UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

(Mark One)

 

 

ý

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

 

 

For the fiscal year ended April 30, 2005

 

 

Or

 

 

o

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

 

 

For the transition period from             to            

 

 

Commission file number 000-23211

 

CASELLA WASTE SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

03-0338873

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

25 Greens Hill Lane, Rutland, VT

 

05701

(Address of principal executive offices)

 

(Zip Code)

 

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

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Securities registered pursuant to Section 12(g) of the Act:

Class A common stock, $.01 per share par value

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ý

 

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

 

The aggregate market value of the common equity held by non-affiliates of the registrant, based on the last reported sale price of the registrant’s Class A common stock on the NASDAQ Stock Market at the close of business on October 31, 2004 was $294,440,791. The Company does not have any non-voting common stock outstanding.

 

There were 23,860,498 shares of Class A common stock, $.01 par value per share, of the registrant outstanding as of June 15, 2005.  There were 988,200 shares of Class B common stock, $.01 par value per share, of the registrant outstanding as of June 15, 2005.

 

 



 

Documents Incorporated by Reference

 

Items 10, 11, 12, 13 and 14 of Part III (except for information required with respect to executive officers of the Company, which is set forth under Part I – Business - “Executive Officers and Other Key Employees of the Company” and with respect to certain equity compensation plan information which is set forth under Part III-”Equity Compensation Plan Information”) have been omitted from this Annual Report on Form 10-K, since the Company expects to file with the Securities and Exchange Commission, not later than 120 days after the close of its fiscal year, a definitive proxy statement. The information required by Items 10, 11, 12, 13 and 14 of Part III of this report, which will appear in the definitive proxy statement, is incorporated by reference into this Annual Report on Form 10-K.

 

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PART I

 

ITEM 1. BUSINESS

 

Casella Waste Systems, Inc. is a vertically-integrated regional solid waste services company that provides collection, transfer, disposal and recycling services to residential, industrial and commercial customers, primarily in the eastern United States.  We believe we are currently the number one or number two provider of solid waste collection services in 80% of the areas served by our collection divisions.  As of June 15, 2005, we owned and/or operated eight Subtitle D landfills, two landfills permitted to accept construction and demolition materials, 37 solid waste collection operations, 34 transfer stations, 38 recycling facilities, one waste-to-energy facility and a 50% interest in a joint venture that manufactures, markets and sells cellulose insulation made from recycled fiber.

 

Overview of Our Business

 

Background.    Casella Waste Systems, Inc. a Delaware Corporation, was founded in 1975 as a single truck operation in Rutland, Vermont and subsequently expanded to include operations in New Hampshire, Maine, upstate New York, northern Pennsylvania and eastern Massachusetts. In 1993, we 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 services industry. In 1995, we expanded our operations from Vermont and New Hampshire to Maine with the acquisition of the companies comprising New England Waste Services of ME, Inc., and in January 1997 we established a market presence in upstate New York and northern Pennsylvania through our acquisition of Superior Disposal Services, Inc.’s business.

 

In 1997, we raised $50.2 million from the initial public offering of shares of our Class A common stock. In 1998, we raised an additional $41.3 million through a follow-on public offering of an additional 1.6 million shares of Class A common stock. In August 2000, we sold 55,750 shares of our Series A redeemable convertible preferred stock to Berkshire Partners LLC, an investment firm, and other investors for $55.8 million.

 

In December 1999, we acquired KTI, an integrated provider of waste processing services, for aggregate consideration of $340.0 million. KTI represented a unique opportunity to acquire disposal capacity and collection operations in our primary market area and in contiguous markets in eastern Massachusetts, as well as other businesses which fit within our operating strategy. Following our acquisition of KTI in December 1999 through 2002, we focused on the integration of KTI and the divestiture of non-core KTI assets.

 

From 2003 to date, we have focused on building our disposal capacity within our footprint, using our partnership model. We believe we have been successful, since we have added Hardwick and Southbridge in Massachusetts, Ontario in upper New York State and West Old Town in Maine, as well as expanded our annual permit limits and overall capacity at our other sites that we own or operate.  In fiscal year 2004 we were successful in securing an increase of our permitted volume capacity from 417 to 1,000 tons per day at our Hakes landfill facility.  At our Waste USA landfill facility, the annual permitted volume was amended in fiscal year 2005 to allow 370,000 tons per year, an increase of 130,000 tons from previously approved levels.  In fiscal year 2005, our Hyland landfill facility received a necessary local approval for the future expansion of an additional 38 acres, representing approximately 5.7 million tons of additional capacity (subject to receipt of permits).  The annual tons disposed in our landfills have increased from 1.4 million tons at the beginning of fiscal year 2003 to 2.5 million tons at the end of fiscal year 2005, and total permitted and permittable capacity has increased from 26.1 million tons to 81.7 million tons over the same time frame.  We have also closed on 22 tuck-in acquisitions during that time.  From May 1, 1994 through April 30, 2005, we have acquired 212 solid waste collection, transfer, recycling and disposal operations.

 

This objective of building disposal capacity is to increase our vertical integration within our footprint to optimize our control of the waste stream from collection through disposal thereby providing an economic benefit.  Internalization of waste refers to the amount of waste that our collection companies collect that is ultimately disposed of in one of our disposal facilities.  As a result of our success in building disposal capacity our internalization increased to 56.8% in fiscal year 2005 from 53.2% in fiscal year 2004.

 

Solid Waste Operations

 

Our solid waste operations comprise a full range of non-hazardous solid waste services, including collection operations,

 

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transfer stations, material recycling facilities and disposal facilities.

 

Collections.    A majority of our commercial and industrial collection services are performed under one-to-three-year service agreements, with prices and fees determined by such factors as collection frequency, type of equipment and containers furnished, the type, volume and weight of solid waste collected, distance to the disposal or processing facility and cost of disposal or processing. Our residential collection and disposal services are performed either on a subscription basis (i.e., with no underlying contract) with individuals, or through contracts with municipalities, homeowner associations, apartment building owners or mobile home park operators.

 

Transfer Stations.    Our transfer stations receive, compact and transfer solid waste collected primarily by various collection operations, for transport to disposal facilities by larger vehicles. We believe that transfer stations benefit us by: (1) increasing the size of the wastesheds which have access to our landfills; (2) reducing costs by improving utilization of collection personnel and equipment; and (3) helping us build relationships with municipalities and other customers by providing a local physical presence and enhanced local service capabilities.

 

Material Recycling Facilities.    Our material recycling facilities, or MRFs, receive, sort, bale and resell recyclable materials originating from the municipal solid waste stream, including newsprint, cardboard, office paper, containers and bottles. Through FCR, we operate 19 MRFs in geographic areas not served by our collection divisions or disposal facilities and three in geographic areas served by our collection divisions. Revenues are received from municipalities and customers in the form of processing, tipping fees and commodity sales. These MRFs are large-scale, high-volume facilities that process recycled materials delivered to them by municipalities and commercial customers under long-term contracts. We also operate MRFs as an integral part of our core solid waste operations, which generally process recyclables collected from our various residential collection operations. This latter group is concentrated primarily in Vermont, as the public sector in other states within our core solid waste services market area has generally maintained primary responsibility for recycling efforts.

 

Disposal Facilities.    We dispose of solid waste at our landfills and at our waste-to-energy facility.

 

Landfills.    The following table (in thousands) reflects landfill capacity and airspace changes, as measured in tons, as of April 30, 2003, 2004 and 2005, for landfills we operated during the years then ended:

 

 

 

 

April 30, 2003

 

April 30, 2004

 

April 30, 2005

 

 

 

Estimated
Remaining
Permitted
Capacity
in Tons
(1)

 

Estimated
Additional
Permittable
Capacity
in Tons
(1)(2)

 

Estimated
Total
Capacity

 

Estimated
Remaining
Permitted
Capacity
in Tons
(1)

 

Estimated
Additional
Permittable
Capacity
in Tons
(1)(2)

 

Estimated
Total
Capacity

 

Estimated
Remaining
Permitted
Capacity
in Tons
(1)

 

Estimated
Additional
Permittable
Capacity
in Tons
(1)(2)

 

Estimated
Total
Capacity

 

Balance, beginning of period

 

8,951

 

17,185

 

26,136

 

7,313

 

22,314

 

29,627

 

15,307

 

50,337

 

65,644

 

Acquisitions

 

607

 

422

 

1,029

 

9,609

 

28,353

 

37,962

 

 

 

 

New expansions pursued (3)

 

(183

)

5,663

 

5,480

 

 

225

 

225

 

 

 

16,830

 

16,830

 

Permits granted (4)

 

 

 

 

97

 

 

97

 

11,453

 

(11,453

)

 

Airspace consumed

 

(1,373

)

 

(1,373

)

(1,840

)

 

(1,840

)

(2,527

)

 

(2,527

)

Changes in engineering estimates

 

(689

)

(956

)

(1,645

)

128

 

(555

)

(427

)

1,448

 

294

 

1,742

 

Balance, end of period

 

7,313

 

22,314

 

29,627

 

15,307

 

50,337

 

65,644

 

25,681

 

56,008

 

81,689

 

 


(1)           We convert estimated remaining permitted capacity and estimated additional permittable capacity from cubic yards to tons by assuming a compaction factor equal to the historic average compaction factor applicable to the respective landfill over the last three fiscal years. In addition to a total capacity limit, certain permits may place a daily and/or annual

 

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limit on capacity.

 

(2)           Represents capacity which we have determined to be “permittable” in accordance with the following criteria: (i) we control the land on which the expansion is sought; (ii) all technical siting criteria have been met or a variance has been obtained or is reasonably expected to be obtained; (iii) we have not identified any legal or political impediments which we believe will not be resolved in our favor; (iv) we are actively working on obtaining any necessary permits and we expect that all required permits will be received within the next two to five years; and (v) senior management has approved the project.

 

(3)           Does not include certain expansion capacity which we are seeking at our NCES landfill.  Since expansion capacity at our NCES landfill has been the subject of litigation, the capacity associated with the litigation, 1.1 million tons with an estimated useful life of 8.5 years, has been omitted.  The increase in fiscal year 2005 is primarily due to a determination of additional permittable airspace capacity at our Hyland, West Old Town and Waste USA landfills.

 

(4)           The increase in permitted airspace capacity is associated with permits granted at our Ontario, West Old Town and Waste USA landfill facilities.

 

NCES.    The North Country Environmental Services (“NCES”) landfill located in Bethlehem, New Hampshire serves the northern and central wastesheds of New Hampshire and certain contiguous Vermont and Maine wastesheds. Since the purchase of this landfill in 1994, we have experienced expansion opposition from the local town through enactment of restrictive local zoning and planning ordinances. In each case, in order to access additional permittable capacity, we have been required to assert our rights through litigation in the New Hampshire court system. In July 2000, we received approval for approximately 600,000 tons of additional capacity, which we expect to last into fiscal year 2008. In addition, although we received state approval for an additional use of approximately 1.1 million tons, outside the original 51 acres, our right to use that capacity has been limited by a ruling of the New Hampshire Supreme Court.

 

Waste USA.    The Waste USA landfill is located in Coventry, Vermont and serves the major wastesheds associated with the northern two-thirds of Vermont. The landfill is permitted to accept residential and commercially produced municipal solid waste, including pre-approved sludges, and construction and demolition debris. Since our purchase of this landfill in 1995, we have expanded the capacity of this landfill which we expect to last through approximately fiscal year 2026.  In fiscal year 2005, the annual permit was increased from 240,000 to 370,000 tons.

 

Clinton County.    The Clinton County landfill, located in Schuyler Falls, New York, is leased from Clinton County pursuant to a 25-year lease which expires in 2021. The landfill serves the principal wastesheds of Clinton, Franklin, Essex, Warren and Washington Counties in New York, and certain selected contiguous Vermont wastesheds. Permitted waste accepted includes municipal solid waste, construction and demolition debris, and special waste which is approved by regulatory agencies. The facility is currently in the final stages of a multi-year landfill expansion permitting process which, if successful, would provide considerable additional volume beyond the current terms of the lease agreement. We have entered into extended agreements with the town and county applicable to this additional volume.

 

Pine Tree.    The Pine Tree landfill is located in Hampden, Maine. It is permitted to accept construction and demolition material, ash, front-end processing residues from the waste-to-energy facilities within the State of Maine and related sludges and special waste which is approved by regulatory agencies. In addition, it is permitted to accept municipal solid waste that is by-pass waste from the Maine Energy Recovery Company, Limited Partnership (“Maine Energy”) and Penobscot Energy Recovery Company (“PERC”) waste-to-energy facilities, as well as municipal solid waste that is in excess of the processing capacities of other waste-to-energy facilities within the State of Maine. We are currently developing our next expansion plan to seek approval for an additional 3.5 million cubic yards.

 

Hardwick.    The Hardwick landfill, which was acquired in March 2003, located in Hardwick, Massachusetts, is permitted to accept construction and demolition material, municipal solid waste and certain difficult-to-manage wastes.  The facility currently is permitted to accept up to 400 tons per day of municipal solid waste with an annual permitted capacity of 82,800 tons of municipal solid waste.  The Hardwick landfill is located on an 18-acre property. In addition, we have options to purchase approximately 253 additional acres that are adjacent to the landfill. We estimate that at its current permit limits, the facility has approximately between 10 and 11 years of operating life.

 

West Old Town.    On February 5, 2004, we completed transactions with the State of Maine and Georgia-Pacific, pursuant to which the State of Maine took ownership of the landfill located in West Old Town, Maine formerly owned by Georgia-Pacific and we became the operator of that facility under a 30-year operating and services agreement between us and

 

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the State of Maine. Under the terms of the agreements, we provided to the State of Maine, and the State of Maine provided to Georgia-Pacific an initial cash payment of $26.0 million upon the issuance of an expansion permit for an additional 10 million cubic yards of commercial capacity at the landfill.  The permit was issued in April, 2004, subject to appeal.  The Pine Tree and West Old Town landfills represent two of the three commercial landfills serving principal wastesheds in the State of Maine.

 

Southbridge.    On November 25, 2003, we acquired Southbridge Recycling and Disposal Park, Inc (“Southbridge Recycling and Disposal”).  Southbridge Recycling and Disposal has a contract with the Town of Southbridge, Massachusetts to maintain and operate a 13-acre construction and demolition recycling facility and a 52-acre landfill permitted to accept residuals from the recycling facility and a limited amount of municipal solid waste. The contract has a remaining term of 11 years and is renewable by us for four additional five-year terms or until the landfill has reached full capacity, whichever is greater. The landfill has currently permitted volume of approximately 4.4 million tons and is authorized to accept up to 180,960 tons per year, consisting of 156,000 tons of residual material and 24,960 tons of municipal solid waste.

 

Maine Energy Waste-to-Energy Facility.    We own a waste-to-energy facility, Maine Energy, which generates electricity by processing non-hazardous solid waste. This waste-to-energy facility provides us with important additional disposal capacity and generates power for sale. The facility receives solid waste from municipalities under long-term waste handling agreements and also receives raw materials from commercial and private waste haulers and municipalities with short-term contracts, as well as from our collection operations. Maine Energy is contractually required to sell all of the electricity generated at its facility to Central Maine Power, an electric utility, and guarantees 100% of its electric generating capacity to CL Power Sales One, LLC. Our use of the facility is subject to permit conditions, some of which are opposed by local authorities. See “—Regulation.”

 

Templeton.    On June 5, 2003, we entered into a construction, operation and management agreement with the Town of Templeton, Massachusetts for the operation of the Templeton sanitary landfill. On February 19, 2004, voters at a special town meeting approved a town by-law banning out-of-town waste at the landfill and related by-laws.  Accordingly, we are seeking to discuss the agreement with officials from the town to determine the appropriate next steps.  The landfill permitting and construction process has been delayed indefinitely as a result of the town’s actions.

 

Hyland.    The Hyland landfill located in Angelica, New York, serves certain Western region wastesheds located throughout western New York. The facility is permitted to accept all residential and commercial municipal solid waste, construction and demolition debris and special waste which is approved by regulatory agencies. The facility is located on a 600-acre property, which represents considerable additional expansion capabilities. In 1999, as part of a long-term settlement with the Town of Angelica, we entered into an agreement requiring a permissive referendum to expand beyond a pre-agreed footprint. During the 2004 local elections, the town passed the required permissive referendum related to the future expansion of the site. This is the first step in securing a permit modification for an additional 38 acres, representing in excess of 5.7 million tons of additional capacity.

 

Ontario.    We have entered into a 25-year operation, management and lease agreement with the Ontario County Board of Supervisors for the Ontario County Landfill, which is located in the Town of Seneca, New York. We commenced operations on December 8, 2003. This landfill serves the central New York wasteshed and is strategically situated to accept long haul volume from both Eastern and downstate markets. The site consists of a 387 acre landfill permitted to accept 624,000 tons per year of municipal solid waste. During fiscal 2005 we received a permit modification for an additional 3.9 million tons. Additional potential expansions amount to 7.0 million tons.

 

Hakes.    The Hakes construction and demolition landfill, located in Campbell, New York, is permitted to accept only construction and demolition material. The landfill serves the principal rural wastesheds of western New York. We believe that the site has permittable capacity of over 3.9 million tons, based on existing regulatory requirements and local community support. We expect to apply for this expansion during the next 6 months and do not expect substantial opposition from the town. We have entered into a revised long-term host community agreement related to the expansion of the facility. In November 2003 we were successful in securing an increase of our permitted volume capacity from 417 to 1,000 tons per day.

 

In April 2005, the Company started operations at Worcester landfill, a closure project with approximately 0.8 million tons of available capacity.  We also have rights to remaining capacity at a residual landfill in Brockton, Massachusetts totaling approximately 122,000 tons as of April 30, 2005.  The Brockton landfill is expected to be closed in late summer of 2005.  The Worcester and Brockton landfills are not included in the above table of remaining landfill capacity.  In addition, we own and/or operated six unlined landfills which are not currently in operation. All of these landfills have been closed and

 

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capped to applicable environmental regulatory standards by us.

 

Operating Segments

 

We manage our solid waste operations on a geographic basis through four regions, which we have designated as the North Eastern, South Eastern, Central and Western regions and which each comprise a full range of solid waste services, and FCR, which comprises our larger-scale non-solid waste recycling and our brokerage operations.

 

Within each geographic region, we organize our solid waste services around smaller areas that we refer to as “wastesheds.” A wasteshed is an area that comprises the complete cycle of activities in the solid waste services process, from collection to transfer operations and recycling to disposal in either landfills or waste-to-energy facilities, some of which may be owned and operated by third parties. We typically operate several divisions within each wasteshed, each of which provides a particular service, such as collection, recycling, disposal or transfer. Each of these divisions is managed as a separate profit center, but operates interdependently with the other divisions within the wasteshed. Each wasteshed generally operates autonomously from adjoining wastesheds.

 

Through its 22 material recycling facilities, FCR services 28 anchor contracts, which are long-term commitments of five years or greater to guarantee the delivery of all recycled residential recyclables to FCR. These contracts may include a minimum volume guarantee by the municipality. We also have service agreements with individual towns and cities and commercial customers, including small solid waste companies and major competitors that do not have processing capacity within a specific geographic region. The 22 FCR facilities process recyclables collected from approximately 2.6 million households, representing a population of approximately 8.1 million people.

 

The following table provides information about each solid waste region and FCR (as of June 15, 2005 except revenue information, which is for the fiscal year ended April 30, 2005).

 

 

 

North Eastern

 

South Eastern

 

Central

 

Western

 

FCR

 

 

 

region

 

region

 

region

 

region

 

Recycling

 

Revenues (in millions)

 

$93.4

 

$89.2

 

$108.7

 

$92.7

 

$82.0

 

Solid waste collection operations

 

8

 

4

 

12

 

13

 

 

Transfer stations

 

4

 

5

 

14

 

10

 

1

 

Recycling facilities

 

7

 

2

 

5

 

2

 

22

 

Subtitle D landfills (2)

 

Hampden, ME
West Old Town, ME

 

Hardwick, MA

 

Bethlehem, NH
Coventry, VT
Schuyler Falls, NY

 

Angelica, NY
Ontario, NY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other disposal facilities (1)

 

Biddeford, ME

 

Southbridge, MA

 

 

Campbell, NY

 

 

 


(1)           The disposal facility located in Biddeford, Maine is a waste-to-energy facility. The Southbridge, Massachusetts disposal facility is permitted to accept construction and demolition material and a limited amount of municipal solid waste. The disposal facility located in Campbell, New York is a landfill permitted to accept only construction and demolition materials.  In April 2005, the Company started operations at Worcester landfill, a closure project with approximately 1.2 million tons of available capacity.  We also have rights to the remaining air space capacity at a residual landfill located in Brockton, Massachusetts totaling approximately 122,000 tons as of April 30, 2005.  The Brockton landfill is expected to be closed in late summer of 2005.

 

(2)           On June 5, 2003, we entered into a construction, operation and management agreement with the Town of Templeton, Massachusetts for the operation of the Templeton sanitary landfill. On February 19, 2004, voters at a special town meeting approved a town by-law banning out-of-town waste at the landfill and related by-laws.  Accordingly, we are seeking to discuss the agreement with officials from the town to determine the appropriate next steps.  The landfill permitting and construction process has been delayed indefinitely as a result of the town’s actions.

 

North Eastern region.    The North Eastern region consists of wastesheds located in Maine. These wastesheds generally have been affected by the regional constraints on disposal capacity imposed by the public policies of New Hampshire, Maine and Massachusetts which have, over the past 10 years, either limited new landfill development or precluded development of additional capacity from existing landfills.  Consequently, the North Eastern region relies more heavily on non-landfill

 

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waste-to-energy disposal capacity than our other regions.  Maine Energy is one of four waste-to-energy facilities in the North Eastern region.

 

We entered the State of Maine in 1996 with our purchase of the assets comprising New England Waste Services of ME., Inc. in Hampden, Maine, which included the Pine Tree landfill.  Our acquisition of KTI in 1999 significantly improved our disposal capacity in this region as the acquisition included the Maine Energy waste-to-energy facility and provided an alternative internalization option for our solid waste assets in eastern Massachusetts.  In 2004, we obtained the right to operate the West Old Town landfill under a 30 year agreement with the State of Maine.  Our major competitor in the State of Maine is Waste Management, Inc., and we have several smaller local competitors.

 

South Eastern region.    We entered eastern Massachusetts in fiscal year 2000 with the acquisition of assets that were divested by Allied Waste Industries, Inc. under court order following its acquisition of Browning Ferris Industries, Inc., and through the acquisition of smaller independent operators. In this region, we rely to a large extent on third party disposal capacity. We believe we have a greater opportunity to increase our internalization rates and operating efficiencies in the South Eastern region through our ownership of the Hardwick landfill, which is currently permitted to accept 400 tons per day of municipal solid waste, and through the Southbridge landfill which is annually permitted to accept 156,000 tons of residual material and 24,960 tons of municipal solid waste. Our primary competitors in eastern Massachusetts are Waste Management, Inc., Allied Waste Industries, Inc., and smaller independent operators.

 

Central region.    The Central region consists of wastesheds located in Vermont, northwestern New Hampshire and eastern upstate New York. The portion of upstate New York served by the Central region includes Clinton (operation of the Clinton County landfill), Franklin, Essex, Warren, Washington, Saratoga, Rennselaer and Albany counties. Our Waste USA landfill in Coventry, Vermont is one of only two permitted Subtitle D landfills in Vermont, and our NCES landfill in Bethlehem, New Hampshire is one of only six permitted Subtitle D landfills in New Hampshire. In the Central region, there are a total of 13 permitted Subtitle D landfills.

 

The Central region has become our most mature operating platform, as we have operated in this region since our inception in 1975. We have achieved a high degree of vertical integration of the wastestream in this region, resulting in stable cash flow performance. In the Central region, we also have a market leadership position. Our primary competition in the Central region comes from Waste Management, Inc. and Allied Waste Industries, Inc. in the larger population centers (primarily southern New Hampshire and Eastern New York) and from smaller independent operators in the more rural areas. As our most mature region, we believe that future operating efficiencies will be driven primarily by improving our core operating efficiencies and providing enhanced customer service.

 

Western region.    The Western region consists of wastesheds in upstate New York (which includes Ithaca, Elmira, Oneonta, Lowville, Potsdam, Geneva, Auburn, Buffalo, Jamestown and Olean) and northern Pennsylvania (Wellsboro). We entered the Western region with our acquisition of Superior Disposal Services, Inc.’s business in 1997 and have consistently expanded in this region largely through tuck-in acquisitions and internal growth. Our collection operations include leadership positions in nearly every rural market in the Western region outside of larger metropolitan markets such as Syracuse, Rochester and Albany.

 

While we have achieved strong market positions in this region, we remain focused on increasing our vertical integration through the acquisition or privatization and operation of additional disposal capacity in the market. As compared to our other operating regions, the Western region, where we own the Hyland and Hakes landfills and operate the Ontario County landfill, presently contains an excess of disposal capacity as a result of the proliferation during the 1990s of publicly-developed Subtitle D landfills. As a result, we believe that opportunities exist for us to enter into long-term leasing arrangements and other strategic partnerships with county and municipal governments for the operation and/or utilization of their landfills, similar to our new long-term lease for the Ontario County landfill.  We expect that successful implementation of this strategy will lead to improved internalization rates.

 

Our primary competitors in the Western region are Waste Management, Inc. and Allied Waste Industries, Inc. in the larger urban areas and smaller independent operators in the more rural markets.

 

FCR Recycling.    FCR Recycling is one of the largest processors and marketers of recycled materials in the eastern United States, comprising 22 material recycling facilities that process and then market recyclable materials that municipalities and commercial customers deliver to it under long-term contracts. Eight of FCR’s facilities are leased, seven are owned and seven are under operating contracts. In fiscal year 2005, FCR processed and marketed approximately

 

8



 

1.1 million tons of recyclable materials. FCR’s facilities are principally located in key urban markets, including in Connecticut; North Carolina; New Jersey; Florida; Tennessee; Georgia; Michigan; New York; South Carolina; Massachusetts; Wisconsin; Maine; and Halifax, Canada.

 

A significant portion of the material provided to FCR is delivered pursuant to 28 anchor contracts, which are long-term contracts.  The anchor contracts generally have an original term of five to ten years and expire at various times between 2005 and 2028. The terms of each of the contracts vary, but all the contracts provide that the municipality or a third party delivers materials to our facility. In approximately one-fourth of the contracts, the municipalities agree to deliver a guaranteed tonnage and the municipality pays a fee for the amount of any shortfall from the guaranteed tonnage. Under the terms of the individual contracts, we charge the municipality a fee for each ton of material delivered to us. Some contracts contain revenue sharing arrangements under which the municipality receives a specified percentage of the revenues from the sale by us of the recovered materials.

 

FCR derives a significant portion of its revenues from the sale of recyclable materials. The purchase and sale prices of recyclable materials, particularly newspaper, corrugated containers, plastics, ferrous and aluminum, can fluctuate based upon market conditions. We use long-term supply contracts with customers with floor price arrangements to reduce the commodity risk for certain recyclables, particularly newspaper, cardboard, plastics, aluminum and metals. Under such contracts, we obtain a guaranteed minimum price for the recyclable materials along with a commitment to receive additional amounts if the current market price rises above the floor price. The contracts are generally with large domestic companies that use the recyclable materials in their manufacturing process, such as paper, packaging and consumer goods companies. In fiscal year 2005, 49% of the revenues from the sale of recyclable materials of the residential recycling segment were derived from sales under long-term contracts with floor prices. We also hedge against fluctuations in the commodity prices of recycled paper and corrugated containers in order to mitigate the variability in cash flows and earnings generated from the sales of recycled materials at floating prices. As of April 30, 2005, we were party to thirty-three commodity hedge contracts. These contracts expire between May 2005 and April 2008.

 

As part of our acquisition of KTI, we had acquired brokerage businesses which were focused on domestic and export markets. In September 2002, we transferred our export brokerage operations to employees who had been responsible for managing that business.  Effective April 1, 2004, the transfer of those export brokerage operations were reflected as a sale for total consideration of approximately $5.0 million.  The gain on the sale amounted to approximately $1.1 million. In June 2003, we transferred our domestic brokerage operations and a commercial recycling business to employees who managed those businesses. The brokerage businesses derived all of their revenues from the sale of recyclable materials, predominately old newspaper, old corrugated cardboard, mixed paper and office paper.  The brokers in the brokerage operation were required to identify both the buyer and the seller of the recyclable materials before committing to broker the transaction, thereby minimizing pricing risk, and were not permitted to enter into speculative trading of commodities.

 

During the second quarter of fiscal 2005, we completed the sale of the assets of Data Destruction Services, Inc. (Data Destruction) for cash sale proceeds of $3.0 million.  This shredding operation had been historically accounted for as a component of continuing operations as part of the FCR Recycling region up until its sale.  The transaction required discontinued operations treatment under SFAS No. 144, therefore the operating results of Data Destruction have been reclassified from continuing to discontinued operations in fiscal 2003, 2004 and 2005.  Also in connection with the discontinued accounting treatment, the loss (net of tax) from the sale amounting to $0.1 million has been recorded and classified as a loss on disposal of discontinued operations.

 

GreenFiber Cellulose Insulation Joint Venture

 

We are a 50% partner in US GreenFiber LLC (“GreenFiber”), a joint venture with Louisana-Pacific. GreenFiber, which we believe is the largest manufacturer of high quality cellulose insulation for use in residential dwellings and manufactured housing, was formed through the combination of our cellulose operations, which we acquired in our acquisition of KTI, with those of Louisiana-Pacific. Based in Charlotte, North Carolina, GreenFiber has a national manufacturing and distribution capability and sells to contractors, manufactured home builders and retailers, including Home Depot, Inc. GreenFiber has eleven manufacturing facilities, located in Atlanta, Georgia; Charlotte, North Carolina; Delphos, Ohio; Elkwood, Virginia; Norfolk, Nebraska; Phoenix, Arizona; Sacramento, California; Tampa, Florida; Denver, Colorado; and Waco, Texas. GreenFiber utilizes a hedging strategy to help stabilize its exposure to fluctuating newsprint costs, which generally represent approximately 62% of its raw material costs, and is a major purchaser of FCR Recycling fiber material produced at various facilities. GreenFiber, which we account for under the equity method, had revenues of $136.4 million for the twelve months ended April 30, 2005. For the same period, we recognized equity income from GreenFiber of $2.9 million.

 

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Competition

 

The solid waste services industry is highly competitive. We compete for collection and disposal volume primarily on the basis of the quality, breadth and price of our 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 our services or the loss of business. In addition, competition exists within the industry not only for collection, transportation and disposal volume, but also for acquisition candidates.

 

The larger urban markets in which we compete are served by one or more of the large national solid waste companies that may be able to achieve greater economies of scale than us, including Waste Management, Inc. and Allied Waste Industries, Inc. We also compete with a number of regional and local companies that offer competitive prices and quality service. In addition, we compete 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 us due to the availability of user fees, charges or tax revenues and tax-exempt financing.

 

The insulation industry is highly competitive and labor intensive. In our cellulose insulation manufacturing activities, GreenFiber, our joint venture with Louisiana-Pacific Corporation, competes primarily with manufacturers of fiberglass insulation such as Owens Corning, CertainTeed Corporation and Johns Manville. These manufacturers have significant market shares and are substantially better capitalized than GreenFiber.

 

Marketing and Sales

 

We have a coordinated marketing and sales strategy, which is formulated at the corporate level and implemented at the divisional level. We market our services locally through division managers and direct sales representatives who focus on commercial, industrial, municipal and residential customers. We also obtain new customers from referral sources and our general reputation. 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 our marketing plan, and many of our managers are involved in local governmental, civic and business organizations. Our name and logo, or, where appropriate, that of our divisional operations, are displayed on all our containers and trucks. Additionally, we attend and make presentations at municipal and state conferences and advertise in governmental associations’ membership publications.

 

We market our commercial, industrial and municipal services through our 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. We emphasize providing quality service and customer satisfaction, and believe that our focus on quality service will help retain existing and attract additional customers.

 

Employees

 

As of June 15, 2005, we employed approximately 2,600 people, including approximately 500 professionals or managers, sales, clerical, data processing or other administrative employees and approximately 2,100 employees involved in collection, transfer, disposal, recycling or other operations. Approximately 117 of our employees are covered by collective bargaining agreements. We believe relations with our employees to be satisfactory.

 

Risk Management, Insurance and Performance or Surety Bonds

 

We actively maintain environmental and other risk management programs, which we believe are appropriate for our business. Our environmental risk management program includes evaluating existing facilities, as well as potential acquisitions, for environmental law compliance and operating procedures. We also maintain a worker safety program, which encourages safe practices in the workplace. Operating practices at all of our operations are intended to reduce the possibility of environmental contamination and litigation.

 

We carry a range of insurance intended to protect our assets and operations, including a commercial general liability

 

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policy and a property damage policy. A partially or completely uninsured claim against us (including liabilities associated with cleanup or remediation at our facilities), if successful and of sufficient magnitude, could have a material adverse effect on our business, financial condition and results of operations. Any future difficulty in obtaining insurance could also impair our ability to secure future contracts, which may be conditioned upon the availability of adequate insurance coverage.

 

Effective July 1, 1999, we established a captive insurance company, Casella Insurance Company, through which we are self-insured for worker’s compensation and, effective May 1, 2000, automobile coverage. Our maximum exposure in fiscal 2005 under the worker’s compensation plan is $750,000 per individual event with a $1,000,000 aggregate limit, after which reinsurance takes effect. Our maximum exposure under the automobile plan is $750,000 per individual event with a $3,000,000 aggregate limit, after which reinsurance takes effect.

 

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. While we have not experienced difficulty in obtaining these financial instruments, if we were unable to obtain these financial instruments in sufficient amounts or at acceptable rates we could be precluded from entering into additional municipal solid waste collection contracts or obtaining or retaining landfill operating permits.

 

Customers

 

We provide our collection services to commercial, industrial and residential customers. A majority of our 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. Our residential collection and disposal services are performed either on a subscription basis (i.e., with no underlying contract) with individuals, or through contracts with municipalities, homeowners associations, apartment owners or mobile home park operators.

 

Maine Energy is contractually required to sell all of the electricity generated at its facilities to Central Maine Power, an electric utility, pursuant to a contract that expires in 2012, and guarantees 100% of its electricity generating capacity to CL Power Sales One, LLC, pursuant to a contract that expires in 2007.

 

FCR provides recycling services to municipalities, commercial haulers and commercial waste generators within the geographic proximity of the processing facilities. We also acted as a broker of recyclable materials, principally to paper and box board manufacturers in the United States, Canada, the Pacific Rim, Europe, South America and Asia, until these businesses were sold as described above.

 

Our cellulose insulation joint venture, GreenFiber, sells to contractors, manufactured home builders and retailers.

 

Raw Materials

 

Maine Energy received approximately 24% of its solid waste in fiscal year 2005 from 19 Maine municipalities under long-term waste handling agreements. Maine Energy also receives raw materials from commercial and private waste haulers and municipalities with short-term contracts, as well as from our own collection operations.

 

In fiscal year 2005, FCR received approximately 49% of its material under long-term agreements with municipalities. These contracts generally provide that all recyclables collected from the municipal recycling programs shall be delivered to a facility that is owned or operated by us. The quantity of material delivered by these communities is dependent on the participation of individual households in the recycling program.

 

The primary raw material for our insulation joint venture is newspaper. In fiscal year 2005, GreenFiber received approximately 15% of the newspaper used by it from FCR. It purchased the remaining newspaper from municipalities, commercial haulers and paper brokers. The chemicals used to make the newspaper fire retardant are purchased from industrial chemical manufacturers located in the United States and South America.

 

Seasonality

 

Our transfer and disposal 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:

 

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              the volume of waste relating to construction and demolition activities decreases substantially during the winter months in the eastern United States; and

 

              decreased tourism in Vermont, New Hampshire, 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 increased volume in the winter ski industry.

 

Since certain of our 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 typically result in increased operating costs.

 

The recycling segment experiences increased volumes of newspaper in November and December due to increased newspaper advertising and retail activity during the holiday season. The insulation business experiences lower sales in November and December because of lower production of manufactured housing due to holiday plant shutdowns.

 

Regulation

 

Introduction

 

We are 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 us are administered by the United States Environmental Protection Agency (“EPA”) and other federal, state and local environmental, zoning, health and safety agencies. Failure to comply with such requirements could result in substantial costs, including civil and criminal fines and penalties. Except as described in this Form 10-K, we believe that we are currently in substantial compliance with applicable federal, state and local environmental laws, permits, orders and regulations. We do not currently anticipate any material environmental costs to bring our operations into compliance, although there can be no assurance in this regard in the future. We expect that our operations in the solid waste services industry will be subject to continued and increased regulation, legislation and regulatory enforcement actions. We attempt to anticipate future legal and regulatory requirements and to carry out plans intended to keep our operations in compliance with those requirements.

 

In order to transport, process, incinerate, or dispose of solid waste, it is necessary for us to possess and comply with one or more permits from federal, state and/or local agencies. We must review these permits periodically, and the permits may be modified or revoked by the issuing agency.

 

The principal federal, state and local statutes and regulations applicable to our various operations are as follows:

 

The Resource Conservation and Recovery Act of 1976, as amended (“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 non-hazardous. Wastes are generally classified as hazardous if they (1) either (a) are specifically included on a list of hazardous wastes, or (b) exhibit certain characteristics defined as hazardous, and (2) are not specifically designated as non-hazardous. Wastes classified as hazardous under RCRA are subject to more extensive regulation than wastes classified as non-hazardous, and businesses that deal with hazardous waste are subject to regulatory obligations in addition to those imposed on handlers of non-hazardous waste.

 

Among the wastes that are specifically designated as non-hazardous are household waste and “special” waste, including items such as petroleum contaminated soils, asbestos, foundry sand, shredder fluff and most non-hazardous 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. 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 those businesses treat, store or dispose of such material. 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

 

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promulgated regulations modeled on some or all of the Subtitle C provisions issued by the EPA, and in many instances the EPA has delegated to those states the principal role in regulating businesses which are subject to those requirements. Some state regulations impose different, additional obligations.

 

We currently do not accept for transportation or disposal hazardous substances (as defined in CERCLA, discussed below) in concentrations or volumes that would classify those materials as hazardous wastes. However, we have transported hazardous substances in the past and very likely will transport and dispose of hazardous substances in the future, to the extent that materials defined as hazardous substances under CERCLA are present in consumer goods and in the non-hazardous waste streams of our customers.

 

We do not accept hazardous wastes for incineration at our waste-to-energy facility. We typically test ash produced at our waste-to-energy facility on a regular basis; that ash generally does not contain hazardous substances in sufficient concentrations or volumes to result in the ash being classified as hazardous waste. However, it is possible that future waste streams accepted for incineration could contain elevated volumes or concentrations of hazardous substances or that legal requirements will change, and that the resulting incineration ash would be classified as hazardous waste.

 

Leachate generated at our landfills and transfer stations is tested on a regular basis, and generally is not regulated as a hazardous waste under federal or state law. In the past, however, leachate generated from certain of our landfills has been classified as hazardous waste under state law, and there is no guarantee that leachate generated from our facilities in the future will not be classified under federal or state law as hazardous waste.

 

In October 1991, the EPA adopted the Subtitle D regulations under RCRA 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. Regulations generally require us to install groundwater monitoring wells at virtually all landfills we operate, to monitor groundwater quality and, indirectly, the effectiveness of the leachate collection systems. The Subtitle D regulations also require facility owners or operators to control emissions of landfill gas (including methane) generated at landfills exceeding certain regulatory thresholds. State landfill regulations must meet these requirements or the EPA will impose such requirements upon landfill owners and operators in that state. Each state also must adopt and implement a permit program or other appropriate system to ensure that landfills within the state comply with the Subtitle D regulatory criteria. Various states in which we operate or in which we 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, as amended (“Clean Water Act”)

 

The Clean Water Act regulates the discharge of pollutants into the “waters of the United States” from a variety of sources, including solid waste disposal sites and transfer stations, processing facilities and waste-to-energy facilities (collectively, “solid waste management facilities”). If run-off or collected leachate from our solid waste management facilities, or process or cooling waters generated at our waste-to-energy facility, is discharged into streams, rivers or other surface waters, the Clean Water Act would require us to apply for and obtain a discharge permit, conduct sampling and monitoring and, under certain circumstances, reduce the quantity of pollutants in such discharge. A permit also may be required if that run-off, leachate, or process or cooling water is discharged to a treatment facility that is owned by a local municipality. Numerous states have enacted regulations, which are equivalent to those issued under the Clean Water Act, but which also regulate the discharge of pollutants to groundwater. Finally, virtually all solid waste management facilities must comply with the EPA’s storm water regulations, which regulate the discharge of impacted storm water to surface waters.

 

The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”)

 

CERCLA established a regulatory and remedial program intended to provide for the investigation and remediation of facilities where or from which a release of any hazardous substance into the environment has occurred or is threatened. CERCLA has been interpreted to impose retroactive strict, and under certain circumstances, joint and several, liability for investigation and 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 certain

 

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transporters of the hazardous substances. In addition, CERCLA imposes liability for the costs of evaluating and addressing damage 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 be based on the existence of any of 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 we were found to be a responsible party for a CERCLA cleanup, the enforcing agency could hold us, under certain circumstances, or any other responsible party, responsible for all investigative and remedial costs, even if others also were liable. CERCLA also authorizes EPA to impose 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 share of investigative and remedial costs. Our ability to get others to reimburse us for their allocable share of such costs would be limited by our ability to identify and locate other responsible parties and prove the extent of their responsibility and by the financial resources of such other parties.

 

The Clean Air Act of 1970, as amended (“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 the landfill was constructed and the annual volume of emissions. 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 where levels of regulated pollutants exceed certain thresholds 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 under the Clean Air Act.

 

The Clean Air Act regulates emissions of air pollutants from our waste-to-energy facility and certain of our processing facilities. The EPA has enacted standards that apply to those emissions. It is possible that the EPA, or a state where we operate, will enact additional or different emission standards in the future.

 

All of the federal statutes described above authorize lawsuits by private citizens to enforce certain 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 private parties successfully advancing such an action.

 

The Occupational Safety and Health Act of 1970, as amended (“OSHA”)

 

OSHA establishes employer responsibilities and authorizes the Occupational Safety and Health Administration to promulgate 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 our 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 we now operate or may operate in the future has laws and regulations governing the generation, storage, treatment, handling, processing, transportation, incineration and disposal of solid waste, water and air pollution and, in most cases, the siting, design, operation, maintenance, closure and post-closure maintenance of solid waste management facilities. In addition, many states have adopted statutes comparable to, and in some cases more stringent than, CERCLA. These statutes impose requirements for investigation and remediation of contaminated sites and liability for costs and damages associated with such sites, and some authorize the state to impose liens to secure costs expended addressing contamination on property owned by responsible parties. Some of those liens may take priority over previously filed instruments. Furthermore, many municipalities also have ordinances, laws and regulations affecting our 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

 

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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 we operate landfills could limit or prohibit the importation of out-of-state waste. Such actions could materially and adversely affect the business, financial condition and results of operations of any of our landfills within those states that receive a significant portion of waste originating from out-of-state.

 

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 rejected as unconstitutional, and therefore invalid, a local ordinance that sought to limit waste going out of the locality by imposing a requirement that the waste be delivered to a particular facility. However, it is uncertain how that precedent will be applied in different circumstances. For example, in 2002, the U.S. Supreme Court decided not to hear an appeal of a federal Appeals Court decision that held that the flow control ordinances directing waste to a publicly owned facility are not per se unconstitutional and should be analyzed under a standard that is less stringent than if waste had been directed to a private facility. The less stringent standard was applied to the facts of that case by the U.S. District Court, which ruled in March 2005 in a favor of upholding the flow control regulations in Oneida and Herkimer Counties in New York.  The ruling was again appealed to the federal Appeals Court, which is expected to uphold the ruling.  Additionally, certain state and local jurisdictions continue to seek to enforce such restrictions and, in certain cases, we may elect not to challenge such restrictions. Further, some proposed federal legislation would allow states and localities to impose flow restrictions. Those restrictions could reduce the volume of waste going to landfills or transfer stations in certain areas, which may materially adversely affect our ability to operate our facilities and/or affect the prices we can charge for certain services. Those restrictions also may result in higher disposal costs for our collection operations. In sum, flow control restrictions could have a material adverse effect on our business, financial condition and results of operations.

 

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 and leaves, beverage containers, newspapers, household appliances and batteries. Regulations reducing the volume and types of wastes available for transport to and disposal in landfills could affect our ability to operate our landfill facilities.

 

Our waste-to-energy facility has been certified by the Federal Energy Regulatory Commission as a “qualifying small power production facility” under the Public Utility Regulatory Policies Act of 1978, as amended (“PURPA”). PURPA exempts qualifying facilities from most federal and state laws governing electric utility rates and financial organization, and generally requires electric utilities to purchase electricity generated by qualifying facilities at a price equal to the utility’s full “avoided cost.”

 

Our waste-to-energy business is dependent upon our ability to sell the electricity generated by our facility to an electric utility or a third party such as an energy marketer. Maine Energy currently sells electricity to an electric utility under a long-term power purchase agreement. When that agreement expires, or if the electric utility were to default under the agreement, there is no guarantee that any new agreement would contain a purchase price as favorable as the one in the current agreement.

 

With regard to the odor control system at our waste-to-energy facility in Biddeford, Maine involving the redirection of our air emissions through scrubbers and scrubber vents, we applied to the City of Biddeford for approval of an increase in the height of our scrubber vents and a change in our odor control chemicals.  The vent height increase needed approval by both the Planning Board and the Zoning Board of Appeals (“ZBA”). The City Council opposed our proposal and it was denied by the Biddeford Zoning Board of Appeals. We appealed the ZBA denial to York County Superior Court.  By order of the Court dated June 2, 2005, the parties are scheduled to report to the Court by December 1, 2005 whether to seek a further continuance in light of ongoing settlement negotiations or to set a date for oral argument.  The Biddeford Planning Board approved our request to test alternative odor control chemicals as part of the control system during the summer of 2002 but postponed any approval of the vent height increase. The test of odor control chemicals showed that none of the three chemicals tested is more effective than water. Based on the test results, we withdrew our request to test alternative odor control for the chemicals. Based on the opposition of the City Council to the vent height increase, we also withdrew that portion of our planning board application.  Notwithstanding our withdrawal of that application, the Planning Board voted to conditionally approve Maine Energy’s use of alternative odor control chemicals and to require Maine Energy to evaluate

 

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certain other control technologies. Based on the absence of an application before the Planning Board, Maine Energy is disputing the jurisdiction of the Planning Board to issue an approval and has appealed that decision to the Zoning Board of Appeals. A hearing was scheduled before the ZBA in June 2004. The parties have agreed to postpone the ZBA hearing indefinitely. Since we are not able to increase our vent heights, there is no assurance that our state-approved odor control system will operate optimally to control odors, or if it does not, that our operations would not be significantly curtailed, which could have a material adverse effect on our business, financial condition and results of operations.

 

Based on the results of the testing that we performed to evaluate the effectiveness of Maine Energy’s odor control system, the City of Biddeford alleged to DEP in October 2002 that emissions of volatile organic compounds (“VOCs”) from the odor control system exceeded DEP air license limits. In cooperation with DEP, Maine Energy agreed to voluntarily perform several rounds of testing to quantify and speciate emissions of VOCs from the scrubber stacks, using appropriate analytical methods. As a result, we may be subject to enforcement action by DEP and we may incur additional material costs to comply with applicable control technology requirements. On December 3, 2003, the City of Biddeford sued Maine Energy in federal court under federal and state law alleging that we are emitting VOCs without appropriate permits or appropriate control technology and that we constitute a public nuisance. The complaint sought an unspecified amount of civil penalties, damages, injunctive relief and attorney’s fees. On June 2, 2004, the complaint was dismissed without prejudice while settlement negotiations take place.  On or about May 25, 2004 Maine Energy received a revised 60-day Notice of Intent to Sue Under the Clean Air Act from the Cities of Biddeford and Saco.  The Cities’ Notice states that they intend to refile suit under the Clean Air Act, based on the alleged violations identified by their Notice, in the event that the ongoing settlement negotiations do not resolve the claims.

 

In addition, on October 16, 2002, the City of Biddeford and Joseph Stephenson (as the Code Enforcement Officer for the City of Biddeford) filed a Land Use Citation and Complaint against Maine Energy alleging that Maine Energy is emitting levels of volatile organic compounds which exceed permitted levels. The complaint sought an unspecified amount of civil penalties, a preliminary and permanent injunction, and legal costs. On December 3, 2002, the court ruled that the complaint failed to meet certain pleading requirements and ordered plaintiffs to file a new complaint by December 30, 2002. On April 7, 2003, the plaintiffs dismissed their action with prejudice.

 

In April 2003, the Company obtained a permit from the MADEP to increase the operating capacity of the Company’s solid waste transfer station located in Holliston, Massachusetts.  The Company is seeking the necessary local approvals required under that permit.  Some local residents have alleged that the transfer station is not being operated in conformance with state and local wetlands laws and certain local approvals, first issued in the 1970s.  The Company has taken steps to identify, respond to and address those allegations, as appropriate.  The Company also is evaluating its indemnification rights against the former owner/operator of the transfer station under the agreement by which the Company acquired the transfer station.  We offer no prediction as to the likely outcome of these matters, and there can be no assurance that these matters would not have a material adverse effect on our financial position or results of operations.

 

On March 2, 2005, our subsidiary Casella Waste Management of Pennsylvania, Inc. (“CWMPA”) was issued an Administrative Order by the Pennsylvania Department of Environmental Protection (“DEP”) revoking CWMPA’s transfer station permit for its 75-ton-per-day transfer station located in Wellsboro, Pennsylvania and ordering that the site be closed.  The DEP based its decision on certain alleged violations related to recordkeeping and site management over a five year period.  On March 10, 2005, CWMPA appealed the Order to the State’s Environmental Hearing Board (“EHB”).  The Pennsylvania Attorney General’s Office is also conducting a criminal investigation of the allegations.  On March 17, 2005, CWMPA and the DEP mutually agreed to a Supersedeas Order approved by the EHB which superseded the March 2, 2005 DEP Order, stating that CWMPA agreed to (i) voluntarily cease operations at the transfer station until May 16, 2005; (ii) relocate its hauling company before May 16, 2005; and (iii) develop a Management and Operation Plan for the transfer station by May 16, 2005.  On May 17, 2005, the EHB judge extended the Supersedeas Order until June 10, 2005 and authorized the transfer station to resume operations upon completion of the relocation of the hauling company and receipt of a permit modification related to the weighing of bag waste from individual customers.  CWMPA satisfied the conditions and recommenced operations at the transfer station on May 20, 2005.  On June 9, 2005, CWMPA and the DEP filed a stipulation with the EHB withdrawing and voiding the March 2, 2005 Order revoking the permit, while reserving the DEP’s right to seek civil penalties and the Company’s right to defend against any such penalties.

 

On March 10, 2005, the Zoning Enforcement Officer for the Town of Hardwick, Massachusetts rendered an opinion that more than half of the current Phase II footprint of the Company’s Hardwick Landfill is on land that is not properly zoned.  On April 7, 2005, the Company appealed the opinion to the Hardwick Zoning Board of Appeals.  A decision is expected by mid-July 2005.  The Company and the Town executed a Host Community Agreement on June 7, 2005, which provides the Town with certain immediate benefits and will provide certain deferred benefits upon receipt of approvals for the rezoning of the existing landfill area and an expansion area.

 

16



 

Executive Officers and Other Key Employees of the Company

 

Our executive officers and other key employees and their respective ages as of June 15, 2005 are as follows:

 

Name

 

Age

 

Position

 

 

 

 

 

Executive Officers

 

 

 

 

 

 

 

 

 

John W. Casella

 

54

 

Chairman, Chief Executive Officer and Secretary

James W. Bohlig

 

58

 

President and Chief Operating Officer, Director

Richard A. Norris

 

61

 

Senior Vice President, Chief Financial Officer and Treasurer

Charles E. Leonard

 

50

 

Senior Vice President, Solid Waste Operations

 

 

 

 

 

Other Key Employees

 

 

 

 

 

 

 

 

 

Michael J. Brennan

 

47

 

Vice President and General Counsel

Timothy A. Cretney

 

41

 

Regional Vice President

Christopher M. DesRoches

 

47

 

Vice President, Selection and Training

Sean P. Duffy

 

45

 

Regional Vice President

Joseph S. Fusco

 

41

 

Vice President, Communications

William Hanley

 

51

 

Vice President, Sales and Marketing

Brian G. Oliver

 

43

 

Regional Vice President

Alan N. Sabino

 

45

 

Regional Vice President

Gary R. Simmons

 

55

 

Vice President, Fleet Management

Michael J. Wall

 

45

 

Regional Vice President

 

John W. Casella has served as Chairman of our Board of Directors since July 2001 and as our Chief Executive Officer since 1993. Mr. Casella served as President from 1993 to July 2001 and as Chairman of the Board of Directors from 1993 to December 1999. In addition, Mr. Casella has been Chairman of the Board of Directors of Casella Waste Management, Inc. since 1977. Mr. Casella is also an executive officer and director of Casella Construction, Inc., a company owned by Mr. Casella and Douglas R. Casella. 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 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 Governors of Vermont and New Hampshire on solid waste issues. 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, a member of our Board of Directors.

 

James W. Bohlig has served as our President since July 2001 and as Chief Operating Officer since 1993. Mr. Bohlig also served as Senior Vice President from 1993 to July 2001. Mr. Bohlig has served as a member of our Board of Directors since 1993. From 1989 until he joined us, Mr. Bohlig was Executive Vice President and Chief Operating Officer of Russell Corporation, a general contractor and developer based in Rutland, Vermont. 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 Executive Program in Business Administration.

 

Richard A. Norris has served as our Senior Vice President, Chief Financial Officer and Treasurer since July 2001. He joined us in July 2000 as Vice President and Corporate Controller. From 1997 to July 2000, Mr. Norris served as Vice President and Chief Financial Officer for NexCycle, Inc., a processor of secondary materials. From 1986 to 1997, he served as Vice President of Finance, US Operations for Laidlaw Waste Systems, Inc. Mr. Norris is qualified as a Chartered Accountant in both Canada and the United Kingdom. Mr. Norris graduated from Leeds University with a Bachelor of Arts in German.

 

Charles E. Leonard has served as our Senior Vice President, Solid Waste Operations since July 2001. From December 1999 until he joined us, he acted as a consultant to several corporations, including Allied Waste Industries, Inc. From November 1997 to December 1999, he was Regional Vice President for Service Corporation International, a provider of death-care services. From September 1988 to January 1997, he served as Senior Vice President, US Operations for Laidlaw Waste Systems, Inc. From June 1978 to July 1988, Mr. Leonard was employed by Browning-Ferris Industries in various management positions. Mr. Leonard is a graduate of Memphis State University with a Bachelor of Arts in Marketing.

 

17



 

Michael J. Brennan has served as our Vice President and General Counsel since July 2000. From January 1996 to July 2000, he served in various capacities at Waste Management, Inc., including most recently, as Associate General Counsel.

 

Timothy A. Cretney has served as our Western Regional Vice President since May 2002. From January 1997 to May 2002 he served as Regional Controller for our Western region. From August 1995 to January 1997, Mr. Cretney was Treasurer and Vice President of Superior Disposal Services, Inc., a waste services company which we acquired in January 1997. From 1992 to 1995, he was General Manager of the Binghamton, New York office of Laidlaw Waste Systems, Inc. and from 1989 to 1992 he was Central New York Controller of Laidlaw Waste Systems. Mr. Cretney holds a B.A. in Accounting from State University of New York College at Brockport.

 

Christopher M. DesRoches has served as our Vice President, Selection and Training since June 1, 2005.  From November 1996 to June 2005, Mr. DesRoches served as our Vice President, Sales and Marketing.  From January 1989 to November 1996, he was a regional vice president of sales for Waste Management, Inc. Mr. DesRoches is a graduate of Arizona State University.

 

Sean P. Duffy has served as our FCR Regional Vice President since December 1999. Since December 1999, Mr. Duffy has also served as Vice President of FCR, Inc., which he co-founded in 1983 and which became a wholly-owned subsidiary of ours in December 1999. From May 1983 to December 1999, Mr. Duffy served in various capacities at FCR, including, most recently, as President. From May 1998 to May 2001, Mr. Duffy also served as President of FCR Plastics, Inc., a subsidiary of FCR, Inc.

 

Joseph S. Fusco has served as our Vice President, Communications 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.

 

William Hanley has served as our Vice-President, Sales and Marketing since June 1, 2005. From 2001 until 2005, Mr. Hanley served as Vice-President, General Sales Manager of Waste Industries, USA. From 1994-2001, he held various sales management positions for Waste Management, Inc and predecessor companies. Mr. Hanley is a graduate of Clarion State University with a Bachelor of Science in Business Administration.

 

Larry B. Lackey has served as our Vice President, Permits, Compliance and Engineering since 1995. From 1993 to 1995, Mr. Lackey served as our Manager of Permits, Compliance and Engineering. 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.

 

Brian G. Oliver has served as our North Eastern Regional Vice President since June 2004. From April 1998 to June 2004 he served as our Eastern Regional Controller. From June 1996 to April 1998, Mr. Oliver served as Division Controller of two Vermont operations. Mr. Oliver holds a Bachelor of Science in Business Administration from Bryant College and also holds a Masters degree from St. Michael’s College.

 

Alan N. Sabino has served as our Central Regional Vice President since July 1996. From 1995 to July 1996, Mr. Sabino served as a Division President for Waste Management, Inc. From 1985 to 1994, he served as Region Operations Manager for Chambers Development Company, Inc., a waste management company. Mr. Sabino is a graduate of Pennsylvania State University.

 

Gary R. Simmons has served as our Vice President, Fleet Management since May 1997. From December 1996 to May 1997, Mr. Simmons was the owner of GRS Consulting, a waste industry consulting firm. From 1995 to December 1996, 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. Wall has served as our South Eastern Regional Vice President since June 2004.  From 2002-2004, Mr. Wall served as Director of Operations for Waste Management, Inc. in Massachusetts.  From 1998-2002, Mr. Wall served as a Division Manager for Waste Management, Inc. overseeing operations in Central New York and Eastern Massachusetts.  From 1993-1998, Mr. Wall held the position of Group Sales Manager for USA Waste Services, Inc.  From 1983-1993,

 

18



 

Mr. Wall held various sales management positions throughout the Northeast for Browning Ferris Industries.  Mr. Wall is a graduate of New England College of New Hampshire.

 

Available Information

 

Our Internet website is http://www.casella.com. We make available, through our website free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We make these reports available through our website at the same time that they become available on the Securities and Exchange Commission’s website.

 

ITEM 2. PROPERTIES

 

At June 15, 2005, we owned and/or operated eight subtitle D landfills, two landfills permitted to accept construction and demolition materials, 34 transfer stations, 24 of which are owned, five of which are leased and five of which are under operating contract, 37 solid waste collection facilities, 25 of which are owned and 12 of which are leased, 38 recyclable processing facilities, 16 of which are owned, 14 of which are leased and eight of which are under operating contracts, one waste-to-energy facility, and utilized ten corporate office and other administrative facilities, four of which are owned and six of which are leased.

 

ITEM 3. LEGAL PROCEEDINGS

 

During the period of November 21, 1996 to October 9, 1997, we performed certain closure activities and installed a cut-off wall at the Clinton County landfill, located in Clinton County, New York. In April 1999, the New York State Department of Labor (“DOL”) alleged that we should have paid prevailing wages in connection with the labor associated with such activities. We have disputed the allegations and a hearing on the liability issue was held on September 16, 2002. In November 2002, both sides submitted proposed findings of fact and conclusions of law. On May 12, 2004, the Commissioner of Labor issued an order finding that the closure activities and the cut-off wall project were “public works” projects that were subject to prevailing wage requirements. On June 10, 2004 we filed a judicial challenge to the Commissioner’s decision, which was stayed for a nine-month period.  On April 15, 2005, we reached a settlement with the DOL whereby we agreed to pay back wages in the amount of $0.5 million, interest in the amount of $0.2 million, and a civil penalty in the amount of $0.03 million.  We also withdrew our appeal of the Commissioner’s findings.

 

The New Hampshire Superior Court in Grafton, NH ruled on February 1, 1999 that the Town of Bethlehem, NH could not enforce an ordinance purportedly prohibiting expansion of the our NCES landfill, at least with respect to 51 acres of NCES’s 87 acre parcel, based upon certain existing land-use approvals. As a result, NCES was able to construct and operate “Stage II, Phase II” of the landfill. In May 2001, the Supreme Court denied the Town’s appeal. Notwithstanding the Supreme Court’s 2001 ruling, the Town continued to assert jurisdiction to conduct unqualified site plan review with respect to Stage III and has further stated that the Town’s height ordinance and building permit process may apply to Stage III. On September 12, 2001, we filed a petition for, among other things, declaratory relief. On December 4, 2001, the Town filed an answer to our petition asserting counterclaims seeking, among other things, authorization to assert site plan review over Stage III, which commenced operation in December 2000, as well as the methane gas utilization/leachate handling facility operating in Stage III, and also an order declaring that an ordinance prohibiting landfills applies to Stage IV expansion. The trial related to the Town’s jurisdiction was held in December 2002 and on April 24, 2003, the Grafton Superior Court upheld the Town’s 1992 ordinance preventing the location or expansion of any landfill, ruling that the ordinance may be applied to any part of Stage IV that goes beyond the 51 acres; ruling that the Town’s height ordinance is valid within the 51 acres; upholding the Town’s right to require Site Plan Review, except that there are certain areas within the Town’s Site Plan Review regulation that are preempted; and ruling that the methane gas utilization/leachate handling facility is not subject to the Town’s ordinance forbidding incinerators.  On May 27, 2003, NCES appealed the Court ruling to the New Hampshire Supreme Court.  On March 1, 2004, the Supreme Court issued an opinion affirming that NCES has all of the local approvals that it needs to operate within the 51 acres.  If successful in obtaining state permits for development and operation within the 51 acres, NCES expects to be able to provide from three to five years of disposal capacity.  The Supreme Court’s opinion left open for further review the question of whether the Town’s 1992 ordinance can prevent expansion of the facility outside the 51 acres, remanding to the Superior Court two legal claims raised by NCES as grounds for invalidating the 1992 ordinance.  An interlocutory appeal to the Supreme Court by NCES regarding a Superior Court judge’s denial of a motion to recuse herself was denied on November 18, 2004.  The parties have filed numerous motions for summary judgment before the trial court.  On April 19, 2005, the Superior Court judge granted NCES’ partial motion for summary judgment, ruling that the

 

19



 

1992 ordinance is invalid because it distinguishes between “users” of land rather than “uses” of land, and that the state statute preempts the Town’s ability to issue a building permit for the methane gas utilization/leachate handling facility to the extent the Town’s regulations relate to design, installation, construction, modification or operation.  A remand trial will be scheduled for the remaining issues not resolved by summary judgment (whether the Town can impose site plan review requirements outside the 51 acres, and whether the 1992 ordinance contravenes the general welfare of the community).

 

On or about November 7, 2001, our subsidiary New England Waste Services of ME, Inc. was served with a complaint filed in Massachusetts Superior Court on behalf of Daniel J. Quirk, Inc. and 14 citizens against The Massachusetts Department of Environmental Protection (“MADEP”), Quarry Hill Associates, Inc. and New England Waste Services of ME, Inc. dba New England Organics, et al. The complaint seeks injunctive relief related to the use of MADEP-approved wastewater treatment sludge in place of naturally occurring topsoil as final landfill cover material at the site of the Quarry Hills Recreation Complex Project in Quincy, Massachusetts (the “Project”), including removal of the material, or placement of an additional “clean” cover. On February 21, 2002, the MADEP filed a motion for stay pending a litigation control schedule. Plaintiffs have filed a cross-motion to consolidate the case with 11 other cases they filed related to the Project. Additionally, we have cross-claimed against other named defendants seeking indemnification and contribution. In September 2002, the court granted a stay of all proceedings pending the filing of summary judgment motions by all defendants on the issue of whether the plaintiffs are barred from suing the defendants as a result of a covenant not to sue that was signed by plaintiffs in 1998. On December 17, 2002, the court granted certain summary judgment motions filed by the defendants, the effect of which was the dismissal of all claims against all defendants in all cases where New England Waste Services of ME, Inc. was a defendant. On or about February 12, 2003, plaintiffs filed an appeal. On September 24, 2004, the Massachusetts State Appeals court reversed the Superior Court and reinstated the dismissed cases.  On May 20, 2005, plaintiff proposed to dismiss without prejudice the two actions in which New England Waste Services of ME, Inc. is a defendant.  We believe that we have meritorious defenses to these claims.

 

On January 10, 2002, the City of Biddeford, Maine filed a lawsuit in York County Superior Court in Maine alleging breach of the waste handling agreement among the Biddeford-Saco Waste Handling Committee, the cities of Biddeford and Saco, Maine and our subsidiary Maine Energy for (1) failure to pay the residual cancellation payments in connection with our merger with KTI and (2) processing amounts of waste above contractual limits without notice to the City. On May 3, 2002, the City of Saco filed a lawsuit in York County Superior Court against us, Maine Energy and other subsidiaries. The complaint in that action, which was amended by the City of Saco on July 22, 2002, alleges breaches of the 1991 waste handling agreement for failure to pay the residual cancellation payment, which Saco alleges is due as a result of, among other things, (1) our merger with KTI and (2) Maine Energy’s failure to pay off certain limited partner loans in accordance with the terms of the agreement. The complaint also seeks damages for breach of contract and a court order requiring us to provide an accounting of all transactions since May 3, 1996 involving transfers of assets to or for the benefit of the equity owners of Maine Energy. On June 6, 2002, the additional 13 municipalities that were parties to the 1991 waste handling agreements filed a lawsuit in York County Superior Court against Maine Energy alleging breaches of the 1991 waste handling agreements for failure to pay the residual cancellation payment which they allege is due as a result of (1) our merger with KTI; and (2) failure to pay off the limited partner loans when funds were allegedly available. On July 25, 2002, the three actions were consolidated for purposes of discovery, case management and pretrial proceedings. On December 23, 2003, the action brought by the Tri-County Towns against Maine Energy was stayed pursuant to a court order as a result of a conditional settlement reached by the parties. The settlement became final, and, on or about July 8, 2004, the Tri-County Towns’ action was dismissed with prejudice pursuant to stipulation by the parties. We are currently engaged in settlement negotiations with the Cities of Biddeford and Saco concerning the claims asserted in these actions and other matters, however, at this stage it is impossible to predict whether a settlement will be reached. We have vigorously contested the claims asserted by the cities. We believe that we have meritorious defenses to these claims.

 

On or about September 17, 2003, we were served with a complaint filed in the Superior Court of Delaware. The complaint alleges that Manner Resins, Inc., our wholly-owned subsidiary, was a party to a lease agreement where it was a tenant and the plaintiff was the landlord. The complaint further alleges that KTI, Inc., our wholly-owned subsidiary, guaranteed the tenant’s obligations under the lease. The landlord alleges that the tenant is in default of the lease in that it constructed improvements without consent, damaged certain structures and failed to make certain payments. Plaintiff’s demand for damages is $0.9 million. We filed a summary judgment motion to dismiss Manner Resins, Inc. in that it was incorrectly named as a party since the tenant is a company now known as First State Recycling, Inc. (“First State”), which we sold on August 11, 2000.  On June 3, 2005, the Court granted our motion for summary judgment effectively dismissing Manner Resins, Inc.  While KTI, Inc. remains in the litigation, the buyer of First State has agreed to indemnify and defend us from any liability that KTI, Inc. might have in the litigation.   We believe that we have meritorious defenses to these claims.

 

20



 

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

 

On March 2, 2005, our subsidiary Casella Waste Management of Pennsylvania, Inc. (“CWMPA”) was issued an Administrative Order by the Pennsylvania Department of Environmental Protection (“DEP”) revoking CWMPA’s transfer station permit for its 75-ton-per-day transfer station located in Wellsboro, Pennsylvania and ordering that the site be closed.  The DEP based its decision on certain alleged violations related to recordkeeping and site management over a five-year period.  On March 10, 2005, CWMPA appealed the Order to the State’s Environmental Hearing Board (“EHB”).  The Pennsylvania Attorney General’s Office is also conducting a criminal investigation of the allegations.  On March 17, 2005, CWMPA and the DEP mutually agreed to a Supersedeas Order approved by the EHB which superseded the March 2, 2005 DEP Order, stating that CWMPA agreed to (i) voluntarily cease operations at the transfer station until May 16, 2005; (ii) relocate its hauling company before May 16, 2005; and (iii) develop a Management and Operation Plan for the transfer station by May 16, 2005.  On May 17, 2005, the EHB judge extended the Supersedeas Order until June 10, 2005 and authorized the transfer station to resume operations upon completion of the relocation of the hauling company and receipt of a permit modification related to the weighing of bag waste from individual customers.  CWMPA satisfied the conditions and recommenced operations at the transfer station on May 20, 2005.  On June 9, 2005, CWMPA and the DEP filed a stipulation with the EHB withdrawing and voiding the March 2, 2005 Order revoking the permit, while reserving the DEP’s right to seek civil penalties and the Company’s right to defend against any such penalties.

 

On March 10, 2005, the Zoning Enforcement Officer for the Town of Hardwick, Massachusetts rendered an opinion that more than half of the current Phase II footprint of the Company’s Hardwick Landfill is on land that is not properly zoned.  On April 7, 2005, the Company appealed the opinion to the Hardwick Zoning Board of Appeals.  A decision is expected by mid-July 2005.  The Company and the Town executed a Host Community Agreement on June 7, 2005, which provides the Town with certain immediate benefits and will provide certain deferred benefits upon receipt of approvals for the rezoning of the existing landfill area and an expansion area.

 

On March 14, 2005, we and our subsidiary New England Waste Services of ME, Inc. (“NEWSME”) were served with a complaint filed by the Environmental Exchange in the State of Maine Superior Court alleging restraint of trade, and conspiracy to monopolize trade.  The plaintiff claims that our ownership of NEWSME, which in turn owns the New England Organics line of business and the Pine Tree Landfill, allegedly enabled NEWSME to obtain favorable tipping fees at Pine Tree Landfill thereby excluding the plaintiff from competitively bidding on a contract with Indeck Maine Energy LLC to haul and dispose of fly ash.  Plaintiff alleges that we and NEWSME lessened competition and monopolized trade.  On April 4, 2005, we and NEWSME filed a motion to dismiss.   We believe that we have meritorious defenses to these claims.

 

On May 25, 2005, we were served with an antitrust summons by the Office of the Attorney General of the State of Maine pursuant to their investigation of whether we and the City of Lewiston have entered into an agreement to operate a

 

21



 

municipal landfill in restraint of trade or commerce and whether such an agreement would constitute an acquisition of assets that may substantially lessen competition or tend to create a monopoly.  The summons seeks the production of documents related to our operations in the State of Maine.  We believe that we have meritorious defenses to any such claims.

 

We offer no prediction of the outcome of any of the proceedings described above. We are vigorously defending each of these lawsuits. However, there can be no guarantee we will prevail or that any judgments against us, if sustained on appeal, will not have a material adverse effect on our business, financial condition or results of operations.

 

We are a defendant in certain other lawsuits alleging various claims incurred in the ordinary course of business, none of which, either individually or in the aggregate, we believe are material to our business, financial condition, results of operations or cash flows.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

There were no matters submitted to a vote of the security holders during the fiscal quarter ended April 30, 2005.

 

22



 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our Class A common stock trades on the Nasdaq National Market under the symbol “CWST”. The following table sets forth the high and low sale prices of our Class A common stock for the periods indicated as quoted on the Nasdaq National Market.

 

Period

 

High

 

Low

 

 

 

 

 

 

 

Fiscal Year Ending April 30, 2004

 

 

 

 

 

First quarter

 

$

12.45

 

$

7.80

 

Second quarter

 

$

14.42

 

$

10.68

 

Third quarter

 

$

15.00

 

$

11.90

 

Fourth quarter

 

$

15.70

 

$

12.52

 

 

 

 

 

 

 

Fiscal Year Ending April 30, 2005

 

 

 

 

 

First quarter

 

$

15.50

 

$

11.90

 

Second quarter

 

$

12.65

 

$

10.80

 

Third quarter

 

$

15.27

 

$

11.97

 

Fourth quarter

 

$

15.30

 

$

11.47

 

 

On June 15, 2005, the high and low sale prices per share of our Class A common stock as quoted on the Nasdaq National Market were $11.92 and $11.50, respectively. As of June 15, 2005 there were approximately 519 holders of record of our Class A common stock and two holders of record of our Class B common stock. There is no established trading market for our Class B common stock.

 

For purposes of calculating the aggregate market value of the shares of common stock held by non-affiliates, as shown on the cover page of this Annual Report on Form 10-K, it has been assumed that all the outstanding shares of Class A common stock were held by non-affiliates except for the shares beneficially held by directors and executive officers and funds represented by them.

 

No dividends have ever been declared or paid on our common stock and we do not anticipate paying any cash dividends on its common stock in the foreseeable future. Our credit facility restricts the payment of dividends on common stock.

 

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

 

The following selected consolidated financial and operating data set forth below with respect to our consolidated statements of operations and cash flows for the fiscal years ended April 30, 2003, 2004 and 2005, and the consolidated balance sheets as of April 30, 2004 and 2005 are derived from the Consolidated Financial Statements included elsewhere in this Form 10-K. The consolidated statements of operations and cash flows data for the fiscal years ended April 30, 2001 and 2002, and the consolidated balance sheet data as of April 30, 2001, 2002 and 2003 are derived from the previously filed Consolidated Financial Statements. The data set forth below should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K.

 

 

 

Fiscal Year Ended April 30,

 

 

 

(in thousands, except per share data)

 

 

 

2001 (1) (4)

 

2002(1) (4)

 

2003 (1) (4)

 

2004 (1) (4)

 

2005

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

479,026

 

$

420,067

 

$

419,518

 

$

437,961

 

$

481,964

 

Cost of operations

 

320,521

 

275,961

 

277,579

 

285,828

 

310,921

 

General and administration

 

63,848

 

54,167

 

55,432

 

58,167

 

63,678

 

Depreciation and amortization

 

53,352

 

50,621

 

47,879

 

59,596

 

65,637

 

Impairment charge

 

79,687

 

 

4,864

 

1,663

 

 

Restructuring charge

 

4,151

 

(438

)

 

 

 

Legal settlements

 

4,209

 

 

 

 

 

Other miscellanseous charges

 

1,604

 

 

 

 

 

Deferred costs

 

 

 

 

 

295

 

Operating income (loss)

 

(48,346

)

39,756

 

33,764

 

32,707

 

41,433

 

Interest expense, net

 

38,423

 

30,355

 

26,036

 

25,249

 

29,391

 

Other (income)/expense, net

 

27,358

 

(6,535

)

(175

)

3,688

 

(894

)

Income (loss) from continuing operations before income taxes, discontinued operations and cumulative effect of change in accounting principle

 

(114,127

)

15,936

 

7,903

 

3,770

 

12,936

 

Provision (benefit) for income taxes

 

(20,511

)

5,140

 

3,825

 

(1,622

)

5,725

 

Income (loss) from continuing operations before discontinued operations and cumulative effect of change in accounting principle

 

(93,616

)

10,796

 

4,078

 

5,392

 

7,211

 

Income (loss) from discontinued operations, net

 

(4,072

)

(109

)

(20

)

(10

)

140

 

Estimated loss on disposal of discontinued operations, net

 

(2,657

)

(4,096

)

 

 

(82

)

Reclassification from discontinued operations, net

 

(1,190

)

1,140

 

50

 

 

 

Cumulative effect of change in accounting principle, net

 

 

(250

)

(63,916

)

2,723

 

 

Net income (loss)

 

$

(101,535

)

$

7,481

 

$

(59,808

)

$

8,105

 

$

7,269

 

Preferred stock dividend

 

1,970

 

3,010

 

3,094

 

3,252

 

3,338

 

Net income (loss) available to common stockholders

 

$

(103,505

)

$

4,471

 

$

(62,902

)

$

4,853

 

$

3,931

 

Basic net (loss) income per common share

 

$

(4.46

)

$

0.19

 

$

(2.65

)

$

0.20

 

$

0.16

 

Basic weighted average common shares outstanding (2)

 

23,189

 

23,496

 

23,716

 

24,002

 

24,679

 

Diluted net (loss) income per common share

 

$

(4.46

)

$

0.19

 

$

(2.63

)

$

0.20

 

$

0.16

 

Diluted weighted average common shares outstanding (2)

 

23,189

 

24,169

 

23,904

 

24,445

 

25,193

 

 

24



 

 

 

Fiscal Year Ended April 30,

 

 

 

(in thousands)

 

 

 

2001 (1) (4)

 

2002(1) (4)

 

2003 (1) (4)

 

2004 (1) (4)

 

2005

 

Other Operating Data:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

(61,518

)

$

(37,674

)

$

(41,925

)

$

(58,335

)

$

(80,064

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

Cash flows provided by operating activities

 

$

63,261

 

$

67,687

 

$

66,952

 

$

69,898

 

$

83,034

 

Cash flows used in investing activities

 

$

(55,565

)

$

(9,533

)

$

(63,208

)

$

(123,658

)

$

(103,755

)

Cash flows provided by (used in) financing activities

 

$

18,765

 

$

(70,065

)

$

7,610

 

$

46,115

 

$

21,292

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,001

 

$

4,298

 

$

15,652

 

$

8,007

 

$

8,578

 

Working capital (deficit), net (3)

 

$

25,168

 

$

(11,795

)

$

(11,591

)

$

(25,875

)

$

(31,949

)

Property, plant and equipment, net

 

$

290,537

 

$

287,206

 

$

302,328

 

$

372,038

 

$

412,753

 

Goodwill

 

$

225,969

 

$

219,730

 

$

159,682

 

$

157,230

 

$

157,492

 

Total assets

 

$

686,293

 

$

621,611

 

$

602,641

 

$

676,277

 

$

712,454

 

Long-term debt, less current maturities

 

$

350,511

 

$

277,545

 

$

302,389

 

$

349,163

 

$

378,436

 

Redeemable preferred stock

 

$

57,720

 

$

60,730

 

$

63,824

 

$

67,076

 

$

67,964

 

Total stockholders' equity

 

$

172,951

 

$

176,796

 

$

119,152

 

$

130,055

 

$

138,782

 

 


(1)           We have revised our consolidated statements of operations to reflect the discontinuation of operations during fiscal years ended April 30, 2001 through 2005.  We have also revised our consolidated statements of cash flows and consolidated balance sheets to reflect the discontinuation of certain operations during fiscal year 2000. In the fourth quarter of fiscal 2003, we entered into negotiations with former employees for the transfer of our domestic brokerage operations and a commercial recycling business and in June 2003, we completed the transaction. The commercial recycling business had been accounted for as a discontinued operation since fiscal year 2001. Due to the nature of the transaction, we could not retain discontinued accounting treatment for this operation. Therefore the commercial recycling operating results have been reclassified from discontinued to continuing operations for fiscal years ended April 30, 2001, 2002 and 2003. In connection with the discontinued accounting treatment in fiscal year 2001, estimated future losses from the operations were recorded and classified as losses from discontinued operations. This amount has been reclassified and offset against actual loss from operations in fiscal years ended April 30, 2001, 2002 and 2003.

 

We divested the assets of Data Destruction Services, Inc. (“Data Destruction”) during the quarter ended October 31, 2004. The transaction required discontinued operations treatment under SFAS No. 144; therefore the operating results of Data Destruction have been reclassified from continuing to discontinued operations in fiscal years ended April 30, 2000, 2001, 2002, 2003 and 2004.  See Note 17 of the Notes to Consolidated Financial Statements.

 

(2)                                  Computed on the basis described in Note 1(n) of Notes to Consolidated Financial Statements.

 

(3)                                  Working capital, net is defined as current assets, excluding cash and cash equivalents, minus current liabilities.

 

(4)                                 Certain reclassifications have been made to the prior period financial statements to conform to the fiscal year 2005 presentation.

 

25



 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto, and other financial information, included elsewhere in this Form10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties. Our actual results may differ materially from those contained in any forward-looking statements.

 

Casella Waste Systems, Inc., together with its subsidiaries, is a vertically integrated regional solid waste services company that provides collection, transfer, disposal and recycling services to residential, industrial and commercial customers, primarily throughout the eastern region of the United States.  As of June 15, 2005, we owned and/or operated eight Subtitle D landfills, two landfills permitted to accept construction and demolition materials, 37 solid waste collection operations, 34 transfer stations, 38 recycling facilities and one waste-to-energy facility, as well as a 50% interest in a joint venture that manufactures, markets and sells cellulose insulation made from recycled fiber.

 

In December 1999, we acquired KTI, an integrated provider of waste processing services, for aggregate consideration of $340.0 million. KTI represented a unique opportunity to acquire disposal capacity and collection operations in our primary market area and in contiguous markets in eastern Massachusetts, as well as other businesses which fit within our operating strategy. Following our acquisition of KTI in December 1999 through 2002, we focused on the integration of KTI and the divestiture of non-core KTI assets.

 

From 2003 to date, we have focused on building our disposal capacity within our footprint, using our partnership model. We believe we have been successful, since we have added Hardwick and Southbridge in Massachusetts, Ontario in upper New York State and West Old Town in Maine, as well as expanded our annual permit limits and overall capacity at our other sites that we own or operate.  In fiscal year 2004 we were successful in securing an increase of our permitted volume capacity from 417 to 1,000 tons per day at our Hakes landfill facility.  At our Waste USA landfill facility, the annual permitted volume was amended in fiscal year 2005 to allow 370,000 tons per year, an increase of 130,000 tons from previously approved levels.  In fiscal year 2005, our Hyland landfill facility received a necessary local approval for the future expansion of an additional 38 acres, representing approximately 5.7 million tons of additional capacity (subject to receipt of permits).  The annual tons disposed in our landfills have increased from 1.4 million tons at the beginning of fiscal year 2003 to 2.5 million tons at the end of fiscal year 2005, and total permitted and permittable capacity has increased from 26.1 tons to 81.7 million tons at over the same time frame.  We have also closed on 22 tuck-in acquisitions during that time, but these have been largely opportunistic. From May 1, 1994 through April 30, 2005, we have acquired 212 solid waste collection, transfer, recycling and disposal operations.

 

This objective of building disposal capacity is to increase our vertical integration within our footprint to optimize our control of the waste stream from collection through disposal thereby providing an economic benefit.  Internalization of waste refers to the amount of waste that our collection companies collect that is ultimately disposed of in one of our disposal facilities.  As a result of our success in building disposal capacity our internalization increased to 56.8% in fiscal year 2005 from 53.2% in fiscal year 2004.

 

Our revenues increased from $438.0 million for the fiscal year ended April 30, 2004 to $482.0 million for the fiscal year ended April 30, 2005.  From May 1, 2002 through April 30, 2005, we acquired 29 solid waste collection, transfer, disposal and recycling operations.  Under the rules of purchase accounting, the acquired companies’ revenues and results of operations have been included from the date of acquisition and affect the period-to-period comparisons of our historical results of operations.  Effective September 30, 2002, we transferred our export brokerage operations to former employees who had been responsible for managing that business.  The domestic brokerage operations, and a recycling business, constituting the remainder of our brokerage revenues, were transferred effective June 30, 2003 to the employees of that unit.  Due to the structure of these transactions, the transfers were not initially recorded as a sale.  Effective April 1, 2004, we completed the sale of the export brokerage operations for total consideration of approximately $5.0 million.  The gain on the sale amounted to approximately $1.1 million.  For the fiscal years ended April 30, 2004 and 2003, the transferred brokerage and recycling businesses accounted for $3.3 million and $35.7 million, respectively, of our revenues.

 

During the second quarter of fiscal 2005, we completed the sale of the assets of Data Destruction Services, Inc. (Data Destruction) for cash sale proceeds of $3.0 million.  This shredding operation had been historically accounted for as a component of continuing operations up until its sale.  The transaction required discontinued operations treatment under

 

26



 

SFAS No. 144, therefore the operating results of Data Destruction have been reclassified from continuing to discontinued operations in fiscal 2003, 2004 and 2005.  Also in connection with the discontinued accounting treatment, the loss (net of tax) from the sale amounting to $0.1 million has been recorded and classified as a loss on disposal of discontinued operations.  

 

Critical Accounting Policies and Estimates

 

The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances. The results of their evaluation form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions and circumstances. Our significant accounting policies are more fully discussed in the Notes to our Consolidated Financial Statements contained elsewhere in this Form 10-K.

 

Landfill Accounting — Capitalized Costs and Amortization

 

We use life-cycle accounting and the units-of-consumption method to recognize certain landfill costs.  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. Landfill preparation costs include the costs of construction associated with excavation, liners, site berms and the installation of leak detection and leachate collection systems. Interest is capitalized on landfill construction projects 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.  Interest capitalized for the years ended April 30, 2003, 2004 and 2005 was $719, $356 and $492, 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. Our judgments regarding the existence of impairment indicators are based on regulatory factors, market conditions and the operational performance of our landfills. Future events could cause us to conclude that impairment indicators exist and that our landfill carrying costs are impaired. Any resulting impairment charge could have a material adverse effect on our financial condition and results of operations.

 

Under life-cycle accounting, all costs related to acquisition and construction of landfill sites are capitalized and charged to income based on tonnage placed into each site.  Landfill permitting, acquisition and preparation costs are amortized on the units-of-consumption method as landfill airspace is consumed. In determining the amortization rate for these landfills, preparation costs include the total estimated costs to complete construction of the landfills’ permitted and permittable capacity. In determining estimated future landfill permitting, acquisition, construction and preparation costs, we consider the landfill costs associated with permitted and permittable airspace. To be considered permittable, airspace must meet all of the following criteria:

 

we control the land on which the expansion is sought;

 

all technical siting criteria have been met or a variance has been obtained or is reasonably expected to be obtained;

 

we have not identified any legal or political impediments which we believe will not be resolved in our favor;

 

we are actively working on obtaining any necessary permits and we expect that all required permits will be received within the next two to five years; and

 

senior management has approved the project.

 

Units-of-consumption amortization rates are determined annually for each of our operating landfills. The rates are based on estimates provided by our engineers and accounting personnel and consider the information provided by airspace surveys, which are performed at least annually. Significant changes in our estimates could materially increase our landfill depletion rates, which could have a material adverse effect on our financial condition and results of operations.  Our estimate of future landfill permitting, acquisition, construction and preparation costs as of April 30, 2005 increased to $363.3 million, compared to $299.6 million as of April 30, 2004 and $149.1 million as of April 30, 2003.  The increase in estimated costs in fiscal 2005 is primarily as a result of additional permitted and permittable airspace from our newly acquired landfill and landfill operating contracts, which increased airspace to 81.7 million tons as of April 30, 2005 as compared to 65.6 million

 

27



 

tons as of April 30, 2004 and 29.6 million tons as of April 30, 2003.  Landfill amortization expense for the years ended April 30, 2005, 2004 and 2003 was $27.6 million, $22.7 million and $13.3 million, respectively.  The increase in fiscal year 2005, compared to fiscal year 2004, was primarily attributable to increased landfill volumes in part resulting from our new landfill operating contracts, which became active in the third and fourth quarter of fiscal year 2004.  Higher landfill amortization expense in fiscal year 2004, compared to fiscal year 2003 was due to volume increases, the effect of newly acquired landfill operations, and as a result of adopting SFAS No. 143.

 

Landfill Accounting — Capping, Closure and Post-Closure Costs

 

Capping includes installation of liners, drainage, compacted soil layers and topsoil over areas of a landfill where total airspace has been consumed and waste is no longer being received.  Capping activities occur throughout the life of the landfill.  Our engineering personnel estimate the cost for each capping event based on the acreage to be capped and the capping materials and activities required.  The estimates also consider when these costs would actually be paid and factor in inflation and discount rates.  The engineers then quantify the landfill capacity associated with each capping event and the costs for each event are amortized over that capacity as waste is received at the landfill.

 

Closure and post-closure costs represent future estimated costs related to monitoring and maintenance of a solid waste landfill, after a landfill facility ceases to accept waste and closes.  We estimate, based on input from our engineers, accounting personnel and consultants, our future cost requirements for closure and post-closure monitoring and maintenance based on our interpretation of the technical standards of the 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 post-closure accruals for the cost of monitoring and maintenance include site inspection, groundwater monitoring, leachate management, methane gas control and recovery, and operation and maintenance costs to be incurred for a period which is generally for a term of 30 years after final closure of a landfill.  Significant reductions in our estimates of the remaining lives of our landfills or significant increases in our estimates of the landfill closure and post-closure maintenance costs could have a material adverse effect on our financial condition and results of operations.  In determining estimated future closure and post-closure costs, we consider costs associated with permitted and permittable airspace.

 

Our estimates of costs to discharge capping, closure and post-closure asset retirement obligations for landfills are developed in today’s dollars.  These costs are then inflated to the period of performance using an estimate of inflation which is updated annually (2.6% was used in both fiscal year 2004 and 2005).  Capping, closure and post-closure liabilities are discounted using the credit adjusted risk-free rate in effect at the time the obligation is incurred (7.6% to 9.5%).  Accretion expense is necessary to increase the accrued capping, closure and post-closure liabilities to the future anticipated obligation. To accomplish this, we accrete our capping, closure and post-closure accrual balances using the same credit-adjusted, risk-free rate that was used to calculate the recorded liability.  Accretion expense on recorded landfill liabilities is recorded to cost of operations from the time the liability is recognized until the costs are paid.  Accretion expense amounted to $1.9 million and $2.2 million in fiscal years 2004 and 2005, respectively.

 

Our estimate of future capping, closure and post-closure costs was $157.6 million as of April 30, 2005, compared to $148.7 million as of April 30, 2004 and $82.4 million as of April 30, 2003.  The increase in estimated costs in fiscal 2005 is primarily as a result of additional permitted and permittable airspace from our newly acquired landfill operating contracts, which also increased airspace to 81.7 million tons as of April 30, 2005 compared to 65.6 million tons as of April 30, 2004 and 29.6 million tons as of April 30, 2003.

 

We provide for the accrual and amortization of estimated future obligations for closure and post-closure based on tonnage placed into each site.  With regards to capping, the liability is recognized and these costs are amortized based on the airspace related to the specific capping event. 

 

Accrued capping, closure and post-closure costs include the current and non-current portion of costs associated with obligations for capping, closure and post-closure of our landfills. The changes to accrued capping, closure and post-closure liabilities are as follows (in thousands):

 

28



 

 

 

Fiscal Year Ended April 30,

 

 

 

2003

 

2004

 

2005

 

 

 

 

 

 

 

 

 

Beginning balance, May 1

 

$

24,772

 

$

25,949

 

$

25,223

 

Cumulative effect of change in accounting principle (1)

 

 

(7,855

)

 

Capping, closure, and post-closure liability, adjusted

 

24,772

 

18,094

 

25,223

 

Obligations incurred

 

8,400

 

4,556

 

4,774

 

Revisions in estimates

 

 

(1,371

)

(2,795

)

Accretion expense

 

 

1,871

 

2,201

 

Payments (2)

 

(9,164

)

(2,707

)

(6,068

)

Acquisitions and other adjustments (3)

 

1,941

 

4,780

 

3,293

 

 

 

 

 

 

 

 

 

Balance, April 30

 

$

25,949

 

$

25,223

 

$

26,628

 

 


(1)           Upon adoption of SFAS No. 143, on May 1, 2003, we recorded a cumulative effect of change in accounting principle of $2.7 million (net of taxes of $1.9 million).  In addition we recorded a decrease in our capping, closure and post-closure obligations of $7.9 million, and a decrease in our net landfill assets of $3.2 million.  For additional information and analyses of the impact that adopting SFAS No. 143 had on our balance sheet and our results of operations for the year ended April 30, 2004, see Note 3 to our Consolidated Financial Statements included in this Form 10-K.

 

(2)           Spending levels were higher in fiscal year 2003 mainly due to closure activities at our Woburn, Massachusetts and Pine Tree, Maine landfills.  Spending levels increased in fiscal year 2005 mainly due to closure activities at our Southbridge, Massachusetts landfill.

 

(3)           In fiscal year 2003, we recorded closure and post-closure accruals relating to the Hardwick landfill acquisition.  The increase in fiscal 2005 is as a result of capping, closure and post-closure accruals relating to the acquisition of the Southbridge, Massachusetts landfill operating contract.

 

We estimate our future capping, closure and post-closure costs in order to determine the capping, closure and post-closure expense per ton of waste placed into each landfill as further described in Note 1(l) to our consolidated financial statements.  The anticipated timeframe for paying these costs varies based on the remaining useful life of each landfill, as well as the duration of the post-closure monitoring period.  Based on our permitted and permittable airspace at April 30, 2005, we expect to make payments relative to capping, closure and post-closure activities from fiscal year 2006 through fiscal year 2093.

 

Asset Impairment

 

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we review our long-lived assets for impairment whenever events or changes in circumstances indicate that the remaining estimated useful life of such assets might warrant revision or that the balances may not be recoverable.  We evaluate possible impairment by comparing estimated discounted future cash flows to determine with the net book value of long-term assets including amortizable intangible assets.  If undiscounted cash flows are insufficient to recover assets, further analysis is performed in order to determine the amount of the impairment.  An impairment loss is then recorded equal to the amount by which the carrying amount of the assets exceeds their fair value.  Fair value is usually determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved.

 

Upon adoption of SFAS No. 142 we have eliminated the amortization of goodwill and annually assess goodwill impairment at each fiscal year end by applying a fair value based test.  We evaluate goodwill for impairment based on fair value of each operating segment.  We estimate fair value based on net future cash flows discounted using an estimated weighted average cost of capital.  We recognize an impairment if the net book value exceeds the fair value of the discounted future cash flows.

 

Bad Debt Allowance

 

Estimates are used in determining our allowance for bad debts and are based on our historical collection experience, current trends, credit policy and a review of our accounts receivable by aging category.  Our reserve is evaluated and revised on a monthly basis.

 

Self-Insurance Liabilities and Related Costs

 

We are self insured for vehicles and workers compensation.  The liability for unpaid claims and associated expenses, including incurred but not reported losses, is determined by a third party actuary and reflected in our consolidated balance

 

29



 

sheet as an accrued liability.  We use a third party to track and evaluate actual claims experience for consistency with the data used in the annual actuarial valuation.  The actuarially determined liability is calculated in part by reference to past claims experience, which considers both the frequency and settlement amount of claims.

 

Income Tax Accruals

 

We record 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.  Management judgment is required in determining our provision for income taxes and liabilities and any valuation allowance recorded against our net deferred tax assets.  Valuation allowances have been established for the possibility that tax benefits may not be realized for certain deferred tax assets.

 

Forward Looking Statements

 

This Form 10-K and other reports, proxy statements, and other communications to stockholders, as well as oral statements by our officers or our agents, may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act, with respect to, among other things, our future revenues, operating income, or earnings per share.  Without limiting the foregoing, any statements contained in this Form 10-K 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 important factors of which we are aware that may cause our actual results to vary materially from those forecasted or projected in any such forward-looking statement, certain of which are beyond our control. Our failure to successfully address any of these factors could have a material adverse effect on our results of operations.

 

General

 

Revenues

 

Our revenues in our North Eastern, South Eastern, Central and Western regions are attributable primarily to fees charged to customers for solid waste disposal and collection, landfill, waste-to-energy, transfer and recycling services.  We derive a substantial portion of our collection revenues from commercial, industrial and municipal services that are generally performed under service agreements or pursuant to contracts with municipalities.  The majority of our residential collection services are performed on a subscription basis with individual households.  Landfill, waste-to-energy facility and transfer customers are charged a tipping fee on a per ton basis for disposing of their solid waste at our disposal facilities and transfer stations.  The majority of our disposal and transfer customers are under one to ten year disposal contracts, with most having clauses for annual cost of living increases.  Recycling revenues, which are included in FCR, Central and Western regions, consist of revenues from the sale of recyclable commodities and operations and maintenance contracts of recycling facilities for municipal customers.  FCR revenues included revenues from commercial brokerage and recycling operations through June 30, 2003 and revenues from the export brokerage business through September 2002, when those operations were sold.

 

Our cellulose insulation business is conducted through a 50/50 joint venture with Louisiana-Pacific, and accordingly, we recognize half of the joint venture’s net income on the equity method in our results of operations.  Also, in the “Other” segment, we have ancillary revenues including major customer accounts and earnings from equity method investees.

 

Our revenues are shown net of inter-company eliminations.  We typically establish our inter-company transfer pricing based upon prevailing market rates.  The table below shows, for the periods indicated, the percentage of our revenues attributable to services provided.  For the fiscal years ended April 30, 2004 and 2003, the percentages of revenues shown below reflect revenues from the domestic brokerage and recycling operations through June 30, 2003 and revenues from the export brokerage business through September 2002.  The export business was transferred to the employees of that unit in September 2002 and our domestic brokerage operations, constituting the remainder of our brokerage revenues, was transferred effective June 30, 2003 to the employees of that unit.  Net of brokerage revenues, collection revenues as a percentage of total revenue in fiscal years ended April 30, 2005 and 2004 were lower compared to prior year respective periods, despite an increase in the absolute dollar amounts, mainly because of the large increase in recycling revenue dollars.  Landfill/disposal revenues as a percentage of total revenues, net of brokerage revenues, increased in the fiscal years ended April 30, 2005 and 2004 compared to prior year respective periods due to the incremental volumes associated with recently acquired landfill facilities.  Recycling revenues increased over the three year period as a percentage of total revenues

 

30



 

mainly due to higher commodity prices and volumes.  The decrease in brokerage revenues as a percentage of revenues is due to the transfer of the export and domestic brokerage businesses to employees of those units.

 

 

 

Fiscal Year
Ended April 30,

 

 

 

2003 (1)

 

2004 (1)

 

2005

 

 

 

 

 

 

 

 

 

Collection

 

49.8

%

51.8

%

49.4

%

Landfill/disposal facilities

 

14.3

 

15.9

 

16.6

 

Transfer

 

8.4

 

8.9

 

8.7

 

Recycling

 

18.7

 

22.7

 

25.3

 

Brokerage

 

8.8

 

0.7

 

0.0

 

 

 

 

 

 

 

 

 

Total revenues

 

100.0

%

100.0

%

100.0

%

 


(1) We revised percentages of total revenues for fiscal years ended April 30, 2003 and 2004 to conform with our classification of revenues attributable to services provided in the fiscal year ended April 30, 2005.

 

Operating Expenses

 

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.  Cost of operations also includes accretion expense related to landfill capping, closure and post closure, leachate treatment and disposal costs and depletion of landfill operating lease obligations.

 

General and administration expenses include management, clerical and administrative compensation and overhead, professional services and costs associated with marketing, sales force and community relations efforts.

 

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-consumption method, and the amortization of intangible assets (other than goodwill) using the straight-line method.  In accordance with SFAS No. 143, Accounting for Asset Retirement Obligations, except for accretion expense, we amortize landfill retirement assets through a charge to cost of operations using a straight-line rate per ton as landfill airspace is utilized.  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.  We depreciate all fixed and intangible assets, other than goodwill, to a zero net book value, and do not apply a salvage value to any fixed assets.

 

We capitalize certain direct landfill development costs, such as engineering, permitting, legal, construction and other costs associated directly with the expansion of existing landfills. Additionally, we also capitalize certain third party expenditures related to pending acquisitions, such as legal and engineering costs.  We routinely evaluate all such capitalized costs, and expense those costs related to projects not likely to be successful.  Internal and indirect landfill development and acquisition costs, such as executive and corporate overhead, public relations and other corporate services, are expensed as incurred.

 

We will have material financial obligations relating to capping, closure and post-closure costs of our existing landfills and any disposal facilities which we may own or operate in the future.  We have provided and will in the future provide accruals for these future financial obligations based on engineering estimates of consumption of permitted landfill airspace over the useful life of any such landfill.  There can be no assurance that our financial obligations for capping, closure or post-closure costs will not exceed the amount accrued and reserved or amounts otherwise receivable pursuant to trust funds.

 

31



 

Results of Operations

 

The following table sets forth for the periods indicated the percentage relationship that certain items from our consolidated financial statements bear in relation to revenues.

 

 

 

Fiscal Year
Ended April 30,

 

 

 

2003

 

2004

 

2005

 

 

 

 

 

 

 

 

 

Revenues

 

100.0

%

100.0

%

100.0

%

Cost of operations

 

66.1

 

65.3

 

64.5

 

General and administration

 

13.2

 

13.2

 

13.2

 

Depreciation and amortization

 

11.4

 

13.6

 

13.6

 

Impairment charge

 

1.2

 

0.4

 

 

Deferred costs

 

 

 

0.1

 

 

 

 

 

 

 

 

 

Operating income

 

8.1

 

7.5

 

8.6

 

Interest expense, net

 

6.2

 

5.8

 

6.1

 

Income from equity method investments

 

(0.5

)

(0.5

)

(0.6

)

Loss on debt extinguishment

 

0.9

 

 

0.4

 

Other expense/(income), net and minority interest

 

(0.4

)

1.4

 

0.1

 

Provision (benefit) for income taxes

 

0.9

 

(0.4

)

1.1

 

 

 

 

 

 

 

 

 

Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle

 

1.0

%

1.2

%

1.5

%

 

Fiscal Year 2005 versus Fiscal Year 2004

 

Revenues.  Revenues increased $44.0 million, or 10.0%, to $482.0 million in fiscal year 2005 from $438.0 million in fiscal year 2004.  Revenues from the rollover effect of acquired businesses accounted for $23.7 million of the increase, primarily due to new disposal facilities in the Western and South Eastern regions (the Ontario and Southbridge landfills), as well as a new recycling facility in the South Eastern region, all of which became active in the third and fourth quarters of fiscal 2004, partially offset by the loss of revenues from the divestiture of the domestic brokerage business amounting to $3.3 million.  The revenue increase is also attributable to an increase in solid waste revenues of $14.5 million, due primarily to higher hauling and transfer volumes in the Central region, higher composting volumes in the North Eastern region and higher commodity prices which resulted in an increase in recycling revenues of $9.1 million.

 

Cost of operations.  Cost of operations increased $25.1 million, or 8.8%, to $310.9 million in fiscal year 2005 from $285.8 million in fiscal year 2004.  Cost of operations as a percentage of revenues decreased to 64.5% for the fiscal year 2005, from 65.3% in the prior year primarily due to the effect of lower disposal costs as a percentage of revenue from the impact of the activation of new disposal capacity.  The dollar increase in cost of operations expense for fiscal year 2005 is primarily due to the effect of higher levels of operating activity and acquired businesses, higher cost of commodity purchases due to higher prices, higher transportation costs as well as higher fuel costs.

 

General and administration.  General and administration expenses increased $5.5 million, or 9.5%, to $63.7 million in fiscal year 2005 from $58.2 million in fiscal year 2004.  General and administration expenses as a percentage of revenues remained unchanged in fiscal year 2005 compared to fiscal year 2004.  The dollar increase in general and administration expense was due to higher bonus accruals, communications and training costs as well as expenses related to compliance with the Sarbanes Oxley Act.

 

Depreciation and amortization.  Depreciation and amortization expense increased $6.0 million, or 10.1% to $65.6 million in fiscal year 2005 from $59.6 million in fiscal year 2004.  While depreciation expense increased by $1.2 million between periods, landfill amortization expense increased by $4.8 million which was primarily due to higher volumes, in part related to new disposal facilities which became active in the third and fourth quarters of fiscal year 2004.  Depreciation and amortization expense as a percentage of revenues remained unchanged in fiscal year 2005 compared to fiscal year 2004.

 

Impairment charge.  In the fourth quarter of fiscal 2004 we recorded an impairment charge of $1.7 million consisting of a $0.4 million write-down of our investment in Resource Optimization Technology (“ROT”), a compost facility, which we transferred at no cost to a third party in February 2005; a charge of $0.9 million relating to the sale of buildings and land at our former recycling facility in Mechanics Falls, Maine; and a charge of $0.4 million related to the discontinuation of an effort to develop a new landfill project in Rockingham, VT.

 

32



 

Deferred costs.  A charge of $0.3 million was recorded in fiscal 2005 to reflect the write-off of deferred development costs associated with unsuccessful negotiations to operate and develop a landfill located in McKean County, Pennsylvania. 

 

Operating income.  Operating income increased $8.7 million, or 26.6 %, to $41.4 million in fiscal year 2005 from $32.7 million in fiscal year 2004 and increased as a percentage of revenues to 8.6% in fiscal year 2005 from 7.5% in fiscal year 2004.  The increase in operating income is primarily due to higher levels of revenue. 

 

Interest expense, net.  Net interest expense increased $4.2 million, or 16.7%, to $29.4 million in fiscal year 2005, from $25.2 million in fiscal year 2004.  This increase is mainly attributable to higher average debt balances due to higher capital expenditures and payments on landfill operating lease contracts as well as higher average interest rates in fiscal year 2005 compared to the prior year.  Net interest expense, as a percentage of revenues, increased to 6.1% for fiscal year 2005 from 5.8% for fiscal year 2004.

 

Income from equity method investments.  Income from equity method investments for fiscal years ended April 30, 2005 and 2004 was solely from our 50% joint venture interest in GreenFiber.  Equity income from GreenFiber increased $0.6 million to $2.9 million in fiscal year 2005 compared to $2.3 million in fiscal year 2004.  The increase is attributable to higher volume as well as increased pricing.

 

Loss on debt extinguishment.  In the fourth quarter of fiscal year 2005 we entered into a new senior secured credit facility resulting in the write off of $1.7 million in debt financing costs associated with the old senior secured credit facility.

 

Other expense/(income), net.  Other expense in fiscal year 2005 was $0.3 million compared to $5.9 million in fiscal year 2004.  Other expense in fiscal year 2005 consisted of the costs of winding down the operations of the New Heights power plant and a loss on retirement of fixed assets, partially offset by gains on the sale of equipment and a dividend from our investment in Evergreen National Indemnity Company.  Other expense in fiscal year 2004 included an $8.0 million charge for the write-down of our investment in the New Heights power plant venture and our remaining investment in certain tire recycling operations and the power plant venture.  Offsetting this charge, we recognized a gain of $1.1 million on the completion of our sale of its export recyclables business and other gains, primarily on the sale of trucks and containers, of $0.5 million. 

 

Provision/(benefit) for income taxes.  Provision for income taxes increased $7.3 million for fiscal year 2005 to $5.7 million from $(1.6) million for fiscal year 2004.  The effective tax rate increased to 44.3% for fiscal year 2005 from (43.0)% for fiscal year 2004 primarily due to a prior year decrease in the valuation allowance for loss carryforwards as utilization of the Company’s tax losses became more certain.

 

Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle.  Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle increased $1.8 million, or 33.3%, to $7.2 million in fiscal year 2005 from $5.4 million in fiscal year 2004 and increased as a percentage of revenue to 1.5% in fiscal year 2005 from 1.2% in fiscal year 2004.  The increase in income from continuing operations before discontinued operations and cumulative effect of change in accounting principle is due to increased operating income, partially offset by increased interest expense and higher tax expense due to a higher effective tax rate.  The North Eastern and South Eastern region’s income from continuing operations before discontinued operations and cumulative effect of change in accounting principle decreased in fiscal year 2005 compared to fiscal year 2004 due primarily to higher costs associated with new disposal facility projects, one of which is not yet fully operational.  Western region’s income from continuing operations before discontinued operations and cumulative effect of change in accounting principle increased from the prior period due to the acquisition of an operating contract at the Ontario landfill.  FCR Recycling’s income from continuing operations before discontinued operations and cumulative effect of change in accounting principle increased in fiscal year 2005 from 2004 due primarily to favorable commodity pricing.

 

Income (loss) from discontinued operations/Loss on disposal of discontinued operations.  During the second quarter of fiscal 2005, we completed the sale of the assets of Data Destruction Services, Inc. (“Data Destruction”) for cash sale proceeds of $3.0 million.  This shredding operation had been historically accounted for as a component of continuing operations up until its sale.  The transaction required discontinued operations treatment under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, therefore the operating results of Data Destruction have been reclassified from continuing to discontinued operations in fiscal 2003, 2004 and 2005.  Also in connection with the discontinued

 

33



 

accounting treatment, the loss (net of tax) from the sale amounting to $0.1 million has been recorded and classified as a loss on disposal of discontinued operations. 

 

Cumulative effect of change in accounting principle, net.  Effective May 1, 2003, we adopted SFAS No. 143, Accounting for Asset Retirement Obligations.  The primary modification to our methodology required by SFAS No. 143 is to require that capping, closure and post-closure costs be discounted to present value.  Upon adoption of SFAS No. 143 we recorded a cumulative effect of change in accounting principle of $2.7 million (net of taxes of $1.9 million) in order to reflect the cumulative change in accounting for landfill obligations retroactive to the date of the inception of the landfill.

 

Fiscal Year 2004 versus Fiscal Year 2003

 

Revenues.  Revenues increased $18.5 million, or 4.4%, to $438.0 million in fiscal year 2004 from $419.5 million in fiscal year 2003. The revenue increase is attributable to an increase in core solid waste revenues of $15.7 million, due primarily to higher composting volumes in the North Eastern region, higher hauling and transfer volumes in the Central and Southeastern regions as well as higher landfill volumes in the Western region.  Higher recycling volumes and prices resulted in a net increase in recycling revenues of $12.0 million.  Loss of revenues from businesses divested, primarily domestic and export brokerage, amounted to $32.6 million, partially offset by the roll-over effect of businesses acquired of $23.4 million, primarily due to new disposal facilities in the Western and South Eastern regions (Ontario, Southbridge and Hardwick landfills) as well as solid waste hauling operations in the Central,  South Eastern and Western regions .

 

Cost of operations.  Cost of operations increased $8.2 million, or 3.0%, to $285.8 million in fiscal year 2004 from $277.6 million in fiscal year 2003. Cost of operations as a percentage of revenues decreased to 65.3% in fiscal year 2004 from 66.2% in fiscal year 2003.  The dollar increase in cost of operations expenses is primarily due to the effect of acquired businesses and a net increase in material purchases resulting from higher recycling volumes, which were partially offset by lower commodity purchases resulting from the divestiture of the export and domestic brokerage business.

 

General and administration.  General and administration expenses increased $2.8 million, or 5.1%, to $58.2 million in fiscal year 2004 from $55.4 million in fiscal year 2003. General and administration expenses as a percentage of revenues remained unchanged in fiscal year 2004 compared to fiscal year 2003.  The dollar increase in general and administrative costs was due to higher bad debt and travel costs associated with the development of new landfill capacity.

 

Depreciation and amortization.  Depreciation and amortization expense increased $11.7 million, or 24.4% to $59.6  million in fiscal year 2004 from $47.9  million in fiscal year 2003.  Depreciation expense was up $2.4 million between periods and landfill amortization expense increased $9.3 million which was primarily attributable to increased landfill volumes, the effect of newly acquired landfill operations and as a result of adopting SFAS No. 143.  Depreciation and amortization expense as a percentage of revenue rose to 13.6% in fiscal year 2004 from 11.4% in fiscal year 2003 which resulted from the higher landfill amortization expense.

 

Impairment charge.  In the fourth quarter of fiscal 2004 we recorded an impairment charge of $1.7 million consisting of a $0.4 million write-down of our investment in Resource ROT, a compost facility, which we intend to transfer at a third party; a charge of $0.9 million relating to the sale of buildings and land at our former recycling facility in Mechanics Falls, Maine; and a charge of $0.4 million related to the discontinued Rockingham landfill project.

 

Operating income.  Operating income decreased $1.1 million, or 3.3 %, to $32.7 million in fiscal year 2004 from $33.8 million in fiscal year 2003 and decreased as a percentage of revenues to 7.5% in fiscal year 2004 from 8.0% in fiscal year 2003.  The decrease in operating income is primarily due to higher depreciation and amortization attributable to increased landfill volumes, the effect of newly acquired landfill operations and as a result of adopting SFAS No. 143. 

 

Interest expense, net.  Net interest expense decreased $0.8 million, or 3.1%, to $25.2 million in fiscal year 2004, from $26.0 million in fiscal year 2003. This decrease is primarily attributable to lower average debt balances and lower interest rates on variable rate debt in the current year, versus the prior period. Interest expense, as a percentage of revenues, decreased to 5.8% in fiscal year 2004 from 6.2% in fiscal year 2003.

 

Income from equity method investments.  Income from equity method investments for fiscal years ended April 30, 2004 and 2003 was solely from our 50% joint venture interest in GreenFiber.  Equity income from GreenFiber increased $0.2 million to $2.3 million in fiscal year 2004 compared to $2.1 million in fiscal year 2003.  Equity income from GreenFiber in

 

34



 

fiscal year 2003 included a $1.0 million gain associated with an eminent domain settlement received from a state department of transportation on the involuntary conversion of a portion of a GreenFiber leased manufacturing facility.

 

Loss on debt extinguishment.  In fiscal year 2003, we entered into a new senior secured credit facility resulting in the write off of $3.6 million in debt financing costs associated with the old senior secured credit facility.

 

Minority interest.  Minority interest in fiscal year 2003 reflects a minority owner’s interest in our majority owned subsidiary, American Ash Recovery Technologies (“AART”).  AART completed its ash operation contract and closed its operations in fiscal year 2003.

 

Other expense/(income), net.  Other expense in fiscal year 2004 included an $8.0 million charge for the write-down of our investment in the New Heights power plant venture and our remaining investment in certain tire recycling operations and the power plant venture.  Offsetting this charge, we recognized a gain of $1.1 million on the completion of our sale of its export recyclables business and other gains, primarily on the sale of trucks and containers, of $0.5 million.  Other income in fiscal 2003 was attributable to a gain of $1.2 million related to a settlement with Oakhurst Company, Inc., as well as a gain on the divestitures and other assets of $1.0 million and a gain on the conclusion of the AART contract of $0.3 million, offset by a $1.3 million charge for interest rate swap unwind costs.

 

Provision/(benefit) for income taxes.    Provision for income taxes decreased $5.4 million for fiscal year 2004 to a benefit of $(1.6) million from a provision of $3.8 million for fiscal year 2003. The effective tax rate decreased to (43.0)% for fiscal year 2004 from 48.4% for fiscal year 2003. This was primarily due to a decrease in the valuation allowance for loss carryforwards in 2004 as utilization of tax losses is more certain, as well as, in 2003, the nondeductible impairment of goodwill and nondeductible losses on business dispositions.

 

Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle.  Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle increased $1.3 million, or 31.7%, to $5.4 million in fiscal year 2004 from $4.1 million in fiscal year 2003 and increased as a percentage of revenue to 1.2% in fiscal year 2004 from 1.0% in fiscal year 2003.  South Eastern region’s income from continuing operations before discontinued operations and cumulative effect of change in accounting principle decreased in fiscal year 2004 compared to fiscal year 2003 due primarily to hauling activities as well as the adoption of SFAS No. 143.  North Eastern region’s income from continuing operations before discontinued operations and cumulative effect of change in accounting principle increased due the adoption of SFAS 143 partially offset by impairment charges for ROT and our Mechanic Falls facility.   FCR Recycling’s income from continuing operations before discontinued operations and cumulative effect of change in accounting principle increased in fiscal year 2004 compared to fiscal year 2003 due to prior year impairment charges associated with domestic brokerage and commercial recycling.

 

Income (loss) from discontinued operations, net.   During the second quarter of fiscal 2005, we completed the sale of the assets of Data Destruction.  This shredding operation had been historically accounted for as a component of continuing operations up until its sale.  The transaction required discontinued operations treatment under SFAS No. 144, therefore the operating results of Data Destruction have been reclassified from continuing to discontinued operations in fiscal 2003 and 2004.

 

Cumulative effect of change in accounting principle, net.  Effective May 1, 2003, we adopted SFAS No. 143.  The primary modification to our methodology required by SFAS No. 143 is to require that capping, closure and post-closure costs be discounted to present value.  Upon adoption of SFAS No. 143 we recorded a cumulative effect of change in accounting principle of $2.7 million (net of taxes of $1.9 million) in order to reflect the cumulative change in accounting for landfill obligations retroactive to the date of the inception of the landfill.

 

Effective May 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets, which, among other things, eliminates the amortization of goodwill and requires an annual assessment of goodwill impairment by applying a fair value based test.  Goodwill was determined to be impaired and the amount of $63.9 million (net of tax benefit of $0.2 million) was charged to earnings in fiscal 2003 as a cumulative effect of change in accounting principle.  The goodwill impairment charge was related to our waste-to-energy operation, Maine Energy, and the brokerage business of the FCR Recycling segment, both of which were acquired as part of our acquisition of KTI. At the time of acquisition, we recorded the fair value of these businesses using an independent third party valuation.  The underlying assumptions used to establish the value of these businesses, including earnings projections, commodity pricing assumptions and industry valuation multiples for recycling products, were not realized.  Accordingly, goodwill impairment charges were recorded as the net book value of these

 

35



 

businesses exceeded their fair value.

 

Liquidity and Capital Resources

 

Our business is capital intensive.  Our capital requirements include acquisitions, fixed asset purchases and capital expenditures for landfill development and cell construction as well as site and cell closure.  We had a net working capital deficit of $31.9 million at April 30, 2005 compared to a net working capital deficit of $25.9 million at April 30, 2004.  Working capital, net comprises current assets, excluding cash and cash equivalents, minus current liabilities.  The main factors accounting for the decrease were higher trade payables and accrual balances due to higher capital expenditures close to year end 2005, deferred taxes and higher current accruals for capping, closure and post-closure costs, partially offset by increases in trade receivables associated with higher revenues in the last month of the year and lower current maturities of long-term debt related to the new credit facility as well as payments on various seller financed notes in fiscal 2005.

 

On April 29, 2005, we entered into a new senior credit facility with a group of banks for which Bank of America is acting as agent.  The new facility consists of a senior secured revolving credit facility in the amount of $350.0 million.  Under certain circumstances we have the option of increasing the credit facility by an additional $100.0 million provided that we are not in default at the time of the increase, and subject to the receipt of commitments from lenders for such additional amount.  This credit facility is secured by all of our assets, including our interest in the equity securities of our subsidiaries.  The new revolving credit facility matures April 2010.  The initial borrowings under the credit facility were used to repay all outstanding indebtedness under the old term loan and the old revolver.  The former senior credit facility consisted of a $175.0 million senior secured revolving credit facility and a senior secured term “B” loan, which had an outstanding balance of $148.5 million at April 29, 2005.  Further advances were available under the old revolver and new revolver in the amount of $142.1 million and $140.4 million as of April 30, 2004 and 2005, respectively.  These available amounts are net of outstanding irrevocable letters of credit totaling $32.9 million and $32.3 as of April 30, 2004 and 2005.  As of April 30, 2004 and 2005 no amounts had been drawn under the outstanding letters of credit.

 

The new senior revolving credit facility agreement contains covenants that may limit our activities, including covenants that restrict dividends on common stock, limit capital expenditures, and set minimum net worth and interest coverage and leverage ratios.  As of April 30, 2005, we were in compliance with all covenants. 

 

We recorded a loss on extinguishment of debt of $1.7 million as a result of the write-off of deferred financing costs associated with the old senior secured credit facility.

 

We have historically entered into interest rate swap agreements to balance fixed and floating rate debt interest risk in accordance with management’s criteria.  The agreements are contracts to exchange fixed and floating interest rate payments periodically over a specified term without the exchange of the underlying notional amounts.  The agreements provide only for the exchange of interest on the notional amounts at the stated rates, with no multipliers or leverage.  Differences paid or received over the life of the agreements are recorded in the consolidated financial statements as additions to or reductions of interest expense on the underlying debt.  We terminated two interest rate swap agreements effective April 28, 2005 concurrent with entering into the new credit facility.  We received net proceeds of $0.4 million which will be amortized against interest expense over the remaining original term of the swap contracts, to February 2006.

 

On May 9, 2005, we entered into three separate interest rate swap agreements with three banks for a notional amount of $75.0 million.  The contracts are forward starting contracts that will effectively fix the interest index rate on the entire notional amount at 4.4% from May 4, 2006 through May 5, 2008. 

 

As of April 30, 2005, we had outstanding $195.0 million of 9.75% senior subordinated notes (the ‘‘notes’’) which mature in January 2013.  The senior subordinated note indenture contains covenants that restrict dividends, stock repurchases and other payments, and limits the incurrence of debt and issuance of preferred stock.  The notes are guaranteed jointly and severally, fully and unconditionally by our significant wholly-owned subsidiaries.

 

Net cash provided by operating activities in fiscal years ended April 30, 2005 and 2004 amounted to $83.0 million and $69.9 million, respectively.  The increase was mainly due to higher landfill amortization and depreciation expense which increased approximately $6.0 million.  This was primarily due to higher landfill volumes, in part related to new disposal facilities which became active in the third and fourth quarters of fiscal year 2004.   Higher income from equity method investments of $0.6 million was more than offset by a dividend of $2.0 million from GreenFiber in fiscal year 2005.

 

36



 

Deferred income taxes increased $7.1 million from the prior year.  Depletion of landfill operating lease obligations increased $3.6 million from the prior year which was due to landfill operating lease contracts entered into in the third and fourth quarters of fiscal year 2004.  The increase from fiscal year 2004 to 2005 was partially offset by the loss on asset writedown recorded in fiscal year 2004.  Changes in assets and liabilities, net of effects of acquisitions and divestitures, decreased $1.0 million from the prior year. 

 

Net cash used in investing activities in fiscal year 2005 and fiscal year 2004 amounted to $103.8 million and $123.7 million, respectively.  The decrease in cash used in investing activities was due to lower acquisition activity by $23.1 million in the current year as well as higher proceeds from divestitures of $1.9 million and advances to unconsolidated entities of $7.3 million in fiscal year 2004 which did not recur in fiscal year 2005.  Capital expenditures increased $21.7 million due to increased landfill development as well as real property purchases partially offset by a decrease in payments on landfill operating lease contracts of $11.9 million related to landfill operating lease agreements entered into during the third and fourth quarters of fiscal year 2004.

 

Net cash provided by financing activities was $21.3 million in fiscal year 2005 compared to $46.1 million provided by financing activities in fiscal year 2004.  The decrease in cash provided by financing activities is primarily due to lower net borrowings of $22.7 million for fiscal year 2005.  Higher net borrowings for fiscal year 2004 were utilized primarily to fund acquisition activity.

 

Our capital expenditures were $80.1 million in fiscal year 2005 compared to $58.3 million in fiscal year 2004.  Capital spending was higher in fiscal year 2005 mainly due to capital expenditures related to existing landfills and newly acquired landfill operating contracts.  We expect capital spending to amount to between $95.0 million and $99.0 million in fiscal year 2006.  The expected increase is due to capital expenditures at the newly acquired landfills.

 

In fiscal year 2005, we acquired ten solid waste hauling and disposal operations for an aggregate consideration of $10.2 million, consisting of $9.5 million in cash and $0.7 million in notes payable and other consideration. In fiscal year 2004, we acquired ten solid waste hauling operations and one construction and demolition processing facility, which also operates a landfill facility under an operating lease contract for an aggregate consideration of $32.6 million, consisting of $31.9 million in cash and $0.7 million in other consideration.  We also obtained two landfill operating lease contracts in fiscal year 2004. For the new landfill operating lease contracts, we made payments totaling $20.3 million and $32.2 million in fiscal years 2005 and 2004, respectively.

 

We generally meet liquidity needs from operating cash flow.  These liquidity needs are primarily for capital expenditures for vehicles, containers and landfill development, debt service costs and capping, closure and post-closure expenditures.  It is our intention to continue to grow organically and through acquisitions.  The funds to do so are expected to be obtained from operations and the our credit facility.  At April 30, 2005 at the Company’s existing covenant requirements, all of the funds available under that facility could have been drawn without breaching those covenants.

 

In addition, we have filed a universal shelf registration statement with the SEC which has not yet become effective.  Once declared effective by the SEC, we could, from time to time, issue securities there under in an amount of up to $250.0 million.  However, our ability and willingness to issue securities pursuant to this registration statement will depend on market conditions at the time of any such desired offering and therefore we may not be able to issue such securities on favorable terms, if at all.

 

Contractual Obligations

 

The following table summarizes our significant contractual obligations and commitments as of April 30, 2005 (in thousands) and the anticipated effect of these obligations on our liquidity in future years:

 

 

 

Fiscal Year(s) April 30,

 

 

 

2006

 

2007-2008

 

2009-2010

 

Thereafter

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

281

 

$

536

 

$

177,440

 

$

195,000

 

$

373,257

 

Capital lease obligations

 

632

 

1,394

 

81

 

 

2,107

 

Interest obligations (1)

 

29,121

 

58,070

 

57,921

 

50,700

 

195,812

 

Operating leases (2)

 

8,976

 

16,609

 

13,980

 

122,814

 

162,379

 

Closure/post-closure

 

5,162

 

6,869

 

9,450

 

136,086

 

157,567

 

Redeemable preferred securities (3)

 

 

76,119

 

 

 

76,119

 

 

 

 

 

 

 

 

 

 

 

 

 

Total contractual cash obligations (4)

 

$

44,172

 

$

159,597

 

$

258,872

 

$

504,600

 

$

967,241

 

 

37



 


(1)           Interest obligations based on long-term debt and capital lease balances as of April 30, 2005.  Interest obligations related to variable rate debt was calculated using variable rates in effect at April 30, 2005.

 

(2)           Includes obligations related to landfill operating lease contracts.

 

(3)           Assumes redemption on the seventh anniversary of the closing date at the book value which includes all accrued and unpaid dividends.

 

(4)           Contractual cash obligations do not include accounts payable or accrued liabilities, which will be paid in fiscal year 2006.

 

We believe that our cash provided internally from operations together with our senior secured credit facility should enable us to meet our working capital and other cash needs for the foreseeable future.

 

Inflation and Prevailing Economic Conditions

 

To date, inflation has not had a significant impact on our operations. Consistent with industry practice, most of our contracts provide for a pass-through of certain costs, including increases in landfill tipping fees and, in some cases, fuel costs.  We have implemented a fuel surcharge program, which is designed to recover fuel price fluctuations.  We therefore believe we should be able to implement price increases sufficient to offset most cost increases resulting from inflation. However, competitive factors may require us to absorb at least a portion of these cost increases, particularly during periods of high inflation.

 

Our business is located mainly in the eastern United States. Therefore, our 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. We are unable to forecast or determine the timing and/or the future impact of a sustained economic slowdown.

 

New Accounting Standards

 

In July 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. These new standards significantly modified the accounting rules related to accounting for business acquisitions, amortization of intangible assets and the method of accounting for impairments of existing goodwill. The effective date for SFAS No. 142 was fiscal years beginning after December 15, 2001.

 

SFAS No. 142, among other things, eliminates the amortization of goodwill and requires an annual assessment of goodwill impairment by applying a fair value based test. SFAS No. 142 requires that any goodwill recorded in connection with an acquisition consummated on or after July 1, 2001 not be amortized. We performed an impairment test as of May 1, 2002 and goodwill was determined to be impaired and the amount of $63.9 million (net of tax benefit of $0.2 million) was charged to earnings as a cumulative effect of a change in accounting principle. The goodwill impairment is associated with the assets acquired by us in connection with its acquisition of KTI. Remaining goodwill will be tested for impairment on an annual basis and further impairment charges may result. In accordance with the non-amortization provisions of SFAS No. 142, remaining goodwill will not be amortized going forward. The following schedule reflects net income (loss) and earnings (loss) per share for fiscal year 2003 adjusted to exclude impairment charges (dollars in thousands, except for per share data).

 

38



 

 

 

Fiscal Year Ended
April 30, 2003

 

Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle

 

$

4,078

 

Discontinued Operations:

 

 

 

Loss from discontinued operations, net

 

(20

)

Reclassification from discontinued operations, net

 

50

 

Cumulative effect of change in accounting principle, net

 

(63,916

)

Reported net loss

 

(59,808

)

Add:

 

 

 

Goodwill impairment charge (net of income taxes of $189)

 

63,916

 

Adjusted net income

 

4,108

 

Less:

 

 

 

Preferred stock dividends

 

3,094

 

Adjusted net income available to common stockholders

 

$

1,014

 

 

 

 

 

Earnings per common share:

 

 

 

Basic earnings per common share:

 

 

 

Reported net loss available to common stockholders

 

$

(2.65

)

Goodwill impairment charge, net

 

2.69

 

Goodwill amortization, net

 

 

Adjusted basic earnings per share available to common stockholders

 

$

0.04

 

Diluted earnings per common share:

 

 

 

Reported net loss available to common stockholders

 

$

(2.63

)

Goodwill impairment charge, net

 

2.67

 

Adjusted diluted earnings per share available to common stockholders

 

$

0.04

 

 

SFAS No. 143, Accounting for Asset Retirement Obligations was adopted effective May 1, 2003. Through April 30, 2003 we recognized expenses associated with (i) amortization of capitalized and future landfill asset costs and (ii) future closure and post-closure obligations on a units-of-consumption basis as airspace was consumed over the life of the related landfill.  This practice, referred to as life-cycle accounting within the waste industry, continues to be followed, with the exception of capitalized and future landfill capping costs.  As a result of the adoption of SFAS No. 143, future capping costs are identified by specific capping event and amortized over the specific estimated capacity related to that event rather than over the life of the entire landfill, as was the practice prior to our adoption of SFAS No. 143.

 

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

 

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

 

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

 

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

 

39



 

 

 

Balance at
April 30, 2003

 

Change

 

Balance at
May 1, 2003

 

Landfill assets

 

$

148,029

 

$

6,166

 

$

154,195

 

Accumulated amortization

 

(63,207

)

(9,394

)

(72,601

)

Net landfill assets

 

$

84,822

 

$

(3,228

)

$

81,594

 

 

 

 

 

 

 

 

 

Capping, closure, and post-closure liabilities

 

$

25,949

 

$

(7,855

)

$

18,094

 

 

The pro forma effects of the application of SFAS 143 as if the statement had been adopted on May 1, 2002, rather than May 1, 2003, using May 1, 2003 costs, assumptions and interest rates are presented below (in thousands):

 

 

 

Fiscal Year Ended
April 30, 2003

 

Net (loss) income available to common stockholders, as reported

 

$

(62,902

)

Reversal of closure and post-closure expense, net of tax

 

(4,331

)

Amortization expense, net of tax

 

1,526

 

Accretion expense, net of tax

 

764

 

Pro forma net (loss) income

 

$

(60,861

)

 

 

 

 

Reported net (loss) income per common share

 

$

(2.63

)

 

 

 

 

Pro forma net (loss) income per common share

 

$

(2.55

)

 

The pro forma asset retirement obligation liability balances as if SFAS 143 had been adopted on May 1, 2002, rather than May 1, 2003, are as follows:

 

 

 

April 30, 2003

 

Accrued capping, closure and post-closure costs, as reported

 

$

25,949

 

 

 

 

 

Pro forma accrued capping, closure and post-closure costs

 

$

18,094

 

 

In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003) Consolidation of Variable Interest Entities (FIN 46R). FIN 46R requires unconsolidated variable interest entities to be consolidated by their primary beneficiaries. FIN 46R was effective for periods ending after December 15, 2003 for public companies. As of April 30, 2004 and 2005, we had no material variable interest entities requiring consolidation under FIN 46R.

 

In December 2004, the FASB issued SFAS 123R, Share-Based Payment.  SFAS 123R replaces SFAS 123 and supersedes APB Opinion No. 25 requiring public companies to recognize compensation expense for the cost of awards of equity instruments. This compensation cost will be measured as the fair value of the award on the grant date estimated using an option-pricing model. SFAS 123R was originally issued with implementation required for interim and annual periods beginning after June 15, 2005.   On April 14, 2005, the Securities and Exchange Commission (SEC) amended the effective date to the beginning of the first fiscal year after June 15, 2005.   We are evaluating the various transition provisions under SFAS 123R and will adopt SFAS 123R effective May 1, 2006, which is expected to result in increased compensation expense in future periods.

 

40



 

Certain Factors That May Affect Future Results

 

The following important factors, among others, could cause actual results to differ materially from those indicated by forward-looking statements made in this Annual Report on Form 10-K and presented elsewhere by management from time to time.

 

The Company’s increased leverage may restrict its future operations and impact its ability to make future acquisitions.

 

The Company’s indebtedness has substantially increased.  The payment of interest and principal due under this indebtedness has reduced, and may continue to reduce, funds available for other business purposes, including capital expenditures and acquisitions.  In addition, the aggregate amount of indebtedness has limited and may continue to limit the Company’s ability to incur additional indebtedness, and thereby may limit its acquisition program.

 

The Company may not be successful in making acquisitions of solid waste assets, including developing additional disposal capacity, or in integrating acquired businesses or assets, which could limit the Company’s future growth.

 

The Company’s strategy envisions that a substantial part of the Company’s future growth will come from making acquisitions of traditional solid waste assets or operations and acquiring or developing additional disposal capacity. These acquisitions may include ‘‘tuck-in’’ acquisitions within the Company’s existing markets, assets that are adjacent to or outside the Company’s existing markets, or larger, more strategic acquisitions. In addition, from time to time the Company may acquire businesses that are complementary to the Company’s core business strategy. The Company may not be able to identify suitable acquisition candidates. If the Company identifies suitable acquisition candidates, the Company may be unable to negotiate successfully their acquisition at a price or on terms and conditions favorable to the Company. Furthermore, the Company may be unable to obtain the necessary regulatory approval to complete potential acquisitions.

 

The Company’s ability to achieve the benefits the Company anticipates from acquisitions, including cost savings and operating efficiencies, depends in part on the Company’s ability to successfully integrate the operations of such acquired businesses with the Company’s operations. The integration of acquired businesses and other assets may require significant management time and company resources that would otherwise be available for the ongoing management of the Company’s existing operations.

 

In addition, the process of acquiring, developing and permitting additional disposal capacity is lengthy, expensive and uncertain. For example, the Company is currently involved in litigation with the Town of Bethlehem, New Hampshire relating to the expansion of a landfill owned by the Company’s wholly owned subsidiary, North Country Environmental Services, Inc. Moreover, the disposal capacity at the Company’s existing landfills is limited by the remaining available volume at the Company’s landfills and annual, quarterly and/or daily disposal limits imposed by the various governmental authorities with jurisdiction over the Company’s landfills.  The Company typically reaches or approximates the Company’s daily, quarterly and annual maximum permitted disposal capacity at the majority of the Company’s landfills. If the Company is unable to develop or acquire additional disposal capacity, the Company’s ability to achieve economies from the internalization of the Company’s waste stream will be limited and the Company may be required to increase the Company’s utilization of disposal facilities owned by third parties, which could reduce the Company’s revenues and/or the Company’s operating margins. 

 

The Company’s ability to make acquisitions is dependent on the availability of adequate cash and the attractiveness of the Company’s stock price.

 

The Company anticipates that any future business acquisitions will be financed through cash from operations, borrowings under the Company’s senior secured credit facility, the issuance of shares of the Company’s Class A common stock and/or seller financing. The Company may not have sufficient existing capital resources and may be unable to raise sufficient additional capital resources on terms satisfactory to the Company, if at all, in order to meet the Company’s capital requirements for such acquisitions.

 

The Company also believes that a significant factor in the Company’s ability to close acquisitions will be the attractiveness to the Company and to persons selling businesses to the Company 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

 

41



 

capital appreciation prospects of the Company’s Class A common stock compared to the equity securities of the Company’s competitors. The trading price of the Company’s Class A common stock on the NASDAQ National Market has limited the Company’s willingness to use the Company’s equity as consideration and the willingness of sellers to accept the Company’s shares and as a result has limited, and could continue to limit, the size and scope of the Company’s acquisition program.

 

Environmental regulations and litigation could subject the Company to fines, penalties, judgments and limitations on the Company’s ability to expand.

 

The Company is subject to potential liability and restrictions under environmental laws, including those relating to transport, recycling, treatment, storage and disposal of wastes, discharges to air and water, and the remediation of contaminated soil, surface water and groundwater. The waste management industry has been and will continue to be subject to regulation, including permitting and related financial assurance requirements, as well as to attempts to further regulate the industry through new legislation.  The Company’s waste-to-energy facility is subject to regulations limiting discharges of pollution into the air and water, and the Company’s solid waste operations are subject to a wide range of federal, state and, in some cases, local environmental, odor and noise and land use restrictions. For example, the Company’s waste-to-energy facility in Biddeford, Maine is affected by zoning restrictions and air emissions limitations in its efforts to implement a new odor control system.  If the Company is not able to comply with the requirements that apply to a particular facility or if the Company operates without necessary approvals, the Company could be subject to civil, and possibly criminal, fines and penalties, and the Company may be required to spend substantial capital to bring an operation into compliance or to temporarily or permanently discontinue, and/or take corrective actions, possibly including removal of landfilled materials, regarding an operation that is not permitted under the law. The Company may not have sufficient insurance coverage for the Company’s environmental liabilities. Those costs or actions could be significant to the Company and impact the Company’s results of operations, as well as the Company’s available capital.

 

Environmental and land use laws also impact the Company’s ability to expand and, in the case of the Company’s solid waste operations, may dictate those geographic areas from which the Company must, or, from which the Company may not, accept waste. Those laws and regulations may limit the overall size and daily waste volume that may be accepted by a solid waste operation. If the Company is not able to expand or otherwise operate one or more of the Company’s facilities because of limits imposed under environmental laws, the Company may be required to increase the Company’s utilization of disposal facilities owned by third parties, which could reduce the Company’s revenues and/or operating margins.

 

The Company has historically grown and intends to continue to grow through acquisitions, and the Company has tried and will continue to try to evaluate and limit environmental risks and liabilities presented by businesses to be acquired prior to the acquisition. It is possible that some liabilities, including ones that may exist only because of the past operations of an acquired business, may prove to be more difficult or costly to address than the Company anticipates. It is also possible that government officials responsible for enforcing environmental laws may believe an issue is more serious than the Company expects, or that the Company will fail to identify or fully appreciate an existing liability before the Company becomes legally responsible to address it. Some of the legal sanctions to which the Company could become subject could cause the Company to lose a needed permit, or prevent the Company from or delay the Company in obtaining or renewing permits to operate the Company’s facilities or harm the Company’s reputation.

 

The Company’s operating program depends on the Company’s ability to operate and expand the landfills the Company owns and leases and to develop new landfill sites. Localities where the Company operates generally seek to regulate some or all landfill operations, including siting and expansion of operations. The laws adopted by municipalities in which the Company’s landfills are located may limit or prohibit the expansion of the landfill as well as the amount of waste that the Company can accept at the landfill on a daily, quarterly or annual basis and any effort to acquire or expand landfills typically involves a significant amount of time and expense.  For example, expansion at the Company’s North County Environmental Services landfill, outside the original 51 acres, will be prohibited as a result of a recent decision by the New Hampshire Supreme Court unless the Company prevails in certain remanded issues under zoning laws or the Town revises its local ordinance prohibiting expansions.  In addition, operation of the Templeton landfill will require repeal of a town by-law prohibiting the acceptance of out-of-town waste. The Company may not be successful in obtaining new landfill sites or expanding the permitted capacity of any of the Company’s current landfills once their remaining disposal capacity has been consumed. If the Company is unable to develop additional disposal capacity, the Company’s ability to achieve economies from the internalization of the Company’s wastestream will be limited and the Company will be required to utilize the disposal facilities of the Company’s competitors.

 

In addition to the costs of complying with environmental laws and regulations, the Company incurs costs defending against

 

42



 

environmental litigation brought by governmental agencies and private parties. The Company is, and also may be in the future, a defendant in lawsuits brought by parties alleging environmental damage, personal injury, and/or property damage.

 

The Company’s operations would be adversely affected if the Company does not have access to sufficient capital.

 

The Company’s ability to remain competitive and sustain the Company’s operations depends in part on cash flow from operations and the Company’s access to capital. The Company currently funds the Company’s cash needs primarily through cash from operations and borrowings under the Company’s senior secured credit facility. However, the Company may require additional equity and/or debt financing for debt repayment and equity redemption obligations and to fund the Company’s growth and operations. In addition, if the Company undertakes more acquisitions or further expands the Company’s operations, the Company’s capital requirements may increase. The Company may not have access to the amount of capital that the Company requires from time to time, on favorable terms or at all.

 

The Company’s results of operations could continue to be affected by changing prices or market requirements for recyclable materials.

 

The Company’s results of operations have been and may continue to be affected by changing purchase or resale prices or market requirements for recyclable materials. The Company’s recycling business involves the purchase and sale of recyclable materials, some of which are priced on a commodity basis. The resale and purchase prices of, and market demand for, recyclable materials, particularly waste paper, plastic and ferrous and aluminum metals, can be volatile due to numerous factors beyond the Company’s control.  Although the Company seeks to limit the Company’s exposure to fluctuating commodity prices through the use of hedging agreements and long-term supply contracts with customers, these fluctuations have in the past contributed, and may continue to contribute, to significant variability in the Company’s period-to-period results of operations.

 

The Company’s business is geographically concentrated and is therefore subject to regional economic downturns.

 

The Company’s operations and customers are principally located in the eastern United States. Therefore, the Company’s business, financial condition and results of operations are susceptible to regional economic downturns and other regional factors, including state regulations and budget constraints and severe weather conditions.  In addition, as the Company expands in the Company’s existing markets, opportunities for growth within these regions will become more limited and the geographic concentration of the Company’s business will increase.

 

Maine Energy may be required to make a payment in connection with the payoff of certain obligations and limited partner loans earlier than the Company had anticipated and which may exceed the amount of the liability the Company recorded in connection with the KTI acquisition.

 

Under the terms of waste handling agreements among the Biddeford-Saco Waste Handling Committee, the cities of Biddeford and Saco, Maine, and the Company’s subsidiary Maine Energy, Maine Energy will be required, following the date on which the bonds that financed Maine Energy and certain limited partner loans to Maine Energy are paid in full, to pay a residual cancellation payment to the respective municipalities party to those agreements equal to a certain percentage of the fair market value of the equity of the partners in Maine Energy. In connection with the Company’s merger with KTI, the Company estimated the fair market value of Maine Energy as of the date the limited partner loans are anticipated to be paid in full, and recorded a liability equal to the applicable percentage of such amount.  The obligation has been estimated by management at $9.7 million. Management believes the possibility of material loss in excess of this amount is remote. The Company’s estimate of the fair market value of Maine Energy may not prove to be accurate, and in the event the Company has underestimated the value of Maine Energy, the Company could be required to recognize unanticipated charges, in which case the Company’s operating results could be harmed.

 

In connection with these waste handling agreements, the cities of Biddeford and Saco have lawsuits pending in the State of Maine seeking the residual cancellation payments and alleging, among other things, the Company’s breach of the waste handling agreement for the Company’s failure to pay the residual cancellation payments in connection with the KTI merger, failure to pay off limited partner loans in accordance with the terms of the agreement and processing amounts of waste above contractual limits without issuance of proper notice. The complaint seeks damages for breach of contract and a court order requiring the Company to provide an accounting of all relevant transactions since May 3, 1996. The Company is currently engaged in settlement negotiations with the cities of Biddeford and Saco, however, at this stage it is impossible to predict whether a settlement will be reached.  If the plaintiffs are successful in their claims against the Company and damages are

 

43



 

awarded, the Company’s operating income in the period in which such a claim is paid would be impacted.

 

The Company may not be able to effectively compete in the highly competitive solid waste services industry.

 

The solid waste services industry is highly competitive, has undergone a period of rapid consolidation and requires substantial labor and capital resources. Some of the markets in which the Company competes or will likely compete are served by one or more of the large national or multinational solid waste companies, as well as numerous regional and local solid waste companies. Intense competition exists not only to provide services to customers, but also to acquire other businesses within each market. Some of the Company’s competitors have significantly greater financial and other resources than the Company. 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 contract. These practices may either require the Company to reduce the pricing of the Company’s services or result in the Company’s loss of business.

 

As is generally the case in the industry, some municipal contracts are subject to periodic competitive bidding. The Company may not be the successful bidder to obtain or retain these contracts. If the Company is unable 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 the Company’s revenues would decrease and the Company’s operating results would be harmed.

 

In the Company’s solid waste disposal markets the Company also competes with operators of alternative disposal and recycling facilities and with counties, municipalities and solid waste districts that maintain their own waste collection, recycling and disposal operations. These entities may have financial advantages because user fees or similar charges, tax revenues and tax-exempt financing may be more available to them than to the Company.

 

The Company’s GreenFiber insulation manufacturing joint venture with Louisiana-Pacific Corporation competes with other parties, principally national manufacturers of fiberglass insulation, which have substantially greater resources than GreenFiber does, which they could use for product development, marketing or other purposes to the Company’s detriment.

 

The Company’s results of operations and financial condition may be negatively affected if the Company inadequately accrues for capping, closure and post-closure costs.

 

The Company has material financial obligations relating to capping, closure and post-closure costs of the Company’s existing landfills and will have material financial obligations with respect to any disposal facilities which the Company may own or operate in the future. Once the permitted capacity of a particular landfill is reached and additional capacity is not authorized, the landfill must be closed and capped, and post-closure maintenance started. The Company establishes accruals for the estimated costs associated with such capping, closure and post-closure obligations over the anticipated useful life of each landfill on a per ton basis. In addition to the landfills the Company currently operates, the Company owns six unlined landfills, which are not currently in operation. The Company has provided and will in the future provide accruals for financial obligations relating to capping, closure and post-closure costs of the Company’s owned or operated landfills, generally for a term of 30 years after final closure of a landfill. The Company’s financial obligations for capping, closure or post-closure costs could exceed the amount accrued and reserved or amounts otherwise receivable pursuant to trust funds established for this purpose. Such a circumstance could result in significant unanticipated charges.

 

Fluctuations in fuel costs could affect the Company’s operating expenses and results.

 

The price and supply of fuel is unpredictable and fluctuates based on events beyond the Company’s control, including among others, geopolitical developments, supply and demand for oil and gas, actions by OPEC and other oil and gas producers, war and unrest in oil producing countries and regional production patterns. Because fuel is needed to run the Company’s fleet of trucks, price escalations for fuel increase the Company’s operating expenses. In fiscal 2005, the Company used approximately 7.5 million gallons of diesel fuel in the Company’s solid waste operations. Although many of the Company’s customer contracts permit the Company to pass on some or all fuel increases to the Company’s customers, the Company may choose not to do so for competitive reasons.

 

The Company could be precluded from entering into contracts or obtaining permits if the Company is unable to obtain third party financial assurance to secure the Company’s contractual obligations.

 

Public solid waste collection, recycling and disposal contracts, obligations associated with landfill closure and the operation

 

44



 

and closure of waste-to-energy facilities may require performance or surety bonds, letters of credit or other means of financial assurance to secure the Company’s contractual performance. If the Company is unable to obtain the necessary financial assurance in sufficient amounts or at acceptable rates, the Company could be precluded from entering into additional municipal solid waste collection contracts or from obtaining or retaining landfill management contracts or 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.

 

The Company may be required to write-off capitalized charges or intangible assets in the future, which could harm the Company’s earnings.

 

Any write-off of capitalized costs or intangible assets reduces the Company’s earnings and, consequently, could affect the market price of the Company’s Class A common stock. In accordance with generally accepted accounting principles, the Company capitalizes certain expenditures and advances relating to the Company’s acquisitions, pending acquisitions, landfills and development projects. From time to time in future periods, the Company may be required to incur a charge against earnings in an amount equal to any unamortized capitalized expenditures and advances, net of any portion thereof that the Company estimates will be recoverable, through sale or otherwise, relating to (1) any operation that is permanently shut down or has not generated or is not expected to generate sufficient cash flow, (2) any pending acquisition that is not consummated, (3) any landfill or development project that is not expected to be successfully completed, and (4) any goodwill or other intangible assets that are determined to be impaired. The Company has incurred such charges in the past.

 

The Company’s revenues and the Company’s operating income experience seasonal fluctuations.

 

The Company’s transfer and disposal 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:

 

the volume of waste relating to construction and demolition activities decreases substantially during the winter months in the North Eastern United States; and

 

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 increased volume from the winter ski industry.

 

Since certain of our 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 typically result in increased operating costs.

 

The Company’s recycling business experiences increased volumes of newspaper in November and December due to increased newspaper advertising and retail activity during the holiday season. The Company’s cellulose insulation joint venture experiences lower sales in March and April due to lower retail activity.

 

Efforts by labor unions to organize the Company’s employees could divert management attention and increase the Company’s operating expenses.

 

Labor unions regularly make attempts to organize the Company’s employees, and these efforts will likely continue in the future. Certain groups of the Company’s employees have chosen to be represented by unions, and the Company has negotiated collective bargaining agreements with these groups. The negotiation of collective bargaining agreements could divert management attention and result in increased operating expenses and lower net income. If the Company is unable to negotiate acceptable collective bargaining agreements, the Company might have to wait through ‘‘cooling off’’ periods, which are often followed by union-initiated work stoppages, including strikes.  Depending on the type and duration of any labor disruptions, the Company’s revenues could decrease and the Company’s operating expenses could increase, which could adversely affect the Company’s financial condition, results of operations and cash flows. As of June 15, 2005, approximately 4.5% of the Company’s employees involved in collection, transfer, disposal, recycling or other operations, including the Company’s employees at the Company’s Maine Energy waste-to-energy facility, were represented by unions.

 

45



 

The Company’s Class B common stock has ten votes per share and is held exclusively by John W. Casella and Douglas R. Casella.

 

The holders of the Company’s Class B common stock are entitled to ten votes per share and the holders of the Company’s Class A common stock are entitled to one vote per share. At June 15, 2005, an aggregate of 988,200 shares of the Company’s Class B common stock, representing 9,882,000 votes, were outstanding, all of which were beneficially owned by John W. Casella, the Company’s Chairman and Chief Executive Officer, or by his brother, Douglas R. Casella, a member of the Company’s Board of Directors. Based on the number of shares of common stock and Series A redeemable convertible preferred stock outstanding on June 15, 2005, the shares of the Company’s Class A common stock and Class B common stock beneficially owned by John W. Casella and Douglas R. Casella represent approximately 29.1% of the aggregate voting power of the Company’s stockholders.  Consequently, John W. Casella and Douglas R. Casella are able to substantially influence all matters for stockholder consideration.

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

At April 30, 2005, our outstanding variable rate debt consisted of the $177.3 million senior secured revolving credit facility. If interest rates on this variable rate debt increased or decreased by 100 basis points, our annual interest expense would increase or decrease by approximately $1.7 million. The remainder of our debt is at fixed rates and not subject to interest rate risk.

 

On May 9, 2005, we entered into three separate interest rate swap agreements with three banks for a notional amount of $75.0 million.  The contracts are forward starting contracts that will effectively fix the interest index rate on the entire notional amount at 4.4% from May 4, 2006 through May 5, 2008.  These agreements will be specifically designated to interest payments under the revolving credit facility and will be accounted for as effective cash flow hedges pursuant to SFAS No. 133. 

 

We are subject to commodity price fluctuations related to the portion of our sales of recyclable commodities that are not under floor or flat pricing arrangements. As of April 30, 2005, to minimize our commodity exposure, we were party to thirty-three commodity hedging agreements. We do not use financial instruments for trading purposes and are not a party to any leveraged derivatives. If commodity prices were to change by 10%, the impact on our EBITDA and operating income is estimated at $2.4 million as of April 30, 2005, without considering our hedging agreements which are solely for OCC and ONP, but considering our revenue share contracts. The effect of the hedge position would reduce the impact by approximately $0.9 million.

 

46



 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Report of Independent Registered Public Accounting Firm

 

 

To the Board of Directors and Stockholders
of Casella Waste Systems, Inc.:

 

We have completed an integrated audit of Casella Waste Systems, Inc.’s 2005 consolidated financial statements and of its internal control over financial reporting as of April 30, 2005 and audits of its 2004 and 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Our opinions, based on our audits, are presented below.

 

Consolidated financial statements

 

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Casella Waste Systems, Inc. and its subsidiaries at April 30, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2005 in conformity with accounting principles generally accepted in the United States of America.  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 of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

As discussed in Note 3 to the consolidated financial statements, as of May 1, 2003, the Company changed its method of accounting for asset retirement obligations and reclassified its loss on extinguishment of debt.

 

Internal control over financial reporting

 

Also, in our opinion, management’s assessment, included in management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of April 30, 2005 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 30, 2005, based on criteria established in Internal Control – Integrated Framework issued by the COSO.  The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to

 

47



 

permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

PricewaterhouseCoopers LLP

Boston, Massachusetts

June 27, 2005

 

48



 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

April 30,

 

April 30,

 

ASSETS

 

2004

 

2005

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

8,007

 

$

8,578

 

Restricted cash

 

129

 

70

 

Accounts receivable - trade, net of allowance for doubtful accounts of $583 and $707

 

49,462

 

51,726

 

Notes receivable - officers/employees

 

89

 

88

 

Refundable income taxes

 

623

 

874

 

Prepaid expenses

 

4,164

 

4,371

 

Inventory

 

1,848

 

2,538

 

Deferred income taxes

 

4,328

 

 

Other current assets

 

854

 

1,138

 

Total current assets

 

69,504

 

69,383

 

 

 

 

 

 

 

Property, plant and equipment, net of accumulated depreciation and amortization of $268,019 and $324,903

 

372,038

 

412,753

 

Goodwill

 

157,230

 

157,492

 

Intangible assets, net

 

3,578

 

2,711

 

Restricted cash

 

12,290

 

12,124

 

Notes receivable - officers/employees

 

1,016

 

916

 

Deferred income taxes

 

286

 

3,155

 

Investments in unconsolidated entities

 

37,914

 

37,699

 

Net assets under contractual obligation

 

2,148

 

1,392

 

Other non-current assets

 

14,928

 

14,829

 

 

 

601,428

 

643,071

 

 

 

 

 

 

 

 

 

$

670,932

 

$

712,454

 

 

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

 

49



 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Continued)

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

 

 

 

April 30,

 

April 30,

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

2004

 

2005

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Current maturities of long-term debt

 

$

5,542

 

$

281

 

Current maturities of capital lease obligations

 

602

 

632

 

Accounts payable

 

40,034

 

46,107

 

Accrued payroll and related expenses

 

7,425

 

9,688

 

Accrued interest

 

6,024

 

4,818

 

Deferred income taxes

 

 

1,419

 

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

 

2,471

 

5,290

 

Other accrued liabilities

 

25,273

 

24,519

 

Total current liabilities

 

87,371

 

92,754

 

 

 

 

 

 

 

Long-term debt, less current maturities

 

349,163

 

378,436

 

Capital lease obligations, less current maturities

 

1,367

 

1,475

 

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

 

22,752

 

21,338

 

Other long-term liabilities

 

13,148

 

11,705

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

Series A redeemable, convertible preferred stock -

 

 

 

 

 

Authorized - 55,750 shares, issued and outstanding - 55,750 and 53,750 as of April 30, 2004 and 2005, respectively, liquidation preference of $1,000 per share plus accrued but unpaid dividends

 

67,076

 

67,964

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Class A common stock -

 

 

 

 

 

Authorized - 100,000,000 shares, $0.01 par value; issued and outstanding - 23,496,000 and 23,860,000 shares as of April 30, 2004 and 2005, respectively

 

235

 

239

 

Class B common stock -

 

 

 

 

 

Authorized - 1,000,000 shares, $0.01 par value, 10 votes per share, issued and outstanding - 988,000 shares

 

10

 

10

 

Accumulated other comprehensive income

 

408

 

767

 

Additional paid-in capital

 

272,993

 

274,088

 

Accumulated deficit

 

(143,591

)

(136,322

)

Total stockholders’ equity

 

130,055

 

138,782

 

 

 

 

 

 

 

 

 

$

670,932

 

$

712,454

 

 

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

 

50



 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

 

 

 

Fiscal Year Ended April 30,

 

 

 

2003

 

2004

 

2005

 

 

 

 

 

 

 

 

 

Revenues

 

$

419,518

 

$

437,961

 

$

481,964

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Cost of operations

 

277,579

 

285,828

 

310,921

 

General and administration

 

55,432

 

58,167

 

63,678

 

Depreciation and amortization

 

47,879

 

59,596

 

65,637

 

Impairment charge

 

4,864

 

1,663

 

 

Deferred costs

 

 

 

295

 

 

 

385,754

 

405,254

 

440,531

 

Operating income

 

33,764

 

32,707

 

41,433

 

Other expense/(income), net:

 

 

 

 

 

 

 

Interest income

 

(318

)

(251

)

(453

)

Interest expense

 

26,354

 

25,500

 

29,844

 

Income from equity method investment

 

(2,073

)

(2,261

)

(2,883

)

Loss on debt extinguishment

 

3,649

 

 

1,716

 

Minority interest

 

(152

)

 

 

Other expense/(income)

 

(1,599

)

5,949

 

273

 

Other expense, net

 

25,861

 

28,937

 

28,497

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes, discontinued operations and cumulative effect of change in accounting principle

 

7,903

 

3,770

 

12,936

 

Provision (benefit) for income taxes

 

3,825

 

(1,622

)

5,725

 

 

 

 

 

 

 

 

 

Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle

 

4,078

 

5,392

 

7,211

 

 

 

 

 

 

 

 

 

Discontinued Operations:

 

 

 

 

 

 

 

Income (loss) from discontinued operations (net of income tax (provision) benefit of $12, $2, and ($96))

 

(20

)

(10

)

140

 

Loss on disposal of discontinued operations (net of income tax provision of ($692))

 

 

 

(82

)

Reclassification from discontinued operations (net of income tax provision of ($34))

 

50

 

 

 

Cumulative effect of change in accounting principle (net of income tax (provision) benefit of $189 and ($1,856))

 

(63,916

)

2,723

 

 

Net income (loss)

 

(59,808

)

8,105

 

7,269

 

Preferred stock dividend

 

3,094

 

3,252

 

3,338

 

Net income (loss) available to common stockholders

 

$

(62,902

)

$

4,853

 

$

3,931

 

 

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

 

51



 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(in thousands, except for per share data)

 

 

 

Fiscal Year Ended April 30,

 

 

 

2003

 

2004

 

2005

 

Earnings Per Share:

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle available to common stockholders

 

$

0.04

 

$

0.09

 

$

0.15