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 March 31, 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
(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 May 14, 1997
----- ------------------------------
Common Stock, $.001 par value 17,662,571
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BIOSAFE INTERNATIONAL, INC.
Index to Contents Page No.
----------------- --------
Part I Financial Information
Item I. Financial Statements:
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996 1-2
Consolidated Statements of Operations for the Three
Months Ended March 31,1997 and 1996, and for
the period from April 23,1990, (inception) to
March 31, 1997. 3
Consolidated Statements of Cash Flows for the Three
Months Ended March 31,1997 and 1996, and for
the period from April 23,1990, (inception) to
March 31, 1997. 4
Notes to Consolidated Financial Statements 5-14
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 15-23
Part II Other Information
Item 1. Legal Proceedings 24-25
Item 2. Changes in Securities 26
Item 3. Defaults on Senior Securities 26
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
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BIOSAFE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
March 31, December 31,
Assets 1997 1996
------ (unaudited)
--------------- ---------------
Current assets:
Cash $ 466,646 $ 264,776
Accounts and notes receivable, net 816,865 1,158,677
Assets held for resale 275,000 275,000
Prepaid expenses and other current assets 568,595 499,000
-------------- --------------
Total current assets 2,127,106 2,197,453
Accounts and notes receivable 340,812 451,169
Restricted cash and securities 1,227,095 1,210,017
Due from former employee (Note 6) 500,000 500,000
Property and equipment, net (Note 4) 12,090,341 11,705,712
Deferred financing costs 652,150 664,105
Other assets 133,523 129,634
-------------- --------------
Total assets $ 17,071,027 $ 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
March 31, December 31,
Liabilities and Stockholders' Equity 1997 1996
------------------------------------ --------------- ---------------
(unaudited)
Current liabilities:
Current portion of long-term debt and
notes payable $ 1,985,806 $ 2,165,378
Accounts payable 1,437,493 1,529,076
Accrued expenses 943,486 1,225,715
Restructuring and current liabilities
related to discontinued operations
(Note 3) 1,750,097 1,785,097
--------------- ---------------
Total current liabilities 6,116,882 6,705,266
Long-term debt and notes payable (Note 6) 10,629,194 9,450,373
Landfill closure and post-closure costs 1,537,000 1,520,000
--------------- ---------------
Total liabilities 18,283,076 17,675,639
--------------- ---------------
Commitments and Contingencies (Note 7)
Minority interest 1,026,885 1,031,456
--------------- ---------------
Stockholders' equity (deficit): (Note 8)
Common stock, $.001 par value.
Authorized 100,000,000 shares;
17,662,571 and 16,802,569 shares
issued and outstanding at March 31, 1997
and December 31, 1996, respectively 17,662 16,802
Additional paid-in capital 21,749,420 21,351,280
Deficit accumulated during the
development stage (24,006,016) (23,217,087)
--------------- ---------------
Total stockholders' equity (deficit) (2,238,934) (1,849,005)
Total liabilities and stockholders'
equity (deficit) $ 17,071,027 $ 16,858,090
=============== ===============
See accompanying notes to consolidated financial statements.
2
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BIOSAFE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
(unaudited)
Period from
Three Months Ended April 23, 1990
-------------------------------- (inception) to
March 31, March 31, March 31,
1997 1996 1997
------------ ------------ -------------
Landfill revenues $ 396,309 $ 417,199 $ 3,236,312
------------ ------------ -------------
Cost of landfill operations:
Operating expenses 242,482 228,421 1,929,047
Depreciation and amortization 112,177 43,831 553,611
Write-off of landfill development costs - - 6,652,075
------------ ------------ ------------
Total cost of landfill operations 354,659 272,252 9,134,733
------------ ------------ ------------
Gross profit 41,650 144,947 (5,898,421)
Selling, general and administrative
expenses 562,605 1,169,060 11,031,108
Amortization of prepaid consulting fees - 166,875 1,335,000
Restructuring - 250,000 1,741,729
------------ ------------ -------------
Income (loss) from operations (520,955) (1,440,988) (20,006,258)
------------ ------------ -------------
Other income (expense):
Royalty and other income(expenses), net(2,718) 12,070 5,845,204
Interest income 34,652 73,160 596,806
Gain on sale of assets - - 222,728
Interest expense and financing costs (304,676) (275,646) (2,514,978)
Equity in loss of affiliate - (30,000) (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) (272,742) (220,416) 715,212
------------ ------------ -------------
Income (loss) before income
taxes , minority interest
and discontinued operations (793,697) (1,661,404) (19,291,046)
Federal and state income tax
expense (benefit) - 25,000 154,579
------------ ------------ ------------
Income (loss) before minority
interest and discontinued
operations (793,697) (1,686,404) (19,445,625)
Minority interest 4,771 6,338 4,407
------------ ------------ -------------
Income (loss) from continuing
operations $ (788,926) $(1,680,066) $(19,441,218)
Discontinued operations - (1,662,453) (4,564,798)
------------ ------------ -------------
Net income (loss) (788,926) (3,342,519) (24,006,016)
============ ============ =============
Net loss per share:
Loss from continuing operations $ (0.05) $ 0.14
Discontinued operations - (0.14)
------------ ------------
Net income (loss) per share
$ (0.05) $ (0.28)
============ ============
Weighted average number of shares
used in computation of net income
(loss) per share 17,454,657 11,745,765
See accompanying notes to consolidated financial statements.
3
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BIOSAFE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
(unaudited)
Period from
Three Months Ended April 23, 1990
-------------------------------- (inception) to
March 31, March 31, March 31,
1997 1996 1997
------------ ------------ -------------
Cash flows from operating activities:
Net income (loss) $ (788,926) $ (3,342,519) $(24,006,013)
Adjustments to reconcile net income
(loss) to net cash used by operating
activities:
Discontinued operations -- 1,662,453 4,564,798
Depreciation and amortization 124,573 285,028 2,494,346
Loss on investment in marketable
securities -- -- 100,000
Equity on loss in affiliate -- (6,338) 96,144
Minority interest (4,574) -- (4,213)
Allowance for doubtful accounts -- -- 242,145
Write-off of accounts and notes
receivable -- -- 2,975,001
Issuance of common stock for services -- -- 400,457
Write-off of landfill development costs -- -- 6,652,075
Write-off of assets -- -- 263,404
Changes in assets and liabilities:
Accounts receivable and notes
receivable 452,169 635,766 (2,776,523)
Prepaid expenses and other
current assets (69,595) 209,555 (568,595)
Accounts payable (80,099) (1,532,634) 1,683,428
Accrued expenses (295,309) 969,602 926,460
Income and franchise taxes payable -- (30,526) --
Deferred income -- -- (500,000)
------------ ------------ -------------
Net cash used by continuing
operations (661,761) (1,149,613) (7,457,086)
Net cash used by discontinued
operations (44,084) (874,238) (2,294,367)
------------ ------------ -------------
Net cash used by operating
activities (705,845) (2,023,851) (9,751,453)
------------ ------------ -------------
Cash flows from investing activities:
Assets held for sale -- 49,464 (159,719)
Restricted cash (17,078) -- (1,227,095)
Receivable from One, Three, Six, Inc. -- -- (800,000)
Investment in affiliate -- (9,971) (96,144)
Construction in progress 50,256 (912,710) (14,559,142)
Future landfill development projects (24,187) (138,047) (838,519)
Operating equipment used at landfills (124,975) -- (826,052)
Equipment used in collection
operations (347,982) -- (347,982)
Other property and equipment (8,315) (34,751) (1,228,026)
Patents (1,679) -- (100,325)
Other assets 1,426 (16,408) (59,278)
Licenses and permits -- -- (78,807)
------------ ------------ -------------
Net cash provided (used) by
investing activities (472,534) (1,062,423) (20,321,089)
------------ ------------ -------------
Cash flows from financing activities:
Deferred financing and
registration costs -- (59,205) (1,503,866)
Borrowings from notes payable
and long-term debt 1,234,064 -- 4,600,471
Repayment of notes payable
and long-term debt (252,815) (352,370) (1,874,113)
Net borrowings and advances
from stockholders and related parties -- (121,768) 266,806
Issuance of subordinated notes payable -- -- 12,405,000
Repayments of subordinated notes payable -- -- (790,000)
Net proceeds from issuance of
common stock 399,000 119,853 16,821,129
Redemption of preferred stock -- -- (300,000)
Preferred stock dividends -- -- (117,334)
Minority interest -- -- 1,031,095
------------ ------------ -------------
Net cash provided by
financing activities 1,380,249 (413,490) 30,539,188
------------ ------------ -------------
Increase (decrease) in cash 201,870 (3,499,764) 466,646
Cash, beginning of period 264,776 5,237,064 --
------------ ------------ -------------
Cash, end of period $ 466,646 $ 1,737,300 $ 466,646
============ ============ =============
See accompanying notes to consolidated financial statements.
4
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(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 March
31, 1997 and for all periods presented have been made. The results of
operations for the period ended March 31, 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.
Minority interest consists of 20% of Waste Professionals of Vermont, Inc.
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, 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
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
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Landfill Closure and Post-Closure Costs
The Company 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 $0 and $90,502 were capitalized during the first
quarter of 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
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Use of Estimates
The preparation of 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 March 31, 1997.
Deferred Financing Costs
Deferred financing costs are amortized on a straight-line basis over the
life of the related notes payable or debt.
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.
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
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(3) Restructuring
During the quarter ended March 31, 1996 the Company recorded
restructuring and discontinued operations charges of $250,000 and
1,662,453 respectively. The restructuring plan has resulted in annual
savings in excess of $4.0 million.
(4) Property and Equipment
Property and equipment are stated at cost and consist of the following;
March 31, December 31,
1997 1996
(unaudited)
--------------- -------------
Construction in progress - landfills owned 7,887,051 7,937,307
Construction in progress - landfills operated - -
Future landfill development projects 451,544 427,357
Equipment used at landfills 2,769,182 2,673,505
Equipment used in collection operations 347,982 -
Buildings, facilities and improvements 792,255 792,255
Other property and equipment 339,061 330,746
--------------- -------------
12,587,075 12,161,170
Less accumulated depreciation and amortization (496,734) (455,458)
---------------- --------------
12,090,341 11,705,712
=============== =============
Acquisition of Landfill in Moretown, Vermont
The Company has acquired, through a joint venture in which the Company has
an 80% interest, a 193 acre 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 150 - 200 TPD. The Company anticipates the operating
level of the landfill to increase to approximately 200 - 250 TPD by the
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
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On March 31, 1997, the Company received a $1 million loan from The Howard
Bank in Burlington, Vermont for development costs and working capital
requirements of the landfill.
Also 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 to receive its final permits to operate cell 2.
On April 11, 1997, the Company signed a Memorandum of Understanding with
the CSWD to lease/purchase the CSWD's 400 ton per day 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 1, 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 million in 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 June 22, 1995, the Company commenced operations and began
accepting waste at the landfill utilizing existing capacity. Since
then, the Company has remodeled and constructed an initial cell at the
landfill, and on August 12, 1996, the Company received final
authorization from the Massachusetts Department of Environmental
Protection to operate the cell under the Town's current existing permit
9
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at 150 TPD. On November 8, 1995, an action was brought against various
parties including the Company relating to the Fairhaven landfill. On
September 9, 1996, pursuant to the Massachusetts Administrative
Procedures Act, the action was heard by a Bristol County Superior Court
Judge. As of May 14, 1997, a ruling has not been issued. The Company,
until the outcome of this litigation is determined, has ceased making
additional capital investments in this project and has operated the
landfill at a reduced capacity. Based on the extensive delays and
additional operating costs to the project because of this litigation
and other matters, resulting in the current uncertainty of the
long-term economic viability of the project, the Company decided to
write-off its capital investment in the project at December 31, 1996 of
$6,342,196. Included in the $6,342,196 is a reserve of $625,000 for
additional litigation and ongoing site construction costs. When the
litigation is resolved, the Company at that time will reassess the
continued feasibility of the project.
The contract requires the Company to pay a "Host Town Fee" of $2.00 per
ton or 5% of the tipping fees for 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."
(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 March 31, 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, $1.54
million has been accrued at March 31, 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.
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(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 for 36 months with an
initial rate of 15%. The initial rate shall be reduced when the Company
raises additional equity as outlined in the agreement. The loan is
primarily secured by a first mortgage on WPV's landfill and the
royalties due the Company under its licensing agreement with ScotSafe,
and is guaranteed by the Company.
(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.
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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:
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 March 31, 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 have
12
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brought claims alleging that the DEP violated the Massachusetts
Environmental Policy Act in issuing the ATO (the "MEPA Claim").
Further, Plaintiffs have 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 is contesting 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.
Pursuant to the Massachusetts Administrative Procedures Act, the ATO
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.
The Company believes that the Plaintiffs' stated grounds in the ATC appeal
are without merit and that the ATC will be upheld as a result of the
hearing. However, if the DEP's granting of the permit were reversed,
the Company's plans with respect to the Fairhaven landfill project
would be materially adversely affected. The ATC permit remains in
effect during the pendency of the appeal.
Previously, 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.
Plaintiffs' common law claims for nuisance, trespass and strict liability
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, a decision in
the ATC appeal may resolve the ATO appeal, and this case is 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) 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 March 31, 1997.
(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.
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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 non-hazardous fully integrated 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 remodeling projects or additional acquisitions.
On April 11, 1997, the Company signed a Memorandum of Understanding
with the CSWD to lease/purchase the CSWD's 400 ton per day 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 1, 1997. No other
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. The ultimate successful
completion of the Company's restructuring is dependent upon the Company's
ability to raise substantial additional capital and to achieve a level of
revenues adequate to support the Company's cost structure.
Recapitalization
To address its need to raise substantial additional capital, BioSafe is
currently negotiating a private placement of up to 100,000 shares of $.001 par
value Convertible Preferred Stock at $100 per share, which could result in gross
proceeds to the Company of up to $10,000,000. The Shares will be converted
into the Company's common shares at a conversion price equal to the average
closing price of the Company's common stock (traded on the NASDAQ Small-Cap
Market under the symbol of BSFE) on the five days prior to closing, subject to
final negotiation and Board approval. The company anticipates closing on this
transaction on or before June 30, 1997.
Three months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
Financial Position
BioSafe had $467,000 in cash as of March 31, 1997. This represented an
increase of $202,000 from December 31, 1996. Working capital as of March 31,
1997, was ($3,990,000), an increase of $518,000 from December 31, 1996. This
increase was primarily due to the proceeds from the January 1997 Regulation "D"
private placement of common stock and the proceeds from the Howard Bank loan.
See Notes 6 and 8 to the Consolidated Financial Statements presented in Item I.
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During the three months ended March 31, 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 $348,000 were made during the three months
ended March 31, 1997.
Results of Operations
Landfill revenues for the quarter ended March 31, 1997 consisted of
$396,000 received from operation of the Moretown landfill which commenced
operations on October 7, 1996. Revenues for the three months ended March 31,
1996 consisted of $417,000 received from operations of the Fairhaven landfill
project which commenced on June 22, 1995. At December 31, 1996 the Company
wrote-off its investment in the Fairhaven landfill project and set-up a reserve
of $625,000 for additional litigation and ongoing site construction costs.
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 $563,000 for the three months ended March 31, 1997, as
compared to $1,169,000 for the comparable quarter ended March 31,1996. This
represented a decrease of $606,000 which was primarily the result of the
restructuring undertaken on March 27, 1996.
Other income and (expenses) for the three months ended March 31, 1997
totaled ($273,000) as compared to ($220,000) for the comparable quarter ended
March 31, 1996. The increase was primarily the result of increased interest
expense and a reduction in interest income. The Company did not receive any
significant revenues under its medical waste licensing agreement during the
quarters ended March 31, 1997 and 1996.
For the quarter ended March 31, 1997, the net loss was ($789,000) as
compared to net loss of ($3,343,000) in the comparable prior year quarter, or a
decrease of $2,554,000. The net loss for the quarter ended March 31, 1996
included non-recurring restructuring and discontinued operation charges of
$1,912,000 and amortization of pre-paid consulting fees of $167,000.
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 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
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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.
Certain Factors Affecting Future Operating Results
Operating Losses and Accumulated Deficit; Uncertainty of Future
Profitability. BioSafe had an accumulated operating deficit at March 31, 1997,
of $24,006,000. 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.
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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.
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
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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.
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 stock and convertible
notes and has raised cumulative net proceeds of approximately $29.2 million from
inception through March 31, 1997 from these transactions.
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The Company has acquired, through a joint venture in which the
Company has an 80% interest, a 193 acre 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 150 - 200 TPD. The Company anticipates the operating
level of the landfill to increase to approximately 200 - 250 TPD by the 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.
On March 31, 1997, the Company received a $1 million loan from The
Howard Bank in Burlington, Vermont for development costs and working capital
requirements of the landfill. See Note 6 to the Consolidated Financial
Statements presented in Item I.
Also 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 to receive its final permits to
operate cell 2.
On April 11, 1997, the Company signed a Memorandum of Understanding
with the CSWD to lease/purchase the CSWD's 400 ton per day 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 1, 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 March 31, 1997. The Company estimates that the total
cost to WPV of completing the Moretown landfill project as planned, including
amounts invested to date, will be approximately $16.2 million.
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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
June 22, 1995, the Company commenced operations and began accepting waste at the
landfill utilizing existing capacity. On October 11, 1995, a Major Modification
Permit was issued by the Massachusetts Department of Environmental
Protection("DEP") including an Authorization to Construct and remodel the
initial cell at the landfill. Since then, the Company has completed remodeling
and constructed an initial cell at the landfill, and on August 12, 1996, the
Company received final authorization from the DEP to operate the cell under the
Town's current existing permit at 150 TPD. On November 8, 1995, an action was
brought against various parties including the Company relating to the remodeling
permits at the Fairhaven landfill seeking among other things to appeal the
permit that had been issued for remodeling the landfill. See "Legal
Proceedings". On September 9, 1996, pursuant to the Massachusetts Administrative
Procedures Act, the action was heard by a Bristol County Superior Court Judge.
As of May 14, 1997 a ruling has not been issued. The Company, until the outcome
of this litigation is determined, has ceased making additional capital
investments in this project and has operated the landfill at a reduced capacity.
Based on the extensive delays and additional operating costs to the project
because of this litigation and other matters, resulting in the current
uncertainty of the long-term economic viability of the project, the Company has
decided to write-off its capital investment in the project through December 31,
1996, of $6,342,196. Included in the $6,342,196 is a reserve of $625,000 for
additional litigation and ongoing site construction costs. When the litigation
is resolved, the Company at that time will reassess the continued feasibility of
the project.
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. 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.
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 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 feasibility
studies, contracting, permitting and initial development, and other due
diligence costs ranging from $500,000 up to $2.0 million, for any 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 in the case of any landfill remodeling project
prior to being able to obtain outside financing or to derive material operating
revenues from the project.
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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 a landfill project as described above assume 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
Moretown, Vermont landfill project, in addition to amounts already invested as
of March 31, 1997, will be approximately $8.1 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 $1-2 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 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 including the development of an
integrated solid waste management company. Although the Company has recently
begun receiving cash revenues from operation of the Moretown landfill, the
Company will require additional financing in order to satisfy its existing and
pending commitments.
BioSafe is currently negotiating a private placement of up to 100,000
shares (the "Shares") of $.001 par value Convertible Preferred Stock at $100
per share, which could result in gross proceeds to the Company of up to
$10,000,000. The Company's other alternatives under consideration in this
regard include the raising of additional equity or long-term debt financing,
and certain prospects for additional bank financing in relation to
specific projects. Their 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 operation.
Inflation
BioSafe 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) 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 March 31, 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 have
brought claims alleging that the DEP violated the Massachusetts
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Environmental Policy Act in issuing the ATO (the "MEPA Claim").
Further, Plaintiffs have 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 is contesting 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.
Pursuant to the Massachusetts Administrative Procedures Act, the ATO
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.
The Company believes that the Plaintiffs' stated grounds in the ATC
appeal are without merit and that the ATC will be upheld as a result of
the hearing. However, if the DEP's granting of the permit were
reversed, the Company's plans with respect to the Fairhaven landfill
project would be materially adversely affected. The ATC permit remains
in effect during the pendency of the appeal.
Previously, 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.
Plaintiffs' common law claims for nuisance, trespass and strict
liability 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, a decision in
the ATC appeal may resolve the ATO appeal, and this case is 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.
25
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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 March 31, 1997.
Item 2. Changes in Securities
On January 21, 1997, the Company closed a private placement
under Rule 506 of Regulation "D" under the Securities act of 1933 as
amended 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.
Item 3. Defaults on Senior Securities
The Company did not make the approximate $200,000 interest
payment on its $8,375,000 principal amount 10% convertible subordinated
redeemable notes due 2000 (the "Notes") that was payable to noteholders
with respect to the quarter ended March 31, 1997. The grace period with
respect to the March 31, 1997 interest payment expired on April 30,
1997. As of the date of this report, greater than 25% of the
noteholders have agreed to forebear from exercising their remedies with
respect to the Notes for a period of 60 days in consideration of
receiving equity in the Company's next equity financing. The total
arrearage with respect to the Notes as of the date of this report is
approximately $200,000.
Item 4. Submission of Matters to a Vote of Security Holders
On February 14, 1997, the Company held a special meeting of
stockholders to approve the change of the Company's state of
incorporation from Nevada to Delaware, including changing its name to
"Waste Systems International, Inc." through a merger of the Company
into a wholly-owned subsidiary. As of that date a quorum was not
present and the meeting has been adjourned until May 30, 1997.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
None
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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: May 14, 1997 /s/ Philip Strauss
------------------------
Philip Strauss
Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
Date: May 14, 1997 /s/ Robert Rivkin
-----------------------
Robert Rivkin
Vice President, Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and Accounting Officer)
27
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