part of the Westfield
Disposal merger, is located in Portland, New York. The facility is currently
under construction and is projected to re-open in October 1999.
The Company also owns and/or operated five unlined landfills, which are not
currently in operation. All of these landfills have been closed and
environmentally capped by the Company. One of the unlined landfills, 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.
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.
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 38 solid waste collection divisions served over 500,000
commercial, industrial and residential customers at July 15, 1999. During fiscal
1999, approximately 49% 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 51 transfer stations as of July 15, 1999, of which 31 were
owned by the Company and 20 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 sought to position itself to provide recycling services to
customers who are willing to pay for the cost of the recycling service.
Depending on the terms of the individual customer contracts and the level of
recovered material commodity prices, the proceeds generated from reselling the
recycled materials are occasionally 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 its
customers. 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 July 15, 1999 the Company operated 16 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
generally taken primary responsibility for recycling efforts. At July 15, 1999,
the Company employed one commodity sales manager to develop end markets, and had
80 employees in the recycling facilities to support the processing of
approximately 70,000 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 2(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 July 15, 1999, the Company had 35 division managers, 3 sales
managers and 42 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 July 15, 1999, the Company employed approximately 1,401 full-time employees,
including approximately 115 professionals or managers, approximately 1,076
employees involved in collection, transfer and disposal operations, and
approximately 210 sales, clerical, data processing or other administrative
employees.
On October 30, 1998, the Company merged with Waste Stream (see `Recent
Developments') . Prior to the merger the employees of Waste Stream's Malone, New
York location had voted in favor of representation by Chauffeurs, Teamsters,
Warehousemen and Helpers Union (`Teamsters') Local #687, but at that time they
did not have an approved, ratified contract with Waste Stream. Negotiations
between the represented employees and the Company are ongoing.
On May 11, 1999 a petition for representation was filed with the National
Labor Relations Board by Teamsters Local #597 on Casella Transportation, Inc.
On June 25, 1999 the employees of Casella Transportation, Inc. rejected the
measure to select union representation.
On July 1, 1999 the Company acquired Resource Waste Systems, Inc. The drivers at
Resource Waste Systems, Inc. are represented by the National Industries Union
Local #88 and the Teamsters Local #379.
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 is aware of no other organizational efforts among its employees. 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.
Effective July 1, 1999, the Company has established a Captive Insurance Company,
`Casella Insurance Company', through which it is self-insured for Workman's
Compensation coverage. The Company's maximum exposure under this plan is
$250,000 per individual event, $2.7 million total, after which reinsurance
takes effect and limits the Company's exposure.
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 and Other Key Employees of the Company
The executive officers and other key employees of the Company, their positions,
and their ages as of July 15, 1999 are as follows:
Name Age Position
---- --- --------
Executive Officers
- ------------------
John W. Casella 48 President, Chief Executive Officer, Chairman of
the Board of Directors and Secretary
Douglas R. Casella 43 Vice Chairman of the Board of Directors
James W. Bohlig 53 Senior Vice President and Chief Operating
Officer, Director
Jerry S. Cifor 38 Senior Vice President and Chief Financial Officer,
Treasurer
Other Key Employees
- -------------------
Michael P. Barrett 45 Vice President, Transportation, Liquid Waste and Recycling
Christopher M. DesRoches 41 Vice President, Sales and Marketing
Joseph S. Fusco 35 Vice President, Communications
James M. Hiltner 35 Regional Vice President
Michael Holmes 44 Regional Vice President
Larry B. Lackey 38 Vice President, Permits, Compliance and
Engineering
Alan N. Sabino 39 Regional Vice President
Gary Simmons 49 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 Casella Waste Management, Inc. in 1975, and has been
a director of that 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. In 1998 Mr. Barrett became Vice President
of Liquid Waste Services. 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
management 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.
Other than the landfills, the principal fixed assets used by the Company in its
solid waste collection and landfill operations included, at July 15, 1999,
approximately 1,402 collection vehicles, 195 pieces of heavy equipment and 261
support vehicles. At July 15, 1999, transfer station operations included 51
transfer stations, 31 of which are owned and 20 of which are leased and/or
operated under agreements expiring between 1999 and 2021.
At July 15, 1999, the Company utilized 16 recycling facilities in its service
areas, of which seven are owned and nine 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 solid waste
collection, maintenance and septic hauling facility 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 initial public offering of the Company's Class A Common
Stock in November, 1997, certain stockholders of the Company agreed to indemnify
the Company for any settlement by the Company or any award against the Company
in excess of $350,000 (but not legal fees paid by or on behalf of the Company or
any other third party). The Company accrued a $215,000 reserve for this claim
during the year ended April 30, 1998.
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, and by a decision dated July 13, 1998, the court granted the
Company's motion for a preliminary injunction. On September 9, 1998, the Town of
Angelica filed a Notice of Appeal but has not yet perfected that appeal. If 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 certain industrial wastes 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. The
Company began accepting waste at the Hyland facility on July 22, 1998, and is in
active settlement negotiations with the town.
The Company's wholly-owned subsidiary, North Country Environmental Services,
Inc. ("NCES"), is a party to consolidated civil actions (Case Nos. 98-E-141 and
98-E-151) against the Town of Bethlehem, New Hampshire (the "Town"), before the
Grafton Superior Court in North Haverhill, New Hampshire. On October 16, 1998,
NCES
commenced an action for declaratory relief against the Town seeking, on a
variety of grounds, to invalidate a Town zoning ordinance which purports to
prohibit the expansion of NCES's landfill beyond its currently permitted
capacity. The Town has taken the position that NCES may not expand the landfill
beyond Stage II, Phase I, which has reached capacity. NCES sought a declaration
that it requires no further approvals from the Town to expand the landfill
throughout its 87-acre parcel and that certain financial exactions imposed by a
1986 Town land-use approval are invalid. In the alternative, NCES sought
compensation under state law for the inverse condemnation of its property.
On October 23, 1998, the Town filed a petition for injunctive and declaratory
relief against NCES. The Town's petition sought to enjoin NCES's construction of
Stage II, Phase II of the landfill and to prevent any further expansion as
violative of the above-noted Town zoning ordinance. The construction of Stage
II, Phase II was proceeding at that time pursuant to a construction permit
issued by the New Hampshire Department of Environmental Services (NHDES) on
September 15, 1998. On October 30, 1998, the court entered a preliminary
injunction requiring NCES to suspend construction of Stage II, Phase II. When
the Town failed to post an injunction bond, however, the court permitted NCES to
complete and cover the liner system in Stage II, Phase II, before the onset of
winter.
On November 30, 1998, NCES and the Town proceeded to trial on eight of NCES's
eleven claims for relief and on the Town's claims for permanent injunctive and
declaratory relief. Earlier, the remaining three NCES claims were bifurcated for
later trial, if needed. On the day of trial, the Town filed two counterclaims
seeking to establish the lawfulness of the financial exactions challenged by
NCES's October 16, 1998 petition.
The Grafton Superior Court issued its order on NCES's first eight claims and the
Town's request for a permanent injunction and declaratory relief on February 1,
1999. The court declined to decide whether the Town's zoning ordinance is valid;
rather, the court held that NCES had appropriated a 51-acre tract of land
comprised of a 10-acre and a 41-acre parcel for landfilling purposes. Stage II,
Phase II is within the 51-acre tract. The court also found that NCES had
obtained permission to operate its landfill facility on this 51-acre tract prior
to the enactment of the challenged zoning ordinance and held that the ordinance
did not apply to NCES's operation of its landfill facility on this tract.
Consequently, the court held that the Town lacked authority to enforce the
zoning ordinance against NCES with respect to the 51-acre tract and denied the
Town's petition in its entirety. The court did not decide the validity of the
zoning ordinance as it relates to 36 acres adjoining the 51-acre tract after
finding that NCES had not demonstrated a present intent to develop this property
for landfilling. Consequently, NCES's ability to use this 36 acres for
landfilling remains unresolved.
On February 10, 1999, the Town moved the Grafton Superior Court to clarify and
reconsider its order. On March 22, 1999, the court denied reconsideration but
offered some clarification which did not result in any substantive change in its
earlier order. On April 20, 1999, the Town filed a notice of appeal with the New
Hampshire Supreme Court seeking review of the superior court's order. NCES filed
a notice of cross-appeal on April 29, 1999.
Concurrently, on March 24, 1999, a special interest group, Environmental Action
for Northern New Hampshire, Inc. ("EANNH") sought to intervene before the
superior court. The reason EANNH gave for seeking intervention was to introduce
evidence which it claimed showed that there were size limitations on the
landfill implicit in the land-use approvals obtained by NCES's predecessors in
1976 and 1986. The superior court denied EANNH intervention on April 22, 1999,
and on May 24, 1999, EANNH appealed the denial of intervention to the New
Hampshire Supreme Court.
The Town's notice of appeal centers on its argument that there were implied
limitations upon the size of the landfill that could be operated by NCES and its
predecessors under the land-use approvals granted by the Town in 1976 and 1986.
NCES's cross-appeal seeks a determination that it has all local approvals
necessary to landfill throughout the entire 87-acre parcel, that the Town's
restrictive zoning ordinance is unlawful for several reasons, and that the
Town's attempted enforcement of the zoning ordinance was in bad faith, entitling
NCES to its attorney's fees.
The New Hampshire Supreme Court has yet to accept any of the appeals. NCES has
filed a motion for summary disposition of EANNH's appeal, but there has yet to
be a ruling on that motion. NCES has also learned that a second special interest
group, AWARE, Inc., intends to seek AMICUS CURIAE status so it may submit briefs
to the Supreme Court in support of the Town's appeal.
The sole issue remaining before the superior court is the lawfulness of the
financial exactions imposed in 1986 by the Town as a condition of land-use
approval. These exactions consist of a discounted tipping fee for Town solid
waste and a per-ton payment to the Town for all solid waste originating from
outside the Town and deposited at the landfill. NCES stopped complying with the
exactions in October of 1998. NCES and the Town have filed cross-motions for
summary judgment respecting the enforceability of the exactions and are awaiting
a ruling. Whatever the court's decision, NCES expects an appeal.
In a separate but related matter, the Waste Management Division of NHDES ("WMD")
issued operating approval to NCES for Stage II, Phase II of the landfill on
March 25, 1999. NCES has been landfilling in Stage II, Phase II since that time.
On April 23, 1999, EANNH appealed the operating approval to the Waste Management
Council, an appellate administrative body with jurisdiction to review certain
decisions of the WMD. EANNH has contended on its appeal that the operating
approval should be suspended because the superior court's order in NCES's favor
is on appeal and hence not final. EANNH has also argued that NCES misled the WMD
into issuing the operating approval by certifying that it had all local
approvals necessary to operate Stage II, Phase II when the order establishing
this proposition was on appeal.
NCES has filed a motion to dismiss EANNH's appeal to the Waste Management
Council on the ground that the Council lacks jurisdiction over the appeal and
that EANNH lacks standing to assert it. The Office of the Attorney General of
the State of New Hampshire has joined in that motion. In the alternative, NCES
has sought a stay of the Council proceedings pending the outcome of the Supreme
Court appeal. EANNH has agreed to a stay provided there is a suspension of the
operating approval during the pendency of the Supreme Court appeal. NCES has
objected to any such suspension.
The Company offers no prediction of the outcome of any of the proceedings
described above.
In addition to the foregoing, the Company may periodically become subject to
various judicial and administrative proceedings involving Federal, state or
local agencies in the normal course of its business and as a result of the
extensive governmental regulation of the waste industry. 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, 1999.
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 .............................. $ 30.75 $ 24.375
Second quarter ............................. $ 34.00 $ 24.00
Third quarter .............................. $ 39.00 $ 24.625
Fourth quarter ............................. $ 26.625 $ 17.25
Fiscal 2000
First quarter (through July 15, 1999) ...... $ 26.50 $ 19.0625
On July 15, 1999, the high and low sale prices per share of the Company's Class
A Common Stock as quoted on the Nasdaq National Market were $26.0625 and $25.50,
respectively. As of July 15, 1999 there were approximately 221 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 July 15, 1999 was $26.00. 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 credit facility 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, 1999 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, 1997, 1998 and 1999, and the
consolidated balance sheets as of April 30, 1998 and 1999 are derived from
the Company's consolidated financial statements included elsewhere in this
Annual Report. The consolidated statements of operations and cash flows data
for the fiscal years ended April 30, 1995 and 1996 and the consolidated
balance sheet data as of April 30, 1995, 1996 and 1997 are derived in part
from the Company's consolidated financial statements not included in this
annual report. The Selected Historical Information presented below, has been
restated to reflect mergers completed by the Company during the current
fiscal year, in transactions accounted for as poolings of interests as more
fully discussed in note(1) below. 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)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Statement of Operations Data:
Revenues $ 38,633 $ 58,247 $ 102,545 $ 140,191 $ 173,418
Cost of operations 23,631 35,244 64,654 86,670 99,869
General and administrative 6,065 10,374 16,053 20,495 25,598
Merger-related costs - - 0 290 1,951
Depreciation and amortization 6,106 9,180 15,310 19,819 24,836
Loss on impairment of long-lived assets - - 0 1,571 0
--------- --------- --------- --------- ---------
Operating income 2,831 3,449 6,528 11,346 21,164
Interest expense, net 2,067 3,275 4,928 7,245 4,924
Other expense (income), net (116) (103) 847 (334) (369)
--------- --------- --------- --------- ---------
Income (loss) before provision
(benefit) for income taxes
and extraordinary items 880 277 753 4,435 16,609
Provision (benefit) for income
taxes 222 148 680 2,510 7,510
Extraordinary items, net - 326 - - -
--------- --------- --------- --------- ---------
Net income (loss) $ 658 $ (197) $ 73 $ 1,925 $ 9,099
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Accretion of preferred stock
and put warrants (2,380) (2,967) (8,530) (5,738) (0)
--------- --------- --------- --------- ---------
Net income (loss) applicable
to common stockholders $ (1,722) $ (3,164) $ (8,457) $ (3,813) $ 9,099
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic net income (loss) per common share $ (0.45) $ (0.75) $ (1.63) $ (0.42) $ 0.62
Basic weighted average common
shares outstanding (2) 3,822 4,201 5,185 9,184 14,782
Diluted net income (loss) per common share $ (0.45) $ (0.75) $ (1.63) $ (0.42) $ 0.58
Diluted weighted average common
shares outstanding (2) 3,822 4,201 5,185 9,184 15,637
Other Operating Data:
Capital Expenditures $ 4,590 $ 12,293 $ 20,050 $ 28,126 $ 47,723
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Other Data:
Cash flows from operating activities $ 6,650 $ 9,826 $ 17,283 $ 21,100 $ 38,069
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Cash flows from investing activities ($ 9,347) ($ 29,547) ($ 55,720) ($ 59,973) ($ 88,463)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Cash flows from financing activities $ 3,178 $ 19,135 $ 39,299 $ 39,300 $ 51,180
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Adjusted EBITDA (3) $ 8,937 $ 12,629 $ 21,838 $ 32,736 $ 46,000
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Balance Sheet Data:
Cash and cash equivalents $ 1,433 $ 847 $ 2,704 $ 3,131 $ 3,917
Working capital (deficit) (866) (1,907) (4,787) 3,845 7,755
Property and equipment, net 27,215 43,138 74,906 89,582 124,377
Total assets 45,607 72,732 152,298 202,414 270,209
Long-term obligations, less
current maturities 22,914 25,909 81,502 81,438 80,013
Redeemable preferred stock 0 22,896 31,426 0 0
Redeemable put warrants (4) 3,142 400 400 0 0
Total stockholders' equity
(deficit) 129 (235) 3,325 83,743 150,396
(1) The Company has restated the selected historical financial information
for all periods presented to reflect the mergers with Waste Stream and
Northern Sanitation, consummated during the year ended April 30, 1999,
accounted for as poolings of interests. The Company has restated the selected
historical financial information for the fiscal years ended April 30, 1997,
1998 and 1999, to reflect the mergers with NEI and Westfield Disposal,
consumated during the year ended April 30, 1999, accounted for as poolings of
interests. See Note 3 of the Notes to Consolidated Financial Statements.
(2) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements.
(3) Adjusted EBITDA is defined as operating income plus depreciation and
amortization and loss on impairment of long-lived assets. Adjusted 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, Adjusted 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 adjusted 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 adjusted 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
adjusted EBITDA is not calculated by all companies and analysts in the same
fashion, the adjusted EBITDA measures presented by the Company may not be
comparable to similarly titled measures reported by other companies. Therefore,
in evaluating adjusted EBITDA data, investors should consider, among other
factors: the non-GAAP nature of adjusted 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 adjusted 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, Massachusetts 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 $38.6 million for the fiscal year
ended April 30, 1995, to $173.4 million for the fiscal year ended April 30,
1999. From May 1, 1994 through April 30, 1999, the Company acquired 132 solid
waste collection, transfer and disposal operations. Between May 1 and July 15,
1999, the Company acquired an additional nine such businesses. All but six 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. During the fiscal year ended April 30, 1999 the Company acquired five
waste collection, transfer and disposal operations in transactions accounted for
as poolings of interest. 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 and Section 21E of the Securities Exchange Act, with
respect to, among other things, the Company's future revenues, operating income,
or earnings per share. Without limiting the foregoing, any statements contained
in this 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, disposal, 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 1998 and
fiscal 1999 is primarily attributable to the impact of the Company's acquisition
of collection businesses during these periods, 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 1998 and fiscal 1999 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.
% OF REVENUES
YEAR ENDED APRIL 30,
1997 1998 1999
------ ------ ------
Collection ............... 76.4% 77.7% 80.5%
Landfill ................. 12.0 10.3 8.4
Transfer ................. 5.1 4.9 4.6
Recycling ................ 5.5 5.5 5.9
Other .................... 1.0 1.6 0.6
------ ------ ------
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 lives 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,
1997 1998 1999
------ ------ ------
Revenues ................................... 100.0% 100.0% 100.0%
Cost of operations ......................... 63.0 61.8 57.6
General and administrative ................. 15.7 14.6 14.8
Merger related costs ....................... 0.0 0.2 1.1
Depreciation and amortization .............. 14.9 14.2 14.3
Loss on impairment of long-lived assets .... 0.0 1.1 0.0
------ ------ ------
Operating income ........................... 6.4 8.1 12.2
Interest expense, net ...................... 4.8 5.1 2.9
Other (income) expenses, net ............... 0.8 (0.2) (0.2)
Provision for income taxes ................. 0.7 1.8 4.3
------ ------ ------
Net income (loss) 0.1 1.4 5.2
------ ------ ------
------ ------ ------
Adjusted EBITDA* ........................... 21.3% 23.4% 26.5%
------ ------ ------
------ ------ ------
* See discussion and computation of adjusted EBITDA below.
FISCAL YEAR ENDED APRIL 30, 1999 VERSUS APRIL 30, 1998
Revenues. Revenues increased $33.2 million, or 23.7%, to $173.4 million in
fiscal 1999 from $140.2 million in fiscal 1998. Approximately $23.6 million of
the increase was attributable to the impact of businesses acquired throughout
fiscal 1998 and fiscal 1999. In addition, approximately $9.6 million of the
increase was attributable to internal volume and price growth (net of the
negative impact of lower average recycled commodity processing in fiscal 1999
compared to fiscal 1998).
Cost of Operations. Cost of operations increased approximately $13.2 million, or
15.2%, to $99.9 million in fiscal 1999 from $86.7 million in fiscal 1998, an
increase corresponding primarily to the Company's revenue growth described
above. Cost of operations as a percentage of revenues decreased to 57.6% in
fiscal 1999 from 61.8% in fiscal 1998. 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 1999; (ii) margin improvements because of price increases in fiscal 1998 and
1999 and (iii) higher landfill internalization due to the Hyland landfill
becoming operational in July, 1998.
General and Administrative. General and administrative expenses increased
approximately $5.1 million, or 24.9%, to $25.6 million in fiscal 1999 from $20.5
million in fiscal 1998. General and administrative expenses as a percentage of
revenues increased to 14.8% in fiscal 1999 from 14.6% in fiscal 1998 due
primarily to an increase in management information systems spending and public
company expenditures for a full year in fiscal 1999 compared to a partial year
in fiscal 1998.
Merger-Related Costs. Merger-related costs consists of legal, engineering,
accounting and other costs associated with the various poolings of interests
consummated during fiscal 1998 and 1999. One such transaction occurred during
fiscal 1998 and five occurred fiscal 1999, resulting in an increase of $1.7
million or 573%. Merger-related costs as a percentage of revenue increased from
0.2% in fiscal 1998 to 1.1% in fiscal 1999.
Depreciation and Amortization. Depreciation and amortization expense increased
$5.0 million, or 25.3%, to $24.8 million in fiscal 1999 from $19.8 million in
fiscal 1998. As a percentage of revenues, depreciation and amortization expense
increased to 14.3% in fiscal 1999 from 14.2% in fiscal 1998. The increase in
depreciation and amortization expense as a percentage of revenues was primarily
the result of: (i) higher rates of disposal internalization due to the
opening of the Hyland landfill, (ii) higher landfill volumes in fiscal 1999
compared to fiscal 1998, resulting in higher landfill amortization expense, and
(iii) front end loader conversions resulting in double container depreciation
charges at certain locations.
Loss on Impairment of Long-Lived Assets. The Company recognized losses on
impairment of long-lived assets in the fourth quarter of fiscal 1998 in the
amount of $1.6 million. The impairment charges were non-cash charges to write
down the assets of the Company's waste tire processing facility in Eliot,
Maine and the Grasslands composting facility in Malone, New York to their
fair market values as of April 30, 1998.
Interest expense, net. Net interest expense decreased approximately $2.3
million, or 32.0% to $4.9 million in fiscal 1999 from $7.2 million in fiscal
1998. This decrease primarily reflects decreased average indebtedness in
fiscal 1999, resulting from debt payoffs following the public stock offerings
in October 1997 and July 1998, from the increased use of the Company's Class
A common stock in effecting acquisitions, and from improved collections
efforts. Days sales in accounts receivable was 45.3 at April 30, 1999
compared to 50.3 at April 30, 1998. The Company capitalized a total of $0.5
million in interest expense in fiscal 1999, compared to a total of $0.1
million in fiscal 1998.
Other (income) expense, net. Net other (income) expense was not material to the
Company's results of operations in fiscal 1998 and 1999.
Provision for income taxes. Provision for income taxes increased
approximately $5.0 million, or 199.2%, to $7.5 million in fiscal 1999 from
$2.5 million in fiscal 1998. This increase reflects the Company's increase in
profitability in fiscal 1999 compared to fiscal 1998. Among the factors
causing income tax expense as a percentage of pre-tax net income to vary
materially from year to year are: (i) the recording of a fixed asset
impairment charge in fiscal 1998 which was non-deductible for income tax
purposes, and (ii) poolings of interest resulting in prior period
restatements of entities not liable for federal income tax due to subchapter
S status.
FISCAL YEAR ENDED APRIL 30, 1998 VERSUS APRIL 30, 1997
Revenues. Revenues increased $37.6 million, or 36.7%, to $140.2 million in
fiscal 1998 from $102.5 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 $3.8 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 compared to fiscal 1997.
Cost of operations. Cost of operations increased $22.0 million, or 34.1%, to
$86.7 million in fiscal 1998 from $64.7 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 61.8% in fiscal 1998 from
63.0% 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 $4.4 million, or 27.7%, to $20.5 million in fiscal 1998 from $16.1
million in fiscal 1997. General and administrative expenses as a percentage of
revenues decreased to 14.6% in fiscal 1998 from 15.7% in fiscal 1997 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 $4.5 million, or 29.5%, to $19.8 million in fiscal 1998 compared
to $15.3 million in fiscal 1997. As a percentage of revenues, depreciation and
amortization expense decreased to 14.2% during fiscal 1998 from 14.9% in fiscal
1997. 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 1998, which generally
have lower depreciation and amortization expenses than other operations.
Interest expense, net. Net interest expense increased approximately $2.3
million, or 47.0%, to $7.2 million in fiscal 1998 from $4.9 million in fiscal
1997. This increase primarily reflects increased indebtedness incurred in
connection with acquisitions and capital expenditures.
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
$1.8 million, or 269.1%, to $2.5 million in fiscal 1998 from $680,000 in fiscal
1997. Among the factors causing income tax expense as a percentage of pre-tax
net income to vary materially from year to year are: (i) the recording of a
fixed asset impairment charge in fiscal 1998 which was non-deductible for income
tax purposes and (ii) poolings of interest resulting in prior period
restatements of entities not liable for federal income due to subchapter S
status.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is capital intensive. The Company's capital
requirements include acquisitions, fixed asset purchases and capital
expenditures for landfill development, cell construction, and site and cell
closure. The Company had positive net working capital of $7.8 million at
April 30, 1999 compared to $3.8 million positive net working capital at April
30, 1998.
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. Subject to the following paragraph, this
revolving line of credit matures in January, 2003. Funds available to the
Company under the line of credit were $78 million at April 30, 1999.
As a result of its announced merger with KTI, the Company is required to obtain
a new line of credit within 30 days after the closing of the merger or August
31, 1999, whichever is earlier. The Company is currently seeking a new five-year
revolving line of credit of $350 million to $400 million. The syndication of
this credit facility was not complete as of July 15, 1999.
In July 1998 the Company completed a follow-on public offering of 2,060,587
shares of its Class A Common Stock at $27.25 per share. In addition, as part of
this same offering, 1,470,580 shares of the Company's Class A Common Stock were
sold by certain selling shareholders at $27.25 per share. The Company's proceeds
of the offering, net of underwriters' discounts and issuance costs were
$52,231,490. The proceeds were used for debt reduction, acquisitions and other
general corporate purposes.
As part of the July 1998 public stock offering the Company registered an
additional 2,000,000 shares of its class A common stock as a `shelf'
registration. The intended use of these additional registered but unissued
shares is as an additional source of capital for the Company's acquisition
policy. As of April 30, 1999, 990,042 shares of the Company's class A common
stock had been issued pursuant to this registration statement.
The Company believes that its cash provided internally from operations together
with the Company's available credit facilities and anticipated new credit
facility should enable it to meet its needs for working capital for the next
twelve months. In addition, the Company also plans to file a new shelf
registration statement following the KTI merger for use in connection with its
acquisition program.
Net cash provided by operations for the fiscal years ended April 30, 1999 and
April 30, 1998 was $38.1 million and $21.1 million, respectively. The
increase was primarily due to the increase in the Company's net income for
the 1999 fiscal year, together with an increase in depreciation and
amortization and an increase in the Company's
accrued closure and post closure costs. The increase 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 1998 increased to $21.1 million from
$17.3 million in fiscal 1997 primarily due to increases in net income,
depreciation and amortization, asset impairment charges and deferred income tax
provisions, offset by decreases in accrued closure/post closure costs and in the
Company's working capital.
For fiscal 1999 and fiscal 1998, cash used in investing activities was $88.5
million and $60.0 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 1999 and fiscal 1998, the Company's financing activities provided
cash of $51.2 million and $39.3 million, respectively. Net cash provided by
financing activities was $39.3 million in the fiscal year ended April 30,
1997. The net cash provided by financing activities in the fiscal years ended
April 30, 1999 and 1998 primarily reflects the net proceeds of the public
stock offerings 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.
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 approach of the year 2000 has raised concerns about the ability of
information technology systems and non-information technology systems, primarily
computer software programs, to properly recognize and process date-sensitive
information with respect to the Year 2000.
The Company has undertaken a Year 2000 project, comprised of four phases, to
address these concerns. Phase one, which has been completed, consisted of
awareness, Year 2000 planning, preparing a written plan, management approval
and support. Phase two involved the evaluation of all systems and equipment,
including hardware, software, security and voice mail, with respect to Year
2000 compliance. The completion date for phase two was June 30, 1999. Phase
three involves addressing any deficiencies identified in Phase two, and the
anticipated completion date is July 31, 1999. Phase four involves the
validation and testing of all systems and equipment, and the anticipated
completion date is August 31, 1999. The Company has performed, and continues
to perform routine updates of all software and hardware systems to facilitate
Year 2000 compliance.
The Company has completed numerous acquisitions in recent months, and the
information systems of a limited number of these acquired operations have not
yet been fully integrated with the Company's information systems. This
integration of the completed acquisitions is expected to occur by July 31, 1999.
The Company continues to make acquisitions as an integral component of its
growth strategy. There is no assurance that the information systems of all
acquired operations, particularly those acquisitions completed in the latter
portion of calendar 1999, will be Year 2000 compliant by December 31, 1999.
The Company uses well-regarded nationally known software vendors for both its
general accounting applications and industry-specific customer information
and billing systems, and all internal productivity software. The Company has
been informed by the respective vendors that all application software is
fully Year 2000 compliant.
The Company's banking arrangement is with an international banking institution
which has informed the Company that it is taking all necessary steps to insure
its customers uninterrupted service throughout applicable Year 2000 time frames.
The Company's payroll is out-sourced by the largest provider of third-party
payroll services in the country, which has made a commitment of uninterrupted
service to their customers throughout applicable Year 2000 time frames.
The Company is currently in the process of replacing all older personal
computers and servers. There are two servers and 25 additional personal
computers that will be replaced, 16 of which will be for the weight-measurement
systems. The two servers will be replaced within the first quarter of fiscal
2000 (ending July 31, 1999). The Company has identified a vendor for the
weight-measurement systems and is in the final stage of evaluating its software
offering. The Company anticipates implementing the product within three months
of acceptance of it, which the Company expects will be in the first quarter of
fiscal 2000.
The Company currently plans a final testing of all systems in the second quarter
of fiscal 2000 (ending October 31, 1999) and expects to be fully Year 2000
compliant by the end of that fiscal quarter.
The Company has expended approximately $1.2 million dollars over the last
eighteen months to address hardware and software-related Year 2000 compliance
issues, principally through the implementation of a new frame network system. A
portion of this investment is attributable to integrating information systems of
companies that the Company has acquired. Once the Company has finished
negotiations with the weight-measurement vendor, the Company will be able to
determine the remaining budget requirements for the Year 2000 compliance
project. The Company will use funds from current operations or the Company's
line of credit to meet Year 2000 remediation expenses.
No single customer represents more than one percent of the Company's revenues,
and we do not expect any material adverse effect on the Company's revenues in
the event an individual customer experiences Year 2000 problems.
In addition, the Company does not believe the Year 2000 noncompliance of the
Company's suppliers of goods and services, other than as specifically discussed
above, would have a material adverse effect on the Company's
revenues and results of operations. Accordingly, the Company has not sought
assurances of Year 2000 compliance from these other vendors.
The Company expects to begin its evaluation of its most reasonably likely worst
case scenarios with respect to the Year 2000 in the second quarter of fiscal
2000. Based upon the results of that evaluation, the Company will determine an
appropriate contingency plan, which the Company believes would be implemented in
the second and third quarters of fiscal 2000.
ADJUSTED EBITDA
Adjusted EBITDA represents operating income (earnings before interest and taxes,
or "EBIT") plus depreciation and amorti