Filed Pursuant to Rule 424(b)(1)
File No. 333-57745
3,070,580 Shares
[LOGO]CASELLA WASTE SYSTEMS
Casella Waste Systems, Inc.
Class A Common Stock
(par value $0.01 per share)
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Of the 3,070,580 shares of Class A Common Stock offered hereby (the
"Offering"), 1,600,000 shares are being sold by the Company and 1,470,580 shares
are being sold by the Selling Stockholders. See "Principal and Selling
Stockholders". The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders.
Each share of Class A Common Stock entitles its holder to one vote,
whereas each share of Class B Common Stock entitles its holder to ten votes.
All of the shares of Class B Common Stock are held by John W. Casella, the
President, Chief Executive Officer and Chairman of the Board and Douglas R.
Casella, the Vice Chairman of the Board. Immediately following consummation of
the Offering, such stockholders will beneficially own in the aggregate shares
of Class B Common Stock and Class A Common Stock having approximately 51% of
the outstanding voting power of the Company's Common Stock.
The Class A Common Stock is quoted on the Nasdaq National Market under
the symbol "CWST". On July 21, 1998, the last reported sale price of the Class A
Common Stock on the Nasdaq National Market was $27.50 per share. See "Market
Price of Class A Common Stock".
See "Risk Factors" beginning on page 8 for certain considerations relevant
to an investment in the Class A Common Stock.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
Initial Public Underwriting Proceeds to Proceeds to
Offering Price Discount (1) Company (2) Selling Stockholders
-------------- ------------ ----------- --------------------
Per Share ........... $27.25 $1.43 $25.82 $25.82
Total (3) ........... $83,673,305 $4,390,929 $41,312,000 $37,970,376
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act").
(2) Before deducting estimated expenses of $500,000 payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 460,587 shares of Class A Common Stock at the initial
public offering price per share, less the underwriting discount, solely to
cover over-allotments. If such option is exercised in full, the initial
public offering price, underwriting discount and proceeds to Company will
be $96,224,301, $5,049,569 and $53,204,356, respectively. See
"Underwriting".
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The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that the shares
will be ready for delivery in New York, New York on or about July 27, 1998,
against payment therefor in immediately available funds.
Goldman, Sachs & Co.
CIBC Oppenheimer
Donaldson, Lufkin & Jenrette
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The date of this Prospectus is July 21, 1998.
EDGAR DESCRIPTION FOR INSIDE FRONT COVER AND GATEFOLD:
On the inside front cover of the Prospectus is a photograph of a waste
collection vehicle bearing the "Casella" logo with a reflection of a white
colonial-style house on the door of the cabin to the vehicle.
On the "gatefold" fold-out to appear inside the inside front cover of the
Prospectus is a map of the Company's operations, by county, in the states of
Vermont, New Hampshire, Maine, New York and Pennsylvania. The areas covered by
the Company's operations are shaded, with the shaded areas each colored
differently to distinguish between the Central, Western and Eastern regions of
the Company's five-state operations. The map contains the words: "The Regional
Outlook. The Company's operations are organized into three regions:", and three
boxes (containing the words "Eastern Region", "Central Region" and "Western
Region", respectively, appear above the map, with lines from the boxes to the
map pointing out the respective regions).
The other text that appears on the page is as follows:
Casella Waste Systems, Inc.
Nasdaq: CWST
Line of Business as a Percent of Revenue for fiscal 1998:
Collection: 73.4
Disposal: 12.4
Recycling: 6.5
Transfer: 5.8
Special Services*: 1.9
*Septic and tire processing
The Company:
[bullet] 28 collection divisions
[bullet] 5 subtitle D landfills
[bullet] 35 transfer stations
[bullet] 9 recycling processing facilities
[bullet] 2 septic/liquid waste divisions
Our Growth:
85 acquisitions since May 1, 1994
28 acquisitions since our November 1997 initial public offering
This Prospectus contains registered service marks, trademarks and trade
names of the Company, including the Casella Waste Systems name and logo.
The Company intends to furnish to its stockholders annual reports
containing audited consolidated financial statements and quarterly reports
containing unaudited interim financial information for the first three fiscal
quarters of each fiscal year of the Company.
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK OF
THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH CLASS A COMMON STOCK, AND THE IMPOSITION OF A PENALTY BID,
IN CONNECTION WITH THE OFFERING. CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS
MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS A COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M OF THE
SECURITIES EXCHANGE ACT OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING".
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements, including the Notes
thereto, appearing elsewhere in this Prospectus. Except as otherwise noted, all
information in this Prospectus assumes no exercise of the Underwriters'
over-allotment option. For purposes hereof, references to "Common Stock" mean
the Class A Common Stock and the Class B Common Stock. See "Description of
Capital Stock" and Notes to Consolidated Financial Statements. The Company's
fiscal year ends on April 30. References to a particular fiscal year are to the
fiscal year ending on April 30 of that year (e.g., the 1998 fiscal year ended
on April 30, 1998). Unless otherwise specified herein, all references to the
"Company" or "Casella" mean Casella Waste Systems, Inc. and its subsidiaries,
and all references to "solid waste" mean non-hazardous solid waste.
The Company
Casella Waste Systems, Inc. is a regional, integrated, non-hazardous solid
waste services company that provides collection, transfer, disposal and
recycling services in Vermont, New Hampshire, Maine, upstate New York and
northern Pennsylvania. At June 15, 1998, the Company owned and/or operated five
Subtitle D landfills, 35 transfer stations, nine recycling processing
facilities, 28 collection divisions and two septic/liquid waste divisions,
which together served over 180,000 commercial, industrial and residential
customers. The Company was founded in 1975 as a single-truck operation in
Rutland, Vermont and subsequently expanded its operations throughout the state
of Vermont. In 1993, the Company initiated an acquisition strategy to take
advantage of anticipated reductions in available landfill capacity in Vermont
and surrounding states due to increasing environmental regulation and other
market forces driving consolidation in the solid waste industry. From May 1,
1994 through April 30, 1998, the Company acquired ownership of or long-term
operating rights to 77 solid waste businesses, including four landfills, and
between May 1, 1998 and June 15, 1998, the Company acquired an additional eight
such businesses, including a Subtitle D landfill in western upstate New York.
The Company believes that additional acquisition opportunities exist in the
markets it serves and in other prospective markets.
The Company's operating strategy is based on the integration of its
collection and disposal operations and the internalization of waste collected.
The Company believes that control of a substantial portion of the waste stream
and economies of scale provide it with advantages over non-integrated
competitors in its markets. During fiscal 1998, approximately 52% of the solid
waste collected by the Company was delivered for disposal at its landfills.
Additionally, approximately 74% of the solid waste disposed of at its landfills
was collected by the Company.
The Company's objective is to continue to grow by expanding its services
in markets where it can be one of the largest and most profitable
fully-integrated solid waste services companies. The Company intends to
continue to pursue this objective by: (i) expanding through acquisitions of
collection companies and disposal facilities in new markets and through
"tuck-in" acquisitions in existing markets; (ii) generating internal growth in
existing markets through increased sales penetration and the marketing of
additional services to existing customers; and (iii) implementing operating
enhancements and efficiencies.
The principal executive offices of the Company are located at 25 Greens
Hill Lane, Rutland, Vermont 05701. The Company's telephone number at such
address is (802) 775-0325. Casella Waste Systems, Inc. was incorporated as a
Delaware corporation in 1993 as a holding company for various operating
subsidiaries.
Recent Developments
Since the Company's initial public offering of Common Stock consummated in
November 1997 (the "November Offering"), the Company has expanded and
strengthened its market presence through the acquisition of 28 solid waste
management businesses, whose operations collectively included one Subtitle D
landfill in western upstate New York (the "Hyland landfill"), 25 collection
operations, four transfer stations and six septic/liquid waste operations.
In November 1997, the Company completed the acquisition of BDS Sanitation,
Inc., Vets Disposal, Inc. and Brookman Disposal, Inc. (collectively, the
"Teelon Group"), which provide solid waste collection and transfer services in
various counties in central New York. The Company believes that the acquisition
of the Teelon Group provides the Company with a new growth platform in central
New York and expands geographically the Company's existing operations in its
Western Region (which includes upstate New York and northern Pennsylvania).
Subsequent to the acquisition of the Teelon Group, the Company completed two
"tuck-in" acquisitions in central New York. See "Business--Service
Area--Western Region".
3
In December 1997, the Company completed the acquisition of All Cycle Waste,
Inc. and Winters Brothers, Inc. (collectively, "All Cycle"), which provide solid
waste collection and transfer services in Chittenden County, Vermont. The
Company believes that the acquisition of All Cycle further strengthens the
Company's market position in its Central Region (which includes Vermont and
certain areas of New Hampshire and upstate New York). See "Business--Service
Area--Central Region".
In February 1998, the Company completed the acquisition of Atlantic Waste
Systems North, Inc., which provides solid waste collection services to
approximately 6,000 commercial, residential and industrial customers in Salem,
New Hampshire and surrounding counties. The Company believes that this
acquisition provides the Company with a new growth platform in southern New
Hampshire and expands geographically the Company's existing operations in its
Eastern Region located in Maine. See "Business--Service Area--Eastern Region".
In May 1998, the Company acquired the Hyland landfill in Angelica, Allegany
County, New York. The Hyland landfill is the Company's first disposal facility
in its Western Region, and serves the western upstate New York waste shed. The
Company has received a permit from the State of New York Department of
Environmental Conservation (the "DEC") for approximately 1,500,000 tons of
disposal capacity at this facility. A lawsuit challenging the permit
modification which authorizes the disposal of municipal solid waste and
industrial waste at the Hyland landfill was recently commenced against the
Company. The Hyland landfill may be subject to additional local restrictions and
permits. The Company has not yet begun accepting waste at the Hyland landfill.
See "Risk Factors--Limitations on Landfill Permitting and Expansion", and
"Business-- Legal Proceedings".
In January 1998, the Company increased its borrowing capacity, including
its ability to obtain letters of credit, to $150 million from $110 million with
a group of banks for which BankBoston, N.A. is acting as agent. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
Risk Factors
Certain risk factors should be considered in evaluating the Company and its
business before purchasing the Class A Common Stock offered by this Prospectus.
Such factors include, among others, the Company's ability to manage growth, a
history of losses, the ability to identify, acquire and integrate acquisition
targets, dependence on management, the uncertain ability to finance the
Company's growth, limitations on landfill permitting and expansion and
geographic concentration. For a discussion of these and certain other factors,
see "Risk Factors".
4
The Offering
Class A Common Stock offered by the Company .......... 1,600,000 shares
Class A Common Stock offered by Selling Stockholders . 1,470,580 shares
Common Stock to be outstanding after this Offering (1):
Class A Common Stock ................................ 12,163,504 shares
Class B Common Stock ................................ 988,200 shares
Total .............................................. 13,151,704 shares
Nasdaq National Market symbol ........................ CWST
Use of Proceeds ...................................... Reduction of existing indebtedness, acquisi-
tions and other general corporate purposes.
The Company will not receive any proceeds
from the sale of shares of Class A Common
Stock by the Selling Stockholders. See "Use of
Proceeds".
Voting Rights ........................................ The holders of Class A Common Stock
generally have rights identical to holders of
Class B Common Stock, except that holders of
Class A Common Stock are entitled to one vote
per share and holders of Class B Common
Stock are entitled to ten votes per share. Hold-
ers of all classes of Common Stock generally
will vote together as a single class on all mat-
ters presented to the stockholders for their
vote or approval except that the holders of
Class A Common Stock will at all times be
entitled to elect at least one director. See
"Description of Capital Stock--Common
Stock--Voting Rights".
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(1) Consists of the number of shares of Class A Common Stock and Class B Common
Stock outstanding on June 15, 1998. Each share of Class B Common Stock is
convertible into one share of Class A Common Stock at the option of the
holder and may not be transferred to anyone other than a Class B Permitted
Holder (as defined). See "Description of Capital Stock". Excludes: (i)
2,385,306 shares of Class A Common Stock issuable upon exercise of stock
options outstanding at June 15, 1998 with a weighted average exercise price
of $15.59 per share; (ii) an additional 581,133 shares reserved for issuance
under the Company's 1997 Stock Incentive Plan, 1997 Employee Stock Purchase
Plan and 1997 Non-Employee Director Stock Option Plan (collectively, the
"Stock Plans"); and (iii) warrants to purchase 185,300 shares of Class A
Common Stock at a weighted average exercise price of $4.33 per share. See
"Management--Benefit Plans", "Description of Capital Stock" and Note 7 of
Notes to Consolidated Financial Statements.
5
Summary Historical and Pro Forma Consolidated Financial and Operating Data
Fiscal Year Ended April 30,
--------------------------------------------------------------------------------
Restated (1) (unaudited)
--------------------------------------------------- Pro Forma (2)
1994 1995 1996 1997 1998 1998
------------ ------------ ------------ ------------ ------------- --------------
(in thousands, except per share data)
Statement of Operations Data:
Revenues ................................. $13,491 $23,869 $ 42,829 $ 79,532 $118,067 $119,350
Cost of operations ....................... 9,640 13,721 25,137 48,057 69,878 70,907
General and administrative ............... 2,702 2,909 7,063 12,534 17,089 17,330
Merger related costs ..................... -- -- -- -- 290 290
Depreciation and amortization ............ 1,483 4,815 8,152 13,695 18,345 18,459
Loss on impairment of long-lived
assets .................................. -- -- -- -- 971 971
------- ------- -------- -------- -------- --------
Operating income (loss) .................. (334) 2,424 2,477 5,246 11,494 11,393
Interest expense, net .................... 613 1,826 2,617 4,290 6,532 4,646
Other expense (income), net .............. 207 36 (90) 923 (80) 80
------- ------- -------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes,
extraordinary items and cumulative
effect of change in accounting
principle ............................... (1,154) 562 (50) 33 5,042 6,667
Provision (benefit) for income taxes ..... (441) 220 144 452 2,385 3,046
Extraordinary items ...................... -- -- 326 -- -- --
Change in accounting principle ........... 124 -- -- -- -- --
------- ------- -------- -------- -------- --------
Net income (loss) ........................ $ (837) $ 342 $ (520) $ (419) $ 2,657 $ 3,621
Accretion of preferred stock and put
warrants ................................ -- (2,380) (2,967) (8,530) (5,738) --
------- ------- -------- -------- -------- --------
Net income (loss) applicable to
common stockholders ..................... $ (837) $(2,038) $ (3,487) $ (8,949) $ (3,081) $ 3,621
======= ======= ======== ======== ======== ========
Basic net income (loss) per common
share ................................... $ (0.35) $ (0.70) $ (1.06) $ (2.29) (0.39) $ 0.32
Basic weighted average common
shares outstanding (3) .................. 2,355 2,900 3,279 3,913 7,912 11,375
Diluted net income (loss) per
common share ............................ $ (0.35) $ (0.70) $ (1.06) $ (2.29) $ (0.39) $ 0.29
Diluted weighted average common
shares outstanding (3) .................. 2,355 2,900 3,279 3,913 7,912 12,459
Other Operating Data:
EBITDA (4) ............................... $ 1,149 $ 7,239 $ 10,629 $ 18,941 $ 30,810 $ 30,823
======= ======= ======== ======== ======== ========
Capital expenditures ..................... $ 843 $ 3,731 $ 10,750 $ 16,971 $ 24,652
======= ======= ======== ======== ========
Cash flows from operating activities ..... $ 1,559 $ 4,978 $ 8,642 $ 14,765 $ 19,447
======= ======= ======== ======== ========
Cash flows from investing activities ..... $(2,270) $(9,187) $(28,209) $(52,641) $(56,499)
======= ======= ======== ======== ========
Cash flows from financing activities ..... $ 1,007 $ 4,547 $ 19,272 $ 38,755 $ 37,649
======= ======= ======== ======== ========
April 30, 1998
--------------------------
As
Actual Adjusted (5)
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(in thousands)
Balance Sheet Data:
Cash and cash equivalents ................................ $ 1,946 $ 1,946
Working capital .......................................... 3,818 4,146
Total assets ............................................. 189,033 189,033
Long-term obligations, net of current maturities ......... 74,833 34,349
Total stockholders' equity ............................... 81,860 122,672
6
(1) The Company has restated issued audited consolidated statements of
operations and consolidated statements of cash flows to reflect the merger
with All Cycle consummated on December 19, 1997, accounted for using the
pooling of interests method of accounting.
(2) Pro forma to give effect to:
(i) the acquisition of substantially all of the assets of H.C. Gobin, Inc.
in fiscal 1998 (the "Gobin acquisition") as if it had occurred on May 1,
1997,
(ii) the application of the net proceeds from the November Offering as if it
had closed on May 1, 1997 and
(iii) the elimination of accretion charges related to the series preferred
stock and put warrants, none of which were outstanding after the
November Offering.
No pro forma adjustments have been made to reflect the impact of this
Offering.
(3) Computed on the basis described in Note 3 of Notes to Consolidated
Financial Statements.
(4) EBITDA is defined as operating income plus depreciation and amortization
and loss on impairment of long-lived assets. EBITDA does not represent,
and should not be considered as, an alternative to net income or cash
flows from operating activities, each as determined in accordance with
generally accepted accounting principles ("GAAP"). Moreover, EBITDA does
not necessarily indicate whether cash flow will be sufficient for such
items as working capital or capital expenditures, or to react to changes
in the Company's industry or to the economy generally. The Company
believes that EBITDA is a measure commonly used by lenders and certain
investors to evaluate a company's performance in the solid waste industry.
The Company also believes that EBITDA data may help to understand the
Company's performance because such data may reflect the Company's ability
to generate cash flows, which is an indicator of its ability to satisfy
its debt service, capital expenditure and working capital requirements.
Because EBITDA is not calculated by all companies and analysts in the same
fashion, the EBITDA measures presented by the Company may not be
comparable to similarly-titled measures reported by other companies.
Therefore, in evaluating EBITDA data, investors should consider, among
other factors: the non-GAAP nature of EBITDA data; actual cash flows; the
actual availability of funds for debt service, capital expenditures and
working capital; and the comparability of the Company's EBITDA data to
similarly-titled measures reported by other companies. For more
information about the Company's cash flows, see the consolidated
statements of cash flows in the Consolidated Financial Statements.
(5) Adjusted to give effect to the sale of the Class A Common Stock offered by
the Company pursuant to this Offering, after deducting the underwriting
discount and estimated Offering expenses payable by the Company, and the
application of net proceeds therefrom.
7
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Class A Common Stock offered by this
Prospectus. This Prospectus may contain forward-looking statements within the
meaning of Section 27A of the Securities Act, with respect to, among other
things, the Company's future revenues, operating income, or earnings per share.
Without limiting the foregoing, any statements contained in this Prospectus that
are not statements of historical fact may be deemed to be forward-looking
statements, and the words "believes", "anticipates", "plans", "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of factors of which the Company is aware that may cause the
Company's actual results to vary materially from those forecast or projected in
any such forward-looking statement, certain of which are beyond the Company's
control. These factors include, without limitation, those described in this
"Risk Factors" section. The Company's failure to address successfully any of
these factors could have a material adverse effect on the Company's results of
operations.
Ability to Manage Growth
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. Consequently, the Company may experience periods
of rapid growth. Such growth, if it were to occur, could place a significant
strain on the Company's management and on its operational, financial and other
resources. Any failure to expand its operational and financial systems and
controls or to recruit appropriate personnel in an efficient manner at a pace
consistent with such growth would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Strategy".
History of Losses
The Company incurred net losses in fiscal 1996 and fiscal 1997. The net
loss was $519,541 in fiscal 1996 (including the write-off of unamortized
issuance costs of $326,308 (net of $168,098 income tax benefit) associated with
certain subordinated debt) and $419,123 in fiscal 1997 (including non-recurring
expenses of approximately $650,000 incurred in connection with the settlement of
certain litigation naming the Company). As of April 30, 1998, the Company's
accumulated deficit was approximately $14 million. Although the Company was
profitable for fiscal 1998, there can be no assurance that the Company will be
profitable in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Ability to Identify, Acquire and Integrate Acquisition Targets
To date, the Company has grown principally through acquiring and
integrating independent solid waste collection, transfer and disposal
operations. The Company's strategy envisions that a substantial part of the
Company's future growth will come from acquiring and integrating similar
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. In addition, the Company competes for acquisition candidates with other
entities, some of which have greater financial resources than the Company.
Failure by the Company to implement successfully its acquisition strategy would
limit the Company's growth potential. See "Business--Strategy" and
"--Acquisition Program".
The consolidation and integration activity in the solid waste industry in
recent years, as well as the difficulties, uncertainties and expenses relating
to the development and permitting of solid waste landfills and transfer
stations, has increased competition for the acquisition of existing solid waste
collection, transfer and disposal operations. Increased competition for
acquisition candidates may result in fewer acquisition opportunities being made
available to the Company as well as less advantageous acquisition terms,
including increased purchase prices. The Company also believes that a
significant factor in its ability to consummate acquisitions will be the
relative attractiveness of shares of the Company's Class A Common Stock as
consideration for potential acquisition candidates. This attractiveness may, in
large part, be dependent upon the relative market price and capital appreciation
prospects of the Class A
8
Common Stock compared to the equity securities of the Company's competitors. If
the market price of the Company's Class A Common Stock were to decline, the
Company's acquisition program could be materially adversely affected.
The successful integration of acquired businesses is important to the
Company's future financial performance. The anticipated benefits from any
acquisition may not be achieved unless the operations of the acquired businesses
are successfully combined with those of the Company in a timely manner. The
integration of any of the Company's acquisitions requires substantial attention
from management. The diversion of the attention of management, and any
difficulties encountered in the transition process, could have an adverse impact
on the Company's business, financial condition and results of operations.
Although the Company has successfully identified and closed acquisitions and
integrated them into its organization and operations in the past, there can be
no assurance that it will be able to do so in the future.
Dependence on Management
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.
The Company currently maintains "key man" life insurance with respect to John W.
Casella, the President, Chief Executive Officer and Chairman, and James W.
Bohlig, the Senior Vice President and Chief Operating Officer, in the amount of
$1.0 million each. See "Management--Executive Officers, Directors and Certain
Key Employees".
In addition, the Company's future success depends on its continuing ability
to identify, hire, train, motivate and retain highly qualified personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to attract, assimilate or retain highly qualified
personnel in the future. The inability to attract and retain the necessary
personnel could have a material adverse effect upon the Company's business,
financial condition and results of operations.
Uncertain Ability to Finance the Company's Growth
The Company anticipates that any future business acquisitions will be
financed through cash from operations, borrowings under its revolving credit
facility, the issuance of shares of the Company's Class A Common Stock and/or
seller financing. If acquisition candidates are unwilling to accept, or the
Company is unwilling to issue, shares of the Company's Class A Common Stock as
part of the consideration for such acquisition, the Company would be required to
utilize more of its available cash resources or borrowings under its revolving
credit facility in order to effect such acquisitions. To the extent that cash
from operations or borrowings under the Company's revolving credit facility is
insufficient to fund such requirements, the Company will require additional
equity and/or debt financing in order to provide the cash to effect such
acquisitions. Additionally, growth through the development or acquisition of new
landfills, transfer stations or other facilities, as well as the ongoing
maintenance of such landfills, transfer stations or other facilities, may
require substantial capital expenditures. 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 any or all of the foregoing capital requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
The terms of the Company's revolving credit facility require the Company to
obtain the consent of the lending banks prior to consummating acquisitions of
other businesses for cash consideration (including all liabilities assumed) in
excess of $10 million. Furthermore, the revolving credit facility contains
various financial covenants predicated on the Company's present and projected
financial condition. In the event future operations differ materially from that
which is anticipated, the Company may no longer be able to meet the tests
provided in the covenants contained in the revolving credit facility. A failure
to meet such covenants or the occurrence of other events may result in a default
under such credit facility. A default could result in acceleration of the
repayment of the debt incurred thereunder which could have a material adverse
effect upon the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources".
9
The registration statement of which this prospectus is a part also
registers the issuance or resale from time to time of up to 2,000,000 shares of
the Company's Class A Common Stock in connection with the purchase of one or
more acquisitions of companies, businesses or assets complementary to the
Company's existing business.
Limitations on Landfill Permitting and Expansion
The Company's operating program depends on its ability to expand the
landfills it owns and leases and to develop new landfill sites. In some areas,
suitable land for new sites or expansion of the Company's existing landfill
sites may be unavailable. 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.
The process of obtaining required permits and approvals to operate and
expand solid waste management facilities, including landfills and transfer
stations, has become increasingly difficult and expensive, often taking several
years, requiring numerous hearings and compliance with zoning, environmental and
other requirements, and often being subject to resistance from citizen, public
interest or other groups. There can be no assurance that the Company will
succeed in obtaining or maintaining the permits it requires to expand or that
such permits will not contain onerous terms and conditions. Even when granted,
final permits to expand are often not approved until the remaining permitted
disposal capacity of a landfill is very low. The Company's landfill in Vermont
is subject to state regulations and practices that generally do not allow
permits for more than five years of expected annual capacity.
Local laws and ordinances also may affect the Company's ability to obtain
permits to expand its landfills. The town of Bethlehem, New Hampshire, where one
of the landfills operated by the Company is located, has an ordinance which
prohibits the expansion of any landfills not operated by the town of Bethlehem.
A proposal to amend this ordinance was defeated by Bethlehem voters in March
1997 and March 1998, and it is not anticipated that another vote will take place
until at least March 1999. The estimated total remaining permitted disposal
capacity of the landfill may be exhausted before the next vote takes place.
Furthermore, certain phases of expansion at the Company's SERF landfill in
Hampden, Maine will require the town of Hampden to amend a local ordinance.
In May 1998, the Company acquired the Hyland landfill in Angelica, Allegany
County, New York. The Company has received a permit from the State of New York
DEC for approximately 1,500,000 tons of disposal capacity at this facility. On
July 17, 1998, the Hyland facility was served with a notice of petition and
petition filed against the DEC and the Company in New York State Supreme Court,
Erie County by The Concerned Citizens of Allegany County. The lawsuit challenges
the decision of the Commissioner of the DEC issued on March 6, 1998 and the
permit modification issued based upon that decision that collectively authorized
the disposal of municipal solid waste and industrial waste at the facility. The
proceeding is a summary proceeding that is expected to be decided on an
expedited basis, and the issues raised in such petition are the same as those
raised by the petitioners in administrative proceedings conducted by the New
York DEC and rejected by both the administrative law judge and the DEC
Commissioner. The Company believes the lawsuit is without merit and intends to
vigorously contest the lawsuit. In the event the lawsuit is successful, the
Company could be prevented from disposing of municipal solid waste and
industrial waste until it complies with the additional procedures with the DEC
and a new permit modification is issued. There can be no assurance that a new
permit modification will be issued under such circumstances or that the process
of obtaining such permit would not be lengthy. The failure of the Company to
obtain a permit modification or a significant delay in obtaining such permit
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Legal Proceedings".
The Town of Angelica, New York, has adopted certain laws which would
require the Company to obtain an additional permit from the Town of Angelica for
the operation of the Hyland landfill, would prohibit the expansion of the
landfill, would prevent the disposal of yard waste and may preclude the disposal
of industrial waste at that facility. The Company has filed a lawsuit against
the Town of Angelica seeking to set aside the enforcement of the law, and a
preliminary injunction has been issued in favor of the Company.
10
If the Company is not successful in its lawsuit, and if the Town of Angelica
seeks to enforce the law by its terms, then the Company would be required to
obtain an additional permit from the Town of Angelica to operate the Hyland
landfill, the expansion of the landfill beyond the currently permitted capacity
would be prohibited, and the Company would be unable to dispose of yard waste
and may be precluded from disposing of industrial waste at the landfill. There
can be no assurance that such limitations would not have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company has not yet begun accepting waste at the Hyland landfill. See
"Business--Legal Proceedings".
At June 15, 1998, the estimated total remaining permitted disposal capacity
of the five landfills owned and/or operated by the Company was approximately
4,272,000 tons (including the approximately 1,500,000 tons at the Company's
Hyland landfill) with approximately 5,360,000 additional tons of disposal
capacity in various stages of permitting. In the event the Company exhausts its
permitted capacity at a landfill, in addition to limiting its ability to expand
internally, the Company would be required to cap and close that landfill and the
Company could be forced to dispose of collected waste at more distant landfills
or at landfills operated by its competitors. The resulting increased cost could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Operations--Landfills".
Geographic Concentration Risks
The Company's operations and customers are located in Vermont, New
Hampshire, Maine, upstate New York and northern Pennsylvania. Therefore, the
Company's business, financial condition and results of operations are
susceptible to downturns in the general economy in this geographic region and
other factors affecting the region such as state regulations and severe weather
conditions. In addition, as the Company expands in its existing markets,
opportunities for growth within these regions will become more limited. The
costs and time involved in permitting and the scarcity of available landfills
will make it difficult for the Company to expand vertically in these markets.
There can be no assurance that the Company will complete a sufficient number of
acquisitions in other markets to lessen its geographic concentration. See
"Business--Service Area".
Seasonality of Business Impacts Quarterly Operating Results
The Company's revenues have historically been lower during the months of
November through March. This seasonality reflects the lower volume of solid
waste during the late fall, winter and early spring months primarily because:
(i) the volume of solid waste relating to construction and demolition activities
decreases substantially during the winter months in the northeastern United
States, and (ii) decreased tourism in Vermont, Maine and eastern New York during
the winter months tends to lower the volume of solid waste generated by
commercial and restaurant customers, which is partially offset by the winter ski
industry. Since certain of the Company's operating and fixed costs remain
constant throughout the fiscal year, operating income is therefore impacted by a
similar seasonality. In addition, particularly harsh weather conditions could
result in increased operating costs to certain of the Company's operations.
There can be no assurance that future seasonal and quarterly fluctuations will
not have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
Fluctuations in Quarterly Results; Potential Stock Price Volatility
The Company believes that period-to-period comparisons of its operating
results should not be relied upon as an indication of future performance. Due to
a variety of factors, including general economic conditions, governmental
regulatory action, acquisitions, capital expenditures and other costs related to
the expansion of operations and services and pricing changes (including the
market price of commodities such as recycled materials), it is possible that in
some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the
Company's Class A Common Stock price could be materially adversely affected. The
market price of the Class A Common Stock may be highly volatile and is likely to
be affected by factors such as actual or anticipated fluctuations in the
Company's operating results, announcements of new acquisitions or contracts by
the Company, its competitors or their customers, government regulatory action,
general market conditions and other
11
factors. Also, the market price of the Class A Common Stock may be affected by
factors affecting the waste management industry in which the Company competes.
In addition, the stock market has from time-to-time experienced significant
price and volume fluctuations that have often been unrelated to the operating
performance of companies whose securities are publicly traded; yet, these broad
market fluctuations may also adversely affect the market price of the publicly
traded securities of such companies, including the Company's Class A Common
Stock. In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
commenced against such companies. There can be no assurance that such litigation
will not occur in the future with respect to the Company. Such litigation could
result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect on the Company's business,
financial condition and results of operations. Any adverse determination in such
litigation could also subject the Company to significant liabilities.
Highly Competitive Industry
The solid waste services industry is highly competitive, is undergoing a
period of increasingly rapid consolidation, and requires substantial labor and
capital resources. Certain of the markets in which the Company competes or will
likely compete are served by one or more of the large national solid waste
companies, as well as numerous regional and local solid waste companies of
varying sizes and resources. The Company also competes with operators of
alternative disposal facilities, including incinerators, and with counties,
municipalities, and solid waste districts that maintain their own waste
collection and disposal operations. These counties, municipalities, and solid
waste districts may have financial advantages due to the availability to them of
user fees, similar charges or tax revenues and the greater availability to them
of tax-exempt financing. Intense competition exists not only to provide services
to customers but also to acquire other businesses within each market. Certain of
the Company's competitors have significantly greater financial and other
resources than the Company. From time to time, these or other competitors may
reduce the price of their services in an effort to expand market share or to win
a competitively bid municipal contract. These practices may either require the
Company to reduce the pricing of its services or result in the Company's loss of
business. As is generally the case in the industry, municipal contracts are
subject to periodic competitive bidding. There can be no assurance that the
Company will be the successful bidder to obtain or retain these contracts. The
Company's inability to compete with larger and better capitalized companies, or
to replace municipal contracts lost through the competitive bidding process with
comparable contracts or other revenue sources within a reasonable time period,
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Competition".
Comprehensive Government Regulation
The Company is subject to extensive and evolving environmental, zoning and
other laws and regulations which have become increasingly stringent in recent
years. These laws and regulations impose substantial costs on the Company and
affect the Company's business in many ways, including as set forth below and
under "Business--Regulation".
In connection with its ownership and operation of landfills and transfer
stations, the Company is required to obtain, comply with and maintain in effect
one or more licenses or permits as well as zoning, environmental and/or other
land use approvals. These licenses or permits and approvals are difficult and
time consuming to obtain and renew and are frequently opposed by public
officials, groups of private citizens, or both. There can be no assurance that
the Company will succeed in obtaining, complying with and maintaining in effect
the permits and approvals required for the continued operation and growth of its
landfills and transfer stations, and the failure of the Company to obtain,
comply with or maintain in effect a permit or approval significant to its
landfills or transfer stations could have a material adverse effect on the
Company's business, financial condition and results of operations.
The design, construction, operation and closure of landfills is extensively
regulated. These include, among others, the regulations establishing minimum
Federal requirements promulgated by the U.S. Environmental Protection Agency
("EPA") in October 1991 under Subtitle D (the "Subtitle D Regulations") of the
Resource Conservation and Recovery Act of 1976 (the "RCRA"). Government
assertions that the
12
Company failed to comply with regulations has resulted in the payment by the
Company of three civil penalties (in the aggregate less than $100,000 in its
23-year operating history). Failure to comply with these regulations could
require the Company to undertake costly and time consuming investigatory or
remedial activities, to curtail operations, to close a landfill temporarily or
permanently, and to defend itself against enforcement actions brought by and pay
civil penalties imposed by EPA or state regulatory agencies. Changes in these
regulations could require the Company to modify, supplement or replace equipment
or facilities at costs which may be substantial. The failure of regulatory
agencies to enforce these regulations vigorously or consistently may give an
advantage to competitors of the Company whose facilities do not comply with the
Subtitle D Regulations or their state counterparts. The Company's financial
obligations arising from any failure to comply with these regulations could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Certain licenses, permits and approvals may limit the types of waste the
Company may accept at a landfill or the quantity of waste it may accept at a
landfill during a given time period. In addition, certain licenses, permits and
approvals, as well as certain state and local regulations, may seek to limit a
landfill to accepting waste that originates only from specified geographic areas
or seek to prohibit the landfill from importing out-of-state waste or otherwise
discriminate against waste originating outside of a defined geographic area. The
Company's Clinton County landfill is not permitted to receive waste from certain
geographic regions in New York. Generally, restrictions on importing
out-of-state waste have not withstood judicial challenge. However, from time to
time, Federal legislation is proposed which would allow individual states to
prohibit the disposal of out-of-state waste or to limit the amount of
out-of-state waste that could be imported for disposal and would require states,
under certain circumstances, to reduce the amounts of waste exported to other
states. Although no such Federal legislation has been enacted, if such Federal
legislation should be enacted in the future, states in which the Company
operates landfills could act to limit or prohibit the Company from importing
out-of-state waste. Such actions could adversely affect any of the Company's
landfills that receive a significant portion of waste originating from other
states and thereby have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition, certain states and localities may for economic or other
reasons restrict the export of waste from their jurisdiction or require that a
specified amount of waste be disposed of at facilities within their
jurisdiction. In 1994, the United States Supreme Court held unconstitutional,
and therefore invalid, a local ordinance that sought to limit the amount of
waste that could be taken out of the locality. However, certain state and local
jurisdictions continue to seek to enforce such restrictions and, in certain
cases, the Company may elect not to challenge such restrictions. In addition,
the aforementioned Federal legislation that has from time to time been proposed
could, if enacted, allow states and localities to impose flow control
restrictions. These restrictions could reduce the volume of waste going to
landfills in certain areas, which may adversely affect the Company's ability to
operate its landfills at their full capacity and/or affect the prices that the
Company can charge for landfill disposal services. These restrictions may also
result in higher disposal costs for the Company's collection operations. If the
Company were unable to pass such higher costs through to its customers, the
Company's business, financial condition and results of operations could be
materially adversely affected.
Businesses that provide waste services, including the Company, are
frequently subject in the normal course of operations to judicial and
administrative proceedings involving Federal, state or local agencies or
citizens' groups. These proceedings, based on violations or alleged violations
of environmental laws or regulations, may seek to impose fines or penalties on
the Company or to revoke, suspend, modify or deny renewal of the Company's
operating permits, approvals or licenses, or require that the Company make
expenditures to remediate potential environmental problems relating to waste
transported, disposed of or stored by the Company or its predecessors, or
resulting from its or its predecessors' operations. Any adverse outcome in these
proceedings could have a material adverse effect on the Company's business,
financial condition and results of operations and may subject the Company to
adverse publicity. The Company also may be subject to actions brought by
individuals or community groups in connection with the permitting, approving or
licensing of its operations. See "--Potential Environmental Liability".
13
Potential Environmental Liability
The Company may be subject to liability for environmental damage, including
personal injury and property damage, that its solid waste 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 or commencing 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 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 operations. See
"Business--Regulation".
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), imposes strict, joint and several liability on the
present owners and operators of facilities from which a release of hazardous
substances into the environment has occurred or is threatened, as well as any
party that owned or operated the facility at the time of disposal of the
hazardous substances, regardless of when the hazardous substance was first
detected. Similar liability is imposed upon the generators of waste which
contains hazardous substances and upon hazardous substance transporters that
select the treatment, storage or disposal site. All such persons, who are
referred to as potentially responsible parties ("PRPs"), generally are jointly
and severally liable for the expense of waste site investigation, waste site
cleanup costs and natural resource damages, regardless of whether they exercised
due care and complied with all relevant laws and regulations. These costs can be
very substantial. Furthermore, such liability can be based upon the existence of
only very small amounts of "hazardous substances", as defined in CERCLA, which
is a much broader category of substances than "hazardous wastes", as defined in
RCRA. The states in which the Company operates have laws similar to CERCLA which
also impose environmental liability on broad classes of parties. Although the
Company is not in the business of transporting or disposing of hazardous waste,
it is possible that hazardous substances have in the past, or may in the future,
come to be located in landfills with which the Company has been associated as a
generator or transporter of waste or as an owner or operator of the landfill. If
EPA ever determines that remedial measures under CERCLA or RCRA are appropriate
at any of these sites or operations, if a state agency makes such a finding
under similar state law, or if a third party brings a private cost-recovery or
contribution action with respect to remedial costs incurred, the Company could
be subject to substantial liability which could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business--Regulation".
With respect to each business that the Company acquires or has acquired,
there may be liabilities that the Company fails to or is unable to discover,
including liabilities arising from waste transportation or disposal activities
or noncompliance with environmental laws by prior owners, and for which the
Company, as a successor owner, may be legally responsible. Representations,
warranties and indemnities from the sellers of such businesses, if obtained and
if legally enforceable, may not cover fully the resulting environmental or other
liabilities due to their limited scope, amount or duration, the financial
limitations of the warrantor or indemnitor or other reasons. Certain
environmental liabilities, even though expressly not assumed by the Company, may
nonetheless be imposed on the Company under certain legal theories of successor
liability, particularly under CERCLA. The Company's insurance program does not
cover liabilities associated with any environmental cleanup or remediation of
the Company's own sites. An uninsured claim against the Company, if successful
and of sufficient magnitude, could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Acquisition Program".
Potential Inadequacy of Accruals for Closure and Post-Closure Costs
The Company will have material financial obligations relating to closure
and post-closure costs of its existing landfills and any disposal facilities
which it may own or operate in the future. In addition to the landfills
currently operated by the Company, the Company owns and/or operated five unlined
landfills which are not currently in operation. Three of these landfills have
been closed and capped by the Company, and a fourth is in the final stages of
obtaining governmental closure design approval. The fifth unlined landfill, a
municipal landfill which is adjacent to the Subtitle D Clinton County landfill
being operated
14
by the Company, was operated by the Company from July 1996 through July 1997.
The Company completed the closure and capping activities at this landfill in
September 1997. Clinton County has indemnified the Company for environmental
liabilities arising from materials disposed of at that unlined landfill prior to
its operation by the Company. The Company has provided and will in the future
provide accruals for financial obligations relating to closure and post-closure
costs of its owned or operated landfills (generally for a term of 30 years after
final closure of a landfill) based on engineering estimates of consumption of
permitted landfill airspace over the useful life of any such landfill. There can
be no assurance that the Company's financial obligations for closing or
post-closing costs will not exceed the amount accrued and reserved or amounts
otherwise receivable pursuant to trust funds established for such purpose. Such
a circumstance could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business--Operations--Landfills".
Inability to Obtain Performance or Surety Bonds, Letters of Credit or Insurance
Municipal solid waste collection contracts and landfill closure obligations
may require performance or surety bonds, letters of credit, or other means of
financial assurance to secure contractual performance. If the Company were
unable to obtain performance or surety bonds or letters of credit in sufficient
amounts or at acceptable rates, it could be precluded from entering into
additional municipal solid waste collection contracts or obtaining or retaining
landfill operating permits. Any future difficulty in obtaining insurance could
also impair the Company's ability to secure future contracts conditioned upon
the contractor having adequate insurance coverage. Accordingly, the failure of
the Company to obtain performance or surety bonds, letters of credit or other
means of financial assurance or to maintain adequate insurance coverage could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Risk Management, Insurance and
Performance or Surety Bonds".
Incurrence of Charges
In accordance with GAAP, the Company capitalizes certain expenditures and
advances relating to acquisitions, pending acquisitions and landfills. Indirect
acquisition costs, such as executive salaries, general corporate overhead,
public affairs and other corporate services, are expensed as incurred. The
Company's policy is to charge against earnings any unamortized capitalized
expenditures and advances (net of any portion thereof that the Company estimates
will be recoverable, through sale or otherwise) relating to any operation that
is permanently shut down or has not generated or is not expected to generate
sufficient cash flow, any pending acquisition that is not consummated and any
landfill development project that is not expected to be successfully completed.
Therefore, the Company may be required to incur a charge against earnings in
future periods, which charge, depending upon the magnitude thereof, could have a
material adverse effect on the Company's business, financial condition and
results of operations. Because of continuing losses at the Company's waste tire
processing facility, located in Eliot, Maine, in the fourth quarter of fiscal
1998 the Company wrote-down the carrying value of the assets of that business in
the amount of $971,000. There can be no assurance that the Company will not
incur additional losses relating to the continued operation of the waste tire
processing facility, including in the event of, among other reasons, a weakening
of the market for tire derived fuel. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 3 of Notes to
Consolidated Financial Statements.
Control by Casellas and Anti-takeover Effect of Class B Common Stock
The holders of Class B Common Stock of the Company are entitled to ten
votes per share, whereas the holders of Class A Common Stock are entitled to one
vote per share. At June 15, 1998, an aggregate of 988,200 shares of Class B
Common Stock, representing 9,882,000 votes, were outstanding, all of which were
beneficially owned by John W. Casella, the President, Chief Executive Officer
and Chairman of the Board of Directors of the Company, or by Douglas R. Casella,
the Vice Chairman of the Board of Directors of the Company (together, the
"Casellas"). Upon completion of this Offering, the Casellas together will
beneficially own shares representing approximately 51% of the aggregate votes to
be cast. As a result, the Casellas, if acting together, will be able to control
the election of all but one member of the Board of Directors and the outcome of
other matters submitted for stockholder consideration, including, without
15
limitation, matters involving the control of the Company, irrespective of how
other stockholders may vote. This concentration of ownership and voting control
may have the effect of delaying or preventing a change of control of the Company
which may be favored by the Company's other stockholders. There can be no
assurance that the Casellas' ability to prevent or cause a change in control of
the Company will not have a material adverse effect on the market price of the
Class A Common Stock. Shares of Class B Common Stock will automatically convert
into shares of Class A Common Stock in the event they cease to be held by Class
B Permitted Holders (as defined) and under certain other circumstances. The
Casellas have certain contractual relationships with the Company. See "Certain
Transactions" for a discussion of contractual relations between the Casellas and
the Company. See also "Principal and Selling Stockholders" and "Description of
Capital Stock".
Anti-Takeover Effect of Certain Charter and By-Law Provisions and Delaware Law
The Company's Amended and Restated Certificate of Incorporation (the
"Restated Certificate of Incorporation") and Amended and Restated By-Laws (the
"Restated By-Laws") provide for the Company's Board to be divided into three
classes of directors serving staggered three-year terms. As a result,
approximately one-third of the Company's Board is be elected each year. The
classified board is designed to ensure continuity and stability in the board's
composition and policies in the event of a hostile takeover attempt or proxy
contest. The classified board would extend the time required to effect any
changes in control of the Company's Board and may tend to discourage any hostile
takeover bid for the Company. Because only a minority of the directors will be
elected at each annual meeting, it would normally take at least two annual
meetings for holders of even a significant majority of the Company's voting
stock to effect a change in the composition of a majority of the Company's
Board, absent approval of the Company's Board. Because of the additional time
required to change the composition of the Company's Board, a classified board
may also make the removal of incumbent management more difficult, even if such
removal would be beneficial to stockholders generally, and may tend to
discourage certain tender offers.
The authorized capital of the Company includes 1,000,000 shares of "blank
check" Preferred Stock. The Board of Directors has the authority to issue shares
of Preferred Stock and to determine the price, designation, rights, preferences,
privileges, restrictions and conditions, including voting and dividend rights,
of these shares of Preferred Stock without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of holders of any Preferred Stock that
may be issued in the future. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could make it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. The Company has no
present plans to issue any Preferred Stock. See "Description of Capital Stock".
The Company's Restated Certificate of Incorporation and Restated By-Laws
provide that any action required or permitted to be taken by stockholders of the
Company must be effected at a duly called annual or special meeting of
stockholders and may not be effected by written consent, and require reasonable
advance notice and other procedures to be followed by a stockholder in
connection with a proposal or director nomination which such stockholder desires
to present at any annual or special meeting of stockholders. Special meetings of
stockholders may be called only by the President of the Company or by the Board
of Directors. The Restated Certificate of Incorporation and Restated By-Laws
provide that members of the Board of Directors may be removed only upon the
affirmative vote of holders of shares representing at least 75% of the votes
entitled to be cast. The Company is subject to the anti-takeover provision of
Section 203 of the Delaware General Corporation Law (the "Delaware Law"), which
will prohibit the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 also could have the effect of delaying or preventing a change of
control of the Company. These provisions, and the provisions of the Restated
Certificate of Incorporation and Restated By-Laws, may have the effect of
deterring hostile takeovers or delaying or preventing changes in control or
management of the Company, including transactions in which stockholders might
otherwise receive a premium for their shares over then current market prices. In
addition, these provisions may limit the ability of stockholders
16
to approve transactions that they may deem to be in their best interests. See
"Description of Capital Stock--Preferred Stock" and "--Delaware Law and Certain
Charter and By-Law Provisions".
No Dividends
The Company does not anticipate paying any cash dividends on the Common
Stock in the foreseeable future. The Company's revolving line of credit
restricts the payment of dividends. See "Dividend Policy".
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Class A Common
Stock offered by the Company pursuant to this Offering are estimated to be $40.8
million ($52.7 million if the Underwriters' over-allotment option is exercised
in full), after deducting the underwriting discount and estimated Offering
expenses. The Company will not receive any proceeds from the sale of shares of
Class A Common Stock by the Selling Stockholders hereunder. See "Principal and
Selling Stockholders".
The Company intends to use the proceeds to repay certain indebtedness owed
to sellers of businesses acquired by the Company, constituting the unpaid
deferred portion of the purchase price for those businesses ("Seller Debt"),
and to reduce the outstanding balance under its $150 million revolving credit
facility. The Seller Debt to be repaid ranges in outstanding principal amount
from approximately $38,000 to approximately $280,000, has due dates ranging
from January 2000 to May 2003, and bears interest at annual rates ranging from
8% to 9.25%. The aggregate outstanding amount of Seller Debt to be repaid from
the net proceeds of this Offering is not expected to exceed $1,100,000. The
revolving credit facility matures in January 2003, and bears interest at
varying rates. The weighted average interest rate applicable to amounts
outstanding under the revolving credit facility at June 15, 1998 was
approximately 6.94% per annum. At June 15, 1998, an aggregate of $73.9 million
was outstanding under the revolving credit facility. The terms of the credit
facility permit the Company to re-borrow under the revolving credit facility
for acquisitions (subject to certain restrictions) and general corporate
purposes. The Company continually evaluates potential acquisition candidates
and intends to continue to pursue acquisition opportunities that may become
available. See "Risk Factors--Uncertain Ability to Finance the Company's
Growth", "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and Note 5 of Notes to
Consolidated Financial Statements.
DIVIDEND POLICY
No dividends have ever been declared or paid on the Company's capital stock
and the Company does not anticipate paying any cash dividends on the Common
Stock in the foreseeable future. The Company's revolving line of credit
restricts the payment of dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
17
MARKET PRICE OF CLASS A COMMON STOCK
The Company's Class A Common Stock began trading on the Nasdaq National
Market under the symbol "CWST" on October 29, 1997. Prior to such date, there
was no established public trading market for the Company's Class A Common
Stock. The following table sets forth the high and low sale prices of the
Company's Class A Common Stock for the periods indicated as quoted on the
Nasdaq National Market.
Period High Low
- ------ ---- ---
Fiscal 1998
Second quarter (commencing October 29, 1997) ......... $22.75 $20.25
Third quarter ........................................ $26.375 $19.00
Fourth quarter ....................................... $34.00 $23.75
Fiscal 1999
First quarter (through July 21, 1998) ................ $30.75 $24.375
At July 21, 1998, the high and low sale prices per share of the Company's
Class A Common Stock as quoted on the Nasdaq National Market were $27.875 and
$27.125, respectively. At July 21, 1998 there were approximately 190 holders of
record of the Company's Class A Common Stock.
18
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of April 30, 1998 and as adjusted to reflect the issuance and sale of the shares
of Class A Common Stock offered by the Company pursuant to this Offering, after
deducting the underwriting discount and estimated offering expenses, and the
application of the net proceeds therefrom. This table should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere in the Prospectus.
April 30, 1998
---------------------------
Actual As Adjusted
------------ ------------
(in thousands)
Current maturities of long-term obligations ....................... $ 3,076 $ 2,748
======== ========
Long-term obligations, net of current maturities .................. 74,833 34,349
-------- --------
Stockholders' equity:
Preferred Stock, $0.01 par value; 1,000,000 shares authorized,
no shares issued or outstanding .................................. -- --
Class A Common Stock, $0.01 par value; 30,000,000 shares
authorized; 10,522,387 shares issued and outstanding, actual;
12,122,387 shares issued and outstanding, as adjusted(1) ......... 105 121
Class B Common Stock, $0.01 par value; 1,000,000 shares
authorized; 988,200 shares issued and outstanding, actual and
as adjusted; ..................................................... 10 10
Additional paid-in capital ........................................ 95,901 136,697
Accumulated deficit ............................................... (14,156) (14,156)
-------- --------
Total stockholders' equity ................................... 81,860 122,672
-------- --------
Total capitalization ....................................... $156,693 $157,021
======== ========
- ------------
(1) Excludes: (i) 1,595,302 shares of Class A Common Stock issuable upon
exercise of stock options outstanding on April 30, 1998 with a weighted
average exercise price of $8.75 per share; (ii) an additional 1,385,500
shares reserved for issuance under the Stock Plans; and (iii) warrants to
purchase 190,392 shares of Class A Common Stock at a weighted average
exercise price of $4.26 per share. See "Management--Benefit Plans",
"Description of Capital Stock" and Note 7 of Notes to Consolidated
Financial Statements.
19
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated financial and operating data set forth
below with respect to the Company's consolidated statements of operations and
cash flows for the fiscal years ended April 30, 1996, 1997 and 1998, and the
consolidated balance sheets as of April 30, 1997 and 1998 are derived from the
Company's consolidated financial statements included elsewhere in this
Prospectus, and the consolidated statement of operations and cash flows data for
the fiscal years ended April 30, 1994 and 1995 and the consolidated balance
sheet data as of April 30, 1994, 1995 and 1996 are derived from the Company's
consolidated financial statements, all of which statements have been audited by
Arthur Andersen LLP. In December 1997, the Company completed the acquisition of
All Cycle in a transaction recorded as a pooling of interests. Accordingly, the
financial statements of the Company have been restated for all prior years to
reflect the financial position, results of operations and cash flows of the
merged entities as if they had been one company for all periods presented. The
data set forth below should be read in conjunction with the Unaudited Pro Forma
Consolidated Statements of Operations and Notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus.
Fiscal Year Ended April 30,
---------------------------------------------------------------------------
Restated(1)
-------------------------------------------------
Pro Forma(2)
1994 1995 1996 1997 1998 1998
---------- ------------ ------------ ------------ ----------- -------------
(in thousands, except per share data)
Statement of Operations Data:
Revenues ................................ $13,491 $23,869 $42,829 $79,532 $118,067 $119,350
Cost of operations ...................... 9,640 13,721 25,137 48,057 69,878 70,907
General and administrative .............. 2,702 2,909 7,063 12,534 17,089 17,330
Merger related costs .................... -- -- -- -- 290 290
Depreciation and amortization ........... 1,483 4,815 8,152 13,695 18,345 18,459
Loss on impairment of long-lived
assets ................................. -- -- -- -- 971 971
------- ------- ------- ------- -------- --------
Operating income (loss) ................. (334) 2,424 2,477 5,246 11,494 11,393
Interest expense, net ................... 613 1,826 2,617 4,290 6,532 4,646
Other expense (income), net ............. 207 36 (90) 923 (80) 80
------- ------- ------- ------- -------- --------
Income (loss) before provision
(benefit) for income taxes,
extraordinary items and
cumulative effect of change in
accounting principle ................... (1,154) 562 (50) 33 5,042 6,667
Provision (benefit) for income taxes..... (441) 220 144 452 2,385 3,046
Extraordinary items ..................... -- -- 326 -- -- --
Change in accounting principle .......... 124 -- -- -- -- --
------- ------- ------- ------- -------- --------
Net income (loss) ....................... $ (837) $ 342 $ (520) $ (419) $ 2,657 $ 3,621
Accretion of preferred stock and put
warrants ............................... -- (2,380) (2,967) (8,530) (5,738) --
------- ------- ------- ------- -------- --------
Net income (loss) applicable to
common stockholders .................... $ (837) $(2,038) $(3,487) $(8,949) $ (3,081) $ 3,621
======= ======= ======= ======= ======== ========
Basic net income (loss) per common
share .................................. $ (0.35) $ (0.70) $ (1.06) $ (2.29) $ (0.39) $ 0.32
======= ======= ======= ======= ======== ========
Basic weighted average common
shares outstanding (3) ................. 2,355 2,900 3,279 3,913 7,912 11,375
======= ======= ======= ======= ======== ========
Diluted net income (loss) per
common share ........................... $ (0.35) $ (0.70) $ (1.06) $ (2.29) $ (0.39) $ 0.29
======= ======= ======= ======= ======== ========
Diluted weighted average common
shares outstanding (3) ................. 2,355 2,900 3,279 3,913 7,912 12,459
======= ======= ======= ======= ======== ========
20
Fiscal Year Ended April 30,
---------------------------------------------------------------------------------
Restated(1)
-----------------------------------------------------
Pro Forma(2)
1994 1995 1996 1997 1998 1998
------------ ------------ ------------- ------------- ------------- -------------
(in thousands)
Other Operating Data:
EBITDA(4) ................................ $ 1,149 $ 7,239 $ 10,629 $ 18,941 $ 30,810 $30,823
======= ======= ======== ======== ======== =======
Capital expenditures ..................... $ 843 $ 3,731 $ 10,750 $ 16,971 $ 24,652
======= ======= ======== ======== ========
Cash flows from operating activities...... $ 1,559 $ 4,978 $ 8,642 $ 14,765 $ 19,447
======= ======= ======== ======== ========
Cash flows from investing activities ..... $(2,270) $(9,187) $(28,209) $(52,641) $(56,499)
======= ======= ======== ======== ========
Cash flows from financing activities...... $ 1,007 $ 4,547 $ 19,272 $ 38,755 $ 37,649
======= ======= ======== ======== ========
April 30,
-------------------------------------------------------------------
Restated(1)
-----------------------------------------------------
1994 1995 1996 1997 1998
------------ ------------ ------------- ------------- -------------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents ................ $ 427 $ 765 $ 470 $ 1,349 $ 1,946
Working capital (deficit) ................ (729) (1,393) (2,205) (5,577) 3,818
Property and equipment, net .............. 6,394 23,203 37,955 67,983 81,684
Total assets ............................. 13,055 38,534 64,893 140,882 189,033
Long-term obligations, less current
maturities .............................. 7,331 22,998 24,103 76,901 74,833
Redeemable preferred stock ............... -- -- 22,896 31,426 --
Redeemable put warrants (5) .............. 62 3,142 400 400 --
Total stockholders' equity (deficit) ..... 738 2,338 (874) 76 81,860
- ------------
(1) The Company has restated issued audited consolidated financial statements to
reflect the merger with All Cycle consummated on December 19, 1997,
accounted for using the pooling of interests method of accounting.
(2) Pro forma to give effect to:
(i) the Gobin acquisition as if it had occurred on May 1, 1997,
(ii) the application of the net proceeds from the November Offering as if
it had closed on May 1, 1997 and
(iii) the elimination of accretion charges related to the series preferred
stock and put warrants, none of which were outstanding after the
November Offering.
No pro forma adjustments have been made to reflect the impact of this
Offering.
(3) Computed on the basis described in Note 3 of Notes to Consolidated Financial
Statements.
(4) EBITDA is defined as operating income plus depreciation and amortization and
loss on impairment of long-lived assets. EBITDA does not represent, and
should not be considered as, an alternative to net income or cash flows from
operating activities, each as determined in accordance with GAAP. Moreover,
EBITDA does not necessarily indicate whether cash flow will be sufficient
for such items as working capital or capital expenditures, or to react to
changes in the Company's industry or to the economy generally. The Company
believes that EBITDA is a measure commonly used by lenders and certain
investors to evaluate a company's performance in the solid waste industry.
The Company also believes that EBITDA data may help to understand the
Company's performance because such data may reflect the Company's ability to
generate cash flows, which is an indicator of its ability to satisfy its
debt service, capital expenditure and working capital requirements. Because
EBITDA is not calculated by all companies and analysts in the same fashion,
the EBITDA measures presented by the Company may not be comparable to
similarly-titled measures reported by other companies. Therefore, in
evaluating EBITDA data, investors should consider, among other factors: the
non-GAAP nature of EBITDA data; actual cash flows; the actual availability
of funds for debt service, capital expenditures and working capital; and the
comparability of the Company's EBITDA data to similarly-titled measures
reported by other companies. For more information about the Company's cash
flows, see the consolidated statements of cash flows in the Company's
Consolidated Financial Statements.
(5) Represents warrants to purchase 100,000 shares of Class A Common Stock
exercisable at $6.00 per share. Pursuant to the terms of these warrants, in
September 1997, warrants to purchase 25,000 shares were exercised by the
holder at $6.00 per share, and warrants to purchase 75,000 shares were
called by the Company at $7.00 per share.
21
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following Unaudited Pro Forma Consolidated Statements of Operations of
the Company have been prepared based upon the historical Consolidated Financial
Statements of the Company and the Notes thereto included elsewhere in this
Prospectus and gives effect to (i) the Gobin acquisition as if it had occurred
on May 1, 1997, (ii) the application of the net proceeds from the November
Offering as if it had closed on May 1, 1997 and (iii) the elimination of
accretion charges related to the series preferred stock and put warrants, none
of which were outstanding after the November Offering. An unaudited pro forma
consolidated balance sheet has not been presented as each of the pro forma
transactions occurred prior to the actual balance sheet dated April 30, 1998
included in the Consolidated Financial Statements.
The Unaudited Pro Forma Consolidated Statements of Operations should be
read in conjunction with "Capitalization" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and with the
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Prospectus. The Unaudited Pro Forma Consolidated Statements of Operations
are not necessarily indicative of the actual results of operations that would
have been reported if the events described above had occurred as of May 1, 1997,
nor do they purport to indicate 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 acquisition. In the opinion of management, all
adjustments necessary to present fairly such pro forma financial results have
been made.
(Unaudited)
Fiscal Year Ended April 30, 1998
-----------------------------------------------------------------------------
Adjustments
Casella H.C. Gobin Related to
--------------- -------------------------------- the November
Historical(1) Historical(2) Adjustments(3) Offering Pro Forma
--------------- --------------- ---------------- ----------------- ----------
(in thousands, except per share data)
$118,067 $1,283 $ -- $ -- $119,350
Revenues ....................................... -------- ------ ----- ------- --------
Cost of operations ............................. 69,878 1,029 -- -- 70,907
General and administrative ..................... 17,089 241 -- -- 17,330
Merger related costs ........................... 290 -- -- -- 290
Depreciation and amortization .................. 18,345 96 18 (3A) -- 18,459
Loss on impairment of long-lived assets ........ 971 -- -- -- 971
-------- ------ ----- ------- --------
Operating income (loss) ........................ 11,494 (83) (18) -- 11,393
Interest (income) expense, net ................. 6,532 56 98 (3B) (2,040)(4) 4,646
Other (income) expense, net .................... (80) 160 -- -- 80
-------- ------ ----- ------- --------
Income (loss) before provision (benefit) for
income taxes .................................. 5,042 (299) (116) 2,040 6,667
Provision (benefit) for income taxes ........... 2,385 56 (201)(5) 806 (5) 3,046
-------- ------ ----- ------- --------
Net income (loss) ........................... $ 2,657 $ (355) $ 85 $ 1,234 $ 3,621
Accretion of preferred stock and
put warrants .................................. (5,738) -- -- 5,738 (6) --
-------- ------ ----- ------- --------
Net income (loss) applicable to common
stockholders .................................. $ (3,081) $ (355) $ 85 $ 6,972 $ 3,621
======== ====== ===== ======= ========
Basic net income (loss) per common
share ......................................... $ (0.39) $ 0.32
======== ========
Basic weighted average common shares
outstanding(7) ................................ 7,912 11,375
======== ========
Diluted net income (loss) per common
share ......................................... $ (0.39) $ 0.29
======== ========
Diluted weighted average common shares
outstanding(7) ................................ 7,912 12,459
======== ========
EBITDA(8) ...................................... $ 30,810 $ 30,823
======== ========
22
(1) No pro forma adjustments have been made to the historical amounts for the
year ended April 30, 1998 (i) to reflect the impact of the Offering or (ii)
to reduce operating expenses to eliminate specific expenses that the Company
believes would not have been incurred had the Gobin acquisition occurred as
of May 1, 1997.
(2) Consists of the combined historical statement of revenues and direct
operating expenses for H.C. Gobin, Inc. for the period of May 1, 1997
through September 5, 1997.
(3) Pro forma adjustments have been made to the historical amounts for the Gobin
acquisition. The Gobin acquisition was accounted for using the purchase
method of accounting for business combinations.
(A) A pro forma adjustment has been made to reflect incremental intangible
amortization expense on the excess of cost over fair market value of the
assets (goodwill) acquired as if the Gobin acquisition had occurred on
May 1, 1997. Goodwill is amortized over lives not exceeding 40 years,
and covenants not-to-compete and customer lists are amortized over lives
not exceeding 10 years.
(B) A pro forma adjustment has been made for the year ended April 30, 1998
to reflect the additional interest expense on the incremental debt
outstanding used to complete the Gobin acquisition as if such
acquisition had occurred on May 1, 1997, assuming a weighted average
interest rate of 8.5%.
(4) A pro forma adjustment has been made for the year ended April 30, 1998 to
reflect reduced interest expense resulting from the application of net
proceeds from the November Offering to reduce borrowings under the Company's
credit facility as if such reduction had occurred on May 1, 1997.
(5) A pro forma adjustment has been made to adjust the pro forma provision for
income taxes to a 39.5% rate on pro forma income before nondeductible
intangible amortization and other nondeductible expenses.
(6) A pro forma adjustment has been made to eliminate accretion charges related
to the series preferred stock and put warrants, none of which were
outstanding after the November Offering.
(7) Computed on the basis described in Note 3 of Notes to Consolidated Financial
Statements.
(8) EBITDA is defined as operating income plus depreciation and amortization and
loss on impairment of long-lived assets. EBITDA does not represent, and
should not be considered as, an alternative to net income or cash flows from
operating activities, each as determined in accordance with GAAP. Moreover,
EBITDA does not necessarily indicate whether cash flow will be sufficient
for such items as working capital or capital expenditures, or to react to
changes in the Company's industry or to the economy generally. The Company
believes that EBITDA is a measure commonly used by lenders and certain
investors to evaluate a company's performance in the solid waste industry.
The Company also believes that EBITDA data may help to understand the
Company's performance because such data may reflect the Company's ability to
generate cash flows, which is an indicator of its ability to satisfy its
debt service, capital expenditure and working capital requirements. Because
EBITDA is not calculated by all companies and analysts in the same fashion,
the EBITDA measures presented by the Company may not be comparable to
similarly-titled measures reported by other companies. Therefore, in
evaluating EBITDA data, investors should consider, among other factors: the
non-GAAP nature of EBITDA data; actual cash flows; the actual availability
of funds for debt service, capital expenditures and working capital; and the
comparability of the Company's EBITDA data to similarly-titled measures
reported by other companies. For more information about the Company's cash
flows, see the consolidated statements of cash flows in the Consolidated
Financial Statements.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto, the Company's Unaudited Pro Forma
Consolidated Statements of Operations and Notes thereto, and other financial
information included elsewhere in this Prospectus.
Overview
The Company is a regional, integrated solid waste services company that
provides collection, transfer, disposal and recycling services in Vermont, New
Hampshire, Maine, upstate New York and northern Pennsylvania. The Company's
objective is to continue to grow by expanding its services in markets where it
can be one of the largest and most profitable fully-integrated solid waste
services companies.
The Company's revenues have increased from $13.5 million for the fiscal
year ended April 30, 1994, to $118.1 million for the fiscal year ended April 30,
1998. From May 1, 1994 through April 30, 1998, the Company acquired 77 solid
waste collection, transfer and disposal operations. Between May 1 and June 15,
1998, the Company acquired an additional eight such businesses, including the
Hyland landfill, a Subtitle D landfill in western upstate New York. All but one
of these acquisitions were accounted for under the purchase method of accounting
for business combinations. Under the rules of purchase accounting, the acquired
companies' revenues and results of operations have been included together with
those of Casella Waste Systems, Inc. from the actual dates of the acquisitions
and will materially affect the period-to-period comparisons of the Company's
historical results of operations. In December 1997, the Company acquired a waste
collection and transfer operation in a transaction recorded as a pooling of
interests. Under the rules governing poolings of interest, the financial
statements of the Company have been restated for all prior years to reflect the
financial position, results of operations and cash flows of the merged entities
as if they had been one company for all periods presented in the accompanying
financial statements.
This Prospectus may contain forward-looking statements within the meaning
of Section 27A of the Securities Act, with respect to, among other things, the
Company's future revenues, operating income, or earnings per share. There are a
number of factors of which the Company is aware that may cause the Company's
actual results to vary materially from those forecast or projected in any such
forward-looking statement, certain of which are beyond the Company's control.
These factors include, without limitation, those set forth above under the
caption "Risk Factors". The Company's failure to address successfully any of
these factors could have a material adverse effect on the Company's results of
operations.
General
The Company's revenues are attributable primarily to fees charged to
customers for solid waste collection, 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 from the sale of tire derived fuel. Other revenues consist
primarily of revenue from waste tire tipping fees and septic/liquid waste
operations. The Company's revenues are shown net of intercompany eliminations.
The Company typically establishes its intercompany transfer pricing based upon
prevailing market rates.
24
The table below shows, for the periods indicated, the percentage of the
Company's revenues attributable to services provided. The increase in the
Company's collection revenues as a percentage of revenues in fiscal 1997 and
fiscal 1998 is primarily attributable to the impact of the Company's acquisition
of collection businesses during fiscal 1996 and fiscal 1997, as well as to
internal growth through price and business volume increases. The decrease in the
Company's landfill revenues and in the Company's transfer revenues as a
percentage of revenues in fiscal 1997 and fiscal 1998 is mainly due to a
proportionately greater increase in collection and other revenues occurring as
the result of acquisitions in those areas; also, as the Company acquires
collection businesses from which it previously had derived transfer revenues,
the acquired revenues are recorded by the Company as collection revenues. The
decline in recycling revenues as a percentage of revenues in fiscal 1997 and
fiscal 1998 principally reflects an absence of acquisitions in this area coupled
with a decline in recyclable commodity prices. The increase in other revenues as
a percentage of revenues in fiscal 1997 and fiscal 1998 is primarily due to the
Company's acquisition and integration of tire processing and septic/liquid waste
operations during these periods.
% of Revenues
------------------------------------
Year Ended April 30,
------------------------------------
1996 1997 1998
------- ------- -------
Collection ............. 68.7% 69.7% 73.4%
Landfill ............... 15.8 15.5 12.4
Transfer ............... 7.1 6.5 5.8
Recycling .............. 7.4 7.1 6.5
Other .................. 1.0 1.2 1.9
----- ----- -----
Total Revenues ......... 100.0% 100.0% 100.0%
===== ===== =====
Cost of operations includes labor, tipping fees paid to third party
disposal facilities, fuel, maintenance and repair of vehicles and equipment,
worker's compensation and vehicle insurance, the cost of purchasing materials to
be recycled, third party transportation expense, district and state taxes, host
community fees and royalties. Landfill operating expenses also include a
provision for closure and post-closure expenditures anticipated to be incurred
in the future, and leachate treatment and disposal costs.
General and administrative expenses include management, clerical and
administrative compensation and overhead, professional services and costs
associated with the Company's marketing and sales force and community relations
expense.
Depreciation and amortization expense includes depreciation of fixed assets
over the estimated useful 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 landfill to landfill depending upon the
purchase price and landfill site and cell development costs. The Company
depreciates all fixed and intangible assets (excluding non-depreciable land)
down to a zero net book value, and does not apply a salvage value to any of its
fixed assets.
Certain direct landfill development costs, such as engineering, permitting,
legal, construction and other costs directly associated with expansion of
existing landfills, are capitalized by the Company. Additionally, the Company
also capitalizes certain third party expenditures related to pending
acquisitions, such as legal and engineering. The Company will have material
financial obligations relating to closure and post-closure costs of its existing
landfills and any disposal facilities which it may own or operate in the future.
The Company has provided and will in the future provide accruals for future
financial obligations relating to closure and post-closure costs of its
landfills (generally for a term of 30 years after final closure of a landfill)
based on engineering estimates of consumption of permitted landfill airspace
over the useful life of any such landfill. There can be no assurance that the
Company's financial obligations for closure or post-closure costs will not
exceed the amount accrued and reserved or amounts otherwise receivable pursuant
to trust funds. The Company routinely evaluates all such capitalized costs, and
expenses those costs related to projects not likely to be successful. Internal
and indirect landfill development and acquisition costs, such as executive and
corporate
25
overhead, public relations and other corporate services, are expensed as
incurred. See "Risk Factors--Incurrence of Charges".
Results of Operations
The following table sets forth for the periods indicated the percentage
relationship that certain items from the Company's Consolidated Financial
Statements bear in relation to revenues.
% of Revenues
---------------------------------------
Year ended April 30,
---------------------------------------
1996 1997 1998
------ ------ ------
Revenues ............................................. 100.0% 100.0% 100.0%
Cost of operations ................................... 58.7 60.4 59.2
General and administrative ........................... 16.5 15.8 14.5
Merger related costs ................................. -- -- 0.2
Depreciation and amortization ........................ 19.0 17.2 15.6
Loss on impairment of long-lived assets .............. -- -- 0.8
Operating income ..................................... 5.8 6.6 9.7
Interest expense, net ................................ 6.1 5.4 5.5
Other (income) expenses, net ......................... (0.2) 1.1 (0.1)
Provision for income taxes ........................... 0.3 0.6 2.0
Net income (loss) before extraordinary items ......... (0.4) (0.5) 2.3
----- ----- -----
EBITDA* .............................................. 24.8% 23.8% 26.1%
===== ===== =====
* See discussion and computation of EBITDA below.
Fiscal Year Ended April 30, 1998 versus April 30, 1997
Revenues. Revenues increased $38.5 million, or 48.5%, to $118.1 million in
fiscal 1998 from $79.6 million in fiscal 1997. Approximately $33.4 million of
the increase was attributable to the impact of businesses acquired throughout
fiscal 1997 and fiscal 1998. In addition, approximately $4.7 million of the
increase was attributable to internal volume and price growth. The balance of
the increase of approximately $400,000 was due to higher average recyclable
commodity prices in fiscal 1998 versus fiscal 1997.
Cost of operations. Cost of operations increased approximately $21.8
million, or 45.4%, to $69.9 million in fiscal 1998 from $48.1 million in fiscal
1997, an increase corresponding primarily to the Company's revenue growth
described above. Cost of operations as a percentage of revenues decreased to
59.2% in fiscal 1998 from 60.4% in fiscal 1997. The decrease was primarily the
result of: (i) productivity improvements in the Company's collection operations
as a result of better route density from acquisitions, routing efficiencies
through route audits and front-end loader vehicle conversions completed
throughout fiscal 1998; and (ii) margin improvements because of price increases
in fiscal 1998.
General and administrative. General and administrative expenses increased
approximately $4.6 million, or 36.3%, to $17.1 million in fiscal 1998 from $12.5
million in fiscal 1997. General and administrative expenses as a percentage of
revenues decreased to 14.5% in fiscal 1998 from 15.8% in fiscal 1997 due
primarily to improved economies of scale related to the significant increase in
revenues.
Merger related costs. Merger related costs consist of legal and
professional fees associated with the All Cycle pooling of interests, as well as
bonus payments made to All Cycle management personnel in consideration of the
pending merger.
Depreciation and amortization. Depreciation and amortization expense
increased $4.7 million, or 34.0%, to $18.3 million in fiscal 1998 from $13.7
million in fiscal 1997. As a percentage of revenues, depreciation and
amortization expense decreased to 15.6% in fiscal 1998 from 17.2% in fiscal
1997. The decrease in depreciation and amortization expense as a percentage of
revenues was primarily the result of: (i) the increase as a percentage of the
total revenues in fiscal 1998 of the Company's collection operations, which have
lower depreciation and amortization expenses than the Company's other
operations; and (ii) lower amortization expense at the Company's Waste USA
landfill in Coventry, Vermont
26
due to the landfill receiving a permit for expansion in fiscal 1998, which
allows the Company to write off the landfill assets over a longer period.
Loss on Impairment of Long-Lived Assets. The Company recognized a loss on
impairment of long-lived assets in the fourth quarter of fiscal 1998 in the
amount of $971,000. The impairment charge was a non-cash charge to write down
the assets of the Company's waste tire processing facility in Eliot, Maine to
fair market value as of April 30, 1998, because of continuing losses of that
facility. Due to pressures on the Company's tire derived fuel customers to meet
the requirements of the Clean Air Act, the Company believes that in the future
these customers will replace tire derived fuel with natural gas as a fuel, and,
therefore, the future undiscounted cash flows will be less than the carrying
value of the waste tire processing facility before the charge.
Interest expense, net. Net interest expense increased approximately $2.2
million, or 52.3% to $6.5 million in fiscal 1998 from $4.3 million in fiscal
1997. This increase primarily reflects increased average indebtedness in fiscal
1998 principally incurred in connection with acquisitions. The Company
capitalized a total of $137,535 in interest expense in fiscal 1998, down from a
total of $182,418 in fiscal 1997.
Other (income) expense, net. Net other (income) expense has not
historically been material to the Company's results of operations. However,
during fiscal 1997, the Company settled a lawsuit for $450,000 and also paid
approximately $200,000 in attorneys fees in connection with such settlement.
Additionally, the Company wrote off $283,000 in recycling assets that were
deemed to have no value in fiscal 1997.
Provision for income taxes. Provision for income taxes increased
approximately $1.9 million, or 427.7%, to $2.4 million in fiscal 1998 from
$500,000 in fiscal 1997. This increase reflects the Company's increase in
profits in fiscal 1998, compared to losses in prior years. See Note 8 of Notes
to Consolidated Financial Statements.
Fiscal Year Ended April 30, 1997 versus April 30, 1996
Revenues. Revenues increased $36.7 million, or 85.6%, to $79.5 million in
fiscal 1997 from $42.8 million in fiscal 1996. Approximately $33.6 million of
the increase was attributable to the impact of businesses acquired throughout
fiscal 1996 and fiscal 1997. In addition, approximately $4.1 million of the
increase was attributable to internal growth, primarily through volume
increases. The effect of these revenue increases was partially offset by a
decrease of approximately $1.0 million due to lower recyclable commodity prices
in fiscal 1997 versus fiscal 1996.
Cost of operations. Cost of operations increased $22.9 million, or 91.1%,
to $48.1 million in fiscal 1997 from $25.1 million in fiscal 1996, an increase
corresponding primarily to the Company's revenue growth described above. Cost of
operations as a percentage of revenues increased to 60.4% in fiscal 1997 from
58.7% in fiscal 1996. The increase was primarily the result of: (i) an increase
in collection operations, which have higher operating costs than other
operations, as a percentage of the Company's total operations as a result of
acquisitions completed in fiscal 1996 and fiscal 1997; (ii) lower margins in
recycling services due to lower commodity prices in fiscal 1997; and (iii)
start-up and transitional expenses related to the acquisitions completed in
fiscal 1997. The Company has historically expensed all costs related to post
acquisition start-up and transitional expenditures.
General and administrative. General and administrative expenses increased
approximately $5.5 million, or 77.4%, to $12.5 million in fiscal 1997 from $7.1
million in fiscal 1996. General and administrative expenses as a percentage of
revenues decreased to 15.8% in fiscal 1997 from 16.5% in fiscal 1996 due to
improved economies of scale related to the significant increase in revenues, and
operating enhancements made to certain acquired operations.
Depreciation and amortization. Depreciation and amortization expense
increased approximately $5.5 million, or 67.9%, to $13.7 million in fiscal 1997
compared to $8.2 million in fiscal 1996. As a percentage of revenues,
depreciation and amortization expense decreased to 17.2% during fiscal 1997 from
19.0% in fiscal 1996. The decrease in depreciation and amortization expense as a
percentage of revenues was primarily the result of an increase in the Company's
collection operations as a percentage of total revenues in fiscal 1997, which
generally have lower depreciation and amortization expenses than other
operations.
27
Interest expense, net. Net interest expense increased approximately $1.7
million, or 65.3%, to $4.3 million in fiscal 1997 from $2.6 million in fiscal
1996. This increase primarily reflects increased indebtedness incurred in
connection with acquisitions and capital expenditures and was offset to a small
degree by slightly lower average interest rates.
Other (income) expense. Other (income) expense has not historically been
material to the Company's results of operations. However, during fiscal 1997,
the Company established a reserve of $650,000 related to a lawsuit that was
settled for $450,000 in the first quarter of fiscal 1998. The Company also paid
$200,000 in attorneys fees in connection with such settlement. Additionally, the
Company wrote off $283,000 for recycling facility assets that were deemed to
have no value in the year ended April 30, 1997.
Provision for income taxes. Provision for income taxes increased
approximately $308,000, or 213.8%, to $452,000 in fiscal 1997 from $144,000 in
fiscal 1996, due principally to an increase in the amount of amortization of
non-deductible goodwill and other non-deductible items in fiscal 1997 as
compared to fiscal 1996.
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, landfill 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 $3.8 million
at April 30, 1998 compared to a $5.6 million working capital deficit at April
30, 1997.
The Company has a $150 million revolving line of credit with a group of
banks for which BankBoston, N.A. is acting as agent. This line of credit is
secured by all assets of the Company, including the Company's interest in the
equity securities of its subsidiaries. This revolving line of credit matures in
January 2003.
The proceeds from the November Offering were $48.4 million, net of
underwriters discounts and issuance costs. A portion of the November Offering
proceeds, $45 million, was used to repay long term debt, and to pay down the
line of credit. Subsequently, the Company re-borrowed under the line of credit
to finance acquisitions. Funds available to the Company under the line of credit
were $86 million at April 30, 1998.
The Company believes that its cash provided internally from operations
together with the Company's available credit facilities and the proceeds of this
Offering should enable it to meet its needs for working capital for the next
fiscal year.
Net cash provided by operations for the fiscal years ended April 30, 1998
and April 30, 1997 was $19.4 million and $14.8 million, respectively. The
increase was primarily due to the increase in the Company's net income for the
1998 fiscal year, together with an increase in depreciation and amortization and
a decrease in the Company's accrued closure and post closure costs. The decrease
in the closure/ post closure accrual is due to the completion in the 1998 fiscal
year of work required to close an unlined cell at the Clinton County landfill
and at stage one of the Company's NCES landfill.
Net cash provided by operations in fiscal 1997 increased to $14.8 million
from $8.6 million in fiscal 1996 primarily due to an increase in depreciation
and amortization of approximately $5.5 million in fiscal 1997 from fiscal 1996,
and improvement of the Company's working capital.
For fiscal 1998 and fiscal 1997, cash used in investing activities was
$56.5 million and $52.6 million, respectively. The increase in investing
activities reflects the Company's capital expenditure and capital needs for
acquisitions which have increased significantly, reflecting the Company's rapid
growth by acquisition and development of revenue producing assets. The Company's
cash needs to fund investing activities are expected to increase further as the
Company continues to complete acquisitions.
For fiscal 1998 and fiscal 1997, the Company's financing activities
provided cash of $37.6 million and $38.8 million, respectively. Net cash
provided by financing activities was $19.3 million in the fiscal year ended
April 30, 1996. The net cash provided by financing activities of $37.6 million
in the fiscal year ended April 30, 1998 reflects the net proceeds of the
November Offering and borrowings on the Company's credit facility, offset by
repayments. Net cash provided by financing activities in fiscal 1997 reflects
primarily bank
28
borrowings and seller subordinated notes, less principal payments on debt. In
fiscal 1996, net cash provided by financing activities reflects the net proceeds
of approximately $12.5 million from the private placement of preferred stock in
December 1995.
The registration statement of which this prospectus is a part also
registers the issuance or resale from time to time of up to 2,000,000 shares of
the Company's Class A Common Stock in connection with the purchase of one or
more acquisitions of companies, businesses or assets complementary to the
Company's existing business.
Seasonality
The Company's revenues have historically been lower during the months of
November through March. This seasonality reflects the lower volume of waste
during the late fall, winter and early spring months primarily because: (i) the
volume of waste relating to construction and demolition activities decreases
substantially during the winter months in the northeastern United States; and
(ii) decreased tourism in Vermont, Maine and eastern New York during the winter
months tends to lower the volume of waste generated by commercial and restaurant
customers, which is partially offset by the winter ski industry. Since certain
of the Company's operating and fixed costs remain constant throughout the fiscal
year, operating income results are therefore impacted by a similar seasonality.
In addition, particularly harsh weather conditions could result in increased
operating costs to certain of the Company's operations.
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. The Company establishes its expenditure levels based on
its expectations as to future revenues, and, if revenue levels are below
expectations, expenses can be disproportionately high. Due to a variety of
factors including general economic conditions, governmental regulatory action,
acquisitions, capital expenditures and other costs related to the expansion of
operations and services and pricing changes, it is possible that in some future
quarter, the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the Company's Class A
Common Stock price would likely be materially and adversely affected.
Inflation and Prevailing Economic Conditions
To date, inflation has not had a significant impact on the Company's
operations. Consistent with industry practice, most of the Company's contracts
provide for a pass through of certain costs, including increases in landfill
tipping fees and, in some cases, fuel costs. The Company therefore believes it
should be able to implement price increases sufficient to offset most cost
increases resulting from inflation. However, competitive factors may require the
Company to absorb at least a portion of these cost increases, particularly
during periods of high inflation.
The Company's business is located in the northeastern United States.
Therefore, the Company's business, financial condition and results of operations
are susceptible to downturns in the general economy in this geographic region
and other factors affecting the region such as state regulations and severe
weather conditions. The Company is unable to forecast or determine the timing
and/or the future impact of a sustained economic slowdown.
Year 2000 Issues
The Company uses well-regarded nationally known software vendors for both
its general accounting applications and industry-specific customer information
and billing systems. The general accounting package which the Company uses is
fully year 2000 compatible, and the provider of the solid waste industry
customer information and billing systems has made a commitment to be year 2000
compatible by August 1998.
The Company's banking arrangements are with an international banking
institution which is taking all necessary steps to insure its customers'
uninterrupted service throughout applicable year 2000 timeframes. The Company's
payroll is performed out-of-house by the largest provider of third party payroll
services in the country, which has made a commitment of uninterrupted service to
their customers throughout applicable year 2000 timeframes.
29
None of the Company's customers represents a large enough share of the
Company's revenues to materially affect overall Company revenues in the event of
an individual customer experiencing year 2000 problems. The Company believes
that the same is true of the Company's suppliers of goods and services, aside
from those discussed above.
EBITDA
EBITDA represents operating income (earnings before interest and taxes, or
"EBIT") plus depreciation and amortization expense and loss on impairment of
long-lived assets. EBITDA is not a measure of financial performance under
generally accepted accounting principles, but is provided because the Company
understands that certain investors use this information when analyzing the
financial position and performance of the Company.
Fiscal Year Ended April 30,
-------------------------------------
Restated
----------------------
1996 1997 1998
------- ------- -------
(in thousands)
Operating income .................................... $ 2,477 $ 5,246 $11,494
Depreciation and amortization ....................... 8,152 13,695 18,345
Loss on impairment of long-lived assets (1) ......... -- -- 971
------- ------- -------
EBITDA .............................................. $10,629 $18,941 $30,810
======= ======= =======
EBITDA as a percentage of revenues .................. 24.8% 23.8% 26.1%
- ------------
(1) See Note 3 of Notes to Consolidated Financial Statements.
Analysis of the factors contributing to the change in EBITDA is included in
the discussions above.
30
BUSINESS
The Company
Casella Waste Systems, Inc. is a regional, integrated, non-hazardous solid
waste services company that provides collection, transfer, disposal and
recycling services in Vermont, New Hampshire, Maine, upstate New York and
northern Pennsylvania. At June 15, 1998, the Company owned and/or operated five
Subtitle D landfills, 35 transfer stations, nine recycling processing
facilities, 28 collection divisions and two septic/liquid waste divisions, which
together served over 180,000 commercial, industrial and residential customers.
The Company was founded in 1975 as a single-truck operation in Rutland, Vermont
and subsequently expanded its operations throughout the state of Vermont. In
1993, the Company initiated an acquisition strategy to take advantage of
anticipated reductions in available landfill capacity in Vermont and surrounding
states due to increasing environmental regulation and other market forces
driving consolidation in the solid waste industry. From May 1, 1994 through
April 30, 1998, the Company acquired ownership or long-term operating rights to
77 solid waste businesses, including four landfills, and between May 1, 1998 and
June 15, 1998 the Company acquired an additional eight such businesses,
including the Hyland landfill, a Subtitle D landfill in western upstate New
York. See "--Operations--Landfills--Hyland" and "--Legal Proceedings". The
Company believes that additional acquisition opportunities exist in the markets
it serves and in other prospective markets.
The Company's operating strategy is based on the integration of its
collection and disposal operations and the internalization of waste collected.
The Company believes that control of a substantial portion of the waste stream
and economies of scale provide it with advantages over non-integrated
competitors in its markets. During fiscal 1998, approximately 52% of the solid
waste collected by the Company was delivered for disposal at its landfills.
Additionally, approximately 74% of the solid waste disposed of at its landfills
was collected by the Company.
Industry Overview
Currently, the solid waste services industry is experiencing significant
consolidation and integration. The Company believes that this consolidation and
integration has been driven primarily by four factors: (i) stringent
environmental regulation resulting in increased capital requirements; (ii) the
inability of many smaller operators to achieve the economies of scale necessary
to compete effectively with large integrated solid waste service providers;
(iii) the competitive advantages of integrated companies generated by providing
integrated collection, transfer and disposal capabilities; and (iv)
privatization of solid waste services by municipalities. Despite the
considerable consolidation and integration that has occurred in the solid waste
industry in recent years, the Company believes the industry remains highly
fragmented both within its target markets and nationally.
Stringent environmental regulations, such as the Subtitle D Regulations,
have resulted in rising costs for owners of landfills. Subtitle D specifies
design, siting, operating, monitoring, closure and financial security
requirements for landfill operations. The permits required for landfill
development, expansion or construction have also become increasingly difficult
to obtain. In addition, Subtitle D requires more stringent engineering of solid
waste landfills including the installation of liners and leachate and gas
collection and monitoring. These ongoing costs are coupled with increased
financial reserve requirements for closure and post-closure monitoring. Certain
of the smaller industry participants have found these costs and regulations
burdensome and have decided either to close their operations or to sell them to
larger operators. As a result, the number of operating landfills has decreased
while the size of landfills has increased.
Economies of scale, driven by the high fixed costs of landfill assets and
the associated profitability of each incremental ton of waste, have led to the
development of higher volume, regional landfills. Larger integrated operators
achieve economies of scale in the solid waste collection and disposal industry
through vertical integration of their operations that may generate a significant
waste stream for their high-volume landfills.
Integrated companies gain further competitive advantage over non-integrated
operators by being able to control the waste stream. The ability of these
companies to internalize the collected solid waste
31
(i.e., collecting the waste at the source, transferring it through their own
transfer stations and disposing of it at their own disposal facility), coupled
with access to significant capital resources to make acquisitions, has created
an environment in which large integrated companies can operate more cost
effectively and competitively than non-integrated operators.
The trend toward consolidation in the solid waste services industry is
further supported by the increasing tendency of a number of municipalities to
privatize their waste disposal operations. Privatization is often an attractive
alternative for municipalities due, among other reasons, to the ability of
integrated operators to leverage their economies of scale to provide the
community with a broader range of services while enabling the municipality to
reduce its own capital asset requirements. The Company believes that the
financial condition of municipal landfills in the northeastern United States was
adversely affected by the 1994 United States Supreme Court decision which
declared "flow control" laws unconstitutional. These laws had required waste
generated in counties or districts to be disposed of at the respective county or
district-owned landfills or incinerators. The reduction in the captive waste
stream to these facilities, resulting from the invalidation of such laws, forced
the counties that owned them to increase their per ton tipping fees to meet
municipal bond payments. The Company believes that these market dynamics are
factors causing municipalities throughout the northeastern states to consider
the privatization of public facilities.
Strategy
The Company's objective is to continue to grow by expanding its services in
markets where it can be one of the largest and most profitable fully-integrated
solid waste services companies. The Company is currently operating in Vermont,
New Hampshire, Maine, upstate New York and northern Pennsylvania, and believes
that these markets and other markets with similar characteristics present
significant opportunities for achieving its objectives. The Company focuses its
efforts on markets which are characterized by: (i) a geographically dispersed
population; (ii) disposal capacity which the Company anticipates may be
available for acquisition by the Company; (iii) significant environmental
regulation which has resulted in a decrease in the total number of operating
landfills; and (iv) a lack of significant competition from other
well-capitalized and established waste management companies. The Company
believes that these characteristics result in significant market opportunities
for the first fully-integrated, well-capitalized market entrant, and create
economic and regulatory barriers to entry by additional competitors in these
markets.
The Company's strategy for achieving its objective is: (i) to acquire solid
waste collection businesses and disposal capacity in new markets, and to make
"tuck-in" acquisitions in these new markets and in existing markets; (ii) to
generate internal growth through increased sales penetration and the marketing
of additional services to existing customers; and (iii) to implement operating
enhancements and efficiencies. The Company intends to implement this strategy as
follows:
Expansion Through Acquisitions. The Company intends to continue to expand
by acquiring solid waste collection companies and disposal capacity in new
markets, and increasing its revenues and operational efficiencies in these new
markets and in existing markets through "tuck-in" and other acquisitions of
solid waste collection operations. In considering new markets, the Company
evaluates the opportunities to acquire or otherwise control sufficient
collection operations and disposal facilities which would enable it to generate
a captive waste stream and achieve the disposal economies of scale necessary to
meet its market share and financial objectives. The Company has established
criteria which enable it to evaluate the prospective acquisition opportunity and
the target market. Historically, the Company has entered new markets which are
adjacent to its existing markets; however, the Company may consider new markets
in non-contiguous geographic areas which meet its criteria. The Company targets
additional "tuck-in" acquisitions within its current markets to allow the
Company to improve further its market penetration and density and to increase
further the internalization rate of its waste streams.
Internal Growth. In order to generate continued internal growth, the
Company has focused on increasing sales penetration in its current and adjacent
markets, soliciting new commercial, industrial and residential customers,
marketing upgraded services to existing customers and, where appropriate,
raising prices. As customers are added in existing markets, the Company's
revenue per routed truck is improved, which generally increases the Company's
collection efficiencies and profitability. The Company uses
32
transfer stations, which serve to link disparate collection operations with
Company-operated landfills, as an important part of its internal growth
strategy.
Operating Enhancements for Acquired and Existing Businesses. The Company
has implemented a system that establishes standards for each of its markets and
tracks operating criteria for its collection, transfer, disposal and other
operations to facilitate improved profitability in existing and acquired
operations. These measurement criteria include collection and disposal routing
efficiency, equipment utilization, cost controls, commercial weight tracking and
employee training and safety procedures. The Company believes that by
establishing standards and closely monitoring compliance, it is able to improve
existing and acquired operations. Moreover, where the Company is able to
internalize the waste stream of acquired operations, it is further able to
increase operating efficiencies and improve capacity utilization.
Acquisition Program
The Company's acquisition program is founded on strong management
capabilities, strict acquisition criteria and defined integration procedures.
From May 1, 1994 through April 30, 1998, the Company acquired ownership or
long-term operating rights to 77 solid waste businesses, including four
landfills, and between May 1, 1998 and June 15, 1998 the Company acquired an
additional eight such businesses, including a Subtitle D landfill in western
upstate New York.
The Company's three regional vice presidents, as well as the Chief
Executive Officer and Chief Operating Officer, are each responsible for
identifying acquisition candidates and consummating acquisitions. In addition to
five dedicated business development personnel, who focus exclusively on
acquisitions, each of the Company's 29 division managers is responsible for
identifying acquisition opportunities within his or her region.
The Company has developed a set of financial, geographic and management
criteria designed to assist management in the evaluation of acquisition
candidates engaged in solid waste collection and disposal. These criteria
consist of a variety of factors, including, but not limited to: (i) historical
and projected financial performance; (ii) internal rate of return, return on
assets and earnings accretion; (iii) experience and reputation of the
acquisition candidate's management and customer service reputation and
relationships with the local communities; (iv) composition and size of the
acquisition candidate's customer base; (v) opportunity to enhance and/or expand
the Company's market area and/or ability to attract other acquisition
candidates; (vi) whether the acquisition will augment or increase the Company's
market share and/or help protect the Company's existing customer base; and (vii)
internalization opportunities to be gained by combining the acquisition
candidate with the Company's existing operations.
The Company utilizes an established integration procedure for newly
acquired businesses designed to effect a prompt and efficient integration of the
acquired business and minimize disruption to the on-going business of both the
Company and the acquired business. Once a solid waste collection operation is
acquired, the Company implements programs designed to reduce disposal costs and
improve collection and disposal routing, equipment utilization, employee
productivity, operating efficiencies and overall profitability. The Company
typically seeks to retain the acquired company's qualified managers, key
employees and selected local operations, while consolidating purchasing and
other administrative functions through the Company's corporate offices.
33
The following table sets forth the acquisitions made by the Company from
May 1, 1994 through June 15, 1998:
Company Location Business Date Acquired
- ----------------------------------------- -------------------- ---------------------- ---------------
Bushee Trucking & Rubbish Removal Manchester, VT Collection June 1998
Whites Sewer and Drain Services Hinesburg, VT Septic June 1998
JR's Trucking & Rubbish Removal Hardwick, VT Collection June 1998
Busy Bee Disposal, Inc. Alfred Station, NY Collection/Septic June 1998
J & N Rubbish Removal, Inc. Corinth, VT Collection May 1998
Aaron & Sons, Inc. Bennington, VT Septic May 1998
Bickford Enterprises, Inc. Pittsfield, ME Collection May 1998
Hyland Facility Associates Landfill Angelica, NY Landfill May 1998
HB Septic Springfield, VT Septic April 1998
Brian Pratt Bennington, VT Collection April 1998
Hartigan Co., Inc. Stowe, VT Septic March 1998
Johnson's Septic Tank Cleaning Lyndon, VT Septic March 1998
Crandall Trucking Meridian, NY Collection March 1998
Hoyt Trucking, Inc. Newport, NH Collection/Transfer March 1998
Station
Atlantic Waste Systems, North, Inc. Salem, NH Collection February 1998
The Depot at Fast Trash Waterbury, VT Collection February 1998
Barker - Sargent Corporation Thetford, VT Collection February 1998
Abbey Rubbish Removal Northfield, VT Collection January 1998
Harvey Fingado Jr. Refuse Service Maryland, NY Collection January 1998
S & S Disposal, Inc. Schenectady, NY Collection January 1998
All Cycle Waste/Winters Brothers Williston, VT Collection/Transfer December 1997
Station
Beebe Roll-Off Container Service Warren, NY Collection December 1997
BFI Geneva NY Division Routes Geneva, NY Collection December 1997
Pine Tree Waste, Inc. S. Portland, ME Collection/Transfer December 1997
Station
Auburn Container Co. Auburn, NY Collection December 1997
BDS Sanitation, Vets Disposal & Various Central NY Collection/Transfer November 1997
Brookman Disposal (the Teelon Station
Group)
D&E Sanitation Services Bethel, ME Collection November 1997
Albert Boudreau Trucking Claremont, NH Collection November 1997
Wilton Waste Service Wilton, NY Collection October 1997
Mansur & Sons Trucking, Inc. Canaan, NH Collection September 1997
Therrien Trucking St. Albans, VT Collection September 1997
Sanpietro Trucking Seneca Falls, NY Collection September 1997
H.C. Gobin, Inc. Claremont, NH Collection September 1997
Chittenden Recycling Services, Inc. Williston, VT Recycling June 1997
Reynells Company, Inc. Waitsfield, VT Septic June 1997
D. M. Lamothe Refuse St. Albans, VT Collection June 1997
Hinman Disposal Service Wellsboro, PA Collection June 1997
Rainbow Rubbish Cortland, NY Collection June 1997
Central Vermont Septic Services, Inc. Burlington, VT Septic June 1997
Metivier Trucking Burlington, VT Collection June 1997
Collins Garbage Service, Inc. Ithaca, NY Collection May 1997
Certain Vermont Routes of Browning Manchester, VT Collection April 1997
Ferris Industries of VT, Inc.
T & R Associates, Inc. Bath, ME Collection April 1997
Arlington Rubbish Arlington, VT Collection March 1997
Barnier Sons and Barnier's Trucking Burlington, VT Collection March 1997
Tri Mountain Trash S. Londonderry, VT Collection March 1997
Wade's Trucking, Inc. Penn Yan, NY Collection/Recycling February 1997
34
Company Location Business Date Acquired
- ------------------------------------------ ----------------------- ----------------------- ---------------
Food Waste Management S. Burlington, VT Collection February 1997
Superior Disposal Services, Inc. Newfield, NY; Transfer Station January 1997
Wellsboro, PA; Collection/Recycling
and Waverly, NY
Kerkim, Inc. Horsehead, NY Collection/ January 1997
Transfer Station
Young & Wilcox Lowville, NY Collection January 1997
Enviropac Windham, ME Collection November 1996
Vermont Waste and Recycling New Haven, VT Collection November 1996
Management, Inc.
Certain Maine Routes of Browning Brewer, ME Collection September 1996
Ferris Industries of Maine, Inc.
Warren County, New York Routes of Warren County, NY
United Waste Systems, Inc. Collection September 1996
First Service Rubbish Removal Crown Point, NY Transfer Station/ September 1996
Collection
C&B Sanitation, Inc. Saratoga Springs, NY Collection September 1996
Lake Placid Disposal Service, Inc. Lake Placid, NY Collection/Recycling August 1996
Bob's Rubbish Removal Bennington, VT Collection July 1996
Clinton County, NY Facilities (lease) Clinton County, NY Landfill/Transfer July 1996
Station/Recycling
Seaward T.I.R.E.S., Inc. Eliot, ME Waste Tire Recycling July 1996
Ray's Disposal Service Carmel, ME Collection June 1996
Jim Blair Trucking Alburg, Vermont Collection May 1996
Earth Waste Systems, Inc. West Rutland, VT Collection/Recycling May 1996
East Mountain Transport Sunderland, VT Collection/Transfer May 1996
Station
Residential Rubbish Service, Inc. Waterbury, VT Collection April 1996
Hiram Hollow Regeneration Corp. Wilton, NY Transfer Station March 1996
Chapin & Sons Hardwick, VT Collection February 1996
RJ's Trucking & Rubbish Removal Richford, VT Collection February 1996
Northeast Waste Services, LTD. White River Junction, Collection/Recycling January 1996
VT
R.C. & Son Sanitation, Inc. Brant Lake, NY Collection January 1996
Sawyer Companies Bangor, ME Landfill/Collection/ January 1996
Recycling/Transfer
Station
Granville Refuse Company Granville, NY Collection September 1995
Warrensburg Sanitation Lake George, NY Collection September 1995
Downey's Rubbish Removal, Inc. Arlington, VT Collection August 1995
Green Mountain Sanitation, Inc. Morrisville, VT Collection/Recycling/ August 1995
Transfer Station
Dana H. Sweet Corp. Cambridge, VT Collection July 1995
M & R Rubbish, Inc. Cossayuna, NY Collection July 1995
Adirondack Refuse, Inc. Brant Lake, NY Collection June 1995
Central Vermont Quality Services, Inc. Rutland, VT Collection/Recycling May 1995
Springer Waste Management Service Glen Falls, NY Collection April 1995
Dix Rubbish Removal Plainfield, VT Collection March 1995
Waste USA, Inc. (NEWS of VT) Coventry, VT Transfer Station/ January 1995
Landfill
Consumat Sanco, Inc. Bethlehem, NH Transfer Station/ July 1994
(NCES Landfill) Landfill
Catamount Waste Services, Inc. Montpelier, VT Transfer Station/ June 1994
Collection
There can be no assurance the Company will continue to be successful in
executing its acquisition strategy. See "Risk Factors--Ability to Identify,
Acquire and Integrate Acquisition Targets".
35
Service Area
The Company is managed on a decentralized basis, with its operations
divided into three geographic regions: the Central, Eastern and Western Regions.
These three regions are further divided into divisions organized around smaller
market areas, known as "waste sheds", each of which contains the complete cycle
of activities in the solid waste service process, from "curb control"
(collection) to transfer stations to landfill (disposal facility). The Company
believes that it achieves a competitive advantage in its markets over
non-integrated competitors by acquiring components of the waste shed and
internalizing operations and activities with other owned or controlled
components of the waste shed.
The following are the Company's three geographic regions that comprise the
Company's service area:
Central Region
The Central Region consists of Vermont, portions of New Hampshire and
eastern upstate New York, an area covering approximately 33,000 square miles and
a population of approximately 2.4 million residents. The Company was founded in
1975 in Rutland, Vermont, and has continued to grow its market presence in the
Central Region. The Company owns and operates Subtitle D landfills in Bethlehem,
New Hampshire; Coventry, Vermont; and, through a 25-year capital lease, operates
the Clinton County landfill located in Schuyler Falls, New York. In addition,
the Company operated 13 collection operations, 23 transfer stations and two
septic/liquid waste operations in the Central Region at June 15, 1998.
Vermont encompasses approximately 9,600 square miles and has a population
of approximately 560,000 residents. The Company owns the Waste USA landfill in
Coventry, Vermont, one of two Subtitle D landfills in Vermont, and leases (with
a right to purchase) the airspace above this landfill. The Company provides
services in substantially all of the markets in Vermont.
The Company's New Hampshire market area consists of the northern and
central (including Lebanon, Hanover, Concord and Plymouth) and certain southern
portions of the state, encompasses approximately 8,000 square miles and has a
population of approximately 423,000 residents. New Hampshire currently has five
Subtitle D landfills in operation, one of which is the NCES landfill in
Bethlehem, New Hampshire, owned by the Company. See "Risk Factors--Limitations
on Landfill Permitting and Expansion". In addition, three primary incinerators
service central and southern New Hampshire. The Company believes that a majority
of the disposal and incineration capacity in New Hampshire serves the
southeastern New Hampshire and Boston markets.
The portion of upstate New York within the Company's Central Region extends
from Interstate 90 north to the Canadian border and from the Vermont border west
to Interstate 81 and the eastern shore of Lake Ontario. This portion of New York
includes Lake Placid, Lake George and Potsdam and encompasses approximately
15,500 square miles and a population of approximately 1.4 million residents.
Three municipal Subtitle D landfills, including the Clinton County landfill
operated by the Company, and one large volume incinerator are located in this
area. The Company believes that certain segments of the Central Region will
present opportunities for acquisitions and consolidations due to a trend toward
privatization of landfills in this region.
Eastern Region
The Company's Eastern Region consists of the central and southern portions
of Maine (including Bangor and Augusta) and southeastern New Hampshire. The
Eastern Region market area encompasses approximately 15,000 square miles and has
a population of approximately 840,000 residents. The Company established a
market presence in Maine through the acquisition of the Sawyer Companies in
December 1995. Through its Sawyer operations, the Company owns the SERF landfill
located in Hampden, Maine, which processes ash, special waste and front end
processing residue from a regional incinerator. In addition, at June 15, 1998,
the Company operated six transfer stations, and collects solid waste from
commercial, industrial and residential customers in the Eastern Region. The
Company's waste tire processing facility, located in Eliot, Maine, has the
capacity to process approximately 3.5 million tires per year and generates tire
derived fuel, which the Company sells to paper mills for consumption as a
supplemental energy source for boiler fuel. Because of continuing losses, in the
fourth quarter of fiscal 1998 the Company wrote-down the carrying value of the
waste tire processing facility in the amount of
36
$971,000. There can be no assurance that the Company will not incur additional
losses relating to the continued operation of the waste tire processing
facility, including in the event of, among other reasons, a weakening of the
market for tire derived fuel. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 3 to the Notes to the
Consolidated Financial Statements.
Unlike the other states in the Company's existing market area, Maine has an
aggressive incineration program and the Company believes that approximately 80%
of the waste shed in the Company's Maine market area is disposed of through
incineration. However, the Company believes that approximately 45% of the
tonnage delivered to incinerators is returned to landfills as ash and front end
processing residue, and the Company believes it is the largest disposer of
incinerated waste material in Maine. There are presently four incinerators and
five Subtitle D landfills operating in Maine, including the landfill owned and
operated by the Company. In addition, since 1989 Maine has had a moratorium on
the development of commercial landfills that prohibits additional capacity from
being built.
Western Region
The Western Region is comprised of the south central, western and southern
tier of upstate New York (including Ithaca, Elmira, Horsehead, Corning and
Watkins Glen) and the northern tier of Pennsylvania. Through the acquisition of
the Superior Disposal Services companies in January 1997, the Company
established its market presence in the Western Region. At June 15, 1998, the
Company operated six transfer stations and nine collection operations in the
Western Region. In May 1998, the Company acquired the Hyland landfill, a
Subtitle D landfill in Angelica, New York, located in the Western Region. The
Hyland landfill is the Company's first disposal facility in its Western Region,
and serves the western upstate New York waste shed. See "Risk
Factors--Limitations on Landfill Permitting and Expansion",
"--Operations--Landfills" and "--Legal Proceedings".
The Company's Western Region encompasses approximately 27,000 square miles
and has a population of approximately 2.4 million residents. A total of 25
municipal Subtitle D landfills and four privately-owned Subtitle D landfills are
located in the Western Region. The Company believes that municipal landfills in
this region typically lack a sufficiently large captive waste stream to offset
adequately the high operating costs of such landfills and, accordingly, that
incentives exist for such landfills to be privatized. Privatization of landfills
favors well-capitalized integrated operators, and creates opportunities for
these operators to establish and consolidate waste sheds.
Operations
The Company's operations include the ownership and/or operation of
landfills, solid waste collection services, transfer stations, recycling
services, septic/liquid waste operations and tire processing and other services.
Landfills
The Company currently owns four Subtitle D landfill operations and operates
a fifth Subtitle D landfill under a long-term lease arrangement with a county.
All of the Company's operating landfills include leachate collection systems,
groundwater monitoring systems and, where required, active methane gas
extraction and recovery systems.
In fiscal 1998, approximately 74% of the solid waste disposed of at the
Company's landfills was collected by the Company, and revenues from the
Company's disposal operations accounted for approximately 12.4% of the Company's
revenue.
37
The following table provides certain information regarding the landfills
that the Company operates. All of such information is provided as of June 15,
1998.
Approximate Capacity
Estimated in
Total Remaining Permitting
Permitted Capacity Process
Landfill Location (Tons) (1) (Tons) (1) (2)
- ---------------------------- -------------------- -------------------- ---------------
Clinton County (3) ......... Schuyler Falls, NY 1,140,000 1,160,000
Waste USA (4) .............. Coventry, VT 1,424,000 600,000
SERF ....................... Hampden, ME 162,000 3,200,000
NCES ....................... Bethlehem, NH 46,000 400,000
Hyland ..................... Angelica, NY 1,500,000 --
- ------------
(1) The Company converts estimated remaining permitted and permittable capacity
calculated in cubic yards to tons by assuming a compaction factor equal to
the historical average compaction factor applicable for the respective
landfill. At June 15, 1998, the Company had not begun accepting waste at the
Hyland landfill. Consequently, for the Hyland landfill, the Company has used
a compaction factor equal to the lowest compaction rate applicable to any
existing facilities (1,408 pounds per cubic yard). Actual compaction rates
at the Company's landfills range up to 1,550 pounds per cubic yard, which
would translate into permitted capacity at the Hyland landfill of 1,650,000
tons. See "Risk Factors--Limitations on Landfill Permitting and Expansion",
"--Operations--Landfills--Hyland" and "--Legal Proceedings".
(2) Represents capacity for which the Company has begun the permitting process.
Does not include additional available capacity at the site for which permits
have not yet been sought.
(3) Operated pursuant to a capital lease expiring in 2021.
(4) The Company leases the airspace above this landfill under a lease which
expires in 2001 and contains an option to renew.
The Company regularly monitors the available permitted in-place disposal
capacity at each of its landfills and evaluates whether to seek to expand this
capacity. In making this evaluation, the Company considers various factors,
including the volume of solid waste projected to be disposed of at the landfill,
the size of the unpermitted capacity included in the landfill, the likelihood
that the Company will be successful in obtaining the approvals and permits
required for the expansion and the costs that would be involved in developing
the expanded capacity. The Company also considers on an ongoing basis the extent
to which it is advisable, in light of changing market conditions and/or
regulatory requirements, to seek to expand or change the permitted waste streams
at a particular landfill or to seek other permit modifications.
The permitting process is lengthy, difficult and expensive, and is subject
to substantial uncertainty and there can be no assurance that any such permits
or expansion requests will be granted. Often, even when permits are granted,
they are not granted until the landfill's remaining capacity is very low. There
can be no assurance that the Company will be able to add additional disposal
capacity when needed or, if added, that such capacity can be added on
satisfactory terms or at its landfills where expansion is most immediately
needed. If the Company is not able to add additional disposal capacity when and
where needed, it may need to dispose of its collected waste at its other
landfills or at landfills owned by others. Such a circumstance could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Limitations on Landfill Permitting and
Expansion", "--Comprehensive Government Regulation" and "--Potential
Environmental Liability".
Set forth below is certain information concerning the Company's landfills.
Clinton County. The Clinton County landfill, located in Schuyler Falls, New
York, is leased by the Company from Clinton County, New York pursuant to a
25-year capital lease which expires in 2021. The Company estimates, based on
current usage levels, that the Clinton County landfill has permitted air space
capacity remaining for approximately seven-and-a-half years of disposal. The
Company expects to file applications with state regulatory officials seeking to
further expand the permitted landfill capacity. See "--Property and Equipment".
Waste USA. The Waste USA landfill is located in Coventry, Vermont and
serves the northern two-thirds of Vermont. The Company owns the landfill and
leases the permitted air space capacity above the landfill
38
through January 2001 with an option to renew the lease. The Company also has an
option to purchase the company from which it leases the air space. In the last
quarter of fiscal 1998, the Company received a permit for an additional
approximately 1,300,000 tons of capacity. The Company estimates, based on
current usage levels, that the Waste USA landfill has permitted air space
capacity for approximately eight-and-a-half years of disposal. In addition, the
Company has applied for a variance which, if obtained, would enable the Company
to amend its permit to add an additional 600,000 tons of permitted capacity. The
Waste USA landfill is subject to state regulations and practices that generally
do not allow permits for more than five years of expected annual capacity. See
"--Property and Equipment".
SERF. The SERF landfill is located in Hampden, Maine. The SERF landfill
processes ash, special waste and front end processing residue (i.e., glass and
other material segregated and disposed of separately from solid waste prior to
incineration), for the Penobscot Energy Recovery Corporation's incinerator under
a contract expiring in 2003. The Company estimates, based on current usage
levels, that the SERF landfill has permitted air space capacity remaining for
approximately one-and-a-half years of disposal. The Company has filed an
application for a permit to expand the capacity of the landfill in three phases.
The Company believes that most elements of the first two of the three phases of
its planned expansion are permittable under the grandfather provisions of local
ordinances. Approval for the third phase of the Company's planned expansion will
require the town of Hampden, Maine to amend a local ordinance. The Company may
not succeed in its effort to amend that ordinance.
NCES. The NCES landfill, located in Bethlehem, New Hampshire, serves the
northern and central New Hampshire waste sheds and portions of the Maine and
Vermont waste sheds. In 1992, the town of Bethlehem adopted a zoning ordinance
which precludes the "expansion of any existing landfills" which are not operated
by the town. A proposed zoning ordinance change was defeated by town residents
in March 1997 and March 1998, and it is not anticipated that another vote would
take place until at least March 1999. In an effort to prolong the useful life of
the permitted capacity until March 1999, the Company is limiting the rate of
disposal at the facility and expects that the capacity at that restricted rate
will be filled no later than March 1999, at which time, if the Company does not
obtain local approval for additional air space capacity, the Company will be
required to initiate closure of the landfill. There can be no assurance that
another vote will take place or that in such a vote the zoning ordinance changes
will be approved by Bethlehem town voters prior to the time when the estimated
total remaining permitted disposal capacity of the NCES landfill is exhausted.
The Company has obtained the necessary state permit to expand its air space
capacity, contingent on local approval. The Company believes that the proximity
of the Waste USA landfill to the NCES landfill would enable the Company to
redirect solid waste to the Waste USA landfill in the event that permitting
takes longer than expected or if no expansion is allowed at NCES. If such
redirection of solid waste is required, it may result in additional costs to the
Company's operations.
Hyland. The Hyland landfill, located in Angelica, New York in Allegany
County, serves the Company's Western Region. The Company has received a permit
from the State of New York DEC for approximately 1,500,000 tons of disposal
capacity at the facility and is permitted to accept 500 tons of municipal solid
waste per day. Prior to its acquisition by the Company in May 1998, the first
cell (with a permitted capacity of 80,000 tons) of the facility was fully
constructed and the facility had not accepted any waste for disposal. The
Company estimates that the Hyland landfill has permitted air space capacity
under the permit from the DEC for 11 years of disposal. On July 17, 1998, the
Hyland facility was served with a notice of petition and petition filed against
the DEC and the Company in New York State Supreme Court, Erie County by The
Concerned Citizens of Allegany County. The lawsuit challenges the decision of
the Commissioner of the DEC issued on March 6, 1998 and the permit modification
issued based upon that decision that collectively authorized the disposal of
municipal solid waste and industrial waste at the facility. The proceeding is a
summary proceeding that is expected to be decided on an expedited basis, and the
issues raised in such petition are the same as those raised by the petitioners
in administrative proceedings conducted by the DEC and rejected by both the
administrative law judge and the DEC Commissioner. The Company believes the
lawsuit is without merit and intends to vigorously contest the lawsuit. In the
event the lawsuit is successful, the Company could be prevented from disposing
of municipal solid waste and industrial waste until it complies with the
additional procedures with the DEC and a new permit modification is issued.
There can be no assurance that a new permit modification will be issued under
such circumstances or that the process of obtaining such permit would not be
lengthy. The failure of the Company to obtain a permit modification or a
significant delay in obtaining such permit could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"--Legal Proceedings".
39
The Town of Angelica, New York, has adopted certain laws which would
require the Company to obtain an additional permit from the Town of Angelica for
the operation of the Hyland landfill, would prohibit the expansion of the
landfill and would prevent the disposal of yard waste and may preclude the
disposal of industrial waste at that facility. The Company has filed a lawsuit
against the Town of Angelica seeking to set aside the enforcement of the law,
and a preliminary injunction has been issued in favor of the Company. If the
Company is not successful in its lawsuit, and if the Town of Angelica seeks to
enforce the law by its terms, then the Company would be required to obtain an
additional permit from the Town of Angelica to operate the Hyland landfill, the
expansion of the landfill beyond the current permitted capacity would be
prohibited, and the Company would be unable to dispose of yard waste and may be
precluded from disposing of industrial waste at the landfill. There can be no
assurance that such limitations would not have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
has not yet begun accepting waste at the Hyland landfill. See "Risk
Factors--Limitations on Landfill Permitting and Expansion" and "--Legal
Proceedings".
The Company also owns and/or operated five unlined landfills, which are not
currently in operation. Three of these landfills have been closed and
environmentally capped by the Company. Governmental approval has been obtained
for closure of a fourth landfill and closure is expected to begin shortly. The
Company has established a reserve for the estimated costs associated with such
closure. The fifth unlined landfill, a municipal landfill which is adjacent to
the Subtitle D Clinton County landfill being operated by the Company, was
operated by the Company from July 1996 through July 1997. The Company completed
the closure and capping activities at this landfill in September 1997, and is
indemnified by Clinton County for environmental liabilities arising from such
landfill prior to the Company's operation. See "Risk Factors--Comprehensive
Government Regulation" and "--Potential Environmental Liability".
Once the permitted capacity of a particular landfill is reached, the
landfill must be closed and capped if additional capacity is not authorized. See
"Risk Factors--Potential Inadequacy of Accruals for Closure and Post-Closure
Costs". The Company establishes reserves for the estimated costs associated with
such closure and post-closure costs over the anticipated useful life of such
landfill.
Solid Waste Collection
The Company's 28 solid waste collection divisions served over 180,000
commercial, industrial and residential customers at June 15, 1998. During fiscal
1998, approximately 52% of the solid waste collected by the Company was
delivered for disposal at its landfills. The Company's collection operations are
generally conducted within a 125-mile radius of its landfills. A majority of the
Company's commercial and industrial collection services are performed under
one-to-three-year service agreements, and fees are determined by such factors as
collection frequency, type of equipment and containers furnished, the type,
volume and weight of the solid waste collected, the distance to the disposal or
processing facility and the cost of disposal or processing. The Company's
residential collection and disposal services are performed either on a
subscription basis (i.e., with no underlying contract) with individuals, or
under contracts with municipalities, homeowners associations, apartment owners
or mobile home park operators. Revenues from collection operations accounted for
approximately 73.4% of the Company's revenues in fiscal 1998. In fiscal 1998, no
single collection customer individually accounted for more than 1% of the
Company's revenues.
Transfer Station Services
The Company operated 35 transfer stations at June 15, 1998, of which 14
were owned by the Company and 21 were leased and/or operated under contracts
with municipalities. The transfer stations receive, compact and transfer solid
waste collected primarily from the Company's various collection operations to
larger Company-owned vehicles for transport to landfills. The Company believes
that transfer stations benefit the Company by: (i) increasing the size of the
waste shed which has access to the Company's landfills; (ii) reducing costs by
improving utilization of collection personnel and equipment; and (iii) building
relationships with municipalities that may lead to future business
opportunities, including privatization of the municipality's waste management
services. Revenues from transfer station services accounted for approximately
5.8% of the Company's revenues in fiscal 1998.
40
Recycling Services
The Company has positioned itself to provide recycling services to
customers who are willing to pay for the cost of the recycling service. The
proceeds generated from reselling the recycled materials are increasingly shared
between the Company and its customers. In addition, the Company has adopted a
pricing strategy of charging collection and processing fees for recycling volume
collected from third parties. By structuring its recycling service program in
this way, the Company has sought to reduce its exposure to commodity price risk
with respect to the recycled materials.
At June 15, 1998, the Company operated nine recycling processing
facilities. The Company processes more than 20 classes of recyclable materials
originating from the municipal solid waste stream, including cardboard, office
paper, containers and bottles. The Company's recycling operations are
concentrated principally in Vermont, as the public sector in other states in the
Company's service area has taken primary responsibility for recycling efforts.
At June 15, 1998, the Company employed one commodity sales manager to develop
end markets, and had 56 employees in the recycling facilities to support the
processing of approximately 65,000 tons of recyclable materials annually.
Revenues from the collection, processing and sale of recyclable waste materials
accounted for approximately 6.5% of the Company's revenues in fiscal 1998.
Waste Tire Processing and Other Services
The Company's waste tire processing facility, located in Eliot, Maine, has
the capacity to process approximately 3.5 million tires per year and generates
tire derived fuel, which the Company sells to paper mills for consumption as a
supplemental energy source for boiler fuel. In June 1997, the Company was
selected by the State of Maine to process an estimated 2.5 million tires over an
18-month period. Revenues from waste tire processing and other special services
(consisting primarily of septic/liquid waste operations) accounted for
approximately 1.9% of the Company's revenues in fiscal 1998. Because of
continuing losses in the Company's waste tire processing facility, in the fourth
quarter of fiscal 1998, the Company wrote-down the carrying-value of the assets
of that business in the amount of $971,000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Competition
The solid waste services industry is highly competitive, is undergoing a
period of increasingly rapid consolidation, and requires substantial labor and
capital resources. The Company competes with numerous solid waste management
companies, many of which are significantly larger and have greater access to
capital and greater financial, marketing or technical resources than the
Company. Certain of the Company's competitors are large national companies that
may be able to achieve greater economies of scale than the Company. The Company
also competes with a number of regional and local companies. In addition, the
Company competes with operators of alternative disposal facilities, including
incinerators, and with certain municipalities, counties and districts that
operate their own solid waste collection and disposal facilities. Public sector
facilities may have certain advantages over the Company due to the availability
of user fees, charges or tax revenues and the greater availability to them of
tax-exempt financing. In addition, recycling and other waste reduction programs
may reduce the volume of waste deposited in landfills.
The Company competes for collection and disposal volume primarily on the
basis of the price and quality of its services. From time to time, competitors
may reduce the price of their services in an effort to expand market share or to
win a competitively bid municipal contract. These practices may also lead to
reduced pricing for the Company's services or the loss of business.
Competition exists within the industry not only for collection,
transportation and disposal volume, but also for acquisition candidates. The
Company generally competes for acquisition candidates with publicly owned
regional and national waste management companies. See "Risk Factors--Highly
Competitive Industry".
41
Marketing and Sales
The Company has a coordinated marketing and sales strategy which is
formulated at the corporate level and implemented at the divisional level. The
Company markets its services locally through division managers and direct sales
representatives who focus on commercial, industrial, municipal and residential
customers. At June 15, 1998, the Company had 29 division managers and 28 direct
sales representatives. The Company also obtains new customers from referral
sources, its general reputation and local market print advertising. Leads are
also developed from new building permits, business licenses and other public
records. Additionally, each division generally advertises in the yellow pages
and other local business print media that cover its service area.
Maintenance of a local presence and identity is an important aspect of the
Company's marketing plan, and many of the Company's managers are involved in
local governmental, civic and business organizations. The Company's name and
logo, or, where appropriate, that of the Company's divisional operations, are
displayed on all Company containers and trucks. Additionally, the Company
attends and makes presentations at municipal and state conferences and
advertises in governmental associations' membership publications.
The Company markets its commercial, industrial and municipal services
through its sales representatives who visit customers on a regular basis and
make sales calls to potential new customers. These sales representatives receive
a significant portion of their compensation based upon meeting certain incentive
targets. The Company emphasizes providing quality services and customer
satisfaction and retention, and believes that its focus on quality service will
help retain existing and attract additional customers.
Property and Equipment
The principal fixed assets used by the Company in connection with its
landfill operations are its five landfills which are described under
"--Operations--Landfills".
The Clinton County landfill is operated under a capital lease scheduled to
expire in 2021. The Company is generally obligated under the lease to expand the
landfill at its own cost, subject to market forces and demand. The Clinton
County landfill is not permitted to receive waste from certain geographic
regions in New York and has a permitted capacity of 125,000 tons per year. The
tipping fee paid for waste generated in Clinton County is fixed for 25 years
subject to limited inflation increases during the term of the lease. During
fiscal 1998, approximately 18.4% (by tonnage) of the solid waste disposed of at
the Clinton County landfill was generated in Clinton County.
Under the lease, the Company is responsible for operating the landfill in
compliance with all applicable environmental laws, including without limitation,
possessing and complying with all necessary permits and licenses. The Company
must indemnify the County for all liabilities resulting from any violations of
those laws (exclusive of violations based on pre-existing conditions, which
remain the responsibility of the County and with respect to which the County
indemnifies the Company). In addition, the Company is responsible for the
composition of waste deposited at the landfill during the lease term, regardless
of the Company's knowledge or monitoring efforts. The lease gives the Company
full physical and managerial control over an unlined landfill on the site, which
was operated by the Company from July 1996 through July 1997, while the lined
landfill was under construction. Clinton County has agreed to indemnify the
Company for environmental liabilities arising from the unlined landfill prior to
its operation by the Company. The Company is responsible for the closure of the
unlined landfill, and post-closure care is the responsibility of the County. The
Company completed the closure and capping activities at this landfill in
September 1997. The Company is also responsible for performing certain cleanup
work with respect to the unlined landfill and has agreed to absorb the resulting
costs subject to satisfactory construction of the lined portion. The Company is
responsible for both closure and post-closure care with respect to the lined
landfill upon exhaustion of the corresponding airspace. See
"--Operations--Landfills--Clinton County".
The Company owns the Waste USA landfill and leases the permitted airspace
capacity above the landfill under a lease which is scheduled to expire in 2001
and which is extendable for an additional six years. The lease payments are made
quarterly in an amount equal to the greater of (a) the rate of $3.75 per ton of
all solid waste accepted at the landfill, as adjusted, or (b) $33,000. The
Company is required to pay the lessor at the end of the lease term the
difference between $6,000,000 and the actual amounts
42
paid under the lease. In addition, at the end of the lease term, the Company is
obligated to exercise one of the following options: (i) to purchase all of the
stock of the lessor for $300,000; (ii) to purchase the leased airspace for
$300,000; or (iii) to extend the term of the lease for the remaining permitted
life of the landfill operation for $300,000. The Company may exercise the option
at any time before January 25, 2001.
Other than the landfills, the principal fixed assets used by the Company in
its solid waste collection and landfill operations included, at June 15, 1998,
approximately 946 collection vehicles, 130 pieces of heavy equipment and 191
support vehicles. At June 15, 1998, transfer station operations included 35
transfer stations, 14 of which are owned and 21 of which are leased and/or
operated under agreements expiring between 1998 and 2021.
At June 15, 1998, the Company utilized nine recycling processing facilities
in its service areas, of which seven are owned and two are leased and/or
operated under agreements expiring between 1999 and 2021.
The Company owns and operates a 46-acre tire processing facility located in
Eliot, Maine, consisting of storage facilities, tire shredding machines and a
scale and receiving area.
The Company's facility in Rutland, Vermont, consisting of approximately
10,000 square feet utilized for the Company's headquarters, and its recycling
processing facility and office located in Montpelier, Vermont, consisting of an
aggregate of approximately 24,000 square feet, are leased from Casella
Associates, a company owned by John and Douglas Casella. See "Certain
Transactions".
Employees
At June 15, 1998, the Company employed 1,043 full-time employees, including
63 professionals or managers, 814 employees involved in collection, transfer and
disposal operations, and 166 sales, clerical, data processing or other
administrative employees. None of the Company's employees are represented by
unions. The employees of SDS of PA, Inc., located in Wellsboro, Pennsylvania,
which the Company acquired in January 1997, rejected a measure in the first half
of fiscal 1998 to select a union to represent the employees in labor
negotiations with management. In addition, in the second half of fiscal 1998,
the production workers of the Company's tire recycling facility in Maine
rejected a measure to select a union to represent them in labor negotiations
with management. An unfair labor charge was filed against the Company with the
Region 1 office of the National Labor Relations Board in Boston, Massachusetts
alleging that on the day the petition was received at the tire recycling
facility, workers were improperly interrogated and/or threatened by local
management. The Company reached an agreement resolving these charges, with no
liability to the Company. The Company is aware of no other organizational
efforts among its employees. Through a labor utilization agreement, the Company
utilizes the services of Clinton County employees at the Clinton County
landfill. The Clinton County employees are represented by a labor union. The
Company believes that its relations with its employees are good.
Risk Management, Insurance and Performance or Surety Bonds
The Company actively maintains environmental and other risk management
programs which it believes are appropriate for its business. The Company's
environmental risk management program includes evaluating existing facilities,
as well as potential acquisitions, for environmental law compliance and
operating procedures. The Company also maintains a worker safety program which
encourages safe practices in the workplace. Operating practices at all Company
operations are intended to reduce the possibility of environmental contamination
and litigation.
The Company carries a range of insurance intended to protect its assets and
operations, including a commercial general liability policy and a property
damage policy. A partially or completely uninsured claim against the Company
(including liabilities associated with cleanup or remediation at its own
facilities) if successful and of sufficient magnitude, could have a material
adverse effect on the Company's business, financial condition and results of
operations. Any future difficulty in obtaining insurance could also impair the
Company's ability to secure future contracts, which may be conditioned upon the
availability of adequate insurance coverage.
43
Municipal solid waste collection contracts and landfill closure obligations
may require performance or surety bonds, letters of credit or other means of
financial assurance to secure contractual performance. The Company has not
experienced difficulty in obtaining performance or surety bonds or letters of
credit. If the Company were unable to obtain performance or surety bonds or
letters of credit in sufficient amounts or at acceptable rates, it may be
precluded from entering into additional municipal solid waste collection
contracts or obtaining or retaining landfill operating permits. See "Risk
Factors--Inability to Obtain Performance or Surety Bonds, Letters of Credit or
Insurance".
Regulation
Introduction
The Company is subject to extensive and evolving Federal, state and local
environmental laws and regulations which have become increasingly stringent in
recent years. The environmental regulations affecting the Company are
administered by the EPA and other Federal, state and local environmental,
zoning, health and safety agencies. The Company believes that it is currently in
substantial compliance with applicable Federal, state and local environmental
laws, permits, orders and regulations, and it does not currently anticipate any
material environmental costs to bring its operations into compliance (although
there can be no assurance in this regard). The Company anticipates there will
continue to be increased regulation, legislation and regulatory enforcement
actions related to the solid waste services industry. As a result, the Company
attempts to anticipate future regulatory requirements and to plan accordingly to
remain in compliance with the regulatory framework.
In order to transport solid waste, it is necessary for the Company to
possess and comply with one or more permits from state or local agencies. These
permits also must be periodically renewed and may be modified or revoked by the
issuing agency.
The principal Federal, state and local statutes and regulations applicable
to the Company's various operations are as follows:
The Resource Conservation and Recovery Act of 1976 ("RCRA")
RCRA regulates the generation, treatment, storage, handling, transportation
and disposal of solid waste and requires states to develop programs to ensure
the safe disposal of solid waste. RCRA divides solid waste into two groups,
hazardous and nonhazardous. Wastes are generally classified as hazardous if they
(i) either (a) are specifically included on a list of hazardous wastes, or (b)
exhibit certain characteristics defined as hazardous; and (ii) are not
specifically designated as nonhazardous. Wastes classified as hazardous under
RCRA are subject to much stricter regulation than wastes classified as
nonhazardous, and businesses that deal with hazardous waste are subject to
regulatory obligations in addition to those imposed on handlers of nonhazardous
waste.
Among the wastes that are specifically designated as nonhazardous are
household waste and "special" waste, including items such as petroleum
contaminated soils, asbestos, foundry sand, shredder fluff and most nonhazardous
industrial waste products.
The EPA regulations issued under Subtitle C of RCRA impose a comprehensive
"cradle to grave" system for tracking the generation, transportation, treatment,
storage and disposal of hazardous wastes. The Subtitle C Regulations impose
obligations on generators, transporters and disposers of hazardous wastes, and
require permits that are costly to obtain and maintain for sites where such
material is treated, stored or disposed. Subtitle C requirements include
detailed operating, inspection, training and emergency preparedness and response
standards, as well as requirements for manifesting, record keeping and
reporting, corrective action, facility closure, post-closure and financial
responsibility. Most states have promulgated regulations modeled on some or all
of the Subtitle C provisions issued by the EPA. Some state regulations impose
different, additional obligations.
The Company is currently not involved with transportation or disposal of
hazardous substances (as defined in CERCLA) in concentrations or volumes that
would classify those materials as hazardous wastes. However, the Company has
transported hazardous substances in the past and very likely will remain
involved with hazardous substance transportation and disposal in the future to
the extent that
44
materials defined as hazardous substances under CERCLA are present in consumer
goods and in the waste streams of its customers.
In October 1991, the EPA adopted the Subtitle D Regulations governing solid
waste landfills. The Subtitle D Regulations, which generally became effective in
October 1993, include location restrictions, facility design standards,
operating criteria, closure and post-closure requirements, financial assurance
requirements, groundwater monitoring requirements, groundwater remediation
standards and corrective action requirements. In addition, the Subtitle D
Regulations require that new landfill sites meet more stringent liner design
criteria (typically, composite soil and synthetic liners or two or more
synthetic liners) intended to keep leachate out of groundwater and have
extensive collection systems to carry away leachate for treatment prior to
disposal. Groundwater monitoring wells must also be installed at virtually all
landfills to monitor groundwater quality and, indirectly, the effectiveness of
the leachate collection system. The Subtitle D Regulations also require, where
certain regulatory thresholds are exceeded, that facility owners or operators
control emissions of methane gas generated at landfills in a manner intended to
protect human health and the environment. Each state is required to revise its
landfill regulations to meet these requirements or such requirements will be
automatically imposed by the EPA upon landfill owners and operators in that
state. Each state is also required to adopt and implement a permit program or
other appropriate system to ensure that landfills within the state comply with
the Subtitle D Regulations criteria. Various states in which the Company
operates or in which it may operate in the future have adopted regulations or
programs as stringent as, or more stringent than, the Subtitle D Regulations.
The Federal Water Pollution Control Act of 1972
The Federal Water Pollution Control Act of 1972, as amended ("Clean Water
Act"), regulates the discharge of pollutants from a variety of sources,
including solid waste disposal sites and transfer stations, into waters of the
United States. If run-off from the Company's transfer stations or if run-off or
collected leachate from the Company's owned or operated landfills is discharged
into streams, rivers or other surface waters, the Clean Water Act would require
the Company to apply for and obtain a discharge permit, conduct sampling and
monitoring and, under certain circumstances, reduce the quantity of pollutants
in such discharge. Also, virtually all landfills are required to comply with the
EPA's storm water regulations issued in November 1990, which are designed to
prevent contaminated landfill storm water runoff from flowing into surface
waters. The Company believes that its facilities are in compliance in all
material respects with Clean Water Act requirements.
The Comprehensive Environmental Response, Compensation, and Liability Act
of 1980
CERCLA established a regulatory and remedial program intended to provide
for the investigation and cleanup of facilities where or from which a release of
any hazardous substance into the environment has occurred or is threatened.
CERCLA's primary mechanism for remedying such problems is to impose strict joint
and several liability for cleanup of facilities on current owners and operators
of the site, former owners and operators of the site at the time of the disposal
of the hazardous substances, as well as the generators of the hazardous
substances and the transporters who arranged for disposal or transportation of
the hazardous substances. In addition, CERCLA also imposes liability for the
cost of evaluating and remedying any damage done to natural resources. The costs
of CERCLA investigation and cleanup can be very substantial. Liability under
CERCLA does not depend upon the existence or disposal of "hazardous waste" as
defined by RCRA, but can also be founded upon the existence of even very small
amounts of the more than 700 "hazardous substances" listed by the EPA, many of
which can be found in household waste. In addition, the definition of "hazardous
substances" in CERCLA incorporates substances designated as hazardous or toxic
under the federal Clean Water Act, Clear Air Act and Toxic Substances Control
Act. If the Company were found to be a responsible party for a CERCLA cleanup,
the enforcing agency could hold the Company, or any other generator, transporter
or the owner or operator of the contaminated facility, responsible for all
investigative and remedial costs even if others may also be liable. CERCLA also
authorizes the imposition of a lien in favor of the United States upon all real
property subject to, or affected by, a remedial action for all costs for which a
party is liable. CERCLA provides a responsible party with the right to bring a
contribution action against other responsible parties for their allocable shares
45
of investigative and remedial costs. The Company's ability to get others to
reimburse it for their allocable shares of such costs would be limited by the
Company's ability to find other responsible parties and prove the extent of
their responsibility and by the financial resources of such other parties.
The Clean Air Act
The Clean Air Act generally, through state implementation of Federal
requirements, regulates emissions of air pollutants from certain landfills based
upon the date of the landfill construction and volume per year of emissions of
regulated pollutants. The EPA has promulgated new source performance standards
regulating air emissions of certain regulated pollutants (methane and
non-methane organic compounds) from municipal solid waste landfills. Landfills
located in areas that do not comply with certain requirements of the Clean Air
Act may be subject to even more extensive air pollution controls and emission
limitations. In addition, the EPA has issued standards regulating the disposal
of asbestos-containing materials.
All of the Federal statutes described above contain provisions authorizing,
under certain circumstances, the institution of lawsuits by private citizens to
enforce the provisions of the statutes. In addition to a penalty award to the
United States, some of those statutes authorize an award of attorney's fees to
parties successfully advancing such an action.
The Occupational Safety and Health Act of 1970 ("OSHA")
OSHA establishes employer responsibilities and authorizes the promulgation
by the Occupational Safety and Health Administration of occupational health and
safety standards, including the obligation to maintain a workplace free of
recognized hazards likely to cause death or serious injury, to comply with
adopted worker protection standards, to maintain certain records, to provide
workers with required disclosures and to implement certain health and safety
training programs. Various of those promulgated standards may apply to the
Company's operations, including those standards concerning notices of hazards,
safety in excavation and demolition work, the handling of asbestos and
asbestos-containing materials, and worker training and emergency response
programs.
State and Local Regulations
Each state in which the Company now operates or may operate in the future
has laws and regulations governing the generation, storage, treatment, handling,
transportation and disposal of solid waste, water and air pollution and, in most
cases, the siting, design, operation, maintenance, closure and post-closure
maintenance of landfills and transfer stations. In addition, many states have
adopted statutes comparable to, and in some cases more stringent than, CERCLA.
These statutes impose requirements for investigation and cleanup of contaminated
sites and liability for costs and damages associated with such sites, and some
provide for the imposition of liens on property owned by responsible parties.
Some of those liens may take priority over previously filed instruments.
Furthermore, many municipalities also have local ordinances, laws and
regulations affecting Company operations. These include zoning and health
measures that limit solid waste management activities to specified sites or
conduct, flow control provisions that direct the delivery of solid wastes to
specific facilities or to facilities in specific areas, laws that grant the
right to establish franchises for collection services and then put out for bid
the right to provide collection services, and bans or other restrictions on the
movement of solid wastes into a municipality.
Certain permits and approvals may limit the types of waste that may be
accepted at a landfill or the quantity of waste that may be accepted at a
landfill during a given time period. In addition, certain permits and approvals,
as well as certain state and local regulations, may limit a landfill to
accepting waste that originates from specified geographic areas or seek to
restrict the importation of out-of-state waste or otherwise discriminate against
out-of-state waste. Generally, restrictions on importing out-of-state waste have
not withstood judicial challenge. However, from time to time Federal legislation
is proposed which would allow individual states to prohibit the disposal of
out-of-state waste or to limit the amount of out-of-state waste that could be
imported for disposal and would require states, under certain circumstances, to
reduce the amounts of waste exported to other states. Although such legislation
has not been passed by Congress, if this or similar legislation is enacted,
states in which the Company operates landfills could limit or prohibit the
importation of out-of-state waste. Such state actions could materially adversely
affect
46
the business, financial condition and results of operations of landfills within
those states that receive a significant portion of waste originating from
out-of-state.
In addition, certain states and localities may for economic or other
reasons restrict the export of waste from their jurisdiction or require that a
specified amount of waste be disposed of at facilities within their
jurisdiction. In 1994, the U.S. Supreme Court held unconstitutional, and
therefore invalid, a local ordinance that sought to impose flow controls on
taking waste out of the locality. However, certain state and local jurisdictions
continue to seek to enforce such restrictions and, in certain cases, the Company
may elect not to challenge such restrictions. In addition, the aforementioned
proposed Federal legislation would allow states and localities to impose certain
flow control restrictions. These restrictions could reduce the volume of waste
going to landfills in certain areas, which may materially adversely affect the
Company's ability to operate its landfills and/or affect the prices that can be
charged for landfill disposal services. These restrictions may also result in
higher disposal costs for the Company's collection operations. If the Company
were unable to pass such higher costs through to its customers, the Company's
business, financial condition and results of operations could be materially
adversely affected.
There has been an increasing trend at the Federal, state and local levels
to mandate or encourage both waste reduction at the source and waste recycling,
and to prohibit or restrict the disposal in landfills of certain types of solid
wastes, such as yard wastes, leaves and tires. The enactment of regulations
reducing the volume and types of wastes available for transport to and disposal
in landfills could affect the Company's ability to operate its landfill
facilities.
Legal Proceedings
On or about October 30, 1997, Mr. Matthew M. Freeman commenced a civil
lawsuit against the Company and two of the Company's officers and directors in
the Rutland Superior Court, Rutland County, State of Vermont. In the complaint,
Mr. Freeman seeks compensation for services allegedly performed by him prior to
1995. Mr. Freeman is seeking a three percent equity interest in the Company or
the monetary equivalent thereof, as well as punitive damages. The Company and
the officers and directors have answered the complaint, denied Mr. Freeman's
allegations of wrongdoing, and asserted various defenses. In order to facilitate
the completion of the November Offering, certain stockholders of the Company,
including the two officers named as defendants, 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 party).
On May 12, 1998, the Company filed suit in New York Supreme Court, Allegany
County against the Town of Angelica, New York seeking a temporary restraining
order and preliminary injunctive relief against the Town's enforcement of a
recently-enacted local law which would prohibit the expansion of the Hyland
landfill, would require the landfill and the operator thereof to receive an
additional permit from the Town of Angelica to continue to operate, would
prevent the disposal of yard waste, may preclude the disposal of certain types
of industrial waste and would impose certain other restrictions on the landfill.
A temporary restraining order was granted by the court on May 14, 1998 in favor
of the Company, and by a decision dated July 13, 1998, the court granted the
Company's motion for a preliminary injunction. If the Company is not successful
in its lawsuit, and if the Town of Angelica seeks to enforce the law by its
terms, then the Company would be required to obtain an additional permit from
the Town of Angelica to operate the Hyland landfill, the expansion of the
landfill beyond the current permitted capacity would be prohibited, and the
Company would be unable to dispose of yard waste and may be precluded from
disposing of industrial waste at the landfill. There can be no assurance that
such limitations would not have a material adverse effect on the Company's
business, financial condition and results of operations. At June 15, 1998 the
Company had not yet begun accepting waste at the Hyland landfill.
On July 17, 1998, the Hyland facility was served with a notice of petition
and petition filed against the DEC and the Company in New York State Supreme
Court, Erie County by The Concerned Citizens of Allegany County. The lawsuit
challenges the decision of the Commissioner of the DEC issued on March 6, 1998
and the permit modification issued based upon that decision that collectively
authorized the disposal of municipal solid waste and industrial waste at the
facility. The proceeding is a summary proceeding that is expected to be decided
on an expedited basis, and the issues raised in such petition
47
are the same as those raised by the petitioners in administrative proceedings
conducted by the DEC and rejected by both the administrative law judge and the
DEC Commissioner. The Company believes the lawsuit is without merit and intends
to vigorously contest the lawsuit. In the event the lawsuit is successful, the
Company could be prevented from disposing of municipal solid waste and
industrial waste until it complies with the additional procedures with the DEC
and a new permit modification is issued. There can be no assurance that a new
permit modification will be issued under such circumstances or that the process
of obtaining such permit would not be lengthy. The failure of the Company to
obtain a permit modification or a significant delay in obtaining such permit
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In the normal course of its business and as a result of the extensive
governmental regulation of the waste industry, the Company may periodically
become subject to various judicial and administrative proceedings involving
Federal, state or local agencies. In these proceedings, an agency may seek to
impose fines on the Company or to revoke, or to deny renewal of, an operating
permit held by the Company. In addition, the Company may become party to various
claims and suits pending for alleged damages to persons and property, alleged
violation of certain laws and for alleged liabilities arising out of matters
occurring during the normal operation of the waste management business. However,
there is no current proceeding or litigation involving the Company that it
believes will have a material adverse effect upon the Company's business,
financial condition and results of operations.
48
MANAGEMENT
Executive Officers, Directors and Certain Key Employees
The executive officers, directors and certain key employees of the Company
and their ages as of June 15, 1998 are as follows:
Name Age Position
- ---- --- --------
Executive Officers and Directors
John W. Casella (1) 47 President, Chief Executive Officer, Chairman of
the Board of Directors and Secretary
Douglas R. Casella 42 Vice Chairman of the Board of Directors
James W. Bohlig 52 Senior Vice President and Chief Operating
Officer, Director
Jerry S. Cifor 37 Vice President and Chief Financial Officer,
Treasurer
John F. Chapple III (2) 57 Director
Michael F. Cronin (1)(2) 44 Director
Kenneth H. Mead 39 Director
Gregory B. Peters (1)(2) 52 Director
Other Key Employees
Robert G. Banfield, Jr. 36 Vice President, Hauling Operations
Michael P. Barrett 44 Vice President, Transportation and Recycling
Christopher M. DesRoches 40 Vice President, Sales and Marketing
Joseph S. Fusco 34 Vice President, Communications
James M. Hiltner 34 Regional Vice President
Michael Holmes 43 Regional Vice President
Larry B. Lackey 37 Vice President, Permits, Compliance and
Engineering
Alan N. Sabino 38 Regional Vice President
Gary Simmons 48 Vice President, Fleet Management
Michael J. Viani 43 Vice President, Business Development
- ----------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
John W. Casella has served as President, Chief Executive Officer and
Chairman of the Board of Directors of the Company since 1993, and has been
Chairman of the Board of Directors of Casella Waste Management, Inc. since 1977.
Mr. Casella has actively supervised all aspects of Company operations since
1976, sets overall corporate policies, and serves as chief strategic planner of
corporate development. Mr. Casella is also an executive officer and director of
Casella Construction, a company owned by Mr. Casella and Douglas R. Casella
which specializes in general contracting, soil excavation and related heavy
equipment work. See "Certain Transactions". Mr. Casella has been a member of
numerous industry-related and community service-related state and local boards
and commissions including the Board of Directors of the Associated Industries of
Vermont, The Association of Vermont
49
Recyclers, Vermont State Chamber of Commerce and the Rutland Industrial
Development Corporation. Mr. Casella has also served on various state task
forces, serving in an advisory capacity to the Governor of Vermont on solid
waste issues. Mr. Casella was an executive officer and director of Meridian
Group, Inc. See "Certain Transactions" for a discussion of the Meridian
bankruptcy. Mr. Casella holds an Associate of Science in Business Management
from Bryant & Stratton University and a Bachelor of Science in Business
Education from Castleton State College. Mr. Casella is the brother of Douglas R.
Casella.
Douglas R. Casella founded the Company in 1975, and has been a director of
the Company since that time. He has served as Vice Chairman of the Board of
Directors of the Company since 1993 and has been President of Casella Waste
Management, Inc. since 1975. Since 1989, Mr. Casella has been President of
Casella Construction, a company owned by Mr. Casella and John W. Casella which
specializes in general contracting, soil excavation and related heavy equipment
work. See "Certain Transactions". Mr. Casella attended the University of
Wisconsin's College of Engineering continuing education programs in sanitary
landfill design, ground water remediation, landfill gas and leachate management
and geosynthetics. Mr. Casella is the brother of John W. Casella.
James W. Bohlig joined the Company as Senior Vice President and Chief
Operating Officer in 1993 with primary responsibility for business development,
acquisitions and operations. Mr. Bohlig has served as a director of the Company
since 1993. From 1989 until he joined the Company, Mr. Bohlig was Executive Vice
President and Chief Operating Officer of Russell Corporation, a general
contractor and developer based in Rutland, Vermont. In addition, Mr. Bohlig was
the President and a director of Meridian Group, Inc. See "Certain Transactions"
for a discussion of the Meridian bankruptcy. Mr. Bohlig is a director of
Consumat Environmental Systems, Inc., a designer and manufacturer of
incineration and pollution control equipment. Mr. Bohlig is a licensed
professional engineer. Mr. Bohlig holds a Bachelor of Science in Engineering and
Chemistry from the U.S. Naval Academy, and is a graduate of the Columbia
University Management Program in Business Administration.
Jerry S. Cifor joined the Company as Chief Financial Officer in January
1994. From 1992 to 1993, Mr. Cifor was Vice President and Chief Financial
Officer of Earthwatch Waste Systems, a waste management company based in
Buffalo, New York. From 1986 to 1991, Mr. Cifor was employed by Waste Management
of North America, Inc., a waste management company, in a number of financial and
operational management positions. Mr. Cifor is a certified public accountant and
was with KPMG Peat Marwick from 1983 until 1986. Mr. Cifor is a graduate of
Hillsdale College with a Bachelor of Arts in Accounting.
John F. Chapple III has served as a director of the Company since 1994.
From August 1989 to July 1994, Mr. Chapple was President and owner of Catamount
Waste Services, Inc., a central Vermont hauling and landfill operation, which
was purchased by the Company in May 1994. Mr. Chapple is a graduate of Denison
University and holds a Bachelor of Arts in Economics.
Michael F. Cronin has served as a director of the Company since December
1995. Mr. Cronin has been a general partner of Weston Presidio Management
Company, a venture capital management firm, since 1991. Mr. Cronin is a director
of Tekni-Plex, Inc., a manufacturer of plastic products and materials. Mr.
Cronin is a graduate of Harvard College and holds an M.B.A. from the Harvard
Graduate School of Business Administration.
Kenneth H. Mead has served as a director of the Company since January 1997.
Mr. Mead has served since January 1997 as President of Materials Exchange
Corporation, a consulting firm. From 1986 to January 1997, Mr. Mead was the
President and principal stockholder of Superior Disposal Services, Inc. and
certain related companies, the assets of which were acquired by the Company in
January 1997.
Gregory B. Peters has served as a director of the Company since 1993. Mr.
Peters has been a general partner of Vermont Venture Capital Partners, L.P., the
General Partner of The Vermont Venture Capital Fund, L.P.; a general partner of
North Atlantic Capital Partners, L.P., the General Partner of North Atlantic
Venture Fund, L.P.; and a general partner of North Atlantic Investors, the
General Partner of North Atlantic Venture Fund II L.P. Mr. Peters is a graduate
of Harvard College and holds an M.B.A. from the Harvard Graduate School of
Business Administration.
50
Other Key Employees of the Company:
Robert G. Banfield, Jr. has served as Vice President, Hauling Operations of
the Company since 1988. Mr. Banfield is a graduate of Merrimack College.
Michael P. Barrett has served as Vice President, Transportation and
Recycling of the Company since January 1997. From June 1991 to January 1997, Mr.
Barrett served as the Company's Division Manager for Transfer Stations,
Recycling and Rutland Hauling.
Christopher M. DesRoches has served as Vice President, Sales and Marketing
of the Company since November 1996. From January 1989 to November 1996, he was a
regional vice president of sales of Waste Management, Inc., a solid waste
company. Mr. DesRoches is a graduate of Arizona State University.
Joseph S. Fusco has served as Vice President, Communications of the Company
since January 1995. From January 1991 through January 1995, Mr. Fusco was
self-employed as a corporate and political communications consultant. Mr. Fusco
is a graduate of the State University of New York at Albany.
James M. Hiltner has served as Regional Vice President of the Company since
March 1998. From 1990 to March 1998, Mr. Hiltner was employed by Waste
Management, Inc. as a region president (July 1996 through March 1998), where his
responsibilities included overseeing that company's waste management operations
in upstate New York and northwestern Pennsylvania, a division president (from
April 1992 through July 1996) and a general manager (from November 1990 through
April 1992).
Michael Holmes has served as Regional Vice President of the Company since
January 1997. From November 1995 to January 1997, Mr. Holmes was Vice President
of Superior Disposal Services, Inc., which was acquired by the Company on
January 1997. From November 1993 to November 1995, he was Superintendent of
Recycling and Solid Waste for the town of Weston, Massachusetts Solid Waste
Department where he managed all aspects of the town's recycling and solid waste
services. From June 1983 to October 1992, he served as the Division Manager of
all divisions in the Binghamton, N.Y. area and the Boston, Massachusetts area
for Laidlaw Waste Services, Inc. Mr. Holmes is a graduate of Broome Community
College.
Larry B. Lackey joined the Company in 1993 and has served as Vice
President, Permits, Compliance and Engineering since 1995. From 1984 to 1993,
Mr. Lackey was an Associate Engineer for Dufresne-Henry, Inc., an engineering
consulting firm. Mr. Lackey is a graduate of Vermont Technical College.
Alan N. Sabino has served as Regional Vice President of the Company since
July 1996. From 1995 to July 1996, Mr. Sabino served as a Division President of
Waste Management, Inc. From 1989 to 1994, he served as Regional Operations
Manager for Chambers Development Company, Inc., a waste management company. Mr.
Sabino is a graduate of Pennsylvania State University.
Gary Simmons joined the Company in May 1997 as Vice President, Fleet
Management. From 1995 to May 1997, Mr. Simmons served as National and Regional
Fleet Service Manager for USA Waste Services, Inc., a waste management company.
From 1977 to 1995, Mr. Simmons served in various fleet maintenance and
management positions for Chambers Development Company, Inc.
Michael J. Viani joined the Company in 1994, and has served as Vice
President, Business Development since 1995. From 1990 to 1994, Mr. Viani served
as Manager of Business Development with Consumat Sanco, Inc., the owner of the
Company's NCES landfill, which the Company purchased in 1994. Mr. Viani is a
graduate of Middlebury College and of the University of Massachusetts.
See "Certain Transactions" and "Principal and Selling Stockholders" for
certain information concerning the Company's directors and executive officers.
51
Election of Directors
The holders of Class A Common Stock, voting separately as a class, will at
all times be entitled to elect at least one director. Mr. Michael F. Cronin is
the designee of the holders of Class A Common Stock.
Messrs. John W. Casella, Douglas R. Casella, James W. Bohlig, Gregory B.
Peters and John F. Chapple III were elected to the Board of Directors pursuant
to an agreement between the Company and certain of its stockholders. This
agreement terminated upon completion of the November Offering. See "Risk
Factors--Control by Casellas and Anti-Takeover Effect of Class B Common Stock"
and "Description of Capital Stock".
The Board of Directors is divided into three classes, each of whose members
serve for a staggered three-year term. Messrs. Douglas R. Casella, Michael F.
Cronin and Kenneth H. Mead serve in the class whose term expires in 1998;
Messrs. James W. Bohlig and Gregory B. Peters serve in the class whose term
expires in 1999; and Messrs. John W. Casella and John F. Chapple III serve in
the class whose term expires in 2000. Upon the expiration of the term of a class
of directors, directors in such class will be elected for three-year terms at
the annual meeting of stockholders in the year in which such term expires.
Compensation of Directors
The Company reimburses non-employee directors for expenses incurred in
attending Board meetings. Non-employee directors of the Company receive stock
options under the Company's 1997 Non-Employee Director Stock Option Plan (the
"Directors' Plan"). The Directors' Plan provides that each non-employee director
will receive an automatic grant of a nonqualified stock option to purchase 5,000
shares of Class A Common Stock upon initial election to the Board of Directors
(vesting in three equal installments on each of the three anniversaries
following the date of grant). An option to purchase 2,000 shares of Class A
Common Stock will be granted to each incumbent non-employee director on the date
of each annual meeting of stockholders beginning with the 1998 annual meeting
(vesting in three equal annual installments beginning on the first anniversary
of the date of grant). Options granted under the Directors' Plan expire ten
years from the date of grant. The option price for options granted under the
Directors' Plan is equal to the fair market value of a share of Class A Common
Stock as of the date of grant. The Company has reserved a total of 50,000 shares
of Class A Common Stock for issuance under the Directors' Plan, all of which are
currently available for future grant.
Board Committees
The Board of Directors has established a Compensation Committee and an
Audit Committee. The Compensation Committee, which consists of Messrs. John W.
Casella, Michael F. Cronin and Gregory B. Peters, reviews executive salaries,
administers any bonus, incentive compensation and stock option plans of the
Company, and approves the salaries and other benefits of the executive officers
of the Company. In addition, the Compensation Committee consults with the
Company's management regarding pension and other benefit plans and compensation
policies and practices of the Company. The Stock Plan Subcommittee of the
Compensation Committee, consisting of Messrs. Cronin and Peters, administers the
issuance of stock options and other awards under the Company's stock option
plans to the Company's executive officers and approves the compensation of Mr.
Casella. The Audit Committee, which consists of Messrs. Chapple, Cronin and
Peters, reviews the professional services provided by the Company's independent
auditors, the independence of such auditors from management of the Company, the
annual financial statements of the Company and the Company's system of internal
accounting controls. The Audit Committee also reviews such other matters with
respect to the accounting, auditing and financial reporting practices and
procedures of the Company as it may find appropriate or as may be brought to its
attention.
52
Executive Compensation
The following table sets forth for each of the last two fiscal years the
cash compensation paid and shares underlying options granted to (i) the
Company's Chief Executive Officer, and (ii) each of the other executive officers
who received annual compensation in excess of $100,000 during fiscal 1998
(collectively, the "Named Executive Officers"):
Summary Compensation Table
Long-Term Compensation
-------------------------------------------------------------------------------
Annual Compensation Awards
---------------------------------------------- ------------------
Securities
Other Annual Underlying All Other
Year Salary Bonus Compensation Options/SARs (#) Compensation
------ ----------- ---------- ---------------- ------------------ -------------
John W. Casella .............. 1998 $156,965 $50,000 $14,279(1) -- $500(2)
President, Chief Executive 1997 $136,141 $45,000 $22,755(1) 20,000 $985(2)
Officer and Chairman
James W. Bohlig .............. 1998 $146,591 $50,000 -- -- --
Senior Vice President and 1997 $126,538 $45,000 -- 30,000 --
Chief Operating Officer
Jerry S. Cifor ............... 1998 $126,235 $42,000 -- -- $500(2)
Vice President and 1997 $107,692 $38,000 -- 16,000 $838(2)
Chief Financial Officer
- ------------
(1) Consists of life insurance premiums paid by the Company on behalf of the
Named Executive Officer.
(2) Consists of amount paid by the Company to the Named Executive Officer's
account in the Company's 401(k) Plan.
Stock Options
No options to purchase shares of the Company's Class A Common Stock were
granted to any of the Named Executive Officers of the Company during the fiscal
year ended April 30, 1998.
Fiscal Year-End Option Values
The following table sets forth information for each of the Named Executive
Officers concerning options to purchase Class A Common Stock exercised by the
Named Executive Officers during fiscal 1998 and the number and value of options
outstanding as of April 30, 1998.
Aggregated Option Exercises in Fiscal Year 1998 and Fiscal Year-End Option
Values
Number of Securities
Underlying Value of Unexercised
Unexercised Options at In-The-Money Options
Shares Value April 30, 1998 (#) at April 30, 1998 ($)(2)
Acquired Realized ----------------------------- -----------------------------
on Exercise ($)(1) Exercisable Unexercisable Exercisable Unexercisable
------------- ----------- ------------- --------------- ------------- --------------
John W. Casella,
President, Chief Executive
Officer and Chairman ............. -- -- 148,334 6,666 $4,324,402 $124,173
James W. Bohlig,
Senior Vice President and
Chief Operating Officer ......... -- -- 300,000 10,000 $8,918,850 $186,250
Jerry S. Cifor,
Vice President and
Chief Financial Officer ......... 20,000 $308,000 106,667 5,333 $3,077,792 $ 99,327
- ------------
(1) Based on the closing sales price of the Class A Common Stock as reported on
the Nasdaq National Market on the date of exercise less the option
exercise price.
(2) These values have been calculated on the basis of the last sale price of
the Company's Class A Common Stock on the Nasdaq National Market as of
April 30, 1998 of $31.125 per share, less the aggregate exercise price.
53
Compensation Committee Interlocks and Insider Participation
The current members of the Compensation Committee of the Company's Board of
Directors are Messrs. John W. Casella, Michael F. Cronin and Gregory B. Peters.
Mr. Casella will abstain from Compensation Committee decisions regarding his own
compensation. Mr. Casella has served as President and Chief Executive Officer of
the Company since 1993.
In connection with the sale by the Company of its Series D Convertible
Preferred Stock in December 1995, the Company entered into a Management Services
Agreement with BCI Growth III, L.P., North Atlantic Venture Fund, L.P. and
Vermont Venture Capital Fund, L.P., all of whom are stockholders of the Company.
Under the Management Services Agreement, the Company agreed to pay a management
fee of approximately $22,300 per month in consideration of certain advisory
services provided by such stockholders to the Company. Gregory B. Peters, a
director of the Company, is affiliated with North Atlantic Venture Fund, L.P.
and The Vermont Venture Capital Fund, L.P. This agreement was terminated upon
the closing of the November Offering.
The Company has from time to time engaged Casella Construction, Inc., a
company owned by John and Douglas Casella, both executive officers, directors
and significant stockholders of the Company, to provide construction services
for the Company. In each of the fiscal years ended April 30, 1996, 1997 and
1998, the Company paid Casella Construction, Inc. $1,236,435, $2,155,618 and
$4,202,500, respectively. The Company engaged Casella Construction, Inc. to
close and cap the municipal unlined landfill located adjacent to the Clinton
County landfill. The Company completed the closure and capping activities at
this landfill in September 1997. The amount to be paid to Casella Construction,
Inc. for this project is $2,465,000, of which $497,000 and $1,890,090 were paid
in the fiscal years ended April 30, 1997 and 1998, respectively. In 1994, the
Company retained Casella Construction, Inc. to close and cap a portion of the
NCES landfill for a contract price of $1,600,000 of which approximately
$1,478,400 was paid through April 30, 1998. In addition, in April 1998 Casella
Construction, Inc. was awarded the contract for the construction of Phase 3 of
the Waste USA landfill as the lowest bidder and after approval by a majority of
the disinterested members of the Board of Directors in accordance with Company
policy.
In August 1993, the Company entered into three real estate leases with
Casella Associates, a Vermont partnership owned by John and Douglas Casella,
relating to facilities occupied by the Company. One of these leases was
terminated in fiscal 1997, for which the Company paid Casella Associates
$191,869. The remaining leases, relating to the Company's corporate headquarters
in Rutland, Vermont and its Montpelier, Vermont facility, call for aggregate
monthly payments of approximately $18,000 and expire in April 2003. These leases
have been classified by the Company as capital leases for financial reporting
purposes. The lease agreements relating to the Rutland and Montpelier properties
provide that if such agreements are terminated prior to their respective lease
terms, either Casella Associates or the Company must pay to Albank an amount
which represents 41.9% and 42.9%, respectively, of the then outstanding
principal balance (which on April 30, 1998 was $867,594), on a term loan made by
Albank to Casella Associates. In fiscal 1997, the Company purchased the land
that is the site of the Company's current Middlebury, Vermont facility from
Casella Associates for $122,000. In addition, the Company leases furniture and
fixtures from Casella Associates pursuant to an operating lease which bears rent
at $950 per month and expires in 1999. In each of the years ended April 30,
1996, 1997 and 1998, the Company paid Casella Associates an aggregate of
$263,400, $558,380 and $244,500, respectively, for such leases. In November
1997, the lease relating to the Company's corporate headquarters in Rutland,
Vermont was amended, after approval by a majority of the disinterested members
of the Board of Directors in accordance with Company policy, to allow the
Company to upgrade and make capital improvements to the premises at an estimated
cost of $500,000, to be paid by the Company. Casella Associates was granted the
option to purchase such capital improvements by December 31, 2002, and if it
does not elect to exercise such option the Company has the right to purchase the
premises for $324,000, the fair market value of the premises prior to the
capital improvements, at the expiration of the term of the lease.
The Company operated an unlined landfill located in Whitehall, New York
owned by Bola, Inc., a corporation owned by John and Douglas Casella which
operated as a single-purpose real estate holding company. The Company paid the
cost of closing this landfill in 1992, and has agreed to pay all post-closure
obligations. In each of the fiscal years ended April 30, 1996, 1997 and 1998,
the Company paid $14,502,
54
$9,605, and $3,019 respectively, pursuant to this arrangement. The Company has
accrued $104,772 for costs associated with its post-closure obligations. There
can be no assurance that such accruals will be adequate to meet such
obligations.
In connection with the settlement of certain litigation naming the Company,
four of its subsidiaries, Messrs. James W. Bohlig and John W. and Douglas R.
Casella and one unrelated person as defendants, the Company paid an aggregate of
$450,000 plus approximately $200,000 in legal expenses incurred by the
defendants. The lawsuit was brought derivatively in the name of Meridian Group,
Inc. ("Meridian"), a Vermont corporation engaged in alternative energy project
development which has been inactive since 1993, of which Messrs. Bohlig and John
Casella were officers, directors and stockholders, as well as individually in
the names of the plaintiffs, who were also stockholders of Meridian. In response
to the lawsuit, in an effort to expedite adjudication, a majority of Meridian's
directors, including Messrs. Bohlig and John Casella, voted to place Meridian
into bankruptcy, and Meridian filed a petition under Chapter 7 of the Federal
Bankruptcy Code ("Chapter 7"). The lawsuit was subsequently removed to the
United States Bankruptcy Court for the District of Vermont. On July 14, 1997,
the bankruptcy court approved the settlement. Messrs. John Casella and Bohlig
were officers and directors of Meridian at the time Meridian filed the petition
under Chapter 7.
On or about October 30, 1997, Mr. Matthew M. Freeman commenced a civil
lawsuit against the Company and Messrs. John Casella and James Bohlig in the
Rutland Superior Court, Rutland County, State of Vermont. In the complaint, Mr.
Freeman seeks compensation for services allegedly performed by him prior to
1995. Mr. Freeman is seeking a three percent equity interest in the Company or
the monetary equivalent thereof, as well as punitive damages. The Company and
Messrs. Casella and Bohlig have answered the complaint, denied Mr. Freeman's
allegations of wrongdoing, and asserted various defenses. In order to facilitate
the completion of the November Offering, certain stockholders of the Company,
including the two officers named as defendants, 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 party). The Company has agreed to indemnify Messrs. Casella and Bohlig
for legal fees incurred by them in connection with the lawsuit, plus settlements
or awards up to $350,000 in the aggregate.
Benefit Plans
1997 Stock Incentive Plan
The 1997 Stock Incentive Plan (the "1997 Incentive Plan") permits the
Company to grant incentive stock options, non-statutory stock options,
restricted stock awards and other stock-based awards, including the grant of
shares based on certain conditions, the grant of securities convertible into
Class A Common Stock and the grant of stock appreciation rights (collectively,
"Awards"). Awards consisting of stock options may not be granted at an exercise
price which is less than 100% of the fair market value of the Class A Common
Stock on the date of grant and may not be granted for a term in excess of ten
years. Subject to adjustment in the event of stock splits and other similar
events, awards may be made under the 1997 Incentive Plan for up to the sum of
(i) 1,308,500 shares of Class A Common Stock, plus (ii) such additional number
of shares of Class A Common Stock as is equal to the aggregate number of shares
which remain available subject to awards granted under the Terminated Plans (as
defined below) which are not actually issued because such awards expire or
otherwise result in shares not being issued.
Officers, employees, directors, consultants and advisors of the Company and
its subsidiaries will be eligible to receive Awards under the 1997 Incentive
Plan. The maximum number of shares with respect to which an Award may be granted
to any participant under the 1997 Incentive Plan may not exceed 200,000 shares
per calendar year.
The 1997 Incentive Plan is administered by the Compensation Committee of
the Board of Directors, provided that the Stock Plan Subcommittee will
administer the issuance of awards to the Company's executive officers. The
Committee has the authority to adopt, amend and repeal the administrative rules,
guidelines and practices relating to the 1997 Incentive Plan and to interpret
the provisions of the 1997 Incentive Plan. The Compensation Committee selects
the recipients of Awards and determines (i) the number of shares of Class A
Common Stock covered by options and the dates upon which such options become
exercisable; (ii) the exercise price of options (which may not be less than 100%
of fair market
55
value on the date of grant); (iii) the duration of options (which may not exceed
ten years); and (iv) the number of shares of Class A Common Stock subject to any
restricted stock or other stock-based Awards and the terms and conditions of
such Awards, including conditions for repurchase, issue price and repurchase
price. The Board of Directors is required to make appropriate adjustments in
connection with the 1997 Incentive Plan and any outstanding Awards to reflect
stock dividends, stock splits and certain other events. In the event of a
merger, liquidation or other Acquisition Event (as defined in the 1997 Incentive
Plan), outstanding Awards will be assumed unless the acquiring or succeeding
corporation does not agree to assume such options, in which case the Board of
Directors shall accelerate the Awards to make them fully exercisable prior to
consummation of the Acquisition Event or provide for a cash-out of the value of
any outstanding options. If any Award expires or is terminated, surrendered,
canceled or forfeited, the unused shares of Class A Common Stock covered by such
Award will again be available for grant under the 1997 Incentive Plan.
Other Stock Option Plans
The Company has previously granted options to purchase shares of Class A
Common Stock pursuant to the 1993 Incentive Stock Option Plan, the 1994
Nonstatutory Stock Option Plan and the 1996 Stock Option Plan (collectively, the
"Terminated Plans"). In connection with the adoption of the Company's 1997
Incentive Plan, the Company has ceased granting options under these plans;
however, all stock options granted prior to the effectiveness of the 1997
Incentive Plan will remain outstanding in accordance with their terms and the
terms of the respective plans under which they were granted.
Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan")
is intended to allow eligible participating employees an opportunity to purchase
shares of Class A Common Stock at a discount. A maximum of 300,000 shares of
Class A Common Stock were authorized for issuance under the 1997 Purchase Plan.
The 1997 Purchase Plan is administered by the Compensation Committee of the
Board of Directors. All employees of the Company, except employees who own five
percent or more of the Company's stock, whose customary employment is more than
20 hours per week and who have been employed by the Company for at least six
months, are eligible to participate in the 1997 Purchase Plan. To participate in
the 1997 Purchase Plan, an employee must authorize the Company to deduct an
amount (up to ten percent of a participant's regular pay) from his or her pay
during six-month periods commencing on May 1 and November 1, or the first
business day thereafter, of each year (each a "Payment Period"). The maximum
number of shares of Class A Common Stock that an employee may purchase in any
Payment Period is determined by applying the formula stated in the 1997 Purchase
Plan. The exercise price for the option for each Payment Period is 85% of the
lesser of the average market price of the Company's Class A Common Stock on the
first or last business day of the Payment Period. If an employee is not a
participant on the last day of the Payment Period, such employee is not entitled
to exercise his or her option, and the amount of his or her accumulated payroll
deductions will be refunded. An employee's rights under the 1997 Purchase Plan
terminate upon his or her voluntary withdrawal from the plan at any time or upon
termination of employment.
Non-Employee Director Stock Option Plan
The Directors' Plan provides for the grant of options to purchase a maximum
of 50,000 shares of Class A Common Stock of the Company to non-employee
directors of the Company. The Directors' Plan is administered by the Board of
Directors. The Directors' Plan provides that each non-employee director will
receive an automatic grant of a nonqualified stock option to purchase 5,000
shares of Class A Common Stock upon initial election to the Board of Directors
(vesting in three equal installments on each of the three anniversaries
following the date of grant). An option to purchase 2,000 shares of Class A
Common Stock will be granted to each incumbent non-employee director on the date
of each annual meeting of stockholders beginning with the 1998 annual meeting
(vesting in three equal annual installments beginning on the first anniversary
of the date of grant). Options granted under the Directors' Plan expire ten
years from the date of grant. The option price for options granted under the
Directors' Plan is equal to the fair market value of a share of Class A Common
Stock as of the date of grant.
56
401(k) Plan
Effective July 1996, the Company implemented a 401(k) Plan Savings and
Retirement Plan (the "401(k) Plan"), a tax-qualified plan covering all of its
employees who are at least 21 years of age and have completed six months of
service with the Company. Each employee may elect to reduce his or her current
compensation by up to 15%, subject to the statutory limit (a maximum of $10,000
in calendar 1998) and have the amount of the reduction contributed to the 401(k)
Plan. Subject to Board approval, the Company may contribute an additional amount
to the 401(k) Plan, up to $500 per individual per calendar year. Employees vest
in Company contributions ratably over a three-year period.
57
CERTAIN TRANSACTIONS
In connection with the sale by the Company of its Series D Convertible
Preferred Stock in December 1995, the Company entered into a Management Services
Agreement with BCI Growth III, L.P., North Atlantic Venture Fund, L.P. and
Vermont Venture Capital Fund, L.P., all of whom are stockholders of the Company.
Under the Management Services Agreement, the Company agreed to pay a management
fee of approximately $22,300 per month in consideration of certain advisory
services provided by such stockholders to the Company. Gregory B. Peters, a
director of the Company, is affiliated with North Atlantic Venture Fund, L.P.
and The Vermont Venture Capital Fund, L.P.
The Company has from time to time engaged Casella Construction, Inc., a
company owned by John and Douglas Casella, both executive officers, directors
and significant stockholders of the Company, to provide construction services
for the Company. In each of the three years ended April 30, 1996, 1997 and 1998,
the Company paid Casella Construction, Inc. $1,236,435, $2,155,618 and
$4,202,200, respectively. The Company engaged Casella Construction, Inc. to
close and cap the municipal unlined landfill located adjacent to the Clinton
County landfill. The Company completed the closure and capping activities at
this landfill in September 1997. The amount to be paid to Casella Construction,
Inc. for this project is $2,465,000, of which $497,000 and $1,890,000 were paid
in the fiscal years ended April 30, 1997 and 1998, respectively. In 1994 the
Company retained Casella Construction, Inc. to close and cap a portion of the
NCES landfill for a contract price of $1,600,000, of which approximately
$1,478,400 was paid through April 30, 1998. In addition, in compliance with the
policy for all related party transactions described below, in April 1998 Casella
Construction, Inc. was awarded the contract for the construction of Phase 3 of
the Waste USA landfill as the lowest bidder and after approval by a majority of
the disinterested members of the Board of Directors in accordance with the
Company policy described below.
In August 1993, the Company entered into three real estate leases with
Casella Associates, a Vermont partnership owned by John and Douglas Casella,
relating to facilities occupied by the Company. One of these leases was
terminated in fiscal 1997, for which the Company paid Casella Associates
$191,869. The remaining leases, relating to the Company's corporate headquarters
in Rutland, Vermont and its Montpelier, Vermont facility, call for aggregate
monthly payments of approximately $18,000 and expire in April 2003. These leases
have been classified by the Company as capital leases for financial reporting
purposes. The lease agreements relating to the Rutland and Montpelier properties
provide that if such agreements are terminated prior to their respective lease
terms, either Casella Associates or the Company must pay to Albank an amount
which represents 41.9% and 42.9%, respectively, of the then outstanding
principal balance (which on April 30, 1998 was $867,594), on a term loan made by
Albank to Casella Associates. In fiscal 1997, the Company purchased the land
that is the site of the Company's current Middlebury, Vermont facility from
Casella Associates for $122,000. In addition, the Company leases furniture and
fixtures from Casella Associates pursuant to an operating lease which bears rent
at $950 per month and expires in 1999. In each of the years ended April 30,
1996, 1997 and 1998, the Company paid Casella Associates an aggregate of
$263,400, $558,380 and $244,500, respectively, for such leases. In November
1997, the lease relating to the Company's corporate headquarters in Rutland,
Vermont was amended, after approval by a majority of the disinterested members
of the Board of Directors in accordance with the Company policy described below,
to allow the Company to upgrade and make capital improvements to the premises at
an estimated cost of $500,000, to be paid by the Company. Casella Associates was
granted the option to purchase such capital improvements by December 31, 2002,
and if it does not elect to exercise such option the Company has the right to
purchase the premises for $324,000, the fair market value of the premises prior
to the capital improvements, at the expiration of the term of the lease.
The Company operated an unlined landfill located in Whitehall, New York
owned by Bola, Inc., a corporation owned by John and Douglas Casella which
operated as a single-purpose real estate holding company. The Company paid the
cost of closing this landfill in 1992, and has agreed to pay all post-closure
obligations. In each of the three years ended April 30, 1996, 1997 and 1998, the
Company paid $14,502, $9,605 and $3,019, respectively, pursuant to this
arrangement. As of April 30, 1998 the Company has accrued $104,772 for costs
associated with its post-closure obligations. There can be no assurance that
such accruals will be adequate to meet such obligations.
58
In connection with the settlement of certain litigation naming the Company,
four of its subsidiaries, Messrs. James W. Bohlig and John W. and Douglas R.
Casella and one unrelated person as defendants, the Company paid an aggregate of
$450,000 plus approximately $200,000 in legal expenses incurred by the
defendants. The lawsuit was brought derivatively in the name of Meridian, a
Vermont corporation which has been inactive since 1993, of which Messrs. Bohlig
and John Casella were officers, directors and stockholders, as well as
individually in the names of the plaintiffs, who were also stockholders of
Meridian. In response to the lawsuit, in an effort to expedite adjudication, a
majority of Meridian's directors, including Messrs. Bohlig and John Casella,
voted to place Meridian into bankruptcy, and Meridian filed a petition under
Chapter 7. The lawsuit was subsequently removed to the United States Bankruptcy
Court for the District of Vermont. On July 14, 1997, the bankruptcy court
approved the settlement. Messrs. John Casella and Bohlig were officers and
directors of Meridian at the time Meridian filed the petition under Chapter 7.
On or about October 30, 1997, Mr. Matthew M. Freeman commenced a civil
lawsuit against the Company and Messrs. John Casella and James Bohlig in the
Rutland Superior Court, Rutland County, State of Vermont. In the complaint, Mr.
Freeman seeks compensation for services allegedly performed by him prior to
1995. Mr. Freeman is seeking a three percent equity interest in the Company or
the monetary equivalent thereof, as well as punitive damages. The Company and
Messrs. Casella and Bohlig have answered the complaint, denied Mr. Freeman's
allegations of wrongdoing, and asserted various defenses. In order to facilitate
the completion of the November Offering, certain stockholders of the Company,
including the two officers named as defendants, 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 party). The Company has agreed to indemnify Messrs. Casella and Bohlig
for legal fees incurred by them in connection with the lawsuit, plus settlements
or awards up to $350,000 in the aggregate.
In connection with and at the time of the Company's acquisition of the
business of Catamount Waste Services, Inc., the Company entered into a lease in
June 1994 with CV Landfill, Inc., a Vermont corporation affiliated with
Catamount Waste Services, Inc., pursuant to which the Company agreed to lease a
transfer station for a term of 10 years. CV Landfill, Inc. is owned by John F.
Chapple III, who became a director of the Company at the time of the acquisition
of the business of Catamount Waste Services, Inc. Pursuant to the lease
agreement, the Company pays monthly rent for the first five years at a rate of
$5.00 per ton of waste disposed of at the transfer station, with a minimum rent
of $6,650 per month. Following the fifth anniversary of the lease agreement, the
Company pays monthly rent at a rate of $2.00 per ton, with a minimum rent of
$2,500 per month. In each of the three years ended April 30, 1996, 1997 and
1998, the Company paid CV Landfill, Inc. $139,687, $136,729 and $96,894,
respectively.
As part of the acquisition by the Company of the assets of Superior
Disposal Service, Inc., Kerkim, Inc. and related companies in January 1997, the
Company engaged Kenneth H. Mead, the sole stockholder of such companies, as a
consultant for a five-year period ending in 2002. Upon such acquisition, Mr.
Mead became a director of the Company. The consulting agreement, which also
contains a non-competition covenant, provides that the Company will pay Mr. Mead
(i) a fee for acquisitions of collection businesses made by the Company with Mr.
Mead's active assistance within a defined geographic area, in an amount equal to
one month's net revenue of any such acquired business; (ii) a fee of $500,000
for the acquisition by the Company with Mr. Mead's active assistance of any
enumerated landfill within a defined geographic area; and (iii) a fee, in
consideration of Mr. Mead's non-competition covenant, of $600,000 paid in
installments of $200,000 on each of the first and second anniversaries of the
date of the agreement and $100,000 on each of the third and fourth
anniversaries. For the fiscal years ended April 30, 1997 and 1998, the Company
paid Mr. Mead an aggregate of $231,000 and $201,871, respectively, pursuant to
this agreement.
Each of the transactions described above has been approved or ratified by a
disinterested majority of the Board of Directors. However, transactions between
the Company and affiliates of John W. Casella and Douglas R. Casella were not
negotiated, and accordingly the Company has no independent basis for concluding
whether or not the terms of such transactions were as favorable as could have
been negotiated with unaffiliated third parties.
The Company adopted a policy in June 1994 which required the Company to
obtain competitive bids for contracts with Casella Construction, Inc. in excess
of $100,000. During the period that such policy was in place (prior to July
1997), the Company awarded two construction contracts greater than $100,000 in
size to Casella Construction, Inc. without soliciting third party bids.
59
In July 1997, the Company's Board of Directors adopted a policy, which it
has since been following, for all related party transactions. The policy
establishes guidelines, including (i) requiring all future transactions,
including without limitation the purchase, sale or exchange of property or the
rendering of any service, between the Company and its officers, directors,
employees or other affiliates to (a) be approved by a majority of the members of
the Board of Directors and by a majority of the disinterested members of the
Board of Directors, and (b) be on reasonable terms no less favorable to the
Company than could be obtained from unaffiliated third parties; and (ii)
requiring a third party bid on all construction contracts in excess of $100,000.
60
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of June 15, 1998, and as
adjusted for the sale of the shares of Class A Common Stock offered hereby, by
(i) each person or entity known to the Company to beneficially own more than
five percent of the Company's Common Stock, (ii) each director and Named
Executive Officer of the Company, (iii) all current directors and executive
officers of the Company as a group and (iv) each other Selling Stockholder.
Class A Common Stock
---------------------------------------------------------
To be To be
Owned Sold Owned
Prior to the in the After the
Offering Offering Offering
----------------------- ---------- ----------------------
Name of Beneficial
Owner(1) Number % Number Number %
- ------------------------------- ------------ ---------- ---------- ------------ ---------
John W. Casella(2) ............ 777,316 7.21% 50,000 727,316 5.9%
Douglas R. Casella(3) ......... 777,316 7.21% 50,000 727,316 5.9%
James W. Bohlig(4) ............ 505,000 4.61% 35,000 470,000 3.7%
Jerry S. Cifor(5) ............. 184,332 1.72% 16,000 168,332 1.4%
Gregory B. Peters(6) .......... 24,684 * -- 24,684 *
John F. Chapple III ........... 220,643 2.09% 30,000 190,643 1.6%
Kenneth H. Mead(7) ............ 562,127 5.33% 40,000 522,127 4.3%
Michael F. Cronin(8) .......... 775,370 7.34% -- 775,370 6.4%
BCI Growth III, L.P.(9) ....... 880,912 8.34% 880,912 -- --
Weston Presidio Capital II,
L.P.(10) ..................... 775,370 7.34% -- 775,370 6.4%
Provident Investment
Counsel, Inc.(11) ............ 534,700 5.06% -- 534,700 4.4%
Directors and executive
officers as a group
(8 people)(12) ............... 3,826,788 33.20% 221,000 3,605,788 27.5%
Other Selling Stockholders
De Novo Trust ................. 60,000 * 20,000 40,000 *
Stephen Houghton(13) .......... 23,892 * 3,392 20,500 *
Elizabeth A. Ruane ............ 19,976 * 19,976 -- --
W. Thomas Sawyer, Jr.
(14) ......................... 40,000 * 40,000 -- --
Joseph M. Winters(15) ......... 42,739 * 39,188 10,653 *
Andrew B. Winters(15) ......... 42,739 * 39,188 10,653 *
Brigid Winters(15) ............ 128,216 1.21% 117,564 10,652 *
Sean Winters(15) .............. 42,739 * 39,188 10,653 *
Maureen Winters(16) ........... 81,525 * 30,000 51,525 *
Winters Family
Partnership (17) ............. 232,717 2.20% 20,172 212,545 1.2%
Total
Common
Class B Common Stock Stock
--------------------------------- ----------
To be Voting
Owned Owned Power
Prior to the After the After the
Offering Offering Offering
---------------- ---------------- ----------
Name of Beneficial
Owner(1) Number % Number % %
- ------------------------------- --------- ------ --------- ------ ----------
John W. Casella(2) ............ 494,100 50% 494,100 50% 25.5%
Douglas R. Casella(3) ......... 494,100 50% 494,100 50% 25.5%
James W. Bohlig(4) ............ -- -- -- -- 2.1%
Jerry S. Cifor(5) ............. -- -- -- -- *
Gregory B. Peters(6) .......... -- -- -- -- *
John F. Chapple III ........... -- -- -- -- *
Kenneth H. Mead(7) ............ -- -- -- -- 2.4%
Michael F. Cronin(8) .......... -- -- -- -- 3.5%
BCI Growth III, L.P.(9) ....... -- -- -- -- --
Weston Presidio Capital II,
L.P.(10) ..................... -- -- -- -- 3.5%
Provident Investment
Counsel, Inc.(11) ............ -- -- -- -- 2.4%
Directors and executive
officers as a group
(8 people)(12) ............... 988,200 100% 988,200 100% 58.6%
Other Selling Stockholders
De Novo Trust ................. -- -- -- -- *
Stephen Houghton(13) .......... -- -- -- -- *
Elizabeth A. Ruane ............ -- -- -- -- --
W. Thomas Sawyer, Jr.
(14) ......................... -- -- -- -- --
Joseph M. Winters(15) ......... -- -- -- -- *
Andrew B. Winters(15) ......... -- -- -- -- *
Brigid Winters(15) ............ -- -- -- -- *
Sean Winters(15) .............. -- -- -- -- *
Maureen Winters(16) ........... -- -- -- -- *
Winters Family
Partnership (17) ............. -- -- -- -- *
- ------------
* Less than 1% of the outstanding Common Stock.
(1) Beneficial ownership is determined in accordance with rules of the
Commission, and includes generally voting power and/or investment power
with respect to securities. Shares of Common Stock subject to options
and/or warrants currently exercisable or exercisable within 60 days of
June 15, 1998 ("Currently Exercisable Options") are deemed outstanding for
computing the percentage beneficially owned by the person holding such
options but are not deemed outstanding for purposes of computing the
percentage beneficially owned by any other person. Except as indicated by
footnote, the Company believes that the persons named in this table, based
on information provided by such persons, have sole voting and investment
power with respect to the shares of Common Stock indicated.
(2) Includes 210,166 shares issuable pursuant to Currently Exercisable
Options. Also includes 4,800 shares of Class A Common Stock held in trust
for the benefit of Mr. Casella's minor children. Mr. Casella disclaims
beneficial ownership of such shares.
61
(3) Includes 210,166 shares issuable pursuant to Currently Exercisable
Options. Also includes 1,600 shares of Class A Common Stock held in trust
for the benefit of Mr. Casella's minor children. Mr. Casella disclaims
beneficial ownership of such shares.
(4) Includes 380,000 shares issuable pursuant to Currently Exercisable
Options. Also includes 8,000 shares held in trust for the benefit of Mr.
Bohlig's minor children. Mr. Bohlig disclaims beneficial ownership of such
shares. The shares to be sold by Mr. Bohlig will be acquired by him upon
his exercise of non-qualified stock options contemporaneously with the
closing of this Offering. Mr. Bohlig will use the proceeds from the sale
of such shares to pay taxes incurred as a result of such exercise and to
exercise incentive stock options.
(5) Includes 164,332 shares issuable pursuant to Currently Exercisable
Options. The shares to be sold by Mr. Cifor will be acquired by him upon
his exercise of non-qualified stock options contemporaneously with the
closing of this Offering. Mr. Cifor will use the proceeds from the sale of
such shares to pay taxes incurred as a result of such exercise and to
exercise incentive stock options.
(6) An aggregate of 299,161 shares previously held by North Atlantic Venture
Fund, L.P., of which Mr. Peters is a General Partner and The Vermont
Venture Capital Fund, L.P., of which Mr. Peters is the Managing General
Partner, were distributed by such funds to the partners thereof without
restriction on resale on or about July 16, 1998. The shares owned by Mr.
Peters represent the shares distributed to him.
(7) Mr. Mead's address is 1669 N.W. Loop, Ocala, FL 34475.
(8) Consists of 775,370 shares held by Weston Presidio Capital II, L.P., of
which Mr. Cronin is a General Partner. Mr. Cronin disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest in
such firm. Mr. Cronin's address is c/o Weston Presidio Capital II, L.P.,
One Federal Street, Boston, MA 02110.
(9) The address of BCI Growth III, LP is Glenpointe Centre West, Teaneck, NJ
07666.
(10) The address of Weston Presidio Capital II, L.P. is One Federal Street,
Boston, MA 02110.
(11) Based on information filed by such stockholder with the Securities and
Exchange Commission on Schedule 13G for the year ended December 31, 1997.
The address of Provident Investment Counsel, Inc. is 300 North Lake
Avenue, Pasadena, CA 91101.
(12) Includes 964,664 shares issuable pursuant to Currently Exercisable
Options.
(13) Includes 19,000 shares issuable pursuant to Currently Exercisable Options.
(14) Includes 40,000 shares issuable pursuant to Currently Exercisable Options.
(15) Such Selling Stockholders were stockholders, or affiliates of
stockholders, of All Cycle, which was acquired by the Company in December
1997 in a transaction accounted for as a pooling of interests. Shares
owned by each such Selling Stockholder includes shares held in escrow to
secure certain obligations of such Selling Stockholder to the Company
pursuant to the acquisition agreement. Some of the shares held by such
person have been pledged to Goldman, Sachs & Co. to secure a loan made by
Goldman, Sachs & Co. to such person.
(16) Such Selling Stockholder was a stockholder of All Cycle, which was
acquired by the Company in December 1997 in a transaction accounted for as
a pooling of interests. Includes shares held in escrow to secure certain
obligations of such Selling Stockholder to the Company pursuant to the
acquisition agreement.
(17) Based on information provided to the Company, the beneficial owners of the
Winters Family Partnership are Joseph M. Winters, Andrew B. Winters,
Brigid Winters and Sean Winters.
62
DESCRIPTION OF CAPITAL STOCK
The following summary of certain provisions of the Company's Common Stock,
Preferred Stock, Restated Certificate of Incorporation and Restated By-Laws is
not intended to be complete and is qualified by reference to the provisions of
applicable law and to the Company's Restated Certificate of Incorporation and
Restated By-Laws included as exhibits to the Registration Statement of which
this Prospectus is a part. See "Available Information".
Authorized Capital Stock
The authorized capital stock of the Company consists of 30,000,000 shares
of Class A Common Stock, $0.01 par value per share, 1,000,000 shares of Class B
Common Stock, $0.01 par value per share, and 1,000,000 shares of Preferred
Stock, $0.01 par value per share.
Common Stock
The shares of Class A Common Stock and Class B Common Stock are identical
in all respects, except for voting rights and certain conversion rights and
transfer restrictions in respect of the shares of the Class B Common Stock, as
described below. The number of authorized shares of any class or classes of
capital stock of the Company may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote of the
holders of a majority of the voting power of the stock of the Company entitled
to vote generally in the election of directors irrespective of the provisions of
Section 242(b)(2) of the Delaware Law or any corresponding provision hereinafter
enacted.
Voting Rights. The holders of Class A Common Stock are entitled to one vote
per share. Holders of Class B Common Stock are entitled to ten votes per share.
Holders of all classes of Common Stock entitled to vote will generally vote
together as a single class on all matters presented to the stockholders for
their vote or approval except that the holders of Class A Common Stock, voting
separately as a class, will at all times be entitled to elect at least one
director, and such director may be removed, with or without cause, only by the
holders of the Class A Common Stock. Mr. Michael F. Cronin is the designee of
the holders of Class A Common Stock.
Dividends. Holders of Class A Common Stock and Class B Common Stock are
entitled to receive dividends at the same rate if, as and when such dividends
are declared by the Board out of assets legally available therefor after payment
of any dividends required to be paid on shares of Preferred Stock, if any. The
Company may not make any dividend or distribution to any holder of any class of
Common Stock unless simultaneously with such dividend or distribution the
Company makes the same dividend or distribution with respect to each outstanding
share of Common Stock regardless of class. In the case of a dividend or other
distribution payable in shares of a class of Common Stock, including
distributions pursuant to stock splits or divisions of Common Stock, only shares
of Class A Common Stock may be distributed with respect to Class A Common Stock,
and only shares of Class B Common Stock may be distributed with respect to Class
B Common Stock. Whenever a dividend or distribution, including distributions
pursuant to stock splits or divisions of the Common Stock, is payable in shares
of a class of Common Stock, the number of shares of each class of Common Stock
payable per share of such class of Common Stock shall be equal in number. In the
case of dividends or other distributions consisting of other voting securities
of the Company or of voting securities of any corporation which is a
wholly-owned subsidiary of the Company, the Company shall declare and pay such
dividends in two separate classes of such voting securities, identical in all
respects except that (i) the voting rights of each such security issued to the
holders of Class A Common Stock shall be one-tenth of the voting rights of each
such security issued to holders of Class B Common Stock; (ii) such security
issued to holders of Class B Common Stock shall convert into the security issued
to the holders of Class A Common Stock upon the same terms and conditions
applicable to the conversion of Class B Common Stock into Class A Common Stock
and shall have the same restrictions on transfer and ownership applicable to the
transfer and ownership of the Class B Common Stock; and (iii) with respect only
to dividends or other distributions of voting securities of any corporation
which is a wholly owned subsidiary of the Company, the respective voting rights
of each such security issued to holders of Class A Common Stock and Class B
Common Stock with respect to elections of directors shall otherwise be as
comparable as is practicable to those of the Class A Common Stock and Class B
Common Stock, respectively. In the case of dividends or other distributions
consisting
63
of securities convertible into, or exchangeable for, voting securities of the
Company or of voting securities of any corporation which is a wholly owned
subsidiary of the Company, the Company shall provide that such convertible or
exchangeable securities and the underlying securities be identical in all
respects (including, without limitation, the conversion or exchange rate) except
that the underlying securities may have the same differences as they would have
if the Company issued voting securities of the Company or of a wholly owned
subsidiary rather than issuing securities convertible into, or exchangeable for,
such securities.
Restrictions on Additional Issuances And Transfer. The Company may not
issue or sell any shares of Class B Common Stock or any securities (including,
without limitation, any rights, options, warrants or other securities)
convertible into, or exchangeable or exercisable for, shares of Class B Common
Stock to any person who is not a Class B Permitted Holder. Additionally, shares
of Class B Common Stock may not be transferred, whether by sale, assignment,
gift, bequest, appointment or otherwise, to a person other than a Class B
Permitted Holder. Notwithstanding the foregoing, (i) any Class B Permitted
Holder may pledge his, her or its shares of Class B Common Stock to a financial
institution pursuant to a bona fide pledge of such shares as collateral security
for indebtedness due to the pledgee provided that such shares remain subject to
the transfer restrictions and that, in the event of foreclosure or other similar
action by the pledgee, such pledged shares of Class B Common Stock may only be
transferred to a Class B Permitted Holder or converted into shares of Class A
Common Stock, as the pledgee may elect; and (ii) the foregoing transfer
restrictions shall not apply in the case of a merger, consolidation or business
combination of the Company with or into another corporation in which all of the
outstanding shares of Common Stock and Preferred Stock of the Company regardless
of class are purchased by the acquiror.
Conversion. Class A Common Stock has no conversion rights. Shares of Class
B Common Stock are convertible into Class A Common Stock, in whole or in part,
at any time and from time to time at the option of the holder, on the basis of
one share of Class A Common Stock for each share of Class B Common Stock
converted. Each share of Class B Common Stock will also automatically convert
into one share of Class A Common Stock if, on the record date for any meeting of
the stockholders of the Company, the number of shares of Common Stock held by
the Class B Permitted Holders is less than 1,077,874 shares (subject to
appropriate adjustment for stock splits, reverse stock splits, stock dividends
and similar transactions). Additionally, at such time as a person ceases to be a
Class B Permitted Holder, any share of Class B Common Stock held by such person
at such time shall automatically convert into a share of Class A Common Stock.
The Company covenants that (i) it will at all times reserve and keep available
out of its authorized but unissued shares of Class A Common Stock, such number
of shares of Class A Common Stock issuable upon the conversion of all
outstanding shares of Class B Common Stock; (ii) it will cause any shares of
Class A Common Stock issuable upon conversion of a share of Class B Common Stock
that require registration with or approval of any governmental authority under
federal or state law before such shares may be issued upon conversion to be so
registered or approved; and (iii) it will use its best efforts to list the
shares of Class A Common Stock required to be delivered upon conversion prior to
such delivery upon such national securities exchange upon which the outstanding
Class A Common Stock is listed at the time of such delivery.
Reclassification and Merger. In the event of a reclassification or other
similar transaction as a result of which the shares of Class A Common Stock are
converted into another security, then a holder of Class B Common Stock will be
entitled to receive upon conversion the amount of such other security that the
holder would have received if the conversion occurred immediately prior to the
record date of such reclassification or other similar transaction. No
adjustments in respect of dividends will be made upon the conversion of any
share of Class B Common Stock; except if a share is converted subsequent to the
record date for the payment of a dividend or other distribution on shares of
Class B Common Stock but prior to such payment, then the registered holder of
such share at the close of business on such record date will be entitled to
receive the dividend or other distribution payable on such date regardless of
the conversion thereof or the Company's default in payment of the dividend due
on such date.
In the event the Company enters into any consolidation, merger, combination
or other transaction in which shares of Common Stock are exchanged for or
changed into other stock or securities, cash and/or any other property, then,
and in such event, the shares of each class of Common Stock will be exchanged
64
for or changed into either (i) the same amount of stock, securities, cash and/or
any other property, as the case may be, into which or for which each share of
any other class of Common Stock is exchanged or changed; provided, however, that
if shares of Common Stock are exchanged for or changed into shares of capital
stock, such shares so exchanged for or changed into may differ to the extent and
only to the extent that the Class A Common Stock and the Class B Common Stock
differ as provided in the Company's Restated Certificate of Incorporation, or
(ii) if holders of each class of Common Stock are to receive different
distributions of stock, securities, cash and/or any other property, an amount of
stock, securities, cash and/or property per share having a value, as determined
by an independent investment banking firm of national reputation selected by the
Board of Directors, equal to the value per share into which or for which each
share of any other class of Common Stock is exchanged or changed.
Liquidation. In the event of liquidation of the Company, after payment of
the debts and other liabilities of the Company and after making provision for
the holders of Preferred Stock, if any, the remaining assets of the Company will
be distributable ratably among the holders of the Class A Common Stock and Class
B Common Stock treated as a single class.
Other Provisions. The holders of the Class A Common Stock and Class B
Common Stock are not entitled to preemptive rights. None of the Class A Common
Stock or Class B Common Stock may be subdivided or combined in any manner unless
the other classes are subdivided or combined in the same proportion. The Company
may not make any offering of options, rights or warrants to subscribe for shares
of Class B Common Stock. If the Company makes an offering of options, rights or
warrants to subscribe for shares of any other class or classes of capital stock
(other than Class B Common Stock) to all holders of a class of Common Stock,
then the Company is required to simultaneously make an identical offering to all
holders of the other classes of Common Stock other than to any class the holders
of which, voting as a separate class, agrees that such offering need not be made
to such class. All such options, rights or warrants offerings shall offer the
respective holders of Class A Common Stock and Class B Common Stock the right to
subscribe at the same rate per share.
As used in this Prospectus, the term "Class B Permitted Holder" includes
only the following persons: (i) John W. Casella or Douglas R. Casella and their
respective estates, guardians, conservators or committees; (ii) the spouses of
John Casella or Douglas Casella and their respective estates, guardians,
conservators or committees; (iii) each descendant of John Casella or Douglas
Casella (a "Casella Descendant") and their respective estates, guardians,
conservators or committees; (iv) each Family Controlled Entity (as defined
below); and (v) the trustees, in their respective capacities as such, of each
Casella Family Trust (as defined below). The term "Family Controlled Entity"
means (i) any not-for-profit corporation if at least a majority of its board of
directors is composed of John Casella or Douglas Casella, their spouses and/or
Casella Descendants; (ii) any other corporation if at least a majority of the
value of its outstanding equity is owned by Class B Permitted Holders; (iii) any
partnership if at least a majority of the economic interest of its partnership
interests are owned by Class B Permitted Holders; and (iv) any limited liability
or similar company if at least a majority of the economic interest of the
Company is owned by Class B Permitted Holders. The term "Casella Family Trust"
includes trusts the primary beneficiaries of which are John Casella or Douglas
Casella, their spouses, Casella Descendants, siblings, spouses of Casella
Descendants and their respective estates, guardians, conservator or committees
and/or charitable organizations, provided that if the trust is a wholly
charitable trust, at least a majority of the trustees of such trust consist of
John Casella or Douglas Casella, their spouses and/or Class B Permitted Holders.
Preferred Stock
The Board of Directors is authorized, subject to any limitations prescribed
by law, without stockholder approval, to issue up to 1,000,000 shares of
Preferred Stock in one or more series. Each such series of Preferred Stock shall
have such rights, preferences, privileges and restrictions, including voting
rights, dividend rights, exchange rights, conversion rights, redemption
privileges and liquidation preferences, as shall be determined by the Board of
Directors. The rights of the holders of shares of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any shares of
Preferred Stock that may be issued in the future. Preferred Stock may, at the
discretion of the Board of Directors, be entitled to preference over the Common
Stock with respect to the payment of dividends and the distribution of assets in
the event of liquidation, dissolution or winding up. Additionally, the issuance
of shares of Preferred
65
Stock could also decrease the amount of earnings and assets available for
distribution to the holders of the Common Stock. If any cumulative dividends or
amounts payable on a return of capital are not paid in full, shares of Preferred
Stock of all issued series would participate ratably in accordance with the
amounts that would be payable on such shares if all such dividends were declared
and paid in full or the sums which would be payable on such shares on the return
of capital if all amounts so payable were paid in full, as the case may be.
The purpose of authorizing the Board of Directors to issue Preferred Stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting capital stock of the Company. The Company has
no present plans to issue any shares of Preferred Stock.
Delaware Law and Certain Charter and By-Law Provisions
The Company is subject to the provisions of Section 203 of the Delaware
Law. In general, this statute prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
becomes an interested stockholder, unless the business combination is approved
in a prescribed manner. An "interested stockholder" is a person who, together
with affiliates and associates, owns (or within the prior three years did own)
15% or more of the corporation's voting stock.
The Company's Restated Certificate of Incorporation provides that vacancies
on the Board of Directors may only be filled by a majority of the Board of
Directors then in office. Furthermore, any director elected by the stockholders,
or by the Board of Directors to fill a vacancy, may be removed only by a vote of
75% of the combined voting power of the shares of Common Stock entitled to vote
for the election of directors (provided that the director elected by the holders
of Class A Common Stock, voting separately as a class, may be removed only by
the holders of at least 75% of the outstanding shares of Class A Common Stock).
The Company's Restated Certificate of Incorporation and Restated By-Laws
provide that any action required or permitted to be taken by the stockholders of
the Company may be taken only at a duly called annual or special meeting of
stockholders. These provisions could have the effect of delaying until the next
stockholders meeting stockholder actions which are favored by the holders of a
majority of the outstanding voting securities of the Company, especially since
special meetings of stockholders may be called only by the Board of Directors or
President of the Company. These provisions may also discourage another person or
entity from making a tender offer for the Company's Common Stock, because such
person or entity, even if it acquired a majority of the outstanding voting
securities of the Company, would be able to take action as a stockholder (such
as electing new directors or approving a merger) only at a duly called
stockholders meeting, and not by written consent. The Restated By-laws also
establish procedures, including advance notice procedures, with regard to the
nomination, other than by or at the direction of the Board of Directors, of
candidates for election as directors and other matters to be brought before
stockholders meetings.
The foregoing provisions, which may be amended only by a 75% vote of the
stockholders, could have the effect of making it more difficult for a third
party to effect a change in the control of the Board of Directors. In addition,
these provisions could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire, a
majority of the outstanding voting stock of the Company and may make more
difficult or discourage a takeover of the Company.
The Company has also included in its Restated Certificate of Incorporation
provisions to eliminate the personal liability of its directors for monetary
damages resulting from breaches of their fiduciary duty to the extent permitted
by Delaware Law and to indemnify its directors and officers to the fullest
extent permitted by Section 145 of the Delaware Law.
Transfer Agent and Registrar
The transfer agent and registrar for the Class A Common Stock is Boston
EquiServe, L.P., Boston, Massachusetts.
66
LEGAL MATTERS
Certain legal matters in connection with this Offering will be passed upon
for the Company by Hale and Dorr LLP, Boston, Massachusetts, and for the
underwriters by Morrison Cohen Singer & Weinstein, LLP, New York, New York.
EXPERTS
The audited financial statements of the Company included in this Prospectus
and elsewhere in this Registration Statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
The audited financial statements of H.C. Gobin, Inc. included in this
Prospectus and elsewhere in this Registration Statement have been audited by
Barrett & Dattilio, P.C., independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports and other information with the Securities and
Exchange Commission (the "Commission"). Such reports and other information
concerning the Company may be inspected and copied at prescribed rates at the
Commission's Public Reference Room, Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549 and at the Commission's regional offices located
at Seven World Trade Center, Suite 1300, New York, New York 10048, and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois, 60661,
upon payment of certain fees prescribed by the Commission. In addition,
materials filed by the Company can be inspected at the offices of the Nasdaq
Stock Market, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006. In
addition, the Company is required to file electronic versions of these documents
with the Commission through the Commission's Electronic Data Gathering, Analysis
and Retrieval (EDGAR) system.
The Company has filed with the Commission a Registration Statement on Form
S-1 (which term shall include all amendments, exhibits, schedules and
supplements thereto) under the Securities Act, with respect to the Class A
Common Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission, to which Registration Statement
reference is hereby made. Statements made in this Prospectus as to the contents
of any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. The Registration
Statement and the exhibits thereto may be inspected and copied at prescribed
rates at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, upon payment of certain fees prescribed by the
Commission. The Commission also maintains a World Wide Web site which provides
online access to reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission at the
address "http://www.sec.gov".
67
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CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF APRIL 30, 1996, APRIL 30, 1997 AND APRIL 30, 1998
TOGETHER WITH AUDITORS' REPORTS
Index to Financial Statements
Page
-----
Consolidated financial statements of Casella Waste Systems, Inc. and subsidiaries
Report of Independent Public Accountants ................................................ F-2
Consolidated balance sheets as of April 30, 1997 and 1998 ............................... F-3
Consolidated statements of operations for each of the three years ended April 30, 1998 .. F-5
Consolidated statements of redeemable preferred stock, redeemable put warrants and
stockholders' equity (deficit) for each of the three years ended April 30, 1998 ....... F-6
Consolidated statements of cash flows for each of the three years ended April 30, 1998 .. F-8
Notes to consolidated financial statements .............................................. F-9
Financial statements of completed acquisitions (included pursuant to Regulation S-X,
Rule 3.05):
The Superior Disposal Companies:
Report of Independent Public Accountants .............................................. F-26
Combined balance sheet as of December 31, 1996 ........................................ F-27
Combined statement of operations for the year ended December 31, 1996 ................. F-28
Combined statement of stockholder's equity for the year ended December 31, 1996 ....... F-29
Combined statement of cash flows for the year ended December 31, 1996 ................. F-30
Notes to combined financial statements ................................................ F-31
Clinton County, New York -- Solid Waste Department Enterprise Fund:
Report of Independent Public Accountants .............................................. F-36
Balance sheets as of December 31, 1995 and June 30, 1996 (unaudited) .................. F-37
Statements of operations for the year ended December 31, 1995 and the six months
ended June 30, 1996 (unaudited) ...................................................... F-38
Statements of funds deficit for the year ended December 31, 1995 and the six months
ended June 30, 1996 (unaudited) ...................................................... F-39
Statements of cash flows for the year ended December 31, 1995 and the six months
ended June 30, 1996 (unaudited) ...................................................... F-40
Notes to financial statements ......................................................... F-41
H.C. Gobin, Inc.:
Report of Independent Public Accountants .............................................. F-45
Balance sheets as of December 31, 1995 and 1996 and June 30, 1997 (unaudited) ......... F-46
Statements of income (loss) and retained earnings for the years ended December 31, 1995
and 1996 and the six months ended June 30, 1997 (unaudited) .......................... F-48
Statements of cash flows for the years ended December 31, 1995 and 1996 and the six
months ended June 30, 1997 (unaudited) ............................................... F-49
Notes to financial statements ......................................................... F-50
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Casella Waste Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Casella
Waste Systems, Inc. (a Delaware corporation) and subsidiaries as of April 30,
1997 and 1998, and the related consolidated statements of operations,
redeemable preferred stock, redeemable put warrants and stockholders' equity
(deficit) and cash flows for each of the three years ended April 30, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Casella Waste Systems, Inc.
and subsidiaries as of April 30, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years ended April 30,
1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
June 12, 1998
F-2
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
April 30,
-------------------------------
1997 1998
-------------------- ---------
(Restated, See Note 1)
--------------------
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 1,349 $ 1,946
Restricted funds--closure fund escrow ................... 1,532 304
Accounts receivable--trade, less allowance for
doubtful accounts of approximately $722 and $1,123 ..... 14,107 17,112
Refundable income taxes ................................. 447 921
Prepaid income taxes .................................... 543 546
Prepaid expenses ........................................ 906 1,204
Other current assets .................................... 745 561
-------- --------
Total current assets ................................ 19,629 22,594
Property and equipment, at cost:
Land and land held for investment ....................... 3,293 4,390
Landfills ............................................... 30,793 34,276
Landfill development .................................... 1,332 3,319
Buildings and improvements .............................. 12,353 15,019
Machinery and equipment ................................. 10,420 12,770
Rolling stock ........................................... 21,666 32,611
Containers .............................................. 11,305 16,079
-------- --------
91,162 118,464
Less--accumulated depreciation and amortization ......... 23,179 36,780
-------- --------
Property and equipment, net ......................... 67,983 81,684
-------- --------
Other assets:
Intangible assets, net .................................. 49,038 78,939
Restricted funds--closure fund escrow ................... 3,335 3,865
Other assets ............................................ 897 1,951
-------- --------
53,270 84,755
-------- --------
$140,882 $189,033
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Continued)
April 30,
---------------------------------
1997 1998
-------------------- ---------
(Restated, See Note 1)
--------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ....................................... $ 6,272 $ 2,595
Current maturities of capital lease obligations ............................ 392 481
Accounts payable ........................................................... 9,034 10,141
Accrued payroll and related expenses ....................................... 1,222 625
Accrued closure and postclosure costs, current portion ..................... 3,417 374
Deferred revenue ........................................................... 2,075 2,021
Other accrued expenses ..................................................... 2,794 2,539
--------- ---------
Total current liabilities .............................................. 25,206 18,776
--------- ---------
Long-term debt, less current maturities ...................................... 75,528 73,748
--------- ---------
Capital lease obligations, less current maturities ........................... 1,373 1,085
--------- ---------
Deferred income taxes ........................................................ 1,599 3,913
--------- ---------
Accrued closure and postclosure costs, less current portion .................. 4,910 6,191
--------- ---------
Other long-term liabilities .................................................. 364 3,460
--------- ---------
Commitments and contingencies (Note 6)
Redeemable preferred stock:
Series A Redeemable with warrants exercisable for Class A Common
Stock, $.01 par value (stated at redemption value)--
authorized--617 shares
issued and outstanding--517 and 0 shares .................................. 3,638 --
Series B Redeemable with warrants exercisable for Class A Common
Stock, $.01 par value (stated at redemption value)--
authorized--1,402 shares
issued and outstanding--1,295 and 0 shares ................................ 9,118 --
Series C Mandatorily Redeemable, $.01 par value
($7.00 redemption value)--
authorized--1,000 shares
issued and outstanding--424 and 0 shares .................................. 2,221 --
Series D Convertible Redeemable, $.01 par value
(stated at redemption value)--
authorized--1,922 shares
issued and outstanding--1,922 and 0 shares ................................ 16,449 --
Redeemable put warrants to purchase 100 shares of Class A Common Stock ....... 400 --
--------- ---------
Total redeemable preferred stock and redeemable put warrants ........... 31,826 --
--------- ---------
Stockholders' equity:
Class A Common Stock--
authorized--30,000 shares, $.01 par value
issued and outstanding--3,458 and 10,523 shares ........................... 35 105
Class B Common Stock--
authorized--1,000 shares, $.01 par value; 10 votes per share
issued and outstanding--1,000 and 988 shares .............................. 10 10
Additional paid-in capital ................................................. 10,976 95,901
Accumulated deficit ........................................................ (10,945) (14,156)
--------- ---------
Total stockholders' equity ............................................. 76 81,860
--------- ---------
$ 140,882 $ 189,033
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Fiscal Year Ended April 30,
------------------------------------------------
Pro Forma
1996 1997 1998 1998
-------- ------- -------- ----------
(Restated, See Note 1) (Unaudited)
Revenues ............................................................... $42,829 $79,532 $118,067 $119,350
------- ------- -------- --------
Operating expenses:
Cost of operations ..................................................... 25,137 48,057 69,878 70,907
General and administrative ............................................. 7,063 12,534 17,089 17,330
Merger related costs ................................................... -- -- 290 290
Depreciation and amortization .......................................... 8,152 13,695 18,345 18,459
Loss on impairment of long-lived assets ................................ -- -- 971 971
------- ------- -------- --------
40,352 74,286 106,573 107,957
------- ------- -------- --------
Operating income ....................................................... 2,477 5,246 11,494 11,393
------- ------- -------- --------
Other (income) expenses:
Interest income ........................................................ (196) (257) (265) (265)
Interest expense ....................................................... 2,813 4,547 6,797 4,911
Other expense (income), net ............................................ (90) 923 (80) 80
------- ------- -------- --------
2,527 5,213 6,452 4,726
------- ------- -------- --------
Income (loss) before provision for income taxes and extraordinary items (50) 33 5,042 6,667
Provision for income taxes ............................................. 144 452 2,385 3,046
------- ------- -------- --------
Income (loss) before extraordinary items ............................... (194) (419) 2,657 3,621
Extraordinary items from extinguishment of debt
(net of $168 income tax benefit) (Note 7) ............................. (326) -- -- --
------- ------- -------- --------
Net income (loss) ...................................................... $ (520) $ (419) $ 2,657 $ 3,621
Accretion of preferred stock and put warrants ......................... (2,967) (8,530) (5,738) --
------- ------- -------- --------
Net income (loss) applicable to common stockholders ................... $(3,487) $(8,949) $ (3,081) $ 3,621
======= ======= ======== ========
Basic net income (loss) per common share ............................... $ (1.06) $ (2.29) $ (0.39) $ 0.32
======= ======= ======== ========
Basic weighted average common shares outstanding ....................... 3,279 3,913 7,912 11,375
======= ======= ======== ========
Diluted net income (loss) per common share ............................. $ (1.06) $ (2.29) $ (0.39) $ 0.29
======= ======= ======== ========
Diluted weighted average common shares outstanding ..................... 3,279 3,913 7,912 12,459
======= ======= ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK, REDEEMABLE PUT
WARRANTS AND STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
Redeemable Preferred Stock (Restated, See Note 1)
---------------------------------------------------------------------------------------------------|
Series A Redeemable with Series B Redeemable with Series C Series D |
Warrants Exercisable for Warrants Exercisable for Mandatorily Convertible |
Class A Common Stock Class A Common Stock Redeemable Redeemable |
------------------------ ------------------------ ---------------------- ------------------------- |
Number of Redemption Number of Redemption Number of Redemption Number of Redemption |
Shares Value Shares Value Shares Value Shares Value |
----------- ------------ ----------- ------------ ----------- ---------- ----------- ------------- |
Balance, April 30, 1995 ......... -- $ -- -- $ -- -- $ -- -- $ -- |
Adjustment in connection with |
pooling of interests (Note 1) .. -- -- -- -- -- -- -- -- |
Capital contribution by pooled |
entity ......................... -- -- -- -- -- -- -- -- |
Issuance of preferred stock and |
other capital transactions ..... 517 2,376 1,295 5,956 424 1,952 1,922 13,455 |
Issuance costs .................. -- -- -- -- -- -- -- (973) |
Accretion of preferred stock .... -- -- -- -- -- 65 -- 65 |
Net loss ........................ -- -- -- -- -- -- -- -- |
--- ------- ----- -------- --- ------- ----- -------- |
Balance, April 30, 1996 ......... 517 2,376 1,295 5,956 424 2,017 1,922 12,547 |
Issuance of Class A Common |
Stock in various acquisitions .. -- -- -- -- -- -- -- -- |
Capital contribution by pooled |
entity ......................... -- -- -- -- -- -- -- -- |
Accretion of preferred stock and |
warrants ....................... -- 1,262 -- 3,162 -- 204 -- 3,902 |
Net loss ........................ -- -- -- -- -- -- -- -- |
--- ------- ----- -------- --- ------- ----- -------- |
Balance, April 30, 1997 ......... 517 3,638 1,295 9,118 424 2,221 1,922 16,449 |
Initial Public Offering-- |
net of issuance costs (Note 1).. -- -- -- -- -- -- -- -- |
Issuance of Class A Common |
Stock in various acquisitions .. -- -- -- -- -- -- -- -- |
Exercise of Common Stock |
Warrants ....................... -- -- -- -- -- -- -- -- |
Exercise of Employee Stock |
Options ........................ -- -- -- -- -- -- -- -- |
Exercise and Call of Redeemable |
Put Warrants ................... -- -- -- -- -- -- -- -- |
Accretion of Preferred Stock and |
Issuance Costs ................. -- 707 -- 1,770 -- 749 -- 2,287 |
Conversion of Convertible |
Preferred Stock ................ (517) (4,345) (1,295) (10,888) -- -- (1,922) (18,736) |
Redemption of Mandatorily |
Redeemable Preferred Stock ..... -- -- -- -- (424) (2,970) -- -- |
Conversion of Class B common |
into Class A ................... -- -- -- -- -- -- -- -- |
Distributions to Shareholders ... -- -- -- -- -- -- -- -- |
Net income ...................... -- -- -- -- -- -- -- -- |
---- ------- ------ -------- ---- ------- ------ -------- |
Balance, April 30, 1998 ......... -- $ -- -- $ -- -- $ -- -- $ -- |
==== ======= ====== ======== ==== ======= ====== ======== |
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK, REDEEMABLE PUT
WARRANTS AND STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
(Continued)
| Stockholders' Equity (Deficit) (Restated, See Note 1)
|------------------------------------------------------
| Class A Class B
| Common Stock Common Stock
| ---------------------- -----------------------
Redeemable | Number $0.01 Par Number $0.01 Par
Put Warrants| of Shares Value of Shares Value
------------| ---------- ----------- ----------- -----------
Balance, April 30, 1995 $ 3,142 | 2,099 $ 21 1,000 $10
Adjustment in connection |
with pooling of interests |
(Note 1) ......................... -- | 156 2 -- --
Capital contribution by |
pooled entity .................... -- | 143 1 -- --
Issuance of preferred stock |
and other capital |
transactions ..................... (2,742) | -- -- -- --
Issuance costs .................... -- | -- -- -- --
Accretion of preferred stock ...... -- | -- -- -- --
Net loss .......................... -- | -- -- -- --
------- | ----- ---- ----- ---
Balance, April 30, 1996 400 | 2,398 24 1,000 10
Issuance of Class A |
Common Stock in various |
acquisitions ..................... -- | 756 8 -- --
Capital contribution by |
pooled entity .................... -- | 304 3 -- --
Accretion of preferred stock |
and warrants ..................... -- | -- -- -- --
Net loss .......................... -- | -- -- -- --
------- | ----- ---- ----- ---
Balance, April 30, 1997 ........... 400 | 3,458 35 1,000 10
Initial Public Offering--net of |
issuance costs (Note 1) .......... -- | 3,000 30 -- --
Issuance of Class A |
Common Stock in various |
acquisitions ..................... -- | 103 1 -- --
Exercise of Common Stock |
Warrants ......................... -- | 148 2 -- --
Exercise of Employee Stock |
Options .......................... -- | 44 -- -- --
Exercise and Call of |
Redeemable Put Warrants .......... (400) | 25 -- -- --
Accretion of Preferred Stock |
and Issuance Costs ............... -- | -- -- -- --
Conversion of Convertible |
Preferred Stock .................. -- | 3,733 37 -- --
Redemption of Mandatorily |
Redeemable Preferred |
Stock ............................ -- | -- -- -- --
Conversion of Class B |
Common into Class A .............. -- | 12 -- (12) --
Distributions to Shareholders -- | -- -- -- --
Net Income ........................ -- | -- -- -- --
| ----- ---- ----- ---
Balance, April 30, 1998 ........... $ -- | 10,523 $105 988 $10
======= | ====== ==== ===== ===
Stockholders' Equity (Deficit)(Restated, See Note 1)
----------------------------------------------------
Total
Additional Stockholders'
Paid-in (Accumulated Equity
Capital Deficit) (Deficit)
------------ ------------- --------------
Balance, April 30, 1995 $ 3,452 $ (1,385) $ 2,098
Adjustment in connection
with pooling of interests
(Note 1) ......................... 198 39 239
Capital contribution by
pooled entity .................... 274 -- 275
Issuance of preferred stock
and other capital
transactions ..................... (2,837) -- (2,837)
Issuance costs .................... -- -- --
Accretion of preferred stock ...... -- (130) (130)
Net loss .......................... -- (520) (520)
------- -------- -------
Balance, April 30, 1996 1,087 (1,996) (875)
Issuance of Class A
Common Stock in various
acquisitions ..................... 9,367 -- 9,375
Capital contribution by
pooled entity .................... 522 -- 525
Accretion of preferred stock
and warrants ..................... -- (8,530) (8,530)
Net loss .......................... -- (419) (419)
------- -------- -------
Balance, April 30, 1997 ........... 10,976 (10,945) 76
Initial Public Offering--net of
issuance costs (Note 1) .......... 48,428 -- 48,458
Issuance of Class A
Common Stock in various
acquisitions ..................... 1,599 -- 1,600
Exercise of Common Stock
Warrants ......................... 651 -- 653
Exercise of Employee Stock
Options .......................... 65 -- 65
Exercise and Call of
Redeemable Put Warrants .......... 250 (225) 25
Accretion of Preferred Stock
and Issuance Costs ............... -- (5,513) (5,513)
Conversion of Convertible
Preferred Stock .................. 33,932 -- 33,969
Redemption of Mandatorily
Redeemable Preferred
Stock ............................ -- -- --
Conversion of Class B
Common into Class A .............. -- -- --
Distributions to Shareholders -- (130) (130)
Net Income ........................ -- 2,657 2,657
------- -------- -------
Balance, April 30, 1998 ........... $95,901 $(14,156) $81,860
======= ======== =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Year Ended April 30,
--------------------------------------
1996 1997 1998
---------- --------- -----------
(Restated, See Note 1)
Cash Flows from Operating Activities:
Net income (loss) .............................................. $ (520) $ (419) $ 2,657
-------- -------- ---------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities--
Depreciation and amortization .................................. 8,152 13,695 18,345
Loss on impairment of long-lived assets ........................ -- -- 971
(Gain) loss on sale of assets .................................. (41) 313 (335)
Provision for deferred income taxes ............................ 569 139 2,237
Non-cash employee compensation ................................. -- -- 60
Extraordinary items--loss on extinguishment of debt ............ 326 -- --
Changes in assets and liabilities, net of effects
of acquisitions--
Accounts receivable .......................................... (1,756) (3,741) (454)
Refundable income taxes ...................................... 4 (189) (474)
Accounts payable ............................................. 482 5,458 169
Accrued closure and postclosure costs ........................ 732 228 (1,763)
Other current assets and liabilities ......................... 694 (719) (1,966)
-------- -------- ---------
9,162 15,184 16,790
-------- -------- ---------
Net cash provided by operating activities ................. 8,642 14,765 19,447
-------- -------- ---------
Cash Flows from Investing Activities:
Acquisitions, net of cash acquired ............................. (17,328) (35,225) (35,793)
Additions to property and equipment ............................ (10,750) (16,971) (24,652)
Proceeds from sale of equipment ................................ 66 166 1,182
Restricted funds--closure fund escrow .......................... (214) (625) 698
Other .......................................................... 17 14 2,066
-------- -------- ---------
Net cash used in investing activities ..................... (28,209) (52,641) (56,499)
-------- -------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of preferred stock, net
of issuance costs ............................................ 12,482 -- --
Payments to subordinated debtholders ........................... (2,072) -- --
Deferred debt acquisition costs ................................ (125) (400) --
Proceeds from issuance of common stock ......................... 275 525 48,455
Proceeds from exercise of stock warrants/options ............... -- -- 869
Call of redeemable put warrants ................................ -- -- (525)
Redemption of Series C Preferred Stock ......................... -- -- (2,970)
Proceeds from long-term borrowings ............................. 23,591 47,228 158,445
Principal payments on long-term debt ........................... (14,879) (8,598) (166,625)
-------- -------- ---------
Net cash provided by financing activities ................. 19,272 38,755 37,649
-------- -------- ---------
Net increase in cash and cash equivalents ....................... (295) 879 597
Cash and cash equivalents, beginning of year .................... 765 470 1,349
-------- -------- ---------
Cash and cash equivalents, end of year .......................... $ 470 $ 1,349 $ 1,946
======== ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for--
Interest ....................................................... $ 2,481 $ 4,252 $ 7,144
======== ======== =========
Income taxes ................................................... $ 117 $ 598 $ 547
======== ======== =========
Supplemental disclosures of noncash investing and
financing activities:
Summary of entities acquired--
Fair value of assets acquired ................................ $ 22,432 $ 67,106 $ 42,554
Common stock issued .......................................... -- (9,374) (1,603)
Cash paid .................................................... (17,328) (35,225) (35,793)
-------- -------- ---------
Liabilities assumed and notes payable to sellers .......... 5,104 $ 22,507 $ 5,158
======== ======== =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. MERGER and INITIAL PUBLIC OFFERING
Casella Waste Systems, Inc. has restated the previously issued audited
consolidated balance sheet as of April 30, 1997, the previously issued audited
consolidated statements of operations, consolidated statements of redeemable
preferred stock, redeemable put warrants and stockholders' equity (deficit) and
consolidated statements of cash flows for the years ended April 30, 1996 and
1997 to reflect the merger with All Cycle Waste, Inc. and Winters Brothers, Inc.
("All Cycle") consummated on December 19, 1997, accounted for using the pooling
of interests method of accounting.
On November 3, 1997, the Company completed an initial public offering of
3,000,000 shares of its Class A Common Stock (the "November Offering") and in
accordance with the terms of the Company's agreements: (i) the Series A and
Series B Redeemable Preferred Stock with warrants exercisable for Class A Common
Stock was automatically redeemed and the redemption price was applied to the
exercise price of the warrants; (ii) the Series D Convertible Preferred Stock
was converted automatically into shares of Class A Common Stock; and (iii) the
Series C Mandatorily Redeemable Preferred Stock was redeemed at its stated
redemption price of $7.00 per share.
Proceeds of the November Offering were $48,427,918, net of underwriters'
discount and offering expenses. Of this amount, $44,962,548 was used for
repayment of indebtedness, $2,970,149 was used for redemption of the Series C
Mandatorily Redeemable Preferred Stock and $495,221 was used for payment under
the Management Services Agreement (see Note 10).
2. OPERATIONS
The Company is a regional, integrated, non-hazardous solid waste services
company that provides collection, transfer, disposal and recycling services in
Vermont, New Hampshire, Maine, upstate New York and northern Pennsylvania.
The consolidated financial statements of the Company include the accounts
of Casella Waste Systems, Inc. and its wholly owned subsidiaries: Casella Waste
Management, Inc., Forest Acquisitions, Inc., New England Waste Services, Inc.,
New England Waste Services of Vermont, Inc., Bristol Waste Management, Inc.,
Sunderland Waste Management, Inc., Newbury Waste Management, Inc., North
Country Environmental Services, Inc., North Country Composting Services, Inc.,
Sawyer Environmental Recovery Facilities, Inc., Sawyer Environmental Services,
Casella T.I.R.E.S., Inc., Pine Tree Waste Services of Maine, Inc., New England
Waste Services of N.Y., Inc., Casella Waste Management of N.Y., Inc. and
Casella Waste Management of Pennsylvania, Inc.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes and the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
F-9
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(c) Revenue Recognition
The Company recognizes revenues as the services are provided. Certain
customers are billed in advance and, accordingly, recognition of the related
revenues is deferred until the services are provided.
(d) Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, trade receivables, investments in closure trust funds, trade
payables and debt instruments. The book values of cash and cash equivalents,
trade receivables, investments in closure trust funds and trade payables
approximate their respective fair values. The Company's debt instruments that
are outstanding as of April 30, 1998 have carrying values that approximate
their respective fair values. See Note 5 for the terms and carrying values of
the Company's various debt instruments.
(e) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
maturities of three months or less to be cash equivalents.
(f) Closure Fund Escrow
Restricted funds held in trust consist of amounts on deposit with various
banks that support the Company's financial assurance obligations for its
facilities' closure and postclosure costs.
(g) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. The Company provides for depreciation using the straight-line
method by charges to operations in amounts that allocate the cost of the assets
over their estimated useful lives as follows:
Estimated
Asset Classification Useful Life
-------------------- ------------
Buildings and improvements ............................. 10-35 years
Machinery and equipment ................................ 2-15 years
Rolling stock .......................................... 1-10 years
Containers ............................................. 2-12 years
The cost of maintenance and repairs is charged to operations as incurred.
Depreciation expense for the years ended April 30, 1996, 1997 and 1998 was
$3,269,639, $6,929,283 and $9,487,641, respectively.
Capitalized landfill costs include expenditures for land and related
airspace, permitting costs and preparation costs. Landfill permitting and
preparation costs represent only direct costs related to these activities,
including legal, engineering and construction. Interest is capitalized on
landfill permitting and construction projects and other projects under
development while the assets are undergoing activities to ready them for their
intended use. The interest capitalization rate is based on the Company's
weighted average cost of indebtedness. No interest was capitalized for the year
ended April 30, 1996. Interest capitalized for the years ended April 30, 1997
and 1998 was $182,418 and $137,535, respectively. Management routinely reviews
its investment in operating landfills, transfer stations and other significant
facilities to determine whether the costs of these investments are realizable.
Landfill permitting, acquisition and preparation costs, excluding the
estimated residual value of land, are amortized as permitted airspace of the
landfill is consumed. Landfill preparation costs include the costs
F-10
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
of construction associated with excavation, liners, site berms and the
installation of leak detection and leachate collection systems. In determining
the amortization rate for these landfills, preparation costs include the total
estimated costs to complete construction of the landfills' permitted
capacities. Units-of-production amortization rates are determined annually for
each of the Company's operating landfills. The rates are based on estimates
provided by the Company's engineers and accounting personnel and consider the
information provided by surveys which are performed at least annually.
(h) Accrued Closure and Postclosure Costs
Accrued closure and postclosure costs include the current and noncurrent
portion of accruals associated with obligations for closure and postclosure of
the Company's operating and closed landfills. The Company, based on input from
its engineers and accounting personnel, estimates its future cost requirements
for closure and postclosure monitoring and maintenance for solid waste
landfills based on its interpretation of the technical standards of the U.S.
Environmental Protection Agency's Subtitle D regulations and the air emissions
standards under the Clean Air Act as they are being applied on a state-by-state
basis. Closure and postclosure monitoring and maintenance costs represent the
costs related to cash expenditures yet to be incurred when a landfill facility
ceases to accept waste and closes.
Accruals for closure and postclosure monitoring and maintenance
requirements in the U.S. consider final capping of the site, site inspection,
groundwater monitoring, leachate management, methane gas control and recovery,
and operation and maintenance costs to be incurred during the period after the
facility closes. Certain of these environmental costs, principally capping and
methane gas control costs, are also incurred during the operating life of the
site in accordance with the landfill operation requirements of Subtitle D and
the air emissions standards. Reviews of the future cost requirements for
closure and postclosure monitoring and maintenance for the Company's operating
landfills by the Company's engineers and accounting personnel are performed at
least annually and are the basis upon which the Company's estimates of these
future costs and the related accrual rates are revised. The Company provides
accruals for these estimated costs as the remaining permitted airspace of such
facilities is consumed.
The states in which the Company operates require a certain portion of
these accrued closure and postclosure obligations to be funded at any point in
time. Accordingly, the Company has placed $4,866,981 and $4,169,139, at April
30, 1997 and 1998, respectively, in restricted investment accounts to fund
these future obligations.
In addition, the Company has been required to post a surety bond or bank
letter of credit to secure its obligations to close its landfills in accordance
with environmental regulations. At April 30, 1998, the Company had provided
letters of credit totaling $4,276,302, expiring between May 1998 and June 1999,
to secure the Company's landfill closure obligations.
F-11
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(i) Intangible Assets
Intangible assets at April 30, 1997 and 1998 consist of the following:
April 30,
-----------------------
1997 1998
---------- ----------
Goodwill .......................................... $45,075 $73,621
Covenants not to compete .......................... 6,016 8,941
Customer lists .................................... 431 420
Deferred debt acquisition costs and other ......... 710 1,818
------- -------
52,232 84,800
Less--accumulated amortization .................... 3,194 5,861
------- -------
$49,038 $78,939
======= =======
Goodwill is the cost in excess of fair value of identifiable assets of
acquired businesses and is amortized using the straight-line method over
periods not exceeding 40 years. Covenants not to compete and customer lists are
amortized using the straight-line method over their estimated useful lives,
typically no more than 10 years. The Company continually evaluates whether
events and circumstances have occurred subsequent to an acquisition that
indicate the remaining estimated useful life or carrying value of these
intangible assets may warrant revision. When factors indicate that these assets
should be evaluated for possible impairment, the Company uses an estimate of
the related business segment's undiscounted cash flows over the remaining life
of the asset in measuring recoverability.
Deferred debt acquisition costs are capitalized and amortized over the
life of the related debt using the effective interest method.
(j) Impairment of Long-Lived Assets
Effective May 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. In accordance
with SFAS No. 121, the Company evaluates the recoverability of its carrying
value of the Company's long-lived assets and certain intangible assets based on
estimated undiscounted cash flows to be generated from each of such assets as
compared to the original estimates used in measuring the assets. To the extent
impairment is identified, the Company reduces the carrying value of such
impaired assets to their fair market value.
The Casella T.I.R.E.S. plant in Eliot, Maine was established by purchasing
the waste tire processing assets of the Seward companies in June, 1996. The
ongoing profitability of this location is dependent on a continuing secondary
market for the product of its tire shredding operations, primarily as tire
derived fuel ("TDF"). Due to pressures on the Company's TDF customers to meet
requirements of the Clean Air Act, management projects that over the next few
years these customers will replace TDF with natural gas as a fuel, and that the
future undiscounted cash flows will be less than the current carrying value of
the assets associated with this site.
F-12
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The primary assets associated with this site include real estate, tire
processing and other equipment, and goodwill. The impairment charge was
computed as the difference between the April 30, 1998 carrying value of the
affected assets, and their fair market value as of that date. The fair market
value of the affected assets was computed in accordance with SFAS No. 121 as
the discounted projected future net cash inflows. The charge was allocated as
follows (in thousands):
Goodwill ...................................................... $471
Tire processing equipment ..................................... 453
Other equipment ............................................... 47
----
Impairment charge ............................................. $971
====
(k) Income Taxes
The Company records income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS No. 109, deferred income taxes are
recognized based on the expected future tax consequences of differences between
the financial statement basis and the tax basis of assets and liabilities,
calculated using currently enacted tax rates.
(l) Unaudited Pro Forma Presentation
The unaudited pro forma statement of operations for the year ended April
30, 1998 gives effect to: (i) the acquisition of substantially all of the
assets of H.C. Gobin, Inc., which took place on August 1, 1997, as if it had
occurred on May 1, 1997, (ii) the application of the net proceeds from the
November Offering, after deducting the underwriting discount and offering
expenses paid by the Company, as if it had closed on May 1, 1997; and (iii) the
elimination of accretion charges related to the Series Preferred Stock and Put
Warrants (see Note 7), none of which were outstanding after the November
Offering.
(m) Earnings per Share and Unaudited Pro Forma Earnings per
Share of Common Stock
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share". This statement supersedes Accounting Principal Board Opinion No. 15.
SFAS No. 128 is effective for interim and annual periods ending after December
15, 1997. The Company has adopted SFAS No. 128 and applied the provisions of
this statement retroactively to all periods presented.
Primary EPS is replaced by Basic EPS, which is computed by dividing income
(loss) available to common stockholders by the weighted average number of
common shares outstanding for the period. Basic common shares no longer include
common equivalents such as convertible preferred shares. 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. The treasury stock method used to compute the
number of potentially-dilutive shares that would be repurchased with the
proceeds of potential stock issuances has been changed. The treasury stock
method now requires use of the average share price for each period instead of
the greater of the ending share price or the average share price.
F-13
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The following is a reconciliation of the ending number of shares
outstanding with the number of shares used in the calculation of basic and
diluted earnings per share (in thousands):
Year ended April 30,
---------------------------------------
1996 1997 1998 1998
Pro Forma
Number of shares outstanding, end of period:
Class A Common Stock ........................... 2,398 3,458 10,523 10,523
Class B Common Stock ........................... 1,000 1,000 988 988
Effect of weighting the average shares
outstanding during the period .................. (119) (545) (3,599) (136)
----- ----- ------ ------
Basic shares outstanding ........................ 3,279 3,913 7,912 11,375
Potentially dilutive shares ..................... -- -- -- 1,084
----- ----- ------ ------
Diluted shares outstanding ...................... 3,279 3,913 7,912 12,459
===== ===== ====== ======
Diluted earnings per share are not presented for the years ended April 30,
1996, 1997 and 1998 because they are anti-dilutive. The number of potentially
dilutive shares excluded from the earnings per share calculation was 1,604,138,
4,420,835 and 2,986,424 for the years ended April 30, 1996, 1997 and 1998,
respectively.
Pro forma basic and diluted weighted average common shares outstanding
gives effect to shares issued in the November Offering and the redemption or
conversion into shares of Class A Common Stock of the Series Preferred Stock and
Put Warrants as if each had occurred on May 1, 1997.
4. BUSINESS COMBINATIONS
(a) Transaction Recorded as a Pooling of Interests
On December 19, 1997, the Company completed its merger with All Cycle in a
business combination recorded as a pooling of interests and, accordingly, the
accompanying financial statements have been restated to include the accounts
and operations of All Cycle for all periods presented. The two businesses
acquired were under common control, and the transaction was considered to be
and accounted for as a single acquisition. All Cycle Waste, Inc. is a solid
waste collection and transfer operation in Chittenden County, Vermont. Winters
Brothers, Inc. owns the real estate that All Cycle Waste, Inc. operates out of
in Williston, Vermont. The Company issued 416,103 shares of its Class A Common
Stock for all of the outstanding stock of All Cycle Waste, Inc. and 187,244
shares of its Class A Common Stock for all of the outstanding stock of Winters
Brothers, Inc.
Prior to December 19, 1997, Casella Waste Systems, Inc. incurred disposal
expense and All Cycle Waste, Inc. earned disposal revenue through the
operations of All Cycle's waste transfer station. These transactions have been
eliminated in the accompanying financial statements.
F-14
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. BUSINESS COMBINATIONS (Continued)
Following is a reconciliation of the amounts (in thousands) of net sales
and net income previously reported for the years ended April 30, 1996 and 1997:
Fiscal Year Ended April 30,
---------------------------
1996 1997
---------- ----------
Revenues:
Casella Waste Systems, Inc. - as previously
reported .................................. $38,109 $ 73,176
All Cycle ................................... 4,721 7,358
Elimination of intercompany revenue ......... -- (1,002)
------- --------
Casella Waste Systems, Inc. - as restated ... $42,830 $ 79,532
======= ========
Net income (loss):
Casella Waste Systems, Inc. - as previously
reported .................................. $ (274) $ (12)
All Cycle ................................... (246) (407)
------- --------
Casella Waste Systems, Inc. - as restated ... $ (520) $ (419)
======= ========
(b) Transactions Recorded as Purchases
During fiscal 1996, the Company completed 17 acquisitions, including one
landfill. During fiscal 1997, the Company completed 25 acquisitions, including
the 25-year capital lease of a landfill. During fiscal 1998, the Company
acquired 33 solid waste hauling operations, exclusive of the All Cycle
transaction discussed above. These transactions were accounted for as
purchases. Accordingly, the operating results of these businesses are included
in the Consolidated Statement of Operations from the dates of acquisition and
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 purchase prices allocated to the net assets acquired were as follows
(in thousands):
Fiscal Year Ended April 30,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
Accounts receivable and prepaid expenses ......... $ 2,947 $ 4,127 $ 2,923
Investments--restricted .......................... 1,240 450 --
Landfills ........................................ 3,495 8,013 --
Property and equipment ........................... 7,451 17,378 9,105
Covenants not to compete and customer lists ...... 2,060 2,445 2,498
Goodwill ......................................... 5,240 34,694 28,028
Deferred taxes ................................... (806) (73) (75)
Debt and notes payable ........................... (3,738) (6,709) (2,650)
Other liabilities assumed ........................ (561) (15,726) (2,433)
-------- --------- --------
Total consideration .............................. $ 17,328 $ 44,599 $ 37,396
======== ========= ========
F-15
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. BUSINESS COMBINATIONS (Continued)
The following unaudited pro forma combined information (in thousands
except for per share information) shows the results of the Company's operations
for the years ended April 30, 1997 and 1998, exclusive of the effects of the
Company's November Offering, as though each of the completed acquisitions had
occurred as of May 1, 1996:
Pro Forma
Year ended April 30,
---------------------------
1997 1998
----------- -------------
Revenues ..................................................... $132,261 $ 131,437
Operating income ............................................. 7,626 12,822
Net income (loss) ............................................ (985) 3,487
Diluted pro forma net income (loss) per common share ......... (0.25) 0.32
Weighted average diluted shares outstanding .................. 3,913 10,898
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, 1996, 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.
5. LONG-TERM DEBT
Long-term debt as of April 30, 1997 and 1998 consists of the following (in
thousands):
April 30,
-----------------------
1997 1998
---------- ----------
Advances on revolving credit facility, which provides for advances
of up to $150,000,000 due January 12, 2003. Interest on
outstanding advances accrues, at the election of the Company,
either at the bank's base rate or LIBOR plus a percentage,
based on a pricing grid as defined (6.875% at April 30, 1998),
payable monthly in arrears. The interest rate is subject to
adjustment under the Swap Agreement described below. The
debt is collateralized by all assets of the Company, whether now
owned or hereafter acquired ....................................... $52,359 $64,150
Bank term notes payable, bearing interest at the bank's base rate
plus 0.25% per annum, secured by all assets of the Company ........ 9,431 --
Notes payable in connection with businesses acquired, bearing
interest at rates of 7% to 10%, due in monthly installments
ranging from $939 to $11,152, expiring September 1998 through
January 2007 ...................................................... 6,508 5,548
Payments due to Clinton County, discounted at 4.75%, due in
quarterly installments of $375,046 through March 2003 ............. 7,796 6,645
Notes payable, secured by assets purchased, bearing interest at
rates of 6% to 30% ................................................ 5,706 --
------- -------
81,800 76,343
Less-current portion ............................................... 6,272 2,595
------- -------
$75,528 $73,748
======= =======
F-16
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. LONG-TERM DEBT (Continued)
On January 21, 1998, the Company entered into a three-year interest rate
swap agreement (the Swap Agreement) with a bank. The purpose was to effectively
convert a portion of the Company's interest rate exposure on advances under its
revolving credit facility line from a floating rate to a fixed rate until the
expiration of the Swap Agreement. The Swap Agreement effectively fixes the
Company's interest rate on the notional amount of $45,000,000 to 5.8% per
annum. Net monthly payments or monthly receipts under the Swap Agreement are
recorded as adjustments to interest expense. The Company paid $162,535 in
interest under this agreement during the year ended April 30, 1998. In the
event of nonperformance by the counterparty, the Company would be exposed to
interest rate risk if the variable interest rate received were to exceed the
fixed rate paid by the Company under the terms of the Swap Agreement.
The revolving credit facility contains certain covenants that, among other
things, restrict dividends or stock repurchases, limit capital expenditures and
annual operating lease payments, and set minimum fixed charges, interest
coverage and leverage ratios and minimum consolidated adjusted net worth
requirements. As of April 30, 1998 the Company was in compliance with all
covenants.
As of April 30, 1998, debt matures as follows (in thousands):
(Unaudited)
Amount
------------
Year Ending April 30,
1999 .................................................... $ 2,595
2000 .................................................... 2,592
2001 .................................................... 2,561
2002 .................................................... 1,924
2003 .................................................... 66,018
Thereafter .............................................. 653
-------
$76,343
=======
6. COMMITMENTS AND CONTINGENCIES
(a) Leases
The following is a schedule of future minimum lease payments (in
thousands), together with the present value of the net minimum lease payments
under capital leases, as of April 30, 1998:
Operating Capital
Leases Leases
--------- --------
Year Ended April 30,
1999 ...................................................... $ 408 $ 509
2000 ...................................................... 343 368
2001 ...................................................... 299 366
2002 ...................................................... 227 350
2003 ...................................................... 148 274
Thereafter ................................................ 258 --
------ ------
Total minimum lease payments ............................ $1,683 1,867
======
Less--amount representing interest ......................... (301)
------
1,566
Current maturities of capital lease obligations ............ 481
------
Present value of long-term capital lease obligations .... $1,085
======
F-17
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. COMMITMENTS AND CONTINGENCIES (Continued)
The Company leases real estate, containers and hauling vehicles under
leases that qualify for treatment as capital leases. The assets related to
these leases have been capitalized and are included in property and equipment
at April 30, 1997 and 1998.
The Company leases operating facilities and equipment under operating
leases with monthly payments ranging from $43 to $3,903.
Total rent expense under operating leases charged to operations was
$502,122, $933,294 and $936,103 for each of the three years ended April 30,
1996, 1997 and 1998, respectively.
(b) Legal Proceedings
In 1997, the Company was a defendant in a lawsuit regarding certain assets
of the Company. The suit was settled for $450,000, and the Company paid an
aggregate of $200,000 representing the legal fees of all defendants. The
settlement was accrued for and included in other accrued expenses in the
accompanying consolidated balance sheet at April 30, 1997.
On or about October 30, 1997, an individual commenced a civil lawsuit
against the Company and two of the Company's officers and directors in the
Rutland Superior Court, Rutland County, State of Vermont. In the complaint, the
individual seeks compensation for services allegedly performed by him prior to
1995. The individual is seeking a three percent equity interest in the Company
or the monetary equivalent thereof, as well as punitive damages. The Company
and the officers and directors have answered the complaint, denied the
individual's allegations of wrongdoing, and asserted various defenses. Certain
stockholders of the Company agreed to indemnify the Company for any settlement
by the Company or any award against the Company in excess of $350,000 (but not
legal fees paid by or on behalf of the Company or any other third party). The
Company accrued a $215,000 reserve for this claim during the year ended April
30, 1998.
In the normal course of conducting its operations, the Company may become
involved in certain legal and administrative proceedings. Some of these actions
may result in fines, penalties or judgments against the Company, which may have
an impact on earnings for a particular period. Management expects that such
matters in process at April 30, 1998 will not have a material adverse effect on
the Company's financial position, including its liquidity or its results of
operations.
(c) Environmental Liability
The Company is subject to liability for any environmental damage,
including personal injury and property damage, that its solid waste facilities
may cause to neighboring property owners, particularly as a result of the
contamination of drinking water sources or soil, possibly including damage
resulting from conditions existing before the Company acquired the facilities.
The Company may also be subject to liability for similar claims arising from
off-site environmental contamination caused by pollutants or hazardous
substances if the Company or its predecessors arrange to transport, treat or
dispose of those materials. Any substantial liability incurred by the Company
arising from environmental damage could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
is not presently aware of any situations that may have a material adverse
impact.
(d) Sawyer Landfill Royalty Payments
In connection with an acquisition, the Company agreed to pay to the seller
a royalty for certain additional permitted landfill capacity. The royalty due
is equal to $2.50 per ton for the first 400,000 tons
F-18
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. COMMITMENTS AND CONTINGENCIES (Continued)
of such additional capacity and $3.50 per ton thereafter. The payments are
generally due as the landfill is utilized except that at the time of the
successful permitting, the first $1 million of royalties becomes immediately
due and payable. This amount may be taken in cash or stock on an equivalent per
share price of $6.55. This option is at the election of the seller and is only
available for the first royalty payment.
7. REDEEMABLE PREFERRED STOCK, REDEEMABLE PUT WARRANTS AND STOCKHOLDERS'
EQUITY (DEFICIT)
(a) Preferred Stock
On December 22, 1995, the Company sold 1,922,169 shares of Series D
Convertible Redeemable Preferred Stock, raising proceeds of $12,482,412, net of
$972,771 in issuance costs. In addition, the Company extinguished certain
subordinated debt through proceeds raised in this Series D Preferred Stock
transaction, and by issuing certain subordinated debt holders 516,620 shares of
the Company's Series A Redeemable Preferred Stock, 1,294,579 shares of the
Company's Series B Redeemable Preferred Stock and 424,307 shares of the
Company's Series C Mandatorily Redeemable Preferred Stock. The Company has
recorded a charge of $2,963,317 based on the difference between the fair market
value of consideration (preferred stock and cash) issued to the subordinated
debt holders and the carrying value of the subordinated debt extinguished. The
charge, net of tax, was allocated to earnings as an extraordinary charge
($126,523) and equity ($2,836,794) based on the relative fair value of the debt
and warrants, respectively. The Company also wrote off the unamortized issuance
costs associated with certain subordinated debt. This write-off resulted in an
extraordinary charge, net of tax, of $199,785. The total extraordinary loss
from the extinguishment of debt amounted to $326,308 (net of $168,098 income
tax benefit).
The difference between the carrying value and the redemption value
(defined as the higher of $1.50, $2.00 and $7.00 or the underlying fair market
value of the Company's Class A Common Stock, respectively) of the Series A and
Series B Redeemable Preferred Stock with warrants exercisable for Class A
Common Stock and the Series D Convertible Redeemable Preferred Stock was being
accreted using the effective interest method through the earliest redemption
date (December 31, 2000, December 31, 2000 and January 1, 2001, respectively).
In accordance with its original terms, immediately prior to the closing of the
November Offering, each share of Series A Preferred Stock and Series B
Preferred Stock, through the exercise of warrants and redemption of preferred
stock in connection therewith, and each share of Series D Preferred Stock
automatically converted into one share of Class A Common Stock.
Also in accordance with its original terms, the Series C Mandatorily
Redeemable Preferred Stock was redeemed immediately following the closing of
the November Offering. The Company had been accreting the difference between
the carrying value and redemption value ($7.00 per share) using the effective
interest method through the earliest fixed redemption date (December 31, 2000).
Therefore, the Company recorded an accelerated accretion charge immediately
prior to the November Offering in order to state the Series C Stock at its
redemption price.
(b) Common Stock
The holders of the Class A Common Stock are entitled to one vote for each
share held. The holders of the Class B Common Stock are entitled to ten votes
for each share held except for the election of one director who is elected by
the holders of Class A Common Stock exclusively. The Class B Common Stock is
convertible into Class A Common Stock on a share-for-share basis at the option
of the shareholder.
F-19
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. REDEEMABLE PREFERRED STOCK, REDEEMABLE PUT WARRANTS AND
STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
(c) Stock Warrants
At April 30, 1998, the Company had outstanding warrants to purchase
190,392 shares of the Company's Class A Common Stock at exercise prices between
$0.01 and $7.25 per share, based on the fair market value of the underlying
common stock at the time of the warrants' issuance. The warrants become
exercisable upon vesting and notification and expire between July 1998 and
October 2003.
(d) Put Warrants
In connection with an acquisition in April 1995, the Company issued
100,000 warrants to purchase one share each of Class A Common Stock exercisable
at $6.00 per share. These warrants were putable to the Company at $4.00 per
share or callable by the Company at $7.00 per share beginning in April 1997 and
were initially recorded at their put price. These warrants were stated at their
put price per share in the accompanying consolidated balance sheet as of April
30, 1997. During fiscal 1998 (but prior to the November Offering), warrants to
acquire 25,000 shares of Class A Common Stock for cash proceeds of $150,000
were exercised. During the same period the Company called the remaining 75,000
warrants in exchange for total cash consideration of $525,000. The difference
between the put price and the call price was accreted through a charge to
accumulated deficit at the time of the call.
(e) Stock Option Plans
During 1993, the Company adopted an incentive stock option plan for
officers and other key employees. The 1993 Incentive Stock Option Plan (the
"1993 Option Plan") provided for the issuance of a maximum of 300,000 shares of
Class A Common Stock. As of April 30, 1998, options to purchase 258,000 shares
of Class A Common Stock at an average exercise price of $1.87 were outstanding
under the 1993 Option Plan. No further options may be granted under this plan.
During 1994, the Company adopted a nonstatutory stock option plan for
officers and other key employees. The 1994 Stock Option Plan (the "1994 Option
Plan") provides for the issuance of a maximum of 150,000 shares of Class A
Common Stock. Options to purchase 150,000 shares of Class A Common Stock at an
average exercise price of $0.60 were outstanding under the 1994 Option Plan as
of April 30, 1997 and April 30, 1998. No further options may be granted under
this plan.
In connection with the May 1994 Senior Note and Warrant Purchase Agreement
(the "Purchase Agreement"), the Company established a nonqualified stock option
pool for certain key employees. The purchase agreement established 338,000
stock options to purchase Class A Common Stock. Options to purchase 338,000
shares of Class A Common Stock at an average exercise price of $2.00 were
outstanding under the Purchase Agreement as of April 30, 1997 and April 30,
1998. No further options may be granted 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 918,135 shares of Class A Common Stock pursuant to the grant of
either incentive stock options or nonstatutory options. As of April 30, 1997,
options to purchase 418,135 shares of Class A Common Stock at an average
exercise price of $10.04 were outstanding under the 1996 Option Plan. As of
April 30, 1998, a total of 601,302 options to purchase Class A Common Stock
were outstanding at an average exercise price of $11.86. 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
F-20
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. REDEEMABLE PREFERRED STOCK, REDEEMABLE PUT WARRANTS AND
STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
optionees and determine the terms of the options granted. The 1997 Stock Option
Plan (the "1997 Option Plan") provides for the issuance of 1,000,000 shares of
Class A Common Stock pursuant to the grant of either incentive stock options or
nonstatutory options. Under the terms of the 1997 Option Plan, all authorized
but unissued options under previous plans are added to the shares available
under this plan. A total of 308,500 authorized but unissued options under the
1996 Option Plan have been transferred to the 1997 Option Plan under this
provision. As of April 30, 1998, options to purchase 248,000 shares of Class A
Common Stock at an average exercise price of $22.52 were outstanding under the
1997 Option Plan.
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
provides for the issuance of a maximum of 50,000 shares of Class A Common Stock
pursuant to the grant of non-statutory options. As of April 30, 1998, no
options have been granted under this plan.
Stock option activity for each of the three years ended April 30, 1996,
1997 and 1998 is as follows:
Number Weighted Average
of Shares Exercise Price
----------- -----------------
Outstanding, April 30, 1995 673,000 $ 1.30
Granted ............................ 115,000 3.53
Terminated ......................... -- --
Exercised .......................... -- --
------- ------
Outstanding, April 30, 1996 788,000 1.63
Granted ............................ 463,135 10.52
Terminated ......................... -- --
Exercised .......................... -- --
------- ------
Outstanding, April 30, 1997 ......... 1,251,135 4.92
Granted ............................ 419,500 19.90
Terminated ......................... 31,000 15.19
Exercised .......................... 44,333 1.49
--------- ------
Outstanding, April 30, 1998 ......... 1,595,302 $ 8.75
========= ======
Exercisable, April 30, 1998 ......... 985,710 $ 4.26
========= ======
Set forth is a summary of options outstanding and exercisable as of April
30, 1998:
Options Outstanding Options Exercisable
--------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Shares Life (Years) Price Options Price
- --------------------------- ------------- -------------- ---------- ------------- ---------
$ 0.60-$ 2.00........... 673,000 4.35 $ 1.36 673,000 $ 1.36
4.61 - 7.00 ......... 197,000 7.35 4.66 150,333 4.67
12.00- 16.00 .......... 497,302 8.58 13.78 118,711 12.74
Over $16.00............ 228,000 9.70 23.18 43,666 24.46
- --------------------------- ------- ---- ------ ------- ------
All .................... 1,595,302 6.80 $ 8.75 985,710 $ 4.26
========= ==== ====== ======= ======
During fiscal 1996, the FASB issued SFAS No. 123, Accounting for
Stock-Based Compensation, which defines a fair value based method of accounting
for stock-based employee compensation and
F-21
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. REDEEMABLE PREFERRED STOCK, REDEEMABLE PUT WARRANTS AND
STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to
continue to measure compensation costs for those plans using the intrinsic
method of accounting prescribed by APB Opinion No. 25. Entities electing to
remain with the accounting in APB Opinion No. 25 must make pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting defined in SFAS No. 123 had been applied.
The Company has elected to account for its stock-based compensation plans
under APB Opinion No. 25. However, the Company has computed, for pro forma
disclosure purposes, the value of all options granted during the years ended
April 30, 1996, 1997 and 1998 using the Black-Scholes option pricing model as
prescribed by SFAS No. 123, using the following weighted average assumptions
for grants in the years ended April 30, 1996, 1997 and 1998.
April 30,
------------------------------------------
1996 1997 1998
---------- ---------- ----------------
Risk-free interest rate ......... 5.69% 6.84% 5.78%-6.49%
Expected dividend yield ......... N/A N/A N/A
Expected life ................... 10 years 10 years 9 years
Expected volatility ............. N/A N/A 40.39%
The value of shares to be issued to employees under the Employee Stock
Purchase Plan (see Note 9) as of April 30, 1998 has been computed for pro forma
disclosure purposes using the Black-Scholes option pricing model using the
following assumptions:
Risk-free interest rate .................................... 5.30%
Expected dividend yield .................................... N/A
Expected life .............................................. 1/3 year
Expected volatility ........................................ 40.39%
The total value of options granted during the years ended April 30, 1996,
1997 and 1998 would be amortized on a pro forma basis over the vesting period
of the options. Options generally vest over a one to three year period. Because
the method of accounting prescribed by SFAS No. 123 has not been applied to
options granted prior to May 1, 1995, the resulting pro forma compensation
costs may not be representative of that to be expected in future years. If the
Company had accounted for these plans in accordance with SFAS No. 123, the
Company's net loss and net loss per share would have increased as reflected in
the following pro forma amounts (in thousands, except for per share amounts):
Fiscal Year Ended April 30,
--------------------------------
1996 1997 1998
--------- --------- --------
Net income (loss)
As reported ............................. $(3,486) $(8,949) $(3,081)
Pro forma ............................... (3,522) (9,143) (3,904)
Net income (loss) per share of
common stock--
As reported ............................. (1.06) (2.29) (0.39)
Pro forma ............................... $ (1.07) $ (2.34) $ (0.49)
The weighted-average grant-date fair value of options granted during the
years ended April 30, 1996, 1997 and 1998 is $0.51, $0.56 and $1.54,
respectively.
F-22
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. REDEEMABLE PREFERRED STOCK, REDEEMABLE PUT WARRANTS AND
STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
(f) Reserved Shares
At April 30, 1997 and 1998 shares of Class A Common Stock were reserved for
the following reasons (in thousands):
April 30,
-------------------
1997 1998
-------- --------
Exercise of stock warrants related to Series A and
Series B Preferred Stock ................................ 1,811 --
Exercise of Series D Convertible Preferred Stock ......... 1,922 --
Exercise of stock warrants/put warrants .................. 456 190
Exercise of stock options ................................ 1,206 2,981
----- -----
5,395 3,171
===== =====
8. INCOME TAXES
The provision (benefit) for income taxes for the years ended April 30,
1996, 1997 and 1998 consists of the following (in thousands):
Fiscal Year Ended April 30,
-------------------------------
1996 1997 1998
---------- ------ ---------
Federal--
Current ............................... $ (329) $306 $ 495
Deferred .............................. 458 136 1,586
------ ---- ------
129 442 2,081
------ ---- ------
State--
Current ............................... (96) 7 24
Deferred .............................. 111 3 280
------ ---- ------
15 10 304
------ ---- ------
Total ............................... $ 144 $452 $2,385
====== ==== ======
The differences in the provisions for income taxes and the amounts
determined by applying the Federal statutory rate of 34% to income before
provision for income taxes and extraordinary loss for the years ended April 30,
1996, 1997 and 1998 are as follows (in thousands):
Fiscal Year Ended April 30,
----------------------------
1996 1997 1998
------- ------ ---------
Tax at statutory rate .......................... $(17) $ 11 $1,714
State income taxes, net of federal benefit ..... (3) 2 266
Meals and entertainment disallowance ........... 11 18 23
Nondeductible goodwill ......................... 20 134 114
Other, net (mainly imputed interest income
for tax purposes) ............................. 133 287 268
---- ---- ------
$144 $452 $2,385
==== ==== ======
F-23
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. INCOME TAXES (Continued)
Deferred income taxes reflect the impact of temporary differences between
the amounts of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for income tax purposes.
Deferred tax assets and liabilities consist of the following at April 30,
1997 and 1998 (in thousands):
April 30,
-----------------
1997 1998
------- -------
Deferred tax assets--
Allowance for doubtful accounts ..................... $ 177 $ 449
Treatment of lease obligations ...................... 65 64
Accrued expenses .................................... 344 490
Net operating loss carryforwards .................... 574 679
Alternative minimum tax credit carryforwards ........ 306 494
Other tax carryforwards ............................. 185 150
Amortization of intangibles ......................... 35 --
Other ............................................... 91 206
------- -------
Total deferred tax assets ........................ 1,777 2,532
Deferred tax liabilities--
Accelerated depreciation of property
and equipment ....................................... (2,245) (3,245)
Amortization of intangibles ......................... -- (543)
Other ............................................... (588) (2,111)
------- -------
Total deferred tax liabilities ................... (2,833) (5,899)
------- -------
Net deferred tax liability ...................... $(1,056) $(3,367)
======= =======
At April 30, 1998, the Company has net operating loss carryforwards and
other tax carryforwards for income tax purposes of approximately $1,698,000 and
$375,000, respectively, that expire principally through 2010. At April 30,
1998, the Company also has $494,000 of alternative minimum tax credit
carryforwards available indefinitely to reduce any future federal income taxes
payable.
9. EMPLOYEE BENEFIT PLANS
On May 1, 1996, the Company adopted the Casella Waste Systems, Inc. 401(k)
Plan and appointed the First National Bank of Boston as trustee of the plan.
The plan went into effect on July 1, 1996 and has a December 31 year end.
Pending board approval, the Company may contribute up to $500 per individual
per calendar year. Participants vest in employer contributions ratably over a
three-year period. Employer contributions for the years ended April 30, 1997
and 1998 amounted to $149,469 and $176,143, respectively.
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. 300,000
shares of Class A Common Stock have been reserved for this purpose. At April
30, 1998, no shares of Class A Common Stock have been issued under this plan.
F-24
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. RELATED PARTY TRANSACTIONS
(a) Management Services Agreement
As part of the Series D Preferred Stock transaction described in Note
7(a), the Company entered into a Management Services Agreement with certain
shareholders of the Series A, Series B and Series C Preferred Stock. In
consideration for certain advisory services to the Company, as defined, a
management fee of approximately $22,300 per month was due. At the closing of
the November Offering, the agreement terminated and the total accrued
management fees paid to the shareholders was $495,221.
(b) Services
During 1996, 1997 and 1998, the Company retained the services of a related
party, a company wholly owned by two of the Company's stockholders, as a
contractor in closing certain landfills owned by the Company. Total purchased
services charged to operations for each of the three years ended April 30,
1996, 1997 and 1998 were $1,291,435, $2,125,606 and $4,202,200, respectively,
of which $24,988 and $0 were outstanding and included in accounts payable at
April 30, 1997 and 1998, respectively. In 1997, the Company entered into
agreements with this company, totaling $4,065,000, to close the unlined
municipal landfill which is adjacent to the Subtitle D Clinton County landfill
and to close a portion of another of the Company's lined landfills. In 1998,
the Company entered into agreements with this company, totaling approximately
$3 million, to construct a portion of a landfill.
(c) Leases and Land Purchase
The Company leases furniture and fixtures from a partnership in which two
of the Company's stockholders are the general partners. This operating lease
requires a monthly payment of $950 and expires in 1999.
On August 1, 1993, the Company entered into three leases for operating
facilities with the same partnership. During 1997, one of the leases was
terminated early for $191,869. The remaining leases are classified as capital
leases in the accompanying consolidated balance sheets. The leases call for
monthly payments ranging from $3,200 to $9,000 and expire in April 2003. Total
interest and amortization expense charged to operations for the years ended
April 30, 1996, 1997 and 1998 under these agreements was $252,000, $249,379 and
$244,500, respectively.
On November 8, 1996, the Company purchased a certain plot of land from the
same related party for $122,000.
(d) Postclosure Landfill
The Company has agreed to pay the cost of postclosure on a landfill owned
by certain principal stockholders. The Company paid the cost of closing this
landfill in 1992, and the postclosure maintenance obligations are expected to
last until 2012. In each of the three years ended April 30, 1996, 1997 and
1998, the Company paid $14,502, $9,605 and $3,019, respectively, pursuant to
this agreement. As of April 30, 1998, the Company has accrued $104,772 for
costs associated with its postclosure obligations.
11. SUBSEQUENT EVENTS
During the period between May 1, 1998 and June 15, 1998 the Company
acquired 8 companies, all accounted for as purchases. The total value of the
assets acquired was approximately $10.2 million. The Company paid $9.6 million
in cash for the companies and assumed $600,000 in liabilities.
F-25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Superior Disposal Companies:
We have audited the accompanying combined balance sheet of the companies
identified in Note 1 (the Companies) as of December 31, 1996, and the related
combined statements of operations, stockholder's equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Companies as of
December 31, 1996, and the results of their operations and their cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
May 23, 1997
F-26
THE SUPERIOR DISPOSAL COMPANIES
COMBINED BALANCE SHEET
December 31,
---------------
1996
---------------
ASSETS
Current assets:
Cash .............................................................. $ 9,254
Accounts receivable--trade, less allowance for doubtful
accounts of approximately $213,000 1,696,172
Prepaid expenses and other current assets ......................... 207,011
-----------
Total current assets ........................................... 1,912,437
-----------
Property and equipment, at cost:
Land and improvements ............................................. 275,871
Buildings and improvements ........................................ 1,413,609
Furniture, fixtures and office equipment .......................... 212,838
Machinery and containers .......................................... 3,038,770
Vehicles .......................................................... 3,511,088
Equipment under capital leases .................................... 391,486
-----------
8,843,662
Less--accumulated depreciation and amortization ................... 3,619,523
-----------
5,224,139
-----------
Other assets:
Intangible assets, net ............................................ 4,412,523
Miscellaneous deposits ............................................ 53,700
-----------
4,466,223
-----------
$11,602,799
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term loans .................................................. $ 1,200,000
Accounts payable .................................................. 1,072,378
Accrued liabilities ............................................... 321,950
Current maturities of long-term debt .............................. 1,748,264
Current maturities of capital lease obligations ................... 68,352
Income taxes payable .............................................. 30,341
Deferred revenue .................................................. 368,809
-----------
Total current liabilities ...................................... 4,810,094
-----------
Long-term debt, less current maturities ............................ 6,377,697
-----------
Capital lease obligations, less current maturities ................. 193,070
-----------
Due to stockholder ................................................. 52,000
-----------
Commitments and contingencies (Note 6)
Stockholder's equity:
Common stock--
Authorized--300 shares, no par value
Issued and outstanding--12 shares ................................ 2,500
Additional paid-in capital ........................................ 116,635
Retained earnings ................................................. 330,218
Less--treasury stock, at cost ..................................... (279,415)
-----------
Total stockholder's equity ..................................... 169,938
-----------
$11,602,799
===========
The accompanying notes are an integral part of these
combined financial statements.
F-27
THE SUPERIOR DISPOSAL COMPANIES
COMBINED STATEMENT OF OPERATIONS
Year Ended December 31,
------------------------
1996
------------------------
Revenues ......................................... $15,130,702
-----------
Costs and expenses:
Cost of services ................................ 10,361,812
General and administrative ...................... 2,429,623
Depreciation and amortization ................... 1,192,065
-----------
13,983,500
-----------
Operating income ................................. 1,147,202
-----------
Other expenses:
Interest expense ................................ 818,950
Loss on sale of equipment ....................... 17,347
-----------
836,297
-----------
Income before provision for income taxes ......... 310,905
Provision for income taxes ....................... 32,724
-----------
Net income ...................................... $ 278,181
===========
The accompanying notes are an integral part of these
combined financial statements.
F-28
THE SUPERIOR DISPOSAL COMPANIES
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY
Additional Total
Common Paid-in Retained Treasury Stockholder's
Stock Capital Earnings Stock Equity
-------- ------------ ------------- ------------- ------------
Balance, December 31, 1995 ......... $2,500 $116,635 $ 1,284,726 $(279,415) $1,124,446
Net income ........................ -- -- 278,181 -- 278,181
Distributions to stockholder ...... - -- (1,232,689) -- (1,232,689)
------ -------- ----------- --------- ----------
Balance, December 31, 1996 ......... $2,500 $116,635 $ 330,218 $(279,415) $ 169,938
====== ======== =========== ========= ==========
The accompanying notes are an integral part of these
combined financial statements.
F-29
THE SUPERIOR DISPOSAL COMPANIES
COMBINED STATEMENT OF CASH FLOWS
Year Ended December 31,
------------------------
1996
------------------------
Cash flows from operating activities:
Net income ........................................................... $ 278,181
-----------
Adjustments to reconcile net income to net cash provided by operating
activities--
Provision for bad debts, net of writeoffs ........................... (195,280)
Depreciation and amortization ....................................... 1,192,065
Loss on sale of equipment ........................................... 17,347
Deferred income tax ................................................. 13,095
Changes in assets and liabilities, net of effects of acquisitions--
Accounts receivable ................................................ 377,336
Other current assets ............................................... (79,578)
Accounts payable ................................................... (285,297)
Accrued and other liabilities ...................................... 152,430
Income taxes payable ............................................... --
Deferred revenue ................................................... (42,459)
-----------
1,149,659
-----------
Net cash provided by operating activities ........................ 1,427,840
-----------
Cash flows from investing activities:
Acquisitions, net of cash acquired ................................... (460,000)
Additions to property and equipment .................................. (1,110,656)
Proceeds from sale of property and equipment ......................... 52,074
Increase in other assets ............................................. (33,261)
-----------
Net cash used in investing activities ............................ (1,551,843)
-----------
Cash flows from financing activities:
Due to stockholder ................................................... 52,000
Proceeds from short-term borrowings .................................. 1,200,000
Proceeds from long-term borrowings ................................... 930,000
Principal payments on long-term debt ................................. (1,520,418)
Principal payments on capital lease obligations ...................... (61,916)
Proceeds from issuance of common stock ............................... --
Distributions to stockholder ......................................... (1,232,689)
-----------
Net cash used in financing activities ............................ (633,023)
-----------
Net decrease in cash .................................................. (757,026)
Cash, beginning of year ............................................... 766,280
-----------
Cash, end of year .................................................... $ 9,254
===========
Supplemental disclosure of cash flow information:
Cash paid during the year for--
Interest ............................................................ $ 827,059
============
Income taxes ........................................................ $ 32,724
============
Supplemental disclosure of noncash investing and financing activities--
Summary of acquisitions--
Fair value of assets acquired ....................................... $ 595,000
Cash paid ........................................................... (460,000)
------------
Liabilities assumed and notes payable to sellers ................. $ 135,000
============
The accompanying notes are an integral part of these
combined financial statements.
F-30
THE SUPERIOR DISPOSAL COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
The Superior Disposal Companies (the Companies), represents the combined
accounts of Superior Disposal Service, Inc. (Superior) (a New York
corporation), Kerkim, Inc. (Kerkim) (a New York corporation) and Kensue, Inc.
(Kensue) (a Pennsylvania corporation). These companies are owned by the same
stockholder. Kensue's financial statements are the consolidation of Kensue and
its two subsidiaries: Claws Refuse, Inc. (Claws) (a Pennsylvania corporation)
and S.D.S. at PA, Inc. (SDS at PA) (a Pennsylvania corporation), which have a
March 31 fiscal year end.
These companies are engaged in non-hazardous waste collection, recycling,
transportation and transfer station businesses. The Companies service
residential, commercial and municipal customers in the states of New York and
Pennsylvania.
For the purpose of the combined financial statements, all material
intercompany balances and transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements reflect the application of certain
accounting policies as described in this note and elsewhere in the financial
statements and notes.
(a) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes and the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
(b) Revenue Recognition
The Company recognizes revenue as the related services are provided.
Certain customers are billed in advance and, accordingly, recognition of the
related revenues is deferred until the services are provided.
(c) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. The Company provides for depreciation and amortization using
the straight-line method by charges to operations in amounts that allocate the
cost of the assets over their estimated useful lives as follows:
Estimated
Useful Life
Asset Classification ------------
--------------------
Buildings and improvements ....................... 28-40 years
Furniture, fixtures and office equipment ......... 4-8 years
Vehicles ......................................... 2-10 years
Machinery and containers ......................... 7-10 years
The cost of maintenance and repairs is charged to operations as incurred.
(d) Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, trade
receivables, trade payables and debt instruments. The book values of cash,
trade receivables and trade payables approximate their respective fair values.
The Company's debt instruments that are outstanding as of December 31, 1996
F-31
THE SUPERIOR DISPOSAL COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
have carrying values that approximate their respective fair values. See Note 5
for the terms and carrying values of the Company's various debt instruments.
(e) Intangible Assets
Goodwill is the cost in excess of fair value of identifiable assets of
acquired businesses and is amortized on the straight-line method over periods
not exceeding 40 years. Other intangible assets include covenants not to
compete and organization costs and are amortized on the straight-line method
over their estimated useful lives, typically no more than 15 and 5 years,
respectively. The Companies continually evaluate whether events and
circumstances have occurred subsequent to an acquisition that indicate the
remaining estimated useful life or carrying value of these intangible assets
may warrant revision. When factors indicate that these assets should be
evaluated for possible impairment, the Companies use an estimate of the related
business segment's undiscounted cash flows over the remaining life of the asset
in measuring recoverability.
Intangible assets at December 31, 1996 consist of the following:
December 31,
-----------
1996
----------
Goodwill ......................................... $4,393,480
Covenants not-to-compete ......................... 539,167
Organization costs ............................... 27,225
----------
4,959,872
Less--accumulated amortization ................... 547,349
----------
$4,412,523
==========
(f) Income Taxes
Superior and Kerkim elected S corporation status under the Internal
Revenue Code. Therefore, the tax effect of each company's operations will be
reflected in the individual tax returns of the stockholder.
Kensue has elected C corporation status under the Internal Revenue Code
and files consolidated federal and state income tax returns. Kensue records
income taxes in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred
income taxes are recognized based on the expected future tax consequences of
differences between the financial statement basis and the tax basis of assets
and liabilities, calculated using enacted tax rates in effect for the year in
which the differences are expected to be reflected in the tax return.
(g) Accounting Principles
Effective May 1, 1996, the Companies adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed
Of. In accordance with SFAS No. 121, the Companies evaluate the recoverability
of its carrying value of the Companies' long-lived assets and certain
intangible assets based on estimated undiscounted cash flows to be generated
from each of such assets as compared to the original estimates used in
measuring the assets. To the extent impairment is identified, the Companies
reduce the carrying value of such impaired assets. The change did not have a
material impact on the Companies' financial statements.
F-32
THE SUPERIOR DISPOSAL COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
3. ACQUISITIONS OF NEW BUSINESSES
In January 1996, Claws acquired the assets of A.C. Hamm for a total
purchase price of $195,000. The fair value of fixed assets acquired and
covenants not-to-compete totaled $143,000 and $10,000, respectively.
In July 1996, Superior also acquired the assets of Gar-Kim, Inc. for a
total purchase price of $400,000. The fair value of fixed assets acquired and
covenants not-to-compete totaled $184,000 and $10,000, respectively.
The acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the purchase prices have been allocated to the
assets acquired based on the estimated fair values at the date of acquisition.
The excess of purchase price over the estimated fair values of the net assets
acquired has been recorded as goodwill, which is being amortized over 40 years.
4. SHORT-TERM LOANS
The short-term loans bear interest at rates ranging from 8% to 9.125% per
annum and are secured by all assets of Superior and a certain loan by a
personal guarantee of the sole stockholder.
5. LONG-TERM DEBT
Long-term debt as of December 31, 1996 consists of the following:
December 31,
-------------
1996
-------------
Term loans and line of credit with banks ..................... $4,981,219
Notes payable in connection with businesses acquired ......... 2,976,109
Other notes payable .......................................... 168,633
----------
8,125,961
Less--current portion ........................................ 1,748,264
----------
$6,377,697
==========
The term loans and line of credit with banks bear interest at rates
ranging from 9% to 9.625% per annum and are secured by all assets of the
Companies, and certain loans by a personal guarantee of the sole stockholder.
The loans are due on dates ranging from January 1997 to September 2002 and are
payable in monthly installments ranging from $520 to $25,000.
Notes payable in connection with businesses acquired bear interest at
rates ranging from 7% to 10% and are secured by all the assets of the
Companies. The notes are due on dates ranging from January 1997 to December
2005, and are payable in monthly installments ranging from $1,000 to $12,215.
F-33
THE SUPERIOR DISPOSAL COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
5. LONG-TERM DEBT (Continued)
As of December 31, 1996, debt matures as follows (rounded to thousands):
Amount
----------
Fiscal Year Ended December 31,
1997 ................................................ $1,748,000
1998 ................................................ 1,238,000
1999 ................................................ 1,206,000
2000 ................................................ 1,512,000
2001 ................................................ 944,000
Thereafter .......................................... 1,478,000
----------
$8,126,000
==========
In January 1997, a substantial portion of the Companies' debt was paid off
by Casella Waste Systems in connection with the acquisition described in Note
9.
6. COMMITMENTS AND CONTINGENCIES
(a) Leases
The following is a schedule of future minimum lease payments, together
with the present value of the net minimum lease payments under capital leases,
as of December 31, 1996.
Operating Leases Capital Leases
------------------ ---------------
Fiscal Year Ended December 31,
1997 ....................................................... $ 39,627 $ 91,296
1998 ....................................................... 40,206 91,296
1999 ....................................................... 39,416 104,404
2000 ....................................................... 37,816 20,655
-------- --------
Total minimum lease payments ............................. $157,065 307,651
========
Amount representing interest ................................ 46,229
--------
261,422
Current maturities of capital lease obligations ............. 68,352
--------
Present value of long-term capital lease obligations ..... $193,070
========
The Companies lease hauling vehicles under leases that qualify for
treatment as capital leases. The assets related to these leases have been
capitalized and are included in property and equipment.
The Companies lease operating facilities and equipment under operating
leases with monthly payments ranging from $170 to $2,900.
Total rent expense under operating leases charged to operations was
$33,600 during the year ended 1996.
(b) Litigation
In the normal course of conducting its operations, the Companies may
become involved in certain legal and administrative proceedings. Some of these
actions may result in fines, penalties or judgments against the Companies,
which may have an impact on earnings for a particular period. Management
F-34
THE SUPERIOR DISPOSAL COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
6. COMMITMENTS AND CONTINGENCIES (Continued)
expects that such matters in process at December 31, 1996 will not have a
material adverse effect on the Companies' financial position, including its
liquidity or its results of operations.
7. INCOME TAXES
The provision for income taxes for the year ended December 31, 1996
consists of the following:
December 31,
-------------
1996
-------------
Federal--
Current .............................................. $ --
Deferred ............................................. 13,095
-------
13,095
State ................................................. 19,629
-------
Total .............................................. $32,724
=======
The provision for income taxes differs from the amounts determined by
applying the federal statutory rate of 40% to income before provision for
income taxes due mainly to the S corporation status of Superior and Kerkim and
state income taxes.
The components of the deferred tax asset at December 31, 1996 are as
follows:
December 31,
-------------
1996
-------------
Net operating loss carryforwards ........................... $ 41,187
Allowance for doubtful accounts ............................ 39,783
Accelerated depreciation of property and equipment ......... 8,000
Deferred revenue ........................................... (11,482)
---------
77,488
Less--valuation allowance .................................. 77,488
---------
$ --
=========
In 1996, the Companies recorded a 100% valuation allowance against the
deferred tax asset, as realization of the asset is uncertain.
8. RELATED PARTY TRANSACTIONS
Superior leases its office and garage facility in Newfield, New York, from
its sole stockholder. Rental payments for the year ended December 31, 1996
totaled $64,000. The lease is on a month-to-month basis.
The sole stockholder is guarantor on several outstanding loans of the
Companies. In addition, one loan is collateralized by the personal residence of
the sole stockholder.
9. SUBSEQUENT EVENTS
On January 2, 1997, Casella Waste Systems, Inc. (CWS) acquired
substantially all of the assets of Superior Disposal Services, Inc., Claws
Refuse Inc. and S.D.S. at PA, Inc., accounted for as an asset purchase. On
January 23, 1997, CWS acquired substantially all of the assets of Kerkim, Inc.,
which it also accounted for as an asset purchase.
F-35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Chairman and Members of the Board of Legislators of
Clinton County, New York:
We have audited the accompanying balance sheet of Clinton County, New
York--Solid Waste Department Enterprise Fund as of December 31, 1995, and the
related statements of operations, fund deficit and cash flows for the year then
ended. These financial statements are the responsibility of the County's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Clinton County, New
York--Solid Waste Department Enterprise Fund as of December 31, 1995, and the
results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
July 25, 1997
F-36
CLINTON COUNTY, NEW YORK--
SOLID WASTE DEPARTMENT ENTERPRISE FUND
BALANCE SHEETS
December 31, 1995 June 30, 1996
------------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 7,271,096 $ 5,296,980
Accounts receivable--trade ......................................... 415,547 591,185
State and federal aid receivable ................................... 946,418 840,603
Prepaid expenses ................................................... -- 67,011
------------ ------------
Total current assets ............................................ 8,633,061 6,795,779
------------ ------------
Property, plant and equipment, at cost:
Land ............................................................... 223,861 235,561
Landfills .......................................................... 5,252,146 5,741,167
Land improvements .................................................. 698,830 698,830
Buildings .......................................................... 2,642,443 2,694,693
Machinery and equipment ............................................ 3,994,023 3,998,733
------------ ------------
12,811,303 13,368,984
Less--accumulated depreciation and amortization .................... 1,928,116 2,142,468
------------ ------------
10,883,187 11,226,516
------------ ------------
$ 19,516,248 $ 18,022,295
============ ============
LIABILITIES AND FUND DEFICIT
Current liabilities:
Bond anticipation notes payable .................................... $ 11,758,648 $ 11,361,098
Current maturities of long-term debt ............................... 322,800 326,000
Accounts payable ................................................... 717,755 75,193
Accrued liabilities ................................................ 371,621 499,871
Accrued closure and postclosure costs, current portion ............. 366,531 122,640
------------ ------------
Total current liabilities ....................................... 13,537,355 12,384,802
------------ ------------
Long-term debt, less current maturities ............................. 4,831,600 4,505,600
------------ ------------
Accrued closure and postclosure costs, less current portion ......... 7,773,402 7,794,081
------------ ------------
Other long-term liabilities ......................................... 127,926 118,961
------------ ------------
Fund deficit:
Contributed capital ................................................ 909,790 909,790
Accumulated deficit ................................................ (7,663,825) (7,690,939)
------------ ------------
Total fund deficit .............................................. (6,754,035) (6,781,149)
------------ ------------
$ 19,516,248 $ 18,022,295
============ ============
The accompanying notes are an integral part of these financial statements.
F-37
CLINTON COUNTY, NEW YORK--
SOLID WASTE DEPARTMENT ENTERPRISE FUND
STATEMENTS OF OPERATIONS
Six Months
Year Ended Ended
December 31, 1995 June 30, 1996
------------------- --------------
(Unaudited)
Service revenues ....................... $4,184,317 $1,539,321
State and federal aid .................. 871,004 --
---------- ----------
Net revenues ....................... 5,055,321 1,539,321
---------- ----------
Operating expenses:
Cost from operations .................. 3,373,310 1,076,742
General and administrative ............ 213,134 74,047
Depreciation and amortization ......... 447,401 214,352
---------- ----------
4,033,845 1,365,141
---------- ----------
Income from operations ................. 1,021,476 174,180
---------- ----------
Other (income) expenses:
Interest income ....................... (334,258) (140,924)
Interest expense ...................... 577,526 353,072
Loss on sale of equipment ............. 16,855 --
Other income .......................... (110,169) (10,854)
---------- ----------
149,954 201,294
---------- ----------
Net income (loss) .................. $ 871,522 $ (27,114)
========== ==========
The accompanying notes are an integral part of these financial statements.
F-38
CLINTON COUNTY, NEW YORK--
SOLID WASTE DEPARTMENT ENTERPRISE FUND
STATEMENTS OF FUNDS DEFICIT
Contributed Accumulated Total Fund
Capital Deficit Deficit
------------- ---------------- ----------------
Balance, December 31, 1994 ................. $909,790 $ (8,535,347) $ (7,625,557)
Net income .............................. -- 871,522 871,522
-------- ------------ ------------
Balance, December 31, 1995 ................. 909,790 (7,663,825) (6,754,035)
Net loss (unaudited) .................... -- (27,114) (27,114)
-------- ------------ ------------
Balance, June 30, 1996 (unaudited) ......... $909,790 $ (7,690,939) $ (6,781,149)
======== ============ ============
The accompanying notes are an integral part of these financial statements.
F-39
CLINTON COUNTY, NEW YORK--
SOLID WASTE DEPARTMENT ENTERPRISE FUND
STATEMENTS OF CASH FLOWS
Six Months
Year Ended Ended
December 31, 1995 June 30, 1996
------------------- --------------
(Unaudited)
Cash flows from operating activities:
Net income (loss) .................................................... $ 871,522 $ (27,114)
------------ ------------
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities--
Depreciation and amortization ....................................... 447,401 214,352
Loss on sale of equipment ........................................... 16,855 --
Changes in assets and liabilities--
Accounts receivable ................................................ 157,083 (175,638)
State and federal aid receivable ................................... (790,263) 105,815
Prepaid expenses ................................................... -- (67,011)
Accounts payable ................................................... 428,814 (642,562)
Accrued closure and postclosure costs .............................. (1,050,610) (223,212)
Accrued liabilities ................................................ 124,778 119,285
------------ ------------
(665,942) (668,971)
------------ ------------
Net cash provided by (used in) operating activities .............. 205,580 (696,085)
------------ ------------
Cash flows from investing activities:
Additions to property and equipment .................................. (6,030,603) (557,681)
Proceeds from sale of equipment ...................................... 67,366 --
------------ ------------
Net cash used in investing activities ............................ (5,963,237) (557,681)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of bond anticipation notes .................... 6,690,000 --
Principal payments on bond anticipation notes ........................ (402,320) (397,550)
Principal payments on long-term debt ................................. (292,800) (322,800)
------------ ------------
Net cash provided by (used in) financing activities .............. 5,994,880 (720,350)
------------ ------------
Net increase (decrease) in cash and cash equivalents .................. 237,223 (1,974,116)
Cash and cash equivalents, beginning of period ........................ 7,033,873 7,271,096
------------ ------------
Cash and cash equivalents, end of period .............................. $ 7,271,096 $ 5,296,980
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest ............................... $ 531,983 $ 191,412
============ ============
The accompanying notes are an integral part of these financial statements.
F-40
CLINTON COUNTY, NEW YORK--
SOLID WASTE DEPARTMENT ENTERPRISE FUND
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1. OPERATIONS
The Clinton County, New York--Solid Waste Department Enterprise Fund (the
Fund) is engaged in nonhazardous waste collection, recycling, transportation
and transfer station and landfill disposal facility businesses. The Fund
services residential, commercial and municipal customers throughout Clinton
County, New York (the County).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition
The Fund recognizes collection and recycling services revenues as the
services are provided. State aid consists of funds granted by the State of New
York to the Fund to subsidize costs associated with the closure of the County's
landfills.
(b) Cash and Cash Equivalents
The Fund considers all highly liquid investments purchased with maturities
of three months or less to be cash equivalents.
(c) Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated
depreciation. The Fund provides for depreciation using the straight-line method
by charges to operations in amounts that allocate the cost of the assets over
their estimated useful lives as follows:
Estimated
Asset Classification Useful Life
-------------------- ------------
Buildings ........................................... 30 years
Machinery and equipment ............................. 5-20 years
Land improvements ................................... 6-15 years
Depreciation expense for the year ended December 31, 1995 and the six
months ended June 30, 1996 was $447,401 and $214,352, respectively. The cost of
maintenance and repairs is charged to operations as incurred.
Capitalized landfill costs include expenditures for land and related
airspace, permitting costs and preparation costs. Landfill permitting and
preparation costs represent only direct costs related to these activities
including legal, engineering and construction. Management routinely reviews its
investment in operating landfills, transfer stations and other significant
facilities to determine whether the costs of these investments are realizable.
Landfill permitting and acquisition costs, excluding the estimated
residual value of land, are typically amortized as permitted airspace of the
landfill is consumed. For many of the Fund's landfills, preparation costs,
which include the costs of construction associated with excavation, liners and
the installation of leak detection and leachate collection systems, are also
typically amortized as total permitted airspace of the landfill is consumed. In
determining the amortization rate for these landfills, preparation costs
include the total estimated costs to complete construction of the landfills'
permitted capacity.
(d) Accrued Closure and Postclosure Costs
New York state laws and regulations require the Fund to place a final
cover on all sites when it stops accepting waste and to perform certain
maintenance and monitoring functions at the sites for thirty years after
closure. Although closure and postclosure care costs will be paid only near or
after the date the landfills stop accepting waste, the Fund reports a portion
of these closure and postclosure care costs as
F-41
CLINTON COUNTY, NEW YORK--
SOLID WASTE DEPARTMENT ENTERPRISE FUND
NOTES TO FINANCIAL STATEMENTS--(Continued)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
an operating expense in each period based on landfill capacity used as of each
balance sheet date. The $8,139,933 and $7,916,721 reported as accrued closure
and postclosure care liability at December 31, 1995 and June 30, 1996,
respectively, represents the cumulative amount recorded to date, less amounts
previously paid, based on the estimated capacity used. As of June 30, 1996, 97
percent of the capacity at the Schuyler Falls landfill and 100 percent at the
AuSable and Mooers landfill site had been used. The Fund will recognize the
remaining estimated cost of closure and postclosure care of $138,267 as the
remaining estimated capacity is filled. These amounts are based on what it
would cost to perform all closure and postclosure care in 1996. Actual cost may
be higher due to inflation, changes in technology or changes in regulations.
The County plans to finance the landfill closures through the issuance of
County bonds and debt service expected to be paid primarily through user fees
charged at the landfills and future lease payments from privatization of the
landfills' management and operations (see Note 5).
(e) General and Administrative Expenses
Included in general and administrative expenses are allocations of general
County expenses in the amounts of $180,000 and $67,000 for the year ended
December 31, 1995 and the six months ended June 30, 1996, respectively.
(f) Income Taxes
The Fund is a department of Clinton County, New York, a municipal
corporation, and is therefore exempt from state and federal income taxes.
(g) Fair Value of Financial Instruments
The Fund's financial instruments consist primarily of cash and cash
equivalents, trade receivables, trade payables and debt instruments. The book
values of cash and cash equivalents, trade receivables and trade payables
approximate their respective fair values. The Fund's debt instruments that are
outstanding as of December 31, 1995 and June 30, 1996 have carrying values that
approximate their respective fair values. See Note 3 for the terms and carrying
values of the Fund's various debt instruments.
(h) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes and the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
(i) Impairment of Long-Lived Assets
Effective January 1, 1996, the Fund adopted Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. This statement
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The statement also requires that certain long-lived assets and
identifiable intangibles to be disposed of be reported at the lower of the
carrying amount or fair value less cost to sell. The adoption of this statement
did not impact the Fund's financial statements.
F-42
CLINTON COUNTY, NEW YORK--
SOLID WASTE DEPARTMENT ENTERPRISE FUND
NOTES TO FINANCIAL STATEMENTS--(Continued)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
3. LONG-TERM DEBT
Long-term debt as of December 31, 1995 and June 30, 1996 consisted of the
following:
December 31, June 30,
1995 1996
-------------- --------------
(unaudited)
Bond anticipation notes payable ......... $11,758,648 $11,361,098
Serial bond payable ..................... 5,154,400 4,831,600
----------- -----------
16,913,048 16,192,698
Less--current portion ................... 12,081,448 11,687,098
----------- -----------
$ 4,831,600 $ 4,505,600
=========== ===========
Bond anticipation notes must be renewed annually. As of December 31, 1995,
the Fund had eight notes outstanding with principal amounts ranging from
$23,000 to $6.4 million. These notes bear interest at rates ranging from 3.85
percent to 4.59 percent.
As of June 30, 1996, the Fund had six notes outstanding with principal
amounts ranging from $75,000 to $6.4 million. These notes bear interest at
rates ranging from 3.62 percent to 4.00 percent.
The Serial Bonds were issued in 1994 in the amount of $5.4 million. As of
December 31, 1995 and June 30, 1996, approximately $5.1 million and $4.8
million, respectively, remains outstanding bearing interest at rates ranging
from 5.1 percent to 5.7 percent. These notes are due to mature in 2012.
As of June 30, 1996, debt matures as follows:
Amount
--------------
(unaudited)
Fiscal Year Ended June 30,
1997 ............................................ $11,687,098
1998 ............................................ 326,000
1999 ............................................ 354,000
2000 ............................................ 357,200
2001 ............................................ 384,200
Thereafter ...................................... 3,084,200
-----------
$16,192,698
===========
4. RETIREMENT BENEFITS
The Fund participates in the New York State and Local Employees'
Retirement System and the Public Employees' Group Life Insurance Plan. These
are cost sharing multiple-employer retirement plans. These plans provide
retirement benefits as well as death and disability benefits. The Fund is
required to contribute at an actuarially determined rate. The contributions
made for the year ended December 31, 1995 and the six months ended June 30,
1996 were $17,304 and $7,334, respectively, and were equal to 100% of the
required contributions.
In addition to providing pension benefits, the Fund provides health
insurance benefits, in accordance with its Civil Service Employees Association,
Inc. contract, to retired employees and their spouses. These benefits are
funded and accounted for by the Fund as paid, which is not materially different
from the accrual method required by SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions. The total cost of providing these
benefits during the year ended December 31, 1995 and the six months ended June
30, 1996 was not material.
F-43
CLINTON COUNTY, NEW YORK--
SOLID WASTE DEPARTMENT ENTERPRISE FUND
NOTES TO FINANCIAL STATEMENTS--(Continued)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
5. SUBSEQUENT EVENT
On July 10, 1996, the Fund entered into a 25-year operation, management
and lease agreement with Casella Waste Systems, Inc. (Casella). Under this
agreement, Casella will lease all of the Fund's non-hazardous solid waste
system facilities, which includes the fully permitted Subtitle D lined
landfill, one transfer station, one recycling facility, 11 convenience stations
and all of the equipment associated with these facilities. As part of this
agreement, Casella will pay the Fund the total sum of $10,501,284 payable in 28
equal quarterly installments, commencing with the closing date. In addition, in
accordance with the agreement, Casella will be responsible for, and pay for,
the capping and closing of the Fund's Schuyler Falls, New York, unlined
landfill in 1997. The Fund will be responsible for postclosure care of the
unlined landfill. The total cost of this landfill closure project is currently
estimated at $3,200,000.
F-44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of:
H.C. Gobin, Inc.
Claremont, NH
We have audited the accompanying balance sheets of H.C. Gobin, Inc. (a
Delaware Corporation) as of December 31, 1996 and 1995, and the related
statement of income and retained earnings and cash flows for the years then
ended. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of H.C. Gobin, Inc. as of
December 31, 1996 and 1995 and the results of operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/ Barrett & Dattilio, P.C.
Barrett & Dattilio, P.C.
Registration #440
September 26, 1997
Quechee, VT
F-45
H.C. GOBIN, INC.
BALANCE SHEETS
December 31,
--------------------------- June 30,
1995 1996 1997
------------ ------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 40,773 $ 81,460 $ 156,423
Accounts receivable--trade, less allowance for
doubtful accounts of approximately $5,000,
$45,000 and $10,000 ................................... 442,085 642,585 567,109
Accounts receivable--employee .......................... 360 800 --
Deferred income taxes .................................. -- 33,236 --
Inventory .............................................. 65,005 61,332 56,383
Prepaid expenses ....................................... 62,245 47,500 51,322
Prepaid insurance ...................................... 24,259 25,904 26,535
Note receivable--stockholder ........................... -- 24,535 24,535
Deposits ............................................... 5,000 -- --
---------- ---------- ----------
Total current assets ................................ 639,727 917,352 882,307
---------- ---------- ----------
Property and equipment, at cost:
Rolling stock .......................................... 484,163 2,601,229 2,443,433
Buildings .............................................. -- 148,053 149,053
Leasehold improvements ................................. 40,089 45,877 45,877
Machinery and equipment ................................ 598,219 1,581,021 1,542,968
Assets under capital lease ............................. 2,183,793 18,255 18,255
Construction in progress ............................... 20,559 -- --
---------- ---------- ----------
3,326,823 4,394,435 4,199,586
Less--accumulated depreciation ......................... 1,299,097 1,521,185 1,587,185
---------- ---------- ----------
Property and equipment, net ......................... 2,027,726 2,873,250 2,612,401
---------- ---------- ----------
Other assets:
Customer list, net of accumulated amortization ......... 11,043 358,727 204,815
Goodwill, net of accumulated amortization .............. 40,985 48,762 46,920
Covenant, net of accumulated amortization .............. 11,528 119,025 10,273
Loan fees, net of accumulated amortization ............. 2,700 63,648 61,160
Management systems ..................................... 32,838 37,679 35,585
Deposits, net of current ............................... 600 6,150 15,850
---------- ---------- ----------
99,694 633,991 374,603
---------- ---------- ----------
$2,767,147 $4,424,593 $3,869,311
========== ========== ==========
See independent auditor's report and accompanying notes to financial statements.
F-46
H.C. GOBIN, INC.
BALANCE SHEETS
(Continued)
December 31,
----------------------------- June 30,
1995 1996 1997
------------- ------------- --------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit .......................................... $ 65,000 $ 249,952 $ 215,417
Current maturities of long-term debt, capital lease
obligations and due to stockholders .................... 365,249 328,196 328,196
Accounts payable ........................................ 272,850 860,544 1,099,260
Accrued payroll and related expenses .................... 16,059 54,788 25,300
State income tax payable ................................ 1,410 1,903 3,587
Deferred revenue ........................................ 6,174 31,739 36,829
401K pension plan ....................................... 476 678 400
Accrued interest ........................................ 3,861 23,539 20,687
Deferred income taxes ................................... 12,188 -- --
Other accrued expenses .................................. -- 1,392 --
---------- ---------- ----------
Total current liabilities ............................ 743,267 1,552,731 1,729,676
---------- ---------- ----------
Long-term debt, less current maturities .................... 437,864 2,267,469 2,093,227
---------- ---------- ----------
Capital lease obligations, less current maturities ......... 461,820 10,737 6,767
---------- ---------- ----------
Deferred income taxes ...................................... -- -- 31,138
---------- ---------- ----------
Due to stockholders, less current maturities ............... 7,388 5,395 2,766
---------- ---------- ----------
Stockholders' equity:
Common stock, no par value
Authorized--3,000 shares
Issued and outstanding--240 shares ..................... 124,800 124,800 124,800
Additional paid-in capital .............................. 50,422 50,422 50,422
Treasury stock--cost .................................... (377,585) (377,585) (377,585)
Retained earnings ....................................... 1,319,171 790,624 208,100
---------- ---------- ----------
Total stockholders' equity ........................... 1,116,808 588,261 5,737
---------- ---------- ----------
$2,767,147 $4,424,593 $3,869,311
========== ========== ==========
See independent auditor's report and accompanying notes to financial statements.
F-47
H.C. GOBIN, INC.
STATEMENTS OF INCOME (LOSS) AND RETAINED EARNINGS
Fiscal Year Ended Six Months Ended
December 31, June 30,
--------------------------- -----------------
1995 1996 1997
------------- ------------- -----------------
(Unaudited)
Net revenues ..................................... $3,676,850 $4,871,867 $2,567,416
---------- ---------- ----------
Operating expenses:
Cost from operations .......................... 2,528,881 3,808,637 2,070,017
General and administrative .................... 517,811 860,264 473,338
Depreciation and amortization ................. 245,993 393,652 203,917
---------- ---------- ----------
3,292,685 5,062,553 2,747,272
---------- ---------- ----------
Income from operations ........................... 384,165 (190,686) (179,856)
---------- ---------- ----------
Other (income) expenses:
Interest income ............................... (4,403) (6,873) --
Interest expense .............................. 172,000 250,521 138,797
Sale of assets ................................ (20,397) 17,990 157,935
Loss on investment ............................ -- -- 29,451
Penalty on capital lease conversion ........... -- 118,330 --
---------- ---------- ----------
147,200 379,968 326,183
---------- ---------- ----------
Income before provision for income taxes ......... 236,965 (570,654) (506,039)
Provision for income taxes ....................... 9,523 (42,107) 76,485
---------- ---------- ----------
Net income (loss) .......................... $ 227,442 $ (528,547) $ (582,524)
========== ========== ==========
Retained earnings, beginning of year ............. 1,091,729 1,319,171 790,624
---------- ---------- ----------
Retained earnings, end of period ................. $1,319,171 $ 790,624 $ 208,100
========== ========== ==========
See independent auditor's report and accompanying notes to financial statements.
F-48
H.C. GOBIN, INC.
STATEMENTS OF CASH FLOWS
Fiscal Year Ended Six Months Ended
December 31, June 30,
------------------------ ----------------
1995 1996 1997
--------- ----------- ----------
(Unaudited)
Cash flows from operating activities:
Net income (loss) ..................................... $ 227,442 $ (528,547) $(582,524)
--------- ----------- ---------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities--
Depreciation and amortization ........................ 245,993 393,652 203,917
(Gain) loss on sale of equipment ..................... (20,397) 17,990 157,935
Provision (benefit) for deferred income taxes ........ 6,413 (45,424) 74,878
Changes in assets and liabilities--
Accounts receivable .................................. (128,923) (200,940) 76,276
Notes receivable ..................................... 13,829 (24,535) --
Prepaid expenses ..................................... (10,180) 18,100 (4,453)
Inventories .......................................... (7,521) 3,673 4,949
Other current assets ................................. (16,939) (611,148) (9,699)
Accounts payable ..................................... 77,038 587,694 197,135
Accrued expenses and other liabilities ............... 13,245 86,059 3,842
--------- ----------- ---------
172,558 225,321 704,780
--------- ----------- ---------
Net cash provided by (used in) operating
activities ........................................ 400,000 (303,426) 122,256
--------- ----------- ---------
Cash flows from investing activities:
Additions to property and equipment ................... (698,197) (1,190,187) (17,832)
Proceeds from sale of equipment ....................... 7,275 14,845 185,918
--------- ----------- ---------
Net cash provided by (used in) investing
activities ........................................ (690,922) (1,175,342) 168,086
--------- ----------- ---------
Cash flows from financing activities:
Proceeds from issuance debt ........................... 962,899 2,429,483 --
Principal payment on line of credit ................... -- 184,952 (34,535)
Principal payments on long-term debt .................. (304,680) (1,094,980) (180,844)
Purchase of treasury stock ............................ (377,585) -- --
--------- ----------- ---------
Net cash provided by (used in) financing
activities ........................................ 280,634 1,519,455 (215,379)
--------- ----------- ---------
Net increase (decrease) in cash and cash equivalents ..... (10,288) 40,687 74,963
Cash and cash equivalents, beginning of period ........... 51,061 40,773 81,460
--------- ----------- ---------
Cash and cash equivalents, end of period ................. $ 40,773 $ 81,460 $ 156,423
========= =========== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for--
Interest ............................................. $ 168,139 $ 230,843 $ 135,167
========= =========== =========
Income taxes ......................................... $ 1,935 $ 2,824 $ --
========= =========== =========
Cash and Cash Equivalents--For purposes of the Statements of Cash Flows, the
Company considers all investment instruments purchased with a maturity of three
months or less to be cash equivalents.
See independent auditor's report and accompanying notes to financial statements.
F-49
H.C. GOBIN, INC.
NOTES TO FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)
1. Summary of Significant Accounting Policies
Operations--H.C. Gobin, Inc. (the Company) was incorporated in 1982 in the
State of Delaware and operates from five locations within New Hampshire. The
Company provides waste services to municipal, industrial and commercial
customers.
Basis of Accounting--The Company uses the accrual basis of accounting for
financial statement purposes and the income tax basis of accounting for tax
purposes.
Depreciation--The Company follows the policy of charging to costs and
expenses annual amounts of depreciation which allocate the cost of the
property, plant and equipment over their estimated useful lives. The Company
employs the straight-line method for determining the annual charge for
depreciation. The ranges of estimated useful lives are:
Years
--------
Vehicles ........................................................ 5-10
Trailers ........................................................ 3-10
Office Equipment ................................................ 3-10
Leasehold Improvements .......................................... 10-40
Income Taxes--No provision for federal income taxes has been made since
under an election previously filed with the Internal Revenue Service, the
Company's income or loss is reported on the tax return of the stockholders.
For state income tax purposes effective December 1, 1994, the Company
changed from the deferred method of accounting for income taxes to an asset and
liability method in accordance with Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes."
Under the asset and liability method, deferred tax assets and liabilities
are determined based on the differences between the financial statement and tax
basis of assets and liabilities and are measured using enacted tax rates.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
Provision for state income taxes as of December 31, 1995 and 1996 and June
30, 1997 are as follows:
December 31,
----------------------
1995 1996 June 30, 1997
--------- --------- -------------
(Unaudited)
Current ................................ $3,110 $ 3,317 $ 1,607
Deferred ............................... 6,413 (45,424) 74,878
------ --------- -------
Provision (Benefit) for income taxes ... $9,523 $ (42,107) $76,485
====== ========= =======
F-50
H.C. GOBIN, INC.
NOTES TO FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
1. Summary of Significant Accounting Policies (Continued)
Net deferred tax liabilities in the accompanying balance sheets include
the following components:
December 31,
--------------------- June 30,
1995 1996 1997
-------- --------- ----------
(Unaudited)
Deferred tax liabilities arising from:
Temporary differences--principally
Cash to accrual adjustment ............... $(70,937) $(33,236) $115,564
Capital leases ........................... 83,125 -- --
Deferred tax assets arising from:
Net operating loss carryforward ........... -- -- (84,426)
-------- -------- --------
Net deferred tax liability (asset) ......... $ 12,188 $(33,236) $ 31,138
======== ======== ========
Taxes paid to the State of Vermont were $150, $150 and $0 during the years
ended December 31, 1995 and 1996 and the six months ended June 30, 1997,
respectively. New Hampshire taxes were $1,935, $3,167 and $(77) during the
years ended December 31, 1995 and 1996 and the six months ended June 30, 1997,
respectively. State of New York taxes were $0 during the years ended December
31, 1995 and 1996 and the six months ended June 30, 1997.
Amortization--The Company is currently amortizing the following intangible
costs over various years using the straight line method.
Items Years
----- ------
Loan Fees ........................................................ 15
Customer List .................................................... 15
Organizational cost .............................................. 5
Covenant Not to Compete .......................................... 15
Goodwill ......................................................... 15
The amortization expense was $4,874, $76,851 and $834,496 for the years
ended December 31, 1995 and 1996 and the six months ended June 30, 1997,
respectively.
Inventories--Inventories consist of service parts. Inventory is stated at
the lower of cost or market on the first-in, first-out, (FIFO) basis.
Allowance for Doubtful Accounts--Allowance for doubtful accounts of
$5,150, $45,000 and $10,000 for the years ended December 31, 1995 and 1996 and
the six months ended June 30, 1997, respectively, have been offset against
accounts receivable for financial statement purposes.
F-51
H.C. GOBIN, INC.
NOTES TO FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
2. Long-Term Debt and Due to Stockholders
Long-term debt and due to stockholders at December 31, 1995 and 1996 and
June 30, 1997, consisted of the following:
December 31,
------------------------- June 30,
1995 1996 1997
---------- ------------ ------------
(Unaudited)
Non-interest bearing demand note due individuals,
unsecured. Payable September, 1996. ............... $ 37,500 $ -- $ --
10.5% note to First NH Bank. Secured by assets of
the Company. Monthly payments of $1,927,
principal and interest. Due March, 1999. .......... 61,684 -- --
13% note due shareholder. Secured by vehicle.
Monthly payments of $505, principal and interest.
Due 1998. ......................................... 12,150 7,389 4,766
11.4% note due individual. Secured by assets of the
Company. Monthly payments of $4,000, principal
and interest. Due 2012 ............................ 353,995 346,021 341,821
Variable note at 1.5% over prime to First NH Bank
secured by assets of the Company. Monthly
payments of $1,600, principal and interest. Due
1997. ............................................. 32,394 -- --
Non-interest bearing note due individual. Unsecured.
Monthly payments of $1,000, principal only. Due
1999. ............................................. 36,000 31,000 25,000
9.2% note due to First Essex Bank. Secured by
assets of the Company and shareholder. Monthly
payments of $32,708, principal and interest. Due
February, 2003. ................................... -- 1,838,743 1,737,194
9.25% note due to First Essex Bank. Secured by
assets purchased. Monthly payments of $5,925,
principal and interest. Due April, 2001. .......... -- 252,479 205,434
Note due Ford Motor Credit. Secured by asset
purchased. Monthly payments of $298, principal
and interest. Due January, 1999. .................. -- 12,213 11,372
8.99% note due to First Essex Bank. Secured by
assets purchased. Monthly payments of $2,435,
principal and interest. Due June, 2001. ........... -- 109,213 94,603
-------- ---------- ----------
533,723 2,597,058 2,420,190
Less Current Portion ............................... 88,471 324,194 324,197
-------- ---------- ----------
$445,252 $2,272,864 $2,095,993
======== ========== ==========
The notes payable were extinguished as part of the acquisition of H.C.
Gobin, Inc. by Casella Waste Systems, Inc. See Note 16. No long-term debt
maturity has been presented.
F-52
H.C. GOBIN, INC.
NOTES TO FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
3. Related Party Transactions
The Company has entered into a lease arrangement for office space and
equipment with a related party. The lease is on a month to month basis
cancelable by either party. Present monthly rent has been set at $1,300. During
the years ended December 31, 1995 and 1996 and the six months ended June 30,
1997, the Company paid the lessor $15,600, $15,600 and $7,800, respectively.
4. Line of Credit
At December 31, 1995 the Company had a line of credit from First NH Bank
with a maximum borrowing limit of $100,000. Borrowings on this line of credit
were $65,000 on December 31, 1995. This line was guaranteed by various assets
of the Company and personally by the majority stockholder.
In February, 1996, the First NH Bank line of credit was repaid and closed.
It was replaced with a line of credit at the First Essex Bank with a maximum
borrowing limit of $250,000. Borrowings on this line were $249,952 and $215,417
at December 31, 1996 and June 30, 1997, respectively. This line is guaranteed
by various assets of the Company and personally by the majority stockholder.
The note matures in April, 2001.
The line of credit was extinguished as part of the acquisition of H.C.
Gobin, Inc. by Casella Waste Systems, Inc. See note 16. No future minimum
payments have been presented.
5. Notes Receivable
Notes receivable at December 31, 1995 and 1996 and June 30, 1997,
consisted of the following:
December 31,
------------------------- June 30,
1995 1996 1997
----------- ---------- ------------
(Unaudited)
Unsecured note from shareholders. No stated interest or
repayment terms. ..................................... $ -- $24,535 $24,535
-------- ------- -------
Less Current Portion .................................. -- 24,535 24,535
-------- ------- -------
$ -- $ -- $ --
======== ======= =======
6. Performance Bonding
The Company has been approved by Frontier Insurance Company for
performance bonding coverage not to exceed $3.5 million including bid bonds at
an annual usage rate of 1.65% of any portion of the coverage used. The Company
had drawn down on the available coverage in the amount of $430,290 as of
December 31, 1995 to secure various projects. During 1996 the Company did not
have a pre-approved limit for performance bonding coverage. As of June 30,
1997, the Company had drawn down on the available coverage in the amount of
$185,000 to secure various projects.
7. Stock Redemption
The Company's majority stockholders of record on December 31, 1994 entered
into a stock redemption plan with the Company. The agreement was executed on
January 1, 1995.
The Company entered into a loan agreement with the stockholders redeeming
their stock under the following terms:
Principal loan amount ..................................... $363,415
Interest rate ............................................. 11.4%
Term of loan .............................................. 207 payments
F-53
H.C. GOBIN, INC.
NOTES TO FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
7. Stock Redemption (Continued)
The loan is secured by various equipment of the Company. See the long-term
debt footnote for additional details.
8. Business Development
The Company is currently involved in various business development projects
within New Hampshire and Vermont. These projects are in the research and
development stages. Expenses related to these development projects are included
as current year expenses within the income statement line items. Costs incurred
during the years ended December 31, 1995 and 1996 and the six months ended June
30, 1997 were approximately $14,000, $13,000 and $1,000, respectively.
9. Prepaid Expenses
The Company has elected to prepay various expenses in order to more
effectively manage its operating affairs. Prepaid items as of December 31, 1995
and 1996 and June 30, 1997 are as follows:
December 31,
---------------------- June 30,
1995 1996 1997
--------- ---------- ------------
(Unaudited)
Licenses ....................... $ 8,230 $12,132 $19,995
Insurance ...................... 24,259 30,079 26,535
Legal fees ..................... 15,753 -- --
Other .......................... -- 2,087 7,330
------- ------- -------
$48,242 $44,298 $53,860
======= ======= =======
10. Contract Costs
The Company incurs various costs related to preparation and implementation
of long-term contracts. Management has elected to amortize these initial costs
over the term of the contract. As of December 31, 1995 and 1996 and June 30,
1997, prepaid contract costs were $38,262, $29,106 and $23,997 respectively.
These costs relate to contracts entered into in 1995, 1996, 1997 and future
years.
11. Business Acquisition
During March of 1996 the Company acquired a commercial hauling business.
The acquisition price was $1,270,665 subject to adjustment based on a formula
outlined in the purchase and sales agreement. The acquisition was financed
through First Essex Bank, with various credit facilities which included
retirement of First NH Bank debt, and capital lease obligations.
12. Obligations Under Capital Leases
The Company is the lessee of vehicles and equipment under capital leases
expiring in various years through 2000. The assets and liabilities under
capital leases are recorded at the lower of the present values of the minimum
lease payments or the fair values of the assets. The assets are included in
property and equipment and are depreciated over their estimated useful lives.
F-54
H.C. GOBIN, INC.
NOTES TO FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
12. Obligations Under Capital Leases (Continued)
As of June 30, 1997, minimum future lease payments under capital leases
are:
Year Ended June 30, (Unaudited)
- -------------------------------
1998 .................................................. $ 3,970
1999 .................................................. 3,970
2000 .................................................. 2,826
-------
Total minimum lease payments ............................. $10,766
=======
The capital lease obligations as of December 31, 1996 were extinguished as
part of the acquisition of H.C. Gobin, Inc. by Casella Waste Systems, Inc. See
Note 16.
13. 401(k) Pension Plan
The Company has a 401(k) type pension and profit sharing plan for eligible
employees. Employees are eligible to participate in the plan if they have been
employed by the Company for one year. Generally, employees can defer up to 15%
of their salary into the plan, not to exceed $9,500. The employer can make a
discretionary contribution for the employees based on profit.
14. Contingent Liabilities
The Company was contingently liable on two (2) employment contracts as of
December 31, 1996:
1) Liable to an employee for severance pay of $7,500 upon employee
voluntary termination at any time prior to August 1, 2000. No amount has been
recorded in the financial statements.
2) Liable to an employee for severance pay equal to 15 weeks full
compensation including salary and medical/dental insurance. This liability is
approximately $24,596 and has been recorded as a liability in the financial
statements.
15. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
16. Subsequent Events
16A) During February 1997 the Company became in technical default of its
loan covenants with First Essex Bank. The default provisions were mitigated
upon the asset sale in August 1997 to Casella Waste Systems, Inc.
16B) During March 1997 the Company lost an investment of $29,451 due to
poor market conditions related to various option investments in Hampton-Rhodes,
LTD.
16C) On August 1, 1997, Casella Waste Systems, Inc., and subsidiaries
(CWS) acquired all of the assets of the Company. The purchase price of
approximately $4,880,000 consisted of $1,421,397 in cash, a $300,000
subordinated note to the seller and $3,158,603 in liabilities and closing costs
paid/assumed at closing.
F-55
H.C. GOBIN, INC.
NOTES TO FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
17. Retained Earnings--Restatement
The retained earnings of the Company have been restated as of January 1,
1995. The restatement is a result of a change in the accounting for capital
lease obligation related to deferred taxes.
Retained Earnings--12/31/94 (As previously reported) ......... $1,020,939
Correction of deferred tax Calculation--12/31/94 ............. 70,790
----------
Retained Earnings--1/1/95 (Restated) ......................... $1,091,729
==========
18. Legal Matters
The Company was involved in several pending legal matters during the audit
period and subsequently through the date of the audit report.
18A) NH/VT Solid Waste Project v. H.C. Gobin, Inc.--The Company has
escrowed approximately $185,000 with the Clerk of the Superior Court for
Sullivan County, New Hampshire. According to the Company's legal council,
evaluation of the likelihood of an unfavorable outcome appears to be unlikely
to exceed the funds held on deposit.
18B) Paul Blann v. H.C. Gobin, Inc.--An employee of the Corporation
terminated in February 1997 has brought a claim for wrongful termination in
both Vermont and New Hampshire courts. The case in New Hampshire was concluded
with a judgement for the Company. The case in Vermont is pending. According to
the Company's legal counsel, in the unlikely event the Company were to lose, a
judgement between $25,000 and $100,000 could be anticipated.
18C) The Company has commenced an arbitration proceeding against Rose
Disposal Services, Inc. and Anco Leasing Corporation based on a claim of
indemnification pursuant to the Company's purchase of assets from those two
corporations in February 1996. Pursuant to that indemnification right, the
Company has set off indemnification payments against two promissory notes given
by it in that asset purchase transaction. The principals of Anco Leasing
Corporation and Rose Disposal Services, Inc. have threatened but have not
brought proceedings to collect amounts due under the promissory note.
F-56
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters for whom Goldman, Sachs
& Co., CIBC Oppenheimer Corp. and Donaldson, Lufkin & Jenrette Securities
Corporation are acting as representatives, has severally agreed to purchase
from the Company and the Selling Stockholders, the respective number of shares
of Class A Common Stock set forth opposite its name below:
Shares of Class A
Underwriter Common Stock
----------- -----------------
Goldman, Sachs & Co. ..................................... 719,128
CIBC Oppenheimer Corp. ................................... 719,126
Donaldson, Lufkin & Jenrette Securities Corporation ...... 719,126
Advest, Inc. ............................................. 76,100
BT Alex. Brown Incorporated .............................. 76,100
First Analysis Securities Corporation .................... 76,100
GS2 Securities, Inc. ..................................... 76,100
Edward D. Jones & Co., L.P. .............................. 76,100
Merrill Lynch, Pierce, Fenner & Smith Incorporated ....... 76,100
Moors & Cabot, Inc. ...................................... 76,100
Raymond James & Associates, Inc. ......................... 76,100
Sanders Morris Mundy ..................................... 76,100
Scott & Stringfellow, Inc. ............................... 76,100
Stifel, Nicolaus & Company, Incorporated ................. 76,100
Tucker Anthony Incorporated .............................. 76,100
---------
Total ................................................ 3,070,580
=========
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares of Class A
Common Stock offered hereby, if any are taken.
The Underwriters propose to offer the shares of Class A Common Stock in
part directly to the public at the public offering price set forth on the cover
page of this Prospectus and in part to certain securities dealers at such price
less a concession of $0.85 per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $0.10 per share to certain
other brokers and dealers. After the shares of Class A Common Stock are
released for sale to the public, the offering price and other selling terms may
from time to time be varied by the representatives.
In connection with the Offering, the Underwriters may purchase and sell
the Class A Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions in connection with the Offering. Stabilizing transactions
consist of certain bids or purchases for the purpose of preventing or retarding
a decline in the market price of the Class A Common Stock; and syndicate short
positions involve the sale by the Underwriters of a greater number of shares of
Class A Common Stock than they are required to purchase from the Company in the
Offering. The Underwriters also may impose a penalty bid, whereby selling
concessions allowed to syndicate members or other broker-dealers in respect of
the securities sold in the Offering for their account may be reclaimed by the
syndicate if such shares of Class A Common Stock are repurchased by the
syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Class A Common
Stock, which may be higher than the price that might otherwise prevail in the
open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 460,587
additional shares of Class A Common Stock solely to cover over-allotments, if
any. If the Underwriters exercise their over-allotment option, the Underwriters
have severally agreed, subject to certain conditions, to purchase approximately
the same percentage thereof that the number of shares of Class A Common Stock to
be purchased by each of them bears to the 3,070,580 shares of Class A Common
Stock offered hereby.
The Company, its directors and executive officers and the Selling
Stockholders have agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 90 days after the date
of this Prospectus, they will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company (other than pursuant to employee stock
option plans existing on the date of this Prospectus and other than to issue
shares upon the exercise of outstanding warrants) which are substantially
similar to the shares of Class A Common Stock or which are convertible or
exchangeable into securities which are substantially similar to the shares of
Class A Common Stock, without the prior written consent of the representatives
except for the Class A Common Stock offered in connection with this Offering.
U-1
The representatives of the Underwriters have informed the Company that
they do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Class A Common Stock offered by them.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
Some of the shares held by Joseph M. Winters, Andrew B. Winters, Brigid
Winters, and Sean Winters, each of whom is a Selling Stockholder, have been
pledged to Goldman, Sachs & Co. to secure margin loans made by Goldman, Sachs &
Co. to such persons in the aggregate principal amount of approximately $4
million. Such loans are expected to be paid in full upon the closing of this
Offering.
In connection with this Offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualifying registered
market makers on Nasdaq, may engage in passive market making transactions in
the Common Stock of the Company on Nasdaq in accordance with Rule 10b-6A under
the Securities Exchange Act of 1934 during the two business day period before
commencement of offers or sales of the Common Stock offered hereby. The passive
market making transactions must comply with applicable volume and price limits
and be identified as such. In general, a passive market maker may display its
bid at a price not in excess of the highest independent bid for the security;
if all independent bids are lowered below the passive market maker's bid,
however, such bid must then be lowered when certain purchase limits are
exceeded.
U-2
[THIS PAGE INTENTIONALLY LEFT BLANK]
================================================================================
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having
been authorized. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy
such securities in any circumstances in which such offer or solicitation is
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
--------------------------------
TABLE OF CONTENTS
Page
-----
Prospectus Summary ................................................... 3
Risk Factors ......................................................... 8
Use of Proceeds ...................................................... 17
Dividend Policy ...................................................... 17
Market Price of Class A Common Stock ................................. 18
Capitalization ....................................................... 19
Selected Consolidated Financial and
Operating Data .................................................... 20
Unaudited Pro Forma Consolidated
Statements of Operations .......................................... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations ..................................................... 24
Business ............................................................. 31
Management ........................................................... 49
Certain Transactions ................................................. 58
Principal and Selling Stockholders ................................... 61
Description of Capital Stock ......................................... 63
Legal Matters ........................................................ 67
Experts .............................................................. 67
Available Information ................................................ 67
Index to Financial Statements ........................................ F-1
Underwriting ......................................................... U-1
3,070,580 Shares
Casella Waste Systems, Inc.
Class A Common Stock
($0.01 par value)
--------------------------------
[LOGO] CASELLA WASTE SYSTEMS
--------------------------------
Goldman, Sachs & Co.
CIBC Oppenheimer
Donaldson, Lufkin & Jenrette
Representatives of the Underwriters
================================================================================
