UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2004
OR
o		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)

 

 

Registrant’s telephone number, including area code: (802) 775-0325

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act) Yes  ý  No  o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of March 4, 2004:

 

Class A Common Stock		23,226,946
Class B Common Stock		988,200

 

 

PART I.      FINANCIAL INFORMATION

 

ITEM 1.      FINANCIAL STATEMENTS

 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)

 

		April 30, 2003			January 31, 2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	15,652		$	9,295
Restricted cash		10,839			12,436
Accounts receivable - trade, net of allowance for doubtful accounts of $895 and $1,465		45,649			44,790
Notes receivable - officers/employees		1,105			1,105
Prepaid expenses		5,906			6,408
Inventory		1,740			1,732
Deferred income taxes		4,275			6,435
Other current assets		1,111			1,128
Total current assets		86,277			83,329
Property, plant and equipment, net of accumulated depreciation and amortization of $201,681 and $254,256		302,328			336,856
Goodwill, net		159,682			164,328
Other intangible assets, net		3,014			3,960
Investments in unconsolidated entities		34,740			43,687
Net assets under contractual obligation		3,844			5,737
Other non-current assets		12,756			13,273
		516,364			567,841
		$	602,641		$	651,170

 

The accompanying notes are an integral part of these consolidated financial statements

 

2

 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except for share and per share data)

 

		April 30, 2003			January 31, 2004
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt		$	4,534		$	5,425
Current maturities of capital lease obligations		1,287			781
Accounts payable		33,743			31,354
Accrued payroll and related expenses		7,383			6,328
Accrued interest		5,375			8,897
Accrued income taxes		4,526			3,556
Accrued closure and post-closure costs, current portion		2,962			465
Other accrued liabilities		15,662			21,215
Total current liabilities		75,472			78,021
Long-term debt, less current maturities		302,389			328,378
Capital lease obligations, less current maturities		1,969			1,487
Accrued closure and post-closure costs, less current maturities		22,987			22,242
Deferred income taxes		5,473			10,326
Other long-term liabilities		11,375			10,743
Commitments and contingencies
Series A redeemable, convertible preferred stock, 55,750 shares authorized, issued and outstanding as of April 30, 2003 and January 31, 2004, liquidation preference of $1,000 per share plus accrued but unpaid dividends		63,824			66,248
STOCKHOLDERS’ EQUITY:
Class A common stock - Authorized - 100,000,000 shares, $0.01 par value issued and outstanding - 22,769,000 and 23,189,000 shares as of April 30, 2003 and January 31, 2004, respectively		228			232
Class B Common Stock - Authorized - 1,000,000 shares, $0.01 par value 10 votes per share, issued and outstanding - 988,000 shares		10			10
Accumulated other comprehensive (loss) income		542			(27		)
Additional paid-in capital		270,068			271,829
Accumulated deficit		(151,696		)	(138,319		)
Total stockholders’ equity		119,152			133,725
		$	602,641		$	651,170

 

The accompanying notes are an integral part of these consolidated financial statements

 

3

 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands)

 

		Three Months Ended January 31,						Nine Months Ended January 31,
		2003			2004			2003			2004
Revenues		$	95,801		$	104,558		$	326,402		$	330,420
Operating expenses:
Cost of operations		61,853			67,804			213,816			214,014
General and administration		13,797			14,733			42,972			44,087
Depreciation and amortization		11,627			14,614			35,915			44,356
		87,277			97,151			292,703			302,457
Operating income		8,524			7,407			33,699			27,963
Other expense/(income), net:
Interest income		(73		)	(53		)	(234		)	(192		)
Interest expense		6,578			6,331			20,665			18,662
Income from equity method investments		(607		)	(1,171		)	(2,357		)	(2,069		)
Loss on debt extinguishment		3,649			—			3,649			—
Minority interest		—			—			(152		)	—
Other (income)/expense		655			(343		)	907			(723		)
Other expense, net		10,202			4,764			22,478			15,678
Income (loss) from continuing operations before income taxes, discontinued operations and cumulative effect of change in accounting principle		(1,678		)	2,643			11,221			12,285
Provision (benefit) for income taxes		(856		)	1,153			4,772			1,631
Income (loss) before discontinued operations and cumulative effect of change in accounting principle		(822		)	1,490			6,449			10,654
Reclassification adjustment from discontinued operations (net of income taxes of $27)		39			—			—			—
Cumulative effect of change in accounting principle (net of income tax (provision) benefit of $189 and ($1,856))		—			—			(63,916		)	2,723
Net income (loss)		(783		)	1,490			(57,467		)	13,377
Preferred stock dividend		778			818			2,306			2,423
Net income (loss) available to common stockholders		$	(1,561	)	$	672		$	(59,773	)	$	10,954

 

The accompanying notes are an integral part of these consolidated financial statements

 

4

 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands except per share data)

 

		Three Months Ended January 31,						Nine Months Ended January 31,
		2003			2004			2003			2004
Earnings Per Share:
Basic:
Income (loss) from continuing operations before discontinued operations and cumulative effect of change in accounting principle		$	(0.07	)	$	0.03		$	0.17		$	0.34
Cumulative effect of change in accounting principle, net		—			—			(2.70		)	0.11
Net income (loss) per common share		$	(0.07	)	$	0.03		$	(2.53	)	$	0.45
Basic weighted average common shares outstanding		23,717			24,062			23,704			23,919
Diluted:
Income (loss) from continuing operations before discontinued operations and cumulative effect of change in accounting principle		$	(0.07	)	$	0.03		$	0.17		$	0.34
Cumulative effect of change in accounting principle, net		—			—			(2.67		)	0.11
Net income (loss) per common share		$	(0.07	)	$	0.03		$	(2.50	)	$	0.45
Diluted weighted average common shares outstanding		23,717			24,795			23,920			24,427

 

The accompanying notes are an integral part of these consolidated financial statements

 

5

 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

 

		Nine Months Ended January 31,
		2003			2004
Cash Flows from Operating Activities:
Net income (loss)		$	(57,467	)	$	13,377
Adjustments to reconcile net income (loss) to net cash provided by operating activities -
Depreciation and amortization		35,915			44,356
Depletion of landfill operating lease obligations		—			395
Cumulative effect of change in accounting principle, net		63,916			(2,723		)
Income from equity method investments		(2,357		)	(2,069		)
Loss on debt extinguishment		3,649			—
Gain on sale of assets		(57		)	(274		)
Minority interest		(152		)	—
Deferred income taxes		7,336			838
Changes in assets and liabilities, net of effects of acquisitions and divestitures -
Accounts receivable		(8,404		)	(2,069		)
Accounts payable		5,774			(1,068		)
Other assets and liabilities		(11,376		)	(4,325		)
		94,244			33,061
Net Cash Provided by Operating Activities		36,777			46,438
Cash Flows from Investing Activities:
Acquisitions, net of cash acquired		(2,489		)	(31,889		)
Payments under landfill operating lease contracts		—			(4,305		)
Additions to property, plant and equipment		(32,161		)	(37,442		)
Proceeds from sale of equipment		1,194			451
(Advances to) distributions from unconsolidated entities		500			(7,074		)
Proceeds from assets under contractual obligation		101			515
Net Cash Used In Investing Activities		(32,855		)	(79,744		)
Cash Flows from Financing Activities:
Proceeds from long-term borrowings		375,471			124,828
Principal payments on long-term debt		(354,077		)	(100,933		)
Deferred financing costs		(11,119		)	(655		)
Proceeds from exercise of stock options		427			3,709
Net Cash Provided by Financing Activities		10,702			26,949
Net (decrease) increase in cash and cash equivalents		14,624			(6,357		)
Cash and cash equivalents, beginning of period		4,298			15,652
Cash and cash equivalents, end of period		$	18,922		$	9,295
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for -
Interest		$	20,140		$	13,827
Income taxes, net of refunds		$	414		$	764
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
Summary of entities acquired in purchase business combinations
Fair market value of assets acquired		$	2,705		$	43,862
Cash paid, net		(2,489		)	(31,889		)
Liabilities assumed and notes payable to seller		$	216		$	11,973

 

The accompanying notes are an integral part of these consolidated financial statements

 

6

 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except for per share data)

 

1.             ORGANIZATION

 

The consolidated balance sheets of Casella Waste Systems, Inc. and Subsidiaries (the “Company” or the “Parent”) as of April 30, 2003 and January 31, 2004, the consolidated statements of operations for the three and nine months ended January 31, 2003 and 2004 and the consolidated statements of cash flows for the nine months ended January 31, 2003 and 2004 are unaudited.  In the opinion of management, such financial statements include all adjustments (which include normal recurring and nonrecurring adjustments) necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented.  The consolidated financial statements presented herein should be read in connection with the Company’s audited consolidated financial statements as of and for the twelve months ended April 30, 2003.  These were included as part of the Company’s Annual Report on Form 10-K for the year ended April 30, 2003 (the “Annual Report”).  The results of the three and nine months ended January 31, 2004 may not be indicative of the results that may be expected for the fiscal year ending April 30, 2004.

 

2.             RECLASSIFICATIONS

 

In the fourth quarter of fiscal 2003, the Company entered into negotiations with former employees for the transfer of our domestic brokerage operation and a commercial recycling business.  The commercial recycling business had been accounted for as a discontinued operation since fiscal 2001.  Due to the nature of the transaction, the Company could not retain historical discontinued accounting treatment for this operation.  Therefore the commercial recycling business’ operating results have been reclassified from discontinued to continuing operations for the three and nine months ended January 31, 2003.  Also in connection with the discontinued accounting treatment recorded in fiscal 2001, estimated future losses from this operation had been recorded and classified as losses from discontinued operations.  This amount has been reclassified and offset against actual losses from operations for the three and nine months ended January 31, 2003.

 

In the fourth quarter of fiscal 2003, the Company revised results for the first quarter of fiscal 2003 to include additional goodwill impairment in the amount of $1,091, net of taxes, relating to the Company’s waste-to-energy operations, Maine Energy.  The Company previously reported goodwill impairment upon adoption of SFAS No. 142 in the amount of $62,825, net of taxes.

 

3.             BUSINESS COMBINATIONS

 

During the nine months ended January 31, 2004, the Company acquired seven solid waste hauling operations and one construction and demolition processing facility, which also operates a landfill facility under an operations and management contract, in transactions accounted for as purchases.  These transactions were in exchange for consideration of $31,889 in cash to the sellers.  The Company completed five such acquisitions during the nine months ended January 31, 2003.  The operating results of these businesses are included in the consolidated statements of operations from the dates of acquisition.  The purchase prices have been allocated to the net assets acquired based on their fair values at the dates of acquisition with the residual amounts allocated to goodwill.

 

7

 

The following unaudited pro forma combined information shows the results of the Company’s operations as though each of the acquisitions had been completed as of May 1, 2002.

 

		Nine Months Ended January 31, 2003			Nine Months Ended January 31, 2004
Revenues		$	341,202		$	334,830
Operating income		$	36,314		$	25,470
Net income (loss) available to common stockholders		$	(58,905	)	$	8,981
Diluted net income (loss) per common share		$	(2.46	)	$	0.37
Diluted weighted average common shares outstanding		23,920			24,427

 

The foregoing pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisitions taken place as of May 1, 2002 or the results of future operations of the Company.  Furthermore, such pro forma results do not give effect to all cost savings or incremental costs that may occur as a result of the integration and consolidation of the completed acquisitions.

 

In December 2003 the Company commenced operations at Ontario County Landfill, after executing a twenty-five year operation, management and lease agreement with Ontario County, New York.  The Landfill is permitted to accept 2,000 tons per day of municipal solid waste.  The Company made initial payments of $4,266 related to this transaction.  This transaction is accounted for as an operating lease.

 

4.             ADOPTION OF NEW ACCOUNTING STANDARDS

 

(a) SFAS No. 143, Accounting for Asset Retirement Obligations.

 

Effective May 1, 2003, the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations.  SFAS No. 143 does not change the basic accounting principles that the Company and the waste industry have historically followed for accounting for these types of obligations.  In general, the Company has followed and will continue the practice of life cycle accounting which recognizes a liability on the balance sheet and related expense as airspace is consumed at the landfill to match operating costs with revenues.

 

The primary modification to the Company’s methodology required by SFAS No. 143 is to require that capping, closure and post-closure costs be discounted to present value.  The Company’s estimates of future capping, closure and post-closure costs historically have not taken into account discounts for the present value of costs to be paid in the future.  Under SFAS No. 143, the Company’s estimates of costs to discharge asset retirement obligations for landfills are developed in today’s dollars.  These costs are then inflated by 2.6% to reflect a normal escalation of prices up to the year they are expected to be paid.  These estimated costs are then discounted to their present value using a credit adjusted risk-free rate of 9.5%.

 

Under SFAS No. 143, the Company no longer accrues landfill retirement obligations through a charge to cost of operations, but rather by an increase to landfill assets.  Under SFAS No. 143, the amortizable landfill assets include not only the landfill development costs incurred but also the recorded capping, closure and post-closure liabilities as well as the cost estimates for future capping, closure and post-closure costs. The landfill asset is amortized over the total capacity of the landfill, as airspace is consumed during the life of the landfill with one exception. The exception is for capping for which both the recognition of the liability and the amortization of these costs are based instead on the airspace consumed for the specific capping event.

 

8

 

Upon adoption, SFAS No. 143 required a cumulative change in accounting for landfill obligations retroactive to the date of the inception of the landfill.  Inception of the asset retirement obligation is the date operations commenced or the date the asset was acquired.  To do this, SFAS No. 143 required the creation of the related landfill asset, net of accumulated amortization and an adjustment to the capping, closure and post-closure liability for cumulative accretion.

 

At May 1, 2003, the Company recorded a cumulative effect of change in accounting principle of $2,723 (net of taxes of $1,856).  In addition we recorded a decrease in our capping, closure and post-closure obligations of $7,855, and a decrease in our net landfill assets of $3,228.  The following is a summary of the balance sheet changes for landfill assets and capping, closure and post-closure liabilities at May 1, 2003 (in thousands):

 

		Balance at April 30, 2003			Change			Balance at May 1, 2003
Landfill assets		$	148,029		$	6,166		$	154,195
Accumulated amortization		(63,207		)	(9,394		)	(72,601		)
Net landfill assets		$	84,822		$	(3,228	)	$	81,594
Capping, closure, and post-closure liability		$	25,949		$	(7,855	)	$	18,094

 

The following table shows the activity and total balances related to accruals for capping, closure and post-closure from April 30, 2003 to January 31, 2004 (in thousands):

 

Balance at April 30, 2003		$	25,949
Obligations incurred		3,432
Accretion expense		1,477
Payments		(3,099		)
Acquisitions and other adjustments		2,803
Cumulative effect of change in accounting principle		(7,855		)
Balance at January 31, 2004		$	22,707

 

(b) SFAS No. 145, Rescission of FASB No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technicial Corrections

 

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No., 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.  SFAS No. 145, among other things, restricts the classification of gains and losses from extinguishment of debt as extraordinary such that most debt extinguishment gains and losses will no longer be classified as extraordinary.  SFAS No. 145 is effective for fiscal years beginning after May 15, 2002.  Upon adoption, gains and losses on future debt extinguishment, if any, will be recorded in pre-tax income.  Prior to the adoption of SFAS No. 145, in the third quarter of fiscal year 2003, the Company recorded an extraordinary loss of $2,170 (net of income tax benefit of $1,479) in connection with the write-off of deferred financing costs related to the old term loan and the old revolver.  This item was reclassified to continuing operations in the financial statements as loss on debt extinguishment in the amount of $3,649.

 

(c) SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.

 

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses costs such as restructuring, involuntary termination of employees and

 

9

 

consolidating facilities but excludes from its scope exit and disposal activities that are in connection with a business combination and those activities to which SFAS No. 143 and No. 144 are applicable. SFAS No. 146 is effective for exit and disposal activities that are initiated after December 31, 2002.  The Company has not engaged in or initiated any exit or disposal activities since December 31, 2002.

 

(d) FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others

 

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (‘‘FIN 45’’). FIN 45 clarifies the requirement of FASB No. 5, Accounting for Contingencies, relating to a guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. It requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN 45 are effective on a prospective basis to guarantees issued or modified after December 31, 2002. The Company has no guarantees as of January 31, 2004, but will record the fair value of future material guarantees, if any.

 

(e) SFAS No. 148, Accounting for Stock-Based Compensation— Transition and Disclosure—an amendment of FAS 123

 

In December, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - - Transition and Disclosure - an amendment of FAS 123.  This statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used in reporting results.  SFAS No. 148 is effective for fiscal years ending after December 15, 2002.  The Company has included the required disclosures in these financial statements (Note 10).

 

(f) FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of APB No. 51

 

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of APB No. 51 (“FIN 46”).  FIN 46 requires that unconsolidated variable interest entities be consolidated by their primary beneficiary who absorbs a majority of the entities’ expected losses or residual benefits.  FIN 46 consolidation requirements apply immediately to all variable interest entities created after January 31, 2003 and on June 15, 2003 for those entities already established.  In October 2003, the FASB issued FASB Staff Position (FSP) 46-6, Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities (VIE) which delayed the effective date of FIN 46 to December 15, 2003 for certain VIEs.  The adoption of FIN 46 had no impact on the Company’s consolidated financial statements.

 

(g) SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity.

 

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity. The statement changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity.  The new statement requires that those instruments be classified as liabilities in statements of financial position. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.  The Company adopted SFAS No. 150 effective August 1, 2003.  In November 2003, the FASB issued an FSP delaying the effective date for certain instruments and entities.  SFAS No. 150 had no impact on the Company’s consolidated financial statements.

 

10

 

5.             LEGAL PROCEEDINGS

 

In the normal course of its business and as a result of the extensive governmental regulation of the waste industry, the Company may periodically become subject to various judicial and administrative proceedings involving Federal, state or local agencies.  In these proceedings, an agency may seek to impose fines on the Company or to revoke, or to deny renewal of, an operating permit held by the Company.  In addition, the Company may become party to various claims and suits for alleged damages to persons and property, alleged violation of certain laws and for alleged liabilities arising out of matters occurring during the normal operation of the waste management business.

 

In July 1996, Clinton County, New York entered into a privatization agreement with the Company for the Company to run the County’s solid waste management system (the “System”) as a private enterprise, including operations at both the existing unlined landfill, as well as newly constructed lined landfill areas.  During the period of November 21, 1996 to October 9, 1997, the Company performed certain closure activities and installed a cut-off wall at the unlined portion of the landfill.  On or about April 1999, the New York State Department of Labor (the “DOL”) alleged that the Company should have paid prevailing wages in connection with the labor associated with such activities related to the unlined landfill.  The DOL is attempting to apply the prevailing wage provisions of Labor Law § 220 to the Company’s construction activities at the unlined portion of the Clinton County landfill, to include (1) cap construction at the unlined landfill; (2) construction of the “Casella Barrier Wall,” which the New York State Department of Environment Conservation (the “DEC”) required as a precondition to permitting the Phase III expansion of the Lined Landfill; and (3) construction of the “County Barrier Wall,” which the DEC required as a corrective measure to control the historical contamination.  The Company has disputed the allegations and a hearing on only the liability issue was held on September 16, 2002.  Since the hearing did not address damages, relevant payroll documents have not been fully reviewed by either party.  Accordingly, neither side is in a position to estimate wage amounts that might be payable in the event the hearing officer finds that the Company is liable for the payment of such prevailing wages.  In addition, any such estimate will differ depending on whether any liability ruling applies to some or all of the activities described above; and whether it would apply only to activities of the Company or to all subcontractors as well.  In November 2002, both sides submitted proposed findings of fact and conclusions of law.  The hearing officer is expected to make a recommendation to the Department of Labor commissioner during the first quarter of calendar 2004 on the liability issue.  The Company continues to explore settlement possibilities with the State.  Although a loss as a result of these claims is reasonably possible, the Company cannot estimate a range of reasonably possible losses at this time.

 

The Company is a defendant in certain other lawsuits alleging various claims, none of which, either individually or in the aggregate, the Company believes are material to its financial condition, results of operations or cash flows.

 

6.             ENVIRONMENTAL LIABILITIES

 

The Company is subject to liability for any environmental damage, including personal injury and property damage, that its solid waste, recycling and power generation facilities may cause to neighboring property owners, particularly as a result of the contamination of drinking water sources or soil, possibly including damage resulting from conditions existing before the Company acquired the facilities. The Company may also be subject to liability for similar claims arising from off-site environmental contamination caused by pollutants or hazardous substances if the Company or its predecessors arrange to transport, treat or dispose of those materials. Any substantial liability incurred by the Company arising from environmental damage could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company is not presently aware of any situations that it expects would have a material adverse impact.

 

11

 

7.             EARNINGS PER SHARE

 

The following table sets forth the numerator and denominator used in the computation of earnings per share from continuing operations before discontinued operations and cumulative effect of change in accounting principle on a basic and diluted basis for the three and nine months ended January 31, 2003 and 2004.

 

		Three Months Ended January 31,						Nine Months Ended January 31,
		2003			2004			2003			2004
Numerator:
Income (loss) from continuing operations before discontinued operations and cumulative effect of change in accounting principle		$	(822	)	$	1,490		$	6,449		$	10,654
Less: Preferred stock dividend		(778		)	(818		)	(2,306		)	(2,423		)
Income (loss) from continuing operations before discontinued operations and cumulative effect of change in accounting principle available to common stockholders		$	(1,600	)	$	672		$	4,143		$	8,231
Denominator:
Number of shares outstanding, end of period:
Class A common stock		22,739			23,189			22,739			23,189
Class B common stock		988			988			988			988
Effect of weighted average shares outstanding during period		(10		)	(115		)	(23		)	(258		)
Weighted average number of common shares used in basic EPS		23,717			24,062			23,704			23,919
Impact of potentially dilutive securities:
Dilutive effect of options, warrants, and contingent stock		—			733			216			508
Weighted average number of common shares used in diluted EPS		23,717			24,795			23,920			24,427

 

For the three and nine months ended January 31, 2003, 9,224 and 8,454 common stock equivalents related to options, warrants, and redeemable convertible preferred stock, respectively, were excluded from the calculation of dilutive shares since the inclusion of such shares would be anti-dilutive.

 

For the three and nine months ended January 31, 2004, 6,195 and 6,703 common stock equivalents related to options, warrants, and redeemable convertible preferred stock, respectively, were excluded from the calculation of dilutive shares since the inclusion of such shares would be anti-dilutive.

 

8.             COMPREHENSIVE INCOME (LOSS)

 

Comprehensive income (loss) represents the change in the Company’s equity from transactions and other events and circumstances from non-owner sources and includes all changes in equity except those resulting from investments by owners and distributions to owners.  Comprehensive income (loss) for the three and nine months ended January 31, 2003 and 2004 is as follows:

 

		Three Months Ended January 31,						Nine Months Ended January 31,
		2003			2004			2003			2004
Net income (loss)		$	(783	)	$	1,490		$	(57,467	)	$	13,377
Other comprehensive (loss) income		2,673			(1,034		)	4,396			(569		)
Comprehensive income (loss)		$	1,890		$	456		$	(53,071	)	$	12,808

 

12

 

The components of other comprehensive income (loss) for the three and nine months ended January 31, 2003 and 2004 are shown as follows:

 

		Three Months Ended
		January 31, 2003									January 31, 2004
		Gross			Tax effect			Net of Tax			Gross			Tax effect			Net of Tax
Change in fair value of interest rate swaps and commodity hedges during period		$	4,494		$	1,821		$	2,673		$	(1,738	)	$	(704	)	$	(1,034	)
		$	4,494		$	1,821		$	2,673		$	(1,738	)	$	(704	)	$	(1,034	)

 

		Nine Months Ended
		January 31, 2003									January 31, 2004
		Gross			Tax effect			Net of Tax			Gross			Tax effect			Net of Tax
Changes in fair value of marketable securities during the period		$	(40	)	$	—		$	(40	)	$	—		$	—		$	—
Change in fair value of interest rate swaps and commodity hedges during period		7,459			3,023			4,436			(956		)	(387		)	(569		)
		$	7,419		$	3,023		$	4,396		$	(956	)	$	(387	)	$	(569	)

 

9.             DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The Company’s strategy to hedge against fluctuations in the commodity prices of recycled paper is to enter into hedges to mitigate the variability in cash flows generated from the sales of recycled paper at floating prices, resulting in a fixed price being received from these sales.  The Company is party to twenty one commodity hedge contracts as of January 31, 2004.  These contracts expire between August 2004 and August 2006.  The Company has evaluated these hedges and believes that these instruments qualify for hedge accounting pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended.  As of January 31, 2004 the fair value of these hedges was an obligation of $1,560, with the net amount (net of taxes of $632) recorded as an unrealized loss in accumulated other comprehensive (loss) income.

 

The Company is party to two interest swap agreements as of January 31, 2004 for an aggregate notional amount of $53,000 expiring in February, 2006.  The Company has evaluated these swaps and believes these instruments qualify for hedge accounting pursuant to SFAS No. 133. As of January 31, 2004, the fair value of these swaps was an obligation of $266, with the net amount (net of taxes of $108) recorded as an unrealized loss in other comprehensive (loss) income. The estimated net amount of the existing losses as of January 31, 2004 included in accumulated other comprehensive (loss) income expected to be reclassified into earnings as payments are either made or received under the terms of the interest rate swaps within the next 12 months is approximately $129. The actual amounts reclassified into earnings are dependent on future movements in interest rates.

 

10.          STOCK BASED COMPENSATION PLANS

 

The Company has elected to account for its stock-based compensation plans under APB Opinion No. 25, Accounting for Stock Issued to Employees, for which no compensation expense is recorded in the statements of operations for the estimated fair value of stock options issued with an exercise price equal to the fair value of the underlying common stock on the grant date.

 

SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FAS 123, requires that entities

 

13

 

electing to remain with the accounting in APB Opinion No. 25 disclose pro forma net income and earnings per share as if the fair value based method of accounting defined in SFAS No. 123 had been applied.

 

If the Company applied the recognition provisions of SFAS 123 using the Black-Scholes option pricing model, the resulting pro forma net income (loss) available to common stockholders, and pro forma net income (loss) available to common stockholders per share would be as follows:

 

		Three Months Ended January 31,						Nine Months Ended January 31,
		2003			2004			2003			2004
Net income (loss) available to common stockholders, as reported		$	(1,561	)	$	672		$	(59,773	)	$	10,954
Deduct: Total stock-based compensation expense determined under fair value based method, net		298			287			853			861
Net income (loss) available to common stockholders, pro forma		$	(1,859	)	$	385		$	(60,626	)	$	10,093
Basic income (loss) per common share:
As reported		$	(0.07	)	$	0.03		$	(2.53	)	$	0.45
Pro forma		$	(0.08	)	$	0.02		$	(2.56	)	$	0.42
Diluted income (loss) per common share:
As reported		$	(0.07	)	$	0.03		$	(2.50	)	$	0.45
Pro forma		$	(0.08	)	$	0.02		$	(2.53	)	$	0.41

 

In accordance with SFAS 123, the fair value of each option grant has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

 

		Nine Months Ended January 31, 2003		Nine Months Ended January 31, 2004
Risk free interest rate		3.00% - 4.50%		2.34% - 3.39%
Expected dividend yield		N/A		N/A
Expected life		5 Years		5 Years
Expected volatility		65.00%		65.00%

 

The Company has recorded no compensation expense for stock options granted to employees during the three and nine months ended January 31, 2003 or 2004.

 

11.          SEGMENT REPORTING

 

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments in financial statements.  In general, SFAS No. 131 requires that business entities report selected information about operating segments in a manner consistent with that used for internal management reporting.

 

The Company classifies its operations into Eastern, Central, Western and FCR Recycling.  The Company’s revenues in the Eastern, Central and Western segments are derived mainly from one industry segment, which includes the collection, transfer, recycling and disposal of non-hazardous solid waste.  The Eastern Region also includes Maine Energy, which generates electricity from non-hazardous solid waste. The Company’s revenues in the FCR Recycling segment are derived from integrated waste handling services, including processing and recycling of wood, paper, metals, aluminum, plastics and glass and brokerage of recycled

 

14

 

materials.  In September 2002, the Company transferred the export brokerage operation and in June 2003 the Company transferred its domestic brokerage operation and a commercial recycling business to two groups of employees who had managed those businesses.  Included in Other are ancillary operations, mainly major customer accounts, earnings from equity method investees and in the nine months ended January 31, 2003, residue recycling operations.

 

		Eastern Region			Central Region			Western Region			Recycling			Other
Three Months Ended January 31, 2003 (1)
Outside Revenues		$	36,509		$	21,015		$	15,931		$	18,909		$	3,437
Inter-segment Revenues		8,997			10,179			2,782			4,806			—
Income (loss) before discontinued operations and cumulative effect of change in accounting principle		(1,836		)	3,961			182			(56		)	(3,073		)
Total Assets		$	219,535		$	107,763		$	108,747		$	69,630		$	80,838

 

		Eliminations			Total
Three Months Ended January 31, 2003 (1)
Outside Revenues		$	—		$	95,801
Inter-segment Revenues		(26,764		)	—
Income (loss) before discontinued operations and cumulative effect of change in accounting principle		—			(822		)
Total Assets		$	—		$	586,513

 

		Eastern Region			Central Region			Western Region			Recycling			Other
Three Months Ended January 31, 2004
Outside Revenues		$	39,990		$	23,524		$	17,947		$	18,949		$	4,148
Inter-segment Revenues		11,437			11,164			3,980			176			—
Income (loss) before discontinued operations and cumulative effect of change in accounting principle		(2,560		)	3,567			(148		)	1,525			(894		)
Total Assets		$	270,527		$	114,938		$	118,214		$	67,920		$	79,571

 

		Eliminations			Total
Three Months Ended January 31, 2004
Outside Revenues		$	—		$	104,558
Inter-segment Revenues		(26,757		)	—
Income (loss) before discontinued operations and cumulative effect of change in accounting principle		—			1,490
Total Assets		$	—		$	651,170

 

15

 

		Eastern Region			Central Region			Western Region			Recycling			Other
Nine Months Ended January 31, 2003 (1)
Outside Revenues		$	118,321		$	69,992		$	51,465		$	75,933		$	10,691
Inter-segment Revenues		30,253			33,754			10,506			7,301			—
Income (loss) before discontinued operations and cumulative effect of change in accounting principle		(2,377		)	15,516			2,714			(336		)	(9,068		)
Total Assets		$	219,535		$	107,763		$	108,747		$	69,630		$	80,838

 

		Eliminations			Total
Nine Months Ended January 31, 2003 (1)
Outside Revenues		$	—		$	326,402
Inter-segment Revenues		(81,814		)	—
Income (loss) before discontinued operations and cumulative effect of change in accounting principle		—			6,449
Total Assets		$	—		$	586,513

 

		Eastern Region			Central Region			Western Region			Recycling			Other
Nine Months Ended January 31, 2004
Outside Revenues		$	127,502		$	76,372		$	57,374		$	56,420		$	12,752
Inter-segment Revenues		38,002			36,864			11,583			3,489			—
Income (loss) before discontinued operations and cumulative effect of change in accounting principle		(5,082		)	14,512			1,284			2,573			(2,633		)
Total Assets		$	270,527		$	114,938		$	118,214		$	67,920		$	79,571

 

		Eliminations			Total
Nine Months Ended January 31, 2004
Outside Revenues		$	—		$	330,420
Inter-segment Revenues		(89,938		)	—
Income (loss) before discontinued operations and cumulative effect of change in accounting principle		—			10,654
Total Assets		$	—		$	651,170

 

(1) Segment data for the three and nine months ended January 31, 2003 have been restated to conform to the classification of data for the current fiscal year.

 

Amounts of the Company’s total revenue attributable to services provided are as follows:

 

		Three Months Ended January 31,						Nine Months Ended January 31,
		2003			2004			2003			2004
Collection		$	46,945		$	51,158		$	149,255		$	161,997
Landfill/disposal facilities		13,993			17,071			46,978			52,447
Transfer		10,369			11,088			36,835			39,748
Recycling		21,001			25,241			61,180			72,934
Brokerage		3,493			—			32,154			3,294
Total revenues		$	95,801		$	104,558		$	326,402		$	330,420

 

16

 

12.          NET ASSETS UNDER CONTRACTUAL OBLIGATION

 

Effective September 30, 2002, the Company transferred its export brokerage operations to former employees, who had been responsible for managing that business.  Consideration for the transaction was in the form of two notes receivable amounting up to $5,460.  These notes are payable within five years of the anniversary date of the transaction to the extent of free cash flow generated from the operations.

 

Effective June 30, 2003, the Company entered into a similar transaction transferring its domestic brokerage operations as well as a commercial recycling business to former employees who had been responsible for managing those businesses.  Consideration for the transaction was in the form of two notes receivable amounting up to $6,925.  These notes are payable within twelve years of the anniversary date of the transaction to the extent of free cash flow generated from the operations.

 

The Company has not accounted for either of these transactions as a sale based on an assessment that the risks and other incidents of ownership have not sufficiently transferred to the buyer. The net assets of the operations are disclosed in the balance sheet as “net assets under contractual obligation”, and are being reduced as payments are made.

 

13.          CONDENSED CONSOLIDATING FINANCIAL INFORMATION

 

The Company’s senior subordinated notes due 2013 are guaranteed jointly and severally, fully and unconditionally by the Company’s significant wholly-owned subsidiaries. The Parent is the issuer and non-guarantor of the senior subordinated notes. The information which follows presents the condensed consolidating financial position as of April 30, 2003 and January 31, 2004; the condensed consolidating results of operations for the three and nine months ended January 31, 2003 and 2004; and the condensed consolidating statements of cash flows for the nine months ended January 31, 2003 and 2004 of (a) the parent company only (“the Parent”), (b) the combined guarantors (“the Guarantors”), each of which is 100% wholly-owned by the Parent, (c) the combined non-guarantors (“the Non-Guarantors”), (d) eliminating entries and (e) the Company on a consolidated basis.

 

17

 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF APRIL 30, 2003
(Unaudited)
(In thousands)

 

		Parent			Guarantors			Non-Guarantors			Elimination			Consolidated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	12,188		$	2,686		$	778		$	—		$	15,652
Accounts receivable – trade, net of allowance for doubtful accounts		485			44,155			1,009			—			45,649
Prepaid expenses		613			5,138			155			—			5,906
Inventory		—			1,740			—			—			1,740
Deferred taxes		3,504			—			771			—			4,275
Other current assets		1,237			1,103			10,715			—			13,055
Total current assets		18,027			54,822			13,428			—			86,277
Property, plant and equipment, net of accumulated depreciation and amortization		2,996			294,109			5,223			—			302,328
Intangible assets, net		—			162,696			—			—			162,696
Investment in subsidiaries		(43,783		)	—			—			43,783			—
Investments in unconsolidated entities		7,778			31,341			—			(4,379		)	34,740
Assets under contractual obligation		—			3,844			—			—			3,844
Other non-current assets		11,046			1,238			472			—			12,756
		(21,963		)	493,228			5,695			39,404			516,364
Intercompany receivable		507,820			(509,887		)	(2,312		)	4,379			—
		$	503,884		$	38,163		$	16,811		$	43,783		$	602,641

 

		Parent			Guarantors			Non - Guarantors			Elimination			Consolidated
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long term debt		1,500			1,777			1,257			—			4,534
Accounts payable		1,350			32,285			108			—			33,743
Accrued payroll and related expenses		1,368			6,015			—			—			7,383
Accrued interest		5,373			2			—			—			5,375
Accrued closure and post-closure costs, current portion		—			2,286			676			—			2,962
Other current liabilities		7,203			5,617			8,655			—			21,475
Total current liabilities		16,794			47,982			10,696			—			75,472
Long-term debt, less current maturities		298,500			2,318			1,571			—			302,389
Capital lease obligations, less current maturities		141			1,828			—			—			1,969
Accrued closure and post closure costs, less current portion		—			21,977			1,010			—			22,987
Deferred income taxes		5,473			—			—			—			5,473
Other long-term liabilities		—			10,047			1,328			—			11,375
COMMITMENTS AND CONTINGENCIES
Series A redeemable, convertible preferred stock, 55,750 shares authorized, issued and outstanding, liquidation preference of $1,000 per share plus accrued but unpaid dividends		63,824			—			—			—			63,824
STOCKHOLDERS’ EQUITY:
Class A common stock -  Authorized - 100,000,000 shares, $0.01 par value issued and outstanding - 22,769,000 shares		228			101			100			(201		)	228
Class B common stock - Authorized - 1,000,000 shares, $0.01 par value 10 votes per share, issued and outstanding - 988,000 shares		10			—			—			—			10
Accumulated other comprehensive income		542			1,190			—			(1,190		)	542
Additional paid-in capital		270,068			47,885			2,825			(50,710		)	270,068
Accumulated deficit		(151,696		)	(95,165		)	(719		)	95,884			(151,696		)
Total stockholders’ equity		119,152			(45,989		)	2,206			43,783			119,152
		$	503,884		$	38,163		$	16,811		$	43,783		$	602,641

 

18

 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JANUARY 31, 2004
(Unaudited)
(In thousands)

 

		Parent			Guarantors			Non - Guarantors			Elimination			Consolidated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	2,089		$	6,414		$	792		$	—		$	9,295
Deferred income taxes		5,461			—			974			—			6,435
Other current assets		4,556			51,068			13,038			(1,063		)	67,599
Total current assets		12,106			57,482			14,804			(1,063		)	83,329
Property, plant and equipment, net of accumulated depreciation and amortization		2,601			332,499			1,756			—			336,856
Goodwill		—			164,328			—			—			164,328
Investment in unconsolidated entities		13,105			34,712			249			(4,379		)	43,687
Investment in subsidiaries		(26,059		)	—			—			26,059			—
Assets under contractual obligation		—			5,737			—			—			5,737
Other non-current assets		10,562			6,352			319			—			17,233
		209			543,628			2,324			21,680			567,841
Intercompany receivable		542,837			(546,361		)	(855		)	4,379			—
		$	555,152		$	54,749		$	16,273		$	24,996		$	651,170

 

		Parent			Guarantors			Non - Guarantors			Elimination			Consolidated
LIABILITIES AND STOCKHOLDERS ‘ EQUITY
CURRENT LIABILITIES:
Current maturities of capital lease obligations		$	299		$	476		$	6		$	—		$	781
Accrued interest		8,895			2