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 June 30, 1997
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
Fax (617) 497-6355
(Registrant's telephone and fax 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 August 14, 1997
----- ----------------------------------
Common Stock, $.001 par value 17,662,571
<PAGE>
BIOSAFE INTERNATIONAL, INC.
Index to Contents Page No.
------------------ --------
Part I Financial Information
Item I. Financial Statements:
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996 1 - 2
Consolidated Statements of Operations for the Three
Months Ended and Six Months Ended June 30, 1997
and 1996, and for the period from April 23, 1990,
(inception) to June 30, 1997. 3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1997 and 1996, and for the period
from April 23,1990, (inception)to June 30, 1997. 4
Notes to Consolidated Financial Statements 5 - 14
Item 2. Management's Discussion and Analysis of
Consolidated Financial Condition and Results
of Operations 15 - 24
Part II Other Information
Item 1. Legal Proceedings 25 - 26
Item 2. Changes in Securities 26
Item 3. Defaults on Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
<PAGE>
BIOSAFE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
June 30, December 31,
Assets 1997 1996
------
------------- -------------
(unaudited)
Current assets:
Cash $ 5,546,660 $ 264,776
Accounts and notes receivable, net 822,518 1,158,677
Assets held for resale - 275,000
Prepaid expenses and other current assets 749,884 499,000
----------- -------------
Total current assets 7,119,062 2,197,453
Accounts and notes receivable 222,712 451,169
Restricted cash and securities 1,254,392 1,210,017
Due from former employee (Note 7) 500,000 500,000
Property and equipment, net (Note 4) 10,383,285 11,705,712
Deferred financing costs 628,193 664,105
Other assets 128,641 129,634
------------- -------------
Total assets $ 20,236,285 $ 16,858,090
============= =============
See accompanying notes to consolidated financial statements.
1
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BIOSAFE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
June 30, December 31,
Liabilities and Stockholders' Equity 1997 1996
------------------------------------
------------- -------------
(unaudited)
Current liabilities:
Current portion of long-term debt and
notes payable (Note 6) $ 761,007 $ 2,165,378
Accounts payable 533,440 1,529,076
Accrued expenses (Note 4) 789,872 1,225,715
Restructuring and current liabilities
related to discontinued operations
(Note 3) 1,595,560 1,785,097
------------- -------------
Total current liabilities 3,679,879 6,705,266
Long-term debt and notes payable (Note 6) 9,779,697 9,450,373
Landfill closure and post-closure costs (Note 5) 1,564,000 1,520,000
------------- -------------
Total liabilities 15,023,576 17,675,639
------------- -------------
Commitments and Contingencies (Note 7)
Minority interest (Note 9) - 1,031,456
------------- -------------
Stockholders' equity (deficit): (Notes 8 & 9)
Common stock, $.001 par value. Authorized
100,000,000 shares; 17,662,571 and
16,802,569 shares issued and outstanding
at June 30, 1997 and December 31, 1996,
respectively 17,662 16,802
Preferred stock, $.001 par value. Authorized
200,000 shares; 97,378 and 0 shares issued
and outstanding at June 30, 1997 and
December 31, 1996, respectively 9,737,807 -
Additional paid-in capital 21,175,515 21,351,280
Deficit accumulated during the development stage (25,718,275) (23,217,087)
------------- -------------
Total stockholders' equity (deficit) 5,212,709 (1,849,005)
------------- -------------
Total liabilities and stockholders'
equity (deficit) $ 20,236,285 $ 16,858,090
============= =============
See accompanying notes to consolidated financial statements.
2
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<TABLE>
BIOSAFE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
(unaudited)
<CAPTION>
Period from
April 23,
1990
Three Months Ended Six Months Ended (inception)
to
-------------------------- ------------------------
June 30, June 30, June 30, June 30, June 30,
1997 1996 1997 1996 1997
------------ ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 636,459 $ 319,413 $ 1,032,768 $ 736,612 $ 3,872,771
------------ ------------ ----------- ----------- -------------
Cost of operations:
Operating expenses 387,474 116,621 629,956 345,042 2,316,521
Depreciation and amortization 145,694 54,456 257,871 98,287 699,305
Write-off of project development costs (Note 4) 837,423 229,113 837,423 229,113 7,489,498
------------ ------------ ----------- ----------- -------------
Total cost of operations 1,370,591 400,190 1,725,250 672,442 10,505,324
------------ ------------ ----------- ----------- -------------
Gross profit (loss) (734,132) (80,777) (692,482) 64,170 (6,632,553)
Selling, general and administrative expenses 475,718 612,796 1,038,323 1,781,856 11,506,826
Amortization of prepaid consulting fees - 166,875 - 333,750 1,335,000
Restructuring (Note 3) - - - 250,000 1,741,729
------------ ------------ ----------- ----------- -------------
Loss from operations (1,209,850) (860,448) (1,730,805) (2,301,436) (21,216,108)
------------ ------------ ----------- ----------- -------------
Other income (expense):
Royalty and other income (expenses), net (11,004) 39,800 (13,722) 51,870 5,834,200
Interest income 24,609 9,023 59,261 82,183 621,415
Gain on sale of assets - - - - 222,728
Interest expense and financing costs (382,307) (352,242) (686,983) (627,888) (2,897,285)
Equity in loss of affiliate - (29,650) - (59,650) (96,144)
Write-off of accounts and notes receivable - - - - (2,975,001)
Loss on investment in marketable securities - - - - (100,000)
Write-off of assets - - - - (263,403)
------------ ------------ ----------- ----------- -------------
Total other income (expense) (368,702) (333,069) (641,444) (553,485) 346,510
------------ ------------ ----------- ----------- -------------
Loss before income taxes , minority interest,
discontinued operations and extraordinary item (1,578,552) (1,193,517) (2,372,249) (2,854,921) (20,869,598)
Federal and state income tax expense (benefit) - 25,000 - 50,000 154,579
------------ ------------ ----------- ----------- -------------
Loss before minority interest,
discontinued operations and
extraordinary item (1,578,552) (1,218,517) (2,372,249) (2,904,921) (21,024,177)
Minority interest 200 (1,996) 4,971 4,342 4,607
------------ ------------ ----------- ----------- -------------
Loss from continuing operations (1,578,352) (1,220,513) (2,367,278) (2,900,579) (21,019,570)
Discontinued operations - - - (1,662,453) (4,564,798)
------------ ------------ ----------- ----------- -------------
Loss before extraordinary item (1,578,352) (1,220,513) (2,367,278) (4,563,032) (25,584,368)
Extraordinary item - Loss on extinguishment of debt (133,907) - (133,907) - (133,907)
------------ ------------ ----------- ----------- -------------
Net Loss $ (1,712,259) $ (1,220,513) $(2,501,185) $(4,563,032) $ (25,718,275)
============ ============ =========== =========== =============
Net loss per share:
Loss from continuing operations $ (0.09) $ (0.10) $ (0.13) $ (0.24)
Discontinued operations - - - (0.14)
Extraordinary item (0.01) - (0.01) -
------------ ------------ ----------- -----------
Net loss per share $ (0.10) $ (0.10) $ (0.14) $ (0.38)
============ ============ =========== ===========
Weighted average number of shares used in
computation of net loss per share 17,662,569 12,115,575 17,562,790 11,930,670
See accompanying notes to consolidated financial statements.
</TABLE>
3
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<TABLE>
BIOSAFE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
(unaudited)
Period from
<CAPTION>
April 23, 1990
(inception) to
Six months ended June 30, June 30,
1997 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,501,185) $ (4,563,032) $ (25,718,272)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Discontinued operations - 1,662,453 4,564,798
Depreciation and amortization 375,870 575,265 2,745,643
Extraordinary loss on extinguishment of debt 133,907 133,907
Loss on investment in marketable securities - - 100,000
Equity on loss in affiliate - 59,650 96,144
Minority interest (200) (4,341) 161
Allowance for doubtful accounts - - 242,145
Write-off of accounts and notes receivable - - 2,975,001
Issuance of common stock for services 44,854 - 445,311
Write-off of project development costs 837,423 - 7,489,498
Write-off of assets - - 263,404
Changes in assets and liabilities:
Accounts receivable and notes receivable 564,616 533,403 (2,664,076)
Prepaid expenses and other current assets (250,884) 178,062 (749,884)
Accounts payable (995,636) (1,147,356) 767,891
Accrued expenses (298,480) 122,991 923,289
Income and franchise taxes payable - (51,535) -
Deferred income - - (500,000)
-------------- -------------- ----------------
Net cash used by continuing operations (2,089,715) (2,634,440) (8,885,040)
Net cash used by discontinued operations (189,537) (966,374) (2,439,820)
-------------- -------------- ----------------
Net cash used by operating activities (2,279,252) (3,600,814) (11,324,660)
-------------- -------------- ----------------
Cash flows from investing activities:
Assets held for sale - - (159,719)
Restricted cash (44,375) (973,257) (1,254,392)
Receivable from One, Three, Six, Inc. - - (800,000)
Investment in affiliate - (49,621) (96,144)
Construction in progress (61,675) (1,748,448) (14,671,073)
Future landfill development projects 16,205 (25,002) (798,127)
Operating equipment used at landfills 722,105 (34,074) 21,028
Equipment used in collection operations (135,382) - (135,382)
Other property and equipment (246,165) (434,002) (1,465,876)
Patents (1,465) (2,601) (100,111)
Other assets 6,094 (3,737) (54,610)
Licenses and permits - - (78,807)
-------------- -------------- ----------------
Net cash provided (used) by investing activities 255,342 (3,270,742) (19,593,213)
-------------- -------------- ----------------
Cash flows from financing activities:
Deferred financing and registration costs (56,798) - (1,560,664)
Borrowings from notes payable and long-term debt 1,234,064 (67,637) 4,600,471
Repayment of notes payable and long-term debt (1,959,215) (3,580,513)
Net borrowings and advances from stockholders and related parties - (118,760) 266,806
Issuance of subordinated notes payable - - 12,405,000
Repayments of subordinated notes payable - 5,905,152 (790,000)
Net proceeds from issuance of common stock 399,000 - 16,821,129
Net proceeds from issuance of preferred stock 7,688,543 - 7,688,543
Redemption of preferred stock - - (300,000)
Preferred stock dividends - - (117,334)
Minority interest 200 (75,024) 1,031,295
-------------- -------------- ----------------
Net cash provided by financing activities 7,305,794 5,643,731 36,464,733
-------------- -------------- ----------------
Increase (decrease) in cash 5,281,884 (1,227,825) 5,546,660
Cash, beginning of period 264,776 5,237,064 -
-------------- -------------- ----------------
Cash, end of period $ 5,546,660 $ 4,009,239 $ 5,546,660
============== ============== ================
See accompanying notes to consolidated financial statements.
4
<PAGE>
</TABLE>
(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 June
30, 1997 and for all periods presented have been made. The results of
operations for the period ended June 30, 1997 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, 1996 audited financial
statements and notes thereto.
(2) Summary of Significant Accounting Policies
Basis for Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
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.
The Company recognizes collection fees from its hauling operations as the
services are provided.
Cost of Operations
Cost of operations includes direct labor, fuel, equipment maintenance,
insurance, depreciation and amortization of equipment and project
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 and
hauling operations. Also included in the cost of landfill operations
are payments made to the 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 the Town. In such Towns, the Town is
responsible for the closure and post-closure costs related to the
landfill.
5
<PAGE>
Landfill Closure and Post-Closure Costs
TheCompany estimates and accrues 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, as necessary, as a component of the purchase price of
facilities acquired, in acquisitions accounted for under the purchase
method, when the acquisition is consummated.
Property and Equipment
Capitalization of landfill development costs begins with the signing of
landfill management contracts for facilities operated by the Company
that are not owned, or upon determination by the Company of the
economic feasibility or extended useful life of each landfill acquired
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 $15,000 and $186,000 were capitalized during the six
months ended June 30, 1997 and 1996, respectively.
Landfill project development costs are amortized 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
amortization calculation. The determination is performed by conducting
annual topography surveys 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 to ensure proper recording of the amortization
provision. The reevaluation process did not materially impact results
of operations for any periods presented.
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 benefits associated with these costs are
expected to be realized and therefore capitalization and amortization
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.
6
<PAGE>
Use of Estimates
The preparation f financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Restricted Cash and Securities
Restricted Cash and Securities consist principally of funds or securities
deposited in connection with landfill closure and post-closure
obligations. Amounts are principally invested in fixed income
securities of federal, state and local governmental entities and
financial institutions. The Company considers its landfill closure and
post-closure investments to be held to maturity. Substantially all of
these investments mature within one year. The market value of these
investments approximates their aggregate cost basis at June 30, 1997.
Deferred Financing Costs
Deferred financing costs are amortized on a straight-line basis over the
life of the related notes payable or debt.
Net loss Per Share
Net loss per common share is based on the weighted average number of
common shares and dilutive common stock equivalent shares outstanding
during each period. Fully diluted net loss per share has been omitted
since they are either the same as primary earnings per share or are
anti-dilutive.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable, and
accrued expenses approximates fair value because of the short maturity
of these items. The carrying amount of debt, notes and balances with
bank lines of credit with interest rates related to the prime rate
approximate fair value because the interest rates change with the
market interest rates. Other debt approximates fair value as the
interest rates charged approximate the Company's external borrowing
rate.
Reclassifications
Certain amounts in prior year financial statements have been reclassified
to conform to the 1997 presentation.
7
<PAGE>
(3) Restructuring and Discontinued Operations
During the three and six months ended June 30, 1997 and 1996, the Company
recorded restructuring and discontinued operations charges of $0 and
$0, and $250,000 and $1,662,453, respectively. As of June 30, 1997, the
Company has liabilities and reserves totaling $1,595,560 relating to
the restructuring and discontinued operations.
(4) Property and Equipment
Property and equipment are stated at cost and consist of the following;
June 30, December 31,
1997 1996
---- ----
(unaudited)
Construction in progress - landfills owned $ 7,940,699 $ 7,937,307
Future landfill development projects 411,152 427,357
Equipment used at landfills 956,856 2,673,505
Equipment used in collection operations 369,444 -
Buildings, facilities and improvements 649,901 792,255
Other property and equipment 369,754 330,746
--------------- -------------
10,697,806 12,161,170
Less accumulated depreciation and amortization (314,521) (455,458)
---------------- --------------
$ 10,383,285 $ 1,705,712
=============== =============
Landfill in Moretown, Vermont
The Company owns a landfill located in Moretown, Vermont. The current
estimated available new capacity at this landfill, excluding
remodeling, is in excess of 1.1 million tons. On September 30, 1996,
the Company received its final permit from the Vermont Department of
Natural Resources to commence operations at the landfill at an average
of 350 tons per day("TPD"). On October 7, 1996, the Company began
operations at the landfill, which is currently operating at
approximately 175 - 225 TPD. The Company anticipates the operating
level of the landfill to increase to approximately 225 - 300 TPD by
September 30, 1997 end of the third quarter of 1997. The Company
intends to operate the landfill at that level until the Company
permits and constructs its next cell, at which time the Company expects
to increase the operating level to full capacity.
8
<PAGE>
On March 31, 1997, the Chittenden Solid Waste District ("CSWD") in
northwestern Vermont awarded BioSafe a $1.3 million, 15-month contract
to dispose of the sludge from the wastewater treatment plants within
the District. Under the contract, the landfill will receive
approximately 23,000 tons of sludge from the Chittenden Solid Waste
District during the period from March 31, 1997 to June 30, 1998 at $56
per ton. In addition, BioSafe will be responsible for transporting the
sludge from the District's special waste processing facility to the
Moretown landfill.
On April 2, 1997, the Company filed its permit application with the
Vermont Agency of Natural Resources for the next cell or cell 2 at the
landfill. On April 14, 1997 the permit application was determined to be
administratively complete by the Vermont Department of Natural
Resources. The Company anticipates that it will take approximately 6 -
12 months from the date of filing to receive its final permits to
operate cell 2.
On June 19, 1997, the Company signed an agreement with the CSWD to
lease/purchase the CSWD's permitted transfer station in Burlington,
Vermont. This transaction will offer the Company greater access to the
Burlington, Vermont and surrounding area markets, Vermont's most
populated and industrialized community. The Company anticipates
taking over operations of the transfer station on or about
September 30, 1997.
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 millionin estimated closure and post-closure costs based on
engineering estimates of the current condition of the landfill.
Town of Fairhaven
On July 24, 1994, BioSafe entered into a contract with the Town of
Fairhaven, Massachusetts to remodel the Town's existing 26 acre
landfill. On November 8, 1995, an action was brought against various
parties including the Company relating to the Fairhaven landfill. On
September 5, 1996, pursuant to the Massachusetts Administrative
Procedures Act, the action was heard by a Bristol County Superior Court
Judge. On June 2, 1997 The Massachusetts Superior Court issued an Order
denying the plaintiff's action. This order, which represents a
favorable outcome for the Company's position, is subject to appeal to
the Massachusetts Appeals Court after entry of a judgment on the order.
The Company has initiated discussions with the Town of Fairhaven with
regard to the future of the project, and has ceased all operations of
the project at this time. As previously disclosed, the future economic
viability of the project is doubtful because of the extensive delays
and additional operating costs resulting from the litigation and other
factors. As of June 30, 1997 the Company has set up a reserve of
$500,000, which is included in accrued expenses on the June 30, 1997
9
<PAGE>
balance sheet, for additional litigation and ongoing site construction
costs. Also, in June of 1997 the Company entered into settlements with
various equipment finance companies relating to the equipment at the
Fairhaven landfill. The settlements resulted in a non-recurring,
non-cash write-off of approximately $800,000 during the quarter ended
June 30, 1997, but relieved the Company of obligations of a similar
amount.
(5) 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 June 30, 1997 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 $2.1 million. Based
upon the existing conditions of the landfill at acquisition and
cumulative usage, $1.56 million has been accrued at June 30, 1997. 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 - Summary of Significant Accounting Policies.
(6) Long-term debt
Howard Bank financing
On March 31, 1997, the Company's subsidiary, Waste Professionals of
Vermont, Inc.("WPV") closed a $1 million term loan with The Howard Bank
of Burlington, Vermont. The term of the loan is payable in 36 equal
monthly payments and bears interest at 12% per annum.
10
<PAGE>
On June 30, 1997 the Company closed a Regulation "D" private placement of
Series "A" Convertible Preferred Stock which raised net proceeds of
approximately $9.2M. See Note 9. As part of the private placement, the
Company converted approximately $570,000 in bank debt into preferred
stock and exchanged a $850,000 minority interest into preferred stock,
which are included in the $9.2 million total net proceeds.
(7) Contingencies
Landfill related activities
In the normal course of its business, and as a result of the extensive
governmental regulation of the solid waste industry, the Company
periodically may become subject to various judicial and administrative
proceedings involving federal, state, or local agencies. In these
proceedings, the agency may seek to impose fines on the Company or to
revoke or deny renewal of an operating permit held by the Company. From
time to time, the Company also may be subjected to actions brought by
citizens' groups in connection with the permitting of its landfills or
transfer stations, or alleging violations of the permits pursuant to
which the Company operates. Certain federal and state environmental
laws impose strict liability on the Company for such matters as
contamination of water supplies or the improper disposal of hazardous
waste. The Company's operation of landfills subjects it to certain
operational, monitoring, site maintenance, closure and post-closure
obligations which could give rise to increased costs for monitoring and
corrective measures. See Note 5 - Landfill Closure and Post Closure
Costs.
The Company has obtained environmental impairment liability insurance
covering claims for sudden or gradual onset of environmental damage. If
the Company were to incur liability for environmental damage in excess
of its insurance limits, its financial condition could be adversely
affected. The Company carries a comprehensive general liability
insurance policy which management considers adequate at this time to
protect its assets and operations from other risks.
None of the Company's landfills are currently connected with the Superfund
National Priorities List or potentially responsible party issues.
Legal Matters
The Company is party to 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, and are summarized as follows:
11
<PAGE>
a) In July 1996, the Company commenced arbitration proceedings against Dr.
Richard Rosen (Rosen), former Chairman, Chief Executive Officer and
President of the Company, seeking to recover amounts, excluding
interest and litigation costs, which the Company believes it was owed
by 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 Rosen's financial dealings with
the Company. The Special Committee retained independent counsel in
connection with its investigation. Rosen resigned from all offices with
the Company on March 27, 1996. Amounts which the Company sought to
recover included unreimbursed advances and amounts which the Company
believed constituted improper expense reimbursements and payments of
Company funds for personal benefit.
An arbitration hearing was completed on October 25, 1996. On January 2,
1997, the arbitrator issued the Award of Arbitrator, directing Rosen to
pay $780,160, excluding interest and litigation costs, for breaches by
Rosen of his employment agreement with the Company "in failing to
discharge in good faith the duties of his positions and failing to act
under the direction of the Board of Directors of the Company. On
February 25, 1997 the Middlesex Superior Court in Cambridge,
Massachusetts confirmed the arbitration award and entered the judgment
against Rosen. Previously, the Company sought and obtained Injunctive
Relief in Massachusetts Superior Court prohibiting any sale or other
transfer by Rosen of his stock in the Company in order to provide
security for the Company's claims. No assurance can be given that the
Company will be able to collect any amounts awarded in arbitration. The
Company is carrying on its June 30, 1997 balance sheet an amount of
$500,000 in unreimbursed advances due from Rosen, but the Company's
other claims and additional advances have not been reflected on the
balance sheet at this time.
b) Susan Allua, et al. v. Massachusetts Department of Environmental
Protection, Town of Fairhaven and BioSafe, Inc. Two cases involving the
same parties were brought in Bristol Superior Court by sixteen
residents of Fairhaven, Massachusetts who reside in the vicinity of the
landfill owned by the Town of Fairhaven (the "Landfill") which is being
remodeled and operated by the Company. The first case commenced on
November 8, 1995. In that case, Plaintiffs appealed a permit issued by
the Massachusetts Department of Environmental Protection (the "DEP")
authorizing the construction of a component of the remodeling project
(the "Authorization to Construct" or "ATC"). Plaintiffs also brought
claims alleging that the DEP violated the Massachusetts Environmental
Policy Act in issuing the ATO (the "MEPA Claim"). Further, Plaintiffs
brought common law claims against the Company for nuisance, trespass
and strict liability based principally on alleged dust and odor
conditions resulting from the Company's excavation activities at the
Landfill. The Company has contested all claims, and is receiving the
cooperation of the Town of Fairhaven and the DEP in opposing the claims
in which those parties are involved.
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On January 12, 1996, the Company filed a motion to dismiss the MEPA
Claims. The Town and DEP 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
BioSafe and the Town, dismissing the MEPA claims in their entirety.
Pursuant to the Massachusetts Administrative Procedures Act, the Court
held a hearing on the ATC appeal on September 5, 1996. On June 2, 1997
the Court issued an order denying the ATC appeal. This order will be
subject to possible appeal to the Massachusetts Appeals Court following
entry of the judgment on the order.
Plaintiffs' common law claims for nuisance, trespass and strict liability
remain outstanding. These claims are based principally on alleged dust
and odor conditions resulting from the Company's excavation activities
at the Fairhaven Landfill during the summer and early fall of 1995. The
Company is pursuing factual discovery with regards to these claims. If
the Plaintiffs pursue these claims after disposition of the ATC appeal,
a period of additional discovery and other pre-trial proceedings would
take place prior to trial on the merits.
The second case commenced on September 9, 1996. In that case, the same
Plaintiffs appealed a permit issued by the DEP authorizing the
operation of a component of the remodeled landfill (the "Authorization
to Operate" or "ATO"). The plaintiffs challenge to the ATO raises
issues similar, and in some instances identical, to those raised in the
ATC appeal. Accordingly, as a legal or practical matter, the decision
in the ATC appeal may resolve the ATO appeal, and this case has been
essentially on hold pending the outcome of the ATC appeal. As with the
ATC permit, the ATO permit remains in effect during the pendency of the
appeal.
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BIOSAFE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
c) With regard to complaints of former employees against the Company with
the Massachusetts Commission Against Discrimination, the Company has
entered into a Settlement Agreement with respect to one of the
complaints, the costs of which will be applied against the previously
established reserve.
(8) Common Stock
On January 21 1997, the Company closed a Regulation "D" private placement
of 860,000 shares of common stock at $.50 per share with gross proceeds
of $430,000. 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.
(9) Preferred Stock
On June 30, 1997 the Company closed a Regulation "D" private placement of
Series "A" Convertible Preferred Stock which raised net proceeds of
approximately $9.2M. See Note 9. As part of the private placement, the
Company converted approximately $570,000 in bank debt into preferred
stock and exchanged a $850,000 minority interest into preferred stock,
which are included in the $9.2 million total net proceeds.
The preferred stock was sold at a price of $100 per share, bears an 8%
annual cumulative dividend, and is convertible into common stock at a
conversion price of $0.28125 per share of common stock, which
conversion price maybe reset to a lower conversion price upon the
occurrence of certain events. The dividend is payable in cash or in
additional shares of preferred stock at the Company's option and is
subject to adjustment after 3 years. The preferred stock is also
redeemable at the Company's option after 1 year, subject to certain
trading requirements.
As a result of the sale of the preferred stock, BioSafe International,
Inc. now has approximately 52,300,000 shares of common stock
outstanding or reserved for issuance upon the conversion of the
preferred stock.
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Item II. 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 1996 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").
BioSafe is a regional fully integrated non-hazardous solid waste
management company also engaged in the business of rehabilitating landfills to
permit their continued operation with increased capacity in an environmentally
sound manner, referred to by BioSafe as "landfill remodeling". BioSafe has
developed technologies for handling of waste materials for use in landfill
remodeling.
The Company, in January 1997, through an 80% owned subsidiary, entered
the waste collection business in the State of Vermont as its initial step 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. An integrated solid waste management company offers
disposal, collection, transfer and recycling services. Accordingly, the Company
is in the initial stages of investigating potential acquisitions of waste
collection, transfer and/or disposal operations which would be integrated with
current or future landfill acquisitions or landfill remodeling projects.
On June 19, 1997, the Company signed an agreement with the CSWD to
lease/purchase the CSWD's permitted transfer station in Burlington, Vermont.
This transaction will offer the Company greater access to the Burlington,
Vermont and surrounding area markets, Vermont's most populated and industrious
community. The Company anticipates taking over operations of the transfer
station on or about September 30, 1997. The Company is in preliminary
discussions with various potential acquisitions, including landfills, transfer
stations and hauling operations, but 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.
As discussed above, BioSafe is focusing its resources and activities on
the development of an integrated solid waste management business. With the
implementation of Subtitle D Regulations and a growing scarcity of urban-center
disposal sites, solid waste disposal continues to move further out from these
urban centers. The Company believes that through utilization of its landfill
remodeling process, it will be able to acquire and develop landfill capacity in
or near urban metropolitan areas. On an integrated basis, this will provide the
Company with a geographical and logistical competitive advantage because the
Company's operations will be more centrally located as compared to its
competitors whose operations will extend out longer distances from disposal
sites.
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Prior to March 27, 1996, the Company had been actively developing other
technologies with potential application in a number of business areas, 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 (collectively, the "Ancillary
Technologies"), and Major Sports Fantasies, Inc.(MSF), a business unrelated to
the environmental industry. Since March 27, 1996 the Company has not allocated
its resources or activities to the development or commercial exploitation of the
Ancillary Technologies or MSF.
The Company is currently maintaining 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 business.
The Company believes that the restructuring, which is now substantially
complete, will allow the Company to improve significantly its operating
profitability in the future and has positioned the Company to pursue
successfully additional expansion opportunities.
Recapitalization
On June 30, 1997 the Company closed a Regulation "D" private placement of
Series "A" Convertible Preferred Stock which raised net proceeds of
approximately $9.2M. See Note 9. As part of the private placement, the
Company converted approximately $570,000 in bank debt into preferred
stock and exchanged a $850,000 minority interest into preferred stock,
which are included in the $9.2 million total net proceeds.
The preferred stock was sold at a price of $100 per share, bears an 8%
annual cumulative dividend, and is convertible into common stock at a conversion
price of $0.28125 per share of common stock, which conversion price maybe reset
to a lower conversion price upon the occurrence of certain events. The dividend
is payable in cash or in additional shares of preferred stock at the Company's
option and is subject to adjustment after 3 years. The preferred stock is also
redeemable at the Company's option after 1 year, subject to certain trading
requirements.
As a result of the sale of the preferred stock, BioSafe International,
Inc. now has approximately 52,300,000 shares of common stock outstanding and
reserved for issuance upon the conversion of the preferred stock.
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Three months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Financial Position
BioSafe had $5,547,000 in cash as of June 30, 1997. This represented an
increase of $5,282,000 from December 31, 1996. Working capital as of June 30,
1997, was 3,439,000, an increase of $7,947,000 from December 31, 1996. This
increase was primarily due to the proceeds from the January 1997 Regulation "D"
private placement of common stock, the proceeds from the March 1997 Howard bank
loan, the increased level of operations at the Company's Vermont operations,
and the proceeds from the June 1997 Regulation "D" private placement of
preferred stock. See Notes 6, 8 and 9 to the Consolidated Financial Statements
presented in Item I.
During the three months ended June 30, 1997, the Company devoted its
resources to various project development and related activities. Additions to
property and equipment, primarily related to development of the Company's
collection operations in Vermont, of $51,000 were made during the three months
ended June 30, 1997.
Results of Operations
Revenues for the quarter ended June 30, 1997 consisted of $636,000
received from the Company's Vermont operations. Revenues for the three months
ended June 30, 1996 consisted of $319,000 received from operations of the
Fairhaven landfill. At December 31, 1996 the Company wrote-off its investment
in the Fairhaven landfill project. Asof June 30, 1997 the Company has set up a
reserve of $500,000 for additional litigation and ongoing site construction
costs at the Fairhaven Landfill. Also, in June of 1997 the Company entered
into settlements with various equipment finance companies relating to the
equipment at the Fairhaven landfill. The settlements resulted in a non-
recurring, non-cash write-off of approximately $800,000 during the quarter
ended June 30, 1997, and relieved the Company of obligations of a similar
amount.
Selling, general and administrative expenses consist of project
development activities, marketing and sales costs, salaries and benefits, and
legal, accounting and other professional fees, and other administrative costs.
These costs totaled $476,000 for the quarter ended June 30, 1997, as compared to
$613,000 for the comparable quarter ended June 30, 1996. This represented a
decrease of $138,000 which was primarily the result of the restructuring
undertaken on March 27, 1996.
Other income and (expenses) for the three months ended June 30, 1997
totaled ($369,000) as compared to ($333,000) for the comparable quarter ended
March 31, 1996. The increase was primarily the result of increased interest
expense and financing costs. The Company did not receive any significant
revenues under its medical waste licensing agreement during the quarters ended
June 30, 1997 and 1996.
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For the quarter ended June 30, 1997, the net loss was ($1,712,000) as
compared to net loss of ($1,221,000) in the comparable prior year quarter, or a
increase of $521,000. The net loss for the quarter ended June 30, 1997 included
a non-recurring non-cash charge of $800,000 to settle obligations relating to
the equipment used at the Fairhaven landfill project and $133,000 for the
extraordinary loss on extinguishment of debt. Excluding these two charges, the
net loss was reduced by $441,000 or 36%. This primarily was the result of the
restructuring commenced on March 27, 1996 and the increased level of operations
at the Company's Vermont operations which was profitable for the six months
ended June 30, 1997.
Environmental and Regulatory Matters
The Company and its customers operate in a highly regulated
environment, and in general the Company's projects, such as the Moretown
landfill, will be 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, BioSafe
or its customers may be required to obtain additional operating permits or
approvals. There can be no assurance that BioSafe 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 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 Moretown landfill project, 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 is included in the Company's total investment in the
project. The Company's contract for the Fairhaven landfill project requires the
Town, 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.
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 5 to the Consolidated Financial Statements presented in Item 1.
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Certain Factors Affecting Future Operating Results
Operating Losses and Accumulated Deficit; Uncertainty of Future
Profitability. BioSafe had an accumulated operating deficit at June 30, 1997, of
$25,718,000. Prospects for future profitability are heavily dependent on the
success of BioSafe's ability to build an integrated solid waste management
company, and its landfill remodeling projects. There can be no assurance that
BioSafe will generate sufficient revenue to be profitable or, if profitable, to
maintain profitability in future years.
Possible Delisting of Securities from NASDAQ System. The Company's
Common Stock is traded on the NASDAQ Small-Cap system. In order to continue to
qualify for quotation on the NASDAQ Small-Cap System, the Company must have,
among other things, at least $2,000,000 in total assets, $1,000,000 in capital
and surplus and a minimum bid price for its common shares of $1.00 per share.
Accordingly, if the Company is unable to satisfy the continued listing criteria
under the rules, any listed security will be subject to delisting. In such an
event, the Company's Common Stock would not be eligible for continued quotation
on the NASDAQ System. The loss of continued quotation on the NASDAQ System may
also cause a decline in share price, loss of news coverage of the Company and
difficulty in obtaining subsequent financing.
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. BioSafe will require substantial funds
to complete and bring to commercial viability all of its currently planned
projects.
Initial Commercialization Stage; Limited Operating History. To date,
although BioSafe has conducted significant testing of methods and processes
based on its size reduction and materials handling technology, and has gained
substantial experience in connection with the development and operation of the
Fairhaven landfill project to date, BioSafe 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 BioSafe will be successful in developing and implementing
commercial landfill remodeling projects, or that any such development can be
accomplished without excessive cost or delay.
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Potential Environmental Liability and Adverse Effect of Environmental
Regulation. BioSafe'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. See "Environmental and
Regulatory Matters".
Potential Adverse Community Relations. The potential exists for
unexpected delays, costs and litigation resulting from community resistance and
concerns relating to specific projects in various communities.
Unpredictability of Patent Protection and Proprietary Technology.
BioSafe'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 BioSafe has been issued a U.S. patent
and certain related foreign patents on certain of its size reduction and
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 BioSafe's processes or design around any processes on which
BioSafe has or may obtain patents. In addition, it is possible that third
parties may have or acquire licenses for other technology that BioSafe may use
or desire to use, so that BioSafe may need to acquire licenses to, or to contest
the validity of, such patents of third parties relating to BioSafe's technology.
There can be no assurance that any license required under such patents would be
made available to BioSafe on acceptable terms, if at all, or that BioSafe would
prevail in any such context. Moreover, BioSafe could incur substantial costs in
defending itself in suits brought against BioSafe or in bringing suits against
other parties related to patent matters.
Risks Attendant to Company Growth. The Company expects to experience
significant growth in its business. This growth will continue to make
significant demands on the Company's management, resources and operations. To
manage its growth effectively, the Company will be required to continue to
improve its operational, financial and management information systems and to
hire and train new employees and manage its current employees. The Company's
failure to manage growth effectively could have a material adverse affect on the
Company's business and financial performance.
Competition. The markets in which BioSafe competes are characterized by
several large companies and numerous small companies. Any of these companies may
develop technologies superior to those of BioSafe. Many of BioSafe's potential
competitors are large companies with substantially greater financial resources
than BioSafe. To the extent these potential competitors offer comparable
technologies, BioSafe's ability to compete effectively could be adversely
affected.
In addition to patent protection, BioSafe also relies on trade secrets,
proprietary know how and technology which it seeks to protect, and
confidentiality agreements with its collaborators, employees and consultants.
There can be no assurance that these agreements and other steps taken by BioSafe
will be effective to protect BioSafe's technology against unauthorized use by
others.
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Dependence on Key Management and Qualified Personnel. BioSafe is highly
dependent upon the efforts of its senior officers, Philip Strauss, President and
Chief Executive Officer and Robert Rivkin, Vice-President and Chief Financial
Officer, and other senior management. The loss of the services of one or more of
these employees might have a material adverse effect on the Company. BioSafe
does not currently maintain key man insurance on any of its personnel. BioSafe's
future success will depend in large part upon its ability to attract and retain
additional highly skilled managerial and technical personnel. BioSafe faces
competition for hiring such personnel from other companies, research and
academic institutions, government entities and other organizations. There can be
no assurance that BioSafe will be successful in attracting and retaining
qualified personnel as required for its projected operations.
Liquidity and Capital Resources
To date, BioSafe has financed its activities primarily through the
issuance of equity securities and debt, including common and preferred stock,
and convertible notes.
On June 30, 1997 the Company closed a Regulation "D" private placement
of Series "A" Convertible Preferred Stock which raised net proceeds of
approximately $9.2M. See Note 9. As part of the private placement, the Company
converted approximately $570,000 in bank debt into preferred stock and exchanged
a $850,000 minority interest into preferred stock, which are included in the
$9.2 million total net proceeds.
The preferred stock was sold at a price of $100 per share, bears an 8%
annual cumulative dividend, and is convertible into common stock at a conversion
price of $0.28125 per share of common stock, which conversion price maybe reset
to a lower conversion price upon the occurrence of certain events. The dividend
is payable in cash or in additional shares of preferred stock at the Company's
option and is subject to adjustment after 3 years. The preferred stock is also
redeemable at the Company's option after 1 year, subject to certain trading
requirements.
The Company's net proceeds from the offering was $7,689,000.
Of the net proceeds, $310,000 was used to pay down existing bank and other long-
term debt with the remainder used for working capital, including settlements of
the Company's existing liabilities related to the management change in March
1996 and resulting restructuring, and to finance future expansion.
The Company owns a landfill located in Moretown, Vermont. The current
estimated available new capacity at this landfill, excluding remodeling, is in
excess of 1.1 million tons. On September 30, 1996, the Company received its
final permit from the Vermont Department of Natural Resources to commence
operations at the landfill at an average of 350 tons per day("TPD"). On October
7, 1996, the Company began operations at the landfill, which is currently
operating at approximately 175 - 225 TPD. The Company anticipates the operating
level of the landfill to increase to approximately 225 - 300 TPD by September
30, 1997. The Company intends to operate the landfill at that level until the
Company permits and constructs its next cell, at which time the Company expects
to increase the operating level to full capacity.
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On March 31, 1997, the Chittenden Solid Waste District ("CSWD") in
northwestern Vermont awarded BioSafe a $1.3 million, 15-month contract to
dispose of the sludge from the wastewater treatment plants within the District.
Under the contract, the landfill will receive approximately 23,000 tons of
sludge from the Chittenden Solid Waste District during the period from March 31,
1997 to June 30, 1998 at $56 per ton. In addition, BioSafe will be responsible
for transporting the sludge from the District's special waste processing
facility to the Moretown landfill.
On April 2, 1997, the Company filed its permit application with the
Vermont Agency of Natural Resources for the next cell or cell 2 at the landfill.
On April 14, 1997 the permit application was determined to be administratively
complete by the Vermont Department of Natural Resources. The Company anticipates
that it will take approximately 6 - 12 months from date of filing to receive its
final permits to operate cell 2.
On June 19, 1997, the Company signed an agreement with the CSWD to
lease/purchase the CSWD's permitted transfer station in Burlington, Vermont.
This transaction will offer the Company greater access to the Burlington,
Vermont and surrounding area markets, Vermont's most populated and industrious
community. The Company anticipates taking over operations of the transfer
station on or about September 30, 1997. See Note 4 to the Consolidated Financial
Statements presented in Item I.
The Company's total investment in the Moretown landfill project was
approximately $8 million at June 30, 1997. The Company estimates that the total
capital cost to WPV of completing the Moretown landfill project as planned,
including amounts invested to date, will be approximately $16.2 million. In
addition, the Company currently anticipates capital requirements of $1.4 million
for the operations of the CSWD transfer station acquisition and its rapidly
growing hauling operations in the State of Vermont.
On July 24, 1994, BioSafe entered into a contract with the Town of
Fairhaven, Massachusetts to remodel the Town's existing 26 acre landfill. On
November 8, 1995, an action was brought against various parties including the
Company relating to the Fairhaven landfill. On September 5, 1996, pursuant to
the Massachusetts Administrative Procedures Act, the action was heard by a
Bristol County Superior Court Judge. On June 2, 1997 The Massachusetts Superior
Court issued an Order denying the plaintiff's action. This order, which
represents a favorable outcome for the Company's position, is subject to appeal
to the Massachusetts Appeals Court after entry of a judgment on the order. The
Company has initiated discussions with the Town of Fairhaven with regard to the
future of the project, and has ceased all operations of the project at this
time. As previously disclosed, the future economic viability of the project is
doubtful because of the extensive delays and additional operating costs
resulting from the litigation and other factors. As of June 30, 1997 the Company
has set up a reserve of $500,000 for additional litigation and ongoing site
construction costs at the Fairhaven Landfill. Also, in June of 1997 the Company
entered into settlements with various equipment finance companies relating to
the equipment at the Fairhaven landfill. The settlements resulted in a
non-recurring, non-cash write-off of approximately $800,000 during the quarter
ended June 30, 1997, and relieved the Company of obligations of a similar
amount.
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The Company and the Town of South Hadley, Massachusetts have
entered into a contract that provides for BioSafe to operate and remodel an
existing 30-acre landfill in South Hadley. On March 26, 1997, the Company
received a landfill disruption permit from the Massachusetts Department of
Environmental Protection which enables the Company to commence feasibility work
at the landfill. The Company anticipates capital requirements relating to the
feasibility work for engineering and permitting of the South Hadley landfill
project of $275,000. If the project is determined to be feasible, the Company
anticipates beginning operations and generating revenues at this site by the end
of 1998 or early 1999.
The Company and the Town of Buckland, Massachusetts have entered into a
contract that provides for BioSafe to operate and remodel an existing 10-acre
landfill in Buckland. The Company and the Town of Buckland are currently
reviewing available options for proceeding with this project.
The Company intends to pursue and develop an integrated solid waste
management company and increase its landfill remodeling business, therefore
dramatically increasing its capital requirements during the next few years.
Typically, the Company expects to be required to incur substantial capital costs
in connection with acquisition due diligence, feasibility studies, contracting,
permitting and initial development, and other costs for any acquisition or
landfill remodeling project in the initial phases of the project. After
completion of these initial phases, the Company will generally seek to obtain
project-level financing 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 prior to being able to obtain outside
financing or to derive material operating revenues from the acquisition or
project.
In summary, the Company's total investment required to
complete its Moretown, Vermont landfill project, the CSWD transfer station
acquisition, and to fund the continued rapid growth of its Vermont hauling
operations, in addition to amounts already invested as of June 30, 1997, will be
approximately $9.5 million, subject to possible cost overruns which cannot be
predicted. Furthermore, feasibility studies required under the Company's
contracts with the Towns of South Hadley and Buckland are expected to cost
approximately $0.5 - 1 million, and if these projects are 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
acquisitions or additional landfill remodeling projects, 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 including the development of an
integrated solid waste management company. Although the Company has recently
begun generating cash from it's Vermont operations, the Company will require
additional financing in order to satisfy its existing and pending commitments.
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Inflation
BioSafe does not believe its operations have been materially affected
by inflation.
24
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BIOSAFE INTERNATIONAL, INC.
Part II Other Information
Item 1. Legal Proceedings.
a) In July 1996, the Company commenced arbitration proceedings against Dr.
Richard Rosen (Rosen), former Chairman, Chief Executive Officer and President
of the Company, seeking to recover amounts, excluding interest and litigation
costs, which the Company believes it was owed by 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
Rosen's financial dealings with the Company. The Special Committee retained
independent counsel in connection with its investigation. Rosen resigned from
all offices with the Company on March 27, 1996. Amounts which the Company
sought to recover included unreimbursed advances and amounts which the Company
believed constituted improper expense reimbursements and payments of Company
funds for personal benefit.
An arbitration hearing was completed on October 25, 1996. On January 2, 1997,
the arbitrator issued the Award of Arbitrator, directing Rosen to pay
$780,160, excluding interest and litigation costs, for breaches by Rosen of
his employment agreement with the Company "in failing to discharge in good
faith the duties of his positions and failing to act under the direction of
the Board of Directors of the Company. On February 25, 1997 the Middlesex
Superior Court in Cambridge, Massachusetts confirmed the arbitration award and
entered the judgment against Rosen. Previously, the Company sought and
obtained Injunctive Relief in Massachusetts Superior Court prohibiting any
sale or other transfer by Rosen of his stock in the Company in order to
provide security for the Company's claims. No assurance can be given that the
Company will be able to collect any amounts awarded in arbitration. The
Company is carrying on its June 30, 1997 balance sheet an amount of $500,000
in unreimbursed advances due from Rosen, but the Company's other claims and
additional advances have not been reflected on the balance sheet at this time.
b) Susan Allua, et al. v. Massachusetts Department of Environmental
Protection, Town of Fairhaven and BioSafe, Inc. Two cases involving the same
parties were brought in Bristol Superior Court by sixteen residents of
Fairhaven, Massachusetts who reside in the vicinity of the landfill owned by
the Town of Fairhaven (the "Landfill") which is being remodeled and operated
by the Company. The first case commenced on November 8, 1995. In that case,
Plaintiffs appealed a permit issued by the Massachusetts Department of
Environmental Protection (the "DEP") authorizing the construction of a
component of the remodeling project (the "Authorization to Construct" or
"ATC"). Plaintiffs also brought claims alleging that the DEP violated the
Massachusetts Environmental Policy Act in issuing the ATO (the "MEPA Claim").
Further, Plaintiffs brought common law claims against the Company for
nuisance, trespass and strict liability based principally on alleged dust and
odor conditions resulting from the Company's excavation activities at the
Landfill. The Company has contested all claims, and is receiving the
cooperation of the Town of Fairhaven and the DEP in opposing the claims in
which those parties are involved.
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On January 12, 1996, the Company filed a motion to dismiss the MEPA Claims. The
Town and DEP 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 BioSafe and the Town,
dismissing the MEPA claims in their entirety.
Pursuant to the Massachusetts Administrative Procedures Act, the Court held a
hearing on the ATC appeal on September 5, 1996. On June 2, 1997 the Court
issued an order denying the ATC appeal. This order will be subject to possible
appeal to the Massachusetts Appeals Court following entry of the judgment on
the order.
Plaintiffs' common law claims for nuisance, trespass and strict liability remain
outstanding. These claims are based principally on alleged dust and odor
conditions resulting from the Company's excavation activities at the Fairhaven
Landfill during the summer and early fall of 1995. The Company is pursuing
factual discovery with regards to these claims. If the Plaintiffs pursue these
claims after disposition of the ATC appeal, a period of additional discovery
and other pre-trial proceedings would take place prior to trial on the merits.
The second case commenced on September 9, 1996. In that case, the same
Plaintiffs appealed a permit issued by the DEP authorizing the operation of a
component of the remodeled landfill (the "Authorization to Operate" or "ATO").
The plaintiffs challenge to the ATO raises issues similar, and in some
instances identical, to those raised in the ATC appeal. Accordingly, as a
legal or practical matter, the decision in the ATC appeal may resolve the ATO
appeal, and this case has been essentially on hold pending the outcome of the
ATC appeal. As with the ATC permit, the ATO permit remains in effect during
the pendency of the appeal.
c) The Company currently has ongoing four complaints with the Massachusetts
Commission Against Discrimination, principally as the result of actions of the
Company's ex-operator of the Fairhaven landfill, Gary Rogers. The Company is
not in a position to evaluate the likelihood that damages or other relief will
be awarded, or that the amount of damages awarded could be material. The
Company has set up an estimated reserve of $125,000 for litigation costs for
these matters as of June 30, 1997.
Item 2. Changes in Securities
On June 30, 1997 the Company closed a Regulation "D" private placement
of Series "A" Convertible Preferred Stock which raised net proceeds of
approximately $9.2M. See Note 9. As part of the private placement, the Company
converted approximately $570,000 in bank debt into preferred stock and exchanged
a $850,000 minority interest into preferred stock, which are included in the
$9.2 million total net proceeds.
The preferred stock was sold at a price of $100 per share, bears an 8% annual
cumulative dividend, and is convertible into common stock at a conversion price
of $0.28125 per share of common stock, which conversion price maybe reset to a
lower conversion price upon the occurrence of certain events. The dividend is
payable in cash or in additional shares of preferred stock at the Company's
option and is subject to adjustment after 3 years. The preferred stock is also
redeemable at the Company's option after 1 year, subject to certain trading
requirements.
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Item 3. Defaults on Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
After a series of adjournments, the special meeting of stockholders
originally called for February 14, 1997 was adjourned sine die on May 30, 1997,
no action having been taken on the proposal presented
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on form 8-K
The Company filed a current Report on Form 8-K and 8K/A on June 26,
1997 regarding the private placement of preferred stock on June 26, 1997.
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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: August 14, 1997 /s/ Philip Strauss
------------------------
Philip Strauss
Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
Date: August 14, 1997 /s/ Robert Rivkin
-----------------------
Robert Rivkin
Vice President, Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and Accounting Officer)
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