UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
FORM 10-Q

 

(Mark One)

 

 

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended January 31, 2007

 

 

 

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)

Delaware

 

03-0338873

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

25 Greens Hill Lane, Rutland, Vermont

 

05701

(Address of principal executive offices)

 

(Zip Code)


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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer  o                   Accelerated filer  x                                            Non-accelerated filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of February 28, 2007:

 

Class A Common Stock

24,329,420

 

 

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,

 

January 31,

 

ASSETS

 

2006

 

2007

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

7,429

 

$

11,929

 

Restricted cash

 

72

 

73

 

Accounts receivable - trade, net of allowance

  for doubtful accounts of $661 and $1,595

 

56,269

 

57,839

 

Notes receivable - officers/employees

 

87

 

87

 

Refundable income taxes

 

 

181

 

Prepaid expenses

 

5,126

 

6,004

 

Inventory

 

2,975

 

3,186

 

Deferred income taxes

 

5,034

 

10,602

 

Other current assets

 

1,982

 

3,335

 

Total current assets

 

78,974

 

93,236

 

 

 

 

 

 

 

Property, plant and equipment, net of accumulated depreciation
and amortization of $388,808 and $415,327

 

481,284

 

506,797

 

Goodwill

 

171,258

 

172,731

 

Intangible assets, net

 

2,762

 

2,276

 

Restricted cash

 

17,887

 

12,518

 

Notes receivable - officers/employees

 

916

 

916

 

Investments in unconsolidated entities

 

44,491

 

48,811

 

Net assets under contractual obligation

 

937

 

88

 

Other non-current assets

 

12,602

 

12,238

 

 

 

732,137

 

756,375

 

 

 

 

 

 

 

 

 

$

811,111

 

$

849,611

 

 

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

 

2




 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Continued)

(Unaudited)

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

 

 

 

April 30,

 

January 31,

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

2006

 

2007

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Current maturities of long-term debt

 

$

527

 

$

1,132

 

Current maturities of capital lease obligations

 

1,061

 

1,096

 

Accounts payable

 

46,364

 

41,316

 

Accrued payroll and related expenses

 

6,818

 

7,598

 

Accrued interest

 

6,650

 

14,067

 

Accrued income taxes

 

200

 

 

Current accrued capping, closure and post-closure costs

 

4,771

 

3,429

 

Other accrued liabilities

 

28,374

 

26,740

 

Total current liabilities

 

94,765

 

95,378

 

 

 

 

 

 

 

Long-term debt, less current maturities

 

452,720

 

479,370

 

Capital lease obligations, less current maturities

 

1,747

 

925

 

Accrued capping, closure and post-closure costs, less current portion

 

23,245

 

25,670

 

Deferred income taxes

 

6,957

 

13,457

 

Other long-term liabilities

 

11,757

 

11,341

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

Series A redeemable, convertible preferred stock -

 

 

 

 

 

Authorized - 55,750 shares, issued and outstanding - 53,000
as of April 30, 2006 and January 31, 2007, liquidation preference
of $1,000 per share plus accrued but unpaid dividends

 

70,430

 

73,104

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Class A common stock -

 

 

 

 

 

Authorized - 100,000,000 shares, $0.01 par value; issued
and outstanding - 24,185,000 and 24,329,000 shares
as of April 30, 2006 and January 31, 2007, respectively

 

242

 

243

 

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

 

159

 

(347

)

Additional paid-in capital

 

274,297

 

274,187

 

Accumulated deficit

 

(125,218

)

(123,727

)

Total stockholders’ equity

 

149,490

 

150,366

 

 

 

 

 

 

 

 

 

$

811,111

 

$

849,611

 

 

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,

 

 

 

2006

 

2007

 

2006

 

2007

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

130,597

 

$

133,492

 

$

399,392

 

$

424,828

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of operations

 

89,034

 

89,800

 

262,704

 

279,717

 

General and administration

 

17,946

 

17,653

 

53,296

 

58,578

 

Depreciation and amortization

 

16,525

 

17,223

 

49,572

 

54,457

 

Deferred costs

 

1,329

 

 

1,329

 

 

 

 

124,834

 

124,676

 

366,901

 

392,752

 

Operating income

 

5,763

 

8,816

 

32,491

 

32,076

 

Other expense/(income), net:

 

 

 

 

 

 

 

 

 

Interest income

 

(208

)

(313

)

(559

)

(910

)

Interest expense

 

8,396

 

10,323

 

23,918

 

30,234

 

Income from equity method investments

 

(3,319

)

(988

)

(4,762

)

(1,978

)

Other income

 

(1,541

)

(50

)

(1,664

)

(351

)

Other expense, net

 

3,328

 

8,972

 

16,933

 

26,995

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

2,435

 

(156

)

15,558

 

5,081

 

Provision for income taxes

 

1,148

 

689

 

7,005

 

3,590

 

Net income (loss)

 

1,287

 

(845

)

8,553

 

1,491

 

Preferred stock dividend

 

859

 

902

 

2,563

 

2,674

 

Net (loss) income available to common stockholders

 

$

428

 

$

(1,747

)

$

5,990

 

$

(1,183

)

 

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

4




 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(Unaudited)

(in thousands, except for per share data)

 

 

 

Three Months Ended 
January 31,

 

Nine Months Ended 
January 31,

 

 

 

2006

 

2007

 

2006

 

2007

 

Earnings Per Share:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Net (loss) income per common share available
to common stockholders

 

$

0.02

 

$

(0.07

)

$

0.24

 

$

(0.05

)

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

25,019

 

25,273

 

24,932

 

25,257

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Net (loss) income per common share available
to common stockholders

 

$

0.02

 

$

(0.07

)

$

0.24

 

$

(0.05

)

 

 

 

 

 

 

 

 

 

 

Diluted weighted average common shares outstanding

 

25,413

 

25,273

 

25,296

 

25,257

 

 

 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,

 

 

 

2006

 

2007

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net income

 

$

8,553

 

$

1,491

 

Adjustments to reconcile net income
to net cash provided by operating activities -

 

 

 

 

 

Depreciation and amortization

 

49,572

 

54,457

 

Depletion of landfill operating lease obligations

 

4,651

 

5,543

 

Income from equity method investments

 

(4,762

)

(1,978

)

Deferred costs

 

1,329

 

 

(Gain) loss on sale of equipment

 

233

 

(591

)

Stock-based compensation

 

 

511

 

Excess tax benefit on the exercise of stock options

 

 

(145

)

Deferred income taxes

 

4,012

 

464

 

Changes in assets and liabilities, net of
effects of acquisitions and divestitures -

 

 

 

 

 

Accounts receivable

 

(3,271

)

(1,393

)

Accounts payable

 

(3,855

)

(5,048

)

Other assets and liabilities

 

5,981

 

2,492

 

 

 

53,890

 

54,312

 

Net Cash Provided by Operating Activities

 

62,443

 

55,803

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Acquisitions, net of cash acquired

 

(19,226

)

(2,087

)

Additions to property, plant and equipment — growth

 

(36,552

)

(25,757

)

— maintenance

 

(51,608

)

(52,592

)

Payments on landfill operating lease contracts

 

(8,450

)

(4,500

)

Proceeds from sale of equipment

 

936

 

1,369

 

Restricted cash from revenue bond issuance

 

 

5,535

 

Investment in unconsolidated entities

 

(3,000

)

(2,328

)

Proceeds from assets under contractual obligation

 

601

 

849

 

Net Cash Used In Investing Activities

 

(117,299

)

(79,511

)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from long-term borrowings

 

159,733

 

239,950

 

Principal payments on long-term debt

 

(104,581

)

(213,459

)

Proceeds from exercise of stock options

 

1,151

 

1,572

 

Excess tax benefit on the exercise of stock options

 

 

145

 

Net Cash Provided by Financing Activities

 

56,303

 

28,208

 

Net increase in cash and cash equivalents

 

1,447

 

4,500

 

Cash and cash equivalents, beginning of period

 

8,578

 

7,429

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

10,025

 

$

11,929

 

 

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

 

6




 

 

 

 CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

 (Unaudited)

 (in thousands)

 

 

 

Nine Months Ended
January 31,

 

 

 

2006

 

2007

 

 

 

 

 

 

 

 Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 Cash paid during the period for -

 

 

 

 

 

 Interest

 

$

16,379

 

$

21,696

 

 Income taxes, net of refunds

 

$

1,299

 

$

2,241

 

 

 

 

 

 

 

 Supplemental Disclosures of Non-Cash Investing and Financing Activities:

 

 

 

 

 

 Summary of entities acquired in purchase business combinations -

 

 

 

 

 

 Fair value of assets acquired

 

$

21,839

 

$

2,332

 

 Cash paid, net

 

(19,226

)

(2,087

)

 

 

 

 

 

 

 Liabilities assumed and holdbacks to sellers

 

$

2,613

 

$

245

 

 

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. (the “Parent”) and Subsidiaries (collectively, the “Company”) as of April 30, 2006 and January 31, 2007, the consolidated statements of operations for the three and nine months ended January 31, 2006 and 2007 and the consolidated statements of cash flows for the nine months ended January 31, 2006 and 2007 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 conjunction with the Company’s audited consolidated financial statements as of and for the twelve months ended April 30, 2006  included as part of the Company’s Annual Report on Form 10-K for the year ended April 30, 2006 (the “Annual Report”).  The results for the three and nine month periods ended January 31, 2007 may not be indicative of the results that may be expected for the fiscal year ending April 30, 2007.

2.             BUSINESS COMBINATIONS

During the nine months ended January 31, 2007, the Company acquired eleven solid waste hauling operations.  These transactions were in exchange for total consideration of $2,332, including $2,087 in cash and $245 in liabilities assumed.  During the nine months ended January 31, 2006, the Company acquired one recycling operation, twelve solid waste hauling operations and recorded additional expenditures for a landfill closure project acquired in the fourth quarter of fiscal year 2005.  These transactions were in exchange for total consideration of $21,839 including $19,226 in cash and $2,613 in capital leases, debt and other liabilities assumed.  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, including the value of non-compete agreements, 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 made in the nine months ended January 31, 2006 and 2007 had been completed as of May 1, 2005.

 

 

Three Months Ended
January 31,

 

Nine Months Ended
January31,

 

 

 

2006

 

2007

 

2006

 

2007

 

Revenue

 

$

131,618

 

$

133,519

 

$

406,916

 

$

425,773

 

Net income (loss)

 

1,378

 

(841

)

8,992

 

1,589

 

Diluted net income (loss) per common share

 

$

0.05

 

$

(0.03

)

$

0.36

 

$

0.06

 

 

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, 2005 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 late September 2005 the Company commenced operations at the Chemung County Landfill, after executing a twenty-five year operation, management and lease agreement with Chemung County, New York.

8




The Company made initial payments of $4,931 related to this transaction.

3.             GOODWILL AND INTANGIBLE ASSETS

The following table shows the activity and balances related to goodwill from April 30, 2006 through January 31, 2007:

 

 

North 
Eastern 
Region

 

South 
Eastern 
Region

 

Central 
Region

 

Western 
Region

 

FCR 
Recycling

 

Total

 

Balance, April 30, 2006

 

$

25,327

 

$

31,645

 

$

31,106

 

$

55,696

 

$

27,484

 

$

171,258

 

Acquisitions

 

147

 

 

687

 

635

 

4

 

1,473

 

Balance, January 31, 2007

 

$

25,474

 

$

31,645

 

$

31,793

 

$

56,331

 

$

27,488

 

$

172,731

 


Intangible assets at April 30, 2006 and January 31, 2007 consist of the following:

 

Covenants 
not to 
compete

 

Licensing 
Agreements

 

Total

 

Balance, April 30, 2006

 

 

 

 

 

 

 

Intangible assets

 

$

16,654

 

$

920

 

$

17,574

 

Less accumulated amortization

 

(14,771

)

(41

)

(14,812

)

 

 

$

1,883

 

$

879

 

$

2,762

 

 

 

 

 

 

 

 

 

Balance, January 31, 2007

 

 

 

 

 

 

 

Intangible assets

 

$

15,469

 

$

920

 

$

16,389

 

Less accumulated amortization

 

(14,029

)

(84

)

(14,113

)

 

 

$

1,440

 

$

836

 

$

2,276

 

 

Intangible amortization expense for the three months ended January 31, 2006 and 2007 was $343 and $151, respectively.  Intangible amortization expense for the nine months ended January 31, 2006 and 2007 was $993 and $689, respectively.   The intangible amortization expense estimated as of January 31, 2007, for the five years following fiscal year 2006 is as follows:

2007

 

2008

 

2009

 

2010

 

2011

 

$

838

 

$

580

 

$

400

 

$

288

 

$

196

 

 

4.             NEW ACCOUNTING STANDARDS

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS No. 154”) which replaces APB Opinion No. 20, Accounting Changes (“APB No. 20”), and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements — An Amendment of APB Opinion No. 28. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. Specifically, this statement requires “retrospective application” of the direct effect for a voluntary change in accounting principle to prior periods’ financial statements, if it is practicable to do so. SFAS No. 154 also strictly redefines the term “restatement” to mean the correction of an error by revising previously issued financial statements. SFAS No. 154 replaces APB No. 20, which required that most voluntary changes in accounting principles be recognized by including in net income of the period of the change the cumulative

9




effect of changing to the new accounting principle. The adoption of SFAS No. 154 effective May 1, 2006 had no impact on the Company’s financial position or results of operations.

On July 13, 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN No. 48.”) FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN No. 48 requires a company to evaluate whether the tax positions taken by a company will more likely than not be sustained upon examination by the appropriate taxing authority. FIN No. 48 also provides guidance on how a company should measure the amount of benefit that the company is to recognize in its financial statements. Under FIN No. 48, a company should also classify a liability for unrecognized tax benefits as current to the extent the company anticipates making a payment within one year. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact this statement will have on its financial position and results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  SFAS No. 157 applies to other existing accounting pronouncements that require or permit fair value measurements.  SFAS No. 157 does not require any new fair value measurements. However, the application of this statement may change the current practice for fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact this statement will have on its financial position and results of operations.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB No. 108”).  SAB No. 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment.  SAB No. 108 is effective for fiscal years ending after November 15, 2006. The Company is currently evaluating the impact this bulletin will have on its financial position and results of operations.

5.             LEGAL PROCEEDINGS

On January 10, 2002, the City of Biddeford, Maine filed a lawsuit in York County Superior Court in Maine alleging breach of the waste handling agreement among the Biddeford-Saco Waste Handling Committee, the cities of Biddeford and Saco, Maine and the Company’s subsidiary Maine Energy for (1) failure to pay certain residual cancellation payments in connection with the Company’s merger with KTI and (2) processing amounts of waste above contractual limits without notice to the City. On May 3, 2002, the City of Saco filed a lawsuit in York County Superior Court against the Company, Maine Energy and other subsidiaries. The complaint in that action, which was amended by the City of Saco on July 22, 2002, alleges breaches of the 1991 waste handling agreement for failure to pay the residual cancellation payment, which Saco alleges is due as a result of, among other things, (1) the Company’s merger with KTI and (2) Maine Energy’s failure to pay off certain limited partner loans in accordance with the terms of the agreement. The complaint also seeks damages for breach of contract and a court order requiring the Company to provide an accounting of all transactions since May 3, 1996 involving transfers of assets to or for the benefit of the equity owners of Maine Energy.  The litigation brought by the Cities of Biddeford and Saco is currently in the discovery phase. Simultaneously, the Company is engaged in settlement negotiations with the City of Biddeford concerning the claims asserted in these actions and other matters, however, at this stage it is impossible to predict whether a settlement will be reached. After engaging in extensive settlement negotiations with the City of Saco, the Company has been notified by the City of Saco that it intends to

10




terminate those negotiations and to litigate its claims for breach of the Waste Handling Agreement to conclusion.  In connection with the Company’s merger with KTI, the Company estimated the fair market value of Maine Energy as of the date the limited partner loans are anticipated to be paid in full, and recorded a liability equal to the applicable percentage of such amount. The obligation has been estimated by the Company at $5,314.  The Company believes that the possibility of material loss in excess of this amount is remote.  The Company has vigorously contested the claims asserted by the cities. The Company believes it has meritorious defenses to these claims.

On or about December 3, 2003, Maine Energy was served with a complaint filed in the United States District Court for the District of Maine. The complaint was a citizen suit under the federal Clean Air Act (“CAA”) and similar state law alleging (1) emissions of volatile organic compounds (“VOCs”) in violation of its federal operating permit; (2) failure to accurately identify emissions; and (3) failure to control VOC emissions through implementation of reasonably available control technology. In addition, the complaint alleged that Maine Energy was negligent and that the subject emissions cause odors and constitute a public nuisance. The allegations related to Maine Energy’s waste-to-energy facility located in Biddeford, Maine and its construction, installation and operation of a new odor control system which redirects air from tipping and processing buildings to a boiler building for treatment by three air vents. The complaint sought an unspecified amount of civil penalties, damages, injunctive relief and attorney’s fees. The court allowed the City’s requests to amend its complaint to assert (1) an additional CAA claim that Maine Energy filed with the Maine DEP a compliance certification for calendar year 2002 which failed to disclose required information concerning VOC emissions, and (2) an additional claim that the installation of the odor control system constituted a major modification under the Maine DEP air rules, which required Maine Energy to obtain emission offsets and to apply the most stringent level of emission control known as the Lowest Available Emission Rate or LAER. This latter amendment sought additional relief in the form of an order requiring that Maine Energy obtain emission offsets and apply LAER to emissions from its tipping and processing operations. On June 2, 2004, the City of Biddeford dismissed the subject complaint without prejudice while settlement negotiations take place. On or about May 25, 2004, Maine Energy received a revised 60-Day Notice of Intent to Sue under the CAA from the Cities of Biddeford and Saco. The Notice states that the Cities intend to refile suit under the CAA in the event that the ongoing settlement negotiations do not resolve the claims. On or about July 22, 2004 and March 28, 2005, Maine Energy received from the United States Environmental Protection Agency (“the EPA”) a request for information pursuant to section 114(a)(1) of the CAA, which states that the EPA is evaluating whether the Maine Energy facility is in compliance with the CAA, CAA regulations, and licenses issued under the CAA.  On September 29, 2006, the EPA notified Maine Energy that the agency was not further pursuing any allegation that Maine Energy emits VOCs at levels in excess of 100 tons per year.

The New Hampshire Superior Court in Grafton County, NH (the “Superior Court”) ruled on February 1, 1999 that the Town of Bethlehem, NH (the “Town”) could not enforce an ordinance purportedly prohibiting expansion of the Company’s landfill owned by its subsidiary North Country Environmental Services, Inc. (“NCES”), at least with respect to 51 acres of NCES’s 105 acre parcel, based upon certain existing land-use approvals. As a result, NCES was able to construct and operate “Stage II, Phase II” of the landfill. In May 2001, the New Hampshire Supreme Court (the “Supreme Court”) denied the Town’s appeal. Notwithstanding the Supreme Court’s 2001 ruling, the Town continued to assert jurisdiction to conduct unqualified site plan review with respect to Stage III (which is within the 51 acres) and further stated that the Town’s height ordinance and building permit process may apply to Stage III. On September 12, 2001, the Company filed a petition for, among other things, declaratory relief. On December 4, 2001, the Town filed an answer to the Company’s petition asserting counterclaims seeking, among other things, authorization to assert site plan review over Stage III, which commenced operation in December 2000, as well as the methane gas utilization/leachate handling facility operating in connection with Stage III, and also an order declaring that an ordinance prohibiting landfills applies to Stage IV expansion. The trial on these claims was held in December 2002 and on April 24, 2003, the Grafton Superior Court upheld the Town’s 1992 ordinance preventing the location or expansion of any landfill, ruling that the ordinance may be applied to any part of

11




Stage IV that goes beyond the 51 acres; ruling that the Town’s height ordinance is valid within the 51 acres; upholding the Town’s right to require Site Plan Review, except that there are certain areas within the Town’s Site Plan Review regulation that are preempted; and ruling that the methane gas utilization/leachate handling facility is not subject to the Town’s ordinance forbidding incinerators. On May 27, 2003, NCES appealed the Superior Court’s ruling to the Supreme Court. On March 1, 2004, the Supreme Court issued an opinion affirming that NCES has all of the local approvals that it needs to operate within the 51 acres and that the Town cannot therefore require site plan review for landfill development within the 51 acres. The Supreme Court’s opinion left open for further review the question of whether the Town’s 1992 ordinance can prevent expansion of the facility outside the 51 acres, remanding to the Superior Court four issues, including two defenses raised by NCES as grounds for invalidating the 1992 ordinance. On April 19, 2005, the Superior Court judge granted NCES’ motion for partial summary judgment, ruling that the 1992 ordinance is invalid because it distinguishes between “users” of land rather than “uses” of land, and that a state statute preempts the Town’s ability to issue a building permit for the methane gas utilization/leachate handling facility to the extent the Town’s regulations relate to design, installation, construction, modification or operation. After this ruling, the Town amended its counterclaim to request a declaration that another zoning ordinance it enacted in March of 2005 is lawful and prevents the expansion of the landfill outside of the 51 acres. In the fall of 2005 NCES and the Town engaged in private mediation in an effort to resolve the disputes between them, but the mediation was unsuccessful. NCES filed a motion with the court on December 15, 2005 for partial summary judgment asserting six different arguments challenging the lawfulness of the March 2005 amendment to the zoning ordinance, and the town filed a cross-motion on January 13, 2006 for partial summary judgment on the same issue. On February 13, 2006, NCES filed its objection with the Grafton Superior Court to the Town’s cross-motion for summary judgment. In April 2006, the court ruled against NCES on the applicability of all six arguments challenging the lawfulness of the March 2005 ordinance and NCES filed a motion for reconsideration. On May 30, 2006, the judge issued a ruling on the motion for reconsideration, reversing her prior ruling with respect to two of the six arguments she ruled earlier to be invalid, thereby preserving such arguments for trial. Additionally, several issues related to the March 2005 amendment that were not the subject of such motions remain to be decided by a trial, in addition to the issues remanded by the Supreme Court, which include whether the Town can impose site plan review requirements outside the 51 acres, and whether the 1992 ordinance contravenes the general welfare of the community. On June 6, 2006, the Town rejected a settlement proposal from NCES at a special town meeting. A conference was held on June 30, 2006 with the judge to establish a discovery schedule and a trial date has been set for the second quarter of calendar year 2007.

On March 10, 2005, the Zoning Enforcement Officer (“ZEO”) for the Town of Hardwick, Massachusetts rendered an opinion that a portion of the current Phase II footprint of the Company’s Hardwick Landfill is on land on Lot 1 that is not zoned for landfill activities. On April 7, 2005, the Company appealed the opinion to the Hardwick Zoning Board of Appeals (“ZBA”). On July 13, 2005, the ZBA denied the Company’s appeal. On August 1, 2005, the Company appealed the ZBA’s decision to the Massachusetts Land Court. The Company proposed a plan to implement an interim closure of the affected Lot 1 which included relocation of waste from an unlined area on Lot 2 (a lot unaffected by the decision) to the affected Lot 1. The ZEO issued a letter prohibiting the Company from relocating waste onto Lot 1. The Company appealed the ZEO decision to the ZBA and the ZBA denied the appeal on November 29, 2005. The Company appealed the ZBA decision to the Land Court and those Land Court appeals have been consolidated.  On January 18, 2006, the Massachusetts Attorney General approved new general bylaw articles of the town which, among other things, prohibit the use of construction and demolition debris as grading, shaping or closure materials. Such articles may have an adverse impact on the Company’s ability to relocate some or all of the waste onto the affected lot. On May 22, 2006, the ZEO issued an order (“Order”) which concluded that only a portion of the Hardwick Landfill’s operations on Lot 2 is on land that is grandfathered for purposes of zoning compliance.  In a May 22, 2006 letter, the ZEO clarified the Order by indicating that the portion of Lot 2 which is grandfathered is the so-called “unlined area” (estimated to be approximately 8.6 acres).  He also reported he would not

12




enforce the Order pending HLI’s expected appeal and resolution of any such appeal by the Hardwick Zoning Board of Appeals (“ZBA”).   In June 2006, HLI and a local group opposed to the landfill each separately appealed the Order to the ZBA.  In October 2006, the ZBA issued a decision in the appeal filed by the opposition group, which overturned the Order and found that only 2.2 acres of Lot 2 are grandfathered, and therefore may serve as a landfill in that zoning district.  HLI appealed the ZBA decision to the Massachusetts Land Court on October 31, 2006.  In December 2006, the ZBA issued a decision denying HLI’s appeal of the May 2006 Order and clarification.  HLI appealed that decision to the Massachusetts Land Court in late December 2006.  On January 24, 2007, Hardwick held a special Town Meeting to vote on three articles, including one to create a landfill zoning district which would include Lots 1 and 2.  Although the Company obtained a 54% majority, the article failed to gain the needed two-thirds approval.  In February 2007, HLI suspended landfill operations, pending the outcome of the zoning appeals in the Land Court.  In the event the Company exhausts its legal and other options to retain the Hardwick Landfill as a regional waste disposal resource, it will need to review this asset for a potential impairment charge.  The carrying value of the landfill is approximately $25,000.

On November 16, 2005, the Town of Ware (adjacent to Hardwick) adopted regulations restricting truck traffic in a manner that affects certain routes into the landfill.  On December 20, 2005, the Company filed an action in Massachusetts Superior Court challenging the regulations and seeking a preliminary injunction.  On December 30, 2005, the Massachusetts Superior Court denied the preliminary injunction.  The Company filed a lawsuit in Massachusetts Superior Court seeking, among other relief, to invalidate the Ware Board of Health regulations.  In addition, the Hardwick Board of Health has proposed regulations which, if adopted, will prohibit most commercial solid waste truck traffic from the road leading to the Landfill through Hardwick.  The Company is monitoring the status of such proposed regulations.

On July 12, 2005, NCES received notice from the Office of the Attorney General of the State of New Hampshire that it has commenced an official investigation into allegations that asbestos was concealed in loads of construction and demolition debris from a hotel renovation, delivered to the NCES landfill by a third party, and disposed there on several occasions between 1999 and 2002.   NCES has cooperated fully in the investigation.  NCES is engaged in discussions with the Office of the Attorney General over the terms of a possible civil settlement regarding this matter.  The Company is not able to estimate the amount of the potential settlement although the Company does not believe the outcome of this matter will have a material adverse effect on its business, financial condition, results of operations or cash flows.

The Company offers no prediction of the outcome of these proceedings. However, there can be no guarantee that the Company will prevail or that any judgments against the Company, if sustained on appeal, will not have a material adverse effect on its business, financial condition, results of operations or cash flows.

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

6.             ENVIRONMENTAL LIABILITIES

The Company is subject to liability for 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 or arranged to transport, treat or dispose of those materials. Any substantial liability incurred by the Company arising from environmental damage could have a material adverse effect on the Company’s business, financial condition and results of

13




operations. The Company is not presently aware of any situations that it expects would have a material adverse impact on its business, financial condition, results of operations, or cash flows.

7.             EARNINGS PER SHARE

The following table sets forth the numerator and denominator used in the computation of earnings per share:

 

 

 

Three Months
Ended January 31,

 

Nine Months
Ended January 31,

 

 

 

2006

 

2007

 

2006

 

2007

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,287

 

$

(845

)

$

8,553

 

$

1,491

 

Less: preferred stock dividends

 

(859

)

(902

)

(2,563

)

(2,674

)

Net (loss) income available to common stockholders

 

$

428

 

$

(1,747

)

$

5,990

 

$

(1,183

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Number of shares outstanding, end of period:

 

 

 

 

 

 

 

 

 

Class A common stock

 

24,091

 

24,329

 

24,091

 

24,329

 

Class B common stock

 

988

 

988

 

988

 

988

 

Effect of weighted average shares outstanding during period

 

(60

)

(44

)

(147

)

(60

)

Weighted average number of common shares used in basic EPS

 

25,019

 

25,273

 

24,932

 

25,257

 

Impact of potentially dilutive securities:

 

 

 

 

 

 

 

 

 

Dilutive effect of options and contingent stock

 

394

 

 

364

 

 

Weighted average number of common shares used in diluted EPS

 

25,413

 

25,273

 

25,296

 

25,257

 

 

For the three and nine months ended January 31, 2006, 6,499 and 6,748 common stock equivalents related to options 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, 2007, 7,957 and 7,312 common stock equivalents related to options 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.             LONG TERM DEBT

On July 25, 2006, the Company amended its existing senior credit facility utilizing the accordion feature and borrowed an additional $100,000 in the form of an increase of $10,000 in the revolving facility, under terms consistent with the existing credit facility, and a senior secured term B loan in the principal amount of $90,000.  The proceeds from the issuance of the term B loan were utilized to repay outstanding revolver borrowings under the credit facility.  The term B loan matures on April 28, 2010 and bears interest at LIBOR plus 2.00%, with annual principal payments of $900 for three years, beginning July 31, 2007, with the remaining principal balance due at maturity.

9.             COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is defined as the change in net assets of a business enterprise during a period from transactions generated from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Accumulated other comprehensive (loss) income included in the accompanying balance sheets consists of changes in the fair value of the Company’s interest rate swap and commodity hedge agreements.  Also included in accumulated other comprehensive (loss) income is the change in fair value of certain securities classified as available for sale as

14




well as the Company’s portion of the change in the fair value of commodity hedge agreements of the Company’s equity method investment, US GreenFiber, LLC (“GreenFiber”).

Comprehensive income (loss) for the three and nine months ended January 31, 2006 and 2007 is as follows:

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

January 31,

 

January 31,

 

 

 

2006

 

2007

 

2006

 

2007

 

Net income (loss)

 

$

1,287

 

$

(845

)

$

8,553

 

$

1,491

 

Other comprehensive loss

 

(198

)

(708

)

(192

)

(506

)

Comprehensive income (loss)

 

$

1,089

 

$

(1,553

)

$

8,361

 

$

985

 

 

The components of other comprehensive loss for the three and nine months ended January 31, 2006 and 2007 are shown as follows:

 

 

 

Three Months Ended January 31,

 

 

 

2006

 

2007

 

 

 

Gross

 

Tax 
effect

 

Net of 
Tax

 

Gross

 

Tax 
effect

 

Net of Tax

 

Changes in fair value of marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

during the period

 

$

9

 

$

3

 

$

6

 

$

(28

)

$

(10

)

$

(18

)

Change in fair value of interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

and commodity hedges during period

 

235

 

94

 

141

 

(800

)

(324

)

(476

)

Reclassification to earnings for interest rate

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps and commodity hedge contracts

 

(488

)

(143

)

(345

)

(360

)

(146

)

(214

)

 

 

$

(244

)

$

(46

)

$

(198

)

$

(1,188

)

$

(480

)

$

(708

)

 

 

 

Nine Months Ended January 31,

 

 

 

2006

 

2007

 

 

 

Gross

 

Tax 
effect

 

Net of 
Tax

 

Gross

 

Tax 
effect

 

Net of Tax

 

Changes in fair value of marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

during the period

 

$

(77

)

$

(27

)

$

(50

)

$

108

 

$

38

 

$

70

 

Change in fair value of interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

and commodity hedges during period

 

842

 

334

 

508

 

50

 

21

 

29

 

Reclassification to earnings for interest rate

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps and commodity hedge contracts

 

(816

)

(166

)

(650

)

(1,019

)

(414

)

(605

)

 

 

$

(51

)

$

141

 

$

(192

)

$

(861

)

$

(355

)

$

(506

)

 

10.          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 was party to twenty-three commodity hedge contracts as of January 31, 2007.  These contracts expire between April 2007 and November 2008.  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 (“SFAS No. 133”), as amended. As of January 31, 2007 the fair value of these hedges was an obligation of $1,406, with the net amount (net of taxes of $569) recorded as an unrealized loss in accumulated other comprehensive (loss) income.

 

15




The Company is party to three separate interest rate swap agreements with three banks for a notional amount of $75,000, which effectively fix the interest index rate on the entire notional amount at 4.4% from May 4, 2006 through May 5, 2008.  These agreements are specifically designated to interest payments under the Company’s term B loan and are accounted for as effective cash flow hedges pursuant to SFAS No. 133.  As of January 31, 2007, the fair value of these swaps was $769, with the net amount (net of taxes of $311) recorded as an unrealized gain in accumulated other comprehensive (loss) income.

On August 1, 2006, the Company entered into three separate interest rate zero-cost collars for a notional amount of $80,000.  The collars have an interest index rate cap of 6.00% and an interest index rate floor of approximately 4.48% and are effective from November 6, 2006 through May 5, 2009.  These agreements are specifically designated to interest payments under the revolving credit facility are accounted for as effective cash flow hedges pursuant to SFAS No. 133.  As of January 31, 2007, the fair value of these collars was an obligation of $27, with the net amount (net of taxes of $11) recorded as an unrealized loss in accumulated other comprehensive (loss) income.

11.          STOCK-BASED COMPENSATION

Effective May 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123(R)”). SFAS No. 123(R) establishes accounting for stock based awards exchanged for employee services. The Company previously accounted for these awards under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and related interpretations and disclosure requirements established by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”).

Under APB 25, no expense was recorded in the income statement for the Company’s stock options granted at fair market value. The pro forma effects on income for stock options and the Company’s employee stock purchase plan were instead disclosed in a footnote to the financial statements.

The Company adopted SFAS No. 123(R) using the modified prospective method. Under this method, all share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the specified vesting period. Prior periods are not restated.  The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair-value recognition provisions of SFAS No. 123 to stock options and the employee stock purchase program prior to adoption of SFAS No. 123(R).

 

Three Months Ended January 31, 2006

 

Nine Months
Ended January

31, 2006

 

Net income available to common stockholders, as reported

 

$

428

 

$

5,990

 

Deduct: Total stock-based compensation expense determined

under fair value based method, net

 

441

 

1,274

 

 

 

 

 

 

 

Net income (loss) available to common stockholders, pro forma

 

$

(13

)

$

4,716

 

 

 

 

 

 

 

Basic income per common share:

 

 

 

 

 

As reported

 

$

0.02

 

$

0.24

 

Pro forma

 

$

0.00

 

$

0.19

 

Diluted income per common share:

 

 

 

 

 

As reported

 

$

0.02

 

$

0.24

 

Pro forma

 

$

0.00

 

$

0.19

 

 

16




Effective March 2, 2006, the Company accelerated the vesting of all unvested stock options. As a result, stock-based compensation in periods subsequent to the acceleration is significantly reduced. The Company recognized stock-based compensation expense totaling $39 ($24 net of tax) related to the accelerated vesting of options previously awarded.  This expense was included in General and Administration expenses in the Consolidated Statements of Operations for fiscal year 2006.

Stock-based compensation expense recognized during the three and nine months ended January 31, 2007 totaled approximately $190 and $511, respectively, or approximately a $0.01 and $0.02 per share decrease to basic and diluted net income per common share for the respective periods.  Of these amounts, expense recorded with respect to stock options was $166 and $436 for the three and nine months ended January 31, 2007, respectively, and expense recorded with respect to the Company’s employee stock purchase plan was $24 and $74 for the three and nine months ended January 31, 2007, respectively.  This expense is included in General and Administration expenses in the Consolidated Statements of Operations.  The total compensation cost at January 31, 2007 related to unvested stock options was $2,081 and that future expense will be recognized over the remaining vesting periods of the stock options.  The weighted average remaining vesting period of those awards is approximately 3.2 years.

The total tax benefit related to the exercise of stock options was approximately $4 and $145 during the three and nine months ended January 31, 2007, respectively. Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits net of deductions resulting from the exercise of stock options as an operating cash flow, in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-15, Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option. SFAS No. 123(R) requires the Company to reflect the tax savings resulting from tax deductions in excess of expense reflected in its financial statements as a financing cash flow.

The Company’s calculations of stock-based compensation expense for the three and nine months ended January 31, 2006 and 2007 were made using the Black-Scholes valuation model. The fair value of the Company’s stock option grants was estimated assuming no expected dividend yield and the following weighted average assumptions for the three and nine months ended January 31, 2006 and 2007, as follows:

 

Three Months Ended

 

Nine Months Ended

 

 

 

January 31,

 

January 31,

 

 

 

2006

 

2007

 

2006

 

2007

 

Stock Options:

 

 

 

 

 

 

 

 

 

Expected life

 

 

 

5 years

 

6 years

 

Risk-free interest rate

 

 

 

3.81%

 

5.10%

 

Expected volatility

 

 

 

40.35%

 

31.02%

 

Stock Purchase Plan:

 

 

 

 

 

 

 

 

 

Expected life

 

0.5 years

 

0.5 years

 

0.5 years

 

0.5 years

 

Risk-free interest rate

 

4.30%

 

5.11%

 

4.13%

 

5.10%

 

Expected volatility

 

40.35%

 

33.50%

 

40.35%

 

32.87%

 

 

Expected life is calculated based on the weighted average historical life of the vested stock options, giving consideration to vesting schedules and historical exercise patterns.  Risk-free interest rate is based on the U.S. treasury yield curve for the period of the expected life of the stock option.  Expected volatility is calculated using the average of weekly historical volatility over the last one, three and six years.  One and three year historical volatility is based on the weekly price changes of the Company’s Class A Common Stock.  The six year historical volatility is based on peer group volatility and the weekly price changes of the common stock of various other publicly traded solid waste companies.

17




The Black-Scholes valuation model requires extensive use of accounting judgment and financial estimation, including estimates of the expected term option holders will retain their vested stock options before exercising them, the estimated volatility of the Company’s common stock price over the expected term, and the number of options that will be forfeited prior to the completion of their vesting requirements. Application of alternative assumptions could produce significantly different estimates of the fair value of stock-based compensation and consequently, the related amounts recognized in the Consolidated Statements of Operations.

In January 1998, the Company implemented its Employee Stock Purchase Plan. Under this plan, qualified employees may purchase shares of Class A Common Stock by payroll deduction at a 15% discount from the market price. 600 shares of Class A Common Stock have been reserved for this purpose.  As of January 31, 2007, 382 shares of Class A Common Stock were available for distribution under this plan.

During 1996, the Company adopted a stock option plan for employees, officers and directors of, and consultants and advisors to the Company. The 1996 Stock Option Plan (the “1996 Option Plan”) provided for the issuance of a maximum of 918 shares of Class A Common Stock pursuant to the grant of either incentive stock options or non-statutory options. As of April 30, 2006, a total of 167 options to purchase Class A Common Stock were outstanding at a weighted average exercise price of $14.30.  As of January 31, 2007, a total of 111 options to purchase Class A common Stock were outstanding at an average exercise price of $15.23. No further options may be granted under this plan.

On July 31, 1997, the Company adopted a stock option plan for employees, officers and directors of, and consultants and advisors to the Company. The Board of Directors has the authority to select the optionees and determine the terms of the options granted. As amended in 1998, the 1997 Stock Option Plan (the “1997 Plan”) provides for the issuance of up to 5,328 shares of Class A Common Stock pursuant to the grant of either incentive stock options or non-statutory options, which includes all authorized, but unissued options under previous plans. As of April 30, 2006, options to purchase 3,056 shares of Class A Common Stock at an average exercise price of $13.12 were outstanding under the 1997 Plan. As of January 31, 2007, options to purchase 3,416 shares of Class A Common Stock at a weighted average exercise price of $13.18 were outstanding under the 1997 Plan. As of January 31, 2007, 438 options were available for future grant under the 1997 Plan.

Additionally, options outstanding under the assumed KTI Stock Option Plan totaled 20 and 12 at April 30, 2006 and January 31, 2007, respectively, at weighted average exercise prices of $18.62 and $22.54, respectively. Upon assumption of this plan, options under the KTI plan became exercisable for an equal number of shares of the Company’s stock. The exercise price of the converted options was increased by 96.1% based on relative fair values of the underlying stock at the date of the KTI acquisition.

On July 31, 1997, the Company adopted a stock option plan for non-employee directors of the Company. The 1997 Non-Employee Director Stock Option Plan (the “Non-Employee Director Plan”) provides for the issuance of a maximum of 200 shares of Class A Common Stock pursuant to the grant of non-statutory options. As of April 30, 2006 and January 31, 2007, options to purchase 189 shares of Class A Common Stock at a weighted average exercise price of $11.87 were outstanding. As of April 30, 2006 and January 31, 2007, 9 options were available for future grant under the Non-Employee Director Plan.

On October 10, 2006, the Company adopted the 2006 Stock Incentive Plan (the “2006 Plan”). Up to an aggregate amount equal to the sum of: (i) 1,275 shares of Class A Common Stock (subject to adjustment in the event of stock splits and other similar events), of which 275 are reserved for issuance to non-employee directors pursuant to the formula grants described below, plus (ii) such additional number of shares of Class A Common Stock as are currently subject to options granted under the Company’s 1993 Incentive Stock Option Plan, 1994 Non-statutory Stock Option Plan, 1996 Option Plan, and 1997 Plan (the “Prior

18




Plans”) which are not actually issued under the Prior Plans because such options expire or otherwise result in shares not being issued, may be issued pursuant to awards granted under the 2006 Plan.

The 2006 Plan is intended to replace the 1997 Plan, which expires by its terms on July 31, 2007 and the Non-Employee Director Plan. Upon the expiration of the 1997 Plan on July 31, 2007, all then outstanding options will remain in effect, but no additional option grants may be made under the 1997 Plan.  As of January 31, 2007, options to purchase 45 shares of Class A Common Stock at a weighted average exercise price of $10.22 were outstanding under the 2006 plan and 1,230 options were available for future grant.

Options granted under the plans described above generally vest over a one to four year period from the date of grant and are granted at prices at least equal to the prevailing fair market value at the issue date. In general, options are issued with a life not to exceed ten years.  Shares issued by the Company upon exercise of stock options are issued from the pool of authorized shares of Class A Common Stock.

A summary of options outstanding as of April 30, 2006, and changes during the nine months ended January 31, 2007, is presented below:

 

 

 

Unvested
Shares

 

Vested
Shares

 

Total
Shares

 

Weighted
Average
Exercise
Price

 

Aggregate
Intrinsic
Value of
Vested
Options

 

Weighted
Average
Remaining
Term
(Years)

 

Outstanding, April 30, 2006

 

 

3,431

 

3,431

 

$

13.14

 

$

11,206

 

5.2

 

Granted

 

488

 

10

 

498

 

12.91

 

 

 

 

 

Forfeited

 

(4

)

(25

)

(29

)

13.93

 

 

 

 

 

Exercised

 

 

(127

)

(127

)

11.19

 

 

 

 

 

Outstanding, January 31, 2007

 

484

 

3,289

 

3,773

 

13.17

 

4,052

 

5.2

 

Exercisable, January 31, 2007

 

 

 

3,289

 

3,289

 

$

13.22

 

$

3,950

 

4.6

 

 

The weighted average grant date fair value per share for the stock options granted during the nine months ended January 31, 2006 and 2007 was $4.96 and $5.23, respectively.  The total intrinsic value of stock options exercised during the three and nine month periods ended January 31, 2007 was $11 and $381, respectively.  The total fair value of the zero and 10 stock options vested during the three and nine month periods ended January 31, 2007 was $0 and $64, respectively.

12.          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 North Eastern, South Eastern, Central, Western and FCR Recycling.  The Company’s revenues in the North Eastern, South 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 North 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 paper, metals, aluminum, plastics and glass.  Included in “Other” are ancillary operations, mainly major customer accounts as well as Parent assets.

19




 

 

 

 

North Eastern

 

South Eastern

 

Central

 

Western

 

FCR

 

 

 

Region

 

Region

 

Region

 

Region

 

Recycling

 

Three Months Ended January 31, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outside revenues

 

$

27,738

 

$

20,692

 

$

28,406

 

$

24,296

 

$

24,591

 

Depreciation and amortization

 

4,577

 

2,609

 

4,104

 

3,417

 

1,314

 

Operating income

 

1,238

 

(2,541

)

2,719

 

976

 

3,870

 

Total assets

 

$

181,111

 

$

145,040

 

$

140,074

 

$

162,686

 

$

89,004

 

 

 

Other

 

Total

 

Three Months Ended January 31, 2006

 

 

 

 

 

 

 

 

 

 

 

Outside revenues

 

$

4,874

 

$

130,597

 

Depreciation and amortization

 

504

 

16,525

 

Operating income

 

(499

)

5,763

 

Total assets

 

$

84,500

 

$

802,415

 

 

 

 

North Eastern

 

South Eastern

 

Central

 

Western

 

FCR

 

 

 

Region

 

Region

 

Region

 

Region

 

Recycling

 

Three Months Ended January 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outside revenues

 

$

28,458

 

$

17,794

 

$

29,019

 

$

26,186

 

$

25,896

 

Depreciation and amortization

 

4,882

 

2,179

 

4,544

 

3,701

 

1,408

 

Operating income

 

777

 

(1,037

)

2,747

 

2,952

 

3,957

 

Total assets

 

$

190,645

 

$

154,336

 

$

150,138

 

$

168,419

 

$

94,278

 

 

 

Other

 

Total

 

Three Months Ended January 31, 2007

 

 

 

 

 

 

 

 

 

 

 

Outside revenues

 

$

6,139

 

$

133,492

 

Depreciation and amortization

 

509

 

17,223

 

Operating income

 

(580

)

8,816

 

Total assets

 

$

91,795

 

$

849,611

 

 

20




 

 

 

North Eastern

 

South Eastern

 

Central

 

Western

 

FCR

 

 

 

Region

 

Region

 

Region

 

Region

 

Recycling

 

Nine Months Ended January 31, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outside revenues

 

$

83,399

 

$

69,014

 

$

89,156

 

$

76,636

 

$

67,228

 

Depreciation and amortization

 

14,004

 

8,725

 

11,917

 

10,003

 

3,529

 

Operating income

 

5,680

 

(1,553

)

12,602

 

7,489

 

9,729

 

Total assets

 

$

181,111

 

$

145,040

 

$

140,074

 

$

162,686

 

$

89,004

 

 

 

Other

 

Total

 

Nine Months Ended January 31, 2006

 

 

 

 

 

 

 

 

 

 

 

Outside revenues

 

$

13,959

 

$

399,392

 

Depreciation and amortization

 

1,394

 

49,572

 

Operating income

 

(1,456

)

32,491

 

Total assets

 

$

84,500

 

$

802,415

 

 

 

 

North Eastern

 

South Eastern

 

Central

 

Western

 

FCR

 

 

 

Region

 

Region

 

Region

 

Region

 

Recycling

 

Nine Months Ended January 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outside revenues

 

$

89,501

 

$

62,263

 

$

97,275

 

$

83,612

 

$

74,081

 

Depreciation and amortization

 

14,325

 

7,771

 

14,889

 

11,729

 

4,209

 

Operating income

 

5,584

 

(2,101

)

11,317

 

8,930

 

10,250

 

Total assets

 

$

190,645

 

$

154,336

 

$

150,138

 

$

168,419

 

$

94,278

 

 

 

Other

 

Total

 

Nine Months Ended January 31, 2007

 

 

 

 

 

 

 

 

 

 

 

Outside revenues

 

$

18,096

 

$

424,828

 

Depreciation and amortization

 

1,534

 

54,457

 

Operating income

 

(1,904

)

32,076

 

Total assets

 

$

91,795

 

$

849,611

 


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

 

Three Months Ended
January 31,

 

Nine Months Ended
January 31,

 

 

 

2006

 

2007

 

2006

 

2007

 

Collection

 

$

61,310

 

$

62,478

 

$

192,729

 

$

199,748

 

Landfill/disposal facilities

 

24,167

 

24,183

 

73,928

 

82,590

 

Transfer

 

10,713

 

9,255

 

34,275

 

33,200

 

Recycling

 

34,407

 

37,576

 

98,460

 

109,290

 

Total revenues

 

$

130,597

 

$

133,492

 

$

399,392

 

$

424,828

 

 

13.          INVESTMENTS IN UNCONSOLIDATED ENTITIES

The Company entered into an agreement in July 2000 with Louisiana-Pacific Corporation to combine their respective cellulose insulation businesses into a single operating entity, GreenFiber, under a joint venture agreement effective August 1, 2000. The Company’s investment in GreenFiber amounted to $30,899 and $33,653 at April 30, 2006 and January 31, 2007, respectively. The Company accounts for its 50% ownership in GreenFiber under the equity method of accounting.

Summarized financial information for GreenFiber is as follows:

21




 

 

April 30, 
2006

 

January 31, 
2007

 

Current assets

 

$

29,975

 

$

27,250

 

Noncurrent assets

 

68,669

 

72,803

 

Current liabilities

 

23,551

 

18,681

 

Noncurrent liabilities

 

$

13,295

 

$

14,066

 

 

 

Three Months Ended 
January 31,

 

Nine Months Ended 
January 31,

 

 

 

2006

 

2007

 

2006

 

2007

 

Revenue

 

$

57,484

 

$

48,999

 

$

132,022

 

$

145,525

 

Gross profit

 

14,236

 

12,134

 

30,395

 

36,184

 

Net income

 

$

6,632

 

$

2,634

 

$

9,524

 

$

5,418

 


The Company purchased membership interests, representing a 34.6% interest, in RecycleBank LLC (“RecycleBank”), a company which markets an incentive-based recycling service that gives homeowners credits for recycling which can be used with participating merchants. This investment is accounted for as an equity method investment.

14.          NET ASSETS UNDER CONTRACTUAL OBLIGATION

Effective June 30, 2003, the Company transferred 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.

Effective August 1, 2005, the Company transferred a certain Canadian recycling operation to a former employee who had been responsible for managing that business.  Consideration for this transaction was in the form of a note receivable amounting up to $1,313, which is payable within six 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 these transactions as sales based on an assessment that the risks and other incidents of ownership have not sufficiently transferred to the buyers. 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.

Net assets under contractual obligation amounted to $937 and $88 at April 30, 2006 and January 31, 2007, respectively.

15.          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, 2006 and January 31, 2007, and the condensed consolidating results of operations for the three and nine months ended January 31, 2006 and 2007 and the condensed consolidating statements of cash flows for the nine months ended January 31, 2006 and 2007 of (a) the Parent company only, (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.

 

22




CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF APRIL 30, 2006

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

ASSETS

 

Parent

 

Guarantors

 

Non-
Guarantors

 

Elimination

 

Consolidated

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

(3,840

)

$

10,747

 

$

522

 

$

 

$

7,429

 

Accounts receivable - trade, net of allowance for doubtful accounts

 

35

 

55,641

 

620

 

(27

)

56,269

 

Deferred taxes

 

4,029

 

 

1,005

 

 

5,034

 

Other current assets

 

2,456

 

7,863

 

 

(77

)

10,242

 

Total current assets

 

2,680

 

74,251

 

2,147

 

(104

)

78,974

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net of accumulated depreciation and amortization

 

3,252

 

478,725

 

(693

)

 

481,284

 

Goodwill

 

 

171,258

 

 

 

171,258

 

Restricted cash

 

5,469

 

3

 

12,415

 

 

17,887

 

Investment in subsidiaries

 

1,189

 

 

 

(1,189

)

 

Assets under contractual obligation

 

 

937

 

 

 

937

 

Other non-current assets

 

27,467

 

37,563

 

120

 

(4,379

)

60,771

 

 

 

37,377

 

688,486

 

11,842

 

(5,568

)

732,137

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany receivable

 

656,623

 

(657,153

)

(3,849

)

4,379

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

696,680

 

$

105,584

 

$

10,140

 

$

(1,293

)

$

811,111

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Parent

 

Guarantors

 

Non-
Guarantors

 

Elimination

 

Consolidated

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long term debt

 

$

 

$

527

 

$

 

$

 

$

527

 

Current maturities of capital lease obligations

 

121

 

940

 

 

 

1,061

 

Accounts payable

 

2,227

 

43,996

 

245

 

(104

)

46,364

 

Accrued payroll and related expenses

 

1,413

 

5,376

 

29

 

 

6,818

 

Accrued interest

 

6,648

 

2

 

 

 

6,650

 

Accrued income taxes

 

200

 

 

 

 

200

 

Other current liabilities

 

5,688

 

13,612

 

13,845

 

 

33,145

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

16,297

 

64,453

 

14,119

 

(104

)

94,765

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, less current maturities

 

451,824

 

896

 

 

 

452,720

 

Deferred income taxes

 

6,957

 

 

 

 

6,957

 

Other long-term liabilities

 

1,682

 

33,372

 

1,695

 

 

36,749

 

 

 

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A redeemable, convertible preferred stock, authorized -
55,750, issued and outstanding - 53,000, liquidation preference of $1,000 per share plus accrued but unpaid dividends

 

70,430

 

 

 

 

70,430

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

 

 

 

Class A common stock -

 

 

 

 

 

 

 

 

 

 

 

Authorized - 100,000,000 shares, $0.01 par value; issued and outstanding - 24,185,000 shares

 

242

 

101

 

100

 

(201

)

242

 

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

 

159

 

91

 

(122

)

31

 

159

 

Additional paid-in capital

 

274,297

 

48,360

 

2,743

 

(51,103

)

274,297

 

Accumulated deficit

 

(125,218

)

(41,689

)

(8,395

)

50,084

 

(125,218

)