Talk about... Deep down, we believe success—growing a great company—is never an accident. We know that for every accomplishment, for every step of progress, for every good result, there are deep underlying values that make our success possible. What we have accomplished and what we will accomplish is and will be the result of how we purposefully choose to do business. Behind all the numbers and above the bottom line is a company of people who love their jobs, and understand that what we do—and how we do it—matters a great deal to our customers, the communities we serve, and the people who invest in us. We’d like to talk about this year’s accomplishments, the progress we’re making and the results we’re delivering—and what long-term, underlying values made them possible—in the words of the people who made them possible. Let’s talk about a great company… Because we have so many different capabilities, often we’re better positioned than competitors... “A project or opportunity is more important than any of the individuals who are a part of it—that’s what teamwork means. In Ontario County, different parts of our business—recycling and solid waste—accomplished a near seamless undertaking. “Many different parts of this business, many different people, took it upon themselves to develop and innovate solutions. “Our approach is that a project is the outcome of many hands, and of a situation where one plus one is more than two. “Teamwork, for us, is also about long-haul relationships, as opposed to short-term responses. “We imagine that we are each, individually, going to be on a project 30 years from now. “This approach requires a higher level of innovation, of creativity and of connectivity to the customer. “Teamwork means being committed to what’s important to the customer—listening to what their real problems are—so solutions reflect a customized picture of what they need, not what we need. Because we have so many different capabilities to manage a community’s waste stream, often we’re better positioned than competitors with bigger balance sheets. “Our customers believe we understand who they are, and that we are passionate about making a difference, rather than just writing a check. “Teamwork—our own and our commitment to communities—is a powerful driver in the creation of value.” In October of 2003 the Ontario County, New York Board of Supervisors selected Casella Waste Systems to be the county’s twenty-five year partner to operate and develop the county’s 2,000 ton-per-day landfill located in Seneca, New York. In December 2003, the company finalized an agreement with the county to lease the facility and assume all operating, permitting and construction responsibilities. These and other strategic disposal capacity additions were made possible through the high level of teamwork and cooperation demonstrated by those involved in the planning and negotiations. Tim Cretney, Western Region Vice-President; Jim Bohlig, President & Chief Operating Officer; Sean Duffy, Region Vice-President, FCR; and Dick Kelley, Ontario Landfill Manager Tons 70,000 60,000 50,000 40,000 30,000 20,000 10,000 CWST Total Disposal Capacity (in thousands) 65,644 26,136 29,627 2002 2003 2004 C A S E L L A W A S T E S Y S T E M S We’re always getting better... “Service is like a habit that gets stronger by paying attention to everything you do. You have to think about what’s going on, not just go through the motions. “After 28 years with the company, there wasn’t much I thought I would get out of our monthly meetings, but I guess you never know it all. Just being there, helps me keep my head on my business and, I think, provides some leadership to the younger drivers who are just getting started. “The route audit program has also helped. They can see things we don’t and help us get the job done right. Even if it’s just a small thing. Anything that can give our customers better service is the right thing to do. “Being safe is also part of customer service. I check everything before I go out—in the garage, on the trucks. You never know where something can happen. Being ready for what you don’t expect is the best way to prevent accidents. You have to think before you act. “Even though I’ve driven for a long time, I think I can still get better at it. Of course, improvements in equipment over the last 20 years have sure helped. But I think the biggest improvement is the effort to make service a habit, to make it like it’s something you just do. “I’m proud knowing that the better I am on the job, the bigger the impact on how well the company does, and that improvements we make in our work really make a difference.” Service isn’t just about the way we approach our customers, but how we interact with all of the people, companies, and communities we serve. Collectively and individually we put the needs of those around us—co-workers as well as shareholders—ahead of our own. Our success is rooted in the idea, “never walk past a problem”—in the truck, in the yard, when we think creatively about a business opportunity. Ken Hier, 28-year Casella employee and 1996 National Driver of the Year C A S E L L A W A S T E S Y S T E M S The deepest levels of our organization know what it takes to be a great company. We just have to ask… “Continuous improvement is not just a process…it’s a mindset. In fiscal 2004, our company-wide “We are constantly seeking ways to improve every facet of our business to the benefit of our customers, employees, and shareholders. “That means we must continue to explore ways to grow the skills and capabilities of everyone in the company because, at the end of the day, it will be their passion to be better that drives improvement at every level of our organization. “We’ve established key performance indicators that help us benchmark and measure our performance in every single aspect of our operations. “Creating corrective action teams lets us use key data to seek out and improve all areas of our performance…it puts real operational muscle into the idea of continuous improvement. “Working together to improve our understanding, to solve problems, has real world consequences respective of service to all of our customers—shareholders, employees, management, residential, commercial and municipal. “Continuous improvement—done every day—is key to growing and protecting value over the long run.” employee turnover decreased 22.7% over the previous year. Taken together with our 25.2% fiscal 2003 reduction in turnover, that’s a nearly 50% improvement. Our emphasis on a safe workplace has helped reduce our total worker’s compensation incidents by 10%. And it didn’t just happen. Safety, as a company focus, combined with efforts to continuously improve hiring practices at every level is helping us find and keep, a more stable, higher performing workforce. Charlie Leonard, Senior Vice-President of Solid Waste Operations C A S E L L A W A S T E S Y S T E M S It’s an asset... “No one likes problems but they happen and it’s how you respond to them that tells people what you’re made of. “We could just wait for the Department of Environmental Protection (Maine) to notice things on their regular inspection. Instead, we choose to do the right thing (to my mind, the only thing) and let them know when something happens as soon as we can. “I’ve had a terrific relationship with the DEP for the last 17 years because they know, if I say I’m going to do something, I do it—that trust is very instrumental in helping us respond quickly when problems come up and get to work immediately on correcting them. “So much of what we do, at the division level and as a company, is really based on the integrity we have. It would be very difficult—no, impossible—for us to do business anywhere without it. “It’s an asset, like any piece of equipment or building we own or operate. It’s just like money—you can earn it…or you can spend it. “My relationship with the DEP is based on my integrity and I’m not going to do anything to jeopardize it. Without it, we may as well be out of business.” In the fall of 2003 at 1 A.M., the improbable happened—a compression fitting on one of the leachate pumps at the Pine Tree landfill failed. Led by Marty Drew, the landfill’s crew acted quickly—first by reporting the spill to the Maine Department of Environmental Protection. Once the spill was remedied, a thorough examination of the landfill’s alarm resulted in the installation of a new state-of-the-art system to enhance problem detection. As added insurance, the pump house compression fittings were modified. Marty Drew, Manager, Pine Tree Landfill C A S E L L A W A S T E S Y S T E M S A serious responsibility, a priority... “The resources we’re entrusted with give us great freedom to grow our company. “Making sure we manage those resources within a framework of accountability and clear guidelines is a serious responsibility, a priority. “For example, the day-to-day cash management—the liquidity—of the company has been improved by putting in place a system that maximizes cash receipts and minimizes interest expense. “This effort to improve cash management has not just been a home office initiative. It has been supported and encouraged at the most fundamental levels of the company to ensure it’s sustainable at the field level where the primary responsibility is the timely collection of receipts. “Managing capital expenditures through shrewd purchasing habits and aggressive cash management has enabled the company to respond quickly and decisively to opportunities (facilities and other assets), relieving the burden from our revolving credit facility for this important activity. “The bottom line is, a healthier financial position isn’t the result of luck, it’s the product of thoughtful planning, keen management, clear leadership, and the willingness to create and live by a framework of accountability. “Our actions are responsibility...made real.” Over 90-days accounts receivables as a percentage of total receivables have improved from nearly 12% to under 2% in three years—the lowest in company history. As a result of this and other responsible financial management efforts, we have become a more flexible company, more capable of leveraging advantages in the marketplace, and more responsible to all stakeholders— investors, customers, communities, and employees. Richard Norris, Senior Vice-President & Chief Financial Officer Over 90 Days Receivables (as a percent of total receivables) 11.8% 2.5% 2.9% 1.2% 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 C A S E L L A W A S T E S Y S T E M S Did we do what we said we would do? “All enterprises rely heavily on trust, but this business, by its very nature and at every single level, seems to separate the truly great from the merely good through the expectation and exercise of trust. “Our ability to deliver results and create value hinges on how well we deliver on these expectations. It can be both sobering and highly motivating. “Our customers and the communities we serve trust us with the stewardship of uniquely public resources—land, air, water, and renewable and non-renewable materials. “Our employees trust us to make smart, sustainable decisions that protect and advance the health of our enterprise and, by extension, their families’ livelihood and opportunities. “Our shareholders trust us with their money—not merely to bury it safely in mason jars in the back yard, but to do something with it. Deploy it, leverage it, grow it. “Investing in someone or something is one of the most unambiguous expressions of trust I know. And a lot of different kinds of people and communities have invested something—not just money—in this company. “Trust is built in many ways, but for us it comes down to a simple measurement—did we do what we said we would do?” John W. Casella, Chairman & CEO C A S E L L A W A S T E S Y S T E M S shareholders’ To our fellow shareholders: As you may know, in past years in this very space we have talked about a very important question for us as a company, “Are we creating long-term value?” This deep enduring mission has been central to the way we do business—from the strategies we decide to pursue, the markets we choose to serve, to the configuration of services we offer our customers and communities. Crucial to our ability to create value is another important question, one that’s an equally as powerful, uncompromising measuring stick. “Did we do what we said we would do?” By the purest financial performance standards we laid out for you last year, the answer to that question is, “yes.” But keeping our word—doing what we said we would do—requires us to adhere to a number of other important performance standards as well, ones we feel equally confident are key aspects of our everyday quest to grow a great company and, by extension, create long-term value. Each of these standards, or values, is manifest in everything we do, and in particular, in nearly every success we’ve had over the past year. They’re also an important part of the foundation we’ve laid that will allow us to execute on future opportunities. Increasingly, we’re seeing our ability to bring the expertise and capabilities of various parts of our business together in creative ways as delivering a tangible, significant competitive advantage as we seek to add disposal capacity in communities across our region. Our success in Ontario County, New York was the direct result of applying this strategic approach. It has played a role as well in other communities, as we doubled the total disposal capacity company-wide over the last twelve to eighteen months. That’s teamwork. Similarly, we view our success as rooted in our decades-old commitment to “never walking past a problem”—in the maintenance shop, on a route, on the phone with a customer or even thinking creatively about a business opportunity. In short, we have an internal fire to solve problems. We back that up with extensive, ongoing, and measurable customer service training company-wide. That’s real service, and that’s how you grow a business. We’re also growing through extensive investment in continuous improvement—all aimed at bottom line impact—from who we bring into the organization, to safety and process improvements, to measuring the key indicators of outstanding solid waste service performance. C A S E L L A W A S T E S Y S T E M S Another example of continuous improvement in action is our strengthened management team in eastern Massachusetts. All the ways we’ve talked about our business in this report have been and are being applied every day to the goal of creating value—through the exercise of our integrity, responsibility, and trust. In the coming year, the way we go about creating that value will remain consistent with the long-term approach we’ve laid out for you over the last year or two and is a crucial part of our three-to-five year strategic plan. We will continue to build a collection of assets in our core markets that make us the premier integrated waste services solution for a broad range of customers. It is our top priority and its focus is through the development of municipal partnerships, a particular Casella Waste Systems strength. We will also continue to leverage our dominant waste services infrastructure, to build a greater concentration of our core franchise and to pursue growth opportunities. Within this context we always strive to deliver the stability and predictability that investors value. Once again, the effort and dedication of each of our more than 2,500 employees deserves special mention. They do fantastic work and are loyal beyond what most companies could reasonably hope for. I thank them for their hard work; I hope you do, too. Our goal is to continue to invest in people and provide them with the tools and the freedom to be great at work...and at life. Someone I admire once said to me, “The best way to make money in business is to build the people around you so that together you can build your business.” I would only add that it is also the best way to get up each morning and go to work confident you can keep your promises, and create and leave something of value to others. Thank you for your support. Sincerely, John W. Casella Chairman & Chief Executive Officer August 6, 2004 four 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 Following our acquisition of KTI in December 1999 through 2002, we focused on the integration of KTI and the divestiture of non- forth under Part I – Business - “Executive Officers and Other Key Employees of the Company” and with respect to certain equity core KTI assets, which included tire recycling assets, commercial recycling facilities, mulch recycling, certain waste-to-energy facilities compensation plan information which is set forth under Part III-”Equity Compensation Plan Information”) have been omitted from this in Florida and Virginia, a waste-to-oil remediation facility and a broker and a processor of high density polyethylene. We also sold our Annual Report on Form 10-K, since the Company expects to file with the Securities and Exchange Commission, not later than 120 days majority interest in Penobscot Energy Recovery Company, LP (“PERC”), which we acquired as part of KTI. As part of this divestiture 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 program, in the fourth quarter of fiscal year 2001, we incurred non-recurring charges of $111.7 million, of which $90.6 million were non- report, which will appear in the definitive proxy statement, is incorporated by reference into this Annual Report on Form 10-K. cash, relating to the impairment of goodwill from the acquisition of KTI, the closure of certain facilities, severance payments to 2 0 0 4 F O R M 1 0 K onepart 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 14, 2004, 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, 39 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. From May 1, 1994 through December 30, 1999, we acquired 161 solid waste businesses, including five Subtitle D landfills. 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. KTI Acquisition and Restructuring—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. KTI assets which we considered core to our operations included the following: • A majority interest in Maine Energy Recovery Company, Limited Partnership, a waste-to-energy facility which provided us with important additional disposal capacity in our Eastern region and which generates electric power for sale. We subsequently acquired the remaining ownership interest in this facility; • FCR, which consisted of 18 recycling facilities (now 23) that process and market recyclable materials under long-term contracts with municipalities and commercial customers. FCR also included a brokerage business; • Transfer and collection operations which were “tuck-ins” to our existing Maine operations; and • Cellulose insulation plants which manufacture cellulose insulation for use in residential dwellings and manufactured housing and which consume significant fiber produced from the residential recycling business of FCR. terminated employees and losses on sale of non-core assets. We have completed the divestiture program for aggregate consideration of $107.6 million, including cash proceeds of $61.7 million which were used to reduce our indebtedness. In September 2002, we transferred our export brokerage operations to former employees who had been responsible for managing that business. 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. In June 2003, we transferred our domestic brokerage operations and a commercial recycling business to employees who managed those businesses, in exchange for notes receivable amounting up to $6.9 million. SOLID WASTE OPERATIONS Our solid waste operations comprise a full range of non-hazardous solid waste services, including collection operations, 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 20 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 and 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. 2 C A S E L L A W A S T E S Y S T E M S 3 Landfills—The following table (in thousands) reflects landfill capacity and airspace changes, as measured in tons, as of April 30, 2002, Clinton County—The Clinton County landfill, located in Schuyler Falls, New York, is leased from Clinton County pursuant to a 25-year 2003 and 2004, for landfills we operated during the years then ended: 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, April 30, 2002 April 30, 2003 April 30, 2004 construction and demolition debris, and special waste which is approved by regulatory agencies. The facility is currently in the final 2 0 0 4 F O R M 1 0 K Estimated Estimated Remaining Additional Permitted Permittable Capacity in Tons (1) Capacity Estimated Total (1)(3) Capacity in Tons Estimated Estimated Remaining Additional Permitted Permittable Capacity in Tons (1) in Tons Estimated Estimated Remaining Additional Permitted Permittable Capacity Estimated Capacity in Tons (1)(2) Total (1)(3) Capacity Capacity Estimated in Tons Total (1)(2)(3) Capacity Balance, beginning of period Acquisitions New expansions pursued (4) Permits granted Airspace consumed Changes in engineering estimates 6,996 — — 3,334 (1,232) 2,968 — 17,201 (2,962) — 9,964 — 17,201 372 (1,232) 8,951 607 (183) — (1,373) 17,185 422 5,663 — — 26,136 1,029 5,480 — (1,373) 7,313 9,609 — 97 (1,840) 22,314 28,353 225 — — 29,627 37,962 225 97 (1,840) (147) (22) (169) (689) (956) (1,645) 128 (555) (427) Balance, end of period 8,951 17,185 26,136 7,313 22,314 29,627 15,307 50,337 65,644 (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 limit on capacity. (2) Includes capacity of 280,000 tons at our NCES landfill which we are currently utilizing and an additional 225,000 tons of capacity within the original 51 acres which is deemed permittable. Our right to utilize approximately 1.1 million tons of additional capacity outside of the original 51 acres was recently limited by the New Hampshire Supreme Court. See “Legal Proceedings.” (3) 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. (4) Does not include certain expansion capacity which we are seeking at our NCES and Hyland landfills. 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. We have also omitted an additional approximately 5.0 million tons of capacity having an estimated useful life of 22.5 years at our Hyland landfill which is subject to a local permissive expansion referendum targeted for calendar year 2004 and our receipt of necessary permits. 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 consistently 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 through June 2005. In addition, we have received state approval for an additional use of approximately 1.1 million tons, outside the original 51 acres, which has been limited by a ruling of the New Hampshire Supreme Court. See “Legal Proceedings.” 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 all 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 2006. We are currently in the process of applying for approximately 5.1 million tons of additional capacity which, at the current usage rate, would add an additional 20 years of capacity. We expect to receive the permit for this additional capacity in fiscal year 2005. 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 and expect to receive the necessary approvals during fiscal year 2005. 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 and 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. In 2002 we received final approval for approximately 3.0 million cubic yards of additional capacity and we are currently developing our next expansion plan. 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 400 tons per day of municipal solid waste with an annual permitted capacity of 88,400 tons of municipal solid waste. The Hardwick landfill is located on an 18-acre property. In addition, we have an option to purchase approximately 160 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 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 $12.5 million and letters of credit in the respective amounts of $12.5 million and $1.0 million, which became payable 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 Wood Recycling, Inc. Wood Recycling 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 12 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 4.6 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. The Massachusetts Department of Environmental Protection (“MADEP”) and the Massachusetts Office of the Attorney General (“MAAGO”) alleged that, under its prior owners, Wood Recycling violated certain solid and hazardous waste, air quality control, industrial wastewater and wetlands statutes and regulations at the recycling facility and landfill. We reached an agreement with MADEP on January 29, 2004, and an agreement with the MAAGO on May 6, 2004. The MAAGO settlement provides for the payment of a penalty of $575,000 ($150,000 of which was conditionally suspended) and a payment of an additional $400,000 to improve the damaged wetlands or to purchase other conservation land. These payments were contemplated by us in our determination of the purchase price for Wood Recycling. The operations of the recycling facility were recommenced on January 29, 2004 as a result of the settlement with MADEP. See “Regulation.” 4 C A S E L L A W A S T E S Y S T E M S 5 2 0 0 4 F O R M 1 0 K Maine Energy Waste-to-Energy Facility—We own a waste-to-energy facility, Maine Energy Recovery Company, Limited Partnership, OPERATING SEGMENTS We manage our solid waste operations on a geographic basis through three regions, which we have designated as the Central, Eastern (“Maine Energy”), which generates electricity by processing non-hazardous solid waste. This waste-to-energy facility provides us with and Western Regions and which each comprise a full range of solid waste services, and FCR, which comprises our larger-scale important additional disposal capacity and generates power for sale. The facility receives solid waste from municipalities under non-solid waste recycling and our brokerage operations. long-term waste handling agreements and also receives raw materials from commercial and private waste haulers and municipalities Within each geographic region, we organize our solid waste services around smaller areas that we refer to as “wastesheds.” with short-term contracts, as well as from our collection operations. Maine Energy is contractually required to sell all of the electricity A wasteshed is an area that comprises the complete cycle of activities in the solid waste services process, from collection to transfer generated at its facility to Central Maine Power, an electric utility, and guarantees 100% of its electric generating capacity to CL Power operations and recycling to disposal in either landfills or waste-to-energy facilities, some of which may be owned and operated by third Sales One, LLC. Maine Energy is part of the Eastern region. Our use of the facility is subject to permit conditions, some of which are parties. We typically operate several divisions within each wasteshed, each of which provides a particular service, such as collection, opposed by local authorities. See “Regulation” and “Legal Proceedings.” 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. Templeton—On June 5, 2003, we entered into a construction, operation and management agreement with the Town of Templeton, Through its 23 material recycling facilities, FCR services 28 anchor contracts, which are long-term commitments of three years or Massachusetts for the operation of the Templeton sanitary landfill. Construction and operation of the landfill is subject to permitting greater to guarantee the delivery of all recycled residential recyclables to FCR. These contracts may include a minimum volume requirements. On February 19, 2004, voters at a special town meeting approved a town by-law banning out-of-town waste at the landfill guarantee committed by the municipality. We also have service agreements with individual towns and cities and commercial customers, and related by-laws. Accordingly, we are seeking to discuss the agreement with officials from the town to determine the appropriate including small solid waste companies and major competitors that do not have processing capacity within a specific geographic region. next steps. The landfill permitting and construction process will be delayed as a result of this vote. The 23 FCR facilities process recyclables collected from approximately 2.6 million households, representing a population of Hyland—The Hyland landfill located in Angelica, New York, serves certain Western region wastesheds located throughout western New The following table provides information about each operating region and FCR (as of June 14, 2004, except revenue information). approximately 8.1 million. 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. As a result, the above table reflects only that capacity which has been pre-agreed with the Town of Angelica as being permittable. We expect to seek a townwide referendum during calendar year 2004 local elections. If successful, we expect to seek and receive a permit for an additional 38 acres, representing in excess of 5.0 million tons of additional capacity. Ontario—We have completed negotiations and 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. The landfill has a permitted capacity of 2.9 million tons and an additional 3.9 million tons expected to be approved in fiscal year 2005. Additional potential expansions include 8.7 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 3.0 million tons, based on existing regulatory requirements and local community support. We expect to apply for this Central Region Eastern Region Western Region FCR Recycling Fiscal year 2004 revenues (in millions) Solid waste collection operations Transfer stations Recycling facilities Subtitle D landfills (1) $100.8 12 14 5 Bethlehem, NH Coventry, VT Schuyler Falls, NY $167.4 12 9 9 Hampden, ME Hardwick, MA West Old Town, ME $77.7 13 10 2 Angelica, NY Ontario, NY $77.1 — 1 23 — Other disposal facilities (2) — Southbridge, MA Biddeford, ME Campbell, NY — (1) In addition, in June 2003 we signed a 20-year construction, operation and management agreement for a Subtitle D landfill located in Templeton, Massachusetts, which is not yet permitted or operating. 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. The landfill permitting and construction process will be delayed as a result of this vote. (2) 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. We also have rights to the remaining air space capacity at a residual landfill and a construction and demolition landfill located in Brockton, Massachusetts and Cheektowaga, New York, respectively, totaling approximately 293,000 tons as of April 30, 2004. The Brockton landfill is expected to be closed by December 31, 2004. The Cheektowaga landfill is expected to be closed expansion during the next 18 months and do not expect substantial opposition from the town. We have entered into a revised in fiscal 2005. 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. Central Region—The Central Region consists of wastesheds located in Vermont, northwestern New Hampshire and eastern upstate We also have rights to remaining capacity at a residual landfill and a construction and demolition landfill in Brockton, Massachusetts New York. The portion of upstate New York served by the Central Region includes Clinton (operation of the Clinton County landfill), and Cheektowaga, New York, respectively, totaling approximately 293,000 tons as of April 30, 2004. The Brockton landfill is expected Franklin, Essex, Warren, Washington, Saratoga, Rennselaer and Albany counties. Our Waste USA landfill in Coventry, Vermont is one to be closed by December 31, 2004. The Cheektowaga landfill is expected to be closed in fiscal 2005. In addition, we own and/or of only two permitted Subtitle D landfills in Vermont, and our NCES landfill in Bethlehem, New Hampshire is one of only six permitted operated six unlined landfills which are not currently in operation. All of these landfills have been closed and capped to applicable Subtitle D landfills in New Hampshire. In the Central Region, there are a total of 13 permitted Subtitle D landfills. environmental regulatory standards by us. 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 NY) 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. 6 C A S E L L A W A S T E S Y S T E M S 7 2 0 0 4 F O R M 1 0 K Eastern Region—The Eastern Region consists of wastesheds located in Maine, southeastern New Hampshire and eastern FCR derives a significant portion of its revenues from the sale of recyclable materials. The purchase and sale prices of recyclable Massachusetts. These wastesheds generally have been affected by the regional constraints on disposal capacity imposed by the public materials, particularly newspaper, corrugated containers, plastics, ferrous and aluminum, can fluctuate based upon market conditions. policies of New Hampshire, Maine and Massachusetts which have, over the past 10 years, either limited new landfill development or We use long-term supply contracts with customers with floor price arrangements to reduce the commodity risk for certain recyclables, precluded development of additional capacity from existing landfills. Consequently, the Eastern Region relies more heavily on nonlandfill particularly newspaper, cardboard, plastics, aluminum and metals. Under such contracts, we obtain a guaranteed minimum price for the waste-to-energy disposal capacity than our other regions. Maine Energy is one of nine waste-to-energy facilities in the Eastern Region. recyclable materials along with a commitment to receive additional amounts if the current market price rises above the floor price. The We entered the State of Maine in 1996 with our purchase of the assets comprising New England Waste Services of ME., Inc. in contracts are generally with large domestic companies that use the recyclable materials in their manufacturing process, such as paper, Hampden, Maine, which included the Pine Tree landfill. Our acquisition of KTI in 1999 significantly improved our disposal capacity in this packaging and consumer goods companies. In fiscal year 2004, 48% of the revenues from the sale of recyclable materials of the region by obtaining the Maine Energy waste-to-energy facility and provided an alternative internalization option for our solid waste residential recycling segment were derived from sales under long-term contracts with floor prices. We also hedge against fluctuations assets in eastern Massachusetts. In 2004, we obtained the right to operate the West Old Town landfill under a 30- year agreement with in the commodity prices of recycled paper and corrugated containers in order to mitigate the variability in cash flows and earnings the State of Maine. Our major competitor in the State of Maine is Waste Management, Inc., as well as several smaller local competitors. generated from the sales of recycled materials at floating prices. As of April 30, 2004, we were party to twenty-two commodity hedge We entered eastern Massachusetts in fiscal year 2000 with the acquisition of assets that were divested by Allied Waste Industries, contracts. These contracts expire between August 2005 and October 2006. Inc. under court order following its acquisition of Browning Ferris Industries, Inc., and through the acquisition of smaller independent As part of our acquisition of KTI, we had acquired brokerage businesses which were focused on domestic and export markets. operators. In this region, we rely to a large extent on third party disposal capacity. We believe we have a greater opportunity to increase In September 2002, we transferred our export brokerage operations to employees who had been responsible for managing that business. our internalization rates and operating efficiencies in the Eastern Region through our ownership of the Hardwich landfill, which is Effective April 1, 2004, we completed the sale of export brokerage operations for total consideration of approximately $5.0 million. The currently permitted to accept 400 tons per day of municipal solid waste, and through the portion of the Southbridge landfill which is gain on the sale amounted to approximately $1.1 million. In June 2003, we transferred our domestic brokerage operations and a annually permitted to accept 156,000 tons of residual material and 24,960 tons of municipal solid waste. Our primary competitors in commercial recycling business to employees who managed those businesses. The brokerage business derived all of its revenues from the eastern Massachusetts are Waste Management, Inc., Allied Waste Industries, Inc., and smaller independent operators. sale of recyclable materials, predominately old newspaper, old corrugated cardboard, mixed paper and office paper. Western Region—The Western Region consists of wastesheds in upstate New York (which includes Ithaca, Elmira, Oneonta, Lowville, to broker the transaction, thereby minimizing pricing risk, and were not permitted to enter into speculative trading of commodities. The brokers in the brokerage operation were required to identify both the buyer and the seller of the recyclable materials before committing Potsdam, Geneva, Auburn, Buffalo, Jamestown and Olean) and northern Pennsylvania (Wellsboro, PA). 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, Albany and Buffalo. 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., Republic Services Group, 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 23 material recycling facilities that process and then market recyclable materials that municipalities and commercial customers deliver to it under long-term contracts. Ten of FCR’s facilities are leased, six are owned and seven are under operating contracts. In fiscal year 2004, FCR processed and marketed approximately 1,106,000 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; New Hampshire; 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 a term of five to ten years and expire at various times between 2004 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. 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 one of the largest manufacturers 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 67% 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 $110.0 million for the twelve months ended April 30, 2004. For the same period, we recognized equity income from GreenFiber of $2.3 million. 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. Some of 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., Allied Waste Industries, Inc. and Republic Services, 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. 8 C A S E L L A W A S T E S Y S T E M S 9 2 0 0 4 F O R M 1 0 K MARKETING AND SALES We have a coordinated marketing and sales strategy, which is formulated at the corporate level and implemented at the divisional level. Maine Energy is contractually required to sell all of the electricity generated at its facilities to Central Maine Power, an electric utility, We market our services locally through division managers and direct sales representatives who focus on commercial, industrial, pursuant to a contract that expires in 2012, and guarantees 100% of its electricity generating capacity to CL Power Sales One, LLC, municipal and residential customers. We also obtain new customers from referral sources, our general reputation and local market print pursuant to a contract that expires in 2007. advertising. Leads are also developed from new building permits, business licenses and other public records. Additionally, each division FCR provides recycling services to municipalities, commercial haulers and commercial waste generators within the geographic generally advertises in the yellow pages and other local business print media that cover its service area. proximity of the processing facilities. We also acted as a broker of recyclable materials, principally to paper and box board manufacturers Maintenance of a local presence and identity is an important aspect of our marketing plan, and many of our managers are involved in the United States, Canada, the Pacific Rim, Europe, South America and Asia, until these businesses were sold as described above. in local governmental, civic and business organizations. Our name and logo, or, where appropriate, that of our divisional operations, are Our cellulose insulation joint venture, GreenFiber, sells to contractors, manufactured home builders and retailers. 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 services and customer satisfaction and retention, and believe that our focus on quality service will help retain existing and attract additional customers. EMPLOYEES As of June 14, 2004, we employed approximately 2,600 persons, including approximately 500 professionals or managers, sales, RAW MATERIALS Maine Energy received approximately 26% of its solid waste in fiscal year 2004 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 2004, FCR received approximately 52% 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. clerical, data processing or other administrative employees and approximately 2,100 employees involved in collection, transfer, The primary raw material for our insulation joint venture is newspaper. In fiscal year 2004, GreenFiber received approximately 17% disposal, recycling or other operations. Approximately 138 of our employees are covered by collective bargaining agreements. We of the newspaper used by it from FCR. It purchased the remaining newspaper from municipalities, commercial haulers and paper believe relations with our employees to be satisfactory. brokers. The chemicals used to make the newspaper fire retardant are purchased from industrial chemical manufacturers located in the 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 SEASONALITY Our transfer and disposal revenues have historically been lower during the months of November through March. This seasonality compliance and operating procedures. We also maintain a worker safety program, which encourages safe practices in the workplace. reflects the lower volume of waste during the late fall, winter and early spring months primarily because: United States and South America. 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 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 • 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. conditioned upon the availability of adequate insurance coverage. Since certain of our operating and fixed costs remain constant throughout the fiscal year, operating income is therefore impacted Effective July 1, 1999, we established a captive insurance company, Casella Insurance Company, through which we are self-insured by a similar seasonality. In addition, particularly harsh weather conditions typically result in increased operating costs. for worker’s compensation and, effective May 1, 2000, automobile coverage. Our maximum exposure in fiscal 2004 under the worker’s The recycling segment experiences increased volumes of newspaper in November and December due to increased newspaper compensation plan is $500,000 per individual event with a $1,000,000 aggregate limit, after which reinsurance takes effect. Our advertising and retail activity during the holiday season. The insulation business experiences lower sales in November and December maximum exposure under the automobile plan is $500,000 per individual event with a $3,000,000 aggregate limit, after which because of lower production of manufactured housing due to holiday plant shutdowns. 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 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 Annual Report on Form 10-K, we believe that we are currently in substantial compliance with applicable federal, state and local environmental laws, collection services are performed under one-to-three-year service agreements, and fees are determined by such factors as collection permits, orders and regulations. We do not currently anticipate any material environmental costs to bring our operations into compliance, frequency, type of equipment and containers furnished, the type, volume and weight of the solid waste collected, the distance to the although there can be no assurance in this regard in the future. We expect that our operations in the solid waste services industry will disposal or processing facility and the cost of disposal or processing. Our residential collection and disposal services are performed be subject to continued and increased regulation, legislation and regulatory enforcement actions. We attempt to anticipate future legal either on a subscription basis (i.e., with no underlying contract) with individuals, or through contracts with municipalities, homeowners and regulatory requirements and to carry out plans intended to keep our operations in compliance with those requirements. associations, apartment owners or mobile home park operators. 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: 10 C A S E L L A W A S T E S Y S T E M S 11 2 0 0 4 F O R M 1 0 K The Resource Conservation and Recovery Act of 1976, as amended (“RCRA”) require us to apply for and obtain a discharge permit, conduct sampling and monitoring and, under certain circumstances, reduce the RCRA regulates the generation, treatment, storage, handling, transportation and disposal of solid waste and requires states to develop quantity of pollutants in such discharge. A permit also may be required if that run-off, leachate, or process or cooling water is programs to ensure the safe disposal of solid waste. RCRA divides solid waste into two groups, hazardous and non-hazardous. Wastes discharged to a treatment facility that is owned by a local municipality. Numerous states have enacted regulations, which are are generally classified as hazardous if they (1) either (a) are specifically included on a list of hazardous wastes, or (b) exhibit certain equivalent to those issued under the Clean Water Act, but which also regulate the discharge of pollutants to groundwater. Finally, characteristics defined as hazardous, and (2) are not specifically designated as non-hazardous. Wastes classified as hazardous under virtually all solid waste management facilities must comply with the EPA’s storm water regulations, which regulate the discharge of RCRA are subject to more extensive regulation than wastes classified as non-hazardous, and businesses that deal with hazardous impacted storm water to surface waters. 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 The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”) such as petroleum contaminated soils, asbestos, foundry sand, shredder fluff and most non-hazardous industrial waste products. CERCLA established a regulatory and remedial program intended to provide for the investigation and remediation of facilities where or The EPA regulations issued under Subtitle C of RCRA impose a comprehensive “cradle to grave” system for tracking the from which a release of any hazardous substance into the environment has occurred or is threatened. CERCLA has been interpreted generation, transportation, treatment, storage and disposal of hazardous wastes. Subtitle C regulations impose obligations on to impose retroactive strict, and under certain circumstances, joint and several, liability for investigation and cleanup of facilities on generators, transporters and disposers of hazardous wastes, and require permits that are costly to obtain and maintain for sites where current owners and operators of the site, former owners and operators of the site at the time of the disposal of the hazardous those businesses treat, store or dispose of such material. Subtitle C requirements include detailed operating, inspection, training and substances, as well as the generators of the hazardous substances and certain transporters of the hazardous substances. In addition, emergency preparedness and response standards, as well as requirements for manifesting, record keeping and reporting, corrective CERCLA imposes liability for the costs of evaluating and addressing damage to natural resources. The costs of CERCLA investigation action, facility closure, post-closure and financial responsibility. Most states have promulgated regulations modeled on some or all of and cleanup can be very substantial. Liability under CERCLA does not depend upon the existence or disposal of “hazardous waste” the Subtitle C provisions issued by the EPA, and in many instances the EPA has delegated to those states the principal role in regulating 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 businesses which are subject to those requirements. Some state regulations impose different, additional obligations. which can be found in household waste. In addition, the definition of “hazardous substances” in CERCLA incorporates substances We currently do not accept for transportation or disposal hazardous substances (as defined in CERCLA, discussed below) designated as hazardous or toxic under the Federal Clean Water Act, Clear Air Act and Toxic Substances Control Act. If we were found in concentrations or volumes that would classify those materials as hazardous wastes. However, we have transported hazardous to be a responsible party for a CERCLA cleanup, the enforcing agency could hold us, under certain circumstances, or any other substances in the past and very likely will transport and dispose of hazardous substances in the future, to the extent that responsible party, responsible for all investigative and remedial costs, even if others also were liable. CERCLA also authorizes EPA to materials defined as hazardous substances under CERCLA are present in consumer goods and in the non-hazardous waste streams 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 of our customers. party is liable. CERCLA provides a responsible party with the right to bring a contribution action against other responsible parties for We do not accept hazardous wastes for incineration at our waste-to-energy facility. We typically test ash produced at our their allocable share of investigative and remedial costs. Our ability to get others to reimburse us for their allocable share of such costs waste to- energy facility on a regular basis; that ash generally does not contain hazardous substances in sufficient concentrations or would be limited by our ability to identify and locate other responsible parties and prove the extent of their responsibility and by the volumes to result in the ash being classified as hazardous waste. However, it is possible that future waste streams accepted for financial resources of such other parties. 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. The Clean Air Act of 1970, as amended (“Clean Air Act”) Leachate generated at our landfills and transfer stations is tested on a regular basis, and generally is not regulated as a hazardous The Clean Air Act, generally through state implementation of federal requirements, regulates emissions of air pollutants from certain waste under federal or state law. In the past, however, leachate generated from certain of our landfills has been classified as hazardous landfills based upon the date the landfill was constructed and the annual volume of emissions. The EPA has promulgated new source waste under state law, and there is no guarantee that leachate generated from our facilities in the future will not be classified under performance standards regulating air emissions of certain regulated pollutants (methane and non-methane organic compounds) from federal or state law as hazardous waste. municipal solid waste landfills. Landfills located in areas where levels of regulated pollutants exceed certain thresholds may be subject In October 1991, the EPA adopted the Subtitle D regulations under RCRA governing solid waste landfills. The Subtitle D to even more extensive air pollution controls and emission limitations. In addition, the EPA has issued standards regulating the disposal regulations, which generally became effective in October 1993, include location restrictions, facility design standards, operating criteria, of asbestos-containing materials under the Clean Air Act. closure and post-closure requirements, financial assurance requirements, groundwater monitoring requirements, groundwater The Clean Air Act regulates emissions of air pollutants from our waste-to-energy facility and certain of our processing facilities. remediation standards and corrective action requirements. In addition, the Subtitle D regulations require that new landfill sites meet The EPA has enacted standards that apply to those emissions. It is possible that the EPA, or a state where we operate, will enact more stringent liner design criteria (typically, composite soil and synthetic liners or two or more synthetic liners) intended to keep additional or different emission standards in the future. leachate out of groundwater and have extensive collection systems to carry away leachate for treatment prior to disposal. Regulations All of the federal statutes described above authorize lawsuits by private citizens to enforce certain provisions of the statutes. In generally require us to install groundwater monitoring wells at virtually all landfills we operate, to monitor groundwater quality and, addition to a penalty award to the United States, some of those statutes authorize an award of attorney’s fees to private parties indirectly, the effectiveness of the leachate collection systems. The Subtitle D regulations also require facility owners or operators to successfully advancing such an action. 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. The Occupational Safety and Health Act of 1970, as amended (“OSHA”) Each state also must adopt and implement a permit program or other appropriate system to ensure that landfills within the state comply OSHA establishes employer responsibilities and authorizes the Occupational Safety and Health Administration to promulgate with the Subtitle D regulatory criteria. Various states in which we operate or in which we may operate in the future have adopted occupational health and safety standards, including the obligation to maintain a workplace free of recognized hazards likely to cause 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”) 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 The Clean Water Act regulates the discharge of pollutants into the “waters of the United States” from a variety of sources, including asbestos and asbestos-containing materials, and worker training and emergency response programs. 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 12 C A S E L L A W A S T E S Y S T E M S 13 2 0 0 4 F O R M 1 0 K State and Local Regulations We have obtained approval from the Maine Department of Environmental Protection (“DEP”) for an odor control system at our Each state in which we now operate or may operate in the future has laws and regulations governing the generation, storage, treatment, waste-to-energy facility in Biddeford, Maine involving the redirection of our air emissions through scrubbers and scrubber vents. handling, processing, transportation, incineration and disposal of solid waste, water and air pollution and, in most cases, the siting, In addition, we proposed an increase in the height of our scrubber vents and a change in our odor control chemicals. At the municipal design, operation, maintenance, closure and post-closure maintenance of solid waste management facilities. In addition, many states level, the vent height increase needs approval by both the Planning Board and the Zoning Board of Appeals (“ZBA”). The City Council have adopted statutes comparable to, and in some cases more stringent than, CERCLA. These statutes impose requirements for has opposed our proposal and it was denied by the Biddeford Zoning Board of Appeals. We appealed the ZBA denial to York County investigation and remediation of contaminated sites and liability for costs and damages associated with such sites, and some authorize Superior Court. Oral argument is scheduled for September 2004. The Biddeford Planning Board approved our request to test the state to impose liens to secure costs expended addressing contamination on property owned by responsible parties. Some of those alternative odor control chemicals as part of the control system during the summer of 2002 but postponed any approval of the vent liens may take priority over previously filed instruments. Furthermore, many municipalities also have ordinances, laws and regulations height increase. The test of odor control chemicals showed that none of the three chemicals tested is more effective than water. Based affecting our operations. These include zoning and health measures that limit solid waste management activities to specified sites or on the test results, we withdrew our request to test alternative odor control for the chemicals. Based on the opposition of the City conduct, flow control provisions that direct the delivery of solid wastes to specific facilities or to facilities in specific areas, laws that Council to the vent height increase, we also withdrew that portion of our planning board application. Notwithstanding our withdrawal of grant the right to establish franchises for collection services and then put out for bid the right to provide collection services, and bans that application, the Planning Board voted to conditionally approve Maine Energy’s use of alternative odor control chemicals and to or other restrictions on the movement of solid wastes into a municipality. require Maine Energy to evaluate certain other control technologies. Based on the absence of an application before the Planning Board, Certain permits and approvals may limit the types of waste that may be accepted at a landfill or the quantity of waste that may be Maine Energy is disputing the jurisdiction of the Planning Board to issue an approval and has appealed that decision to the Zoning Board accepted at a landfill during a given time period. In addition, certain permits and approvals, as well as certain state and local regulations, of Appeals. A hearing was scheduled before the ZBA in June 2004. The parties have agreed to postpone the ZBA hearing until may limit a landfill to accepting waste that originates from specified geographic areas or seek to restrict the importation of out-of-state September 2004. Since we are not able to increase our vent heights, there is no assurance that our state-approved odor control system waste or otherwise discriminate against out-of-state waste. Generally, restrictions on importing out-of-state waste have not withstood will operate optimally to control odors, or if it does not, that our operations would not be significantly curtailed, which could have a judicial challenge. However, from time to time federal legislation is proposed which would allow individual states to prohibit the disposal material adverse effect on our business, financial condition and results of operations. 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 Based on the results of the testing that we performed to evaluate the effectiveness of Maine Energy’s odor control system, the certain circumstances, to reduce the amounts of waste exported to other states. Although such legislation has not been passed by City of Biddeford alleged to DEP in October 2002 that emissions of volatile organic compounds (“VOCs”) from the odor control system Congress, if this or similar legislation is enacted, states in which we operate landfills could limit or prohibit the importation of out-of- exceeded DEP air license limits. In cooperation with DEP, Maine Energy agreed to voluntarily perform several rounds of testing to state waste. Such actions could materially and adversely affect the business, financial condition and results of operations of any of our quantify and speciate emissions of VOCs from the scrubber stacks, using appropriate analytical methods. As a result, we may be landfills within those states that receive a significant portion of waste originating from out-of-state. subject to enforcement action by DEP and we may incur additional material costs to comply with applicable control technology Certain states and localities may, for economic or other reasons, restrict the export of waste from their jurisdiction, or require requirements. On December 3, 2003, the City of Biddeford sued Maine Energy in federal court under federal and state law alleging that that a specified amount of waste be disposed of at facilities within their jurisdiction. In 1994, the U.S. Supreme Court rejected as we are emitting VOCs without appropriate permits or appropriate control technology and that we constitute a public nuisance. unconstitutional, and therefore invalid, a local ordinance that sought to limit waste going out of the locality by imposing a requirement The complaint sought an unspecified amount of civil penalties, damages, injunctive relief and attorney’s fees. On May 25, 2004, the that the waste be delivered to a particular facility. However, it is uncertain how that precedent will be applied in different complaint was dismissed without prejudice while settlement negotiations take place. See “—Legal Proceedings.” circumstances. For example, in 2002, the U.S. Supreme Court decided not to hear an appeal of a federal Appeals Court decision that In addition, on October 16, 2002, the City of Biddeford and Joseph Stephenson (as the Code Enforcement Officer for the City of held that the flow control ordinances directing waste to a publicly owned facility are not per se unconstitutional and should be analyzed Biddeford) filed a Land Use Citation and Complaint against Maine Energy alleging that Maine Energy is emitting levels of volatile organic under a standard that is less stringent than if waste had been directed to a private facility. The less stringent standard was applied to compounds which exceed permitted levels. The complaint sought an unspecified amount of civil penalties, a preliminary and permanent the facts of that case by the magistrate, who recommended in March, 2004 in a favor of upholding the flow control regulations in injunction, and legal costs. On December 3, 2002, the court ruled that the complaint failed to meet certain pleading requirements and Oneida and Herkimer Counties in New York. Objections have been filed and the outcome is uncertain. Additionally, certain state and ordered plaintiffs to file a new complaint by December 30, 2002. On April 7, 2003, the plaintiffs dismissed their action with prejudice. local jurisdictions continue to seek to enforce such restrictions and, in certain cases, we may elect not to challenge such restrictions. We own a membership interest in New Heights Investor Co., LLC, through which we own a 50% interest in the power plant assets Further, some proposed federal legislation would allow states and localities to impose flow restrictions. Those restrictions could owned by New Heights Recovery & Power LLC. The power plant is a waste-to-energy facility using tires as fuel, in Ford Heights, Illinois. reduce the volume of waste going to landfills or transfer stations in certain areas, which may materially adversely affect our ability to In August 2000, the Illinois Environmental Protection Agency (“IEPA”) issued a violation notice to the facility asserting non-compliance operate our facilities and/or affect the prices we can charge for certain services. Those restrictions also may result in higher disposal with its construction permit related to air emissions. The facility has undertaken certain corrective measures and submitted an costs for our collection operations. In sum, flow control restrictions could have a material adverse effect on our business, financial application in March 2002 which provides for correction of certain permit conditions that were inconsistent with operations. While non- condition and results of operations. compliance with permitting requirements is subject to civil penalties, we do not expect them to be assessed. However, there can be There has been an increasing trend at the federal, state and local levels to mandate or encourage both waste reduction at the no assurance that, if civil penalties were assessed, they would not have a material adverse effect on our financial position or results of source and waste recycling, and to prohibit or restrict the disposal in landfills of certain types of solid wastes, such as yard wastes and operations. In April 2004, the IEPA issued a violation notice related to the storage piles of used tire shred. A response to the violation leaves, beverage containers, newspapers, household appliances and batteries. Regulations reducing the volume and types of wastes notice was submitted on May 28, 2004 indentifying corrective measures taken and a proposed schedule for the removal of the storage available for transport to and disposal in landfills could affect our ability to operate our landfill facilities. piles. A meeting with the IEPA took place on June 23, 2004 and they are seeking a commitment by July 14, 2004 to segregate the Our waste-to-energy facility has been certified by the Federal Energy Regulatory Commission as a “qualifying small power piles, install a containment berm and post financial assurance until the materials are removed. production facility” under the Public Utility Regulatory Policies Act of 1978, as amended (“PURPA”). PURPA exempts qualifying In connection with our acquisition of Wood Recycling, Inc., the Massachusetts Department of Environmental Protection facilities from most federal and state laws governing electric utility rates and financial organization, and generally requires electric utilities (“MADEP”) and the Massachusetts Office of the Attorney General (“MAAGO”) have alleged that, under its prior owners, Wood to purchase electricity generated by qualifying facilities at a price equal to the utility’s full “avoided cost.” Recycling violated certain solid and hazardous waste, air quality control, industrial wastewater and wetlands statutes and regulations at Our waste-to-energy business is dependent upon our ability to sell the electricity generated by our facility to an electric utility or a the recycling facility and landfill. We reached an agreement with MADEP on January 29, 2004, and an agreement with the MAAGO on third party such as an energy marketer. Maine Energy currently sells electricity to an electric utility under a long term power purchase May 6, 2004. The settlement provides for the payment of a penalty of $575,000 ($150,000 of which has been conditionally suspended) agreement. When that agreement expires, or if the electric utility were to default under the agreement, there is no guarantee that any and a payment into an escrow account of an additional $400,000 to improve the damaged wetlands or to purchase other conservation new agreement would contain a purchase price as favorable as the one in the current agreement. land. These payments were contemplated by us in our determination of the purchase price for Wood Recycling. The operations of the recycling facility were recommenced on January 29, 2004 as a result of the settlement with MADEP. 14 C A S E L L A W A S T E S Y S T E M S 15 In April 2003, the Company obtained a permit from the MADEP to increase the operating capacity of the Company’s solid waste Charles E. Leonard has served as our Senior Vice President, Solid Waste Operations since July 2001. From December 1999 until transfer station located in Holliston, Massachusetts. The Company is seeking the necessary local approvals required under that he joined us, he acted as a consultant to several corporations, including Allied Waste Industries, Inc. From November 1997 to permit. Some local residents have alleged that the transfer station is not being operated in conformance with state and local wetlands December 1999, he was Regional Vice President for Service Corporation International, a provider of death-care services. From laws and certain local approvals, first issued in the 1970s. The Company has taken steps to identify, respond to and address those September 1988 to January 1997, he served as Senior Vice President, US Operations for Laidlaw Waste Systems, Inc. From June allegations, as appropriate. The Company also is evaluating its indemnification rights against the former owner/operator of the transfer 1978 to July 1988, Mr. Leonard was employed by Browning-Ferris Industries in various management positions. Mr. Leonard is a station under the agreement by which the Company acquired the transfer station. We offer no prediction as to the likely outcome of graduate of Memphis State University with a Bachelor of Arts in Marketing. these matters, and there can be no assurance that these matters would not have a material adverse effect on our financial position Michael J. Brennan has served as our Vice President and General Counsel since July 2000. From January 1996 to July 2000, he 2 0 0 4 F O R M 1 0 K or results of operations. EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE COMPANY Our executive officers and other key employees and their respective ages as of June 14, 2004 are as follows: Name Executive Officers John W. Casella James W. Bohlig Richard A. Norris Charles E. Leonard Other Key Employees Michael J. Brennan Timothy A. Cretney Christopher M. DesRoches Sean P. Duffy Joseph S. Fusco Larry B. Lackey Brian G. Oliver Alan N. Sabino Gary R. Simmons Michael J. Wall Age Position 53 57 60 49 46 40 46 44 40 43 42 44 54 44 Chairman, Chief Executive Officer and Secretary President and Chief Operating Officer, Director Senior Vice President, Chief Financial Officer and Treasurer Senior Vice President, Solid Waste Operations Vice President and General Counsel Regional Vice President Vice President, Sales and Marketing Regional Vice President Vice President, Communications Vice President, Permits, Compliance and Engineering North Eastern Regional Vice President Regional Vice President Vice President, Fleet Management South Eastern 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. served in various capacities at Waste Management, Inc., including most recently, as Associate General Counsel. Timothy A. Cretney has served as our 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, Sales and Marketing since November 1996. 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 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. 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 Region 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 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, 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, free of charge, 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. We make these reports available through our website at the same time that they become available on the Securities and Exchange Commission’s website. 16 C A S E L L A W A S T E S Y S T E M S 17 2 0 0 4 F O R M 1 0 K ITEM 2. PROPERTIES At June 14, 2004, we owned and/or operated eight subtitle D landfills, two landfills permitted to accept construction and demolition the MADEP filed a motion for stay pending a litigation control schedule. Plaintiffs have filed a cross-motion to consolidate the case with materials, 34 transfer stations, 24 of which are owned, five of which are leased and five of which are under operating contract, 37 solid 11 other cases they filed related to the Project. Additionally, we have cross-claimed against other named defendants seeking waste collection facilities, 24 of which are owned and 13 of which are leased, 39 recyclable processing facilities, 16 of which are owned, indemnification and contribution. In September 2002, the court granted a stay of all proceedings pending the filing of summary 15 of which are leased and eight of which are under operating contracts, one waste-to-energy facility, and utilized eleven corporate judgment motions by all defendants on the issue of whether the plaintiffs are barred from suing the defendants as a result of a covenant office and other administrative facilities, four of which are owned and seven of which are leased. ITEM 3. LEGAL PROCEEDINGS The New Hampshire Superior Court in Grafton, NH ruled on February 1, 1999 that the Town could not enforce an ordinance purportedly 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. We believe that we have meritorious defenses to these claims. prohibiting expansion of our NCES landfill, at least with respect to 51 acres of NCES’s 87 acre parcel, based upon certain existing On or about December 11, 2001, we were served with a bill in equity in aid of discovery filed in the Strafford Superior Court in 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 New Hampshire by Nancy Hager. The bill in equity seeks an accounting related to non-compete tip fee payments from us to Ms. Hager Court denied the Town’s appeal. Notwithstanding the Supreme Court’s 2001 ruling, the Town continued to assert jurisdiction to conduct pursuant to a 1993 release and settlement agreement. The bill in equity is a request for pre-litigation discovery for the purpose of unqualified site plan review with respect to Stage III and has further stated that the Town’s height ordinance and building permit process investigating a potential claim for failure to pay appropriate non-compete tip fee amounts. In light of an arbitration clause in the 1993 may apply to Stage III. On September 12, 2001, we filed a petition for, among other things, declaratory relief. On December 4, 2001, release and settlement agreement, we filed a motion to stay the proceedings under the bill in equity pending completion of the the Town filed an answer to our petition asserting counterclaims seeking, among other things, authorization to assert site plan review arbitration process. On March 18, 2002, the court granted our motion to stay. On August 5, 2002, the court extended the stay pending over Stage III, which commenced operation in December 2000, as well as the methane gas utilization/leachate handling facility the arbitration process. On October 17, 2002, Ms. Hager voluntarily withdrew her bill in equity without prejudice. On January 15, 2003, operating in Stage III, and also an order declaring that an ordinance prohibiting landfills applies to Stage IV expansion. The trial related Ms. Hager filed a written request for arbitration with the American Arbitration Association. On June 5, 2003, Mrs. Hager submitted a to the Town’s jurisdiction was held in December 2002 and on April 24, 2003, the Grafton Superior Court upheld the Town’s 1992 disclosure letter to the arbitration panel alleging that she is owed between $480,000 and $560,000. On July 7, 2003, Ms. Hager revised ordinance preventing the location or expansion of any landfill, ruling that the ordinance may be applied to any part of Stage IV that goes her claim to allege that she is owed between $637,000 and $1,000,000. On March 9, 2004, we reached a settlement in principle with 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 Ms. Hager that resolves not only her claims to date but also any potential future claims as a result of applying the non-compete language Review, except that there are certain areas within the Town’s Site Plan Review regulation that are preempted; ruling that the methane prospectively. The settlement includes (i) the pre-payment by us on or about June 15, 2004 of the amount of $400,000 reflecting the gas utilization/leachate handling facility is not subject to the Town’s ordinance forbidding incinerators. On May 27, 2003, NCES amount of $1.08 per ton for the next 372,000 tons disposed at the North Country Environmental Services Landfill; and (ii) payment by appealed the Court ruling to the New Hampshire Supreme Court. On March 1, 2004, the Supreme Court issued an opinion affirming us of an additional $479,880 over time commencing on July 1, 2004 at the rate of $1.29 per ton for the next 372,000 tons disposed that NCES has all of the local approvals that it needs to operate within the 51 acres. If successful in obtaining state permits for at the North Country Environmental Services landfill. development and operation within the 51 acres, NCES expects to be able to provide from three to five years of disposal capacity. The On January 10, 2002, the City of Biddeford, Maine filed a lawsuit in York County Superior Court in Maine alleging breach of the Supreme Court’s opinion left open for further review the question of whether the Town’s 1992 ordinance can prevent expansion of the waste handling agreement among the Biddeford-Saco Waste Handling Committee, the cities of Biddeford and Saco, Maine and our facility outside the 51 acres, remanding to the Superior Court two legal claims raised by NCES as grounds for invalidating the 1992 subsidiary Maine Energy for (1) failure to pay the residual cancellation payments in connection with our merger with KTI and (2) ordinance. The trial court hearing on the remanded issues is expected to occur in November, 2004. processing amounts of waste above contractual limits without notice to the City. On May 3, 2002, the City of Saco filed a lawsuit in During the period of November 21, 1996 to October 9, 1997, we performed certain closure activities and installed a cut-off wall York County Superior Court against us, Maine Energy and other subsidiaries. The complaint in that action, which was amended by the at the Clinton County landfill, located in Clinton County, New York. On or about April 1999, the New York State Department of Labor City of Saco on July 22, 2002, alleges breaches of the 1991 waste handling agreement for failure to pay the residual cancellation alleged that we should have paid prevailing wages in connection with the labor associated with such activities. We have disputed the 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 allegations and a hearing on the liability issue was held on September 16, 2002. In November 2002, both sides submitted proposed off certain limited partner loans in accordance with the terms of the agreement. The complaint also seeks damages for breach of findings of fact and conclusions of law. On May 12, 2004, the Commissioner of Labor issued an order finding that the closure activities contract and a court order requiring us to provide an accounting of all transactions since May 3, 1996 involving transfers of assets to and the cut-off wall project were “public works” projects that were subject to prevailing wage requirements. We continue to explore 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 settlement possibilities with the State in lieu of a hearing on damages, which is not yet scheduled. Although a loss as a result of these waste handling agreements filed a lawsuit in York County Superior Court against Maine Energy alleging breaches of the 1991 waste claims is probable, we cannot estimate a range of probable losses at this time. handling agreements for failure to pay the residual cancellation payment which they allege is due as a result of (1) our merger with KTI; On or about July 2, 2001, we were served with a complaint filed in New York State Supreme Court, Erie County, as one of over and (2) failure to pay off the limited partner loans when funds were allegedly available. On July 25, 2002, the three actions were twenty defendants named in a toxic tort lawsuit filed by residents surrounding three sites in Cheektowaga, New York known as the consolidated for purposes of discovery, case management and pretrial proceedings. On December 23, 2003, the action brought by the Buffalo Crushed Stone limestone quarry, the Old Land Reclamation inactive landfill and the Schultz landfill. We are alleged to have Tri-County Towns against Maine Energy was stayed pursuant to a court order as a result of a conditional settlement reached by the liability as a result of our airspace agreement at the Schultz landfill, which is a permitted construction and demolition landfill. Plaintiffs parties. The settlement agreement is conditioned upon final approval by the Tri-County Towns which is required prior to August 1, 2004. claim property damages and some personal injuries based on alleged nuisance conditions arising out of these facilities and seek We are currently engaged in settlement negotiations with the Cities of Biddeford and Saco concerning the claims asserted in these compensatory damages in excess of $3 million, punitive damages of $10 million and injunctive relief. We believe that we have actions and other matters, however, at this stage it is impossible to predict whether a settlement will be reached. We have vigorously meritorious defenses to these claims. contested the claims asserted by the cities. We believe we have meritorious defenses to these claims. On or about November 7, 2001, our subsidiary New England Waste Services of Maine, Inc. was served with a complaint filed in On or about September 17, 2003, we were served with a complaint filed in the Superior Court of Delaware. The complaint alleges Massachusetts Superior Court on behalf of Daniel J. Quirk, Inc. and 14 citizens against The Massachusetts Department of 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 Environmental Protection (“MADEP”), Quarry Hill Associates, Inc. and New England Waste Services of ME, Inc. dba New England landlord. The complaint further alleges that KTI, Inc., our wholly-owned subsidiary, guaranteed the tenant’s obligations under the lease. Organics, et al. The complaint seeks injunctive relief related to the use of MADEP-approved wastewater treatment sludge in place of The landlord alleges that the tenant is in default of the lease in that it constructed improvements without consent, damaged certain naturally occurring topsoil as final landfill cover material at the site of the Quarry Hills Recreation Complex Project in Quincy, structures and failed to make certain payments. Plaintiff’s demand for damages is $867,000. We believe that we have meritorious Massachusetts (the “Project”), including removal of the material, or placement of an additional “clean” cover. On February 21, 2002, defenses to these claims. 18 C A S E L L A W A S T E S Y S T E M S 19 four On or about December 3, 2003, Maine Energy was served with a complaint filed in the United States District Court, District of Maine. The complaint is a citizen suit under the federal Clean Air Act 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 alleges that Maine Energy was negligent and that the subject emissions cause odors and constitute a public nuisance. The allegations relate 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 seeks an unspecified amount of civil penalties, damages, injunctive relief and attorney’s fees. We are currently working with the Maine Department of Environmental Protection to determine the extent of any VOC emissions and whether any further action is necessary. On May 25, 2004, the City of Biddeford dismissed the subject complaint without prejudice while settlement negotiations take place. 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, 2004. one part 2 0 0 4 F O R M 1 0 K 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 Fiscal Year 2003 First quarter Second quarter Third quarter Fourth quarter Fiscal Year 2004 First quarter Second quarter Third quarter Fourth quarter High $ 13.00 $ 9.45 $ 9.56 $ 8.88 $ 12.45 $ 14.42 $ 15.00 $ 15.70 Low $ 7.60 $ 4.86 $ 5.26 $ 6.58 $ 7.80 $ 10.68 $ 11.90 $ 12.52 On June 14, 2004, the high and low sale prices per share of our Class A common stock as quoted on the Nasdaq National Market were $14.50 and $14.14, respectively. As of June 14, 2004 there were approximately 441 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 nonaffiliates 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. 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 2002, 2003 and 2004, and the consolidated balance sheets as of April 30, 2003 and 2004 are derived from the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. The consolidated statements of operations and cash flows data for the fiscal years ended 2000 and 2001, and the consolidated balance sheet data as of April 30, 2000, 2001 and 2002 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 Annual Report on Form 10-K. 20 C A S E L L A W A S T E S Y S T E M S 21 CASELLA WASTE SYSTEMS, INC. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (In thousands, except per share data) CASELLA WASTE SYSTEMS, INC. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (In thousands) Fiscal Year 2000 (1) 2001 (1) 2002 (1) 2003 (1) 2004 Fiscal Year 2000 (1) 2001 (1) 2002 (1) 2003 (1) 2004 (1) 2 0 0 4 F O R M 1 0 K Statement of Operations Data: Revenues Cost of operations General and administration Depreciation and amortization Impairment charge Restructuring charge Legal settlements Other miscellaneous charges Merger-related costs Operating income (loss) Interest expense, net Other expense/(income), net Income (loss) from continuing operations before income taxes, discontinued operations, extraordinary loss and cumulative effect of change in accounting principle (Provision) benefit for income taxes Income (loss) from discontinued operations, net Estimated loss on disposal of discontinued operations, net Reclassification from discontinued operations, net Cumulative effect of change in accounting principle, net Net (loss) income Preferred stock dividend Net (loss) income available to common stockholders Basic net (loss) income per common share Basic weighted average common shares outstanding (2) Diluted net (loss) income per common share Diluted weighted average common shares outstanding (2) $ 315,263 $ 480,366 $ 421,235 $ 420,863 $ 439,686 193,341 40,765 38,670 — — — — 1,490 40,997 15,672 3,283 321,214 64,079 53,411 79,687 4,151 4,209 1,604 — (47,989) 38,654 27,358 276,693 54,456 50,712 — (438) — — — 39,812 30,547 (6,533) 278,347 287,309 55,772 47,930 4,864 — — — — 33,950 26,254 (175) 58,198 59,673 1,663 — — — — 32,843 25,397 3,687 22,042 (10,700) (114,001) 20,443 15,798 (5,111) 7,871 (3,813) 3,759 1,623 1,101 (4,130) — (1,393) (2,657) (4,096) (1,190) 1,140 — — 50 — — — — (101,535) (1,970) (250) 7,481 (3,010) (63,916) (59,808) (3,094) 2,723 8,105 (3,252) $ 11,050 $ (103,505) $ 4,471 $ (62,902) $ 4,853 $ 0.59 $ (4.46) $ 0.19 $ (2.65) $ 0.20 18,731 23,189 23,496 23,716 24,002 — — 11,050 — Other Operating Data: Capital expenditures Other Data: Cash flows provided by operating activities Cash flows used in investing activities Cash flows provided by (used in) financing activities Balance Sheet Data: Cash and cash equivalents Working capital (deficit), net (3) Property, plant and equipment, net Goodwill Total assets Long-term debt, less current maturities Redeemable preferred stock $ (68,575) $ (61,518) $ (37,674) $ (41,925) $ (58,335) $ 48,398 $ (155,088) $ 63,261 $ (55,565) $ 67,687 $ (9,533) $ 64,952 $ (61,208) $ 69,898 $ (123,658) $ 116,423 $ 18,765 $ (70,065) $ 7,610 $ 46,115 $ 7,788 $ 106,580 $ 369,261 $ 259,964 $ 860,470 $ 437,853 $ — $ 22,001 $ 33,056 $ 290,537 $ 225,969 $ 686,293 $ 350,511 $ 57,720 $ 4,298 $ (635) $ 287,206 $ 219,730 $ 621,611 $ 277,545 $ 60,730 $ 15,652 $ (76) $ 302,328 $ 159,682 $ 602,696 $ 302,389 $ 63,824 $ 8,007 $ (12,568) $ 372,038 $ 157,230 $ 676,277 $ 349,163 $ 67,076 Total stockholders’ equity $ 274,718 $ 172,951 $ 176,796 $ 119,152 $ 130,055 (1) We have revised our consolidated statements of operations, 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 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 2001, 2002 and 2003. In connection with the discontinued accounting treatment in fiscal 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 2001, 2002 and 2003. 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. 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 Annual Report on Form 10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those $ 0.57 $ (4.46) $ 0.19 $ (2.63) $ 0.20 described in the section of this Annual Report on Form 10-K entitled “Certain Factors That May Affect Future Results.” Our actual 19,272 23,189 24,169 23,904 24,445 results may differ materially from those contained in any forward-looking statements. Casella Waste Systems, Inc. and 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 14, 2004, 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, 39 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. From May 1, 1994 through December 1999, we acquired 161 solid waste collection, transfer and disposal operations. In December 1999, we acquired KTI. KTI assets which we considered core to our operations included interests in waste-to-energy facilities in Maine, significant residential and commercial recycling operations, transfer and collection operations which were “tuckins” to existing operations and cellulose insulation manufacturing operations. In addition, KTI’s assets included a number of businesses that were not core to our operating strategy. Following our acquisition of KTI, we focused on the integration of KTI and the divestiture of non-core KTI assets, which has now been completed. As part of the divestiture program, in the fourth quarter of fiscal year 2001 we incurred non-recurring charges of $111.7 million, of which $90.6 million was non-cash. The divestiture program resulted in aggregate consideration of $107.6 million, including cash proceeds of $61.7 million which were used to reduce our indebtedness. Revenues related to divested assets were $54.9 million in fiscal year 2001. Since December 1999, we have made 44 acquisitions. 22 C A S E L L A W A S T E S Y S T E M S 23 In December 2003, we commenced operations at Ontario County Landfill, after executing a 25-year operation, management and Under SFAS No. 143, we no longer accrue landfill retirement obligations through a charge to cost of operations, but rather by an lease agreement with Ontario County, New York. The landfill is permitted to accept 624,000 tons per year of municipal solid waste. increase to landfill assets. Under SFAS No. 143, the amortizable landfill assets include not only the landfill development costs incurred On February 5, 2004, we completed transactions with the State of Maine and Georgia-Pacific, pursuant to which the State of Maine but also the recorded capping, closure and post-closure liabilities as well as the cost estimates for future capping, closure and took ownership of the landfill located in West Old Town, Maine formerly owned by Georgia-Pacific and we became the operator of that post-closure costs. The landfill asset is amortized over the total capacity of the landfill as airspace is consumed during the life of the facility under a 30-year operating and services agreement between us and the State of Maine. landfill, with one exception. The exception is for capping for which both the recognition of the liability and the amortization of these costs On August 28, 2003, we announced that we were selected by the McKean County, Pennsylvania Solid Waste Authority as the are based instead on the airspace consumed for the specific capping event. successful bidder to negotiate a service agreement to operate and develop the county’s landfill. We cannot assure that the negotiations will result in a final service agreement. Landfill Accounting—Capitalized Costs and Amortization Our revenues increased from $420.9 million for the fiscal year ended April 30, 2003 to $439.7 million for the fiscal year ended April We use life-cycle accounting and the units-of-production method to recognize certain landfill costs. Under life-cycle accounting, all costs 30, 2004. From May 1, 2002 through April 30, 2004, we acquired 21 solid waste collection, transfer, disposal and recycling operations. related to the acquisition and construction of landfill sites are capitalized or accrued and charged to income based on tonnage placed Under the rules of purchase accounting, the acquired companies’ revenues and results of operations have been included from the date into each site. Capitalized landfill costs include expenditures for land and related airspace, permitting costs and preparation costs. of acquisition and affect the period-to-period comparisons of our historical results of operations. Effective September 30, 2002, we Landfill permitting and preparation costs represent only direct costs related to these activities, including legal, engineering and transferred our export brokerage operations to former employees, who had been responsible for managing that business. The domestic construction. Landfill preparation costs include the costs of construction associated with excavation, liners, site berms and the brokerage operations, and a recycling business, constituting the remainder of our brokerage revenues, were transferred effective June installation of leak detection and leachate collection systems. Interest is capitalized on landfill construction projects while the assets 30, 2003 to the employees of that unit. Due to the structure of these transactions, the transfers were not initially recorded as a sale. are undergoing activities to ready them for their intended use. Management routinely reviews its investment in operating landfills, Effective April 1, 2004, we completed the sale of the export brokerage operations for total consideration of approximately $5.0 million. transfer stations and other significant facilities to determine whether the costs of these investments are realizable. Our judgments The gain on the sale amounted to approximately $1.1 million. For the fiscal years ended April 30, 2004, 2003 and 2002, the transferred regarding the existence of impairment indicators are based on regulatory factors, market conditions and the operational performance brokerage and recycling businesses accounted for $3.3 million, $35.7 and $50.1 million, respectively, of our revenues. of our landfills. Future events could cause us to conclude that impairment indicators exist and that our landfill carrying costs are 2 0 0 4 F O R M 1 0 K 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 Annual Report on Form 10-K. Landfill Accounting—Adoption of SFAS No. 143 Effective May 1, 2003, we adopted SFAS No. 143, Accounting for Asset Retirement Obligations. Through April 30, 2003 we recognized expenses associated with (i) amortization of capitalized and future landfill asset costs and (ii) future closure and postclosure obligations on a units-of-production 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 events 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. 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. 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, 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 Annual Report on Form 10-K. 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. 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 are then inflated by 2.6% to reflect a normal escalation of prices up to the year they are expected to be paid. These estimated costs are then discounted to their present value using a credit adjusted risk-free rate of 9.5%. impaired. Any resulting impairment charge could have a material adverse effect on our financial condition and results of operations. Landfill permitting, acquisition and preparation costs are amortized on the units-of-production 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. 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-production 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. In determining estimated future landfill permitting, acquisition, construction and preparation costs, we consider the landfill costs associated with permitted and permittable airspace. Our estimate of future landfill permitting, acquisition, construction and preparation costs for the year ended April 30, 2004 increased to $299.6 million, compared to $157.6 million for the year ended April 30, 2003 and $149.1 million for the year ended April 30, 2002. The increase in estimated costs in fiscal 2004 is primarily as a result of additional permitted and permittable airspace from our newly acquired landfill and landfill operating contracts, which increased airspace to 65.6 million tons as of April 30, 2004 as compared to 29.6 million tons as of April 30, 2003 and 26.1 million tons as of April 30, 2002. Landfill amortization expense for the years ended April 30, 2004, 2003 and 2002 was $22.7 million, $13.3 million and $10.3 million, respectively. The increase in fiscal year 2004 was primarily attributable to higher landfill amortization due to increased landfill volumes and as a result of adopting SFAS No. 143. Higher landfill amortization expense in fiscal year 2003, compared to fiscal year 2002, was due to volume increases. Landfill Accounting—Capping 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. 24 C A S E L L A W A S T E S Y S T E M S 25 2 0 0 4 F O R M 1 0 K Landfill Accounting—Closure and Post-Closure Costs Asset Impairment Closure and post-closure costs represent future estimated costs related to monitoring and maintenance of a solid waste landfill, after In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we continually review our a landfill facility ceases to accept waste and closes. We estimate, based on input from our engineers, accounting personnel and long-lived assets for impairment whenever events or changes in circumstances indicate that the remaining estimated useful life of such consultants, our future cost requirements for closure and post-closure monitoring and maintenance based on our interpretation of the assets might warrant revision or that the balances may not be recoverable. We evaluate possible impairment by comparing estimated technical standards of the Subtitle D regulations and the air emissions standards under the Clean Air Act as they are being applied on future cash flows, before interest expense and on an undiscounted basis, with the net book value of long-term assets including a state-by-state basis. Closure and post-closure accruals for the cost of monitoring and maintenance include site inspection, amortizable intangible assets. If undiscounted cash flows are insufficient to recover assets, further analysis is performed in order to groundwater monitoring, leachate management, methane gas control and recovery, and operation and maintenance costs to be incurred determine the amount of the impairment. An impairment loss is then recorded equal to the amount by which the carrying amount of the during the period after the facility closes. Significant reductions in our estimates of the remaining lives of our landfills or significant assets exceeds their fair value. Fair value is usually determined based on the present value of estimated expected future cash flows increases in our estimates of the landfill closure and post-closure maintenance costs could have a material adverse effect on our using a discount rate commensurate with the risks involved. financial condition and results of operations. In determining estimated future closure and post-closure costs, we consider costs We adopted SFAS No. 142 effective May 1, 2002 and have eliminated the amortization of goodwill and annually assess goodwill associated with permitted and permittable airspace. impairment by applying a fair value based test. SFAS No. 143 requires 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 Bad Debt Allowance the future. Under SFAS No. 143, our estimates of costs to discharge asset retirement obligations for landfills are developed in today’s Estimates are used in determining our allowance for bad debts and are based on our historical collection experience, current trends, dollars. These costs are then inflated by 2.6% to reflect a normal escalation of prices up to the year they are expected to be paid. These credit policy and a review of our accounts receivable by aging category. Our reserve is evaluated and revised on a monthly basis. estimated costs are then discounted to their present value using a credit adjusted risk-free rate of 9.5%. Our estimate of future capping, closure and post-closure costs was $148.7 million for the year ended April 30, 2004, compared to $82.4 million for the year ended April Self-Insurance Liabilities and Related Costs 30, 2003 and $83.0 million for the year ended April 30, 2002. The increase in estimated costs in fiscal 2004 is primarily as a result of We are self insured for vehicles and workers compensation. The liability for unpaid claims and associated expenses, including incurred additional permitted and permittable airspace from our newly acquired landfill and landfill operating contracts, which increased airspace but not reported losses, is determined by a third party actuary and reflected in our consolidated balance sheet as an accrued liability. to 65.6 million tons as of April 30, 2004 compared to 29.6 million tons as of April 30, 2003 and 26.1 million tons as of April 30, 2002. We use a third party to track and evaluate actual claims experience for consistency with the data used in the annual actuarial valuation. Accrued capping, closure and post-closure costs include the current and non-current portion of costs associated with obligations The actuarially determined liability is calculated in part by reference to past claims experience, which considers both the frequency and for capping, closure and post-closure of our landfills. The changes to accrued capping, closure and post-closure liabilities are as settlement amount of claims. follows (in thousands): Years Ended April 30, 2002 2003 2004 Beginning balance, May 1 Cumulative effect of change in accounting principle (1) Capping, closure, and post-closure liability, adjusted Obligations incurred Revisions in estimates Accretion expense Payments (2) Acquisitions and other adjustments (3) Balance, April 30 $ 17,230 — 17,230 6,665 — — (408) 1,285 $ 24,772 $ 24,772 — 24,772 8,400 — — (9,164) 1,941 $ 25,949 $ 25,949 (7,855) 18,094 4,556 (1,371) 1,871 (2,707) 4,780 $ 25,223 (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 increased in fiscal year 2003 mainly due to closure activities at our Woburn, Massachusetts and Pine Tree, Maine landfills. (3) In fiscal year 2002, we recorded additional post-closure accruals relating to one of our construction and demolition landfills. In fiscal year 2003, we recorded closure and post-closure accruals relating to the Hardwick landfill acquisition. The increase in fiscal 2004 is as a result of capping, closure and post-closure accruals relating to the acquisition of the Southbridge 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 Discontinued Operations Prior to fiscal year 2003, we carried discontinued businesses at estimated net realizable value less costs to be incurred through the date of disposition. Upon adoption of SFAS No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets, the assets and liabilities of discontinued operations are separately classified in the accompanying consolidated balance sheets. 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 Annual Report on 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 Annual Report on 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 forwardlooking statement, certain of which are beyond our control. These factors include, without limitation, those outlined below in the section entitled “Certain Factors That May Affect Future Results”. Our failure to successfully address any of these factors could have a material timeframe for paying these costs varies based on the remaining useful life of each landfill, as well as the duration of the post-closure adverse effect on our results of operations. monitoring period. Based on our permitted and permittable airspace at April 30, 2004, we expect to make payments relative to capping, closure and post-closure activities from fiscal year 2005 through fiscal year 2089. 26 C A S E L L A W A S T E S Y S T E M S 27 2 0 0 4 F O R M 1 0 K GENERAL Revenues Operating Expenses Our revenues in our Eastern, Central and Western Regions are attributable primarily to fees charged to customers for solid waste Cost of operations includes labor, tipping fees paid to third party disposal facilities, fuel, maintenance and repair of vehicles and disposal and collection, landfill, waste-to-energy, transfer and recycling services. We derive a substantial portion of our collection equipment, worker’s compensation and vehicle insurance, the cost of purchasing materials to be recycled, third party transportation revenues from commercial, industrial and municipal services that are generally performed under service agreements or pursuant to expense, district and state taxes, host community fees and royalties. Cost of operations also includes accretion expense related to contracts with municipalities. The majority of our residential collection services are performed on a subscription basis with individual landfill capping, closure and post closure, leachate treatment and disposal costs and depletion of landfill operating lease obligations. households. Landfill, waste-to-energy facility and transfer customers are charged a tipping fee on a per ton basis for disposing of their General and administration expenses include management, clerical and administrative compensation and overhead, professional solid waste at our disposal facilities and transfer stations. The majority of our disposal and transfer customers are under one to ten year services and costs associated with marketing, sales force and community relations efforts. disposal contracts, with most having clauses for annual cost of living increases. Recycling revenues, which are included in FCR and in Depreciation and amortization expense includes depreciation of fixed assets over the estimated useful life of the assets using the the Eastern, Central and Western Regions, consist of revenues from the sale of recyclable commodities and operations and straight-line method, amortization of landfill airspace assets under the units-of-production method, and the amortization of intangible maintenance contracts of recycling facilities for municipal customers. FCR Recycling revenues included revenues from commercial assets (other than goodwill) using the straight-line method. Effective May 1, 2003, we adopted SFAS No. 143, Accounting for Asset brokerage and recycling operations through June 30, 2003 and revenues from the export brokerage business through September 2002, Retirement Obligations. Under SFAS No. 143, except for accretion expense, we no longer accrue landfill retirement obligations through when those operations were sold. a charge to cost of operations, but rather as an increase to landfill assets which are amortized using a straight-line rate per ton as landfill Our cellulose insulation business is conducted through a 50/50 joint venture with Louisiana-Pacific, and accordingly, we airspace is utilized. The amount of landfill amortization expense related to airspace consumption can vary materially from landfill to recognize half of the joint venture’s net income on the equity method in our results of operations. Also, in the “Other” segment, we landfill depending upon the purchase price and landfill site and cell development costs. We depreciate all fixed and intangible assets, have ancillary revenues including major customer accounts, earnings from equity method investees and, in fiscal year 2002, other than goodwill, to a zero net book value, and do not apply a salvage value to any fixed assets. revenues from residue recycling. We capitalize certain direct landfill development costs, such as engineering, permitting, legal, construction and other costs Our revenues are shown net of inter-company eliminations. We typically establish our inter-company transfer pricing based upon associated directly with the expansion of existing landfills. Additionally, we also capitalize certain third party expenditures related to prevailing market rates. The table below shows, for the periods indicated, the percentage of our revenues attributable to services pending acquisitions, such as legal and engineering costs. We routinely evaluate all such capitalized costs, and expense those costs provided. For the fiscal year ended April 30, 2004, 2003 and 2002, the percentages of revenues shown below reflect revenues from related to projects not likely to be successful. Internal and indirect landfill development and acquisition costs, such as executive and the domestic brokerage and recycling operations through June 30, 2003 and revenues from the export brokerage business through corporate overhead, public relations and other corporate services, are expensed as incurred. September 2002. The export business was transferred to the employees of that unit in September 2002 and our domestic brokerage We will have material financial obligations relating to capping, closure and post-closure costs of our existing landfills and any operations, constituting the remainder of our brokerage revenues was transferred effective June 30, 2003 to the employees of that disposal facilities which we may own or operate in the future. We have provided and will in the future provide accruals for these future unit. Excluding the effect of brokerage revenues, collection and transfer revenues as a percentage of total revenue were lower in the financial obligations based on engineering estimates of consumption of permitted landfill airspace over the useful life of any such landfill. fiscal year ended April 30, 2004 compared to the prior year, despite an increase in the absolute dollar amounts, mainly because of the There can be no assurance that our financial obligations for capping, closure or post-closure costs will not exceed the amount accrued large increase in recycling revenue dollars. Collection revenues as a percentage of total revenues in fiscal 2003 compared to fiscal year and reserved or amounts otherwise receivable pursuant to trust funds. 2002 were lower as a percentage of total revenue, mainly because of the large increase in recycling revenue dollars. Net of brokerage revenues, landfill/disposal revenues as a percentage of total revenues in fiscal years 2004, 2003 and 2002 remained constant. The increase between fiscal years in recycling revenues as a percentage of total revenues is mainly due to higher commodity prices and volumes. The decrease in brokerage revenues as a percentage of revenues in fiscal year 2003 compared to fiscal year 2002 is due to lower commodity prices and volumes as well as the transfer of the export and domestic brokerage businesses to employees of those 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. units. The decrease in other revenues as a percentage of revenues during fiscal year 2003 is primarily attributable to divestitures made Fiscal Year Ended April 30, during the prior year. Fiscal Year Ended April 30, 2002 (1) As reported 2003 Collection Landfill/disposal facilities Transfer Recycling Brokerage Other Total revenues 46.7% 13.7 10.8 15.5 11.9 1.4 100.0% 46.7% 14.3 11.3 19.0 8.7 0.0 100.0% 2004 48.8% 15.8 11.7 23.0 0.7 0.0 100.0% (1) We revised percentages of total revenues for fiscal year 2002 to conform with our classification of revenues attributable to services provided in fiscal year 2003. Revenues Cost of operations General and administration Depreciation and amortization Impairment charge Restructuring charge Operating income Interest expense, net Income from equity method investments Loss on debt extinguishment Other expense/(income), net and minority interest (Benefit) provision for income taxes Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle 2002 100.0% 65.7 12.9 12.0 — (0.1) 9.5 7.3 (0.5) — (1.1) 1.2 2.6% 2003 100.0% 66.1 13.2 11.4 1.2 — 8.1 6.2 (0.5) 0.9 (0.4) 0.9 1.0% 2004 100.0% 65.3 13.2 13.6 0.4 — 7.5 5.8 (0.5) — 1.4 (0.4) 1.2% 28 C A S E L L A W A S T E S Y S T E M S 29 2 0 0 4 F O R M 1 0 K FISCAL YEAR 2004 VERSUS FISCAL YEAR 2003 Revenues—Revenues increased $18.8 million, or 4.5%, to $439.7 million in fiscal year 2004 from $420.9 million in fiscal year 2003. $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 The revenue increase is attributable to an increase in core solid waste revenues of $15.7 million due to volume and price increases, and a gain on the conclusion of the American Ash Recovery Technologies (“AART”) contract of $0.3 million, offset by a $1.3 million and higher recycling volumes and prices which resulted in a net increase in recycling revenues of $12.3 million. Loss of revenues from charge for interest rate swap unwind costs. businesses divested amounted to $32.6 million, partially offset by the roll-over effect of businesses acquired of $23.4 million. Cost of operations—Cost of operations increased $9.0 million, or 3.2%, to $287.3 million in fiscal year 2004 from $278.3 million in million for fiscal year 2003. The effective tax rate decreased to (43.2)% for fiscal year 2004 from 48.4% for fiscal year 2003. This was fiscal year 2003. Cost of operations as a percentage of revenues decreased to 65.3% in fiscal year 2004 from 66.1% in fiscal year primarily due to a decrease in the valuation allowance for loss carryforwards in 2004 as utilization of tax losses is more certain, as well 2003. The dollar increase in cost of operations expenses is primarily due to the effect of acquired businesses and a net increase in as, in 2003, the nondeductible impairment of goodwill and nondeductible losses on business dispositions. (Benefit) provision for income taxes—Provision for income taxes decreased $5.4 million for fiscal year 2004 to $(1.6) million from $3.8 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. 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 General and administration—General and administration expenses increased $2.4 million, or 4.3%, to $58.2 million in fiscal year 2004 post-closure costs be discounted to present value. Upon adoption of SFAS No. 143 we recorded a cumulative effect of change in from $55.8 million in fiscal year 2003. General and administration expenses as a percentage of revenues remained unchanged in fiscal accounting principle of $2.7 million (net of taxes of $1.9 million) in order to reflect the cumulative change in accounting for landfill year 2004 compared to fiscal year 2003. The dollar increase in general and administrative costs was due to higher bad debt and travel obligations retroactive to the date of the inception of the landfill. costs associated with the development of new landfill capacity. 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 Depreciation and amortization—Depreciation and amortization expense increased $11.8 million, or 24.6% to $59.7 million in fiscal year 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 2004 from $47.9 million in fiscal year 2003. Depreciation expense was up $2.4 million between periods and landfill amortization expense 2003 as a cumulative effect of change in accounting principle. The goodwill impairment charge was related to our waste-to-energy increased $9.4 million which was primarily attributable to increased landfill volumes, the effect of newly acquired landfill operations and operation, Maine Energy, and the brokerage business of the FCR Recycling segment, both of which were acquired as part of our as a result of adopting SFAS No. 143. Depreciation and amortization expense as a percentage of revenue rose to 13.6% in fiscal year acquisition of KTI. At the time of acquisition, we recorded the fair value of these businesses using an independent third party valuation. 2004 from 11.4% in fiscal year 2003 which resulted from the higher landfill amortization expense. 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 Interest expense, net—Net interest expense decreased $0.9 million, or 3.4%, to $25.4 million in fiscal year 2004, from $26.3 million recorded as the net book value of these businesses exceeded their fair value. 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. Impairment charge—In the fourth quarter of fiscal 2004 we recorded an impairment charge of $1.6 million consisting of a $0.4 million write-down of our investment in Resource Optimization Technology (“ROT”), a compost facility, which we intend to transfer at no cost to the minority interest holder of ROT; 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 $0.3 million related to the discontinued Rockingham landfill project. Income from equity method investments—Income from equity method investments for fiscal years 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 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 $3.7 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, 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 was $6.0 million compared to other income of $1.6 million in fiscal year 2003. Due to an adverse court ruling involving a power plant in Fort Heights, Illinois in which we own a 50% joint venture interest and the exercise by a third party of an option to purchase our remaining interest in certain tire recycling operations, other expense in fiscal year 2004 includes an $8.0 million charge for the write-down of our investment in the tire recycling operation 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 FISCAL YEAR 2003 VERSUS FISCAL YEAR 2002 Revenues—Revenues decreased $0.3 million, or (0.1%), to $420.9 million in fiscal year 2003 from $421.2 million in fiscal year 2002. Divested businesses accounted for a decrease of approximately $26.2 million. These decreases were offset by price and volume increases in the core solid waste business amounting to $2.3 million, higher commodity prices and volumes amounting to $21.4 million and the positive rollover effect of acquisitions amounting to approximately $2.2 million. Cost of operations—Cost of operations increased $1.6 million, or 1.0%, to $278.3 million in fiscal year 2003 from $276.7 million in fiscal year 2002. Cost of operations as a percentage of revenues increased to 66.1% in fiscal year 2003 from 65.7% in fiscal year 2002. This increase arose mainly from higher insurance costs, partially offset by operating improvements in direct labor and lower commodity purchases resulting from the sale of the export brokerage business. The increased insurance costs arose mainly from a negative actuarial adjustment of $1.5 million related to our captive insurance company in fiscal 2003 versus a positive adjustment of $2.8 million in fiscal 2002. General and administration—General and administration expenses increased $1.3 million, or 2.4%, to $55.8 million in fiscal year 2003 from $54.5 million in fiscal year 2002. General and administration expenses increased slightly as a percentage of revenues to 13.2% in fiscal year 2003 from 12.9% in fiscal year 2002. The increase in general and administration expenses was primarily the result of legal and insurance expenses. Depreciation and amortization—Depreciation and amortization expense decreased $2.8 million, or (5.5%), to $47.9 million in fiscal year 2003 from $50.7 million in fiscal year 2002. The decrease was mainly attributable to our adopting SFAS 142 which eliminates recognition of goodwill amortization, partially offset by higher landfill amortization expense due to volume increases. Depreciation and amortization expense as a percentage of revenues decreased to 11.4% in fiscal year 2003 from 12.0% in fiscal year 2002. Interest expense, net—Net interest expense decreased $4.3 million, or 14.1%, to $26.3 million in fiscal year 2003, from $30.6 million in fiscal year 2002. 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 6.2% in fiscal year 2003 from 7.3% in fiscal year 2002. 30 C A S E L L A W A S T E S Y S T E M S 31 Impairment charge—In the fourth quarter of fiscal 2003 we recorded an impairment charge of $4.9 million to adjust the book value of the domestic brokerage and commercial recycling businesses to net realizable value. 2 0 0 4 F O R M 1 0 K 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 $12.6 million at April 30, 2004 compared to a net working capital deficit of $0.1 million at April 30, 2003. Working capital, net comprises current assets, Income from equity method investments—Income from equity method investments in fiscal year 2003 of $2.1 million reflects equity excluding cash and cash equivalents, minus current liabilities. The main factors accounting for the decrease were higher trade payable income in our 50% joint venture interest in GreenFiber. Equity income from GreenFiber in fiscal year 2003 included a $1.0 million gain and accrual balances, partially offset by increases in trade receivables and higher levels of restricted cash. associated with an eminent domain settlement received from a state department of transportation on the involuntary conversion of a We have a $325.0 million credit facility with a group of banks for which Fleet Bank, N.A. is acting as agent. This credit facility portion of a GreenFiber leased manufacturing facility. Income from equity method investments in fiscal year 2002 of $1.9 million reflects consists of a $175.0 million senior secured revolving credit facility and a senior secured term “B” loan, which had an outstanding equity income in our 50% joint venture interest in GreenFiber amounting to $4.3 million, offset by a $2.4 million loss related to our balance of $148.5 million at April 30, 2004. We have the right to increase the amount of the revolver and/or the term loan by an further investment in the New Heights tire processing business. aggregate amount of up to $50.0 million at our discretion, 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. On August 26, 2003, we amended the terms of the term loan, Loss on debt extinguishment—In fiscal year 2003, we entered into a new senior secured credit facility resulting in the write off of $3.7 lowering the borrowing rate and modifying the prepayment provisions to include a prepayment premium applicable to the first two years million in debt financing costs associated with the old senior secured credit facility. following the date of the amendment. Minority interest—This amount represented the minority owners’ interest in our majority owned subsidiary AART, which completed its restrict dividends and stock repurchases, limit capital expenditures, and set minimum net worth and profitability requirements and The term loan and revolving credit facility agreement contains covenants that may limit our activities, including covenants that ash operation contract and was dissolved in February 2003. interest coverage and leverage ratios. As of April 30, 2004, we considered the profitability covenant, which requires our cumulative adjusted net income for any two consecutive quarters to be positive, to be the most restrictive. As of April 30, 2004, we were in Other (income)/expense, net—Other income was $1.6 million in fiscal year 2003 compared to $4.5 million in other expenses in fiscal compliance with this covenant as we reported consolidated adjusted net income of $0.6 million for the six months ended April 30, 2004. year 2002. This decrease is attributable to the difference in gain on divestitures. In addition there was a gain of $1.2 million in fiscal Consolidated adjusted net income is defined by the credit facility agreement. In accordance with this definition, consolidated net year 2003 related to a settlement with Oakhurst Company, Inc., offset by a $1.3 million charge for interest rate swap unwind costs. income, determined in accordance with generally accepted accounting principles, is adjusted for elimination of certain nonrecurring (Benefit) provision for income taxes—Provision for income taxes decreased $1.3 million for fiscal year 2003 to $3.8 million from $5.1 14, 2004, we amended the terms of the senior credit facility to clarify the definition of certain non-recurring charges excluded from the million for fiscal year 2002. The effective tax rate increased to 48.4% for fiscal year 2003 from 32.4% for fiscal year 2002. This was covenant calculations in fiscal 2004. primarily due to an increase in the valuation allowance for loss carryforwards, nondeductible impairment of goodwill and the loss on the As of April 30, 2004, we had available borrowing capacity under our $175.0 million revolving credit facility of up to $142.1 million, sale of a significant portion of our interest in New Heights in fiscal year 2002, partially offset by the decrease in nondeductible goodwill subject to our ability to meet certain borrowing conditions. The available capacity of $142.1 million is net of outstanding irrevocable amortization, recognition of additional tax losses from New Heights and the elimination of capital loss carryforwards. letters of credit of $32.9 million. This credit facility is secured by all of our assets, including our interest in the equity securities of our charges, extraordinary gains, income from discontinued operations and non-cash income attributable to equity investments. On June Reclassification from discontinued operations, net—In the fourth quarter of fiscal 2003, we entered into negotiations with former As of April 30, 2004, we had outstanding $195.0 million of 9.75% senior subordinated notes (the ‘‘notes’’) which mature in January employees for the transfer of our domestic brokerage operation and a commercial recycling business. The commercial recycling 2013. The senior subordinated note agreement contains covenants that restrict dividends, stock repurchases and other payments, and business had been accounted for as a discontinued operation since fiscal year 2001. Due to the nature of the transaction, we could limits the incurrence of debt and issuance of preferred stock. The notes are guaranteed jointly and severally, fully and unconditionally not retain discontinued accounting treatment for this operation. Therefore the commercial recycling business has been reclassified from by our significant wholly-owned subsidiaries. discontinued to continuing operations for fiscal years 2002, and 2003. In fiscal year 2001, we estimated and accrued for anticipated Net cash provided by operating activities in fiscal years 2004 and 2003 amounted to $69.9 million and $65.0 million, respectively. future losses from this business which were recorded and classified as losses from discontinued operations. This amount has been The increase was mainly due to higher income from operations. Net cash provided by operating activities in fiscal year 2003 decreased reclassified and offset against actual losses from operations in fiscal years 2002 and 2003. by $2.7 million from $67.7 in fiscal year 2002. The decrease was primarily due to the cash outflows from landfill closure activities. Estimated loss on disposal of discontinued operations, net—The estimated loss on disposal of discontinued operations for fiscal year respectively. The increase in cash used in investing activities was due to a higher level of acquisitions, payments under landfill operating Net cash used in investing activities in fiscal year 2004 and fiscal year 2003 amounted to $123.7 million and $61.2 million, subsidiaries. The revolving credit facility matures in January 2008 and the term loan matures in January 2010. 2002 is primarily due to the loss on the sale of the commercial recycling business. lease contracts, capital expenditures and advances to unconsolidated entities. Net cash used in investing activities in fiscal year 2003 and fiscal year 2002 amounted to $61.2 million and $9.5 million, respectively. The increase in cash used in investing activities reflected Cumulative effect of change in accounting principle, net—Effective May 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible mainly lower proceeds from divestitures and an increase in acquisitions. Assets, which, among other things, eliminates the amortization of goodwill and requires an annual assessment of goodwill impairment by Net cash provided by financing activities was $46.1 million in fiscal year 2004 compared to $7.6 million provided by financing 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) activities in fiscal year 2003. The increase in cash provided by financing activities is primarily due to higher net borrowings, lower outlays was charged to earnings in fiscal year 2003 as a cumulative effect of change in accounting principle. The goodwill impairment charge was on deferred financing costs and higher proceeds from the exercise of stock options. Net cash provided by financing activities was $7.6 related to our waste-to-energy operation, Maine Energy, and the brokerage business of the FCR Recycling segment, both of which were million in fiscal year 2003 compared to net cash used in financing activities of $70.1 in fiscal year 2002. This increase was primarily due 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 to paying down less debt, net of borrowings, than in fiscal year 2002, partially offset by refinancing costs of $11.5 million. party valuation. The underlying assumptions used to establish the value of these businesses, including earnings projections, commodity pricing Our capital expenditures were $58.3 million in fiscal year 2004 compared to $41.9 million in fiscal year 2003. Capital spending was assumptions and industry valuation multiples for recycling products, were not realized. Accordingly, goodwill impairment charges were recorded higher in fiscal year 2004 mainly due to capital expenditures related to existing landfills and newly acquired landfill operating contracts. as the net book value of these businesses exceeded their fair value. In fiscal year 2002, we adopted SFAS No. 133, Accounting for Derivative Our capital expenditures were $37.7 million in fiscal year 2002. Capital spending was higher in fiscal year 2003 mainly due to capital Instruments and Hedging Activities, which resulted in a charge to earnings as a cumulative effect of change in accounting principle in the amount expenditures related to the upgrade of the truck fleet and facilities. We expect capital spending to amount to between $68.0 million and of $0.3 million (net of tax benefit of $0.2 million) for the portion of interest rate swap hedges determined to be ineffective. $72.0 million in fiscal year 2005. The expected increase is due to capital expenditures at the newly acquired landfills. 32 C A S E L L A W A S T E S Y S T E M S 33 2 0 0 4 F O R M 1 0 K In fiscal year 2004, we acquired ten solid waste hauling operations and one construction and demolition processing facility, which NEW ACCOUNTING PRONOUNCEMENTS SFAS No. 143, Accounting for Asset Retirement Obligations was adopted effective May 1, 2003. Through April 30, 2003 we also operates a landfill facility under an operating lease contract, in transactions accounted for as purchases, for an aggregate recognized expenses associated with (i) amortization of capitalized and future landfill asset costs and (ii) future closure and postclosure consideration of $32.6 million, consisting of $31.9 million in cash and $0.7 million in other consideration. We also acquired two landfill obligations on a units-of-production basis as airspace was consumed over the life of the related landfill. This practice, referred to as operating lease contracts. For the three new landfill operating lease contracts, we made payments totaling $32.2 million. During fiscal life-cycle accounting within the waste industry, continues to be followed, with the exception of capitalized and future landfill capping year 2003, we completed eight acquisitions for an aggregate consideration of $21.0 million, consisting of $18.1 million in cash and $2.9 costs. As a result of the adoption of SFAS No. 143, future capping costs are identified by specific capping event and amortized over million in notes payable and other consideration. In comparison, during fiscal year 2002, we completed four acquisitions for an the specific estimated capacity related to that event rather than over the life of the entire landfill, as was the practice prior to our aggregate consideration of $7.4 million, consisting of $4.6 million in cash and $2.8 million in notes payable and other consideration. In adoption of SFAS No. 143. fiscal year 2002, we completed our previously announced divestiture program which was announced in March 2001, from which we The primary modification to our methodology required by SFAS No. 143 is that capping, closure and post-closure costs be received total consideration of $107.6 million, including cash proceeds of $61.7 million which were used to reduce our indebtedness. discounted to present value. Our estimates of future capping, closure and post-closure costs historically have not taken into account We intend to use the additional availability under our revolving credit facility to support our acquisition program. As of June 14, discounts for the present value of costs to be paid in the future. Under SFAS No. 143, our estimates of costs to discharge asset 2004, we were negotiating an operating agreement in connection with the Kness Landfill in Sergeant, Pennsylvania owned by the retirement obligations for landfills are developed in today’s dollars. These costs are then inflated by 2.6% to reflect a normal escalation McKean County Solid Waste Authority. The closing of the McKean County transaction is subject to normal contingencies and there of prices up to the year they are expected to be paid. These estimated costs are then discounted to their present value using a credit can be no assurances that we will enter into that agreement. adjusted risk-free rate of 9.5%. Contractual Obligations Under SFAS No. 143, 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 The following table summarizes our significant contractual obligations and commitments as of April 30, 2004 (in thousands) and the but also the recorded capping, closure and post-closure liabilities, as well as the cost estimates for future capping, closure and anticipated effect of these obligations on our liquidity in future years: Fiscal Year(s) 2005 2006-2007 2008-2009 Thereafter Total Long-term debt Capital lease obligations Interest obligations (1) Operating leases (2) Closure/post-closure Redeemable preferred securities (3) $ 5,542 602 26,649 23,145 9,236 — $ 4,068 829 52,507 19,979 11,376 — $ 3,103 538 50,007 11,014 5,078 78,951 $ 336,035 — 75,163 58,850 150,154 — $ 348,748 1,969 204,326 112,988 175,844 78,951 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 amzortization 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, 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 $7.8 million, and a decrease in our net landfill assets of $3.2 million. The following is a summary of the balance sheet changes for landfill assets and capping, closure and post-closure Total contractual cash obligations (4) $ 65,174 $ 88,759 $ 148,691 $ 620,202 $ 922,826 liabilities at May 1, 2003 (in thousands): (1) Interest obligations based on long-term debt and capital lease balances as of April 30, 2004. Interest obligations related to variable rate debt calculated using variable rates in effect at April 30, 2004. (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 2005. We believe that our cash provided internally from operations together with our senior secured credit facilities 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 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. Landfill assets Accumulated amortization Net landfill assets Capping, closure, and post-closure liabilities Balance at April 30, 2003 $ 148,029 (63,207) $ 84,822 $ 25,949 Change $ 6,166 (9,394) $ (3,228) $ (7,855) Balance at May 1, 2003 $ 154,195 (72,601) $ 81,594 $ 18,094 The following table shows the activity and total balances related to accruals for capping, closure and post-closure from April 30, 2003 to April 30, 2004 (in thousands): Balance at April 30, 2003 Cumulative effect of change in accounting principle (1) Capping, closure, and post-closure liability, adjusted Obligations incurred Revisions in estimates Accretion expense Payments Acquisitions and other adjustments Balance at April 30, 2004 $ 25,949 (7,855) 18,094 4,556 (1,371) 1,871 (2,707) 4,780 $ 25,223 (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. 34 C A S E L L A W A S T E S Y S T E M S 35 2 0 0 4 F O R M 1 0 K SFAS No. 145, Rescission of FASB No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections was Our ability to achieve the benefits we anticipate from acquisitions, including cost savings and operating efficiencies, depends in issued in April, 2002 and among other things, restricts the classification of gains and losses from extinguishment of debt as part on our ability to successfully integrate the operations of such acquired businesses with our operations. The integration of acquired extraordinary such that most debt extinguishment gains and losses are no longer classified as extraordinary. SFAS No. 145 is effective businesses and other assets may require significant management time and company resources that would otherwise be available for for fiscal years beginning after May 15, 2002. Upon adoption, gains and losses on future debt extinguishment, if any, will be recorded the ongoing management of our existing operations. in pre-tax income. Prior to the adoption of SFAS No. 145, in the third quarter of fiscal year 2003, we recorded an extraordinary loss of In addition, the process of acquiring, developing and permitting additional disposal capacity is lengthy, expensive and uncertain. $2.2 million (net of income tax benefit of $1.5 million) in connection with the write-off of deferred financing costs related to the old term For example, we are currently involved in litigation with the Town of Bethlehem, New Hampshire relating to the expansion of a landfill loan and the old revolver. This item was reclassified to continuing operations in the financial statements as loss on debt extinguishment owned by our wholly owned subsidiary, North Country Environmental Services, Inc. Moreover, the disposal capacity at our existing in the amount of $3.7 million. landfills is limited by the remaining available volume at our landfills and annual and/or daily disposal limits imposed by the various SFAS No. 148, Accounting for Stock-Based Compensation— Transition and Disclosure—an amendment of FAS 123 was issued governmental authorities with jurisdiction over our landfills. We typically reach or approximate our daily and annual maximum permitted by the FASB in December 2002. This statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to disposal capacity at all of our landfills. If we are unable to develop or acquire additional disposal capacity, our ability to achieve provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee economies from the internalization of our waste stream will be limited and we may be required to increase our utilization of disposal compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in facilities owned by third parties, which could reduce our revenues and/or our operating margins. Although we have recently entered both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect into several landfill operating lease contracts and have announced that we are the successful bidder for the negotiation of an operating of the method used in reporting results. SFAS No. 148 is effective for fiscal years ending after December 15, 2002. We have included agreement for the McKean County Landfill in Pennsylvania, there can be no assurance that any or all of these landfill management the required disclosures in the Notes to the Consolidated Financial Statements (Note 1(o)). contracts will result in successful operations at the respective sites or that the landfill projects will receive all necessary permits. We FASB Interpretation No. 46 (Revised), Consolidation of Variable Interest Entities, an Interpretation of APB No. 51 was issued by recently experienced a delay with respect to our landfill management contract in Templeton, Massachusetts as a result of the Town’s the FASB in December 2003. In January 2003, the FASB issued FIN 46, which requires variable interest entities to be consolidated by adoption of by-laws prohibiting the acceptance of out-of-town waste. their primary beneficiaries. A primary beneficiary is the party that absorbs a majority of the entity's expected losses or receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Our ability to make acquisitions is dependent on the availability of adequate cash and the attractiveness of our stock price. In December 2003, the FASB revised FIN 46 to provide companies with clarification of key terms, additional exemptions for application We anticipate that any future business acquisitions will be financed through cash from operations, borrowings under our senior secured and an extended initial application period. FIN 46 is currently effective for all variable interest entities created or modified after January credit facilities, the issuance of shares of our Class A common stock and/or seller financing. We may not have sufficient existing capital 31, 2003 and special purpose entities created on or before January 31, 2003. The FASB's December 2003 revision to FIN 46 makes resources and may be unable to raise sufficient additional capital resources on satisfactory terms , if at all, in order to meet our capital the Interpretation effective for all other variable interests beginning March 31, 2004. The adoption of FIN 46 had no impact on our requirements for such acquisitions. consolidated financial statements. We also believe that a significant factor in our ability to close acquisitions will be the attractiveness to us and to persons selling SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity was issued by the businesses to us of our Class A common stock as consideration for potential acquisition candidates. This attractiveness may, in large FASB in May 2003. The statement changes the accounting for certain financial instruments that, under previous guidance, issuers could part, be dependent upon the relative market price and capital appreciation prospects of our Class A common stock compared to the account for as equity. The new statement requires that those instruments be classified as liabilities in statements of financial position. equity securities of our competitors. The trading price of our Class A common stock on the Nasdaq National Market has limited our SFAS No. 150 is effective for all financial instruments entered into or modified after June 14, 2003, and otherwise is effective at the willingness to use our equity as consideration and the willingness of sellers to accept our shares and as a result has limited, and could beginning of the first interim period beginning after June 15, 2003. We adopted SFAS No. 150 effective August 1, 2003. In November continue to limit, the size and scope of our acquisition program. 2003, the FASB issued an FSP delaying the effective date for certain instruments and entities. SFAS No. 150 had no impact on our consolidated financial statements. 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. Our increased leverage may restrict our future operations and impact our ability to make future acquisitions. Our 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 our ability to incur additional indebtedness, and thereby may limit our acquisition program. We 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 our future growth. Our strategy envisions that a substantial part of our 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 our existing markets, assets that are adjacent to or outside our existing markets, or larger, more strategic acquisitions. In addition, from time to time we may acquire businesses that are complementary to our core business strategy. We may not be able to identify suitable acquisition candidates. If we identify suitable acquisition candidates, we may be unable to negotiate successfully their acquisition at a favorable price or on favorable terms and conditions. Furthermore, we may be unable to obtain the necessary regulatory approval to complete potential acquisitions. Environmental regulations and litigation could subject us to fines, penalties, judgments and limitations on our ability to expand. We are 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. Our waste-to-energy facility is subject to regulations limiting discharges of pollution into the air and water, and our 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, our waste-to-energy facility in Biddeford, Maine is affected by zoning restrictions and air emissions limitations in our efforts to implement a new odor control system. If we are not able to comply with the requirements that apply to a particular facility or if we operate without necessary approvals, we could be subject to civil, and possibly criminal, fines and penalties, and we 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. We may not have sufficient insurance coverage for our environmental liabilities. Those costs or actions could be significant and impact our results of operations, as well as our available capital. Environmental and land use laws also impact our ability to expand and, in the case of our solid waste operations, may dictate those geographic areas from which we must, or, from which we 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 we are not able to expand or otherwise operate one or more of our facilities because of limits imposed under environmental laws, we may be required to increase our utilization of disposal facilities owned by third parties, which could reduce our revenues and/or operating margins. 36 C A S E L L A W A S T E S Y S T E M S 37 2 0 0 4 F O R M 1 0 K We have historically grown and intend to continue to grow through acquisitions, and we have tried and will continue to try to Maine Energy may be required to make a payment in connection with the payoff of certain obligations and limited partner loans evaluate and address environmental risks and liabilities presented by newly acquired businesses as we have identified them. It is earlier than we had anticipated and which may exceed the amount of the liability we recorded in connection with the KTI acquisition. possible that some liabilities, including ones that may exist only because of the past operations of an acquired business, may prove to Under the terms of waste handling agreements among the Biddeford-Saco Waste Handling Committee, the cities of Biddeford and be more difficult or costly to address than we anticipate. It is also possible that government officials responsible for enforcing Saco, Maine, 13 other municipalities and our subsidiary Maine Energy, Maine Energy will be required, following the date on which the environmental laws may believe an issue is more serious than we would expect, or that we will fail to identify or fully appreciate an bonds that financed Maine Energy and certain limited partner loans to Maine Energy are paid in full, to pay a residual cancellation existing liability before we become legally responsible to address it. Some of the legal sanctions to which we could become subject payment to the respective municipalities party to those agreements equal to an aggregate of 18% of the fair market value of the equity could cause us to lose a needed permit, or prevent us from or delay us in obtaining or renewing permits to operate our facilities or harm of the partners in Maine Energy. In connection with our merger with KTI, we estimated the fair market value of Maine Energy as of the our reputation. date the limited partner loans are anticipated to be paid in full, and recorded a liability equal to 18% of such amount. Our estimate of Our operating program depends on our ability to operate and expand the landfills we own and lease and to develop new landfill the fair market value of Maine Energy may not prove to be accurate, and in the event we have underestimated the value of Maine sites. Localities where we operate generally seek to regulate some or all landfill operations, including siting and expansion of operations. Energy, we could be required to recognize unanticipated charges, in which case our operating results could be harmed. The laws adopted by municipalities in which our landfills are located may limit or prohibit the expansion of the landfill as well as the In connection with these waste handling agreements, the cities of Biddeford and Saco and the additional 13 municipalities that amount and origin of waste that we can accept at the landfill on a daily or annual basis and any effort to acquire or expand landfills were parties to the agreements have filed lawsuits in the State of Maine seeking the residual cancellation payments and alleging, among typically involves a significant amount of time and expense. For example, expansion at our North County Environmental Services landfill, other things, our breach of the waste handling agreement for our failure to pay the residual cancellation payments in connection with outside the original 51 acres, will be prohibited as a result of a recent decision by the New Hampshire Supreme Court unless we prevail the KTI merger, failure to pay off limited partner loans in accordance with the terms of the agreement and processing amounts of waste in certain remanded issues under zoning laws or the Town revises its local ordinance prohibiting expansions. Expansion of our Hyland above contractual limits without issuance of proper notice. The complaint seeks damages for breach of contract and a court order landfill is subject to the passage of a town-wide referendum, and operation of the Templeton landfill will require repeal of a town by-law requiring us to provide an accounting of all relevant transactions since May 3, 1996. If the plaintiffs are successful in their claims against prohibiting the acceptance of out-of-town waste. We may not be successful in obtaining new landfill sites or expanding the permitted us and damages are awarded, our operating income in the period in which such a claim is paid would be impacted. capacity of any of our current landfills once their remaining disposal capacity has been consumed. If we are unable to develop additional disposal capacity, our ability to achieve economies from the internalization of our wastestream will be limited and we will be required to We may not be able to effectively compete in the highly competitive solid waste services industry. utilize the disposal facilities of our competitors. The solid waste services industry is highly competitive, has undergone a period of rapid consolidation and requires substantial labor and In addition to the costs of complying with environmental laws and regulations, we incur costs defending against environmental capital resources. Some of the markets in which we compete or will likely compete are served by one or more of the large national or litigation brought by governmental agencies and private parties. We are, and also may be in the future, a defendant in lawsuits brought multinational solid waste companies, as well as numerous regional and local solid waste companies. Intense competition exists not only by parties alleging environmental damage, personal injury, and/or property damage. For example, we are one of over twenty defendants to provide services to customers, but also to acquire other businesses within each market. Some of our competitors have significantly named in a toxic tort lawsuit filed on July 2, 2001 by residents surrounding three sites in Cheektowaga, New York alleging, among other greater financial and other resources than us. From time to time, competitors may reduce the price of their services in an effort to things, that we have liability as a result of our airspace agreement at the Schultz construction and demolition debris landfill. expand market share or to win a competitively bid contract. These practices may either require us to reduce the pricing of our services or result in our loss of business. Our operations would be adversely affected if we do not have access to sufficient capital. As is generally the case in the industry, some municipal contracts are subject to periodic competitive bidding. We may not be the Our ability to remain competitive and sustain our operations depends in part on cash flow from operations and our access to capital. successful bidder to obtain or retain these contracts. If we are unable to compete with larger and better capitalized companies, or to We intend to fund our cash needs primarily through cash from operations and borrowings under our new senior secured credit facilities. replace municipal contracts lost through the competitive bidding process with comparable contracts or other revenue sources within a However, we may require additional equity and/or debt financing for debt repayment obligations and to fund our growth and operations. reasonable time period, our revenues would decrease and our operating results would be harmed. In addition, if we undertake more acquisitions or further expand our operations, our capital requirements may increase. We may not In our solid waste disposal markets we also compete with operators of alternative disposal and recycling facilities and with have access to the amount of capital that we require from time to time, on favorable terms or at all. counties, municipalities and solid waste districts that maintain their own waste collection, recycling and disposal operations. These Our results of operations could continue to be affected by changing prices or market requirements for recyclable materials. available to them than to us. Our results of operations have been and may continue to be affected by changing purchase or resale prices or market requirements Our GreenFiber insulation manufacturing joint venture with Louisiana-Pacific Corporation competes with other parties, principally for recyclable materials. Our recycling business involves the purchase and sale of recyclable materials, some of which are priced on a national manufacturers of fiberglass insulation, which have substantially greater resources than GreenFiber does, which they could use commodity basis. The resale and purchase prices of, and market demand for, recyclable materials, particularly waste paper, plastic and for product development, marketing or other purposes to our detriment. ferrous and aluminum metals, can be volatile due to numerous factors beyond our control. Although we seek to limit our exposure to fluctuating commodity prices through the use of hedging agreements and long-term supply contracts with customers, these changes Our results of operations and financial condition may be negatively affected if we inadequately accrue for capping, closure and have in the past contributed, and may continue to contribute, to significant variability in our period-to-period results of operations. post-closure costs. entities may have financial advantages because user fees or similar charges, tax revenues and tax-exempt financing may be more Our business is geographically concentrated and is therefore subject to regional economic downturns. We have material financial obligations relating to capping, closure and post-closure costs of our existing landfills and will have material financial obligations with respect to any disposal facilities which we may own or operate in the future. Once the permitted capacity of Our operations and customers are principally located in the eastern United States. Therefore, our business, financial condition and a particular landfill is reached and additional capacity is not authorized, the landfill must be closed and capped, and postclosure results of operations are susceptible to regional economic downturns and other regional factors, including state regulations and budget maintenance started. We establish reserves for the estimated costs associated with such capping, closure and post-closure obligations constraints and severe weather conditions. In addition, as we expand in our existing markets, opportunities for growth within these over the anticipated useful life of each landfill on a per ton basis. In addition to the landfills we currently operate, we own six unlined regions will become more limited and the geographic concentration of our business will increase. landfills, which are not currently in operation. We have provided and will in the future provide accruals for financial obligations relating to capping, closure and post-closure costs of our owned or operated landfills, the latter generally for a term of 30 years after final closure of a landfill. Our 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. 38 C A S E L L A W A S T E S Y S T E M S 39 Fluctuations in fuel costs could affect our operating expenses and results. Our Class B common stock has ten votes per share and is held exclusively by John W. Casella and Douglas R. Casella. The price and supply of fuel is unpredictable and fluctuates based on events beyond our control, including among others, geopolitical The holders of our Class B common stock are entitled to ten votes per share and the holders of our Class A common stock are entitled to 2 0 0 4 F O R M 1 0 K 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 our fleet of trucks, price escalations for fuel increase our operating expenses. During fiscal 2004, we used approximately 6.8 million gallons of diesel fuel in our solid waste operations. Although many of our customer contracts permit the Company to pass on some or all fuel increases to our customers, we may choose not to do so for competitive reasons. We could be precluded from entering into contracts or obtaining permits if we are unable to obtain third party financial assurance to secure our contractual obligations. Public solid waste collection, recycling and disposal contracts, obligations associated with landfill closure and the operation and closure of waste-to-energy facilities may require performance or surety bonds, letters of credit or other means of financial assurance to secure our contractual performance. If we are unable to obtain the necessary financial assurance in sufficient amounts or at acceptable rates, we 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 our ability to secure future contracts conditioned upon the contractor having adequate insurance coverage. We may be required to write-off capitalized charges or intangible assets in the future, which could harm our earnings. Any write-off of capitalized costs or intangible assets reduces our earnings and, consequently, could affect the market price of our Class A common stock. In accordance with generally accepted accounting principles, we capitalize certain expenditures and advances relating to our acquisitions, pending acquisitions, landfills and development projects. From time to time in future periods, we 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 we estimate 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. We have incurred such charges in the past. Our revenues and our operating income experience seasonal fluctuations. one vote per share. At June 14, 2004, an aggregate of 988,200 shares of our Class B common stock, representing 9,882,000 votes, were outstanding, all of which were beneficially owned by John W. Casella, our Chairman and Chief Executive Officer, or by his brother, Douglas R. Casella, a member of our Board of Directors. Based on the number of shares of common stock and Series A redeemable convertible preferred stock outstanding on June 14, 2004, the shares of our Class A common stock and Class B common stock beneficially owned by John W. Casella and Douglas R. Casella represent approximately 29.9% of the aggregate voting power of our 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, 2004, our outstanding variable rate debt consisted of the $148.5 million term loan portion of our new senior secured 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 $1.5 million. In addition, the revolving credit facility portion of our new senior secured credit facility, as it may be outstanding from time to time, is variable rate debt. The remainder of our debt is at fixed rates and not subject to interest rate risk. On February 24, 2003, we entered into two interest rate swap agreements with two banks, effectively fixing the interest index rate on a notional $53.0 million at approximately 2.4%. These agreements are specifically designated to existing interest payments under the term loan and are accounted for as effective cash flow hedges pursuant to SFAS No. 133. The fair value of the swaps is estimated at a loss of $0.1 million as of April 30, 2004. 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, 2004, to minimize our commodity exposure, we were party to twenty-two 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 operating margin is estimated at $1.9 million as of April 30, 2004, without considering our hedging agreements. The effect of the hedge position would reduce the impact by approximately $0.7 million. On December 2, 2001, Enron Corporation (“Enron”), the counterparty for all of our commodity hedges as of that date, filed for Chapter 11 bankruptcy protection. As a result of the filing, we executed the early termination provisions provided under the forward contracts, and filed a claim with the bankruptcy court. Additionally, we agreed with our equity method investee, GreenFiber, to include GreenFiber in our claim (as allowed under the applicable affiliate provisions). We recorded a charge of $1.7 million in fiscal 2002 other expense to recognize the change in fair value of our commodity contracts. Subsequent changes in the fair value of these commodity Our transfer and disposal revenues have historically been lower during the months of November through March. This seasonality contracts were reflected in earnings until their March 2003 termination. We have no remaining exposure related to our claims against Enron. 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 northeastern 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 to our operations. Our recycling business experiences increased volumes of newspaper in November and December due to increased newspaper advertising and retail activity during the holiday season. Our cellulose insulation joint venture experiences lower sales in November and December because of lower production of manufactured housing due to holiday plant shutdowns. Efforts by labor unions to organize our employees could divert management attention and increase our operating expenses. Labor unions regularly make attempts to organize our employees, and these efforts will likely continue in the future. Certain groups of our employees have chosen to be represented by unions, and we have negotiated collective bargaining agreements with these groups. Additional groups of employees may seek union representation in the future, and the negotiation of collective bargaining agreements could divert management attention and result in increased operating expenses and lower net income. If we are unable to negotiate acceptable collective bargaining agreements, we 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, our revenues could decrease and our operating expenses could increase, which could adversely affect our financial condition, results of operations and cash flows. As of June 14, 2004, approximately 5.3% of our employees involved in collection, transfer, disposal, recycling or other operations, including our employees at our Maine Energy waste-to-energy facility, were represented by unions. 40 C A S E L L A W A S T E S Y S T E M S 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: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Casella Waste Systems, Inc. and its subsidiaries (the “Company”) at April 30, 2004 and April 30, 2003, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2004 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 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 described 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. As described in Note 3 to the consolidated financial statements, on May 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets, and its method of accounting for the impairment or disposal of long-lived assets. As described in Note 1(p) to the consolidated financial statements, on May 1, 2001, the Company changed its method of accounting for derivative instruments and hedging activities. By: /s/ PricewaterhouseCoopers LLP Boston, Massachusetts Date: June 17, 2004 41 CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) 2 0 0 4 F O R M 1 0 K April 30, 2003 April 30, 2004 Fiscal Year Ended April 30, Asset CURRENT ASSETS: Cash and cash equivalents Restricted cash Accounts receivable-trade, net of allowance for doubtful accounts of $895 and $583 Notes receivable-officers/employees Refundable income taxes Prepaid expenses Inventory Deferred income taxes Other current assets Total current assets Property, plant and equipment, net of accumulated depreciation and amortization of $201,681 and $268,019 Intangible assets, net Deferred income taxes Investments in unconsolidated entities Net assets under contractual obligation Other non-current assets $ 15,652 10,839 46,531 1,105 — 5,079 1,740 4,275 1,111 86,332 302,328 162,696 — 34,740 3,844 12,756 516,364 $ 8,007 12,419 49,462 1,105 623 4,164 1,848 4,328 854 82,810 372,038 160,808 5,631 37,914 2,148 14,928 593,467 $ 602,696 $ 676,277 The accompanying notes are an integral part of these consolidated financial statements. Liabilities and stockholders’ equity April 30, 2003 April 30, 2004 CURRENT LIABILITIES: Current maturities of long-term debt Current maturities of capital lease obligations Accounts payable Accrued payroll and related expenses Accrued interest Accrued capping, closure and post-closure costs, current portion Other accrued liabilities Total current liabilities Long-term debt, less current maturities Capital lease obligations, less current maturities Accrued capping, closure and post-closure costs, less current maturities Deferred income taxes Other long-term liabilities $ 4,534 1,287 33,290 7,383 5,375 2,962 15,925 70,756 302,389 1,969 22,987 2,994 18,625 $ 5,542 602 40,034 7,425 6,024 2,471 25,273 87,371 349,163 1,367 22,752 — 18,493 COMMITMENTS AND CONTINGENCIES Series A redeemable, convertible preferred stock, 55,750 shares authorized, issued and outstanding as of April 30, 2003 and 2004, liquidation preference of $1,000 per share plus accrued but unpaid dividends 63,824 67,076 STOCKHOLDERS’ EQUITY: Class A common stock - Authorized - 100,000,000 shares, $0.01 par value issued and outstanding - 22,769,000 and 23,496,000 shares as of April 30, 2003 and 2004, respectively Class B Common Stock - Authorized - 1,000,000 shares, $0.01 par value 10 votes per share, issued and outstanding - 988,000 shares Accumulated other comprehensive income Additional paid-in capital Accumulated deficit Total stockholders’ equity Revenues Operating expenses: Cost of operations General and administration Depreciation and amortization Impairment charge Restructuring charge Operating income Other expense/(income), net: Interest income Interest expense Income from equity method investments Loss on debt extinguishment Minority interest Other expense/(income) Other expense, net Income from continuing operations before income taxes, discontinued operations and cumulative effect of change in accounting principle (Benefit) provision for income taxes Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle Discontinued Operations: Estimated loss on disposal of discontinued operations (net of income tax benefit of $157) Reclassification from discontinued operations (net of income tax provision $776 and $34) Cumulative effect of change in accounting principle (net of income tax (provision) benefit of $170, $189 and ($1,856)) Net income (loss) Preferred stock dividend 2002 2003 2004 $ 421,235 $ 420,863 $ 439,686 276,693 54,456 50,712 — (438) 381,423 39,812 (904) 31,451 (1,899) — (154) (4,480) 24,014 15,798 5,111 10,687 (4,096) 1,140 (250) 7,481 3,010 278,347 55,772 47,930 4,864 — 386,913 33,950 (318) 26,572 (2,073) 3,649 (152) (1,599) 26,079 7,871 3,813 4,058 — 50 (63,916) (59,808) 3,094 287,309 58,198 59,673 1,663 — 406,843 32,843 (251) 25,648 (2,261) — — 5,948 29,084 3,759 (1,623) 5,382 — — 2,723 8,105 3,252 Net income (loss) available to common stockholders $ 4,471 $ (62,902) $ 4,853 The accompanying notes are an integral part of these consolidated financial statements. Fiscal Year Ended April 30 2002 2003 2004 Earnings Per Share: Basic: Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle available to common stockholders Estimated loss on disposal of discontinued operations, net Reclassification from discontinued operations, net Cumulative effect of change in accounting principle, net Net income (loss) per common share available to common stockholders Basic weighted average common shares outstanding $ 0.33 (0.18) 0.05 (0.01) $ 0.19 23,496 $ 0.32 (0.17) 0.05 (0.01) $ 0.19 24,169 $ 0.04 — — (2.69) $ (2.65) 23,716 $ 0.04 — — (2.67) $ (2.63) 23,904 $ 0.09 — — $ 0.11 $ 0.20 24,002 $ 0.09 — — 0.11 $ 0.20 24,445 43 228 235 Diluted: 10 542 270,068 (151,696) 119,152 10 408 272,993 (143,591) 130,055 $ 602,696 $ 676,277 Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle available to common stockholders Estimated loss on disposal of discontinued operations, net Reclassification from discontinued operations, net Cumulative effect of change in accounting principle, net Net income (loss) per common share available to common stockholders Diluted weighted average common shares outstanding The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. 42 C A S E L L A W A S T E S Y S T E M S CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) Stockholders’ Equity Balance, April 30, 2001 22,198 $ 222 Issuance of Class A common stock Issuance of Class A common stock from the exercise of stock warrants, options and employee stock purchase plan Accrual of preferred stock dividend Net income Unrealized gain / (loss) on securities, net of reclassification adjustments Change in fair value of interest rate swaps and commodity hedges, net of reclassification adjustments Total comprehensive income Other Balance, April 30, 2002 Issuance of Class A common stock from the exercise of stock warrants, options and employee stock purchase plan Accrual of preferred stock dividend Net loss Change in fair value of interest rate swaps and commodity hedges, net of reclassification adjustments Total comprehensive loss Other Balance, April 30, 2003 Issuance of Class A common stock from the exercise of stock warrants, options and employee stock purchase plan Accrual of preferred stock dividend Net income Change in fair value of interest rate swaps and commodity hedges, net of reclassification adjustments Total comprehensive income Other Balance, April 30, 2004 Class A Common Stock # of Shares Class B Common Stock # of Shares Par Value 12 457 — — — — — — — 5 — — — — — — Par Value $ 10 — — — — — — — — 988 — — — — — — — — 22,667 $ 227 988 $ 10 102 — — — — — $ 1 — — — — — — — — — — — $ — — — — — — 22,769 $ 228 988 $ 10 727 — — — — — 23,496 $ 7 — — — — — $ 235 — — — — — — 988 $ — — — — — — $ 10 The accompanying notes are an integral part of these consolidated financial statements. 2 0 0 4 F O R M 1 0 K Additional Paid-In Capital (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Total Comprehensive Income (Loss) Balance, April 30, 2001 $ 271,502 $ (99,369) $ 586 $ 172,951 Issuance of Class A common stock Issuance of Class A common stock from the exercise of stock warrants, options and employee stock purchase plan Accrual of preferred stock dividend Net income Unrealized gain / (loss) on securities, net of reclassification adjustments Change in fair value of interest rate swaps and commodity hedges, net of reclassification adjustments Total comprehensive income Other 138 4,063 (3,010) — — — — 4 — — 7,481 — — — — — — — — 138 4,068 (3,010) 7,481 $ 7,481 (586) (586) (586) (4,250) — — (4,250) — 4 (4,250) $ 2,645 Balance, April 30, 2002 $ 272,697 $ (91,888) $ (4,250) $ 176,796 Issuance of Class A common stock from the exercise of stock warrants, options and employee stock purchase plan Accrual of preferred stock dividend Net loss Change in fair value of interest rate swaps and commodity hedges, net of reclassification adjustments Total comprehensive loss Other $ 459 (3,094) — — — 6 $ — (59,808) — — — $ — — — 4,792 — — $ 460 (3,094) (59,808) 4,792 — 6 $ (59,808) 4,792 $ (55,016) Balance, April 30, 2003 $ 270,068 $ (151,696) $ 542 $ 119,152 Issuance of Class A common stock from the exercise of stock warrants, options and employee stock purchase plan Accrual of preferred stock dividend Net income Change in fair value of interest rate swaps and commodity hedges, net of reclassification adjustments Total comprehensive income $ 6,053 (3,252) — — — $ — 8,105 — — Other Balance, April 30, 2004 124 $ 272,993 — $ (143,591) $ — — — (134) — — $ 408 $ 6,060 (3,252) 8,105 $ 8,105 (134) — (134) $ 7,971 124 $ 130,055 The accompanying notes are an integral part of these consolidated financial statements. 44 C A S E L L A W A S T E S Y S T E M S 45 CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Fiscal Year Ended April 30, 2002 2003 2004 Fiscal Year Ended April 30, 2002 2003 2004 2 0 0 4 F O R M 1 0 K Supplemental Disclosures of Cash Flow Information: Cash paid (received) during the period for - Interest Income taxes, net of refunds Supplemental Disclosures of Non-Cash Investing and Financing Activities: Summary of entities acquired in purchase business combinations Fair value of assets acquired Cash paid, net Liabilities assumed and notes payable to seller Common Stock and Stock Options Issued as Compensation $ 32,887 $ (1,267) $ 20,763 $ 54 $ 23,313 $ 349 $ 7,377 (4,601) $ 2,776 $ 650 $ 27,756 (18,068) $ 9,688 $ — $ 45,925 (31,947) $ 13,978 $ — The accompanying notes are an integral part of these consolidated financial statements. Cash Flows from Operating Activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities - Depreciation and amortization Depletion of landfill operating lease obligations Estimated loss on disposal of discontinued operations, net Reclassification from discontinued operations, net Cumulative effect of change in accounting principle, net Income from equity method investments Impairment charge Loss on debt extinguishment Loss from commodity hedge contracts, net Loss from asset write down Gain on investments, net (Gain) loss on sale of equipment Gain on sale of assets Minority interest Deferred income taxes Changes in assets and liabilities, net of effects of acquisitions and divestitures - Accounts receivable Accounts payable Other assets and liabilities Net Cash Provided by Operating Activities Cash Flows from Investing Activities: Acquisitions, net of cash acquired Acquisitions of landfill operating lease contracts Additions to property, plant and equipment Proceeds from divestitures Proceeds from sale of equipment Proceeds from sale of investments Advances to unconsolidated entities Proceeds from assets under contractual obligation Net Cash Used In Investing Activities Cash Flows from Financing Activities: Proceeds from long-term borrowings Principal payments on long-term debt Deferred financing costs Proceeds from exercise of stock options Net Cash Provided by (Used in) Financing Activities Cash used in discontinued operations Net (decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period $ 7,481 $ (59,808) $ 8,105 50,712 — 4,096 (1,140) 250 (1,899) — — 1,289 — (1,216) (76) (4,848) (154) 6,121 8,116 (5,100) 4,055 60,206 67,687 (4,601) — (37,674) 31,216 1,938 3,530 (3,942) — (9,533) 73,384 (147,009) — 3,560 (70,065) (5,792) (17,703) 22,001 $ 4,298 47,930 — — (50) 63,916 (2,073) 4,864 3,649 — — — 386 (684) (152) 6,052 (7,466) 12,031 (3,643) 124,760 64,952 (18,068) — (41,925) 875 1,212 — (3,302) — (61,208) 380,521 (361,905) (11,466) 460 7,610 — 11,354 4,298 $ 15,652 59,673 1,248 — — (2,723) (2,261) 1,663 — — 8,018 — (308) (1,144) — (2,005) (5,859) 8,065 (2,574) 61,793 69,898 (31,947) (32,223) (58,335) 4,984 506 — (7,332) 689 (123,658) 195,303 (150,562) (2,632) 4,006 46,115 — (7,645) 15,652 $ 8,007 The accompanying notes are an integral part of these consolidated financial statements. 46 C A S E L L A W A S T E S Y S T E M S 47 CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except for per share data) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Casella Waste Systems, Inc. (“the Company” or “the Parent”) is a regional, integrated solid waste services company that provides collection, transfer, disposal and recycling services, primarily in the eastern United States. The Company markets recyclable metals, aluminum, plastics, paper and corrugated cardboard which have been processed at its facilities as well as recyclables purchased from third parties. The Company also generates and sells electricity under a long-term contract at a waste-to-energy facility, Maine Energy Recovery Company LP (“Maine Energy”) (see Note 12). A summary of the Company’s significant accounting policies follows: (a) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. (b) Use of Estimates and Assumptions The Company’s preparation of its financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements. The estimates and assumptions will also affect the reported amounts of revenues and expenses during the reporting period. Summarized below are the estimates and assumptions that the Company considers to be significant in the preparation of its financial statements. Landfill Accounting—Capitalized Costs and Amortization The Company uses life-cycle accounting and the units-of-production method to recognize certain landfill costs. Under lifecycle accounting, all costs related to acquisition, construction, capping, closure and post-closure of landfill sites are capitalized or accrued and charged to income based on tonnage placed into each site. The Company routinely reviews its investment in operating landfills, transfer stations and other significant facilities to determine whether the carrying value of these investments is realizable. The Company’s judgments regarding the existence of impairment indicators are based on regulatory factors, market conditions and operational performance of its landfills. Units-of-production amortization rates are determined annually for each of the Company’s operating landfills, and such rates are based on estimates provided by its engineers and accounting personnel and consider the information provided by surveys, which are performed at least annually. Landfill Accounting—Accrued Capping, Closure and Post-Closure Costs Accrued capping, closure and post-closure costs represent future estimated costs related to capping, monitoring and maintenance of a solid waste landfill, after a landfill facility ceases to accept waste and closes. SFAS No. 143, Accounting for Asset Retirement Obligations, .requires 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 are then inflated by 2.6% to reflect a normal escalation of prices up to the year they are expected to be paid. These estimated costs are then discounted to their present value using a credit adjusted risk-free rate of 9.5%. Recovery of Long—Lived Assets In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews its 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. An impairment loss is recorded if 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. Allowance for Doubtful Accounts The Company estimates the allowance for bad debts based on historical collection experience, current trends, credit policy and a review of accounts receivable by aging category. 2 0 0 4 F O R M 1 0 K Self Insurance Reserves The Company is self insured for vehicles and worker’s compensation. Through the use of actuarial calculations provided by a third party, the Company estimates the amounts required to settle insurance claims. The actuarially-determined liability is calculated in part by reference to past claims experience, which considers both the frequency and settlement of claims. The Company’s self insurance reserves totaled $8,935 and $10,376 at April 30, 2003 and 2004, respectively. Discontinued Operations Prior to fiscal year 2003, the Company carried discontinued businesses at estimated net realizable value less costs to be incurred through the date of disposition. Upon adoption of SFAS No. 144, the assets and liabilities of discontinued operations are separately classified in the accompanying consolidated balance sheets. Income Taxes The Company uses estimates to determine its provision for income taxes and related assets and liabilities and any valuation allowance recorded against its net deferred tax assets. Valuation allowances have been established for the possibility that tax benefits may not be realized for certain deferred tax assets. (c) Revenue Recognition The Company recognizes collection, transfer, recycling and disposal revenues as the services are provided. Certain customers are billed in advance and, accordingly, recognition of the related revenues is deferred until the services are provided. Revenues from the sale of electricity to local utilities by the Company’s waste-to-energy facility (see Note 12) are recorded at the contract rate specified by its power purchase agreement as the electricity is delivered. Revenues from the sale of recycled materials are recognized upon shipment. Rebates to certain municipalities based on sales of recyclable materials are recorded upon the sale of such recyclables to third parties and are included as a reduction to revenues. Revenues for processing of recyclable materials are recognized when the related service is provided. Revenues from brokerage are recognized at the time of shipment. (d) Fair Value of Financial Instruments The Company’s financial instruments consist primarily of cash and cash equivalents, trade receivables, investments in closure trust funds, trade payables and debt instruments. The carrying values of these financial instruments approximate their respective fair values. See Note 11 for the terms and carrying values of the Company’s various debt instruments. (e) Cash and Cash Equivalents The Company considers all highly liquid investments purchased with maturities of three months or less to be cash equivalents. (f) Inventory Inventory includes secondary fibers, recyclables ready for sale and supplies and is stated at the lower of cost (first-in, firstout) or market. Inventory consisted of finished goods and supplies of approximately $1,740 and $1,848 at April 30, 2003 and 2004, respectively. (g) Investments In accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, the Company classifies its investment in equity securities as “available for sale.” Accordingly, the carrying value of the securities is adjusted to fair value through other comprehensive income. In October, 2001, the Company sold its remaining Bangor Hydro Warrants for $3,530. The resulting gain of $1,654 is included in other income. $1,038 (net of taxes of $707) of the gain was reclassified from other comprehensive income. The Company used the specific identification method as a basis for calculating the gain on sale. For the periods ending April 30, 2002, 2003 and 2004, the Company wrote down to fair value certain equity security investments. The write downs, which were reclassified from other comprehensive income in fiscal year 2002, amounted to $438, $42 and $20, respectively, and were due to declines in the fair value which, in the opinion of management, were considered to be other than temporary. The write downs are included in other expense/(income) in the accompanying statements of operations. As of April 30, 2003 and 2004, the fair value of investments was approximately $20 and $0, respectively, which is included in other current assets in the accompanying consolidated balance sheets. 48 C A S E L L A W A S T E S Y S T E M S 49 (h) Property, Plant and Equipment Summarized financial information of GreenFiber is as follows: Property, plant and equipment are recorded at cost, less accumulated depreciation and amortization. The Company provides for depreciation and amortization using the straight-line method by charges to operations in amounts that allocate the cost of the assets over their estimated useful lives as follows (See Note 6): Asset Classification Buildings and improvements Machinery and equipment Rolling stock Containers Estimated Useful Life 10-35 years 2-15 years 1-12 years 2-12 years The cost of maintenance and repairs is charged to operations as incurred. Capitalized landfill costs include expenditures for land and related airspace, permitting costs and preparation costs. Landfill permitting and preparation costs represent only direct costs related to these activities, including legal, engineering and construction. Landfill preparation costs include the costs of construction associated with excavation, liners, site berms and the installation of leak 2 0 0 4 F O R M 1 0 K April 30, 2003 April 30, 2004 $ 23,185 $ 36,025 $ 7,069 $ 600 $ 25,284 $ 38,728 $ 9,532 $ 113 Current assets Noncurrent assets Current liabilities Noncurrent liabilities For the Twelve Months Ended April 30, 2002 2003 2004 Revenue Gross Profit Net Income $ 99,030 $ 27,870 $ 8,586 $ 98,589 $ 21,075 $ 4,146 $ 116,057 $ 25,421 $ 4,523 detection and leachate collection systems. Interest is capitalized on landfill permitting and construction projects while the assets are A portion of the Company’s 50% interest in its New Heights joint venture was sold in September 2001 for consideration of $250. undergoing activities to ready them for their intended use. The interest capitalization rate is based on the Company’s weighted average The Company retained an interest of 9.95% in the tire assets of New Heights, as well as financial obligations related solely to the New cost of indebtedness. Interest capitalized for the years ended April 30, 2002, 2003 and 2004 was $437, $719 and $356, respectively. Heights power plant. The Company’s investment in the power assets of New Heights amounted to $2,586 at April 30, 2003. On April Management periodically reviews its investment in operating landfills, transfer stations and other significant facilities to determine 22, 2004, the Company reacquired at no cost the remaining 40.05% interests in the tire assets of New Heights. whether the costs of these investments are realizable. The Company sold 80.1% of the equity of Recovery Technologies Group, Inc. (“RTG”) in September, 2001 as part of the sale of Landfill permitting, acquisition and preparation costs are amortized as landfill airspace is consumed. In determining the amortization its tire processing business. The Company retained a 19.9% indirect interest in the RTG tire collection and processing business which rate for these landfills, preparation costs include the total estimated costs to complete construction of the landfills’ permitted and was valued at $3,080 at April 30, 2003. On April 22, 2004, the Company transferred its 19.9% indirect interest in RTG, as a result of permittable capacity. To be considered permittable, airspace must meet all of the following criteria: the Company must control the land a purchase option exercise by the purchasers of the original 80.1% interest. on which the expansion is sought; all technical siting criteria have been met or a variance has been obtained or is reasonably expected Due to an adverse court ruling involving the New Heights power plant and the exercise by the other stockholders of RTG of an option to be obtained; no legal or political impediments have been identified which the Company believes will not be resolved in its favor; the to purchase the Company’s remaining interest in RTG operations, the Company recorded a charge against operations recorded in other Company is actively working on obtaining any necessary permits and expects that all required permits will be received within the next expense in fiscal year 2004 amounting to $8,018 which reduced the balance in the investment in New Heights and RTG to $0 at April two to five years; and senior management has approved the project. Units-of-production amortization rates are determined annually for 30, 2004. On April 29, 2004, New Heights filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The New each of the Company’s operating landfills. The rates are based on estimates provided by the Company’s engineers and accounting Heights venture took this action to either reorganize its debts pending the outcome of an appeal filed with the Illinois Supreme Court for personnel and reflect the information provided by surveys, which are performed at least annually. reconsideration of the previously announced Appellate Court decision which ruled against New Heights in its claim to receive a retail During fiscal year 2004, the Company entered into three operation, management and lease agreements with separate payment rate for electricity generated at the facility, or liquidate in the event the Illinois Supreme Court decides not to hear the appeal. municipalities to operate landfills. These transactions are accounted for as operating leases with the undiscounted value of all future The Company had received a promissory note and other consideration from Oakhurst Company, Inc. (“OCI”) in connection with minimum payments amortized over the life of the contract based on tonnage placed in each respective disposal facility. the Company’s acquisition of OCI’s 37.5% interest in New Heights on July 3, 2001. The Company estimated the realizable value at $0. (i) Intangible Assets The Company reached a settlement with OCI in April, 2003 and received $1,220 which is included in other (income)/expense. In April, 2003, the Company acquired a 9.9% interest in Evergreen National Indemnity Company (“Evergreen”) for total Covenants not to compete and customer lists are amortized using the straight-line method over their estimated useful lives, typically consideration of $5,329. In December, 2003, the Company acquired an additional 9.9% interest in Evergreen for total consideration of no more than 10 years (See Note 7). $5,306. The Company’s investment in Evergreen amounted to $5,329 and $10,657 at April 2003 and 2004, respectively. The Company Goodwill is the cost in excess of fair value of identifiable assets of acquired businesses and has been amortized through April accounts for its investment in Evergreen under the cost method of accounting. 30, 2002 using the straight-line method over periods not exceeding 40 years. In July 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after (k) Income Taxes December 15, 2001. These standards modified the accounting rules related to accounting for business acquisitions, amortization of The Company records income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred intangible assets and the method of accounting for impairment. Under SFAS No. 142, goodwill and intangible assets deemed to income taxes are recognized based on the expected future tax consequences of differences between the financial statement basis and have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue the tax basis of assets and liabilities, calculated using currently enacted tax rates. to be amortized over their useful lives. (j) Investments in Unconsolidated Entities (l) Accrued Capping, Closure and Post-Closure Costs Accrued capping, closure and post-closure costs include the current and non-current portion of accruals associated with obligations for The Company entered into an agreement in July 2000 with Louisiana-Pacific to combine their respective cellulose insulation businesses capping, closure and post-closure of the Company’s operating and closed landfills. The Company, based on input from its engineers, into a single operating entity, US GreenFiber LLC (“GreenFiber”) under a joint venture agreement effective August 1, 2000. The accounting personnel and consultants, estimates its future cost requirements for capping, closure and post-closure monitoring and Company contributed the operating assets of its cellulose insulation manufacturing business together with $1,000 in cash. There was maintenance for solid waste landfills based on its interpretation of the technical standards of the U.S. Environmental Protection no gain or loss recognized on this transaction. The Company’s investment in GreenFiber amounted to $23,746 and $27,256 at April Agency’s Subtitle D regulations and the air emissions standards under the Clean Air Act as they are being applied on a state-by-state 30, 2003 and 2004, respectively. The Company accounts for its 50% ownership in GreenFiber under the equity method of accounting. basis. Capping, closure and post-closure monitoring and maintenance costs represent the costs related to cash expenditures yet to be incurred when a landfill facility ceases to accept waste and closes. 50 C A S E L L A W A S T E S Y S T E M S 51 Accruals for capping, closure and post-closure monitoring and maintenance requirements consider final capping of the site, site The total value of options granted during the years ended April 30, 2002, 2003 and 2004 would be amortized on a pro forma basis inspection, groundwater monitoring, leachate management, methane gas control and recovery, and operation and maintenance costs to over the vesting period of the options. Options generally vest over a one to three year period. If the Company had accounted for these be incurred during the period after the facility closes. Certain of these environmental costs, principally capping and methane gas control plans in accordance with SFAS No. 123, the Company’s net income (loss) and net income (loss) per share would have changed as costs, are also incurred during the operating life of the site in accordance with the landfill operation requirements of Subtitle D and the reflected in the following pro forma amounts: air emissions standards. Reviews of the future cost requirements for capping, closure and post-closure monitoring and maintenance for the Company’s operating landfills by the Company’s engineers, accounting personnel and consultants are performed at least annually and Fiscal Year 2002 2003 2004 2 0 0 4 F O R M 1 0 K are the basis upon which the Company’s estimates of these future costs and the related accrual rates are revised prospectively. The Company provides accruals for these estimated costs as the remaining permitted airspace of such facilities is consumed. The Company operates in states which require a certain portion of landfill capping, closure and post-closure obligations to be secured by financial assurance, which may take the form of restricted cash, surety bonds and letters of credit. Surety bonds securing closure and post-closure obligations at April 30, 2003 and 2004 totaled $25,705 and $34,550, respectively. (m) Comprehensive Income (Loss) Comprehensive income (loss) is defined as the change in net assets of a business enterprise during a period from transactions generated from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Accumulated other comprehensive income included in the accompanying balance sheets consists of changes in the fair value of the Company’s interest rate swap and commodity hedge agreements as well as the cumulative effect of the change in accounting principle due to the adoption of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (See Note 1(p)). (n) Earnings per Share Basic earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on the combined weighted average number of common shares and potentially dilutive shares, which include, where appropriate, the assumed exercise of employee stock options and the conversion of convertible debt and convertible preferred stock. In computing diluted earnings per share, the Company utilizes the treasury stock method with regard to employee stock options and the “if converted” method with regard to its convertible debt and preferred stock. (o) Stock Based Compensation Plans The Company has elected to account for its stock-based compensation plans under APB Opinion No. 25, Accounting for Stock Issued to Employees, for which no compensation expense is recorded in the statements of operations for the estimated fair value of stock options issued with an exercise price equal to the fair value of the underlying common stock on the grant date. During fiscal 1996, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation, which defines a fair value based method of accounting for stock-based employee compensation and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation costs for those plans using the intrinsic method of accounting prescribed by APB Opinion No. 25. Entities electing to remain with the accounting in APB Opinion No. 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in SFAS No. 123 had been applied. In addition, the Company has adopted the disclosure requirements of SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. In accordance with SFAS No. 123 and SFAS No. 148, the Company has computed, for pro forma disclosure purposes, the value of all options granted during the fiscal years 2002, 2003 and 2004 using the Black-Scholes option pricing model as prescribed by SFAS No. 123, using the following weighted average assumptions for grants in the fiscal years ended 2002, 2003 and 2004. Fiscal Year Risk free interest rate Expected dividend yield Expected life Expected volatility 2002 2003 2004 4.03%-5.05% N/A 5 Years 65.00% 2.57%-4.50% N/A 5 Years 65.00% 2.34%-3.39% N/A 5 Years 45.88% Net income (loss) available to common stockholders, as reported $ 4,471 $ (62,902) $ 4,853 Deduct: Total stock-based compensation expense determined under fair value based method, net Pro forma, net income (loss) Basic income (loss) per common share: As reported Pro forma Diluted income (loss) per common share: As reported Pro forma (3,804) $ 667 $ 0.19 $ 0.03 $ 0.19 $ 0.03 (1,507) $ (64,409) (1,145) $ 3,708 $ (2.65) $ (2.72) $ (2.63) $ (2.70) $ 0.20 $ 0.16 $ 0.20 $ 0.15 (p) Accounting for Derivatives and Hedging Activities The Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, on May 1, 2001. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company’s objective for utilizing derivative instruments is to reduce its exposure to fluctuations in cash flows due to changes in the variable interest rates under its credit facility and changes in the commodity prices of recycled paper. The Company’s strategy to hedge against fluctuations in variable interest rates involves entering into interest rate swaps that are specifically designated to existing interest payments under the credit facility and accounted for as cash flow hedges pursuant to SFAS No. 133. Upon adoption of SFAS No. 133, the Company recorded the ineffective portion of the interest rate hedges in place at the time of adoption amounting to $250 (net of taxes of $170) as a cumulative effect of change in accounting principle in fiscal year 2002. At April 30, 2003 and 2004, the Company had two interest rate swaps outstanding, expiring in February, 2006, with an aggregate notional amount of $53,000. The Company has evaluated these swaps and believes these instruments qualify for hedge accounting pursuant to SFAS No. 133. The fair value of these swaps was an obligation of $555 and $118, with the net amount (net of taxes of $223 and $48) recorded as an unrealized loss in other comprehensive income at April 30, 2003 and 2004, respectively. The estimated net amount of the existing losses as of April 30, 2004 included in accumulated other comprehensive income expected to be reclassified into earnings as payments are either made or received under the terms of the interest rate swaps within the next 12 months is approximately $65. The actual amounts reclassified into earnings are dependent on future movements in interest rates. The Company’s strategy to hedge against fluctuations in the commodity prices of recycled paper is to enter into hedges to mitigate the variability in cash flows generated from the sales of recycled paper at floating prices, resulting in a fixed price being received from these sales. The Company has entered into twenty-two commodity hedges, which expire at various times between April 2005 and October 2006. The Company has evaluated these hedges and believes that these instruments qualify for hedge accounting pursuant to SFAS No. 133. As of April 30, 2004, the fair value of these hedges was an obligation of $515 and $2,423, with the net amount (net of taxes of $197 and $969) recorded as an unrealized loss in accumulated other comprehensive income at April 30, 2003 and 2004, respectively. On December 2, 2001, Enron Corporation (Enron), the counterparty for all of the Company’s commodity hedges as of that date, filed for Chapter 11 bankruptcy protection. As a result of the filing, the Company executed the early termination provisions provided under the forward contracts, and filed a claim with the bankruptcy court. Additionally, the Company agreed with its equity method investee, GreenFiber, to include GreenFiber in its claim (as allowed under the applicable affiliate provisions). The Company recorded a charge of $1,688 in fiscal 2002 in other expense to recognize the change in fair value of these commodity contracts. Subsequent changes in the fair value of these commodity contracts were reflected in earnings until their March 2003 termination. The Company has no remaining exposure related to its claims against Enron. 52 C A S E L L A W A S T E S Y S T E M S 53 2 0 0 4 F O R M 1 0 K (q) Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. Effective May 1, 2003, the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations. Through April 30, Concentration of credit risk with respect to accounts receivable is limited because a large number of geographically diverse customers 2003 we recognized expenses associated with (i) amortization of capitalized and future landfill asset costs and (ii) future closure and comprise the Company’s customer base, thus spreading the trade credit risk. For the years ended April 30, 2003 and 2004, no single group post-closure obligations on a units-of-production basis as airspace was consumed over the life of the related landfill. This practice, or customer represents greater than 2.0% of total accounts receivable. The Company controls credit risk through credit evaluations, credit referred to as life-cycle accounting within the waste industry, continues to be followed, with the exception of future landfill capping limits, and monitoring procedures. The Company performs credit evaluations for commercial and industrial customers and performs ongoing costs. As a result of the adoption of SFAS No. 143, future capping costs are identified by specific capping event and amortized over credit evaluations of its customers, but generally does not require collateral to support accounts receivable. Credit risk related to derivative the specific estimated capacity related to that event rather than over the life of the entire landfill, as was the practice prior to our instruments results from the fact the Company enters into interest rate and commodity price swap agreements with various counterparties. adoption of SFAS No. 143. However, the Company monitors its derivative positions by regularly evaluating positions and the credit worthiness of the counterparties. The primary modification to the Company’s methodology required by SFAS No. 143 is to require that capping, closure and 2. RECLASSIFICATIONS Certain reclassifications have been made to the prior period financial statements to conform to the current presentation. 3. ADOPTION OF 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. The Company performed an impairment test as of May 1, 2002 and goodwill was determined to be impaired and the amount of $63,916 (net of tax benefit of $189) was charged to earnings as a cumulative effect of a change in accounting principle. The goodwill impairment is associated with the assets acquired by the Company 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 years 2002 and 2003 adjusted to exclude goodwill amortization and impairment charges. postclosure costs be discounted to present value. The Company’s estimates of future capping, closure and post-closure costs historically have not taken into account discounts for the present value of costs to be paid in the future. Under SFAS No. 143, the Company’s estimates of costs to discharge asset retirement obligations for landfills are developed in today’s dollars. These costs are then inflated by 2.6% to reflect a normal escalation of prices up to the year they are expected to be paid. These estimated costs are then discounted to their present value using a credit adjusted risk-free rate of 9.5%. Under SFAS No. 143, the Company no longer accrues landfill retirement obligations through a charge to cost of operations, but rather by an increase to landfill assets. Under SFAS No. 143, the amortizable landfill assets include not only the landfill development costs incurred but also the recorded capping, closure and post-closure liabilities as well as the cost estimates for future capping, closure and post-closure costs. The landfill asset is amortized over the total capacity of the landfill, as airspace is consumed during the life of the landfill with one exception. The exception is for capping for which both the recognition of the liability and the amortization of these costs are based instead on the airspace consumed for the specific capping event. Upon adoption, SFAS No. 143 required a cumulative change in accounting for landfill obligations retroactive to the date of the inception of the landfill. Inception of the asset retirement obligation is the date operations commenced or the date the asset was acquired. To do this, SFAS No. 143 required the creation of the related landfill asset, net of accumulated amortization and an adjustment to the capping, closure and post-closure liability for cumulative accretion. At May 1, 2003, the Company recorded a cumulative effect of change in accounting principle of $2,723 (net of taxes of $1,856). In addition we recorded a decrease in our capping, closure and post-closure obligations of $7,855, 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 Fiscal Year 2002 2003 liabilities at May 1, 2003 (in thousands): Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle Discontinued Operations: Estimated loss on disposal of discontinued operations, net Reclassification from discontinued operations, net Cumulative effect of change in accounting principle, net Reported net (loss) income Add: Goodwill impairment charge (net of income taxes of $189) Goodwill amortization (net of income taxes of $2,143) Adjusted net income Less: Preferred stock dividends Adjusted net income available to common stockholders Earnings per common share: Basic earnings per common share: Reported net (loss) income available to common stockholders Goodwill impairment charge, net Goodwill amortization, net Adjusted basic earnings per share available to common stockholders Diluted earnings per common share: Reported net (loss) income available to common stockholders Goodwill impairment charge, net Goodwill amortization, net Adjusted diluted earnings per share available to common stockholders $ 10,687 $ 4,058 (4,096) 1,140 (250) 7,481 — 4,956 12,437 3,010 $ 9,427 $ 0.19 — 0.21 $ 0.40 $ 0.19 — 0.21 $ 0.40 — 50 (63,916) (59,808) 63,916 — 4,108 3,094 $ 1,014 $ (2.65) 2.69 — $ 0.04 $ (2.63) 2.67 — $ 0.04 Landfill assets Accumulated amortization Net landfill assets Capping, closure, and post-closure liabilities Balance at April 30, 2003 $ 148,029 (63,207) $ 84,822 $ 25,949 Change $ 6,166 (9,394) $ (3,228) $ (7,855) Balance at May 1, 2003 $ 154,195 (72,601) $ 81,594 $ 18,094 The pro forma effects of the application of SFAS 143 as if the statement had been adopted on May 1, 2001, rather than May 1, 2003, using May 1, 2003 costs, assumptions and interest rates are presented below (in thousands): Fiscal Year 2002 2003 Net (loss) income available to common stockholders, as reported Reversal of closure and post-closure expense, net of tax Amortization expense, net of tax Accretion expense, net of tax Pro forma net (loss) income Reported net (loss) income per common share Pro forma net (loss) income per common share $ 4,471 (4,509) 1,026 663 $ 7,291 $ 0.19 $ 0.30 $ (62,902) (4,331) 1,526 764 $ (60,861) $ (2.63) $ (2.55) 54 C A S E L L A W A S T E S Y S T E M S 55 The pro forma asset retirement obligation liability balances as if SFAS 143 had been adopted on May 1, 2001, rather than May 1, 2003, are as follows: April 30, Accrued capping, closure and post-closure costs, as reported Pro forma accrued capping, closure and post-closure costs 2002 2003 $ 24,772 $ 16,169 $ 25,949 $ 18,094 The Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets as of May 1, 2002. Among other things, this standard requires that the assets and liabilities of a disposal group held for sale (including those of discontinued operations) be presented separately in the asset and liability sections, respectively, of the balance sheet. The standard also requires reclassification of such items in prior periods if such financial statements are presented for comparative purposes. SFAS No. 145, Rescission of FASB No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections was issued by the FASB in April, 2002 and among other things, restricts the classification of gains and losses from extinguishment of debt as extraordinary such that most debt extinguishment gains and losses are no longer classified as extraordinary. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. Upon adoption, gains and losses on future debt extinguishment, if any, will be recorded in pre-tax income. Prior to the adoption of SFAS No. 145, in the third quarter of fiscal year 2003, we recorded an extraordinary loss of $2,170 (net of income tax benefit of $1,479) in connection with the write-off of deferred financing costs related to the old term loan and the old revolver. This item was reclassified to continuing operations in the financial statements as loss on debt extinguishment in the amount of $3,649. 2 0 0 4 F O R M 1 0 K 4. BUSINESS COMBINATIONS On December 14, 1999, the Company consummated its acquisition of KTI, a publicly traded solid waste handling company. KTI specialized in solid waste disposal and recycling, and operated manufacturing facilities utilizing recycled materials. All of KTI’s common stock was acquired in exchange for 7,152 shares of Class A Common Stock. In addition to the above, the Company also acquired four, eight and eleven solid waste hauling, landfill disposal or material recycling operations in fiscal years 2002, 2003 and 2004, respectively, in transactions accounted for as purchases. Accordingly, the operating results of these businesses are included in the accompanying consolidated statements of operations from the dates of acquisition, and the purchase prices have been allocated to the net assets acquired based on fair values at the dates of acquisition, with the residual amounts allocated to goodwill. Management does not believe the final purchase price allocation will produce materially different results than reflected herein. The purchase prices allocated to those net assets acquired were as follows: April 30, Current assets Property, plant and equipment Goodwill Intangible assets Current liabilities Other non-current liabilities Total consideration 2003 $ 525 21,025 5,253 953 (1,160) (5,660) 2004 $ 217 39,092 4,653 1,963 (7,653) (5,722) $ 20,936 $ 32,550 SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FAS 123 was issued The following unaudited pro forma combined information shows the results of the Company’s operations for the fiscal years 2003 by the FASB in December 2002. This statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to and 2004 as though each of the acquisitions completed in the fiscal years 2003 and 2004 had occurred as of May 1, 2002. provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used in reporting results. SFAS No. 148 is effective for fiscal years ending after December 15, 2002. The Company has included the required disclosures in these financial statements (Note 1). FASB Interpretation No. 46 (Revised), Consolidation of Variable Interest Entities, an Interpretation of APB No. 51 was issued by the FASB in December 2003. In January 2003, the FASB issued FIN 46, which requires variable interest entities to be consolidated by their primary beneficiaries. A primary beneficiary is the party that absorbs a majority of the entity s expected losses or receives a majority of the entity s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. In December 2003, the FASB revised FIN 46 to provide companies with clarification of key terms, additional exemptions for application and an extended initial application period. FIN 46 is currently effective for all variable interest entities created or modified after January 31, 2003 and special purpose entities created on or before January 31, 2003. The FASB s December 2003 revision to FIN 46 makes the Interpretation effective for all other variable interests beginning March 31, 2004. The adoption of FIN 46 had no impact on the Company’s consolidated financial statements. SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity was issued by the FASB in May 2003. The statement changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The new statement requires that those instruments be classified as liabilities in statements of financial position. SFAS No. 150 is effective for all financial instruments entered into or modified after June 14, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We adopted SFAS No. 150 effective August 1, 2003. In November 2003, the FASB issued an FSP delaying the effective date for certain instruments and entities. SFAS No. 150 had no impact on the Company’s consolidated financial statements. Fiscal Year Revenues Operating income Net income (loss) Diluted pro forma net income (loss) per common share Weighted average diluted shares outstanding 2003 2004 $ 438,478 $ 36,920 $ (58,821) $ (2.46) 23,904 $ 444,144 $ 32,020 $ 6,134 $ 0.25 24,445 The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisitions taken place or the results of future operations of the Company. Furthermore, the pro forma results do not give effect to all cost savings or incremental costs that may occur as a result of the integration and consolidation of the completed acquisitions. In December 2003, the Company commenced operations at Ontario County Landfill, after executing a 25-year operation, management and lease agreement with Ontario County, New York. The Company made initial payments of $4,266 related to this transaction. In February 2004, the Company 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 the Company became the operator of that facility under a 30-year operating and service agreement between the Company and the State of Maine. Under the terms of the agreement, the Company provided to the State of Maine, and the State of Maine provided to Georgia-Pacific an initial cash payment of $12,500 and a letters of credit in the respective amounts of $12,500 and $1,000, which became payable 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. Both of these transactions are accounted for as operating leases, therefore they are excluded from the above presentation. 56 C A S E L L A W A S T E S Y S T E M S 57 5. RESTRICTED CASH Restricted cash consists of cash held in trust on deposit with various banks as collateral for the Company’s financial obligations relative 8. NET ASSETS UNDER CONTRACTUAL OBLIGATION Effective September 30, 2002, the Company transferred its export brokerage operations to former employees, who had been to its self insurance claims liability as well as landfill capping, closure and post-closure costs and other facilities’ closure costs. Cash is responsible for managing that business. Consideration for the transaction was in the form of two notes receivable, amounting to 2 0 0 4 F O R M 1 0 K also restricted by specific agreement for facilities’ maintenance and other purposes. A summary of restricted cash is as follows: April 30, Insurance Landfill closure Facility maintenance and operations Total 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at April 30, 2003 and 2004 consist of the following: April 30, Land Landfills Landfill operating lease contracts Buildings and improvements Machinery and equipment Rolling stock Containers Less: accumulated depreciation and amortization 2003 2004 $ 10,715 73 51 $ 12,298 70 51 $ 10,839 $ 12,419 2003 2004 $ 10,499 148,029 — 53,369 155,784 94,345 41,983 504,009 201,681 $ 16,449 206,460 30,512 60,177 172,085 108,236 46,138 640,057 268,019 $5,460. These notes were payable within five years of the anniversary date of the transaction to the extent of free cash flow generated from the operations. Effective June 30, 2003, the Company entered into a similar transaction transferring its domestic brokerage operations as well as a commercial recycling business to former employees who had been responsible for managing those businesses. Consideration for the transaction was in the form of two notes receivable amounting up to $6,925. These notes are payable within twelve years of the anniversary date of the transaction to the extent of free cash flow generated from the operations. The Company did not initially account for either of these transactions as a sale based on an assessment that the risks and other incidents of ownership had not sufficiently transferred to the buyer. The net assets of both brokerage operations, amounting to $3,844 at April 30, 2003, were disclosed in the balance sheet as “net assets under contractual obligation”, and the balance reduced as payments were made. Effective April 1, 2004, the notes from the buyer of the export brokerage operations were paid in full and accordingly the Company was able to account for the transfer of the export brokerage operations as a sale, for total consideration of $4,984. The gain on the sale amounted to $1,144 and is included in other income for fiscal year 2004. The net assets of the domestic brokerage operations are disclosed in the balance sheet as “net assets under contractual obligation” and are being reduced as payments are made. Net assets under contractual obligations amounted to $2,148 at April 30, 2004. 9. ACCRUED CAPPING, CLOSURE AND POST CLOSURE Accrued capping, closure and post-closure costs include the current and non-current portion of costs associated with obligations for closure and post-closure of our landfills. 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 the 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. The changes to accrued capping, closure and post-closure liabilities are as follows: $ 302,328 $ 372,038 Years Ended April 30, 2002 2003 2004 Depreciation expense for the fiscal years 2002, 2003 and 2004 was $32,397, $33,042 and $35,411, respectively. Landfill amortization expense for the fiscal years 2002, 2003 and 2004 was $10,333, $13,257 and $22,689, respectively. Depletion expense on landfill operating lease contracts was $1,248 in fiscal year 2004. 7. INTANGIBLE ASSETS Intangible assets at April 30, 2003 and 2004 consist of the following (in thousands): April 30, 2003 Intangible assets Less accumulated amortization April 30, 2004 Intangible assets Less accumulated amortization Goodwill Covenants not to compete Customer lists Total $ 159,682 — $ 159,682 $ 157,230 — $ 157,230 $ 14,963 (12,210) $ 2,753 $ 16,402 (12,995) $ 688 (427) $ 261 $ 175,333 (12,637) $ 162,696 $ 688 (517) $ 174,320 (13,512) $ 3,407 $ 171 $ 160,808 Intangible amortization expense for the fiscal years 2002, 2003 and 2004 was $7,982, $1,631 and $1,572, respectively. The intangible amortization expense estimated as of April 30, 2004, for the five years following 2004 is as follows: 2005 2006 2007 2008 2009 $ 1,284 $ 1,034 $ 535 $ 265 $ 86 58 C A S E L L A W A S T E S Y S T E M S Balance, May, 1 Cumulative effect of change in accounting principle (1) Capping, closure, and post-closure liability, adjusted Obligations incurred Revisions in estimates Accretion expense Payments (2) Acquisitions and other adjustments (3) Balance, April 30 $ 17,230 — 17,230 6,665 — — (408) 1,285 $ 24,772 $ 24,772 — 24,772 8,400 — — (9,164) 1,941 $ 25,949 (7,855) 18,094 4,556 (1,371) 1,871 (2,707) 4,780 $ 25,949 $ 25,223 (1) Upon adoption of SFAS No. 143, on May 1, 2003, we 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. 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. (2) Spending levels increased in fiscal year 2003 mainly due to closure activities at our Woburn, Massachusetts and Pine Tree, Maine landfills. (3) In fiscal year 2002, we recorded additional post-closure accruals relating to one of our construction and demolition landfills. In fiscal year 2003, we recorded closure and post closure accruals relating to the Hardwick landfill acquisition. The increase in fiscal 2004 is as a result of capping, closure and post closure accruals relating to the acquisition of the Southbridge landfill operating contract. 10. OTHER ACCRUED LIABILITIES Other accrued liabilities at April 30, 2003 and 2004 consist of the following: April 30, Self insurance reserve Other accrued liabilities Total other accrued liabilities 2003 2004 $ 7,730 8,195 $ 8,962 16,311 $ 15,925 $ 25,273 59 11. LONG-TERM DEBT Long-term debt as of April 30, 2003 and 2004 consists of the following: Senior subordinated notes, due February 1, 2013, 9.75%, interest payable semiannually, unsecured and unconditionally guaranteed. Senior secured term loan (the “term loan”) due January 24, 2010, bearing interest at LIBOR plus 2.75% (approximately 3.90% at April 30, 2004 based on three month LIBOR), with principal payments of $1,500 per year, beginning in fiscal 2004 with the remaining principal balance due at maturity. This loan is collateralized by substantially all of the assets of the Company. Senior secured revolving credit facility (the “revolver”), which provides for advances of up to $175,000, due January 24, 2008, bearing interest at LIBOR plus 2.75%, (approximately 3.90% at April 30, 2004 based on three month LIBOR). This loan is collateralized by substantially all of the assets of the Company. Notes payable in connection with businesses acquired, bearing interest at rates of 0% - 12.5%, due in monthly, quarterly or annual installments varying to $75, expiring November 2004 through May 2009. Notes payable in connection with businesses acquired, bearing interest at 0%, discounted at 4.74% to 5.5%, due in monthly and annual installments varying to $1,000 through April 2005. Less - current maturities April 30, April 30, 2004 2003 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. The Company terminated five interest rate swaps in January, 2003 concurrent with the issuance of the notes and entering into its new senior credit facility. These derivatives were accounted for as cash flow hedges pursuant to SFAS 133 and were designated to $ 150,000 $ 200,957 interest payments under the previous credit facility. At April 30, 2002, the fair value of these swaps was an obligation of $8,225. The 150,000 148,500 — — 2,460 2,958 4,463 306,923 4,534 2,290 354,705 5,542 $ 302,389 $ 349,163 early termination costs associated with the unwind of these swaps amounted to $1,296 which is included in other expense/(income), net in the consolidated statements of operations for fiscal year 2003. The Company entered into new interest rate swap agreements as cash flow hedges for the new senior credit facility. As of April 30, 2004, interest rate swap agreements in notional amounts and with terms as set forth in the following table were outstanding: Bank Notional Amounts Receive Pay Range of Agreement Bank A Bank B $ 26,500 $ 26,500 LIBOR LIBOR 2.434% 2.450% February 2003 to February 2006 February 2003 to February 2006 The fair value of the swaps is estimated at a loss of $118 as of April 30, 2004. As of April 30, 2004, debt matures as follows: 2 0 0 4 F O R M 1 0 K On January 24, 2003, the Company issued $150,000 of 9.75% senior subordinated notes (the “notes”), due 2013. The senior subordinated note agreement 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 the Company and its significant subsidiaries. Concurrently with the initial issuance of the notes, the Company entered into a senior credit facility consisting of a term loan in the aggregate principal amount of $150,000 and a revolver in the aggregate principal amount of $175,000. The Company, under certain circumstances, has the option of increasing the term loan or the revolver by an additional $50,000. On August 26, 2003, the Company amended the terms of the term loan, lowering the borrowing rate and modifying the prepayment provisions to include a prepayment premium applicable to the first two years following the date of the amendment. On February 2, 2004, the Company issued an additional $45,000 of 9.75% senior subordinated notes due 2013. Proceeds from the issuance were used to repay outstanding indebtedness under the Company’s revolving credit facility, to pay transaction costs related to the offering and will be used and for general corporate purposes, including acquisitions. A premium of $6,075 was recorded upon the issuance which will be amortized over the life of the notes. Premium amortization of $118 was recorded to interest expense in fiscal 2004 using the effective interest rate method. The unamortized premium was $5,957 at April 30, 2004. Further advances were available under the revolver in the amount of $141,586 and $142,061 as of April 30, 2003 and 2004, respectively. These available amounts are net of outstanding irrevocable letters of credit totaling $33,414 and $32,939 as of April 30, 2003 and 2004. As of April 30, 2003 and 2004 no amounts had been drawn under the outstanding letters of credit. The term loan and revolving credit facility agreement contains covenants that may limit the Company’s activities, including covenants that restrict dividends and stock repurchases, limit capital expenditures, and set minimum net worth and profitability requirements and interest coverage and leverage ratios. As of April 30, 2004, the Company considered the profitability covenant, which requires the cumulative adjusted net income for any two consecutive quarters to be positive, to be the most restrictive. As of April 30, 2004, the Company was in compliance with this covenant as the Company reported consolidated adjusted net income of $634 for the definition, consolidated net income, determined in accordance with generally accepted accounting principles, is adjusted for elimination of certain nonrecurring charges, extraordinary gains, income from discontinued operations and non-cash income attributable to equity investments. On June 14, 2004, the Company amended the terms of the senior credit facility to clarify the definition of certain non- recurring charges excluded from the covenant calculations in other expense in fiscal 2004. The Company recorded a loss on debt extinguishment of $3,649 as a result of the write-off of deferred financing costs related to the old term loan and the old revolver. The Company has 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 Fiscal Year 2004 2005 2006 2007 2008 Thereafter $ 5,542 2,289 1,779 1,555 1,548 341,992 $ 354,705 12. COMMITMENTS AND CONTINGENCIES (a) Leases The following is a schedule of future minimum lease payments, together with the present value of the net minimum lease payments under capital leases, as of April 30, 2004. Fiscal Year 2005 2006 2007 2008 2009 Thereafter Total Minimum Lease Payments Less-current maturities of capital lease obligations Present value of long term capital lease obligations Operating Leases Capital Leases $ 23,145 12,987 6,992 6,208 4,806 58,850 $ 112,988 $ 736 503 499 494 82 — 2,314 345 1,969 602 $ 1,367 The Company leases real estate, compactors and hauling vehicles under leases that qualify for treatment as capital leases. The assets related to these leases have been capitalized and are included in property and equipment at April 30, 2003 and 2004. The Company leases operating facilities and equipment under operating leases with monthly payments varying to $49. six months ended April 30, 2004. Consolidated adjusted net income is defined by the credit facility agreement. In accordance with such Less-amount representing interest 60 C A S E L L A W A S T E S Y S T E M S 61 During fiscal year 2004, the Company entered into three operation, management and lease agreements with separate (e) Employment Contracts municipalities to operate landfills. These transactions are accounted for as operating leases with the undiscounted value of all future The Company has entered into employment contracts with four of its senior officers. Two contracts are dated December 8, 1999, while minimum payments amortized over the life of the contract based on tonnage placed in each respective disposal facility. Those future the other two are dated June 18, 2001 and July 20, 2001, respectively. Each contract has a three year term and a two year covenant minimum payments are included in the preceding table. Depletion of landfill operating lease contracts charged to operations was $1,248 not to compete from the date of termination. These contracts automatically extend for a one year period at the end of the initial term in fiscal year 2004. and any renewal period. Total annual commitments for salaries under these contracts are $1,117. In the event of a change in control of Total rent expense under operating leases charged to operations was $5,787, $4,955 and $4,970 in fiscal years 2002, 2003 and the Company, or in the event of involuntary termination without cause, the employment contracts provide for a payment ranging from 2 0 0 4 F O R M 1 0 K 2004, respectively. (b) Investment in Waste-to-Energy Facilities The Company owns a 100% interest in Maine Energy, which utilizes non-hazardous solid waste as the fuel for the generation of electricity. Maine Energy sells the electricity it produces to Central Maine Power (“Central Maine”) pursuant to a long-term power purchase agreement. Under this agreement, Maine Energy has agreed to sell energy to Central Maine through May 31, 2007 at an initial rate of 7.18 cents (determined in 1996) per kilowatt-hour (“kWh”), which escalates annually by 2% (8.74 cents per kWh as of April 30, 2004). From June 1, 2007 until December 31, 2012, Maine Energy is to be paid the then current market value for both its energy and capacity by Central Maine. If, in any year, Maine Energy fails to produce 100,000,000 kWh of electricity and Maine Energy does not have a force majeure defense, such as physical damage to the plant or other similar events, Maine Energy must pay approximately $3,750 to Central Maine as liquidated damages. This payment obligation is secured by a letter of credit with a bank. Additionally, if, in any year, Maine Energy fails to produce 15,000,000 kWh of electricity and Maine Energy does not have a force majeure defense, Maine Energy must pay the balance of the letter of credit to Central Maine as liquidated damages. The balance of the letter of credit at April 30, 2004 was $15,000. Maine Energy produced and sold 159,006,000 kWh, 158,075,200 kWh and 150,732,000 kWh of electricity to Central Maine in the fiscal years ended April 30, 2002, 2003 and 2004, respectively, thereby meeting its kWh requirements under the power purchase agreement. Under the terms of a waste handling agreement between certain municipalities and Maine Energy, the latter is obligated to make a payment at the point in time that Maine Energy pays off its debt obligations (as defined), currently estimated to occur in 2008, or upon the consummation of an outright sale of Maine Energy. The obligation has been estimated by management at $9,700. Management believes the possibility of material loss in excess of this amount is remote. (c) Legal Proceedings In the normal course of its business and as a result of the extensive governmental regulation of the waste industry, the Company may periodically become subject to various judicial and administrative proceedings involving Federal, state or local agencies. In these proceedings, an agency may seek to impose fines on the Company or to revoke, or to deny renewal of, an operating permit held by the Company. In addition, the Company may become party to various claims and suits pending for alleged damages to persons and property, alleged violation of certain laws and for alleged liabilities arising out of matters occurring during the normal operation of the waste management business. During the period of November 21, 1996 to October 9, 1997, the Company performed certain closure activities and installed a cut- off wall at the Clinton County landfill, located in Clinton County, New York. On or about April 1999, the New York State Department of Labor alleged that the Company should have paid prevailing wages in connection with the labor associated with such activities. The Company has 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. The Company continues to explore settlement possibilities with the State in lieu of a hearing on damages, which is not yet scheduled. Although a loss as a result of these claims is probable, the Company cannot estimate a range of probable losses at this time. The Company is a defendant in certain other lawsuits alleging various claims incurred in the ordinary course of business, none of which, one to three years of salary and bonuses. 13. PREFERRED STOCK The Company is authorized to issue up to 1,000 shares of preferred stock in one or more series. As of April 30, 2003 and 2004, the Company had 56 shares authorized, issued and outstanding of Series A Redeemable Convertible Preferred Stock issued at $1,000 per share. These shares are convertible into Class A common stock, at the option of the holders, at $14 per share. Dividends are cumulative at a rate of 5%, compounded quarterly from the issuance date of August 11, 2000. The Company has the option to redeem the preferred stock for cash at any time after three years at a price giving the holder a defined yield, but must redeem the shares by the seventh anniversary date at liquidation value, which equals original cost, plus accrued but unpaid dividends, if any. Pursuant to the stock agreement, acceleration of the liquidation provisions would occur upon change in control of the Company. During the fiscal years 2002, 2003 and 2004, the Company accrued $3,010, $3,094 and $3,252 of dividends, respectively, which are included in the carrying value of the preferred stock in the accompanying consolidated balance sheets. 14. STOCKHOLDERS’ EQUITY (a) Common Stock The holders of the Class A Common Stock are entitled to one vote for each share held. The holders of the Class B Common Stock are entitled to ten votes for each share held, except for the election of one director, who is elected by the holders of the Class A Common Stock exclusively. The Class B Common Stock is convertible into Class A Common Stock on a share-for-share basis at the option of the shareholder. (b) Stock Warrants At April 30, 2003 and 2004, there were outstanding warrants to purchase 122 and 91 shares, respectively, of the Company’s Class A Common Stock at exercise prices between $15.88 and $43.63 per share, based on the fair value of the underlying common stock at the time of the warrants’ issuance. The warrants are exercisable and expire at varying times through November 2008. (c) Stock Option Plans During 1993, the Company adopted an incentive stock option plan for officers and other key employees. The 1993 Incentive Stock Option Plan (the “1993 Option Plan”) provided for the issuance of a maximum of 300 shares of Class A Common Stock. As of April 30, 2003, options to purchase 15 shares of Class A common stock were outstanding at a weighted average exercise price of $4.61. As of April 30, 2004, options to purchase 14 shares of Class A common stock were outstanding at a weighted average exercise price of $4.61. No further options may be granted under this plan. During 1994, the Company adopted a non-statutory stock option plan for officers and other key employees. The 1994 Stock Option Plan (the “1994 Option Plan”) provided for the issuance of a maximum of 150 shares of Class A Common Stock. As of April 30, 2003, options to purchase 15 shares of Class A common stock at a weighted average exercise price of $0.60 were outstanding under the 1994 Option Plan. As of April 30, 2004, there were no options outstanding under this plan. No further options may be granted either individually or in the aggregate, the Company believes are material to its financial condition, results of operations or cash flows. under this plan. (d) Environmental Liability In May 1994, the Company also established a nonqualified stock option pool for certain key employees. The plan, which was not approved by stockholders, established 338 stock options to purchase Class A common stock. As of April 30, 2003, options to The Company is subject to liability for any environmental damage, including personal injury and property damage, that its solid waste, purchase 255 shares of Class A common stock were outstanding at a weighted average exercise price of $2.00. As of April 30, 2004, recycling and power generation facilities may cause to neighboring property owners, particularly as a result of the contamination of there were no options outstanding under this plan. No further options may be granted under this plan. drinking water sources or soil, possibly including damage resulting from conditions existing before the Company acquired the facilities. During 1996, the Company adopted a stock option plan for employees, officers and directors of, and consultants and advisors to The Company may also be subject to liability for similar claims arising from off-site environmental contamination caused by pollutants the Company. The 1996 Stock Option Plan (the “1996 Option Plan”) provided for the issuance of a maximum of 918 shares of Class or hazardous substances if the Company or its predecessors arrange to transport, treat or dispose of those materials. Any substantial A Common Stock pursuant to the grant of either incentive stock options or non-statutory options. As of April 30, 2003, a total of 300 liability incurred by the Company arising from environmental damage could have a material adverse effect on the Company’s business, options to purchase Class A Common Stock were outstanding at a weighted average exercise price of $11.89. As of April 30, 2004, financial condition and results of operations. The Company is not presently aware of any situations that it expects would have a material a total of 279 options to purchase Class A common Stock were outstanding at an average exercise price of $11.62. No further options adverse impact on the results of operations or financial condition. may be granted under this plan. 62 C A S E L L A W A S T E S Y S T E M S 63 On July 31, 1997, the Company adopted a stock option plan for employees, officers and directors of, and consultants and advisors Set forth below is a summary of options outstanding and exercisable as of April 30, 2004: 2 0 0 4 F O R M 1 0 K to the Company. The Board of Directors has the authority to select the optionees and determine the terms of the options granted. The 1997 Stock Option Plan (the “1997 Option Plan”) provides for the issuance of 5,328 shares of Class A Common Stock pursuant to the grant of either incentive stock options or non-statutory options, which includes all authorized, but unissued options under previous plans. As of April 30, 2003, options to purchase 3,548 shares of Class A Common Stock at an average exercise price of $13.58 were outstanding under the 1997 Option Plan. As of April 30, 2004, options to purchase 2,959 shares of Class A Common Stock at a weighted average exercise price of $12.99 were outstanding under the 1997 Option Plan. As of April 30, 2004, 414 options were available for future grant under the 1997 Option Plan. Additionally, options outstanding under the assumed KTI Stock Option Plan totaled 82 and 70 at April 30, 2003 and 2004, respectively, at weighted average exercise prices of $22.42 and $20.41, respectively. Upon assumption of this plan, options under the KTI plan became exercisable for an equal number of shares of the Company’s stock. The exercise price of the converted options was increased by 96.1% based on relative fair values of the underlying stock at the date of the KTI acquisition. On July 31, 1997, the Company adopted a stock option plan for non-employee directors of the Company. The 1997 Non- Employee Director Stock Option Plan provides for the issuance of a maximum of 200 shares of Class A Common Stock pursuant to the grant of non-statutory options. As of April 30, 2003 and 2004, options to purchase 139 shares of Class A Common Stock at a weighted average exercise price of $11.36 and 117 shares of Class A Common Stock at a weighted average exercise price of $11.44, respectively, were outstanding. As of April 30, 2004, 27 options were available for future grant under the 1997 Non-Employee Director Stock Option Plan. On July 2, 2001, the Company offered its employees, other than executive officers, the opportunity to ask the Company to exchange options having an exercise price of $12.00 or more per share. For every two eligible options surrendered, the participating option holders received one new option on February 4, 2002 at an exercise price of $12.75, which was equal to the closing price of a common share as quoted by NASDAQ on that day. 666 options were surrendered for exchange under the offering resulting in 333 options being granted to participants. Options generally vest over a one to three year period from the date of grant and are granted at prices at least equal to the prevailing fair market value at the issue date. In general, options are issued with a life not to exceed ten years. Stock option activity for the fiscal years 2002, 2003 and 2004 is as follows: Outstanding, April 30, 2001 Granted Surrendered under Exchange Program Terminated Exercised Outstanding, April 30, 2002 Granted Terminated Exercised Outstanding, April 30, 2003 Granted Terminated Exercised Outstanding, April 30, 2004 Exercisable, April 30, 2002 Exercisable, April 30, 2003 Exercisable, April 30, 2004 Number of Options Weighted Average Exercise Price 5,410 710 (666) (802) (415) 4,237 225 (83) (26) 4,353 230 (355) (791) 3,437 3,812 3,982 3,164 15.65 13.09 (27.77) (20.56) (7.87) 13.09 8.30 (19.06) (5.28) 12.77 10.54 22.28 (6.11) $ 13.07 $ 13.27 $ 13.06 $ 13.27 Range of Exercise Price $ 4.61 - $ 6.91 $ 6.92 - $ 10.38 $ 10.39 - $15.58 $ 15.59 - $ 23.38 Over $ 23.39 Totals Number of Outstanding Options 130 1,098 1,541 422 246 3,437 Options Outstanding Options Exercisable Weighted Average Remaining Contractual Life (Years) 4.1 6.6 6.1 4.6 2.9 5.8 Weighted Average Exercise Price $ 5.05 8.81 13.26 17.32 26.95 $ 13.07 Number of Exercisable Options 102 940 1,454 422 246 3,164 Weighted Average Exercise Price $ 4.86 8.80 13.29 17.32 26.95 $ 13.27 The weighted average grant date fair value of options granted during the fiscal years 2002, 2003 and 2004 is $7.06, $8.30 and $4.76, respectively. 15. EMPLOYEE BENEFIT PLANS The Company offers its eligible employees the opportunity to contribute to a 401(k) plan. The Company may contribute up to five-hundred dollars per individual per calendar year. Participants vest in employer contributions ratably over a three year period. Employer contributions for the fiscal years 2002, 2003 and 2004 amounted to $406, $368 and $397, respectively. In January 1998, the Company implemented its Employee Stock Purchase Plan. Under this plan, qualified employees may purchase shares of Class A Common Stock by payroll deduction at a 15% discount from the market price. 600 shares of Class A Common Stock have been reserved for this purpose. During the fiscal years 2002, 2003 and 2004, 31, 28 and 36 shares, respectively, of Class A Common Stock were issued under this plan. 16. INCOME TAXES The (benefit) provision for income taxes from continuing operations for the fiscal years 2002, 2003 and 2004 consists of the following: Fiscal Year 2002 2003 2004 Federal— Current Deferred Deferred benefit of loss carryforwards State— Current Deferred Deferred benefit of loss carryforwards $ (1,639) 8,458 (4,049) 2,770 565 2,803 (1,027) 2,341 $ 22 (739) 1,970 1,253 871 1,592 97 2,560 $ 22 5,507 (7,985) (2,456) 360 1,872 (1,399) 833 $ 5,111 $ 3,813 $ (1,623) 64 C A S E L L A W A S T E S Y S T E M S 65 The differences in the (benefit) provision for income taxes and the amounts determined by applying the Federal statutory rate to The valuation allowance includes $6,156 related to losses acquired through acquisitions. To the extent that future realization of income before (benefit) provision for income taxes for the years ended April 30, 2002, 2003 and 2004 are as follows: such carryforwards exceeds the Company’s current estimates, additional benefits received will be recorded as a reduction of goodwill. 2 0 0 4 F O R M 1 0 K Fiscal Year 2002 2003 2004 Federal statutory rate Tax at statutory rate State income taxes, net of federal benefit Decrease in valuation allowance Losses on business dispositions Non-deductible impairment charge Non-deductible goodwill Equity in loss of unconsolidated entities Other, net 35% $ 5,529 1,523 — (2072) — 1,052 (390) (531) $ 5,111 35% $ 2,755 1,645 (3,173) 849 568 — — 1,169 $ 3,813 35% $ 1,315 (360) (2,746) — — — — 168 $ (1,623) Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax purposes. Deferred tax assets and liabilities consist of the following at April 30, 2003 and 2004: April 30, Deferred tax assets: Net operating loss carryforwards Accrued expenses and reserves Alternative minimum tax credit carryforwards Gain on business dispositions Capital loss carryforward Amortization of intangibles Other Total deferred tax assets Less: valuation allowance Total deferred tax assets after valuation allowance Deferred tax liabilities: Accelerated depreciation of property and equipment Amortization of intangibles Basis difference in partnership interests Other Total deferred tax liabilities Net deferred tax asset 2003 2004 $ 45,385 11,243 672 757 — 102 2,674 60,833 (24,696) 36,137 (33,181) — (1,487) (188) (34,856) $ 1,281 $ 48,944 11,889 672 329 224 — 2,151 64,209 (10,317) 53,892 (33,030) (8,219) (2,602) (82) (43,933) $ 9,959 In assessing the realizability of carryforwards and other deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company adjusts the valuation allowance in the period management determines it is more likely than not that deferred tax assets will or will not be realized. 17. DISCONTINUED OPERATIONS, ASSETS HELD FOR SALE, DIVESTITURES AND IMPAIRMENT CHARGES Discontinued Operations: In the fourth quarter of fiscal 2003, the Company entered into negotiations with former employees for the transfer of its domestic brokerage operations and a commercial recycling business. The transaction was completed in June 2003. The commercial recycling business had been accounted for as a discontinued operation since fiscal 2001. Due to the nature of the transaction, the Company could not retain discontinued accounting treatment for this operation. Therefore, the commercial recycling business’ operating results have been reclassified from discontinued to continuing operations for fiscal 2002 and 2003. In fiscal 2001, estimated future losses from this operation were recorded and classified as losses from discontinued operations. This amount has been reclassified and offset against actual losses from operations in fiscal 2002 and 2003. Net Assets Held for Sale: The Company had identified for sale certain other businesses which were classified as net assets held for sale as of April 30, 2001. These included its Timber Energy business and its one remaining plastics recycling facility. On May 17, 2001, the plastics recycling business was sold for approximately $998 in total consideration. The consideration consisted of $406 in cash and $592 in notes. On July 31, 2001, the Timber Energy business was sold for approximately $15,000 in total consideration. The consideration comprised the buyer’s assumption of debt, reimbursement of restricted cash funds, and a working capital adjustment, resulting in $10,691 cash. As discussed above, in June 2003, the Company transferred a commercial recycling business to former employees. The net assets of the commercial recycling business were $(306) and $(1,280) as of April 30, 2002 and 2003, respectively. Other Divestitures: In October, 2001, the Company sold its Multitrade division for consideration of $6,893. The transaction resulted in a gain of $4,156 which is included in other (income)/expense, net. In July, 2001, the Company sold its S&S Commercial division for consideration of $887. The transaction resulted in a gain of $692 which is included in other expense/(income), net. In April 2003, the Company sold its FCR Virginia division for consideration of $875. The transaction resulted in a gain of $684 which is included in other expense/(income), net. Effective September 30, 2002, the Company transferred its export brokerage operations to former employees, who had been responsible for managing that business. Consideration for the transaction was in the form of two notes receivable amounting to $5,460. These notes were payable within five years of the anniversary date of the transaction to the extent of free cash flow generated from the operations. The Company did not initially account for this transaction as a sale based on an assessment that the risks and other At April 30, 2004, the Company has, for Federal income tax purposes, net operating loss carryforwards of approximately $124,735 incidents of ownership had not sufficiently transferred to the buyer. Effective April 1, 2004, the Company completed the sale the export that expire in years 2005 through 2024 and state net operating loss carryforwards of approximately $71,853 that expire in years 2005 brokerage operations for total consideration of $4,984. The gain on the sale amounted to $1,144 and is included in other through 2024. Substantial limitations restrict the Company’s ability to utilize certain Federal and state loss carryforwards. Due to expense/(income) for fiscal year 2004. uncertainty of the utilization of the carryforwards, no tax benefit has been recognized for approximately $16,833 of the Federal net operating loss carryforwards and $42,104 of the state net operating loss carryforwards. In addition, the Company has approximately Impairment Charges: $672 minimum tax credit carryforward available that is not subject to limitation. In the fourth quarter of fiscal 2004 we recorded an impairment charge of $1,663, consisting of a $404 write-down of our investment in The $14,379 net decrease in the valuation allowance is primarily due to the reduction in the valuation allowance for Federal and Resource Optimization Technology (“ROT”), a compost facility, which we intend to transfer at no cost to the minority interest holder state loss carryforwards as utilization of the Company’s tax losses is more certain, and the expiration of certain Federal and state loss of ROT; a charge of $926 relating to the sale of buildings and land at its former recycling facility in Mechanics Falls, Maine; and a charge carryforwards. The change in the valuation allowance includes a $6,783 decrease related to Federal loss carryforwards that was of $333 for the discontinued Rockingham landfill project. recorded as a reduction to KTI goodwill. In the fourth quarter of fiscal 2003, the Company recorded an impairment charge of $4,864 to adjust the book value of the domestic brokerage and commercial recycling business to net realizable value. 66 C A S E L L A W A S T E S Y S T E M S 67 2 0 0 4 F O R M 1 0 K (e) Employee Loans As of April 30, 2003 and 2004, the Company has recourse loans to officers and employees outstanding in the amount of $1,105. The interest on these notes is payable upon demand by the Company. The notes have no fixed repayment terms. Interest is at the Wall Street Journal Prime Rate (4.00% at April 30, 2004). Notes from officers consisted of $1,016 at April 30, 2003 and 2004 with the remainder being from employees of the Company. (f) Commodity Sales The Company sells recycled paper products to its equity method investee, GreenFiber. Revenue from sales to GreenFiber amounted to $2,303, $3,375 and $3,071 for fiscal years 2002, 2003 and 2004, respectively. 20. SEGMENT REPORTING SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments in financial statements. In general, SFAS No. 131 requires that business entities report selected information about operating segments in a manner consistent with that used for internal management reporting. The Company classifies its operations into Eastern Region, Central Region, Western Region and FCR Recycling. The Company’s revenues in the Eastern Region, Central Region and Western Region segments are derived mainly from one industry segment, which includes the collection, transfer, recycling and disposal of non-hazardous solid waste. The Eastern Region also includes Maine Energy, which generates electricity from non-hazardous solid waste. The Company’s revenues in the FCR Recycling and brokerage segment are derived from integrated waste handling services, including processing and recycling of wood, paper, metals, aluminum, plastics and glass and brokerage of recycled materials. Ancillary operations, mainly residue recycling (through 2002), major customer accounts and earnings from equity method investees, are included in Other. 18. EARNINGS PER SHARE The following table sets forth the numerator and denominator used in the computation of earnings per share: Fiscal Year Ended April 30, 2002 2003 2004 Numerator: Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle Less: preferred stock dividends Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle available to common stockholders $ 10,687 (3,010) $ 4,058 (3,094) $ 5,382 (3,252) $ 7,677 $ 964 $ 2,130 Denominator: Number of shares outstanding, end of period: Class A common stock Class B common stock Effect of weighted average shares outstanding during period Weighted average number of common shares used in basic EPS Impact of potentially dilutive securities: Dilutive effect of options, warrants and contingent stock Weighted average number of common shares used in diluted EPS 22,667 988 (159) 23,496 673 24,169 22,769 988 (41) 23,716 188 23,904 23,496 988 (482) 24,002 443 24,445 For the fiscal years 2002, 2003 and 2004, 6,653, 8,408 and 6,513, respectively, of potentially dilutive common stock related to options, convertible debt, warrants and redeemable convertible preferred stock, respectively, were excluded from the calculation of dilutive shares since the inclusion of such shares would be anti-dilutive. 19. RELATED PARTY TRANSACTIONS (a) Services During fiscal years 2002, 2003 and 2004, the Company retained the services of a related party, a company wholly owned by two of the Company’s major stockholders and members of the Board of Directors (one of whom is also an officer), as a contractor in developing or closing certain landfills owned by the Company. Total purchased services charged to operations or capitalized to landfills for the fiscal years 2002, 2003 and 2004 were $2,559, $1,525 and $5,759, respectively, of which $28 and $499 were outstanding and included in accounts payable at April 30, 2003 and 2004, respectively. (b) Leases On August 1, 1993, the Company entered into two leases for operating facilities with a partnership in which two of the Company’s major stockholders and members of the Board of Directors (one of whom is also an officer) are the general partners. The leases are classified as capital leases in the accompanying consolidated balance sheets. The leases call for monthly payments of approximately $21 and expired in April 2003. The leases were renewed effective May 1, 2003 as capital leases for a term of 60 months. Total expense charged to operations for fiscal years 2002, 2003 and 2004 under these agreements was $204, $196 and $255, respectively. (c) Landfill Post-closure The Company has agreed to pay the cost of post-closure on a landfill owned by certain principal shareholders. The Company paid the cost of closing this landfill in 1992, and the post-closure maintenance obligations are expected to last until 2012. In the fiscal years 2002, 2003 and 2004, the Company paid $6, $8 and $9 respectively, pursuant to this agreement. As of April 30, 2003 and 2004, the Company has accrued $75 and $106 respectively, for costs associated with its post-closure obligations. (d) Transfer Station Lease In June 1994, the Company entered into a transfer station lease for a term of 10 years. The transfer station was owned by a current member of the Company’s Board of Directors, who became a director upon the execution of the lease. Under the terms of the lease the Company agreed to pay monthly rent for the first five years at a rate of five dollars per ton of waste disposed of at the transfer station, with a minimum rent of $7 per month. In June 1999, the monthly rent was lowered to a rate of two dollars per ton of waste disposed, with a minimum rent of $3 per month. Total lease payments for the fiscal years 2002, 2003 and 2004 were $64, $55 and $35, respectively. In October 2003, the Company agreed to assume the post-closure obligations at an adjacent closed landfill owned by the same member of the Company’s Board of Directors in exchange for ownership of the transfer station and closed landfill site and termination of the lease and rental obligations. 68 C A S E L L A W A S T E S Y S T E M S 69 Eastern Region Central Region Western FCR Region Recycling Other $ 152,095 $ 91,935 $ 65,628 $ 94,117 $ 17,460 31,889 43,777 14,626 18,338 58 1,525 21,140 9,247 15,850 108,517 19,163 12,758 2,559 11,856 25,212 1,125 10,192 7,434 6,490 48,576 (10,417) 4,121 10,044 2,573 37,433 (709) 2,501 1,263 905 (8) $ 270,854 $ 109,673 $ 104,479 $ 69,531 $ 67,074 Eliminations Total $ — $ 421,235 (108,688) — — — — — — 10,687 50,712 30,547 37,674 219,730 $ — $ 621,611 Eastern Region Central Western Region FCR Region Recycling Other $ 153,318 $ 90,524 $ 68,451 $ 94,326 $ 14,244 39,444 43,253 13,740 22,577 1 (6,342) 22,706 10,097 16,200 56,734 19,118 11,531 (204) 9,734 25,485 2,577 8,204 6,811 9,874 49,847 (4,331) 3,426 10,451 4,900 27,616 (6,964) 2,063 (901) 1,217 — $ 238,570 $ 107,694 $ 110,045 $ 64,989 $ 81,398 Year Ended April 30, 2002 Outside revenues Inter-segment Revenues Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle Depreciation & amortization Interest expense (net) Capital expenditures Goodwill Total assets Year Ended April 30, 2002 Outside revenues Inter-segment Revenues Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle Depreciation & amortization Interest expense (net) Capital expenditures Goodwill Total assets Year Ended April 30, 2003 Outside revenues Inter-segment Revenues Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle Depreciation & amortization Interest expense (net) Capital expenditures Goodwill Total assets Year Ended April 30, 2003 Outside revenues Inter-segment Revenues Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle Depreciation & amortization Interest expense (net) Capital expenditures Goodwill Total assets Year Ended April 30, 2004 Outside revenues Inter-segment Revenues Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle Depreciation & amortization Interest expense (net) Capital expenditures Goodwill Total assets Year Ended April 30, 2004 Outside revenues Inter-segment Revenues Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle Depreciation & amortization Interest expense (net) Capital expenditures Goodwill Total assets Amounts of our total revenue attributable to services provided are as follows: Fiscal Year Collection Landfill / disposal facilities Transfer Recycling Brokerage Other (1) Total 2 0 0 4 F O R M 1 0 K Eastern Region Central Western Region FCR Region Recycling Other $ 167,371 50,731 $ 100,789 48,458 $ 77,669 15,930 $ 77,091 3,657 $ 16,766 (12,128) 30,986 12,820 25,716 56,260 18,120 12,778 (639) 14,410 28,684 1,213 9,899 7,357 13,771 50,918 5,644 3,987 4,461 2,769 21,368 (7,467) 2,023 1,398 1,669 — $ 298,575 $ 114,630 $ 122,109 $ 59,457 $ 81,506 Eliminations Total $ — (118,776) $ 439,686 — — — — — — 5,382 59,673 25,397 58,335 157,230 $ — $ 676,277 2002 2003 2004 $ 196,863 57,449 45,597 65,508 50,125 5,693 $ 196,478 59,942 47,478 80,237 36,728 — $ 214,039 69,639 51,631 101,087 3,290 — $ 421,235 $ 420,863 $ 439,686 (1) Other revenues consist of revenues from entities divested during fiscal 2002, including Timber Energy and Multitrade. 21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of certain items in the Consolidated Statements of Operations by quarter for fiscal years 2003 and 2004. Fiscal Year 2003 Third Quarter(1)(2) Quarter(1) Quarter(1) Second First Fourth Quarter Eliminations Total $ — $ 420,863 (119,015) — — — — — — 4,058 47,930 26,254 41,925 159,682 $ — $ 602,696 Revenues Operating income (Loss) income from continuing operations before discontinued operations and cumulative effect of change in accounting principle Net (loss) income available to common stockholders Income per common share: Basic: (Loss) income from continuing operations before discontinued operations and cumulative effect of change in accounting principle Net (loss) income available to common stockholders Diluted: (Loss) income from continuing operations before discontinued operations and cumulative effect of change in accounting principle Net (loss) income available to common stockholders $ 116,031 11,467 $ 114,570 13,708 $ 95,801 8,525 $ 94,461 250 2,557 (62,071) 4,714 3,860 (822) (1,561) (2,391) (3,130) 0.08 (2.62) 0.08 (2.62) 0.17 0.16 0.16 0.16 (0.07) (0.07) (0.07) (0.07) (0.13) (0.13) (0.13) (0.13) 70 C A S E L L A W A S T E S Y S T E M S 71 Fiscal Year 2004 Revenues Operating income (Loss) income from continuing operations before discontinued operations and cumulative effect of change in accounting principle Net (loss) income available to common stockholders Income per common share: Basic: (Loss) income from continuing operations before discontinued operations and cumulative effect of change in accounting Net (loss) income available to common stockholders Diluted: (Loss) income from continuing operations before discontinued operations and cumulative effect of change in accounting principle Net (loss) income available to common stockholders First Quarter Second Quarter Third Quarter Fourth Quarter $ 113,888 10,367 $ 111,974 10,191 $ 104,558 7,407 $ 109,266 4,878 3,471 5,396 5,694 4,886 1,490 672 (5,273) (6,101) 0.11 0.22 0.11 0.22 0.20 0.20 0.20 0.20 0.03 0.03 0.03 0.03 (0.25) (0.25) (0.25) (0.25) (1) In the fourth quarter of fiscal 2003, the Company entered into negotiations with former employees for the transfer of the Company’s domestic brokerage operations and a commercial recycling business and in June 2003, the Company completed the transaction. The commercial recycling business had been accounted for as a discontinued operation since fiscal 2001. Due to the nature of the transaction, the Company could not retain discontinued accounting treatment for this operation. Therefore, the commercial recycling operating results have been reclassified from discontinued to continuing operations for fiscal years 2001, 2002 and 2003 and the above quarterly summary data has been revised from amounts previously reported. (2) The Company revised results for the first quarter of fiscal 2003 to include additional goodwill impairment in the amount of $1,100, net of taxes, relating to our waste-to-energy operations, Maine Energy. The Company previously reported goodwill impairment upon the adoption of SFAS 142 in the amount of $62,800, net of taxes. 22. CONDENSED CONSOLIDATING FINANCIAL INFORMATION The senior subordinated notes are guaranteed jointly and severally, fully and unconditionally by the Company’s significant wholly-owned subsidiaries. The Parent is the issuer and non-guarantor of the senior subordinated notes. The information which follows presents the condensed consolidating financial position as of April 30, 2003 and 2004; the condensed consolidating results of operations for the years ended April 30, 2002, 2003 and 2004; and the condensed consolidating statements of cash flows for the years ended April 30, 2002, 2003 and 2004 of (a) the parent company only (“the Parent”), (b) the combined guarantors (“the Guarantors”), each of which is 100% wholly-owned by the Parent, (c) the combined non-guarantors (“the Non-Guarantors”), (d) eliminating entries and (e) the Company on a consolidated basis. 2 0 0 4 F O R M 1 0 K CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET AS OF APRIL 30, 2003 (In thousands) Assets CURRENT ASSETS: Cash and cash equivalents Prepaid expenses Inventory Deferred taxes Other current assets Total current assets Property, plant and equipment, net of accumulated depreciation and amortization Intangible assets, net Deferred income taxes Investment in subsidiaries Investments in unconsolidated entities Assets under contractual obligation Other non-current assets Intercompany receivable Liabilities And Stockholders’ Equity CURRENT LIABILITIES: Current maturities of long term debt Accounts payable Accrued payroll and related expenses Accrued interest Accrued capping, closure and post-closure costs, current portion Other current liabilities Total current liabilities Long-term debt, less current maturities Capital lease obligations, less current maturities Accrued capping, closure and post closure costs, less current portion Deferred income taxes Other long-term liabilities COMMITMENTS AND CONTINGENCIES Series A redeemable, convertible preferred stock, 55,750 shares authorized, issued and outstanding, liquidation preference of $ 1,000 per share plus accrued but unpaid dividends STOCKHOLDERS’ EQUITY: Class A common stock - Authorized - 100,000,000 shares, $0.01 par value issued and outstanding - 22,769,000 shares Class B common stock - Non - Parent Guarantors Guarantors Elimination Consolidated $ 12,188 1,121 — 3,504 1,722 18,535 2,996 — — (44,742) 7,778 — 11,046 (22,922) 507,840 $ 2,686 3,803 1,740 — 46,140 54,369 294,109 162,696 — — 31,341 3,844 1,238 493,228 (509,887) $ 778 155 — 771 11,724 13,428 5,223 — — — — — 472 5,695 (2,312) $ — — — — — — — — — 44,742 (4,379) — — 40,363 4,359 $ 15,652 5,079 1,740 4,275 59,586 86,332 302,328 162,696 — — 34,740 3,844 12,756 516,364 — $ 503,453 $ 37,710 $ 16,811 $ 44,722 $ 602,696 Non - Parent Guarantors Guarantors Elimination Consolidated $ 1,500 1,350 1,368 5,373 — 2,000 11,591 298,500 141 — 2,994 7,251 $ 1,777 31,832 6,015 2 2,286 6,557 48,469 2,318 1,828 21,977 — 10,046 $ 1,257 108 — — 676 8,655 10,696 1,571 — 1,010 — 1,328 — — — — — — — — — — — — $ 4,534 33,290 7,383 5,375 2,962 17,212 70,756 302,389 1,969 22,987 2,994 18,625 63,824 — — — 63,824 228 101 100 (201) 228 Authorized – 1,000,000 shares, $0.01 par value 10 votes per share, issued and outstanding - 988,000 shares Accumulated other comprehensive income Additional paid-in capital Accumulated deficit 10 542 270,068 (151,696) — 1,190 47,885 (96,104) Total stockholders’ equity 119,152 (46,928) — — 2,825 (719) 2,206 — (1,190) (50,710) 96,823 44,722 10 542 270,068 (151,696) 119,152 72 C A S E L L A W A S T E S Y S T E M S 73 $ 503,453 $ 37,710 $ 16,811 $ 44,722 $ 602,696 CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET AS OF APRIL 30, 2004 (In thousands) CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FISCAL YEAR ENDED APRIL 30, 2002 (In thousands) 2 0 0 4 F O R M 1 0 K Assets CURRENT ASSETS: Non - Parent Guarantors Guarantors Elimination Consolidated Cash and cash equivalents Accounts receivable - trade, net of allowance for $ 7,805 $ (196) $ 398 doubtful accounts Prepaid expenses Other current assets Total current assets Property, plant and equipment, net of accumulated depreciation and amortization Intangible assets, net Deferred income taxes Investment in subsidiaries Investments in unconsolidated entities Assets under contractual obligation Other non-current assets 83 1,504 5,436 14,828 2,764 — 5,631 (35,115) 13,105 — 11,849 (1,766) 48,096 3,457 2,494 53,851 367,589 157,230 — — 29,188 2,148 6,537 562,692 1,283 — 13,247 14,928 1,685 — — — — — 120 1,805 Intercompany receivable 553,154 (555,465) (2,069) $ — — (797) — (797) — — — 35,115 (4,379) — — 30,736 4,380 $ 8,007 49,462 4,164 21,177 82,810 372,038 157,230 5,631 — 37,914 2,148 18,506 593,467 — $ 566,216 $ 61,078 $ 14,664 $ 34,319 $ 676,277 Liabilities And Stockholders’ Equity CURRENT LIABILITIES: Current maturities of long term debt Accounts payable Accrued interest Accrued capping, closure and post-closure costs, current portion Other current liabilities Total current liabilities Long-term debt, less current maturities Capital lease obligations, less current maturities Accrued capping, closure and post closure costs, less current portion Other long-term liabilities COMMITMENTS AND CONTINGENCIES Series A redeemable, convertible preferred stock, 55,750 shares authorized, issued and outstanding, liquidation preference of $1,000 per share plus accrued but unpaid dividends STOCKHOLDERS’ EQUITY: Class A common stock - Authorized - 100,000,000 shares, $0.01 par value issued and outstanding - 23,496,000 shares Class B common stock - Non - Parent Guarantors Guarantors Elimination Consolidated $ 1,500 1,780 6,022 — 4,787 14,089 347,957 — — 7,039 $ 1,942 37,516 2 1,928 18,354 59,742 1,206 1,367 21,453 10,040 $ 2,100 738 — 543 10,956 14,337 — — 1,299 1,414 $ — — — — (797) (797) — — — — $ 5,542 40,034 6,024 2,471 33,300 87,371 349,163 1,367 22,752 18,493 67,076 — — — 67,076 235 101 100 (201) 235 Revenues Operating expenses: Cost of operations General and administration Depreciation and amortization Restructuring charge Operating income (loss) Other expense/(income), net: Interest income Interest expense (Income) loss from equity method investments Minority interest Other (income)/expense, net Other (income)/expense, net Income (loss) from continuing operations before income taxes, discontinued operations and cumulative effect of change in accounting principle Provision for income taxes Non - Parent Guarantors Guarantors Elimination Consolidated $ — $ 418,500 $ 12,232 $ (9,497) $ 421,235 4,057 (333) 1,765 (438) 5,051 (5,051) (29,858) 31,183 (19,390) — 1,239 (16,826) 273,651 54,145 48,503 — 376,299 42,201 (1,896) 31,363 (1,899) — (6,249) 21,319 8,482 644 444 — 9,570 2,662 (254) 9 — (154) 530 131 (9,497) — — — (9,497) — 31,104 (31,104) 19,390 — — 19,390 276,693 54,456 50,712 (438) 381,423 39,812 (904) 31,451 (1,899) (154) (4,480) 24,014 11,775 4,044 20,882 — 2,531 1,067 (19,390) — 15,798 5,111 Income (loss) from continuing operations before discontinued operations and cumulative effect of change in accounting principle Reclassification adjustment from discontinued operations Estimated loss on disposal of discontinued operations, net Cumulative effect of change in accounting principle, net Net income (loss) Preferred stock dividend Net income (loss) available to common stockholders 7,731 — — (250) 7,481 3,010 $ 4,471 20,882 1,140 (4,096) — 17,926 — $ 17,926 1,464 — — — 1,464 — $ 1,464 (19,390) — — — (19,390) — $ (19,390) 10,687 1,140 (4,096) (250) 7,481 3,010 $ 4,471 Authorized - 1,000,000 shares, $0.01 par value 10 votes per share, issued and outstanding -988,000 shares Accumulated other comprehensive income Additional paid-in capital Accumulated deficit 10 408 272,993 (143,591) — 1,933 48,270 (83,034) Total stockholders’ equity 130,055 (32,730) — — 2,595 (5,081) (2,386) — (1,933) (50,865) 88,115 35,116 10 408 272,993 (143,591) 130,055 $ 566,216 $ 61,078 $ 14,664 $ 34,319 $ 676,277 74 C A S E L L A W A S T E S Y S T E M S 75 CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FISCAL YEAR ENDED APRIL 30, 2003 (In thousands) CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FISCAL YEAR ENDED APRIL 30, 2002 (In thousands) 2 0 0 4 F O R M 1 0 K Revenues Operating expenses: Cost of operations General and administration Depreciation and amortization Impairment charge Operating income (loss) Other expense/(income), net: Interest income Interest expense (Income) loss from equity method investments Loss on debt extinguishment Minority interest Other income, net Other expense/(income), net Income (loss) from continuing operations before income taxes, discontinued operations and cumulative effect of change in accounting principle Provision (benefit) for income taxes Income (loss) from continuing operations before discontinued operations and cumulative effect of change in accounting principle Reclassification adjustment from discontinued operations, net Cumulative effect of change in accounting principle, net Net (loss) income Preferred stock dividend Non - Parent Guarantors Guarantors Elimination Consolidated $ — $ 416,777 $ 13,949 $ (9,863) $ 420,863 (926) (3) 1,812 400 1,283 (1,283) (27,864) 26,826 50,277 3,649 — 1,420 54,308 (55,591) 4,217 275,747 55,227 43,849 4,464 379,287 37,490 (3,398) 30,450 (2,073) — — (2,536) 22,443 15,047 — 13,389 548 2,269 — 16,206 (2,257) (160) 400 — — (152) (483) (395) (9,863) — — — (9,863) — 31,104 (31,104) (50,277) — — — (50,277) (1,862) (404) 50,277 — (59,808) 15,047 (1,458) 50,277 — — (59,808) 3,094 50 (63,916) (48,819) — — — (1,458) — — — 50,277 — 278,347 55,772 47,930 4,864 386,913 33,950 (318) 26,572 (2,073) 3,649 (152) (1,599) 26,079 7,871 3,813 4,058 50 (63,916) (59,808) 3,094 Net (loss) income available to common stockholders $ (62,902) $ (48,819) $ (1,458) $ 50,277 $ (62,902) CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FISCAL YEAR ENDED APRIL 30, 2004 (In thousands) Revenues Operating expenses: Cost of operations General and administration Depreciation and amortization Impairment Charge Operating income (loss) Other expense/(income), net: Interest income Interest expense (Income) loss from equity method investments Other expense/(income), net: Other expense/(income), net Income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle Benefit for income taxes Income (loss) from continuing operations before cumulative effect of change in accounting principle Cumulative effect of change in accounting principle, net Net income (loss) Preferred stock dividend Non - Parent Guarantors Guarantors Elimination Consolidated $ — $ 432,677 $ 16,849 $ (9,840) $ 439,686 (935) 69 1,793 — 927 (927) (24,587) 25,745 (8,716) (289) (7,847) 6,920 (1,185) 8,105 — 8,105 3,252 283,917 57,222 51,601 925 393,665 39,012 (1,363) 25,511 (2,261) 6,337 28,224 10,788 — 10,788 2,518 13,306 — 14,167 907 6,279 738 22,091 (5,242) (97) 188 — (100) (9) (5,233) (438) (4,795) 205 (4,590) — (9,840) — — — (9,840) — 25,796 (25,796) 8,716 — 8,716 (8,716) — (8,716) — (8,716) — 287,309 58,198 59,673 1,663 406,843 32,843 (251) 25,648 (2,261) 5,948 29,084 3,759 (1,623) 5,382 2,723 8,105 3,252 Net income (loss) available to common stockholders $ 4,853 $ 13,306 $ (4,590) $ (8,716) $ 4,853 Non - Parent Guarantors Guarantors Elimination Consolidated Net Cash Provided by (Used In) Operating Activities $ (10,523) $ 77,115 $ (401) $ 1,496 $ 67,687 Cash Flows from Investing Activities: Additions to property, plant and equipment Proceeds from divestitures, net of cash divested Other (647) 3,530 (36,986) 31,216 (1,578) (41) (5,027) Net Cash Provided by (Used In) Investing Activities 2,883 (7,348) (5,068) Cash Flows from Financing Activities: Proceeds from long-term borrowings Principal payments on long-term debt Proceeds from exercise of stock options Intercompany borrowings Net Cash Provided by (Used In) Financing 70,984 (141,103) 3,560 64,955 Activities Cash Provided (used in) discontinued operations Net (decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of period (1,604) 759 (8,485) 12,847 — (5,710) — (68,425) (74,135) (6,551) (10,919) 8,542 2,400 (196) — 4,966 7,170 — 1,701 612 Cash and cash equivalents, end of period $ 4,362 $ (2,377) $ 2,313 — — — — — — (1,496) (1,496) — — — $ — (37,674) 31,216 (3,075) (9,533) 73,384 (147,009) 3,560 — (70,065) (5,792) (17,703) 22,001 $ 4,298 CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FISCAL YEAR ENDED APRIL 30, 2003 (In thousands) Non - Parent Guarantors Guarantors Elimination Consolidated Net Cash Provided by (Used In) Operating Activities $ 3,861 61,782 $ 2,534 $ (3,225) $ 64,952 Cash Flows from Investing Activities: Acquisitions, net of cash acquired Additions to property, plant and equipment Other Net Cash Used In Investing Activities Cash Flows from Financing Activities: Proceeds from long-term borrowings Principal payments on long-term debt Deferred financing costs Proceeds from exercise of stock options Intercompany borrowings Net Cash Provided by (Used In) Financing (369) (5,329) (5,698) 376,737 (354,558) (11,466) 460 (1,510) Activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period 9,663 7,826 4,362 (18,068) (39,509) 4,114 (53,463) 2,541 (5,902) — — 105 (3,256) 5,063 (2,377) Cash and cash equivalents, end of period $ 12,188 $ 2,686 (2,047) — (2,047) 1,243 (1,445) — — (1,820) (2,022) (1,535) 2,313 $ 778 — — — — — — — 3,225 3,225 — — $ — (18,068) (41,925) (1,215) (61,208) 380,521 (361,905) (11,466) 460 — 7,610 11,354 4,298 $ 15,652 76 C A S E L L A W A S T E S Y S T E M S 77 four one 2 0 0 4 F O R M 1 0 K CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FISCAL YEAR ENDED APRIL 30, 2004 (In thousands) part Non - Parent Guarantors Guarantors Elimination Consolidated $ 1,601 64,562 $ 3,735 $ — $ 69,898 Net Cash Provided by Operating Activities Cash Flows from Investing Activities: Acquisitions, net of cash acquired Acquisitions of landfill operating lease contracts Additions to property, plant and equipment Proceeds from divestitures Advances to unconsolidated entities Other Net Cash Used In Investing Activities Cash Flows from Financing Activities: Proceeds from long-term borrowings Principal payments on long-term debt Deferred financing costs Proceeds from exercise of stock options Intercompany borrowings Net Cash Provided by (Used in) Financing Activities Net decrease in cash and cash equivalents Cash and cash equivalents, beginning of period — — (6,047) — (7,332) — (13,379) 193,285 (146,626) (2,632) 4,006 (40,638) 7,395 (4,383) 12,188 (31,947) (32,223) (49,547) 4,984 — 1,195 (107,538) 2,018 (2,667) — — 40,743 40,094 (2,882) 2,686 Cash and cash equivalents, end of period $ 7,805 $ (196) — — (2,741) — — — (2,741) — (1,269) — — (105) (1,374) (380) 778 $ 398 — — — — — — — — — — — — — — — (31,947) (32,223) (58,335) 4,984 (7,332) 1,195 (123,658) 195,303 (150,562) (2,632) 4,006 — 46,115 (7,645) 15,652 $ — $ 8,007 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The information required with respect to changes in the Company’s accountants was previously reported in the Current Report on Form 8-K of the Company filed on May 22, 2002 and in the Current Report on Form 8-K of the Company filed on June 18, 2002, and is incorporated by reference into this Annual Report on Form 10-K. ITEM 9A. CONTROLS AND PROCEDURES The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the 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 “Executive Officers and Other Key Employees of the Company” in Item 1 of Part I of this Annual Report on Form 10-K and with respect to equity compensation plan information which is set forth under “Equity Compensation Plan Information” below) 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 this Annual Report on Form 10-K, which will appear in the definitive proxy statement, is incorporated by reference into Part III of this Annual Report on Form 10-K. Equity Compensation Plan Information The following table shows information about the securities authorized for issuance under the Company’s equity compensation plans as of April 30, 2004: (a) (b) (c) Number of securities to be issued upon exercise of outstanding options and warrants (1) Weighted-average exercise price of outstanding options and warrants Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (2) 3,365,813 — $ 12.92 — 908,941(3) — Plan Category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders (1) This table excludes an aggregate of 70,111 shares issuable upon exercise of outstanding options assumed by the Company in connection with its acquisition of KTI, Inc. The weighted average exercise price of the excluded options is $20.41 (2) In addition to being available for future issuance upon exercise of options that may be granted after April 30, 2004, 414,475 shares under the Company’s Amended and Restated 1997 Stock Incentive Plan, of the 908,941 reflected in column (c), may instead be issued in the form of restricted effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange stock or other equity-based awards. Act of 1934, as amended (the “Exchange Act”)) of the Company as of April 30, 2004. Based on this evaluation, the Chief Executive (3) Includes 459,966 shares issuable under the Company’s 1997 Employee Stock Purchase Plan. Officer and Chief Financial Officer concluded that, as of April 30, 2004, the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Chief Executive Officer and Chief Financial Officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended April 30, 2004 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting. A description of the material terms of the equity compensation plans not approved by the Company’s security holders is included in Note 14 “Stockholders’ Equity” to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. 78 C A S E L L A W A S T E S Y S T E M S 79 part four one ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Consolidated Financial Statements included under Item 8: Report of Independent Public Accountants Consolidated Balance Sheets as of April 30, 2003 and 2004 Consolidated Statements of Operations for the fiscal years 2002, 2003, and 2004. Consolidated Statements of Stockholders’ Equity for the fiscal years 2002, 2003, and 2004. Consolidated Statements of Cash Flows for the fiscal years 2002, 2003, and 2004. Notes to Consolidated Financial Statements (a)(2) Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts (a)(3) Exhibits: The Exhibits that are filed as part of this Annual Report on Form 10-K or that are incorporated by reference herein are set forth in the Exhibit Index hereto. (b) Reports on Form 8-K The Company furnished a report on Form 8-K on March 11, 2004 reporting under item 12 thereof its results for the fiscal quarter ended January 31, 2004. (c) The Exhibits that are filed as part of this Annual Report on Form 10-K or that are incorporated by reference herein are set forth in the Exhibit Index hereto. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CASELLA WASTE SYSTEMS, INC. By: /s/ John W. Casella John W. Casella Chairman and Chief Executive Officer Date: June 25, 2004 2 0 0 4 F O R M 1 0 K Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date /s/ John W. Casella John W. Casella Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) June 25, 2004 /s/ James W. Bohlig James W. Bohlig President and Chief Operating Officer, Director June 25, 2004 /s/ Richard A. Norris Richard A. Norris Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) June 25, 2004 /s/ Douglas R. Casella Douglas R. Casella Director /s/ John F. Chapple III John F. Chapple III Director /s/ Gregory B. Peters Gregory B. Peters Director /s/ James F. Callahan, Jr. James F. Callahan, Jr. Director /s/ D. Randolph Peeler D. Randolph Peeler Director June 25, 2004 June 25, 2004 June 25, 2004 June 25, 2004 June 25, 2004 80 C A S E L L A W A S T E S Y S T E M S 81 2 0 0 4 F O R M 1 0 K EXHIBIT INDEX Exhibit No. Description 2.1 3.1 3.3 4.1 4.2 4.3 4.4 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 Agreement and Plan of Merger dated as of January 12, 1999 and as amended by Amendments No. 1, 2 and 3 10.9 Lease Agreement, as Amended, between Casella Associates and Casella Waste Management, Inc., dated thereto, among Casella Waste Systems, Inc. (“Casella”), KTI, Inc. (“KTI”) and Rutland Acquisition Sub, Inc. December 9, 1994 (Rutland lease) (incorporated herein by reference to Exhibit 10.17 to the registration statement (incorporated herein by reference to Annex A to the registration statement on Form S-4 as filed November 12, on Form S-1 of Casella as filed August 7, 1997 (file no. 333-33135)). 1999 (file no. 333-90913)). 10.10 Lease Agreement, as Amended, between Casella Associates and Casella Waste Management, Inc., dated Amended and Restated Certificate of Incorporation of Casella (incorporated herein by reference to Exhibit 4.1 to December 9, 1994 (Montpelier lease) (incorporated herein by reference to Exhibit 10.18 to the registration the registration statement on Form S-8 of Casella as filed November 18, 1998 (file no. 333-67487)). statement on Form S-1 of Casella as filed August 7, 1997 (file no. 333-33135)). Second Amended and Restated By-Laws of Casella (incorporated herein by reference to Exhibit 3.1 to the current 10.11 Lease, Operations and Maintenance Agreement between CV Landfill, Inc. and the Registrant dated June 30, report on Form 8-K of Casella as filed August 18, 2000 (file no. 000-23211)). 1994 (incorporated herein by reference to Exhibit 10.20 to the registration statement on Form S-1 of Casella as Form of stock certificate of Casella Class A common stock (incorporated herein by reference to Exhibit 4 to filed August 7, 1997 (file no. 333-33135)). Amendment No. 2 to the registration statement on Form S-1 of Casella as filed October 9, 1997 (file no. 333-33135)). 10.12 Restated Operation and Management Agreement by and between Clinton County (N.Y.) and the Registrant dated Certificate of Designation creating Series A Convertible Preferred Stock (incorporated herein by reference to Exhibit 4.1 to the current report on Form 8-K of Casella as filed August 18, 2000 (file no. 000-23211)). Indenture, dated January 24, 2003, by and among Casella Waste Systems, Inc., the Guarantors named therein and U.S. Bank National Association, as Trustee, relating to the 9.75% Senior Subordinated Notes due 2013, including the form of 9.75% Senior Subordinated Note (incorporated by reference to Exhibit 4.1 to the current September 9, 1996 (incorporated herein by reference to Exhibit 10.21 to the registration statement on Form S-1 of Casella as filed August 7, 1997 (file no. 333-33135)). 10.13 Labor Utilization Agreement by and between Clinton County (N.Y.) and the Registrant dated August 7, 1996 (incorporated herein by reference to Exhibit 10.22 to the registration statement on Form S-1 of Casella as filed August 7, 1997 (file no. 333-33135)). report on Form 8-K of Casella as filed January 24, 2003 (file no. 000-23211)). 10.14 Lease and Option Agreement by and between Waste U.S.A., Inc. and New England Waste Services of Vermont, Exchange and Registration Rights Agreement, dated January 21, 2003, by and among Casella Waste Systems, Inc., the Guarantors listed therein and Purchasers listed therein, relating to the 9.75% Senior Subordinated Notes Inc., dated December 14, 1995 (incorporated herein by reference to Exhibit 10.23 to the registration statement on Form S-1 of Casella as filed August 7, 1997 (file no. 333-33135)). due 2013 (incorporated herein by reference to Exhibit 4.2 to the registration statement on Form S-4 of Casella 10.15 Amendment No. 2 to Lease Agreement, by and between Casella Associates and Casella Waste Management, as filed on February 11, 2003 (file no. 333-103106)). 1993 Incentive Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to the registration statement Inc., dated as of November 20, 1997 (Rutland lease). (incorporated herein by reference to Exhibit 10.25 to the registration statement on Form S-1 of Casella as filed on June 25, 1998 (file no. 333-57745)). on Form S-1 of Casella as filed August 7, 1997 (file no. 333-33135)). 10.16 Amendment No. 1 to Stock Option Agreement, dated as of May 12, 1999, by and between KTI, Inc. and the 1994 Nonstatutory Stock Option Plan (incorporated herein by reference to Exhibit 10.2 to the registration statement on Form S-1 of Casella as filed August 7, 1997 (file no. 333-33135)). 1996 Stock Option Plan (incorporated herein by reference to Exhibit 10.3 to the registration statement on Form S-1 of Casella as filed August 7, 1997 (file no. 333-33135)). 1997 Non-Employee Director Stock Option Plan (incorporated herein by reference to Exhibit 10.5 to Amendment No. 1 to the registration statement on Form S-1 of Casella as filed September 24, 1997 (file no. 333-33135)). Registrant (incorporated herein by reference to the current report on Form 8-K of Casella as filed May 13, 1999 (file no. 000-23211)). 10.17 Power Purchase Agreement between Maine Energy Recovery Company and Central Maine Power Company dated January 12, 1984, as amended (incorporated herein by reference to Exhibit 10.8 to the registration statement on Form S-4 of KTI as filed October 18, 1994 (file no. 33-85234)). 10.18 Host Municipalities’ Waste Handling Agreement among Biddeford-Saco Solid Waste Committee, City of Biddeford, City of Saco and Maine Energy Recovery Company dated June 7, 1991 (incorporated herein by reference to Exhibit Amended and Restated 1997 Stock Incentive Plan (incorporated herein by reference to the Definitive Proxy 10.10 to the registration statement on Form S-4 of KTI as filed October 18, 1994 (file no. 33-85234)). Statement on Schedule 14A of Casella as filed September 21, 1998). 1995 Registration Rights Agreement between Casella and the stockholders who are a party thereto, dated as of December 22, 1995 (incorporated herein by reference to Exhibit 10.8 to the registration statement on Form S-1 of Casella as filed August 7, 1997 (file no. 333-33135)). Warrant to Purchase Common Stock of Casella granted to John W. Casella, dated as of July 26, 1993 (incorporated herein by reference to Exhibit 10.11 to Amendment No. 1 to the registration statement on Form S-1 of Casella as filed September 24, 1997 (file no. 333-33135)). Warrant to Purchase Common Stock of Casella granted to Douglas R. Casella, dated as of July 26, 1993 (incorporated herein by reference to Exhibit 10.12 to Amendment No. 1 to the registration statement on Form S-1 of Casella as filed September 24, 1997 (file no. 333-33135)). 10.19 Form of Maine Energy Recovery Company Waste Handling Agreement (Town of North Berwick) dated June 7, 1991 and Schedule of Substantially Identical Waste Disposal Agreements (incorporated herein by reference to Exhibit 10.11 to the registration statement on Form S-4 of KTI as filed October 18, 1994 (file no. 33- 85234)). 10.20 Third Amendment to Power Purchase Agreement between Maine Energy Recovery Company, L.P. and Central Maine Power Company dated November 6, 1995. (incorporated herein by reference to Exhibit 10.38 to the registration statement on Form S-4 as filed November 12, 1999 (file no. 333-90913)). 10.21 Non-Exclusive License to Use Technology between KTI and Oakhurst Technology, Inc. dated December 29, 1998 (incorporated herein by reference to Exhibit 4.5 to the current report on Form 8-K of KTI as filed January 15, 1999 (file no. 000-25490)). 82 C A S E L L A W A S T E S Y S T E M S 83 10.22 Management Compensation Agreement between Casella Waste Systems, Inc. and John W. Casella dated 10.36 Amendment No. 1 and Release to Second Amended and Restated Revolving Credit and Term Loan Agreement December 8, 1999 (incorporated herein by reference to Exhibit 10.43 to the annual report on Form 10-K of (incorporated herein by reference to Exhibit 10.36 to the annual report on Form 10-K of Casella as filed on July Casella as filed August 4, 2000 (file no. 000-23211)). 24, 2003 (file no. 000-23211)). 10.23 Management Compensation Agreement between Casella Waste Systems, Inc. and James W. Bohlig dated 10.37 Amendment No. 2 to Second Amended and Restated Revolving Credit and Term Loan Agreement (incorporated December 8, 1999 (incorporated herein by reference to Exhibit 10.44 to the annual report on Form 10-K of by reference to Exhibit 10.2 to the quarterly report on Form 10-Q of Casella Waste Systems, Inc. as filed on Casella as filed August 4, 2000 (file no. 000-23211)). September 12, 2003 (file no. 000-23211)). 10.24 Preferred Stock Purchase Agreement, dated as of June 28, 2000, by and among the Company and the 10.38 Amendment No. 3 and Consent to Certain Acquisitions to Second Amended and Restated Revolving Credit and Purchasers identified therein (incorporated herein by reference to Exhibit 10.1 to the current report on Form 8-K Term Loan Agreement (incorporated herein by reference to Exhibit 10.4 to the registration statement on Form S-4 of Casella as filed August 18, 2000 (file no. 000-23211)). of Casella Waste Systems, Inc. as filed on February 20, 2004 (file no. 000-23211)). 10.25 Registration Rights Agreement, dated as of August 11, 2000, by and among the Company and the Purchasers 10.39 Joinder Agreement to Second Amended and Restated Revolving Credit and Term Loan Agreement (incorporated identified therein (incorporated herein by reference to Exhibit 10.2 to the current report on Form 8-K of Casella herein by reference to Exhibit 10.5 to the registration statement on Form S-4 of Casella Waste Systems, Inc. as as filed August 18, 2000 (file no. 000-23211)). filed on February 20, 2004 (file no. 000-23211)). 2 0 0 4 F O R M 1 0 K KTI, Inc. 1994 Long-Term Incentive Award Plan (incorporated herein by reference to Exhibit (d)(3) to the Schedule 10.40 Amendment No. 4 to Second Amended and Restated Revolving Credit and Term Loan Agreement. 10.26 10.27 10.28 TO of Casella as filed July 2, 2001 (file no. 000-23211)). KTI, Inc. Non-Plan Stock Option Terms and Conditions (incorporated herein by reference to Exhibit (d)(4) to the Schedule TO of Casella as filed July 2, 2001 (file no. 000-23211)). Management Compensation Agreement between Casella Waste Systems, Inc. and Charles E. Leonard dated June 18, 2001 (incorporated herein by reference to Exhibit 10.39 to the annual report on Form 10-K of Casella as filed on July 12, 2002 (file no. 000-23211)). 10.29 Management Compensation Agreement between Casella Waste Systems, Inc. and Richard Norris dated July 20, 2001 (incorporated herein by reference to Exhibit 10.40 to the annual report on Form 10-K of Casella as filed on July 12, 2002 (file no. 000-23211)). 10.30 US GreenFiber LLC Limited Liability Company Agreement, dated June 26, 2000, between U.S. Fiber, Inc. and Greenstone Industries, Inc. (incorporated herein by reference to Exhibit 10.41 to the annual report on Form 10-K of Casella as filed on July 12, 2002 (file no. 000-23211)). 10.31 Purchase Agreement, dated August 17, 2001, by and among Crumb Rubber Investors Co., LLC, Casella Waste Systems, Inc. and KTI Environmental Group, Inc. (incorporated herein by reference to Exhibit 10.42 to the annual report on Form 10-K of Casella as filed on July 12, 2002 (file no. 000-23211)). 10.32 Purchase Agreement, dated August 17, 2001, by and among New Heights Holding Corporation, KTI, Inc., KTI Operations, Inc. and Casella Waste Systems, Inc. (incorporated herein by reference to Exhibit 10.43 to the annual report on Form 10-K of Casella as filed on July 12, 2002 (file no. 000-23211)). 10.33 Form of Non-Plan Non-Statutory Stock Option Agreement as issued by Casella Waste Systems, Inc. to certain individuals as of May 25, 1994 (incorporated herein by reference to Exhibit 10.44 to the annual report on Form 10-K of Casella as filed on July 12, 2002 (file no. 000-23211)). 10.34 Second Amended and Restated Revolving Credit and Term Loan Agreement, dated January 24, 2003, by and among Casella Waste Systems, Inc. and its Subsidiaries (other than Excluded Subsidiaries), the lending institutions party thereto and Fleet National Bank, individually and as administrative agent, and Bank of America, N.A., individually and as syndication agent, with Fleet Securities, Inc. and Banc of American Securities LLC acting as Co-Arrangers (incorporated herein by reference to Exhibit 10.1 to the quarterly report on Form 10-Q of Casella Waste Systems Inc. as filed September 12, 2003 (file no. 000-23211)). 10.35 Construction, Operation and Management Agreement between New England Waste Services of Massachusetts, Inc. and the Town of Templeton, Massachusetts (incorporated herein by reference to Exhibit 10.35 to the annual report on Form 10-K of Casella as filed on July 24, 2003 (file no. 000-23211)). 21.1 23.1 31.1 31.2 32.1 Subsidiaries of Casella Waste Systems, Inc. Consent of PricewaterhouseCoopers LLP. Certification of Principal Executive Officer required by Rule 13a-15(e) or Rule 15d-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Principal Financial Officer required by Rule 13a-15(e) or Rule 15d-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders of Casella Waste Systems, Inc.: Our audits of the consolidated financial statements referred to in our report dated June 17, 2004 appearing in this Annual Report on Form 10-K also included an audit of the financial statement schedule as of and for each of the three years ended April 30, 2004 listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. By: /s/ PricewaterhouseCoopers LLP Boston, Massachusetts Date: June 17, 2004 84 C A S E L L A W A S T E S Y S T E M S 85 FINANCIAL STATEMENT SCHEDULES Schedule II Valuation Accounts ALLOWANCE FOR DOUBTFUL ACCOUNTS (in thousands) April 30, 2002 2003 2004 Balance at beginning of period Additions - Charged to expense Deductions - Bad debts written off, net of recoveries Balance at end of period $ 4,904 (895) (3,188) $ 821 $ 821 798 (724) $ 895 $ 895 1,524 (1,836) $ 583 RESTRUCTURING (in thousands) April 30, 2002 2003 2004 Balance at beginning of period Additions - Charged to expense Deductions - Amounts paid Balance at end of period $ 4,151 (438) (3,676) $ 37 $ 37 — (37) $ — $ — — — $ — SAFE HARBOR STATEMENT Certain matters discussed in this press release are "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such by the context of the statements, including words such as the Company "believes," "anticipates," "expects" or words of similar import. Similarly, statements that describe the Company's future plans, objectives or goals are forward-looking statements. Such forward-looking statements, and all phases of our operations, involve a number of risks and uncertainties, any one or more of which could cause actual results to differ materially from those described in our forward-looking statements. Such risks and uncertainties include or relate to, among other things: the risk that the expected expansion permits will not be issued; our efforts to expand or otherwise reposition our new and existing disposal facilities to increase the amount of municipal solid waste that may be accepted may meet with unanticipated resistance or otherwise take longer than expected; continuing weakness in general economic conditions may affect our revenues; and fluctuations in the commodity pricing of our recyclables may make it more difficult for us to predict our results of operations. Other factors which could materially affect such forward-looking statements can be found in our periodic reports filed with the Securities and Exchange Commission, including certain factors which could affect future operating results detailed in the Management's Discussion and Analysis section in our Form 10-K for the fiscal year ended April 30, 2004, and in our most recently-filed Form 10-Q. 2 0 0 4 F O R M 1 0 K shareholder information Annual Meeting of Shareholders Killington Grand Hotel Killington, VT Tuesday, October 5, 2004 10:00 a.m. Casella Waste Systems 25 Greens Hill Lane Rutland, VT 05701 Toll Free: (800) 227-3552 Telephone: (802) 775-0325 Direct inquiries to: Joseph Fusco Telephone: (802) 775-0325 E-mail: joe.fusco@casella.com Auditors PricewaterhouseCoopers, LLP One International Place Boston, MA 02110 Legal Counsel Wilmer Cutler Pickering Hale and Dorr, LLP 60 State Street Boston, MA 02109 Transfer Agent & Registrar EquiServe Trust Company N.A. 150 Royal Street Boston, MA 02021 Stock Exchange Casella Waste Systems, Inc., is traded on the NASDAQ National Market under the ticker symbol “CWST.” 86 C A S E L L A W A S T E S Y S T E M S 87 board of directors John W. Casella Chairman, Chief Executive Officer & Secretary Gregory B. Peters Managing General Partner, Lake Champlain Capital Management, LLC John F. Chapple III President, Marlin Management Services Douglas R. Casella Vice Chairman President, Casella Construction, Inc. James W. Bohlig President & Chief Operating Officer D. Randolph Peeler Managing Director, Berkshire Partners, LLC James F. Callahan, Jr. Retired Partner, Arthur Andersen, LLP company officers John W. Casella Chairman & Chief Executive Officer James W. Bohlig President & Chief Operating Officer Charles E. Leonard Senior Vice President, Solid Waste Operations Richard A. Norris Senior Vice President & Chief Financial Officer Timothy A. Cretney Regional Vice President Sean P. Duffy Regional Vice President Brian G. Oliver Regional Vice President Alan N. Sabino Regional Vice President Michael J. Wall Regional Vice President Michael J. Brennan Vice President & General Counsel Christopher M. DesRoches Vice President, Sales Joseph S. Fusco Vice President, Communications Gerry Gormley Vice President, Human Resources Christopher Hubbard Vice President, Information Systems Larry B. Lackey Vice President, Permits, Compliance & Engineering Gary R. Simmons Vice President, Fleet Management 88 C A S E L L A W A S T E S Y S T E M S