<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
COMMISSION FILE NUMBER
0 - 25998
BIOSAFE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
NEVADA 95-4203626
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10 FAWCETT STREET, CAMBRIDGE, MASSACHUSETTS 02138
(Address of principal executive offices, including zip code)
(617) 497-4500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days
Yes X No .
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
CLASS OUTSTANDING AS OF NOVEMBER 5, 1996
Common Stock, $.001 par value 16,629,428
<PAGE> 2
BIOSAFE INTERNATIONAL, INC.
---------------------------
<TABLE>
<CAPTION>
Index to Contents Page No.
----------------- --------
<S> <C> <C>
Part I Financial Information
Item I. Financial Statements:
Consolidated Balance Sheets as of September 30, 1996 and December
31, 1995 1 - 2
Consolidated Statements of Operations for the
Three Months Ended and Nine Months Ended September 30,1996
and 1995, and for the period from April 23,1990, (inception)
to September 30, 1996. 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1996 and 1995, and for the period
from April 23,1990, (inception)
to September 30, 1996. 4
Notes to Consolidated Financial Statements 5 - 13
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 14 - 23
Part II Other Information
Item 1. Legal Proceedings 24 - 25
Item 2. Changes in Securities 25
Item 3. Defaults on Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
</TABLE>
<PAGE> 3
<TABLE>
BIOSAFE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Consolidated Balance Sheets
<CAPTION>
September 30, December 31,
Assets 1996 1995
------ ------------ ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash $ 1,837,498 $ 5,237,064
Accounts and notes receivable, net (Note 3) 1,495,047 2,047,065
Assets held for sale (Note 4) 150,000 --
Prepaid expenses and other current assets 394,576 515,558
----------- -----------
Total current assets 3,877,121 7,799,687
Assets held for sale (Note 4) 311,569 505,980
Accounts and notes receivable (Note 3) 561,949 --
Restricted cash and securities 1,192,939 187,500
Due from former employees (Note 5) 647,381 385,425
Investment in affiliate 5,425 10,029
Property and equipment, net (Note 6) 16,368,159 12,503,091
Prepaid consulting fees 333,750 834,375
Deferred financing costs 818,235 1,182,251
Other assets 102,292 99,772
----------- -----------
Total assets $24,218,820 $23,508,110
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
<TABLE>
BIOSAFE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Consolidated Balance Sheets
<CAPTION>
September 30, December 31,
Liabilities and Stockholder's Equity 1996 1995
------------------------------------ ------------ ------------
(unaudited)
<S> <C> <C>
Current liabilities:
Current portion of long-term debt and notes payable $ 1,491,357 $ 1,526,188
Accounts payable 1,839,420 2,546,169
Accrued expenses 614,108 635,879
Restructuring and current liabilities related to
discontinued operations (Note 4) 826,372 622,624
Income and franchise taxes payable -- 75,535
------------ ------------
Total current liabilities 4,771,257 5,406,395
Long-term debt and notes payable 9,541,367 12,266,003
Landfill closure and post-closure costs (Note 7) 1,500,000 1,500,000
------------ ------------
Total liabilities 15,812,624 19,172,398
------------ ------------
Contingencies (Note 7)
Minority interest 1,043,210 1,044,111
------------ ------------
Stockholders' equity (deficit): (Notes 9)
Common stock, $.001 par value. Authorized
100,000,000 shares; 16,601,332 and
11,706,338 shares issued and outstanding
at September 30, 1996 and December 31, 1995,
respectively 16,601 11,706
Additional paid-in capital 21,011,971 12,607,210
Deficit accumulated during the development stage (13,665,586) (9,327,315)
------------ ------------
Total stockholders' equity 7,362,986 3,291,601
------------ ------------
Total liabilities and stockholders' equity $ 24,218,820 $ 23,508,110
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
<TABLE>
BIOSAFE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statements of Operation
(unaudited)
<CAPTION>
Period from
Three Months Ended Nine Months Ended April 23, 1990
----------------------------- -------------------------- (inception) to
September 30, September 30, September 30, September 30, September 30,
1996 1995 1996 1995 1996
------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Landfill revenues $ 312,407 $ 752,232 $ 1,049,019 $ 1,487,047 $ 2,393,416
----------- ----------- ----------- ----------- ------------
Cost of landfill operations:
Operating expenses 149,162 173,474 494,204 173,474 1,260,216
Write-off of landfill development costs -- -- 229,113 -- 229,113
Depreciation 110,410 44,603 208,697 51,317 280,346
----------- ----------- ----------- ----------- ------------
Total cost of landfill operations 259,572 218,077 932,014 224,791 1,769,675
----------- ----------- ----------- ----------- ------------
Gross profit 52,835 534,155 117,005 1,262,256 623,741
Selling, general and administrative expenses 480,573 1,102,199 2,262,429 1,825,351 9,252,328
Amortization of prepaid consulting fees 166,875 166,875 500,625 333,750 1,001,250
Restructuring (Note 4) -- -- 250,000 -- 1,565,323
----------- ----------- ----------- ----------- ------------
Income (loss) from operations (594,613) (734,919) (2,896,049) (896,845) (11,195,160)
----------- ----------- ----------- ----------- ------------
Other income (expense):
Royalty and other income, net (Note 3) 910,594 -- 962,464 -- 5,887,683
Interest income 40,596 75,884 122,779 121,541 506,709
Gain on sale of assets -- -- -- -- 222,728
Interest expense and financing costs (189,358) (79,594) (817,246) (135,752) (1,845,430)
Equity in loss of affiliate (173) -- (59,823) -- (59,823)
Write-off of accounts and notes receivable -- -- -- (2,975,000) (2,975,000)
Loss on investment in marketable securities -- (10,938) -- (82,813) (100,000)
Write-off of assets -- -- -- -- (241,546)
----------- ----------- ----------- ----------- ------------
Total other income (expense) 761,659 (14,648) 208,174 (3,072,024) 1,395,321
----------- ----------- ----------- ----------- ------------
Income (loss) before income taxes, minority interest
and discontinued operations 167,046 (749,567) (2,687,875) (3,968,869) (9,799,839)
Federal and state income tax expense (61,156) -- (11,156) (185,000) 166,879
----------- ----------- ----------- ----------- ------------
Income (loss) before minority interest
and discontinued operations 228,202 (749,567) (2,676,719) (3,783,869) (9,966,718)
Minority interest (3,441) 3,237 901 3,237 (12,115)
----------- ----------- ----------- ----------- ------------
Income (loss) from continuing operations 224,761 (746,330) (2,675,818) (3,780,632) (9,978,833)
Discontinued operations (Note 4) -- -- (1,662,453) (693,174) (3,686,753)
----------- ----------- ----------- ----------- ------------
Net income (loss) 224,761 (746,330) (4,338,271) (4,473,806) $(13,665,586)
============
Preferred stock dividend -- -- -- 9,500
----------- ----------- ----------- -----------
Net income (loss) available for
common shareholders $ 224,761 $ (746,330) $(4,338,271) $(4,483,306)
=========== =========== =========== ===========
Net income (loss) per share:
Income (loss) from continuing operations $ 0.01 $ (0.06) $ (0.20) $ (0.41)
Discontinued operations -- -- (0.13) (0.08)
----------- ----------- ----------- -----------
Net income (loss) per share $ 0.01 $ (0.06) $ (0.33) $ (0.49)
=========== =========== =========== ===========
Weighted average number of shares used in
computation of net income (loss) per share 16,043,285 11,559,246 13,334,119 9,171,414
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
<TABLE>
BIOSAFE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statements of Cash Flows
(unaudited)
<CAPTION>
Period from
April 23, 1990
Nine months ended September 30, (inception) to
------------------------------- September 30,
1996 1995 1996
---- ---- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(4,338,271) $(4,473,806) $(13,665,586)
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Discontinued operations 1,662,453 693,174 3,686,753
Depreciation and amortization 865,029 385,067 1,678,422
Deferred income taxes -- (185,000) --
Loss on investment in marketable securities -- 82,812 100,000
Equity on loss in affiliate 59,823 -- 59,823
Minority interest (901) (3,237) 12,115
Allowance for doubtful accounts - non -trade -- -- 334,926
Allowance for doubtful accounts - trade -- -- 12,500
Write-off of accounts and notes receivable -- 2,975,000 2,975,001
Issuance of common stock for services 17,157 -- 400,457
Write-off of landfill development costs 229,113 -- 229,113
Write-off of assets -- -- 241,546
Changes in assets and liabilities:
Accounts and notes receivable (9,931) (1,046,157) (3,614,142)
Prepaid expenses and other current assets 120,982 (288,086) (394,576)
Accounts payable (942,542) 889,866 2,074,492
Accrued expenses 214,020 146,031 562,738
Income and franchise taxes payable (75,535) (98,005) --
Deferred income -- -- (500,000)
----------- ----------- ------------
Net cash used by continuing operations (2,198,604) (922,341) (5,806,419)
Net cash used by discontinued operations (1,408,861) (1,111,560) (2,819,232)
----------- ----------- ------------
Net cash used by operating activities (3,607,465) (2,033,901) (8,625,651)
----------- ----------- ------------
Cash flows from investing activities:
Assets held for sale (22,500) -- (425,000)
Restricted cash and securities (1,005,439) (187,500) (1,192,939)
Receivable from One, Three, Six, Inc. -- -- (800,000)
Investment in affiliate (55,219) -- (65,248)
Construction in progress (3,912,367) (8,577,548) (13,322,272)
Future landfill development projects (392,204) -- (738,681)
Operating equipment at landfills 162,763 -- 130,949
Other property and equipment (180,073) (843,008) (1,137,731)
Patents (6,577) (18,248) (69,962)
Other assets (18,654) (27,399) (53,196)
Licenses and permits -- -- (78,807)
----------- ----------- ------------
Net cash provided (used) by investing activities (5,430,270) (9,653,703) (17,752,887)
----------- ----------- ------------
Cash flows from financing activities:
Deferred financing and registration costs (23,676) (354,316) (1,441,468)
Net borrowings and advances
from stockholders and related parties (261,956) (395,245) 119,425
Net borrowings from notes payable and long-term debt 7,600 2,570,611 1,061,461
Issuance of subordinated notes payable -- -- 12,405,000
Repayments of subordinated notes payable -- (490,000) (790,000)
Minority interest 1,027,458 1,031,095
Net proceeds from issuance of common stock 5,916,201 9,265,903 16,247,857
Redemption of preferred stock -- -- (300,000)
Preferred stock dividends -- (117,334)
----------- ----------- ------------
Net cash provided by financing activities 5,638,169 11,624,411 28,216,036
----------- ----------- ------------
Increase (decrease) in cash (3,399,566) (63,193) 1,837,498
Cash, beginning of period 5,237,064 170,893 --
----------- ----------- ------------
Cash, end of period $ 1,837,498 $ 107,700 $ 1,837,498
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 7
BIOSAFE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
(1) BASIS OF PRESENTATION
These consolidated financial statements have been prepared by the Company
without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at
September 30, 1996 and for all periods presented have been made. The
results of operations for the period ended September 30, 1996 are not
necessarily indicative of the operating results for the full year.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. It is
suggested that these condensed financial statements be read in
conjunction with the Company's December 31, 1995 audited financial
statements and notes thereto.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Landfill Revenue Recognition
The Company's revenues from its landfill operations consist of disposal
fees (known as tipping fees) charged to customers. Tipping fees are
recognized as revenue based on the volume or weight of solid waste
disposed of at the Company's operated or owned landfill sites. The
daily volume of waste disposed at the Company's disposal facilities may
vary according to market and weather conditions.
Cost of Landfill Operations
Cost of operations includes direct labor, payroll taxes, employee
benefits, fuel, equipment maintenance, insurance, depreciation and
amortization, depletion of landfill development costs, accruals for
ongoing closure and post-closure regulatory compliance (for landfills
owned) and other routine maintenance and operating costs directly
related to landfill operations. Also included in cost of landfill
operations are payments made to certain Towns in which each landfill is
located in the form of "Host Town Fees" and "Closure Fees" (for
landfills operated under management contracts), which are negotiated on
a rate per ton basis as part of the contract with each Town. At
landfills operated under management contracts, the Towns are
responsible for the ultimate closure and post-closure costs related to
such landfills.
Landfill Closure and Post-Closure Costs
The Company estimates and accrues remaining closure and post-closure costs
for landfills owned or acquired on a unit-of-production basis over each
facility's estimated remaining airspace capacity. The Company records
reserves for estimated closure and post-closure costs, as necessary, as
a component of the purchase price for acquisitions using the purchase
method of accounting when the acquisition is consummated.
(Continued)
5
<PAGE> 8
BIOSAFE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
Property and Equipment
Capitalization of landfill development costs begin upon determination by
the Company of economic feasibility or extended useful life of each
landfill as a result of comprehensive engineering and profitability
studies. Capital costs include acquisition, engineering, legal and
other direct costs associated with the permitting and development of
new landfills, expansions at existing landfills, and cell development.
These costs are capitalized pending receipt of all necessary operating
permits or commencement of operations.
Interest is capitalized on landfill costs related to permitting, site
preparation, and facility construction during the period that these
assets are undergoing activities necessary for their intended use.
Interest costs of $167,675 and $0, and $353,240 and $0 were capitalized
during the three and nine months ended September 30, 1996 and 1995,
respectively.
Landfill development costs are depleted using the unit-of-production
method, which is calculated using the total units of airspace filled
during the year in relation to total estimated permitted airspace
capacity. The determination of airspace usage and remaining airspace
capacity is an essential component in the calculation of landfill asset
depletion. The determination is performed by conducting topography
surveys, generally using aerial survey techniques, of the Company's
landfill facilities to determine remaining airspace capacity in each
landfill. The surveys are reviewed by the Company's consulting
engineers, the Company's internal operating and engineering staff, and
its financial and accounting staff. Current year-end remaining airspace
capacity is compared with prior year-end remaining airspace capacity to
determine the amount of airspace used during the current year. The
result is compared against the airspace consumption figures used during
the current year for accounting purposes (primarily tipping volume) to
ensure proper recording of the provision for depletion. The process of
reevaluating airspace consumption did not impact results of operations
for any periods presented in these consolidated financial statements.
The Company performs assessments for each landfill of the recoverability
of capitalized costs which requires considerable judgment by management
with respect to certain external factors, including, but not limited
to, anticipated future revenues, estimated economic life and changes in
environmental regulation. It is the Company's policy to periodically
review and evaluate that the benefit associated with these costs are
expected to be realized and therefore capitalization and depletion is
justified. Capitalized costs related to landfill development for which
no future economic benefit is determined by the Company are expensed in
the period in which such determination is made. Landfill development
costs of $0 and $0, and $229,113 and $0, were expensed based on such
determination during the three and nine months ended September 30, 1996
and 1995, respectively.
(Continued)
6
<PAGE> 9
BIOSAFE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
All other property and equipment are stated at cost. Depreciation and
amortization are provided using the straight-line method over the
estimated useful lives of the respective assets as follows:
Buildings, facilities and improvements 10 to 30 years
Vehicles and equipment 5 to 10 years
Earnings Per Share
Primary earnings per common share are based on the weighted average number
of common shares and dilutive common stock equivalent shares
outstanding during each period. Fully diluted earnings per share have
been omitted since they are either the same as primary earnings per
share or are anti-dilutive.
Reclassifications
Certain amounts in prior year financial statements have been reclassified
to conform to the 1996 presentation.
(3) MEDICAL WASTE TECHNOLOGY AGREEMENT
In February 1996 the Company entered into a licensing and services
agreement with ScotSafe Limited ("ScotSafe"), a Glasgow, Scotland
company for the exclusive rights to use the Company's continuous feed
auger medical waste processing technology in the British Isles. The
Company earned royalties and consulting fees of approximately $900,000
during the nine months ended September 30, 1996 from the completion of
two medical waste treatment facilities by ScotSafe during this period.
(4) RESTRUCTURING OF OPERATIONS AND ASSETS HELD FOR SALE
On March 27, 1996, the Company announced its intention to take meaningful
action to conserve cash and working capital, including the
restructuring of the Company's operations to focus its resources and
activities on its core business of landfill remodeling and operation.
Restructuring Charge
During the first quarter of 1996, the Company recorded a restructuring
charge of $250,000 for estimated restructuring costs associated with
management's plan to focus on the core business of landfill remodeling
and operation. These costs included accruals for employee severance,
non-cancelable lease commitments and professional fees. The
restructuring plan is expected to result in annual savings in excess of
$1.0 million. As of September 30, 1996, costs of $249,000 have been
charged to the reserve.
(Continued)
7
<PAGE> 10
BIOSAFE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
Assets Held for Sale and Discontinued Operations
During the fourth quarter of 1995, the Company recorded a non-recurring
charge to 1995 earnings of approximately $1.3 million primarily related
to the write-down of assets to their estimated net realizable value.
The aggregate carrying values of such property considered no longer
strategic to the Company's operations is reviewed periodically and
stated at the estimated net realizable value. During the nine months
ended September 30, 1996, the Company recorded an additional charge of
$54,118 to reduce the carrying value of these assets. Net assets of the
discontinued operations consists primarily of equipment of $36,569.
Also included in assets held for sale is property of $425,000 not
related to discontinued operations. As a result of discontinuance of
these operations, the Company expects annual savings in excess of $3.0
million. The Company anticipates disposing these assets during 1997.
On March 27, 1996, the Company ceased operations at its technology center
in Woburn, Massachusetts and discharged all employees and consultants
previously engaged in developing technologies with potential
application in activities including the manufacture of useful materials
from tires and other recycled materials, contaminated soil cleanup and
recycling, industrial sludge disposal, size reduction equipment design
and manufacture (the "Ancillary Technologies"), and Major Sports
Fantasies, Inc. ("MSF"), a business unrelated to the environmental
industry. The Company did not recognize any substantial revenues from
the technology center operations or MSF activities.
The expenses associated with operating the Ancillary Technologies for all
periods presented are reported in the accompanying reclassified
consolidated financial statements of operations and cash flows under
discontinued operations. During the first quarter of 1996, the Company
provided a reserve of $650,000 for estimated costs directly associated
with disposing of the Ancillary Technologies and MSF. The discontinued
operations reserve was recorded net of a deferred tax asset of zero.
The Company has recorded a valuation allowance against the full amount
of its deferred tax asset, which consists primarily of its available
net operating loss tax carryforwards. As of September 30, 1996, costs
of $236,000 have been charged to the reserve with the most of the
balance expected to be utilized by December 31, 1996.
The Company plans to maintain ownership of its infectious medical waste
disposal technology, which is fully developed and requires no further
development costs, which is outside the Company's core landfill
remodeling and operations business.
(Continued)
8
<PAGE> 11
BIOSAFE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
On March 27, 1996, Dr. Richard H. Rosen resigned from the offices of
Chairman of the Board of Directors, President, Chief Executive Officer
and Treasurer of the Company and all of its subsidiaries and affiliates
(See "Due From Former Employees' Note 5 and Part II, Item 1 "Legal
Proceedings"). The Board of Directors named Philip Strauss, Chief
Operating Officer, to the additional positions of Chief Executive
Officer and President of the Company and, on June 24, 1996 the Company
also named Philip Strauss Chairman of the Board of Directors.
(5) DUE FROM FORMER EMPLOYEES
The Company has commenced arbitration proceedings against Dr. Richard
Rosen, former Chairman, Chief Executive Officer and President of the
Company, seeking to recover an amount in excess of $1.8 million,
excluding interest, which the Company believes is owed to it by Dr.
Rosen. This action was undertaken at the direction of the Board of
Directors following its receipt of a report by a special committee
which had been appointed to investigate Dr. Rosen's financial dealings
with the Company. The Special Committee retained independent counsel in
connection with its investigation. Dr. Rosen resigned from all offices
with the Company on March 27, 1996. Amounts which the Company seeks to
recover include unreimbursed advances and amounts which the Company
believes constitute improper expense reimbursements and payments of
Company funds for personal benefit. An arbitration hearing was
completed on October 25, 1996; the arbitrator has not yet issued a
ruling. No assurance can be given that the Company will be able to
prevail in these proceedings or that it will be able to collect any
amounts awarded in arbitration. The Company is carrying on its balance
sheet an amount of approximately $471,000 in unreimbursed advances due
from Dr. Rosen, but the Company's other claims and additional advances
have not been reflected on the balance sheet at this time.
(Continued)
9
<PAGE> 12
(6) PROPERTY AND EQUIPMENT
<TABLE>
Property and equipment are stated at cost and consist of the following;
<CAPTION>
September 30, December 31,
1996 1995
---- ----
(unaudited)
<S> <C> <C>
Construction in progress - landfills owned $ 7,541,513 $ 5,152,750
Construction in progress - landfills operated 6,380,759 4,907,155
Future landfill development projects 432,472 269,381
Operating equipment at landfills 989,883 1,040,646
Buildings, facilities and improvements 732,133 664,060
Other property and equipment 722,806 702,821
----------- -----------
16,799,566 12,736,813
Less accumulated depreciation and amortization (431,407) (233,722)
----------- -----------
$16,368,159 $12,503,091
=========== ===========
</TABLE>
Town of Fairhaven
The Company entered into a management contract with the Town of Fairhaven,
Massachusetts on July 24, 1994 to remodel the Town of Fairhaven landfill.
On June 22, 1995, the Company commenced operations and began accepting
waste at the landfill utilizing existing capacity. The Company has
remodeled and constructed an initial cell at the landfill. On August 9,
1996 the Company received final authorization from the Massachusetts
Department of Environmental Protection ("MDEP") to operate its initial
cell and maintain a daily capacity of 150 tons per day. The company
expects the MDEP to increase the daily rate from 150 tons per day to
approximately 400 tons per day when additional lined cells are
constructed at the landfill. The Company, as discussed below, is
currently awaiting findings from a court hearing held on September 5,
1996. The Company, subject to the court findings, is currently in the
process of revising its construction schedule and operating budget for
the project based on the delays and additional costs caused by the
litigation and other matters. In the near future, the Company intends to
reduce its daily intake from the currently permitted 150 tons per day
level. Such reduction, will result in a shortened construction period,
which will then allow the Company to reach the approximate 400 tons per
day level sooner. The company does not anticipate reaching 400 tons per
day until late 1997. When the company reaches 400 tons per day, the
Fairhaven project will generate increased operating cash flow, which will
reduce the Company's dependence on external financing to fund future
project capital costs. The contract requires the Company to pay a "Host
Town Fee" of $2.00 per ton or 5% of the tipping fees for
(Continued)
10
<PAGE> 13
BIOSAFE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
solid waste and $3.00 per ton to contribute to the Town's closure and
post-closure costs, excluding waste from the Town and waste for
"beneficial reuse."
On November 8, 1995 an action was brought against various parties including
the Company relating to the Fairhaven landfill. Plaintiffs are 16
residents of Fairhaven, Massachusetts who reside in the vicinity of the
Fairhaven landfill. In the litigation, the plaintiffs seek an order
annulling the major modification permit issued by the MDEP (the
"Permit"), which authorized one phase of the landfill remodeling project
claiming the MDEP violated the Massachusetts Environmental Policy Act
("MEPA") in issuing the Permit (the "MEPA Claims"). Further, the
plaintiffs have brought certain common law claims against the Company for
nuisance, trespass and strict liability based principally on alleged odor
and dust conditions resulting from The Company's work at the Fairhaven
landfill. The common law claims seek compensatory damages and injunctive
relief.
Pursuant to the Massachusetts Administrative Procedures Act, the Permit
Appeal has been heard by a Bristol County Superior Court Judge on
September 5, 1996. Plaintiffs, the MDEP, the Town and the Company each
have submitted briefs to the Court. The Company has challenged all of the
alleged procedural and substantive grounds asserted by the Plaintiffs for
the appeal, and is now awaiting the ruling.
On January 12, 1996, the Company filed a motion to dismiss the MEPA Claims.
The Town filed a similar motion. The Court heard oral argument on the
motions to dismiss on April 9, 1996. On May 1, 1996, the Court issued a
decision on the motions to dismiss in favor of the Company and the Town,
dismissing the MEPA Claims in their entirety.
Plaintiffs' common law claims for nuisance, trespass and strict liability
are based principally on alleged odor and dust conditions resulting from
BioSafe's excavation activities at the landfill during the summer and
early fall of 1995. The Company is pursuing factual discovery with regard
to these claims. If the Plaintiffs pursue these claims after disposition
of the Permit Appeal, a period of additional discovery and other
pre-trial proceedings would take place prior to trial on the merits.
Acquisition of Landfill in Moretown, Vermont
In May 1995, the Company submitted a successful bid, through the Company's
80%-owned subsidiary, Waste Professionals of Vermont, Inc. ("WPV"), to
purchase a landfill located in Moretown, Vermont, and certain related
assets at an auction conducted by the United States Bankruptcy Court
for the District of Vermont. On June 2, 1995, the Bankruptcy Court
entered its order authorizing and directing the sale of this landfill
and certain related assets to WPV, which transaction closed on July 5,
1995.
On September 9, 1996 the Company received its Full Certification from the
Vermont Agency of Natural Resources (VANR) to commence operations at
the Moretown landfill using available
(Continued)
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BIOSAFE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
capacity and to begin construction of Cell One, Phase II. The ACT 250
Land Use Permit was received on September 30, 1996 which enabled the
Company to commence operations at an average of 350 tons of waste per
day. The Company commenced operations at the landfill on October 7,
1996.
The Company's ownership of the landfill through its subsidiary, WPV,
involves a greater degree of exposure to potential environmental
liabilities than is involved with landfills operated under a management
contract. In conjunction with the acquisition, the Company recorded
$1.5 million for estimated closure and post-closure costs based on
engineering estimates of the current condition of the landfill. See
Note 7.
(7) LANDFILL CLOSURE AND POST-CLOSURE COSTS
Landfills are typically developed in a series of cells, each of which is
constructed, filled, and capped in sequence over the operating life of
the landfill. When all cells are filled and the operating life of the
landfill is over, all cells must be capped, the entire site must be
closed and post-closure care and monitoring activities begin. The
Company will have material financial obligations relating to the final
closure and post-closure costs of each landfill the Company owns.
The Company has estimated as of September 30, 1996 that the total costs
for final closure and post-closure of Cell I at the Moretown, Vermont
landfill, including capping costs, cap maintenance, groundwater
monitoring, methane gas monitoring, and leachate treatment and disposal
for up to 30 years after closure, is approximately $2 million. Based
upon the existing conditions of the landfill at acquisition, $1.5
million has been accrued at September 30, 1996. See Note 6.
The Company bases its estimates for these accruals on respective State
regulatory requirements, including input from its internal and external
consulting engineers and interpretations of current requirements and
proposed regulatory changes. The closure and post-closure requirements
are established under the standards of the U.S. Environmental
Protection Agency's Subtitle D regulations as implemented and applied
on a state-by-state basis.
The determination of airspace usage and remaining airspace capacity is an
essential component in the calculation of closure and post-closure
accruals. See Note 2.
None of the Company's landfills are currently connected with Superfund
National Priority Lists or potentially responsible party issues.
(Continued)
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BIOSAFE INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statements of Operations
(8) CONTINGENCIES
Legal Matters
The Company is party to certain pending legal proceedings and claims.
Although the outcome of such proceedings and claims cannot be
determined with certainty, the Company's management, after consultation
with outside legal counsel, is of the opinion that the expected final
outcome should not have a material adverse effect on the Company's
financial position, results of operations or liquidity with the
exception of certain litigation brought against the Company related to
the Fairhaven Landfill. See Note 6.
(9) COMMON STOCK
On June 28, 1996 the Company closed an offering to overseas investors
under Regulation S of the Securities Act of approximately 3.3 million
shares of common stock at approximately $2.00 per share, raising net
proceeds of approximately $5.9 million. The purchasers were all non
U.S. - persons and were primarily existing institutional BioSafe
shareholders and internationally recognized environmental mutual funds.
The private placement agent for the transaction was Capital Growth
International, Inc.
These shares have not been registered under the Securities Act and may not
be sold in the United States without such registration or an applicable
exemption from the requirement of registration.
On July 6, 1996 the Company's Subordinated Redeemable Convertible Notes
due October 6, 2000 became eligible for conversion. Through September
30, 1996, such notes in the principal amount of $2,750,000, plus
accrued interest in the amount of $25,185 have been converted into
1,514,178 shares of common stock of the Company. Subsequent to
September 30, 1996 an additional $50,000 in principal, plus accrued
interest of $1,494 was converted into 28,096 shares of common stock of
the Company.
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<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Following discussion should be read in conjunction with the
unaudited Condensed Consolidated Financial Statements and related Notes thereto
of the Company included herein and the Consolidated Financial Statements and
related Notes thereto included in the Company's 1995 Annual Report on Form 10-K.
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference are discussed herein (See
"Certain Factors Affecting Future Operating Results").
The Company is engaged in the business of rehabilitating landfills to
permit their continued operation with increased capacity in an environmentally
sound manner, referred to by the Company as "landfill remodeling", and landfill
operation. The Company has developed technologies for handling of waste
materials for use in landfill remodeling and operations. The Company is also in
the initial stages of investigating potential acquisitions of waste collection
and transfer operations to develop fully integrated solid waste management
operations in markets where it believes it can maximize utilization of Company
owned or operated landfills through such integration. No binding agreements or
understanding for any such acquisitions exist at this time and no assurance can
be given that the Company will be able to complete any such acquisitions.
Prior to March 27, 1996, The company had been actively developing other
technologies with potential application in a number of business areas, including
the Ancillary Technologies and Major Sports Fantasies, Inc., a business
unrelated to the environmental industry, as defined and discussed in Note (4) to
the Consolidated Financial Statements. The Company is not currently allocating
its resources or activities to the development or commercial exploitation of the
Ancillary Technologies or Major Sports Fantasies, Inc.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
FINANCIAL POSITION
- ------------------
BioSafe had $1,837,000 in cash as of September 30, 1996. This
represented a decrease of $3,400,000 , from December 31, 1995. Working capital
as of September 30, 1996 was $(894,000), a decrease of $3,287,000, or 137%, from
December 31, 1995. This decrease was primarily due to the use of cash to fund
the net loss for the nine months ended September 30, 1996, capital costs
associated with landfill
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<PAGE> 17
development projects, and the restructuring and discontinued operations costs
and reserves which the Company recorded in the first quarter of 1996, partially
offset by the net proceeds of approximately $5.9 million in equity that the
Company raised on June 28, 1996. See Notes 4 and 9 to the consolidated financial
statements.
During the nine months ended September 30, 1996, the Company allocated
resources to various project development and related activities, see Note 6 to
the Consolidated Financial Statements. Additions to property and equipment,
primarily related to landfill remodeling and construction of $4,063,000 were
made during the nine months ended September 30, 1996.
RESULTS OF OPERATIONS
- ---------------------
Through the first quarter of 1995, substantially all of the Company's
revenue had been attributable to the sale and licensing of it's medical waste
treatment technology to BioMedical Waste Systems, Inc. ("Biomed"). On August 31,
1995 the Company terminated its agreement with Biomed in most territories as a
result of Biomed's failure to make required payments.
In February 1996 the Company entered into a licensing and services
agreement with ScotSafe Limited ("ScotSafe"), a Glasgow, Scotland company for
the exclusive rights to use the Company's continuous feed auger medical waste
processing technology in the British Isles. The Company earned royalties and
consulting fees of approximately $900,000 during the nine months ended September
30, 1996 from the completion of two medical waste treatment facilities by
ScotSafe during this period, see Note 3 to the Consolidated Financial
Statements.
On March 27, 1996, the Company announced its intention to take
meaningful action to conserve cash and working capital, including the
restructuring of the Company's operations to focus its resources and activities
on its core business of landfill remodeling and operation, see Note 4 to the
consolidated financial statements. The Company expects the restructuring and
related discontinued operations to result in annual savings in excess of $4.0
million.
Landfill revenues for the nine months ended September 30, 1996
consisted of $1,049,000 received from operation of the Fairhaven landfill
project which commenced on June 22, 1995, utilizing existing capacity.
For the nine months ended September 30, 1996, the net loss was
($4,338,000) as compared to a net loss of ($4,474,000) during the nine months
ended September 30, 1995. During the nine months ended September 30, 1995 the
Company wrote-off $2,975,000 in accounts and notes receivable from Biomed. The
net loss for the nine months ended September 30, 1996 consisted of $1,912,000
related to restructuring and discontinued operations, an increase of $953,000 in
interest expense and financing costs, primarily related to the Fairhaven
landfill and the convertible debenture issued in
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<PAGE> 18
the fourth quarter of 1995, the write-off of $229,000 in landfill development
costs associated with the termination of the Company's option to purchase a
landfill in Rushville, PA for remodeling and development, partially offset by
net operating income from the Fairhaven landfill and revenues from the ScotSafe
agreement.
In addition, on March 29, 1995, the Company entered into a two-year
agreement with Liviakis Financial Communications, Inc. ("Liviakis"), whereby
Liviakis assists and consults with the Company on matters concerning mergers and
acquisitions, corporate finance, investor relations and financial public
relations. As compensation for services to be rendered by Liviakis, the Company
issued 890,000 unregistered, restricted shares of Common Stock. As a result, on
March 29, 1995, the Company recorded a prepaid asset of $1,335,000. The Company
is amortizing this expense over the two years of the Agreement, at a rate of
$167,000 per quarter or $501,000 for the nine months ended September 30, 1996.
Selling, general and administrative expenses consist of project
development activities, marketing costs, salaries and benefits, legal,
accounting and other professional fees, and other administrative costs. These
costs totaled $2,262,000 for the nine months ended September 30, 1996. This
represented an increase of $437,000, or 24%, compared to the $1,825,000 incurred
during the nine months ended September 30, 1995. The increase was primarily
associated with the development and marketing of the Company's landfill
remodeling technology, financing activities and non-recurring professional fees
associated with the investigation discussed in Note 4 to the consolidated
financial statements. Also, on March 27, 1996, the Company announced its
intention to take meaningful action to conserve cash and working capital,
including the restructuring of the Company's operations to focus its resources
and activities on its core business of landfill remodeling and operation. The
restructuring is expected to result in annual saving in excess of $4.0 million.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995
RESULTS OF OPERATIONS
- ---------------------
For the three months ended September 30, 1996, net income was $225,000
as compared to a net loss of ($746,000) in the comparable prior year quarter,
an increase of $924,000. This change was primarily the result of the Company's
restructuring announced on March 27, 1996, and the cost containment measures
and overhead reductions instituted as part of that restructuring, and the
recognition of approximately $900,000 of revenues relating to the Company's
medical waste business.
Landfill Revenues for the three months ended September 30, 1996 were
$312,000 as compared to revenues of $752,000 in the comparable prior year
quarter, a decrease of $433,000. Revenues for the three months ended September
30, 1995
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<PAGE> 19
included a large amount of material for beneficial reuse accepted at the
landfill during initial construction activities.
Selling, general and administrative expenses for the quarter ended
September 30, 1996 were approximately $481,000, as compared to $1,102,000 for
the comparable prior year's quarter. The decrease was primarily due to the
Company's March 27, 1996 restructuring plan, and the cost containment measures
and overhead reductions instituted as part of that plan.
During the 3 months ended March 31, 1996 the Company earned
approximately $900,000 from its agreement with ScotSafe as discussed previously.
ENVIRONMENTAL AND REGULATORY MATTERS
The Company and its customers operate in a highly regulated
environment, and in general the Company's landfill remodeling projects, such as
the Fairhaven landfill, are required to have federal, state and/or local
government permits and approvals. Any of these permits or approvals may be
subject to denial, revocation or modification under various circumstances. In
addition, if new environmental legislation or regulations are enacted or
existing legislation or regulations are amended or are interpreted or enforced
differently, The Company or its customers may be required to obtain additional
operating permits or approvals. There can be no assurance that the Company will
meet all of the applicable regulatory requirements. Any delay in obtaining
required permits or approvals will tend to cause delays in the Company's ability
to obtain bond or other project financing, resulting in increases in the
Company's needs to invest capital in projects prior to obtaining financing, and
will also tend to reduce project returns by deferring the receipt of project
revenues. In the event that the Company is required to cancel any planned
project as a result of the inability to obtain required permits or other
regulatory impediments, the Company may lose any investment it has made in the
project up to that point, and in the case of the Fairhaven and Moretown landfill
projects, have a material adverse effect on the Company's financial condition
and results of operations.
To the extent possible, the Company intends to conduct its operations
in such a manner as to minimize the impact of environmental issues on operating
results. As a general matter, the Company will seek to avoid projects in which
it would be required to handle or dispose of hazardous waste, although it is
prepared to consider projects that may involve some cleanup of previously
existing hazardous waste, subject to controls designed to minimize exposure to
risk of liability and to assure an economic return from the activity. The
Company's landfill projects will involve the installation and operation of
extensive environmental monitoring systems to enable the Company to identify and
deal with any potential environmental problems, which systems have already been
implemented at the Fairhaven and Moretown landfill projects. The cost of
installing these systems will be included in the Company's total investment in
the project. The Company's contract for the Fairhaven landfill project requires
the Town,
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as owner of the landfill, to pay for the ultimate cost of closing the landfill,
and provides for a set-aside of a part of the Town's share of project revenues
to establish a sinking fund for payment of closure costs, so that the Company
will not be required to establish any reserves for this purpose. The Company
intends to implement similar arrangements for closure costs in its agreements
for other landfill projects which it may enter into in the future where it
manages but does not own. The Company's ownership of the Moretown landfill
through its subsidiary, Waste Professionals of Vermont, Inc., involves a greater
degree of exposure to potential environmental liabilities than is involved with
landfills operated under a management contract. In conjunction with the
acquisition of the Moretown project, the Company recorded $1.5 million in
estimated closure and post-closure costs based on engineering estimates of the
current condition of the landfill. See Note 7 to the Consolidated Financial
Statements.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
INITIAL COMMERCIALIZATION STAGE; LIMITED OPERATING HISTORY. To date,
although the Company has conducted significant testing of methods and processes
based on its materials handling technology, and has gained substantial
experience in connection with the development and operation of the Fairhaven
landfill project to date, the Company has not yet carried through a landfill
remodeling project to completion. Final development and operation may be subject
to engineering and construction problems such as cost overruns and start-up
delays resulting from technical or mechanical problems, unfavorable conditions
in the equipment or labor market, or environmental permitting and other
regulatory problems, as well as other possible adverse factors. There can be no
assurance that the Company will be successful in developing and implementing
commercial landfill remodeling projects, or that any such development can be
accomplished without excessive cost or delay.
OPERATING LOSSES AND ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE
PROFITABILITY. The Company had an accumulated operating deficit at September 30,
1996 of $13,666,000. Prospects for future profitability are heavily dependent on
the success of the Company's landfill remodeling and operation projects. There
can be no assurance that the Company will generate sufficient revenue to be
profitable or, if profitable, to maintain profitability in future years.
RISKS OF LIMITED LIQUIDITY. The Company has limited liquidity in
relation to its short-term capital commitments and operating cash requirements.
The Company's ability to satisfy its commitments and operating requirements is
dependent on a number of pending financing activities which are not assured of
successful completion. Any failure of the Company to obtain sufficient financing
in the short run would have a materially adverse effect on the Company's
financial condition and operations.
FUTURE CAPITAL WILL BE REQUIRED. The Company will require substantial
funds to complete and bring to commercial viability all of its currently planned
projects.
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<PAGE> 21
UNPREDICTABILITY OF PATENT PROTECTION AND PROPRIETARY TECHNOLOGY. The
Company's success depends, in part, on its ability to obtain and enforce
patents, maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. While the Company has been issued a U.S.
patent and certain related foreign patents on certain of its materials handling
technology, with particular reference to landfill remodeling, and on its CFA
medical waste treatment system, there can be no assurance that others will not
independently develop similar or superior technologies, duplicate any of the
Company's processes or design around any processes on which the Company has or
may obtain patents. In addition, it is possible that third parties may have or
acquire licenses for other technology that the Company may use or desire to use,
so that it may need to acquire licenses to, or to contest the validity of, such
patents of third parties relating to the Company's technology. There can be no
assurance that any license required under such patents would be made available
to the Company on acceptable terms, if at all, or that it would prevail in any
such context. Moreover, the Company could incur substantial costs in defending
itself in suits brought against it or in bringing suits against other parties
related to patent matters.
In addition to patent protection, the Company also relies on trade
secrets, proprietary know-how and technology which it seeks to protect through
confidentiality agreements with its collaborators, employees and consultants.
There can be no assurance that these agreements and other steps taken by the
Company will be effective to protect its technology against unauthorized use by
others.
POTENTIAL ENVIRONMENTAL LIABILITY AND ADVERSE EFFECT OF ENVIRONMENTAL
REGULATION. The Company's business exposes it to the risk that it will be held
liable if harmful substances escape into the environment as a result of its
operations and cause damages or injuries. Moreover, federal, state and local
environmental legislation and regulations require substantial expenditures and
impose significant liabilities for noncompliance.
DEPENDENCE ON OPERATING PERMITS. The Company's ability to derive
revenues from its landfill projects is dependent on obtaining requisite permits
from state and/or local authorities. Obtaining such permits is time-consuming
and expensive, and success cannot be assured in any case. As illustrated by
litigation in which the Company is now involved (see Note 6 to the Financial
Statements), permits, once granted, are subject to challenge in civil
proceedings. If the Company is not successful in obtaining a permit for one of
its project, or if a permit is revoked as a result of litigation, the Company
stands to lose all or part of its investment in the project.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its activities primarily through the
issuance of equity securities and debt, including convertible notes and common
stock warrants.
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<PAGE> 22
During the year ended December 31, 1995 the Company raised net proceeds of
$19,038,000 through private placements of equity securities and the issuance of
long-term debt. On June 28, 1996 the Company raised net proceeds of $5,916,000
through a private placement of common stock, see Note 9 to the consolidated
financial statements.
At present, the Company is focusing its resources and efforts on the
development of its landfill remodeling and operations business. The Company is
also in the initial stages of investigating potential acquisitions of waste
collection and transfer operations to develop fully integrated solid waste
management operations in markets where it believes it can maximize utilization
of Company owned or operated landfills through such integration. No binding
agreements or understanding for any such acquisitions exist at this time and no
assurance can be given that the Company will be able to complete any such
acquisitions.
The Company is currently engaged in a project with the Town of
Fairhaven, Massachusetts to remodel its existing 28-acre landfill. Total
investments in the Fairhaven landfill project through September 30, 1996 were
approximately $8.0 million. The Company estimates that the total cost of
development of the Fairhaven landfill project, including amounts invested to
date, will be approximately $20 million. Since assuming responsibility for
operation of the landfill in June 1995, the Company has received revenue from
such operation. On October 11, 1995, the Company received a Major Modification
Permit including an Authorization to Construct and remodel phase 1 of the first
of three "cells" of the landfill. This permit has been challenged in state court
by certain residents of the Town of Fairhaven. See "Legal Proceedings" in Item 1
and Note 6 to the Consolidated Financial Statements.
Construction of phase 1 of the first cell of the Fairhaven landfill has
been completed. On August 9, 1996 the Company obtained final authorization to
operate its initial cell from the MDEP, and maintain a daily capacity of 150
tons per day. The company expects the MDEP to increase the daily rate from 150
tons per day to approximately 400 tons per day when additional lined cells are
constructed at the landfill. The Company, as discussed below, is currently
awaiting findings from a court hearing held on September 5, 1996. The Company,
subject to the court findings, is currently in the process of revising its
construction schedule and operating budget for the project based on the delays
and additional costs caused by the litigation and other matters. In the near
future the Company intends to reduce its daily intake from the currently
permitted 150 tons per day level. Such reduction, will result in a shortened
construction period, which will then allow the Company to reach the approximate
400 tons per day level sooner. The company does not anticipate reaching 400 tons
per day until late 1997. When the company reaches 400 tons per day, the
Fairhaven project will generate increased operating cash flow, which will reduce
the Company's dependence on external financing to fund future project capital
costs. Additional Authorization to Construct (ATC), Authorization to Operate
(ATO) and other minor permits will also be required for the second phase of the
first cell and for the second
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<PAGE> 23
and third cells. The Company believes that the final issuance of a permit to
operate phase 1 of the first cell reflects substantial acceptance of its
remodeling approach as applied at the Fairhaven landfill by the MDEP, but no
assurance can be given that further required ATCs, ATOs and other permits will
be obtained on a timely basis.
The Company is pursuing various options for project financing of
development expenses of the Fairhaven Landfill project, although no assurance
can be given that any such project financing will be obtained.
A second landfill project involves the Moretown landfill, located in
Moretown, Vermont. On July 5, 1995, WPV, a corporation 80% owned by the Company,
acquired the property of the Moretown landfill, together with certain related
assets. The remaining 20% of WPV is held by an individual not affiliated with
the Company. The Moretown landfill was acquired from an entity in bankruptcy
which had owned the real estate on which the landfill had operated pursuant to a
lease. The Company's total investment in the Moretown landfill project was
approximately $7.0 million at September 30, 1996. The Company estimates that the
total cost to WPV of completing the Moretown landfill project as planned,
excluding remodeling, including amounts invested to date, will be approximately
$15.0 million.
On September 9, 1996 the Company received its Full Certification from
the Vermont Agency of Natural Resources (VANR) to commence operations at the
Moretown landfill using available capacity and to begin construction of Cell
One, Phase II. The ACT 250 Land Use Permit was received on September 30, 1996
which enabled the Company to commence operations at an average of 350 tons of
waste per day. The Company commenced operations at the landfill on October 7,
1996.
The Company is pursuing various options for project financing of
development expenses of the Moretown Landfill project, although no assurance can
be given that any such project financing will be obtained.
A third landfill project involves a landfill located on a 26-acre
parcel in the Town of South Hadley, Massachusetts, for which the Company and the
Town entered into an agreement under which the Company will operate and remodel
the landfill. Thirteen of the 26 acres may contain hazardous waste and will not
be included in the first phase of the remodeling, subject to a feasibility
study. In addition, the Company's proposal to remodel and operate the 10-acre
landfill of the Town of Buckland, Massachusetts has been approved by the Town,
and a contract for this project has also been negotiated. The Company has also
been chosen to remodel the Town of Orange, Massachusetts landfill, and is in
preliminary negotiations for landfill remodeling contracts or landfill
acquisitions in the Northeast and Midatlantic areas.
If the Company is successful in raising additional capital to meet
existing commitments and to support additional capital investments, the Company
intends to pursue and increase its landfill remodeling and operating business.
The Company is
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also in the initial stages of investigating potential acquisitions of waste
collection and transfer operations to develop fully integrated solid waste
management operations in markets where it believes it can maximize utilization
of Company owned or operated landfills through such integration. No binding
agreements or understanding for any such acquisitions exist at this time and no
assurance can be given that the Company will be able to complete any such
acquisitions.
Typically, the Company expects to be required to incur substantial
capital costs in connection with feasibility studies, contracting, permitting
and initial development, ranging from $500,000 up to $2.0 million, for any such
landfill remodeling project or landfill acquisition in the initial phases of the
project. After completion of these initial phases, the Company will generally
seek to obtain project-level financing and to recapture a part of its initial
investment from such project financing. The Company will therefore be required
to commit substantial capital resources from internal sources in the case of any
landfill remodeling project or landfill acquisition prior to being able to
obtain outside financing or to derive material operating revenues from the
project.
To the extent practicable, the Company seeks in its projects to retain
the flexibility to defer scheduled capital investments. For example, the total
investments required for the Fairhaven landfill project as described above
assumes completion of landfill remodeling over the entire site. The Company may
stage remodeling investments over an extended period of time while still
collecting projected project revenues from the utilization of existing space.
In summary, the Company's total investment required to complete its
Fairhaven and Moretown landfill projects, in addition to amounts already
invested as of September 30, 1996, will be approximately $20 million, subject to
possible cost overruns which cannot be predicted. The Company estimates that, of
the $20 million estimated required investment, approximately $12 million will be
invested in the Fairhaven landfill project, and approximately $8 million will be
invested in the Moretown landfill. Furthermore, feasibility studies required
under the Company's contracts with the Towns of South Hadley and Buckland,
Massachusetts, are expected to cost approximately $1 million, of which the
Company has spent approximately $396,000 through September 30, 1996, and if
either of these projects is determined to be feasible, substantial investments,
comparable to those required for the Company's other landfill remodeling
projects would be required to complete the projects. The Company also has under
discussion and negotiation a number of additional landfill remodeling projects
or acquisitions, and any contracts resulting from these discussions and
negotiations would increase the Company's capital requirements accordingly. In
addition, the Company requires cash to fund its corporate staff and other
overhead expenses, which may grow significantly as the Company expands the scope
of its operations, although the Company anticipates increases in revenues and
cash flow from both the Moretown and Fairhaven landfill projects, and the
Company's medical waste business in the foreseeable future.
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As discussed above, the Company will require additional financing in
order to satisfy its existing and pending capital commitments. The Company's
additional alternatives under consideration in this regard include: (a) certain
prospects for project financing (such as secured debt financing with banks or
other institutions) in relation to specific projects; (b) the raising of
additional equity or long-term debt financing, (c) exercising its call rights
with respect to certain outstanding warrants when and if the applicable market
price conditions are satisfied, with the possibility that proceeds of
approximately $38.0 million could be realized from exercise of these warrants.
There can be no assurance that all or any of these financing plans and
expectations will be realized. Failure of the Company to obtain required
financing in the short term could have a materially adverse effect on the
Company's financial condition and operations.
INFLATION
The Company does not believe its operations have been materially
affected by inflation.
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BIOSAFE INTERNATIONAL, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
(a) The Company has commenced arbitration proceedings against Dr.
Richard Rosen, former Chairman, Chief Executive Officer and President of the
Company (See Note 4), seeking to recover amounts which it believes are owed to
it by Dr. Rosen. This action was undertaken at the direction of the Board of
Directors based on recommendations of a special committee of the directors which
had been appointed to investigate Dr. Rosen's dealings with the Company. Dr.
Rosen resigned from all offices with the Company on March 27, 1996. Amounts
which the Company seeks to recover include unreimbursed advances and amounts
which the Company believes constitute improper expense reimbursements and
payments of Company funds for personal benefit. An arbitration hearing was
completed on October 25, 1996; the arbitrator has not yet issued a ruling. No
assurance can be given that the Company will be able to prevail in these
proceedings or that it will be able to collect any amounts awarded in
arbitration. The Company is carrying on its balance sheet an amount of
approximately $471,000 in unreimbursed advances due from Dr. Rosen, but the
Company's other claims and additional advances have not been reflected at this
time.
(b) The Company is a party to litigation pending in Superior Court in
Bristol County, Massachusetts, captioned SUSAN ALLUA, ET AL. v. MASSACHUSETTS
DEPARTMENT OF ENVIRONMENTAL PROTECTION, TOWN OF FAIRHAVEN AND BIOSAFE, INC.
(Civil Litigation No. A95-01717) (the "Litigation"). Plaintiffs are 16 residents
of Fairhaven, Massachusetts, who reside in the vicinity of the Fairhaven
Landfill. Plaintiffs commenced the litigation on November 8, 1995. In the
litigation, plaintiffs seek an order annulling the permit issued by the
Massachusetts Department of Environmental protection (the "MDEP") on October 11,
1995, authorizing one phase of the reclamation project undertaken by the Town of
Fairhaven and BioSafe at the Fairhaven Landfill (the "Permit"). Plaintiffs also
have brought claims alleging that the MDEP violated the Massachusetts
Environmental Policy Act ("MEPA") in issuing the Permit (the "MEPA Claims").
Further, plaintiffs have brought certain common law claims against the Company
for nuisance, trespass and strict liability based principally on alleged odor
and dust conditions resulting from the Company's work at the Fairhaven Landfill.
The common law claims seek compensatory damages and injunctive relief.
Pursuant to the Massachusetts Administrative Procedures Act, the
Permit Appeal was heard by a Bristol County Superior Court Judge. The Court had
a hearing on the Permit Appeal on September 5, 1996, but has not yet announced
its findings.
Previously, on January 12, 1996, the Company filed a motion to
dismiss the MEPA claims. The Town filed a similar motion. The Court heard oral
argument on
24
<PAGE> 27
the motions to dismiss on April 9, 1996. On May 1, 1996, the Court issued a
decision on the motions to dismiss in favor of BioSafe and the Town, dismissing
the MEPA claims in their entirety.
Plaintiffs' common law claims for nuisance, trespass and strict
liability are based principally on alleged odor and dust conditions resulting
from BioSafe's excavation activities at the Fairhaven Landfill during the summer
and early fall of 1995. The Company is pursuing factual discovery with regard to
these claims. If the Plaintiffs pursue these claims after disposition of the
Permit Appeal, a period of additional discovery and other pre-trial proceedings
would take place prior to trial on the merits.
(c) One, Three, Six, Inc. ("One, Three, Six") has filed a lawsuit
against BioSafe, Inc. ("BSI"), a subsidiary of the Company, in the Circuit Court
of DuPage County, Illinois, seeking recovery of $433,000 in principal and
interest allegedly due under a promissory note. The promissory note had been
executed by BSI in connection with One, Three, Six's payment of $400,000 to BSI
as an advance against BSI's share, as a BSI stockholder, of liquidation proceeds
derived from the sale of One, Three, Six's assets, which proceeds were to be
distributed to One, Three, Six's stockholders upon completion of winding up its
affairs. Pursuant to a confession-of-judgment provision in the promissory note,
on or about September 26, 1996, One, Three, Six obtained an order of judgment in
its favor for the amount at issue plus costs. BSI contends that One, Three, Six
obtained the promissory note by misrepresentations and has violated BSI's rights
as a minority stockholder. BSI is preparing to make the necessary filings to
re-open the judgment and to assert its affirmative defenses and counterclaims.
By a Complaint filed October 17, 1996 in Massachusetts Superior Court, One,
Three, Six has commenced proceedings to enforce the judgment entered by the
Illinois Court, and has ordered the attachment of certain bank accounts of BSI.
Bank accounts of the Company are not subject to the attachment, and the
attachment does not have any material effect on the Company's access to its
funds. BSI intends to seek to stay the enforcement proceedings upon re-opening
of the Illinois judgment. Final resolution of this matter may require a
revaluation of the asset recorded on the Company's books related to the
liquidation of One, Three, Six, but the potential effect, if any, cannot be
determined at this time. The Company does not believe that this matter will have
a material adverse effect on its financial condition or operations.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
25
<PAGE> 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
26
<PAGE> 29
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant as duly caused this Report to be signed on its behalf the
undersigned, thereunto duly authorized.
BIOSAFE INTERNATIONAL, INC.
Date: November 6, 1996 /s/ Philip Strauss
----------------------------------
Philip Strauss
Chief Executive Officer,
President, and Treasurer
(Principal Executive Officer)
Date: November 6, 1996 /s/ Robert Rivkin
-----------------------------------
Robert Rivkin
Vice President, Chief Financial
Officer and Secretary (Principal
Financial and Accounting Officer)
27
<PAGE> 30
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 the
undersigned, thereunto duly authorized.
BIOSAFE INTERNATIONAL, INC.
Date: November 6, 1996 By:__________________________________
Philip Strauss
Chief Executive Officer,
President, and Treasurer
(Principal Executive Officer)
Date: November 6, 1996 By:__________________________________
Robert Rivkin
Vice President, Chief Financial
Officer and Secretary (Principal
Financial and Accounting Officer)
28
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