UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

 

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 126-2 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  August 29, 2003:

	Class A Common Stock	22,833,982
	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			July 31, 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	15,652		$	5,737
Restricted cash		10,839			11,606
Accounts receivable - trade, net of allowance for doubtful accounts of $895 and $1,048		45,649			50,889
Notes receivable - officers/employees		1,105			1,105
Prepaid expenses		5,906			5,583
Inventory		1,740			1,581
Deferred income taxes		4,275			4,110
Other current assets		1,111			1,078
Total current assets		86,277			81,689
Property, plant and equipment, net of accumulated depreciation and amortization of $201,681 and $224,984		302,328			305,084
Goodwill, net		159,682			162,938
Other intangible assets, net		3,014			3,223
Investments in unconsolidated entities		34,740			35,048
Net assets under contractual obligation		3,844			5,948
Other non-current assets		12,756			13,269
		516,364			525,510
		$	602,641		$	607,199

 

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

 

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CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except for share and per share data)

 

		April 30, 2003			July 31, 2003
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt		$	4,534		$	4,441
Current maturities of capital lease obligations		1,287			1,028
Accounts payable		33,743			34,674
Accrued payroll and related expenses		7,383			5,991
Accrued interest		5,375			8,347
Accrued income taxes		4,526			3,832
Accrued closure and post-closure costs, current portion		2,962			1,750
Other accrued liabilities		15,662			16,288
Total current liabilities		75,472			76,351
Long-term debt, less current maturities		302,389			302,037
Capital lease obligations, less current maturities		1,969			1,812
Accrued closure and post-closure costs,  less current maturities		22,987			17,727
Deferred income taxes		5,473			8,514
Other long-term liabilities		11,375			11,344
Commitments and contingencies
Series A redeemable, convertible preferred stock, 55,750 shares authorized, issued and outstanding as of April 30, 2003 and July 31, 2003, liquidation preference of $1,000 per share plus accrued but unpaid dividends		63,824			64,622
STOCKHOLDERS’ EQUITY:
Class A common stock - Authorized - 100,000,000 shares, $0.01 par value issued and outstanding - 22,769,000 and 22,797,000 shares as of April 30, 2003 and July 31, 2003, respectively		228			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			733
Additional paid-in capital		270,068			269,323
Accumulated deficit		(151,696		)	(145,502		)
Total stockholders’ equity		119,152			124,792
		$	602,641		$	607,199

 

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 July 31,
		2002			2003
Revenues		$	116,031		$	113,888
Operating expenses:
Cost of operations		77,792			74,278
General and administration		14,711			14,473
Depreciation and amortization		12,061			14,770
		104,564			103,521
Operating income		11,467			10,367
Other (income)/expense, net:
Interest income		(79		)	(52		)
Interest expense		7,155			6,275
Income from equity method investments		(201		)	(35		)
Minority interest		(152		)	—
Other (income)/expense, net		28			(159		)
Other expense, net		6,751			6,029
Income from continuing operations before income taxes, discontinued operations and cumulative effect of change in accounting principle		4,716			4,338
Provision for income taxes		2,159			867
Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle		2,557			3,471
Reclassification adjustment from discontinued operations (net of income taxes of $19)		47			—
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)		(61,312		)	6,194
Preferred stock dividend		759			798
Net income (loss) available to common stockholders		$	(62,071	)	$	5,396

 

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

 

4

 

		Three Months Ended July 31,
		2002			2003
Earnings Per Share:
Basic:
Net income before cumulative effect of change in accounting principle		$	0.08		$	0.11
Reclassification adjustment from discontinued operations, net		—			—
Cumulative effect of change in accounting principle, net		(2.70		)	0.11
Net income (loss) per common share		$	(2.62	)	$	0.22
Basic weighted average common shares outstanding		23,684			23,760
Diluted:
Net income before cumulative effect of change in accounting principle		$	0.07		$	0.11
Reclassification adjustment from discontinued operations, net		—			—
Cumulative effect of change in accounting principle, net		(2.64		)	0.11
Net income (loss) per common share		$	(2.57	)	$	0.22
Diluted weighted average common shares outstanding		24,152			24,006

 

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)

 

		Three Months Ended July 31,
		2002			2003
Cash Flows from Operating Activities:
Net income (loss)		$	(61,312	)	$	6,194
Adjustments to reconcile net income (loss) to net cash provided by operating activities -
Depreciation and amortization		12,061			14,770
Reclassification adjustment from discontinued operations		(47		)	—
Cumulative effect of change in accounting principle, net		63,916			(2,723		)
Income from equity method investments		(201		)	(35		)
(Gain) loss on sale of assets		4			(54		)
Minority interest		(152		)	—
Deferred income taxes		1,308			1,351
Changes in assets and liabilities, net of effects of acquisitions and divestitures -
Accounts receivable		(8,768		)	(7,440		)
Accounts payable		7,419			2,252
Other assets and liabilities		(4,320		)	673
		71,220			8,794
Net Cash Provided by Operating Activities		9,908			14,988
Cash Flows from Investing Activities:
Acquisitions, net of cash acquired		—			(6,027		)
Additions to property, plant and equipment		(11,336		)	(17,738		)
Proceeds from sale of equipment		110			59
(Advances to) distributions from unconsolidated entities		500			(693		)
Proceeds from assets under contractual obligation		—			304
Net Cash Used In Investing Activities		(10,726		)	(24,095		)
Cash Flows from Financing Activities:
Proceeds from long-term borrowings		21,550			33,400
Principal payments on long-term debt		(24,462		)	(34,261		)
Proceeds from exercise of stock options		427			53
Net Cash Used In Financing Activities		(2,485		)	(808		)
Net decrease in cash and cash equivalents		(3,303		)	(9,915		)
Cash and cash equivalents, beginning of period		4,298			15,652
Cash and cash equivalents, end of period		$	995		$	5,737

 

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

 

6

 

		Three Months Ended July 31,
		2001			2002
Supplemental Disclosures of Cash Flow Information:
Cash paid (received) during the period for -
Interest		$	6,598		$	2,878
Income taxes, net of refunds		$	210		$	341
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
Summary of entities acquired in purchase business combinations
Fair market value of assets acquired		$	—		$	6,213
Cash paid, net		—			(6,027		)
Liabilities assumed and receivables forgiven to seller		$	—		$	186

 

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

 

7

 

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 July 31, 2003, the consolidated statements of operations for the three months ended July 31, 2002 and 2003 and the consolidated statements of cash flows for the three months ended July 31, 2002 and 2003 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 months ended July 31, 2003 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 quarter ended July 31, 2002.  Also in connection with the discontinued accounting treatment recorded in fiscal 2001, estimated future losses from this operation were recorded and classified as losses from discontinued operations.  This amount has been reclassified and offset against actual losses from operations for the quarter ended July, 31, 2002.

 

3.                                      BUSINESS COMBINATIONS

 

During the three months ended July 31, 2003, the Company acquired three solid waste hauling operations in transactions accounted for as purchases.  These transactions were in exchange for consideration of $6,027 in cash to the sellers.  The Company completed no such acquisitions during the three months ended July 31, 2002.  The operating results of these businesses are included in the consolidated statements of operations from the dates of acquisition.  The purchase prices have been allocated to the net assets acquired based on their fair values at the dates of acquisition with the residual amounts allocated to goodwill.

 

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

 

		Three Months Ended July 31, 2002			Three Months Ended July 31, 2003
Revenues		$	117,471		$	114,508
Operating income		$	11,790		$	10,510
Net income (loss) available to common stockholders		$	(61,975	)	$	5,466
Diluted net income (loss) per common share		$	(2.57	)	$	0.23
Diluted weighted average common shares outstanding		24,152			24,006

 

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.

 

8

 

4.                                      ADOPTION OF NEW ACCOUNTING STANDARDS

 

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 has 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.

 

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 $7,807, 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		$	(7,807	)	$	18,142

 

9

 

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

 

Balance at April 30, 2003		$	25,949
Obligations incurred		1,104
Accretion expense		596
Payments		(365		)
Cumulative effect of change in accounting principle		(7,807		)
Balance at June 30, 2003		$	19,477

 

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. The Company adopted SFAS 145 effective May 1, 2003.  Under SFAS 145, gains and losses on future debt extinguishment, if any, will be recorded in pre-tax income.  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 Company’s old term loan and old revolver.  This item will be reclassified to continuing operations in the third quarter of fiscal 2004.

 

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 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.

 

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 requirements 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 will record the fair value of future material guarantees, if any.

 

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).

 

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

 

10

 

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.  The Company has no unconsolidated subsidiaries or affiliates; therefore FIN 46 had no impact on the Company’s consolidated financial statements.

 

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 Casella for Casella 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, we 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 alleged that we 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 Casella'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.  We have 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 Casella 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 Casella 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 summer or fall of 2003 on the liability issue.  We continue to explore settlement possibilities with the State.  We believe that we have meritorious defenses to these claims.  Although a loss as a result of these claims is reasonably possible, we 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.

 

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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 months ended July 31, 2002 and 2003.

 

		Three Months Ended July 31,
		2002			2003
Numerator:
Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle		$	4,716		$	4,338
Less:  Preferred dividends		(759		)	(798		)
Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle available to common stockholders		$	3,957		$	3,540
Denominator:
Number of shares outstanding, end of period:
Class A common stock		22,722			22,796
Class B common stock		988			988
Effect of weighted average shares outstanding during period		(26		)	(24		)
Weighted average number of common shares used in basic EPS		23,684			23,760
Impact of potentially dilutive securities:
Dilutive effect of options, warrants and contingent stock		468			246
Weighted average number of common shares used in diluted EPS		24,152			24,006

 

For the three months ended July 31, 2002 and 2003, 7,039 and 7,163 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 months ended July 31, 2002 and 2003 is as follows:

 

		Three Months Ended July 31,
		2002			2003
Net income (loss)		$	(61,312	)	$	6,194
Other comprehensive income		426			191
Comprehensive income (loss)		$	(60,886	)	$	6,385

 

The components of other comprehensive income (loss) for the three months ended July 31, 2002 and 2003 are shown as follows:

 

12

 

		Three Months Ended July 31, 2002
		Gross			Tax effect			Net of Tax
Changes in fair value of marketable securities during the period, net		$	(37	)	$	—		$	(37	)
Change in fair value of interest rate swaps and commodity hedges during period, net		779			316			463
		$	742		$	316		$	426

 

		Three Months Ended July 31, 2003
		Gross			Tax effect			Net of Tax
Change in fair value of interest rate swaps and commodity hedges during period, net		$	322		$	131		$	191
		$	322		$	131		$	191

 

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 twelve commodity hedge contracts as of July 31, 2003.  These contracts expire between August 2003 and November 2005.  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 of July 31, 2003 the fair value of these hedges was an obligation of $363, with the net amount (net of taxes of $147) recorded as an unrealized loss in accumulated other comprehensive income.

 

The Company is party to two interest swap agreements as of July 31, 2003 for an aggregate notional amount of $53,000 expiring in February, 2004.  The Company has evaluated these swaps and believes these instruments qualify for hedge accounting pursuant to SFAS No. 133. As of July 31, 2003, the fair value of these swaps was a receivable of $39, with the net amount (net of taxes of $16) recorded as an unrealized gain in other comprehensive income. The estimated net amount of the existing losses as of July 31, 2003 included in accumulated other comprehensive income expected to be reclassified into earnings as payments are either made or received under the terms of the interest rate swaps within the next 12 months is approximately $15. 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 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.

 

13

 

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

 

		Three Months Ended July 31,
		2002			2003
Net income (loss) available to common stockholders, as reported		$	(62,071	)	$	5,396
Deduct: Total stock-based compensation expense determined under fair value based method, net		273			131
Net income (loss) available to common stockholders, pro forma		$	(62,344	)	$	5,265
Basic income (loss) per common share:
As reported		$	(2.62	)	$	0.22
Pro forma		$	(2.63	)	$	0.22
Diluted income (loss) per common share:
As reported		$	(2.57	)	$	0.22
Pro forma		$	(2.57	)	$	0.22

 

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

 

 

The Company granted no stock options during the three months ended July 31, 2003.  The Company has recorded no compensation expense for stock options granted to employees during the three months ended July 31, 2002 or 2003.

 

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

 

14

 

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 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 quarter ended July 31, 2002, residue recycling operations.

 

15

 

		Eastern Region			Central Region			Western Region			Recycling			Other
Three Months Ended July 31, 2002
Outside Revenues		$	40,014		$	24,472		$	17,324		$	30,477		$	3,744
Inter-segment Revenues		10,143			11,979			3,894			7,035			—
Income (loss) from continuing operations before discontinued operations and cumulative effect of change in accounting principle		(459		)	5,515			1,072			(240		)	(3,331		)
Total Assets		$	219,689		$	109,366		$	105,629		$	70,438		$	58,333

 

		Eliminations			Total
Three Months Ended July 31, 2002
Outside Revenues		$	—		$	116,031
Inter-segment Revenues		(33,051		)	—
Income (loss) from continuing operations before discontinued operations and cumulative effect of change in accounting principle		—			2,557
Total Assets		$	—		$	563,455

 

		Eastern Region			Central Region			Western Region			Recycling			Other
Three Months Ended July 31, 2003
Outside Revenues		$	43,656		$	25,970		$	20,604		$	19,497		$	4,161
Inter-segment Revenues		13,232			12,551			3,370			3,195			—
Income (loss) from continuing operations before cumulative effect of change in accounting principle		(1,369		)	5,441			981			400			(1,982		)
Total Assets		$	244,434		$	114,453		$	111,404		$	67,699		$	69,088

 

		Eliminations			Total
Three Months Ended July 31, 2003
Outside Revenues		$	—		$	113,888
Inter-segment Revenues		(32,348		)	—
Income (loss) from continuing operations before cumulative effect of change in accounting principle		—			3,471
Total Assets		$	—		$	607,078

 

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

 

		Three Months Ended July 31,
		2002			2003
Collection		$	51,267		$	55,553
Landfill / disposal facilities		15,607			17,827
Transfer		13,142			14,247
Recycling		17,501			22,967
Brokerage		18,417			3,294
Other		97			—
Reported revenues		$	116,031		$	113,888

 

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 will be reduced as payments are made.

 

13.                               NEW ACCOUNTING PRONOUNCEMENTS

 

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. Management believes that adoption will have no effect on the Company’s results of operations and financial position as well as related disclosures.

 

14.                               CONDENSED CONSOLIDATING FINANCIAL INFORMATION

 

The senior subordinated notes 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 July 31, 2003; the condensed consolidating results of operations for the three months ended July 31, 2002 and 2003; and the condensed consolidating statements of cash flows for the three months ended July 31, 2002 and 2003 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.

 

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
Deferred income taxes		—			—			—			—			—
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

 

17

 

		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
Minority interest		—			—			—			—			—
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 (loss)		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 July 31, 2003

(Unaudited)

(In thousands)

 

		Parent			Guarantors			Non-Guarantors			Elimination			Consolidated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	3,175		$	2,157		$	405		$	—		$	5,737
Accounts receivable-trade, net of allowance for doubtful accounts		1,118			48,370			1,401			—			50,889
Other current assets		5,223			7,349			12,491			—			25,063
Total current assets		9,516			57,876			14,297			—			81,689
Property, plant and equipment, net of accumulated depreciation and amortization		2,691			298,095			4,298			—			305,084
Intangible assets, net		—			162,938			—			—			162,938
Investment in subsidiaries		(37,161		)	—			—			37,161			—
Assets under contractual obligation		—			5,948			—			—			5,948
Other non-current assets		18,937			36,486			496			(4,379		)	51,540
		(15,533		)	503,467			4,794			32,782			525,510
Intercompany receivable		519,821			(522,608		)	(1,592		)	4,379			—
		$	513,804		$	38,735		$	17,499		$	37,161		$	607,199

 

		Parent			Guarantors			Non - Guarantors			Elimination			Consolidated
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts Payable		$	1,796		$	32,654		$	103		$	—		$	34,553
Accrued interest		8,345			2			—			—			8,347
Accrued income taxes		1,997			1,649			186			—			3,832
Accrued closure and post-closure costs, current portion		—			1,001			870			—			1,871
Other current liabilities		5,135			11,928			10,685			—			27,748
Total current liabilities		17,273			47,234			11,844			—			76,351
Long-term debt, less current maturities		298,500			2,274			1,263			—			302,037
Deferred income taxes		8,514			—			—			—			8,514
Other long-term liabilities		103			28,498			2,282			—			30,883
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		64,622			—			—			—			64,622
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 (loss)		733			770			—			(770		)	733
Additional paid-in capital		269,323			46,932			2,825			(49,757		)	269,323
Accumulated deficit		(145,502		)	(87,074		)	(815		)	87,889			(145,502		)
Total stockholders’ equity		124,792			(39,271		)	2,110			37,161			124,792
		$	513,804		$	38,735		$	17,499		$	37,161		$	607,199

 

19

 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

THREE MONTHS ENDED JULY 31, 2002

(Unaudited)

(In thousands)

 

		Parent			Guarantors			Non - Guarantors			Elimination			Consolidated
Revenues		$	—		$	115,235		$	2,320		$	(1,524	)	$	116,031
Operating expenses:
Cost of operations		918			75,769			2,629			(1,524		)	77,792
General and administration		(156		)	14,696			171			—			14,711
Depreciation and amortization		428			11,244			389			—			12,061
		1,190			101,709			3,189			(1,524		)	104,564
Operating income (loss)		(1,190		)	13,526			(869		)	—			11,467
Other expense/(income), net:
Interest income		(7,036		)	(354		)	(48		)	7,359			(79		)
Interest expense		7,024			7,380			110			(7,359		)	7,155
(Income) loss from equity method investments		57,954			(201		)	—			(57,954		)	(201		)
Minority interest		—			—			(152		)	—			(152		)
Other expense/(income), net:		65			(38		)	1			—			28
Other expense, net		58,007			6,787			(89		)	(57,954		)	6,751
Income (loss) from continuing operations before income taxes, discontinued operations, extraordinary item and cumulative effect of change in accounting principle		(59,197		)	6,739			(780		)	57,954			4,716
Provision for income taxes		2,115			1			43			—			2,159
Income (loss) from continuing operations before discontinued operations and cumulative effect of change in accounting principle		(61,312		)	6,738			(823		)	57,954			2,557
Reclassification adjustment from discontinued operations, net		—			47			—			—			47
Cumulative effect of change in accounting principle, net		—			(63,916		)	—			—			(63,916		)
Net loss		(61,312		)	(57,131		)	(823		)	57,954			(61,312		)
Preferred stock dividend		759			—			—			—			759
Net loss available to common stockholders		$	(62,071	)	$	(57,131	)	$	(823	)	$	57,954		$	(62,071	)

 

20

 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

THREE MONTHS ENDED JULY 31, 2003

(Unaudited)

(In thousands)

 

		Parent			Guarantors			Non - Guarantors			Elimination			Consolidated
Revenues		$	—		$	112,146		$	4,222		$	(2,480	)	$	113,888
Operating expenses:
Cost of operations		204			73,740			2,814			(2,480		)	74,278
General and administration		(118		)	14,394			197			—			14,473
Depreciation and amortization		449			12,830			1,491			—			14,770
		535			100,964			4,502			(2,480		)	103,521
Operating income (loss)		(535		)	11,182			(280		)	—			10,367
Other expense/(income), net:
Interest income		(5,927		)	(337		)	(26		)	6,238			(52		)
Interest expense		6,337			6,107			69			(6,238		)	6,275
(Income) loss from equity method investments		(7,995		)	(35		)	—			7,995			(35		)
Other expense/(income), net:		(4		)	(126		)	(29		)	—			(159		)
Other expense, net		(7,589		)	5,609			14			7,995			6,029
Income (loss) from continuing operations before income taxes, discontinued operations, extraordinary item and cumulative effect of change in accounting principle		7,054			5,573			(294		)	(7,995		)	4,338
Provision for income taxes		860			—			7			—			867
Income (loss) from continuing operations before discontinued operations, extraordinary item and cumulative effect of change in accounting principle		6,194			5,573			(301		)	(7,995		)	3,471
Cumulative effect of change in accounting principle, net		—			2,518			205			—			2,723
Net loss		6,194			8,091			(96		)	(7,995		)	6,194
Preferred stock dividend		798			—			—			—			798
Net loss available to common stockholders		$	5,396		$	8,091		$	(96	)	$	(7,995	)	$	5,396

 

21

 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED JULY 31, 2002

(Unaudited)

(In thousands)

 

		Parent			Guarantors			Non-Guarantors				Elimination			Consolidated
Net Cash Provided by (Used in) Operating Activities		$	(3,490	)	$	13,388		$	10			$	—		$	9,908
Cash Flows from Investing Activities:
Additions to property, plant and equipment		(38		)	(11,288		)	(10			)	—			(11,336		)
Other		—			610			—				—			610
Net Cash Used In Investing Activities		(38		)	(10,678		)	(10			)	—			(10,726		)
Cash Flows from Financing Activities:
Proceeds from long-term borrowings		21,550			—			—				—			21,550
Principal payments on long-term debt		(23,421		)