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 AND EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ..................... to ........................
Commission file number 000-23211
CASELLA WASTE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 03-0338873
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
25 Greens Hill Lane, Rutland, 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 [ ] No [ x ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 10, 1997:
Class A Common Stock 9,795,875
Class B Common Stock 1,000,000
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In $1,000's)
October 31, October 31,
April 30, 1997 1997
1997 (Unaudited) (Proforma)
--------- ----------- ----------
CURRENT ASSETS:
Cash and Cash Equivalents $1,415 $1,544 $3,433
Restricted Cash - Closure Fund Escrow 1,532 1,177 1,177
Accounts Receivable-trade, net of allowance
for doubtful accounts of $710 and $1,019. 12,936 16,345 16,345
Inventory - Recycled Materials 387 299 299
Prepaid Expenses 2,204 2,146 2,146
-------- -------- --------
Total Current Assets 18,474 21,511 23,400
-------- -------- --------
PROPERTY AND EQUIPMENT, at Cost:
Land and Land Held for Investment 3,093 3,220 3,220
Landfills 30,793 31,530 31,530
Landfill Development 1,332 2,242 2,242
Buildings and Improvements 11,006 12,157 12,157
Machinery and Equipment 10,071 11,317 11,317
Rolling Stock 20,325 25,307 25,307
Containers 10,470 12,330 12,330
-------- -------- --------
87,090 98,103 98,103
Less - Accumulated Depreciation and Amortization 22,273 29,624 29,624
-------- -------- --------
Property and Equipment, net 64,817 68,479 68,479
-------- -------- --------
OTHER ASSETS:
Intangible Assets, net 45,968 54,647 54,647
Restricted Funds - Closure Fund Escrow 3,335 3,206 3,206
Other Assets 779 1,462 618
-------- -------- --------
50,082 59,315 58,471
-------- -------- --------
$133,373 $149,305 $150,350
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
2
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
(In $1,000's)
October 31, October 31,
April 30, 1997 1997
1997 (Unaudited) (Proforma)
-------- ----------- ----------
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt $5,585 $4,712 $4,415
Current Maturities of Capital Lease Obligations 392 318 318
Accounts Payable 8,174 9,361 9,361
Accrued Closure and Post-Closure Costs, Current
Portion 3,417 640 640
Deferred Revenue 1,729 2,073 2,073
Other Accrued Expenses 3,806 2,938 2,367
-------- -------- --------
Total Current Liabilities 23,103 20,042 19,174
-------- -------- --------
Long-Term Debt, Less Current Maturities 70,509 87,784 43,292
-------- -------- --------
Capital Lease Obligations, Less Current Maturities 1,373 1,249 1,249
-------- -------- --------
Deferred Income Taxes 1,599 1,599 1,599
-------- -------- --------
Accrued Closure and Post-Closure Costs, less
Current Portion 4,910 5,439 5,439
-------- -------- --------
Other Long-Term Liabilities 364 425 425
-------- -------- --------
COMMITMENTS AND CONTINGENCIES:
REDEEMABLE PREFERRED STOCK:
Series A Redeemable with warrants 3,638 4,345 0
exercisable for Class A Common Stock, $.01
par value (stated at redemption value)
Authorized - 616,620 Shares
Issued and Outstanding - 516,620 Shares,
(no shares proforma)
Series B Redeemable with warrants 9,118 10,888 0
exercisable for Class A Common Stock, $.01
par value (stated at redemption value)
Authorized - 1,402,461 Shares
Issued and Outstanding - 1,294,579 Shares
(no shares proforma)
Series C Mandatorily Redeemable, $.01 par 2,221 2,970 0
value ($7.00 redemption value)
Authorized - 1,000,000 Shares
Issued and Outstanding - 424,307 Shares
(no shares proforma)
Series D Convertible Redeemable, $.01 par 16,449 18,736 0
value (stated at redemption value)
Authorized - 1,922,169 Shares
Issued and Outstanding - 1,922,169 Shares
(no shares proforma)
Redeemable Put Warrants to purchase 100,000 400 0 0
Shares of Class A Common Stock
-------- -------- --------
TOTAL REDEEMABLE PREFERRED STOCK
And PUT WARRANTS 31,826 36,939 0
-------- -------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Class A Common Stock - 28 29 97
Authorized - 10,000,000 Shares, $.01 par value
Issued and Outstanding - 2,854,445 and
2,919,445 shares (9,652,813 shares proforma)
Class B Common Stock - 10 10 10
Authorized - 1,000,000 Shares, $.01 par value;
10 Votes per Share.
Issued and Outstanding - 1,000,000 Shares
Additional Paid-In Capital 9,982 10,255 93,531
Accumulated Deficit (10,331) (14,466) (14,466)
-------- -------- --------
(311) (4,172) 79,172
-------- -------- --------
$133,373 $149,305 $150,350
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(In $1,000's, except for per share amounts)
Quarter Quarter Quarter Six Months Six Months Six Months
Ended Ended Ended Ended Ended Ended
10/31/96 10/31/97 10/31/97 10/31/96 10/31/97 10/31/97
(Proforma) (Proforma)
-------- -------- ---------- --------- --------- ----------
Revenues $17,989 $28,420 $28,420 $33,206 $54,850 $54,850
------- ------- ------- -------- ------- -------
Operating Expenses:
Cost of Operations 9,951 16,427 16,427 18,668 32,089 32,089
General and Administrative 2,770 3,957 3,957 5,073 7,636 7,636
Depreciation and Amortization 3,102 4,551 4,551 6,108 8,403 8,403
------- ------- ------ -------- ------- -------
15,823 24,935 24,935 29,849 48,128 48,128
------- ------- ------ -------- ------- -------
Operating Income 2,166 3,485 3,485 3,357 6,722 6,722
------- ------- ------ -------- ------- -------
Other (Income) Expenses:
Interest Income (66) (78) (78) (108) (127) (127)
Interest Expense 913 2,113 1,094 1,633 3,832 1,794
Other Expense (Income), net 158 (98) (98) 137 66 66
------- ------- ------ -------- ------- -------
1,005 1,937 918 1,662 3,771 1,733
------- ------- ------ -------- ------- -------
Income Before Provision for Income Taxes 1,161 1,548 2,568 1,695 2,951 4,989
Provision for Income Taxes 437 704 1,112 945 1,347 2,163
------- ------- ------ -------- ------- -------
Net Income 724 844 1,456 750 1,603 2,826
======= ======= ====== ======== ======= =======
Accretion of Preferred Stock and Put Warrants (5,450) (3,623) 0 (5,550) (5,738) 0
------- ------- ------ -------- ------- -------
Net Income (Loss) Applicable to Common
Stockholders ($4,726) ($2,779) $1,456 ($4,800) ($4,135) $2,826
======= ======= ====== ======== ======= =======
Pro Forma
Net Income (Loss) per Share of Common Stock $0.13 $0.24
====== =======
Weighted Average Common Stock and Common
Stock Equivalent Shares Outstanding 11,555 11,561
====== =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED OCTOBER 31, 1996 AND 1997
(UNAUDITED)
(In $1,000's)
1996 1997
------- ------
Cash Flows from Operating Activities:
Net Income $750 $1,603
------- ------
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities-
Depreciation and Amortization 6,109 8,403
(Gain) Loss on Sale of Equipment 153 (64)
Changes in Assets and Liabilities, net of effects of acquisitions-
Accounts Receivable (3,056) (2,790)
Accounts Payable 3,105 1,172
Accrued Closure and Postclosure Costs 1,019 (2,249)
Other Current Assets/Liabilities (65) (887)
------- ------
7,265 3,585
------- ------
Net Cash Provided by Operating Activities 8,014 5,188
------- ------
Cash Flows from Investing Activities:
Acquisitions, net of Cash Acquired (10,975) (5,736)
Additions to Property and Equipment (7,474) (9,199)
Proceeds from Sale of Equipment 91 167
Restricted Funds - Closure Fund Escrow (276) 484
Other Assets/Liabilities 162 (622)
------- ------
Net Cash Used in Investing Activities (18,472) (14,906)
------- ------
Cash Flows from Financing Activities:
Proceeds from Issuance of Common Stock 0 24
Proceeds from exercise of redeemable put warrants 0 150
Call of redeemable put warrants 0 (525)
Proceeds from Long-Term Borrowings 16,042 92,248
Principal Payments on Long-Term Debt (3,234) (81,291)
Principal Payments on Capital Lease Obligations (1,045) (759)
------- ------
Net Cash Provided by Financing Activities 11,763 9,847
------- ------
Net Increase in Cash and Cash Equivalents 1,305 129
Cash and Cash Equivalents, Beginning of Period 475 1,415
------- ------
Cash and Cash Equivalents, End of Period $1,780 $1,544
======= ======
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period for -
Interest $1,364 $3,613
======= ======
Income Taxes $123 $457
======= ======
Supplemental Disclosures of Noncash Investing and Financing Activities
Summary of Entities Acquired -
Fair Market Value of Assets Acquired $27,141 $12,318
Cash Paid (10,975) (5,736)
------- ------
Liabilities Assumed and Notes Payable to Sellers $16,166 $6,582
======= ======
The accompanying notes are an integral part of these consolidated financial
statements.
5
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The consolidated balance sheets of Casella Waste Systems, Inc. and Subsidiaries
(the "Company") as of October 31, 1997, the consolidated statements of
operations for the three and six months ended October 31, 1997 and 1996, and the
consolidated statements of cash flows for the six months ended October 31, 1997
and 1996 are unaudited. In the opinion of management, such financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of financial position, results of operations,
and cash flows for the periods presented. The balance sheet as of April 30, 1997
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principals, since they are
not required by Article 10 of Regulation S-X concerning Interim Financial
Statements. The consolidated financial statements presented herein should be
read in connection with the Company's audited consolidated financial statements
for the twelve months ended April 30, 1997 and for the three months ended July
31, 1997 (the `Registration Statement'). These were included as part of the
Company's registration statement filed on Form S-1/A on October 9, 1997.
1. PROFORMA FINANCIAL INFORMATION
Under the terms of the Company's agreements with the holders of the series A and
B redeemable preferred stock with warrants exercisable for class A common stock,
the preferred stock was automatically redeemed and the redemption price was
applied to the exercise of the warrants upon the closing of the Company's
initial public offering on November 3, 1997. Under the terms of the Company's
agreements with the holders of the series D convertible preferred stock, the
preferred stock was converted automatically into shares of class A common stock
upon the closing of the Company's initial public offering. The unaudited pro
forma consolidated balance sheet and unaudited pro forma statement of operations
reflect these transactions and the accretion of the series C mandatorily
redeemable preferred stock to its redemption value.
The unaudited pro forma consolidated balance sheet gives also effect to the
application of the net proceeds of the initial public offering to the redemption
of the series C mandatorily redeemable preferred stock and to debt reduction, as
if the offering had occurred on October 31, 1997.
The unaudited pro forma consolidated statement of operations gives effect to the
application of the net proceeds of the initial pubic offering as if it had
occurred on May 1, 1997.
2. BUSINESS COMBINATIONS
During the six months ended October 31, 1997, the Company and its principal
subsidiaries acquired 13 businesses for $5,735,908 in cash and $6,582,056 in
debt assumed. These acquisitions were accounted for as purchases. The purchase
prices have been allocated to the net assets acquired based on 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 for the six months ended October 31, 1997,as though each
of the completed acquisitions had occurred as of May 1, 1997.
Amounts in thousands, except for per share data
Six Months Ended
October 31, 1997
----------------
Revenues $57,101
Operating Income 6,961
Net Income (Loss) 1,624
Pro forma income (loss) per
Share of common stock .21
Weighted average common stock
And common stock equivalent
Shares outstanding 7,725
The 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, 1997 for the six months ended October 31,
1997 or the results of future operations of the Company. Furthermore, the 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.
6
3. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share". This
statement supersedes Accounting Principal Board Opinion No. 15. Primary EPS is
replaced by Basic EPS, which is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. In addition, Fully Diluted EPS is replaced with Diluted EPS, which gives
effect to all common shares that would have been outstanding if all dilutive
potential common shares (relating to such things as the exercise of stock
warrants and convertible preferred stock) had been issued. SFAS No. 128 is
effective for interim and annual periods ending after December 15, 1997. Earlier
application is not permitted, but when the opinion becomes effective, all prior
periods presented must be restated. The adoption of this statement will not have
a material impact on the Company's financial statements.
4. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a lawsuit brought by Matthew M. Freeman, seeking
compensation for services allegedly performed by Mr. Freeman prior to 1995. In
such claim, Mr. Freeman has asserted that he is seeking a three-percent equity
interest in the Company or the monetary equivalent thereof. The Company intends
to vigorously contest any effort by Mr. Freeman in this regard. In order to
facilitate the completion of the recent initial public offering of the Company's
class A common stock, certain stockholders of the Company agreed to indemnify
the Company for any settlement by the Company or any award against the Company
in excess of $350,000 (but not including legal fees paid by or on behalf of the
Company or any other third party). The Company accrued a $215,000 reserve for
this claim during the quarter ended July 31, 1997.
The Company is a party to various other litigation matters arising in the
ordinary course of business. Management believes that the ultimate resolution of
these matters will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
In the normal course of business and as a result of the extensive government
regulation of the solid waste industry, the Company periodically may become
subject to various judicial and administrative proceedings and investigations
involving federal, state, or local agencies. To date, the Company has not been
required to pay any material fine or had a judgement entered against it for
violation of any environmental law. From time to time, the Company also may be
subjected to actions brought by citizens groups in connection with the
permitting of landfills or transfer stations, or alleging violations of the
permits pursuant to which the Company operates. From time to time, the Company
is also subject to claims for personal injury or property damage arising out of
accidents involving its vehicles or other equipment.
5. ENVIRONMENTAL LIABILITIES
The continuing business in which the Company is engaged is intrinsically
connected with the protection of the environment. As such, a significant portion
of the Company's operating costs and capital expenditures could be characterized
as costs of environmental protection. While the Company is faced, in the normal
course of business, with the need to expend funds for environmental protection
and remediation, it does not expect such expenditures to have a material adverse
effect on its financial condition or results of operations because its business
is based upon compliance with environmental laws and regulations and its
services are priced accordingly. In addition, as part of its ongoing operations,
the Company provides for estimated closure and post-closure monitoring costs
over the life of disposal sites as airspace is consumed. While all these costs
may increase in the future as a result of legislation or regulation, the Company
believes that in general it tends to benefit when government regulation
increases, since this may increase the demand for its services. Furthermore, the
Company believes it has the resources and experience to manage environmental
risk.
6. SUBSEQUENT EVENTS
Initial Public Offering of Class A Common Stock
On October 28, 1997, the Company commenced an initial public offering of
3,000,000 shares of its class A common stock, priced at $18.00 per share. The
Company received net proceeds of $50,220,000 on November 3, 1997. The proceeds
of this offering were used to repay debt and redeem the series C preferred
mandatorily redeemable preferred stock. Since the proceeds of the offering were
received on November 3, 1997, the effects of this transaction are not reflected
in the Company's consolidated financial statements as of October 31, 1997.
As a result of the initial public offering, the series A and B preferred stock
were redeemed and the series D preferred stock was converted automatically into
class A common stock on a share-for-share basis as of the date of the public
offering.
Acquisition of Teelon Group - Issuance of Unregistered Securities
On November 5, 1997, the Company acquired the Teelon group of solid waste
collection companies in western New York State in a transaction accounted for as
a purchase. The total purchase price was $4.9 million, including $1.5 million in
liabilities assumed and/or discharged, $2.8 million cash paid to sellers and
$560,000 in class A common stock (28,000 shares) issued to the sellers. This
issuance of common stock was an unregistered transaction involving related
affiliates of the issuer under rule 144 of the Securities Act of 1934.
7
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This and other reports, proxy statements, and other communications to
stockholders, as well as oral statements by the Company's officers or its
agents, may contain forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended, with respect to, among other
things, the Company's future revenues, operating income, or earnings per share.
Without limiting the foregoing, the words "believes", "anticipates", "plans",
"expects", and similar expressions are intended to identify forward-looking
statements. There are a number of factors of which the Company is aware that may
cause the Company's actual results to vary materially from those forecast or
projected in any such forward-looking statement. These factors include, without
limitation, those set forth below under the caption "Certain Factors That May
Affect Future Results". The Company's failure to successfully address any of
these factors could have a material adverse effect on the Company's results of
operations.
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and the related notes, included elsewhere in
this report.
RESULTS OF OPERATIONS
The Company is a regional, integrated solid waste services company providing
collection, transfer, disposal and recycling services in Vermont, New Hampshire,
Maine, upstate New York and northern Pennsylvania. The Company's objective is to
continue to grow by expanding its services in markets where it can be one of the
largest and most profitable fully-integrated solid waste services companies.
During the fiscal year ended April 30, 1997, the Company acquired 24 solid waste
collection, transfer and landfill operations. During the six months ended
October 31, 1997, the Company acquired another 13 similar operations. All of
these acquisitions were accounted for under the rules governing the purchase
method of accounting for business combinations. Under these rules the acquired
companies' revenues and results of operations have been included together with
those of Casella Waste Systems, Inc. from the dates of the acquisitions. The
resulting growth in revenues and results of operations of the Company will
materially affect the period-to-period comparisons of this financial
information.
REVENUES
The Company's revenues are attributable primarily to fees charged to customers
for solid waste collection, landfill, transfer and recycling services. The
Company derives a substantial portion of its collection revenues from
commercial, industrial and municipal services that are generally performed under
service agreements or pursuant to contracts with municipalities. The majority of
the Company's residential collection services are performed on a subscription
basis with individual households. Landfill and transfer customers are charged a
tipping fee on a per ton basis for disposing of their solid waste at the
Company's disposal facilities and transfer stations. The majority of the
Company's landfill and transfer customers are under one-year to ten-year
disposal contracts, with most having clauses for annual cost of living
increases. Recycling revenues consist of revenues from the sale of recyclable
commodities and tire derived fuel. Other revenues consist primarily of revenue
from tipping fees charged at waste tire processing facilities and septic pumping
and portable toilet operations. The Company's revenues are shown net of
inter-company eliminations. The Company typically establishes its inter-company
transfer pricing based upon prevailing market rates.
During the periods presented on the Consolidated Statement of Operations,
revenue was comprised of the following lines of business:
Three months ended Six months ended
------------------------- -------------------------
10/31/97 10/31/96 10/31/97 10/31/96
-------- -------- -------- --------
Collection 69.6% 62.5% 69.1% 63.2%
Landfill 14.9 20.0 15.2 19.5
Transfer 5.9 6.0 6.5 6.8
Recycling 7.6 10.3 7.0 9.1
Other 2.0 1.2 2.2 1.4
---- ---- ----- ----
Total Revenue 100% 100% 100% 100%
==== ==== ===== ====
8
Collection revenues increased as a percentage of total revenues because most of
the Company's acquisitions over the last eighteen months were primarily
collection companies. Other revenue increased due to the acquisition of the
Maine waste tire processing operation in July 1996, and due to two portable
toilet/septic-pumping acquisitions in the first quarter of the current fiscal
year. The remaining revenue categories have decreased as a percentage of total
revenues due to fewer acquisitions being consummated in these lines of business.
Any increases in landfill or transfer revenues achieved by internalizing the
waste volumes of newly acquired collection businesses are eliminated in the
consolidated statements.
Revenues increased $10.4 million, or 58.0%, for the three months ended October
31, 1997 over the same period in 1996. Revenues increased $21.6 million, or
65.2% for the six months ended October 31, 1997 over the comparable period in
1996. Of this increase, $9.0 million of the second quarter growth and $19.6
million of the year-to-date growth was due to the impact of businesses acquired
during the year ended April 30, 1997, and during the current fiscal year. The
balance of the increase was due to internal growth, comprised of net new
business, volume increases of existing customers, price increases, and increases
in recycled commodities pricing.
OPERATING EXPENSES
The following table depicts for the periods presented on the Consolidated
Statement of Operations the relationship between revenues and certain expense
items:
Three months ended Six months ended
------------------------- -------------------------
10/31/97 10/31/96 10/31/97 10/31/96
-------- -------- -------- --------
Revenues 100% 100% 100% 100%
Cost of operation 57.8 55.3 58.5 56.2
General and administrative 13.9 15.4 13.9 15.3
Depreciation and amortization 16.0 17.2 15.3 18.4
---- ---- ---- ----
Operating income 12.3 12.0 12.3 10.1
Interest expense, net 7.2 4.7 6.8 4.6
Other (income) expense (0.3) 0.9 0.1 0.4
Provision for income taxes 2.5 2.4 2.5 2.8
---- ---- ---- ----
Net Income 3.0 4.0 2.9 2.3
==== ==== ==== ====
EBITDA* 28.3 29.3 27.6 28.5
==== ==== ==== ====
*See discussion and computation of EBITDA below.
Cost of Operations
Cost of operations includes labor, tipping fees paid to third party disposal
facilities, fuel, maintenance and repair of vehicles and equipment, worker's
compensation and vehicle insurance, the cost of purchasing recyclable materials,
third party transportation expense, district and state taxes, host community
fees and royalties. Landfill operating expenses also include a provision for
closure and post-closure expenditures which the Company anticipates will be
incurred in the future, and leachate treatment and disposal costs.
As a percentage of revenue, cost of operations increased for both the three
months and six months ending October 31, 1997 compared to the same periods
ending October 31, 1996. The main cause of this is the Company's emphasis on
acquisitions of collection companies over the last eighteen months. As a
percentage of revenues, collection revenue has increased from 63.2% for the six
months ended October 31, 1996 to 69.1% for the six months ended October 31,
1997. Collections operations tend to have higher costs of operations as a
percentage of revenues than other types of activities the Company has
historically been involved with. When the proportion of the Company's revenue
derived from collection activities grows, overall cost of operations as a
percentage of revenue will tend to rise.
General and Administrative
General and administrative expenses include management, clerical and
administrative compensation and overhead, professional services and costs
associated with the Company's marketing and sales force and community relations
expense.
As a percentage of revenue, general and administrative expenses have dropped 150
basis points for the three-month period ending October 31, 1997 compared to the
same period during 1996. The decrease for the six-month period ending October
31, 1997 compared to the same period in 1996 was 140 basis points. This
improvement is due to improved economies of scale achieved subsequent to the
acquisitions of the last eighteen months, and to the leveraging off of our
existing corporate overhead.
9
Depreciation and Amortization
Depreciation and amortization expense includes depreciation of fixed assets over
the useful life of the assets using the straight-line method, amortization of
landfill airspace assets under the units-of-production method, and the
amortization of goodwill and other intangible assets using the straight-line
method. The amount of landfill amortization expense related to airspace
consumption can vary materially from site to site depending on the purchase
price and landfill site and cell development costs.
Depreciation and amortization expenses for the six months ended October 31, 1997
were 15.3% of revenue compared to 18.4% during the same six months ended October
31, 1996. This change reflects the Company's increasing share of revenue
generated from collection operations, which have lower depreciation and
amortization costs as a percentage of revenues than the Company's other
operations. This trend was partially offset, especially in the quarter ended
October 31, 1997, by increased landfill amortization due to the opening of a new
lined cell at the Company's leased disposal facility in Clinton County, NY.
INTEREST EXPENSE (NET)
During the three months ended October 31, 1997, interest as a percent of revenue
increased to 7.2% from 4.7% for the quarter ended October 31, 1996. Net interest
expense rose to 6.8% as a percent of revenue during the six months ended October
31, 1997 compared to 4.6% for the six months ended October 31, 1996. The
increase in interest expense has been driven by the Company's expansion by
acquisitions and capital expenditures during the year ended April 30, 1997 and
the six months ended October 31, 1997. The Company's total debt (including
capital leases) has risen from $26.9 million at April 30, 1996 to $77.9 million
at April 30, 1997 to $94.1 at October 31, 1997.
OTHER INCOME AND EXPENSE
As a rule this category is not material to total revenues or the results of
operations. However, during the three months ended October 31, 1996 this item
was 0.9% of revenue due to a one-time charge recorded in connection with
liquidated damages paid to an affiliate of the Company on early termination of a
facility lease in Middlebury, Vermont, as described in the Registration
Statement.
PROVISION FOR INCOME TAXES
For interim periods of the fiscal year ended April 30, 1998, income taxes are
accrued at a combined federal and state rate of 46%.
EBITDA
EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization)
represents operating income (earnings before interest and taxes, or "EBIT") plus
depreciation and amortization expense. EBITDA is not a measure of financial
performance under generally accepted accounting principals, but is provided
because the Company understands that certain investors use this information when
analyzing the financial position and performance of the Company.
Amounts in $1,000's
Three months ended Six months ended
------------------------- -------------------------
10/31/97 10/31/96 10/31/97 10/31/96
-------- -------- -------- --------
Operating income $3,485 $2,166 $6,722 $3,357
Depreciation and amortization 4,551 3,102 8,403 6,108
------- ------ ------- ------
EBITDA $8 ,036 $5,268 $15,125 $9,465
======= ====== ======= ======
EBITDA as a percentage of
revenue 28.3% 29.3% 27.6% 28.5%
Analysis of the factors contributing to the change in EBITDA is included in the
discussions above.
10
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is capital intensive. The Company's capital requirements
include acquisitions, fixed asset purchases and capital expenditures for
landfill development, cell construction, and site and cell closure. Because of
these needs the Company has in the past had working capital deficits. The
Company had positive net working capital of $1.5 million at October 31, 1997
compared to a $4.6 million working capital deficit at April 30, 1997. The main
factors contributing to this are an increase in net accounts receivable of $3.4
million and a decrease in current accrued closure costs of $2.8 million. The
increase in accounts receivable is due to the acquisition of accounts
receivable, and to increases in revenues. Average days sales in accounts
receivable was 47.7 days for the year ended April 30, 1997 and 48.0 for the six
months ended October 31, 1997. The decrease in current closure accruals is due
to payments to close one phase of the Company's Bethlehem, NH site and to close
Clinton County's unlined landfill made during the first six months of the
current year. These payments had totaled $3.1 million through October 31, 1997.
As a result, net cash provided from operating activities decreased to $5.2
million for the six months ended October 31, 1997 from $8.0 million for the six
months ended October 31, 1996.
The Company has a $110 million credit facility with a group of banks for which
BankBoston, N.A. is acting as agent. This credit facility includes an $85
million revolving line of credit, subject to availability, and term loans
equaling $25 million in total. This credit facility is secured by all assets of
the Company, including the Company's interest in the equity securities of its
subsidiaries. The revolving line of credit matures in July, 2002, and the term
loans of $10 and $15 million mature in July, 2002 and July, 2004 respectively.
On October 28, 1997 the Company commenced an initial public offering of its
class A common stock. The proceeds from this offering were received on November
3, 1997. A portion of the proceeds of this offering, $45 million, was used to
repay long term debt. Of this, $28.5 was used to pay down the $54 million
outstanding on the Company's Bank of Boston credit line of $85 million, and $15
million was used to pay off the Company's term loan of that amount. Funds
available to the Company under the line of credit were $31 million at October
31, 1997 and $59.5 million at November 3, 1997.
The Company's cash provided internally from operations together with the
proceeds of the initial public offering and the Company's available credit
facilities should enable it to meet its needs for working capital for the next
twelve months.
SEASONALITY
The Company's revenues have historically been lower during the months of
November through March. This seasonality reflects the lower volume of waste
during the late fall, winter, and early spring months primarily due to (a)
decreased volumes of waste generated by construction and demolition activities
in the northeastern United States during these months, and (b) decreased volumes
of waste generated by commercial enterprises dependent on the tourism industry
in the Company's market area. Since certain of the Company's operating and fixed
costs remain constant throughout the fiscal year, operating income results can
be negatively affected by this seasonality. In addition, particularly harsh
weather conditions could result in increased operating costs to certain of the
Company's operations.
11
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Quarterly Report on Form 10-Q and presented elsewhere by management from
time to time.
The Company's objective is to continue to grow by expanding its services in
markets where it can be one of the largest and most profitable fully-integrated
solid waste services companies. Such growth, if it were to occur, could place a
significant strain on the Company's management and operational, financial and
other resources.
The Company has incurred net losses in three of the last four years. There can
be no assurance that the Company will be profitable in the future.
The Company's strategy envisions that a substantial part of the Company's future
growth will come from acquiring and integrating solid waste collection, transfer
and disposal operations. There can be no assurance that the Company will be able
to identify suitable acquisition candidates and, once identified, to negotiate
successfully their acquisition at a price or on terms and conditions favorable
to the Company, or to integrate the operations of such acquired businesses with
the Company.
The Company is highly dependent upon the services of the members of its senior
management team, the loss of any of whom may have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, the Company's future success depends on its continuing ability to
identify, hire, train, motivate and retain highly trained personnel.
The Company anticipates that any future business acquisitions will be financed
through cash from operations, borrowings under its bank line of credit, the
issuance of shares of the Company's class A common stock and/or seller
financing. There can be no assurance that the Company will have sufficient
existing capital resources or will be able to raise sufficient additional
capital resources on terms satisfactory to the Company, if at all, in order to
meet its capital requirements.
The Company's operating program depends on its ability to expand the landfills
it owns and leases and to develop new landfill sites. There can be no assurance
that the Company will be successful in obtaining new landfill sites or expanding
the permitted capacity of any of its current landfills once its remaining
disposal capacity has been consumed.
12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company received a notice of claim dated September 22, 1997 from Matthew M.
Freeman, seeking compensation for services allegedly performed by Mr. Freeman
prior to 1995. In such claim, Mr. Freeman has asserted that he is seeking a
three- percent equity interest in the Company or the monetary equivalent
thereof. The Company intends to vigorously contest any effort by Mr. Freeman in
this regard. In order to facilitate the completion of the recent initial public
offering of the Company's class A common stock, certain stockholders of the
Company have agreed to indemnify the Company for any settlement by the Company
or any award against the Company in excess of $350,000 (but not including legal
fees paid by or on behalf of the Company or any other third party). A notice of
complaint dated October 31, 1997 was served against the Company in this matter
on November 4, 1997. This matter is currently pending in Rutland Superior Court,
Rutland County, State of Vermont.
The Company is not aware of any other non-routine or incidental material legal
proceedings.
ITEM 2. CHANGES IN SECURITIES
Changes in Rights and Classes of Stock
None.
Sales of Unregistered Securities
During the quarter ended October 31, 1997 the Company had the following sales of
unregistered securities:
In September 1997, the former owner of a business acquired by the Company
exercised warrants to purchase 25,000 shares of the Registrants class A common
stock at an exercise price of $6.00 per share. These shares were offered and
issued in reliance upon the exemption from registration set forth in Section
4(2) under the Securities Act.
In September 1997, the Company issued 20,000 shares upon the exercise of options
by an officer of the Company, at an exercise price of $0.60 per share, for an
aggregate consideration of $12,000. These shares were offered and issued in
reliance upon the exemption from registration set forth in Rule 701 under the
Securities Act.
No underwriters were involved in the foregoing issuances of securities.
Use of Proceeds of Initial Public Offering
On October 28, 1997, the Company commenced the initial public offering of its
class A common stock pursuant to a Registration Statement on Form S-1
(Commission file number 333-33135, declared effective October 27, 1997). The
offering closed on November 3, 1997, resulting in the sale of all of the
4,000,000 shares offered (of which, 3,000,000 shares were sold by the Company
and 1,000,000 shares were sold for the account of certain shareholders) at an
offering price of $18.00 per share (constituting aggregate gross proceeds of
$54,000,000 for the account of the Company and $18,000,000 for the account of
the selling stockholders), and on November 6, 1997 the underwriters exercised in
full their overallotment option to purchase an additional 600,000 shares at
$18.00 per share (constituting additional aggregate gross proceeds of
$10,800,000), all of which were offered by certain stockholders of the Company.
The managing underwriters of the offering were Goldman, Sachs & Co., Donaldson,
Lufkin & Jenrette Securities Corporation and Oppenheimer & Co., Inc.
No expenses were incurred for the Company's account in connection with the
issuance and distribution of the Company's class A common stock pursuant to the
aforementioned registration statement during the period between the date such
registration statement was declared effective and October 31, 1997. Through
November 6, 1997, the following expenses were incurred for the Company's account
in connection with the offering:
Underwriting discount $ 3,780,000
Expenses paid to or for underwriters --
Other expenses 1,612,181
-----------
Total expenses 5,392,181
-----------
Net offering proceeds $48,607,819
No net offering proceeds to the Company were used during the period between the
effective date of the aforementioned registration statement and October 31,
1997.
13
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended October 31, 1997 (prior to the time that the Company
became obligated to file reports under the Securities Exchange Act of 1934), the
Company submitted to a vote of its shareholders certain matters in anticipation
of the Company becoming a public company.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11 Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K: None.
14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Casella Waste Systems, Inc.
Date: By: /s/ Jerry Cifor
Jerry Cifor
Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer and
Duly Authorized Officer)
EXHIBIT 11
CASELLA WASTE SYSTEMS, INC.
Per Share Earnings
(Unaudited)
Amounts in $1,000's, except for per share amounts
Three months ended 10/31/97 Six months ended 10/31/97
--------------------------- --------------------------
Actual Pro Forma Actual Pro forma
------ --------- ------ ---------
Net income after tax $844 $1,456 $1,603 $2,826
Accretion of preferred stock
and redeemable put warrants ($923) - ($974) -
Net income applicable to
common shareholders ($79) $1,456 $629 $2,826
Number of primary common
shares outstanding 7,745 10,479 7,725 10,459
Primary earnings per share ($.01) $.14 $.08 $.27
Number of fully diluted common
shares outstanding 8,821 11,555 8,826 11,561
Fully diluted earnings per share ($.01) $.13 $.07 $.24
5
1,000
U.S. DOLLARS
6-MOS
APR-30-1998
MAY-1-1997
OCT-31-1997
1
1,544
0
17,365
(1,019)
299
21,511
98,103
29,624
149,306
20,042
0
0
36,939
39
(4,211)
149,306
0
54,850
0
32,089
16,039
335
3,832
2,951
1,347
1,603
0
0
0
1,603
.08
.07
