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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K/A
(Amendment No. 2)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 0-25998
WASTE SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4203626
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
420 Bedford Street, Suite 300
Lexington, Massachusetts 02173
(Address of principal executive offices) (zip code)
(781) 862-3000 Phone
(781) 862-2929 Fax
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act: None Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
Series F Warrants
Placement Agent Warrants
------------------------------------
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A or any
amendment to this Form 10-K/A
As of March 24, 1998, the market value of the voting stock of the
Registrant held by non-affiliates of the Registrant was $66,854,700
The number of shares of the Registrant's common stock, par value $.01
per share, outstanding as of March 24, 1998 was 3,911,181.
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TABLE OF CONTENTS
Explanatory note: this is amendment number 2 to the Form 10-K filed with
the Securities and Exchange Commission on March 27, 1998.
PAGE
PART I
Item 1. Business 1
Item 2. Unchanged
Item 3. Legal Proceedings 8
Item 4. Unchanged
PART II
Item 5. Unchanged
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations 12
Item 8. Financial Statements and Supplementary Data 20
Item 9. Unchanged
PART III
Item 10. Unchanged
Item 11. Unchanged
Item 12. Unchanged
Item 13. Unchanged
PART IV
Item 14. Unchanged
Signatures 47
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Note Regarding Forward Looking Statements:
This Annual Report on Form 10-K/A contains forward-looking statements concerning
among other things, the Company's expected future revenues, operations and
expenditures and estimates of the potential markets for the Company's services.
Such statements made by the Company fall within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All such forward-looking statements are
necessarily only estimates of future results and the actual results achieved by
the Company may differ materially from these projections due to a number of
factors as discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Certain Factors
Affecting Future Operating Results" of this Form 10-K/A.
PART I
Item 1. Business
The Company
Waste Systems International, Inc. (referred to herein as the "Company"
or "WSI") is a regional integrated non-hazardous solid waste management company
that provides solid waste collection, recycling, transfer and disposal services
to commercial and residential customers.
The Company currently owns and operates a solid waste landfill in
Moretown, Vermont, three transfer stations and collection operations which
operate as an integrated solid waste operation, serving over 4,400 commercial
and residential customers in the Burlington, St. Albans, St. Johnsbury and
Barre-Montpelier, Vermont areas.
The Company currently has two additional landfill projects at different
stages of development. In November 1997, WSI signed a definitive agreement to
acquire a 700-acre, 3 million cubic yard permitted municipal solid waste
landfill in Hopewell, Pennsylvania. This transaction is expected to close by the
end of May, 1998. Additionally, the Company entered into a contract to operate
and remodel an existing 30-acre municipal landfill in South Hadley,
Massachusetts. On March 16, 1998 the Company filed its draft environmental
impact report with the Massachusetts Department of Environmental Protection
("MDEP") and anticipates receiving all of its required MDEP permits during the
second or third quarter of 1998, which would allow WSI to begin accepting solid
waste at the first 6-acre lined cell by the first or second quarter of 1999. The
South Hadley landfill project is currently expected to have approximately 2
million cubic yards of new capacity for future disposal.
On March 23, 1998, the Company signed a definitive agreement to acquire
Horvath Sanitation, Inc., d/b/a Eagle Waste ("Eagle"), which is based in
Altoona, Pennsylvania. This transaction is also expected to close by the end of
May 1998. Eagle has approximately $8 million in annual revenue and collects
approximately 200 tons per day of solid waste. Eagle's operations will be
integrated with the Hopewell, Pennsylvania landfill acquisition discussed above.
Ultimately, WSI intends to create integrated solid waste management operations
in the geographical areas surrounding each of its landfills.
WSI's objective is to expand the current geographic scope of its
operations and to become one of the leading providers of non-hazardous solid
waste management services in each market that it serves. The Company's primary
growth strategy is to acquire landfills in or near urban metropolitan areas, and
to secure dedicated waste streams for such landfills by acquisition or
development of collection operations and transfer stations. The internalization
of waste streams is a major component of the Company's strategy. The Company
believes that significant opportunities exist to expand its operations in each
of its current and targeted markets.
Industry Overview
Based on published industry information, the solid waste management
industry generated approximately $36 billion in revenue during 1997 and is
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expected to grow to $40 billion by the year 2000. Of the $36 billion,
approximately 43% is controlled by public companies with the remaining split
almost equally between 6,000 small private operators and municipal governments.
The solid waste management industry is generally experiencing
significant consolidation and integration. The Company believes that the
consolidation and integration is a result of the following factors, among
others: (i) increasingly stringent environmental regulations which have resulted
in an increased need for substantial capital requirements to remain compliant
with such regulations; (ii) the inability of many smaller operators to achieve
the economies of scale necessary to compete with larger providers; (iii) the
competitive and economic benefits of providing integrated collection, recycling,
transfer and disposal services; and (iv) the privatization of solid waste assets
and services by municipalities. Although significant consolidation within the
solid waste management industry has occurred, the Company believes the industry
remains highly fragmented and that a substantial number of potential acquisition
opportunities remain.
Strategy and Acquisition Program
WSI is pursuing an acquisition strategy to achieve its objective of
becoming a leading provider of integrated solid waste management services in
each of the markets it serves. The key elements of its strategy are: (i)
identify landfills near urban metropolitan centers that are economically
feasible for acquisition; (ii) develop an integrated solid waste management
operation which provides collection, recycling, transfer and disposal services
to increase and control waste streams to its landfills; (iii) consolidate and
expand its operations around each of its landfills through "tuck-in"
acquisitions; (iv) improve existing and acquired operations through
internalization of the waste stream, thus increasing operating efficiencies and
improving capacity utilization; and (v) internal growth.
The following table sets forth acquisitions completed by the Company
through February 1998:
<TABLE>
<CAPTION>
<C> <C> <C> <C> <C>
Acquisition Month Acquired Principal Business Location Market Area
Moretown Landfill July 1995 Landfill Moretown, VT Vermont
The Hartigan Company January 1997 Solid waste collection Stowe, VT Central Vermont
CSWD Transfer Station October 1997 Transfer Station Burlington, VT N.W. Vermont
VT.
Doyle Disposal January 1998 Solid waste collection Barre, VT Central Vermont
Perkins Disposal January 1998 Solid waste collection St. Johnsbury, VT N. E. Vermont
Rapid Rubbish Solid waste collection/
Removal , Inc. February 1998 Transfer Station St. Johnsbury, VT N. E. Vermont
Greenia Trucking February 1998 Solid waste collection St. Albans, VT N. W. Vermont
</TABLE>
In addition, the Company has signed certain agreements for the acquisition or
operation of landfills and collection companies described under "Integrated
Solid Waste Management Operations - Hopewell, Pennsylvania" and "--South Hadley,
Massachusetts." There can be no assurance that the Company will continue to be
successful in executing its acquisition strategy. See Management's Discussion
and Analysis of Financial Condition and Results of Operations - Certain Factors
Affecting Future Operating Results - "Ability to Identify, Acquire and Integrate
Acquisition Targets").
Integrated Solid Waste Management Operations
The Company believes that it can successfully create integrated solid
waste management operations by acquiring or developing disposal capacity and
subsequently integrating them with strategically located collection operations
and transfer stations. The Company's strategy, if successful would ensure a
steady and growing long-term waste stream to its landfills. The Company's
current integrated solid waste management operations are as follows:
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Moretown, Vermont. The Company established its first integrated solid
waste management operations in the geographical area surrounding its landfill in
Moretown, Vermont. In addition to the landfill in Moretown, Vermont, the Company
currently owns and/or operates three transfer stations and collection operations
serving over 4,400 commercial and residential customers in the Burlington, St.
Albans, St. Johnsbury and Barre-Montpelier, Vermont areas. The first cell ("Cell
1") at the Company's landfill is currently operating at approximately 300-350
tons per day ("TPD") with remaining estimated permitted capacity as of December
31, 1997 of approximately 215,000 cubic yards. A permit application was filed
with the Vermont Agency of Natural Resources for the development of a second
cell ("Cell 2") on April 3, 1997. On March 11, 1998, WSI received its draft
certification for Cell 2 from the Vermont Agency of Natural Resources. The
Company expects to receive all of the permits required for Cell 2 by the end of
the second quarter of 1998 although no assurances can be given that all required
permits will be issued in accordance with the Company's expected schedule. When
all of the permits are granted, the Company will begin construction on Cell 2,
which will increase the permitted landfill capacity by an estimated 1.3 million
cubic yards. For the year ended December 31, 1997, approximately 24% of the
waste received at its Moretown, Vermont landfill was collected by the Company's
hauling operations or received at the Company's transfer stations. Also, 100% of
the waste collected by the Company was disposed of at its Moretown, Vermont
landfill.
Hopewell, Pennsylvania. In November 1997, WSI signed a definitive
agreement to acquire the 700-acre, 3 million cubic yard permitted municipal
solid waste landfill in Hopewell, Pennsylvania. The purchase price of
approximately $6.0 million will be paid primarily by the assumption of debt on
the facility. The existing landfill consists of five permitted cells, one of
which is currently operating. The Hopewell project represents a new market for
the Company, in which it intends to build a network of adjoining collection
operations and transfer stations within the central Pennsylvania region. The
Company has also identified additional room for expansion at the landfill. This
transaction is expected to close by the end of May, 1998.
On March 23, 1998, the Company signed a definitive agreement to acquire
Horvath Sanitation, Inc., d/b/a Eagle Waste ("Eagle"), which is based in
Altoona, Pennsylvania. Eagle has approximately $8 million in annual revenue and
collects approximately 200 tons per day of solid waste. Eagle's operations will
be integrated with the Hopewell, Pennsylvania landfill as discussed above. The
Company has also identified additional tuck-in opportunities for acquisition of
collection companies and transfer stations in the area, which would help ensure
WSI a stable, long-term waste stream to the landfill.
South Hadley, Massachusetts. WSI and the Town of South Hadley,
Massachusetts have entered into a contract as of August 22, 1995, whereby the
Company will operate and remodel (see "Landfill Remodeling" below) the town's
30-acre municipal solid waste landfill. The Town of South Hadley will retain
full ownership of the landfill while the Company operates and remodels the
facility. In March 1997,the Company received a landfill disruption permit from
the MDEP which enabled WSI to begin engineering work and feasibility studies at
the South Hadley landfill. On March 16, 1998 the Company filed its draft
environmental impact report with the MDEP and anticipates receiving all of its
operating and construction permits during the second or third quarter of 1998,
which would allow WSI to begin accepting solid waste at the first 6-acre lined
cell during the first or second quarter of 1999. The South Hadley landfill
project is currently expected to have approximately 2 million cubic yards of new
capacity for future disposal.
Landfill Remodeling
Municipal waste at landfills typically contains a large amount of low
density, bulky material. The Company believes that by processing and recycling a
percentage of this material, it is possible to recapture approximately 40-80% of
the landfill's original permitted disposal capacity. The remodeling process
begins with the excavation of the landfill and processing of existing solid
waste. The landfill is then lined in accordance with current environmental
standards, and the remaining processed solid waste is returned to the new lined
landfill. At this point, the site is considered operational and is ready to
receive additional solid waste from outside sources.
The benefits of landfill remodeling are: (a) the entire landfill can be
brought into compliance with current applicable environmental regulations; (b)
the useful life of the landfill can be extended as a result of the volume
reduction of the existing waste creating substantial new waste capacity; and (c)
the high cost of closing down a landfill in compliance with current
environmental regulations can be deferred and the future closure costs can be
financed through the utilization of the new waste capacity.
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Medical Waste Technology
WSI currently maintains ownership of an infectious medical waste
disposal technology, known as the continuous flow auger ("CFA") process, which
is the subject of a U.S. patent and a pending European Community patent
application. This process is fully developed and requires no further capital
funding. The Company's activities in this area have been limited to licensing of
the technology and related engineering consulting services to licensees. A
previous world-wide licensing arrangement with BioMedical Waste Systems, Inc.
("BioMed") was terminated as to most jurisdictions as a result of BioMed's
failure to make contractual minimum payments. In February 1996, WSI entered into
an exclusive licensing arrangement for the United Kingdom and Ireland with
ScotSafe Limited ("ScotSafe"), which was expanded to cover all of Europe in
November 1996. This arrangement was terminated in late 1997 as a result of
ScotSafe's failure to pay royalties due. Subsequent to the termination, ScotSafe
was placed into receivership and its assets were purchased by Eurocare
Environmental Services, Ltd. ("Eurocare") in December 1997. Eurocare is
currently operating the three facilities the Company constructed for ScotSafe
without a licensing agreement. The Company petitioned Scottish Courts for an
interim interdict, which would have required Eurocare to cease operations until
proper licensing of the CFA process was obtained from WSI. The Company's
petition to the Court was denied since the Company currently does not hold a
European patent on the CFA process. However, since the Company does have a
European patent application pending, the Scottish courts have required that
Eurocare track all waste processed at the plants and to remove some of the
recommended modifications to the standard CFA process which were recommended by
WSI while under agreement with ScotSafe. Although no assurances can be given,
the Company expects to be granted its European patents during 1998, at which
time, the Company will act vigorously to protect its rights to the CFA
technology against Eurocare and seek substantial damages. Otherwise, the Company
has no licenses or other revenue-paying arrangements with respect to the CFA
technology, and is reassessing its business plans in this respect.
Competition
The solid waste management industry is highly competitive and very
fragmented and requires substantial labor and capital resources. Competition
exists for collection, recycling, transfer and disposal services. The markets in
which the Company competes or is likely to compete in are usually served by one
or more of the large national, regional or local solid waste companies who may
have greater financial, marketing or technical resources than WSI and may be
able to achieve greater economies of scale than the Company.
The Company also competes with counties, municipalities and operators
of alternative disposal facilities that operate their own waste collection and
disposal facilities. The availability of user fees, charges or tax revenues and
the availability of tax-exempt financing may provide a competitive advantage to
the public sector. Additionally, alternative disposal facilities such as
recycling and incineration may reduce the demand for the disposal of solid waste
in landfills.
The Company competes for waste collection and disposal business on the
basis of quality of operation, price and geographical location. From time to
time, competitors may reduce the price of their services in an effort to expand
or maintain market share or to win competitively bid contracts.
Competition also exists within the industry for acquisition targets
where the Company will usually compete with publicly owned national or regional
solid waste management companies.
Government Regulation
The Company and its customers are subject to extensive and evolving
environmental laws and regulations that have been enacted in response to
technological advances and increased concern over environmental issues. These
regulations are administered by the U.S. EPA and various other federal, state
and local environmental, transportation and health and safety agencies. The
Company believes that such laws and regulations have the effect of enhancing the
potential market in which the Company operates by allowing the Company to offer
economical solutions for regulatory problems to its customers and acquisition
candidates. On the other hand, such laws and regulations represent a potential
constraint on the Company's operation of projects for its customers or for its
own account.
In order to develop and operate a landfill project, the Company must go
through several governmental review processes and obtain one or more permits and
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often zoning or other land use approvals. These permits and zoning or land use
approvals are difficult and time consuming to obtain and may be opposed by
various local authorities and ad hoc citizens' groups. Once obtained, operating
permits generally must be periodically renewed and are subject to modification
and revocation by the issuing agency.
The Company's landfill operations subject it to certain operational,
monitoring, site maintenance, closure and post-closure, and financial assurance
obligations which change from time to time and which could give rise to
increased capital expenditures and operating costs. In connection with the
Company's preliminary development of landfill projects, the Company will expend
considerable time, effort and resources in complying with the governmental
review and permitting process necessary to develop or increase the capacity of
these landfills. Governmental authorities have the power to enforce compliance
with these laws and regulations and to obtain injunctions or impose civil or
criminal penalties in the case of violations. Failure to correct the problems to
the satisfaction of the authorities could lead to curtailed operations or even
closure of a landfill.
The principal federal, state, and local statutes and regulations
applicable to the Company's operations are as follows:
The Resource Conservation and Recovery Act of 1976. RCRA regulates the
generation, treatment, storage, handling, transportation and disposal of solid
waste and requires states to develop programs to ensure the safe disposal of
solid waste. RCRA divides solid waste into two groups, hazardous and
non-hazardous. Wastes are generally classified as hazardous wastes if they (i)
either (a) are specifically included on a list of hazardous wastes or (b)
exhibit certain hazardous characteristics and (ii) are not specifically
designated as non-hazardous. Wastes classified as hazardous under RCRA are
subject to much stricter regulation than wastes classified as non-hazardous, and
businesses that deal with hazardous waste are subject to regulatory obligations
in addition to those imposed on handlers of non-hazardous waste.
Among the wastes that are specifically designated as non-hazardous
waste are household waste and "special" waste, including items such as petroleum
contaminated soils, asbestos, foundry sand, shredder fluff and most
non-hazardous industrial waste products.
The EPA regulations issued under Subtitle C of RCRA impose a
comprehensive "cradle to grave" system for tracking the generation,
transportation, treatment, storage and disposal of hazardous wastes. The
Subtitle C Regulations impose obligations on generators, transporters and
disposers of hazardous waste, and require permits that are costly to obtain and
maintain for sites where such material is treated, stored or disposed. Subtitle
C requirements include detailed operating, inspection, training and emergency
preparedness and response standards, as well as requirements for manifesting,
record keeping and reporting, corrective action, facility closure, post-closure
and financial responsibility. Most states have promulgated regulations modeled
on some or all of the Subtitle C provisions issued by the EPA. Some state
regulations impose different, additional obligations.
The Company is not involved with transportation or disposal of
hazardous substances (as defined in CERCLA) in concentrations or volumes that
would classify those materials as hazardous wastes.
In October 1991, the U.S. EPA adopted new regulations pursuant to
Subtitle D of RCRA (the "Subtitle D Regulations"). These new regulations became
generally effective in October 1993 (except for certain MSW landfills accepting
less than 100 TPD, as to which the effective date was April 9, 1994, and new
financial assurance requirements, which became effective April 9, 1997) and
include location restrictions, facility design standards, operating criteria,
closure and post-closure requirements, financial assurance requirements,
groundwater monitoring requirements, groundwater remediation standards and
corrective action requirements. In addition, these regulations require that new
landfills meet more stringent liner design criteria (typically, composite soil
and synthetic liners or two or more synthetic liners) designed to keep leachate
out of groundwater and have extensive collection systems to control leachate for
treatment prior to disposal. Groundwater wells must also be installed at
virtually all landfills to monitor groundwater quality. The regulations also
require, where threshold test levels are present, that methane gas generated at
landfills be controlled in a manner that protects human health and the
environment. Each state is required to revise its landfill regulations to meet
these requirements or such requirements, will be automatically imposed upon it
by the U.S. EPA. Each state is also required to adopt and implement a permit
program or other appropriate system to ensure that landfills within the state
comply with the Subtitle D criteria. Many states have already adopted
regulations or programs as stringent as or more stringent than the Subtitle D
Regulations, which were first proposed in August 1988.
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The Federal Water Pollution Control Act of 1972 (the "Clean Water
Act"). The Clean Water Act establishes rules regulating the discharge of
pollutants from a variety of sources, including solid waste disposal sites, into
waters of the United States. If runoff or collected leachate from the Company's
landfills and transfer stations are discharged into streams, rivers or other
surface waters of the United States, the Clean Water Act would require the
Company to apply for and obtain a discharge permit, conduct sampling and
monitoring and, under certain circumstances, reduce the quantity of pollutants
in such discharge. Also, virtually all landfills are required to comply with the
new federal storm water regulations, which are designed to prevent possibly
contaminated storm water from flowing into surface waters. The Company is
working with the appropriate regulatory agencies to ensure that its facilities
are in compliance with Clean Water Act requirements, particularly as they apply
to treatment and discharge of leachate and storm water. The Company has secured
or has applied for the required discharge permits under the Clean Water Act or
comparable state-delegated programs. To ensure compliance with the Clean Water
Act pretreatment and discharge requirements, the Company has either installed
wastewater treatment systems at its facilities to treat its effluent to
acceptable levels before discharge or has arranged to discharge its effluent to
municipal wastewater treatment facilities. The Company believes that its
facilities are in compliance in all material respects with Clean Water Act
requirements.
The Comprehensive Environmental Response, Compensation, and Liability
Act of 1980 ("Superfund" or "CERCLA"). CERCLA established a regulatory and
remedial program intended to provide for the investigation and cleanup of
facilities from which there has been, or is threatened, a release of any
hazardous substance into the environment. CERCLA's primary mechanism for
remedying such problems is to impose strict joint and several liability for
cleanup of facilities on current owners and operators of the site, former owners
and operators of the site at the time of the disposal of the hazardous
substances, as well as the generators of the hazardous substances and the
transporters who arranged for disposal or transportation of the hazardous
substances. The costs of CERCLA investigation and cleanup can be very
substantial. Liability under CERCLA does not depend upon the existence or
disposal of "hazardous waste" but can also be founded upon the existence of even
very small amounts of the numerous "hazardous substances" listed by the EPA,
many of which can be found in household waste. If the Company were to be found
to be a responsible party for a CERCLA cleanup, either at one of the Company's
owned or operated facilities, the enforcing agency could hold the Company
completely responsible for all investigative and remedial costs even if others
may also be liable. CERCLA also authorized the imposition of a lien in favor of
the United States upon all real property subject to or affected by a remedial
action for all costs for which a party is liable. The Company's ability to
obtain reimbursement from others for their allocable share of such costs would
be limited by the Company's ability to find other responsible parties and prove
the extent of their responsibility and by the financial resources of such other
parties. In the past, legislation has been introduced in Congress to limit the
liability of municipalities and others under CERCLA as generators and
transporters of municipal solid waste. Although such legislation has not been
enacted, if it were to pass it would limit the Company's ability to seek full
contribution from municipalities for CERCLA cleanup costs even if the hazardous
substances that were released and caused the need for cleanup at one of the
Company's facilities were generated by or transported to the facility by a
municipality.
The Clean Air Act. The Clean Air Act provides for regulation, through
state implementation of federal requirements, of the emission of air pollutants
from certain landfills based upon the date of the landfill construction and
volume per year of emissions of regulated pollutants. The EPA has recently
promulgated new source performance standards regulating air emissions of certain
regulated pollutants (methane and non-methane organic compounds) from municipal
solid waste landfills. The EPA may also issue regulations controlling the
emissions of particular regulated air pollutants from municipal solid waste
landfills. Landfills located in areas with air pollution problems may be subject
to even more extensive air pollution controls and emission limitations. In
addition, the EPA has issued standards regulating the removal, handling and
disposal of asbestos-containing materials.
Each of the federal statutes described above contains provisions
authorizing, under certain circumstances, the bringing of lawsuits by private
citizens to enforce the provisions of the statutes.
The Hazardous Materials Transportation Act. The transportation of
hazardous waste is regulated both by the EPA pursuant to RCRA and by the federal
Department of Transportation ("DOT") pursuant to the Hazardous Materials
Transportation Act ("HMTA"). Pursuant to the HMTA, DOT has enacted regulations
governing the transport of hazardous waste. These regulations govern, among
other things, packaging of the hazardous waste during transport, labeling and
marking requirements, and reporting of and response to spills of hazardous waste
during transport. In addition, under both the HMTA and RCRA, transporters of
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hazardous waste must comply with manifest and record keeping requirements, which
are designed to ensure that a shipment of hazardous waste is properly identified
and can be tracked from its point of generation to point of disposal at a
permitted hazardous waste treatment, storage or disposal facility.
The Occupational Safety and Health Act of 1970 ("OSHA"). OSHA
authorizes the Occupational Safety and Health Administration to promulgate
occupational safety and health standards. Various of those promulgated
standards, including standards for notices of hazards, safety in excavation, and
the handling of asbestos, may apply to certain of the Company's operations. OSHA
regulations set forth requirements for the training of employees handling, or
who may be exposed in the workplace to, concentrations of asbestos-containing
materials that exceed specified action levels. The OSHA regulations also set
standards for employee protection, including medical surveillance, the use of
respirators, protective clothing and decontamination units, during asbestos
demolition, removal or encapsulation as well as its storage, transportation and
disposal. In addition, OSHA specifies a maximum permissible exposure level for
airborne asbestos in the workplace. The company has no direct involvement in
asbestos removal or abatement projects.
State and Local Regulation. Each state in which the Company now
operates or may operate in the future has laws and regulations governing the
generation, storage, treatment, handling, transportation and disposal of solid
and hazardous waste, water and air pollution and, in most cases, the citing,
design, operation, maintenance, closure and post-closure maintenance of
landfills and transfer stations. In addition, many states have adopted
"Superfund" statutes comparable to, and in some cases more stringent than,
CERCLA. These statutes impose requirements for investigation and cleanup of
contaminated sites and liability for costs and damages associated with such
sites, and some provide for the imposition of liens on property owned by
responsible parties. Furthermore, many municipalities also have ordinances,
local laws and regulations affecting Company operations. These include zoning
and health measures that limit solid waste management activities to specified
sites or activities, flow control provisions that direct the delivery of solid
wastes to specific facilities, laws that grant the right to establish franchises
for collection services and then put out for bid for the right to provide
collection services, and bans or other restrictions on the movement of solid
wastes into a municipality.
Certain permits and approvals may limit the types of waste that may be
accepted at a landfill or the quantity of waste that may be accepted at a
landfill during a given time period. In addition, certain permits and approvals,
as well as certain state and local regulations, may limit a landfill to
accepting waste that originates from specified geographic areas or seek to
restrict the importation of out-of-state waste or otherwise discriminate against
out-of-state waste. Generally, restrictions on the importation of out-of-state
waste have not withstood judicial challenge. However, proposed federal
legislation would allow individual states to prohibit the disposal of
out-of-state waste or to limit the amount of out-of-state waste that could be
imported for disposal and would require states, under certain circumstances, to
reduce the amounts of waste exported to other states. If this or similar
legislation is enacted, states in which the Company operates landfills could act
to limit or prohibit the importation of out-of-state waste. Such state actions
could adversely affect landfills within those states that receive a significant
portion of waste originating from out-of-state.
In addition, certain states and localities may for economic or other
reasons restrict the exportation of waste from their jurisdiction or require
that a specified amount of waste be disposed of at facilities within their
jurisdiction. In 1994, the United States Supreme Court held unconstitutional,
and therefore invalid, a local ordinance that sought to impose flow controls on
taking waste out of the locality. However, certain state and local jurisdictions
continue to seek to enforce such restrictions and, in certain cases, the Company
may elect not to challenge such restrictions based upon various considerations.
In addition, the aforementioned proposed federal legislation would allow states
and localities to impose certain flow control restrictions. These restrictions
could result in the volume of waste going to landfills being reduced in certain
areas, which may adversely affect the Company's ability to operate its landfills
at their full capacity and/or affect the prices that can be charged for landfill
disposal services.
There has been an increasing trend at the federal, state and local
level to mandate and encourage waste reduction at the source and waste recycling
and to prohibit the disposal of certain types of solid wastes, such as yard
wastes, in landfills. The enactment of regulations reducing the volume and types
of wastes available for transport to and disposal in landfills could affect the
Company's ability to operate its facilities at their full capacity.
The Company believes that it is in compliance with federal, state and
local regulations based on the Company's internal review process which has not
identified any non compliance and the Company has not received any verbal or
written notification from any governmental agency to the contrary.
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Environmental Impairment Liability Insurance
The Company has a $5.0 million environmental impairment liability
insurance policy covering claims for sudden or gradual onset of environmental
damage. If the Company were to incur a 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.
Employees of the Registrant
As of December 31, 1997, WSI had 35 full time employees. As a result of
the acquisitions executed subsequent to year-end, the Company had 60 full time
employees as of March 24, 1998 and, based on acquisitions under definitive
agreements as of March 23, 1998, the Company expects the number of full time
employees to grow to approximately 175 by June 30, 1998. WSI believes its future
success will depend in part on its continued ability to recruit and retain
highly qualified technical and managerial personnel.
WSI's employees are not subject to any collective bargaining agreement.
WSI considers its relations with its employees to be good.
Item 3. Legal Proceedings
Richard Rosen. In July 1996, the Company commenced arbitration
proceedings against 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 of the Board appointed to
investigate Rosen's financial dealings with the Company, in consultation with
independent counsel retained 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 judgment
against Rosen, which is now non-appealable, in an amount of approximately
$833,000. The Company is currently pursuing discovery against Rosen through this
forum to identify assets that Rosen may have available to satisfy the
outstanding judgment. In August of 1996, the Company secured a preliminary
injunction in Middlesex Superior Court with respect to any future sales of the
Company's stock by Rosen. The Company has filed a Motion in such action asking
the Court to issue a broader form of permanent injunction in the case. On
September 8, 1997 the Company commenced a supplementary process action in
Cambridge District Court to collect on such judgment, including seeking
foreclosure on all shares of the Company's stock owned by Rosen. On March 5,
1998 the judge granted the Company's motion and the Company is in the process of
obtaining all the shares held by Rosen. No assurance can be given that the
Company will be able to collect the entire balance of any amounts awarded in
arbitration including interest and litigation costs. The Company is carrying on
its December 31, 1997 balance sheet an amount of $300,000 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. The Company expects
to have received in the aggregate a minimum of approximately $300,000 from Rosen
in cash or stock by March 31, 1998.
On March 27, 1997, Rosen commenced an action against the Company in
Middlesex County (Massachusetts) Superior Court, seeking an award of damages
resulting from the Company's alleged breach of a Memorandum of Understanding
entered into between the Company and Rosen in connection with the termination of
Rosen's employment with the Company, in which Rosen had been granted an option
to purchase certain assets of the Company not related to its core business. The
Company believes this claim to be frivolous and is vigorously defending this
action.
8
<PAGE>
Marguerite Piret. In October 1997 in the Middlesex Superior Court, the
Company commenced an action against Marguerite A. Piret, a former director of
the Company and the wife of Rosen, seeking damages against Ms. Piret for
breaches of her fiduciary duty as a former director of the Company. The case is
in the discovery stage and no trial date has been set. If the Company is
successful in its claims, the Company may recover direct and consequential
damages from Ms. Piret.
Other Proceedings. As of the beginning of fiscal 1997, the Company had
pending against it four complaints with the Massachusetts Commission Against
Discrimination ("MCAD"). Currently, the Company has pending against it two
ongoing complaints with the Massachusetts Commission Against Discrimination. 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.
With respect to the two other MCAD complaints, one has been settled for an
amount not material to the Company and the other has been dismissed by MCAD
(with leave to file a claim in Massachusetts Superior Court expiring as of
September 21, 1998).
9
<PAGE>
PART II
Item 6. Selected Consolidated Financial and Operating Data
Over the past two years, the Company has changed its focus from an environmental
technologies company to an integrated solid waste management company. The
Company has restructured its operations, commenced operations in Vermont,
operated the Fairhaven landfill, which has been terminated, and (including the
cessation of operations at its environmental technology center) made several
acquisitions. These acquisitions, dispositions and restructuring activities
affect the comparability of the financial information herein.
<TABLE>
Waste Systems International, Inc. and Subsidiaries
Selected Financial Data
(in thousands except for outstanding shares and earnings per share data)
Fiscal Year Ended
--------------------------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1997 1996 1995 1994 1993
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $3,458 $1,496 $1,344 $0 $0
------- ------- ------ ------ -------
Cost of operations:
Operating expenses 1,719 921 766
- -
Depreciation and amortization 692 370 72
- -
Write-off of landfill
development costs 1,495 6,652 - - -
------- ------- ------ ------ -------
Total cost of operations 3,906 7,943 838 - -
------- ------- ------ ------ -------
Gross profit (loss) (448) (6,447) 506 - -
Selling, general and
administrative expenses 2,138 2,443 3,286 1,485 936
Amortization of prepaid
consulting fees - 834 501 - -
Restructuring 596 1,741 - - -
------- ------- ------ ------ --------
Loss from operations (3,182) (11,465) (3,281) (1,485) (936)
------- ------- ------ ------ -------
Other income (expense):
Royalty and other income
(expense), net (521) 923 865 1,850 1,300
Interest income 172 178 289 14 27
Interest expense and
financing costs (1,355) (1,182) (471) (166) (125)
Equity in loss of affiliate - (96) - - -
Gain on sale of assets - - - 223 -
Write-off of accounts and
notes receivable (568) - (2,975) - -
Loss on investment in
marketable securities - - (91) (9) -
Write-off of assets - (22) - - -
Total other income ------- ------- ------ ------ -------
(expense) (2,272) (199) (2,383) 1,912 1,202
------- ------- ------ ------ -------
Income (loss) before income
taxes, minority
interest, discontinued
operations and
extraordinary item (5,454) (11,664) (5,664) 427 266
Federal and state income tax
expense (benefit) 6 (23) (110) 185 103
------- ------- ------ ------ -------
Income (loss) before
minority interest
discontinued
operations and
extraordinary item (5,460) (11,641) (5,554) 242 163
Minority interest 5 (12) 13
------- ------- ------ ------ -------
continuing operations (5,455) (11,629) (5,567) 242 163
Discontinued operations - (2,261) (2,303)
------- ------- ------ ------ -------
extraordinary item (5,455) (13,890) (7,870) 242 163
Extraordinary item - loss on
extinguishment of debt (134) - - - -
------- ------- ------ ------ -------
Net income (loss) (5,589) (13,890) (7,870) 242 163
Preferred stock dividend (not declared) 395 - 10 108
-
Net income (loss)
available for ------- ------- ------ ------ ------
common shareholders ($5,984) ($13,890) ($7,880) $134 $163
======= ======= ======= ====== ======
Earnings (loss) per share:
Income (loss) from ($1.51) ($4.10) ($2.88) $0.27 $0.22
continuing operations
Discontinued operations 0.00 (0.80) (1.19) 0.00 0.00
Extraordinary item (0.04) 0.00 0.00 0.00 0.00
Preferred stock dividend
(not declared) (0.11) 0.00 (0.01) (0.12) 0.00
------- ------- ------ ------ ------
Earnings (loss) per share ($1.66) ($4.90) ($4.08) $0.15 $0.22
======= ======= ====== ====== ======
Weighted average number of shares
used in computation of earnings
(loss) per share 3,612,623 2,834,841 1,932,809 899,727 729,181
10
<PAGE>
Item 6. Selected Consolidated Financial and Operating Data -
(Continued)
Waste Systems International, Inc. and Subsidiaries
Selected Financial Data
(in thousands except for outstanding shares and earnings per share data)
Fiscal Year Ended
-------------------------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1997 1996 1995 1994 1993
-------------------------------------------------------------
EBIDTA (1) ($2,469) ($9,909) ($2,592) ($1,476) ($903)
One-time charges
Write-off of landfill development
costs 1,495 6,652 - - -
Restructuring 596 1,741 - - -
------- -------- -------- -------- -------
Adjusted EBITDA ($378) ($1,516) ($2,592) ($1,476) ($903)
======= ======== ======== ======== =======
Capital expenditures $998 $6,599 $9,749 $807 $138
Cash flow from operating activities ($4,581) ($3,912) ($3,083) ($209) ($567)
Cash flow from investing activities $706 ($7,641) ($10,267) ($1,588) ($138)
Cash flow from financing activities $6,575 $6,581 $18,416 $1,965 $639
Balance Sheet Data (at period end):
Cash and cash equivalents $2,964 $265 $5,237 $171 $3
Working capital 1,532 (4,508) 2,393 659 (88)
Total assets 18,560 16,858 23,508 4,369 1,289
Long-term debt, less current 7,201 9,450 12,266 1,263 505
maturities
Total stockholder's equity 5,972 (1,849) 3,292 597 (403)
(deficit)
</TABLE>
(1) EBITDA is defined as operating income from continuing operations excluding
one-time charges for write-off of landfill development costs and
restructuring charges, plus depreciation and amortization, which includes
depreciation and amortization included in selling, general and
administrative expenses. EBITDA does not represent, and
should not be considered as an alternative to net income or cash flows from
operating activities, each as determined in accordance with generally
accepted accounting principles ("GAAP"). Moreover, EBITDA does not
necessarily indicate whether cash flow will be sufficient for such items as
working capital or capital expenditures, or to react to changes in the
Company's industry or to the economy in general. The Company believes that
EBITDA is a measure commonly used by lenders and certain investors to
evaluate a company's performance in the solid waste industry. The Company
also believes that EBITDA data may help to understand the Company's
performance because such data may reflect the Company's ability to generate
cash flows, which is an indicator of its ability to satisfy its debt
service, capital expenditures and working capital requirements.
However, functional or legal requirements may require the conservation of
funds for uses other than those previously described. Because
EBITDA is not calculated by all companies and analysts in the same fashion,
the EBITDA measures presented by the Company may not be comparable to the
similarly-titled measures reported by other companies. Therefore, in
evaluating EBITDA data, investors should consider, among other factors: the
non-GAAP nature of EBITDA; actual cash flows; the actual availability of
funds for debt service, capital expenditures and working capital; and the
comparability of the Company's EBITDA data to similarly-titled measures
reported by other companies.
11
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Note Regarding Forward Looking Statements:
This Annual Report on Form 10-K/A contains forward-looking statements concerning
among other things, the Company's expected future revenues, operations and
expenditures and estimates of the potential markets for the Company's services.
Such statements made by the Company fall within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All such forward-looking statements are
necessarily only estimates of future results and the actual results achieved by
the Company may differ materially from these projections due to a number of
factors as discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Certain Factors
Affecting Future Operating Results" of this Form 10-K/A.
Introduction
Waste Systems International, Inc. (referred to herein as the "Company"
or "WSI") is a regional integrated non-hazardous solid waste management company
that provides solid waste collection, recycling, transfer and disposal services
to commercial and residential customers.
The Company currently owns and operates a solid waste landfill in
Moretown, Vermont, three transfer stations and collection operations which
currently operate as an integrated solid waste operation, serving over 4,400
commercial and residential customers in the Burlington, St. Albans, St.
Johnsbury and Barre-Montpelier, Vermont areas.
The Company currently has two additional landfill projects at different
stages of development. In November 1997, WSI signed a definitive agreement to
acquire a 700-acre, 3 million cubic yard permitted municipal solid waste
landfill in Hopewell, Pennsylvania. This transaction is expected to close by the
end of May, 1998. Additionally, the Company entered into a contract to operate
and remodel an existing 30-acre municipal landfill in South Hadley,
Massachusetts. On March 16, 1998 the Company filed its draft environmental
impact report with the MDEP and anticipates receiving all of its required MDEP
permits during the first or second quarter of 1998, which would allow WSI to
begin accepting solid waste at the first 6-acre lined cell during the second or
third quarter of 1999. The South Hadley landfill project is currently expected
to have approximately 2 million cubic yards of new capacity for future disposal.
On March 23, 1998, the Company signed a definitive agreement to acquire
Horvath Sanitation, Inc., D/B/A Eagle Waste ("Eagle"), which is based in
Altoona, Pennsylvania. This transaction is also expected to close by the end of
May 1998. Eagle has approximately $8 million in annual revenue and collects
approximately 200 tons per day of solid waste. Eagle's operations will be
integrated with the Hopewell, Pennsylvania landfill acquisition discussed above.
Ultimately, WSI intends to create integrated solid waste management operations
in the geographical areas surrounding each of its landfills.
WSI's objective is to expand the current geographic scope of its
operations and to become one of the leading providers of non-hazardous solid
waste management services in each market that it serves. The Company's primary
growth strategy is to acquire landfills in or near urban metropolitan areas, and
to secure dedicated waste streams for such landfills by acquisition or
development of collection operations and transfer stations. The internalization
of waste streams is a major component of the Company's strategy. The Company
believes that significant opportunities exist to expand its operations in each
of its current and targeted markets.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Over the past two years, the Company has changed its focus from an environmental
technologies company to an integrated solid waste management company. The
Company has restructured its operations, commenced operations in Vermont,
operated the Fairhaven landfill, which has been terminated, and (including
cessation of operations at its environmental technology center) made several
acquisitions. These acquisitions, dispositions and restructuring activities
affect the comparability of the financial information herein.
12
<PAGE>
Results of Operations
Revenues. Revenues for the year ended December 31, 1997 increased
$1,962,000 to $3,458,000 from $1,496,000 in 1996. The increase of 131% was due
primarily to increased waste volume accepted at the Company's Moretown, Vermont
landfill, in its first full year of operation, the acquisition on October 6,
1997 of the CSWD transfer station located in Burlington, VT and the internal
growth of the Company's collection operations. All 1997 revenues were generated
from the Company's Vermont operation as compared to 1996, where approximately
$1,157,000 or 77% was generated from the Company's operations at the Fairhaven
landfill. See Note 6 to the Consolidated Financial Statements presented in Item
8.
Operating expenses. Operating expenses for 1997 were approximately
$1,718,000 as compared to $921,000 for 1996. The increase of $797,000 was
primarily due to the growth of the Company's Vermont operations. During 1997,
the Company's Vermont operations expanded as a result of the Company's purchase
of a collection company and the CSWD transfer station. (See Item 1 Business -
"Integrated Solid Waste Management Operations")
Depreciation and amortization. Depreciation and amortization expense
was $692,000 and $370,000 for the years-ended 1997 and 1996, respectively. The
increase of 87% was due primarily to the growth in the operation at the
Company's Vermont landfill which resulted in increased amortization of
capitalized landfill costs and to a substantial increase in capital equipment
used in the Company's other Vermont operations.
Write-off of landfill development projects. Write-off of landfill
development costs were $1,495,000 and $6,652,000 for the years-ended 1997 and
1996, respectively. The write-off of landfill development costs are related to
the Fairhaven landfill project. See Note 6 to the Consolidated Financial
Statements presented in Item 8. On February 24, 1998, the Company entered into a
termination agreement with the Town of Fairhaven that required the Company to
perform a certain amount of construction and closure work at the landfill. The
estimated costs to terminate this project have been reserved for by the Company
as of December 31, 1997 and are included in accrued expenses on the December 31,
1997 balance sheet. See Notes 6 and 8 to the Consolidated Financial Statements
presented in Item 8.
Gross margins, excluding the write-off of landfill development costs
and restructuring charges for 1997 and 1996 were 30.3% and 13.7%, respectively.
The increase was primarily due to increased efficiencies at the Company's
Vermont operations as discussed above.
Selling, general and administrative expenses. Selling, general and
administrative expenses for 1997 were approximately $2,138,000, a decrease of
12.5% from 1996. The decrease was due to the restructuring undertaken in March
of 1996 and to the cessation of operations at the Fairhaven landfill. The
decrease was partially offset by increases in selling, general and
administrative expenses at the Company's Vermont operations and general
corporate expenses due the building of an infrastructure necessary to support
increases in acquisition, operating and administrative activities.
Restructuring. Restructuring charges for 1997 and 1996 were $596,000
and $1,742,000, respectively, which consisted of costs incurred for employee
severance, non-cancelable lease commitments, professional fees and litigation
costs. The restructuring has resulted in annual savings of approximately $4
million. See Note 4 to the Consolidated Financial Statements presented in Item
8.
Royalty and other income (expense). Royalty and other income (expense)
decreased approximately $1,444,000 in 1997 to ($521,000) from $923,000 in 1996.
Royalty income for 1997 and 1996 was $0 and $907,131, respectively. The decrease
in 1997 was due primarily to the Company not recognizing royalty income in 1997.
See Note 3 to the Consolidated Financial Statements presented in Item 8.
Interest expense. Interest expense for 1997 was approximately
$1,355,000 (net of capitalized interest of $24,000) as compared to approximately
$1,182,000 (net of capitalized interest of $42,000) for 1996. The increase
resulted primarily from additional indebtedness incurred in connection with
acquisitions and capital expenditures at the Company's Vermont operations.
13
<PAGE>
Write-off of accounts and notes receivable. In December 1997, ScotSafe
began operating under bankruptcy protection, and as a result of this
development the Company terminated its licensing agreements with ScotSafe and
wrote off the receivable due from ScotSafe of approximately $570,000. See Note 3
to the Consolidated Financial Statements presented in Item 8.
Financial Position
WSI had approximately $3.0 million in cash as of December 31, 1997.
This represented an increase of approximately $2.7 million from December 31,
1996. Working capital as of December 31, 1997, was approximately $1,532,000, an
increase of approximately $6.0 million over 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 term
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, 7, 12 and 13 to the Consolidated Financial Statements
presented in Item 8.
At December 31, 1997, the Company had approximately $945,000 in net
trade accounts receivable related to waste collection and disposal services as
compared to approximately $331,000 at December 31, 1996. The increase is
primarily due to increased levels of operation at the Company's Vermont
operation. Approximately 94% or $888,000 of such receivables is considered
current or within 90 days due. The Company has estimated an allowance for
doubtful accounts of approximately $46,000, which is considered sufficient to
cover estimated future bad debts.
During the year ended December 31, 1997, the Company devoted
substantial resources to various project development and related activities.
Additions to property and equipment of $3,283,359 were made during the year
ended December 31, 1997, which primarily consisted of property and equipment for
the Company's Vermont operations.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Results of Operations
Revenues. Revenues for the year ended December 31, 1996 and 1995 were
approximately $1,496,000 and $1,344,000. Revenues for 1996 were derived from
operations at the Fairhaven landfill, and from the Moretown landfill which
commenced operations on October 6, 1996. Revenues for 1995 were entirely from
operations at the Fairhaven landfill.
Operating Expenses. Operating expenses for 1996 were $921,000 as
compared to $766,000 in 1995. The increase of $155,000 primarily consisted of
operating costs associated with the Moretown, Vermont landfill which commenced
operations on October 6, 1996.
Depreciation and amortization. Depreciation and amortization expense
was $370,000 and $72,000 for 1997 and 1996, respectively. The increase of
$299,000 is primarily due to the additional property and equipment acquired for
use at the Fairhaven and Vermont landfills.
Write-off of landfill costs. In 1996, the Company wrote-off its
capital investment in the Fairhaven landfill project of approximately $6.7
million due to the uncertain economic viability of the project. See Notes
6 and 8 to the Consolidated Financial Statements presented in Item 8.
Selling, general and administrative. 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 $2,443,000 for the
year ended December 31, 1996, as compared to $3,287,000 for the year ended
December 31, 1995. This represented a decrease of $844,000, which was primarily
the result of the restructuring undertaken on March 27, 1996. See Note 4 to the
Consolidated Financial Statements included in Item 8.
Amortization of prepaid consulting fees On March 29, 1995, the Company
entered into a two-year agreement with Liviakis Financial Communications, Inc.
("Liviakis"), whereby Liviakis would provide ongoing assistance and consultation
to the Company on matters concerning mergers and acquisitions, corporate
14
<PAGE>
finance, investor relations and financial public relations. As compensation for
services to be rendered by Liviakis, the Company issued 890,000 unregistered,
restricted shares of Common Stock. As a result, on March 29, 1995, the Company
recorded a prepaid asset of $1,335,000. The Company was amortizing this expense
over the two years of the Agreement, at a rate of $167,000 per quarter, or a
total of $501,000 for the year ended December 31, 1996. On December 18, 1996 the
Company terminated its consulting agreement with Liviakis. As a result, the
Company expensed the remaining prepaid consulting fees in the amount of
$333,750.
Restructuring. On March 27, 1996, the Company announced its intention
to take meaningful action to conserve cash and working capital, including the
restructuring of the Company's operations to focus its resources and activities
on developing an integrated solid waste management operation. See Note 4 to the
Consolidated Financial Statements presented in Item 8. As a result , the Company
recorded restructuring charges of $1,742,000, which included accruals for
employee severance, non-cancelable lease commitments, professional fees and
litigation costs.
Royalty and other income (expense), net. Through the first quarter of
1995, substantially all of WSI's revenue had been attributable to the sale and
licensing of WSI's medical waste treatment technologies to BioMedical Waste
Systems, Inc. ("BioMed"). On August 31, 1995, the Company terminated its
agreement with BioMed in most territories as a result of BioMed's failure to
make required payments to the Company as required by the licensing agreement.
In February 1996, the Company entered into a licensing and services
agreement with ScotSafe Limited ("ScotSafe"), a Glasgow, Scotland company for
the exclusive rights to use the Company's continuous feed auger medical waste
processing technology in the British Isles and Ireland. The Company earned
royalties and consulting fees of approximately $1,000,000 during the year ended
December 31, 1996 from the completion of three medical waste treatment
facilities by ScotSafe during this period. See Note 3 to the Consolidated
Financial Statements presented in Item 8.
Interest expense. The increase of $710,000 in interest expense to
$1,182,000 in 1996 from $472,000 in 1995 was primarily the result of the
Company's November 1995 Regulation S offering of $11.2 million in subordinated
convertible debt, which bears interest at 10%. See Note 7 to the Consolidated
Financial Statements presented in Item 8.
Liquidity and Capital Resources
The Company's business is capital intensive. The Company's capital
requirements, which are substantial, include acquisitions, property and
equipment purchases and capital expenditures for landfill cell construction,
landfill development and landfill closure activities. Principally due to these
factors, the Company may incur working capital deficits. The Company plans to
meet its capital needs through various financing sources, including internally
generated funds and debt, including bank financing, and equity securities.
WSI expects to grow primarily through acquisition. The Company
maintains an acquisitions department that is responsible for the identification,
due diligence, negotiation and closure of acquisitions. As the Company expands
into additional geographic regions, the number of acquisitions completed by the
Company is also expected to dramatically increase. The Company's believes that a
combination of internally generated funds, the proceeds from the Notes and an
anticipated expanded bank facility will provide adequate funds to support the
Company's cost structure, acquisition strategy and working capital requirements
for the foreseeable future.
In connection with its growth strategy, the Company currently is and at
any given time will be involved in potential acquisitions that are in various
stages of negotiation and consummation (ranging from initial discussions to the
execution of definitive agreements), some of which may be material. If the
Company is successful in executing its acquisition strategy, the Company may
incur substantial costs in the form of cash or issuance of stock. However, there
can be no assurance that the Company will be successful in executing its
acquisition strategy.
Through March 31, 1998 the Company acquired 5 collection companies and
a transfer station in the State of Vermont. The aggregate cost of these
acquisitions was approximately $5.0 million consisting of approximately $4.4
million in cash and approximately $600,000 in assumed liabilities. Acquisition
integration costs related to the 5 acquisitions in Vermont were approximately
$320,000.
15
<PAGE>
To date, WSI has financed its activities primarily through the issuance
of debt and equity securities, including convertible subordinated notes. See
Notes 7, 12 and 13 to the Consolidated Financial Statements. The Company has
raised, from inception through December 31, 1997, cumulative net proceeds of
approximately $34.3 million through private placements of equity securities and
the issuance of long-term debt. If the Company is successful in raising
additional capital, WSI intends to aggressively pursue and develop an integrated
solid waste management company. There can be no assurance that additional debt
or equity financing will be available, or available on terms acceptable to the
Company. Failure of the Company to obtain required financing in the short term
could have a material adverse effect on the Company's financial condition and
operation.
Net cash used by operating activities for 1997 and 1996 was $4.6
million and $3.9 million, respectively. The use of $4.6 million in 1997
consisted of the substantial completion of the restructuring and related
liabilities, the termination of the Fairhaven landfill project and the growth of
the Company's Vermont operations. See Notes 4, 6 and 8 to the Consolidated
Financial Statements presented in Item 8.
Net cash provided (used) by investing activities for 1997 and 1996 was
$706,000 and ($7.7) million, respectively. The net cash provided by investing
activities in 1997 of $706,000 was primarily due to the reduction in collateral
requirements on the Vermont landfill closure and post-closure performance bond
of approximately $1.0 million, and the proceeds from the sale of the Fairhaven
equipment for approximately $800,000, offset by additional capital expenditures
for the Company's Vermont operations. The net cash used by investing activities
in 1996 was primarily the result of the Company's investment in the Moretown,
Vermont and Fairhaven, Massachusetts landfills.
The Company's capital expenditures and capital needs for acquisitions
have increased significantly, reflecting the Company's rapid growth by
acquisition and development of revenue producing assets, and will increase
further as the Company continues to complete acquisitions. Capital expenditures
for 1998 are currently expected to be approximately $6 million with respect to
the businesses that the Company owned at December 31, 1997, compared to total
capital expenditures of $1.0 million in 1997 and $6.6 million in 1996.
Additionally, total capital expenditures are expected to further increase in
1998 due to acquisitions. The decrease of $5.6 million in 1997 capital
expenditures from 1996 capital expenditures relating to businesses owned by the
Company as of December 31, 1997 is primarily due to the completion of
construction of Cell 1 at the Moretown landfill and construction costs at the
Fairhaven, Massachusetts landfill.
Net cash provided by financing activities for 1997 and 1996 was
approximately $6.6 million and $6.6 million, respectively. The 1997 proceeds
were primarily due to the Company's June of 1997 Regulation "D" private
placement of Series A Convertible Preferred Stock which raised net proceeds of
approximately $7.6 million. The 1996 proceeds were primarily due to the
Company's June of 1996 Regulation S offering of common stock which raised
approximately $6.6 million.
At December 31, 1997, the Company had approximately $5.4 million of
long-term and short-term debt, $2.7 million in capital leases and equipment
notes payable. In addition, on February 12, 1998, the Company closed a $5
million bridge loan with BIII Capital Partners, L.P. and Roton & Co. See Note 15
to the Consolidated Financial Statements presented in Item 8.
Certain Factors Affecting Future Operating Results
History of Losses. During the fiscal years ending December 31, 1997,
1996 and 1995, the Company suffered net losses (including non-recurring charges)
of approximately ($5,589,000), ($13,890,000) and ($7,880,000) respectively, on
revenues of $3,458,000, $1,496,000, and $1,344,000 respectively. Prospects for
future profitability are heavily dependent upon the success of the Company's
acquisition strategy and in its ability to continue to build integrated solid
waste management operations. There can be no assurance that WSI will generate
sufficient revenue to be profitable or, if profitable, to maintain profitability
in future years
The Independent Auditors' Report of KPMG Peat Marwick LLP
for the fiscal year ended December 31, 1997, states that "the Company must
raise substantial additional capital and must achieve a level of revenues
adequate to support the Company's cost structure, which raises substantial
doubt about its ability to continue as a going concern." On May 13, 1998,
the Company closed an offering of $60.0 million in Subordinated Notes
(the "Notes"), which resulted in net proceeds to the Company
16
<PAGE>
of approximately $58.3 million and during the fourth quarter of 1997, the
Company began generating positive cash flows, excluding non-recurring charges,
and expects to continue generating positive cash flows, excluding non-recurring
charges, in 1998. The Company used the proceeds from the Notes to repay existing
debt, complete several acquisitions and to increase working capital for general
corporate purposes. The Company believes that a combination of internally
generated funds, the proceeds from the Notes and an anticipated expanded bank
facility will provide adequate funds to support the Company's cost structure
(including repayment of the Notes if that is required), acquisition strategy and
working capital requirements for the foreseeable future. The Company does not
believe that going concern uncertainty has materially affected its ability to
finance and conduct its business operations.
Uncertain Ability to Finance the Company's Growth. The Company has
limited liquidity in relation to its short-term capital commitments and
operating cash requirements. Additionally, WSI will require substantial funds to
complete and bring to commercial viability all of its currently planned
projects. The Company also anticipates that any future business acquisitions
will be financed through cash from operations, proceeds from the Notes,
borrowings under its bank line of credit, the issuance of the Company's common
stock or seller financing, or additional equity or debt financings. Therefore,
WSI's ability to satisfy its capital commitments and operating requirements are
dependent on a number of pending or future financing activities, none of which
are assured successful completion.
Dependence on Management. The Company's future success is highly
dependent upon the services of its executive officers, particularly, Philip
Strauss, Chairman, Chief Executive Officer and President of the Company, and
Robert Rivkin, Vice President, Chief Financial Officer, Treasurer and Secretary
of the Company. The loss of the services of Mr. Strauss or Mr. Rivkin could have
a material adverse effect on the Company's business, financial condition and
results of operations. WSI does not currently maintain key man insurance on any
of its personnel.
The Company's future success is also highly dependent upon its
continuing ability to identify, hire, train and motivate highly qualified
personnel. WSI faces competition for hiring such personnel from other companies,
government entities and other organizations. There can be no assurances that WSI
will be successful in attracting and retaining qualified personnel as required
for its projected operations. The inability to attract and retain qualified
personnel could have a material adverse effect upon the Company's business,
financial condition and results of operations.
Ability to Manage Growth. The Company's objective is to contiue to grow
by expanding its services in markets where it can be one of the largest and most
profitable fully-integrated solid waste management companies. Accordingly, the
Company may experience periods of significant rapid growth. Such growth, if it
were to occur, could place a significant strain on the Company's management and
its operational, financial and other resources. Any failure to expand its
operational, and financial systems and controls or to recruit appropriate
personnel in an efficient manner at a pace consistent with such growth could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Ability to Identify, Acquire and Integrate Acquisition Targets. The
future success of the Company is highly dependent upon the Company's continued
ability to successfully identify, acquire and integrate additional solid waste
collection, recycling, transfer and disposal businesses. As competition for
acquisition candidates increases within the solid waste management industry, the
availability of suitable candidates at terms favorable to the Company decreases.
The Company competes for acquisition candidates with larger, more established
companies that may have significantly greater capital resources, which can
further decrease the availability of suitable acquisition candidates. There can
be no assurance that the Company will be able to identify suitable acquisition
candidates and if available, will be able to obtain necessary financings at a
price or on terms and conditions favorable to the Company, or to successfully
integrate the acquisitions with current operations.
The Company believes that a significant factor in its ability to
consumate acquisitions will be the attractiveness of the Company's common stock
as consideration for potential acquisition targets. This attractiveness may, in
large part, be dependent upon the relative market price and capital appreciation
prospects of the Company's equity securities as compared to its competitors. If
the market price of the Company's common stock were to decline, the Company's
acquistion program could be materially adversely affected.
Competition. The solid waste management industry is highly competitive,
very fragmented and requires substantial labor and capital resources.
Competition exists for collection, recycling, transfer and disposal services,
and acquisition targets. The markets the Company competes or is likely to
17
<PAGE>
compete in are usually served by one or more of the large national, regional or
local solid waste companies who may have accumulated substantial goodwill and or
have greater financial, marketing or technical resources than WSI. The Company
also competes with counties, municipalities and operators of alternative
disposal facilities that operate their own waste collection and disposal
facilities. The availability of user fees, charges or tax revenues and the
availability of tax-exempt financing may provide a competitive advantage to the
public sector. Additionally, alternative disposal facilities such as recycling
and incineration may reduce the demand for the disposal of solid waste in
landfills. Competition for waste collection and disposal business is based on
the quality of operation, price and geographical location. From time to time,
competitors may reduce the price of their services in an effort to expand or
maintain market share or to win competitively bid contracts. There can be no
assurance that the Company will be able to successfully bid such contracts or
compete with the larger and better capitalized companies.
Limitations on Landfill Permitting and Expansion. The Company's
operations depend on its ability to expand the landfills it owns or operates and
develop new landfill sites. There can be no assurances that the Company will be
successful in obtaining new landfill sites or expanding the permitted capacity
of its landfill. The process of obtaining required permits and approvals to
operate and expand landfills and transfer stations has become increasingly
difficult and expensive. The process can take several years and involves
hearings and compliance with zoning, environmental and other requirements. There
can be no assurance that the Company will be successful in obtaining and
maintaining required permits. Even when granted, final permits to expand are
often not approved until the remaining capacity of the landfill is very low. In
the event the Company exhausts its permitted capcaity at its landfill, the
Company's ability to expand internally will be limited and the Company will be
required to cap and close the landfill. In addition, the Company could be forced
to dispose of its waste at landfills operated by its competitors. The additional
costs could have a material adverse effect on the Company's business.
Geographic Concentration of Operations. The Company has initially
established integrated solid waste management operations in Vermont, and is
developing integrated solid waste management operations in Central Pennsylvania
and Western Massachusetts. Since the Company's current primary source of
revenues will be concentrated in these geographic locations, the Company's
business, financial condition and results of operations can be materially
effected by, but not limited to, the following: (i) downturns in the local
economy, (ii) severely harsh weather conditions, and (iii) state regulations.
Additionally, the growing competition within the local economies for waste
streams may make it increasingly difficult to expand within these regions. There
can be no assurance that the Company will be able to continue to increase the
waste stream to its landfills, or be able to expand its geographic markets to
lessen the effects of adverse events that may occur in these regions.
Seasonality. The Company's revenues and results of operations tend to
vary seasonally. The winter months of the fourth and first quarters of the
calendar year tend to yield lower revenues than those experienced in the warmer
months of the second and third quarters. The primary reasons for lower revenues
in the winter months include, but are not limited to: (i) harsh winter weather
conditions which can interfere with collection and transportation; (ii)
construction and demolition activities which generate landfill waste are
primarily performed in the warmer seasons; and (iii) the volume of waste in the
region is generally lower in comparison to that which occurs in warmer months.
The Company believes that the seasonality of the revenue stream will not have a
material adverse effect on the Company's business, financial condition and
results of operations on an annualized basis.
Environmental and Government Regulations. The Company and its customers
operate in a highly regulated environment, and in general the Company's landfill
projects will be required to have federal, state and/or local government permits
and approvals (see "Business-Government Regulation."). 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, WSI or its customers may be required to obtain additional
operating permits or approvals. There can be no assurance that WSI 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 working capital in projects prior to obtaining more permanent
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 the cancellation of any landfill projects, may
have a materially adverse effect on the Company's financial condition and
results of operations.
18
<PAGE>
Potential Environmental Liability and Adverse Effect of Environmental
Regulation. WSI's business exposes it to the risk that it will be held liable if
harmful substances escape into the environment and cause damages or injuries as
a result of its operating activities. Moreover, federal, state and local
environmental legislation and regulations require substantial expenditures and
impose significant liabilities for noncompliance. See "Business--Government
Regulation" in Item 1.
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.
Performance or Surety Bonds and Letters of Credit. The Company may be
required to post a performance or surety bond, or letter of credit to ensure
proper closure and post-closure monitoring and maintenance at its landfills and
transfer stations. Failure to obtain performance or surety bonds, or letters of
credit in sufficient amounts or at acceptable rates may have a material adverse
impact on the Company's business, financial condition and results of operations.
Environmental Impairment Liability Insurance. The Company has a $5.0
million environmental impairment liability insurance policy covering claims for
sudden or gradual onset of environmental damage. If the Company were to incur a
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.
Adequacy of Accruals for Closure and Post-Closure Costs. The Company
has material financial obligations relating to closure and post-closure costs of
its existing landfills and any landfill it may purchase or operate in the
future. The Company estimates and accrues closure and post-closure costs based
on engineering estimates of airspace usage and remaining airspace capacity.
There can be no assurances that the Company's financial obligations for closure
and post-closure costs will not exceed the amount accrued, and that this may
have a material adverse effect on the Company's business, financial condition
and results of operations.
Capital Expenditures. The Company capitalizes, in accordance with
generally accepted accounting principles, certain expenditures and advances
relating to acquisitions, pending acquisitions and landfill projects. The
Company's policy is to expense in the current period, all unamortized capital
expenditures and advances relating to any operation that is permanently shut
down or any acquisition that will not be consummated and any landfill project
that is terminated. Thus, the Company may be required to incur a charge against
earnings in future periods that could have a material adverse effect on the
Company's business, financial conditions and results of operations.
Inflation
WSI does not believe its operations have been materially affected by
inflation.
19
<PAGE>
Item 8. Financial Statements and Supplementary Data
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page No.
Report of Independent Accountants 21
Consolidated Balance Sheets
at December 31, 1997 and 1996 22-23
Consolidated Statements of Operations
for the years ended December 31, 1997, 1996 and 1995 24
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995 25-26
Consolidated Statements of Stockholders'Equity (Deficit)
for the years ended December 31, 1997, 1996 and 1995 27-30
Notes to Consolidated Financial Statements 31-46
20
<PAGE>
Report of Independent Accountants
The Board of Directors
Waste Systems International, Inc.:
We have audited the accompanying consolidated balance sheets of Waste Systems
International, Inc. (a Delaware Corporation) and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Waste Systems
International, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
The consolidated financial statements have been prepared assuming that Waste
Systems International, Inc. will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company must raise
substantial additional capital and must achieve a level of revenues adequate to
support the Company's cost structure, which raises substantial doubt about its
ability to continue as a going concern. The financial statements do not include
adjustments that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 26, 1998
21
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, December 31,
Assets 1997 1996
------ ------------ ------------
Current assets:
Cash and cash equivalents $ 2,964,274 $ 264,776
Accounts and notes receivable, net (Note 3) 944,793 1,158,677
Assets held for sale (Notes 4 and 6) 125,000 275,000
Prepaid expenses
and other current assets (Note 5) 1,241,092 499,000
------------ ------------
Total current assets 5,275,159 2,197,453
Accounts and notes receivable (Note 3) - 451,169
Restricted cash and securities 254,000 1,210,017
Property and equipment, net (Note 6) 12,487,183 11,705,712
Deferred financing costs, net 362,174 664,105
Other assets (Note 5) 181,738 629,634
------------ ------------
Total assets $ 18,560,254 $ 16,858,090
============ ============
See accompanying notes to consolidated financial statements.
22
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, December 31,
Liabilities and Stockholders' Equity (Deficit) 1997 1996
- ---------------------------------------------- ------------ -------------
Current liabilities:
Current portion of long-term debt
and notes payable (Note 7) $ 843,831 $ 2,165,378
Accounts payable 353,937 1,529,076
Accrued expenses (Notes 6, 8 and 11) 1,766,386 1,225,715
Restructuring and current liabilities
related to discontinued operations (Note 4) 778,609 1,785,097
------------ -------------
Total current liabilities 3,742,763 6,705,266
Long-term debt and notes payable (Note 7) 7,201,262 9,450,373
Landfill closure and post-closure
costs (Notes 10 and 11) 1,644,000 1,520,000
------------ -------------
Total liabilities 12,588,025 17,675,639
------------ -------------
Commitments and Contingencies (Note 11)
Minority interest (Notes 12 and 13) - 1,031,456
------------ -------------
Stockholders' equity (deficit): (Notes 12, 13, 14 and 15)
Common stock, $.01 par value. Authorized
30,000,000 shares; 3,893,415 and 3,360,514
shares issued and outstanding at
December 31, 1997 and 1996, respectively 38,934 33,605
Preferred stock, $.001 par value. Authorized
1,000,000 shares:
Series A Convertible Preferred Stock;
200,000 designated, 92,580 and 0 issued
and outstanding at December 31, 1997
and 1996, resepctively 9,257,807 -
Series B Convertible Preferred Stock;
100,000 designated, 40,488 and 0 issued
and outstanding at December 31, 1997
and 1996, respectively 4,048,750 -
Additional paid-in capital 21,432,437 21,334,447
Accumulated deficit (28,805,699) (23,217,087)
------------ -------------
Total stockholders' equity (deficit) 5,972,229 (1,849,005)
------------ -------------
Total liabilities and stockholders'
equity (deficit) $ 18,560,254 $ 16,858,090
============ ============
See accompanying notes to consolidated financial statements.
23
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31,
-----------------------------------------
1997 1996 1995
---- ---- ----
Revenues
3,457,692 1,495,606 1,344,397
------------ ------------ ------------
Cost of operations:
Operating expenses 1,718,214 920,553 766,012
Depreciation and amortization 692,224 369,785 71,649
Write-off of landfill development
costs (Note 6) 1,495,388 6,652,075 -
------------ ------------ ------------
Total cost of operations 3,905,826 7,942,413 837,661
------------ ------------ ------------
Gross profit (loss) (448,134) (6,446,807) 506,736
Selling, general and administrative
expenses 2,138,180 2,442,816 3,286,680
Amortization of prepaid consulting fees - 834,375 500,625
Restructuring (Note 4) 596,426 1,741,729 -
------------ ------------ ------------
Loss from operations (3,182,740) (11,465,727) (3,280,569)
------------ ------------ ------------
Other income (expense):
Royalty and other income
(expense), net (Note 3) (520,846) 922,703 865,220
Interest income 172,363 178,224 289,145
Interest expense and financing
costs (1,354,614) (1,182,118) (471,763)
Equity in loss of affiliate - (96,144) -
Write-off of accounts and notes
receivable (Note 3) (568,217) - (2,975,001)
Loss on investment in marketable
securities - - (90,625)
Write-off of assets - (21,858) -
------------ ------------ ------------
Total other income (expense) (2,271,314) (199,193) (2,383,024)
------------ ------------ ------------
Loss before income taxes,
minority interest,
discontinued operations
and extraordinary item (5,454,054) (11,664,920) (5,663,593)
Federal and state income
tax expense (benefit) (Note 9) 5,622 (23,456) (109,465)
------------ ------------ ------------
Loss before minority interest,
discontinued operations
and extraordinary item (5,459,676) (11,641,464) (5,554,128)
Minority interest (Note 12) 4,971 (12,655) 13,016
------------ ------------ ------------
Loss from continuing
operations (5,454,705) (11,628,809) (5,567,144)
Discontinued operations (Note 4) - (2,260,963) (2,303,835)
------------ ------------ ------------
Loss before extraordinary
item (5,454,705) (13,889,772) (7,870,979)
Extraordinary item - Loss on
extinguishment of debt (133,907) - -
------------ ------------ ------------
Net loss (5,588,612) (13,889,772) (7,870,979)
Preferred stock dividends
(Not declared - Note 12) 395,235 - 9,500
------------ ------------ ------------
Net loss available for
common shareholders (5,983,847) (13,889,772) (7,880,479)
============ ============ ============
Net loss per share:
Income (loss) from
continuing operations (1.51) (4.10) (2.88)
Discontinued operations - (0.80) (1.19)
Extraordinary item (0.04) - -
Preferred stock dividends (0.11) - (0.01)
------------ ------------ ------------
Net loss per share (1.66) (4.90) (4.08)
============ ============ ============
Weighted average number of shares
used in computation of net
income (loss) per share 3,612,623 2,834,841 1,932,809
See accompanying notes to consolidated financial statements.
24
<PAGE>
<TABLE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<CAPTION>
Year ended December 31,
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (5,588,612) $ (13,889,772) $ (7,870,979)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 900,549 1,556,380 689,186
Write-off of landfill development costs 1,495,388 6,652,075 -
Equity on loss in affiliate - 96,144 -
Write-off of accounts and notes receivable 568,217 - 2,975,001
Loss on investment in marketable securities - - 90,625
Write-off of assets - 21,858 -
Minority interest 4,971 (12,655) 13,016
Discontinued operations - 2,260,963 2,303,835
Extraordinary item - loss on extinguishment of debt 133,907 - -
Deferred income taxes - - (185,000)
Allowance for doubtful accounts - non -trade - - 219,645
Allowance for doubtful accounts - trade 23,333 10,000 12,500
Issuance of common stock for services 44,854 17,157 303,300
Changes in assets and liabilities:
Accounts and notes receivable 73,503 375,519 (1,695,436)
Prepaid expenses and other current assets (242,092) 16,558 (512,653)
Accounts payable (1,175,139) (1,253,507) 2,157,252
Accrued expenses 62,463 853,051 129,163
Accrued landfill closure & post-closure costs 124,000 20,000 -
Income and franchise taxes payable - (75,535) (22,470)
----------- ------------ ------------
Net cash used by continuing operations (3,574,658) (3,351,764) (1,393,015)
Net cash used by discontinued operations (1,006,448) (560,377) (1,689,906)
----------- ------------ ------------
Net cash used by operating activities (4,581,146) (3,912,141) (3,082,921)
Cash flows from investing activities:
Assets held for sale - 127,500 (287,219)
Restricted cash and securities 956,017 (1,022,517) (187,500)
Investment in affiliate - (86,115) (10,029)
Landfills (307,552) (5,199,493) (8,699,803)
Landfill development projects (263,868) (467,855) (324,752)
Machinery and equipment (114,330) (914,600) (724,822)
Rolling stock (122,905) - -
Containers (189,109) (16,716) -
Proceeds on the sale of equipment 800,000 - -
Patents - (35,261) (20,795)
Other assets (52,127) (26,162) (12,316)
----------- ------------ ------------
Net cash provided (used) by investing activities 706,126 (7,641,219) (10,267,236)
----------- ------------ ------------
Cash flows from financing activities:
Deferred financing and registration costs (56,098) (86,074) (1,216,480)
Net borrowings and advances
from stockholders and related parties - (114,575) (662,072)
Repayments of notes payable and long-term debt (2,445,476) (426,734) (1,000,984)
Borrowings from notes payable and long-term debt 1,143,861 1,117,982 568,271
Issuance of subordinated notes payable - - 11,225,000
Repayments of subordinated notes payable - - (490,000)
Minority interest (4,971) - 1,031,095
Proceeds from issuance of common stock 686,724 6,090,473 8,970,998
Proceeds from issuance of Series A preferred stock 7,250,478 - -
Proceeds from issuance of Series B preferred stock - - -
Preferred stock dividends - - (9,500)
----------- ------------ ------------
Net cash provided by financing activities 6,574,518 6,581,072 18,416,328
----------- ------------ ------------
Increase (decrease) in cash 2,699,498 (4,972,288) 5,066,171
Cash, beginning of period 264,776 5,237,064 170,893
----------- ------------ ------------
Cash, end of period $ 2,964,274 $ 264,776 $ 5,237,064
=========== ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
25
<PAGE>
Supplemental disclosures of cash flow information:
During the years ended December 31, 1997, 1996 and 1995, cash paid for
interest was $1,493,221, $1,201,864, and $221,458, respectively.
Supplemental disclosures of noncash activities:
In June 1997, the Company issued Series A Preferred Stock valued at
$850,000 in exchange for the remaining 20% minority interest in the
Moretown, Vermont landfill.
In June 1997, the Company issued Series A Preferred Stock valued at $44,854
in exchange for consulting services.
In June 1997, the Company wrote down assets with a net book value of
approximately $1,752,000 by $915,000 to a net realizable value of
approximately $837,000 related to the Fairhaven landfill project.
In June 1997, the Company issued Series A Preferred Stock at a value of
$700,000 and retired the FDIC loan of $511,093 and accrued interest of
$55,000. The pay off resulted in a realized loss on the early retirement of
debt of $133,907.
In October 1997, the Company converted 4,800 shares valued at $480,000, of
its Series A Preferred Stock into 341,334 shares of its Common Stock.
In December 1997, the Company converted $3,950,000, plus accrued interest,
of its 10% Convertible, Redeemable, Subordinated Notes due October 6, 2000
for 44,488 shares of its Series B Convertible Preferred Stock.
In 1997, 1996 and 1995, the Company acquired assets of $2,190,050,
$683,777 and $1,148,516, respectively under capital lease obligations.
In 1996, the Company exchanged $2,850,000 of convertible subordinated debt
and $27,425 of accrued interest for 313,992shares of common stock.
See accompanying notes to consolidated financial statements.
26
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock Additional Stockholders'
Series A Series B Common Stock paid-in Accumulated equity
Shares Amount Shares Amount Shares Amount capital deficit (deficit)
---------- ---------- ---------- ---------- --------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 - 475,000 4,750 475,000 538,535 5,385 1,541,861 (1,424,806) 597,440
Issuance of common stock
through March 29, 1995 - - - - 16,540 165 321,335 - 321,500
Preferred stock dividends - - - - - - (9,500) - (9,500)
Issuance of common stock due
to 1.75-to-1 Stock Split - - - - 416,308 4,163 (4,163) - -
Issuance of common stock at
$10.00 per share, for
conversion of preferred
stock on March 29, 1995 - (475,000) (4,750) (475,000) 47,500 475 474,525 - -
Issuance of common stock at
$10.00 per share, in exchange
for debt and accrued interest
on March 29, 1995 - - - - 111,716 1,117 1,116,039 - 1,117,156
Issuance of common stock at
$10.00 per share, through
Private Placement on
March 29,1995 - - - - 400,000 4,000 3,996,000 - 4,000,000
Capitalization of BioSafe
International, Inc. - - - - 60,000 600 30,930 (31,530) -
Issuance of common stock at
$10.00 per share, for
investment banking services - - - - 40,000 400 (400) - -
Issuance of common stock at
$10.00 per share, net of 25%
discount due to restrictions
on sale or transfer of stock,
for prepaid consulting services - - - - 178,000 1,780 1,342,120 - 1,343,900
Issuance of common stock at
$10.00 per share, through
private placement in
April, 1995 - - - - 502,000 5,020 5,017,490 - 5,022,510
Expenses incurred in
connection with the
issuance of common stock
and merger in March and
April, 1995 - - - - - - (1,295,047) - (1,295,047)
Issuance of 110,000
Series C Warrants to
purchase stock at
$10.00 per share - - - - - - - - -
Issuance of 561,000 Series D
Warrants to purchase common
stock at $23.75 per share - - - - - - - - -
Issuance of 100,000 Series E
Warrants to purchase common
stock at $17.50 per share - - - - - - - - -
Issuance of 144,000 merger-related
Placement Agent Warrants to
purchase common stock at
$11.50 per share - - - - - - - - -
Issuance of 22,925 Warrants to
purchase common stock at
$11.45 per share - - - - - - - - -
Issuance of 10,000 Warrants to
purchase common stock at
$17.50 per share - - - - - - - - -
27
<PAGE>
Exercise of Series A Warrants
to purchase 21,919 shares of
common stock at $12.15 per
share - - - - 21,919 219 265,937 - 266,156
Exercise of Series D Warrants
to purchase 1,125 shares of
common stock at $23.75 per
share - - - - 1,125 11 26,708 - 26,719
Exercise of Series E Warrants
to purchase 225 shares of
common stock at $17.50 per
share - - - - 225 2 3,939 - 3,941
Exercise of Warrants to purchase
400 shares of common stock
at $11.45 per share - - - - 400 4 4,576 - 4,580
Exercise of merger-related
Placement Agent Warrants to
purchase 3,000 shares of
common stock at
$11.50 per share - - - - 3,000 30 34,470 - 34,500
Issuance of 2,000 shares
and 2,000 shares of common
stock at $40.00 and $21.25 per
share, respectively, for
consulting services - - - - 4,000 40 122,460 - 122,500
Expenses incurred in connection
with the securities
registration statement
on Form S-1 - - - - - - (393,775) - (393,775)
Issuance of 25,000 Warrants
to purchase common stock
at $14.45 per share - - - - - - - - -
Issuance of Series F Warrants
to purchase a number of
shares of common stock
equal to the number of
shares of common stock
issuable upon conversion
of the convertible debentures
(or, in the case of the first
200 units, 150% of such number
of shares), at the lesser of a
price equal to 75% of the 20-day
average bid price of the common
stock immediately prior to the
date nine months following the
issuance of the convertible
debentures or $45.00 per share - - - - - - - - -
Issuance of 140,313 convertible
debenture-related Placement
Agent Warrants to purchase
common stock at $50.00
per share - - - - - - - - -
Net loss for the year ended
December 31, 1995 - - - - - - - (7,870,979) (7,870,979)
---------- ---------- ---------- ---------- --------- ---------- ---------- ------------ ------------
Balance, December 31, 1995 - - - - 2,341,268 23,413 12,595,503 (9,327,315) 3,291,601
Exercise of Warrants to purchase
1,728 shares of common stock
at $11.45 per share - - - - 1,728 17 19,769 - 19,786
Exercise of merger-related
Placement Agent Warrants to
purchase 1,755 shares of
common stock at
$11.50 per share - - - - 1,755 18 20,165 - 20,183
28
<PAGE>
Exercise of merger-related
Placement Agent Warrants to
purchase 6,444 shares of
common stock at
$11.50 per share - - - - 6,444 64 74,042 - 74,106
Exercise of Options to purchase
656 shares of common stock
at $10.00 per share - - - - 656 7 6,555 - 6,562
Issuance of common stock at
$9.70 per share, through
private placement in
June, 1996 - - - - 660,949 6,609 6,404,591 - 6,411,200
Expenses incurred in
connection with the
private placement in
June, 1996 - - - - - - (651,926) - (651,926)
Issuance of 70,000 warrents to
purchase common stock at $17.50
per share in exchange for cancellation
of 140,313 convertible debenture
-related placement agent warrents
issued in 1995 to purchase common
stock at $50.00 per share - - - - - - - - -
Exercise of Options to purchase
656 shares of common stock
at $10.00 per share - - - - 656 7 6,555 - 6,562
Issuance of common stock at
$11.25 per share, net of 50%
discount due to restrictions on
sale, for director's fee - - - - 2,000 20 11,230 - 11,250
Conversion of convertible
debentures, plus
accrued interest at a
conversion price of $9.16 - - - - 313,992 3,140 2,874,285 - 2,877,425
Reclassification of deferred
financing
costs related to convertible
debentures converted to
common stock - - - - - - (235,888) - (235,888)
Exercise of Series C Warrants
to purchase 400 shares of
common stock at $10.00 per
share - - - - 400 4 3,996 - 4,000
Issuance of common stock at
$7.50 per share, net of 50%
discount due to restrictions on
sale, for director's fee - - - - 1,575 16 5,890 - 5,906
Issuance of common stock at
$6.85 per share, in exchange
for debt in November 1996 - - - - 29,091 291 199,709 - 200,000
Net loss for the year ended
December 31, 1996 - - - - - - - (13,889,772) (13,889,772)
---------- ---------- ---------- ---------- --------- ---------- ---------- ------------ ------------
Balance, December 31, 1996 - - - - 3,360,514 33,605 21,334,477 (23,217,087) (1,849,005)
Issuance of common stock at $2.50
per share, in connection with a
private placement, January 1997 - - - - 172,000 1,720 428,280 - 430,000
Issuance of Series A Convertible
Preferred Stock, 8% cumulative
annual dividend, convertible
into common stock at a price
of $1.406 per share,
June 1997 97,380 9,737,807 - - - - (892,475) - 8,845,332
29
<PAGE>
Issuance of common stock at $3.75
per share, in connection with
the purchase of minority
interest in the Company's
collection operations in
Vermont, September 1997 - - - - 18,667 187 69,813 - 70,000
Exercise of Series E Warrants to
purchase 901 shares of common
stock at $17.50 per share,
November 1997 - - - - 901 9 15,755 - 15,764
Conversion of Series A Convertible
Preferred Stock for common
stock at $1.406 per share,
September and October 1997 (4,800) (480,000) - - 341,334 3,413 476,587 - -
Issuance of Series B Convertible
Preferred Stock, 6% cumulative
annual dividend, convertible
into common stock at a price
of $6.26 per share,
December 30, 1997 - - 40,488 4,048,750 - - - - 4,048,750
Net loss for the year ended
December 31, 1997 - - - - - - - (5,588,612) (5,588,612)
---------- ---------- ---------- ---------- --------- ---------- ---------- ------------ ------------
Balance, December 31, 1997 92,580 9,257,807 40,488 4,048,750 3,893,415 38,934 21,432,437 (28,805,699) 5,972,229
</TABLE>
See accompanying notes to the consolidated financial statements
30
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business and Nature of Operations
Waste Systems International, Inc. (the "Company" or "WSI") is a
regional integrated non-hazardous solid waste management company that provides
collection, recycling, transfer and disposal services to commercial and
residential customers. WSI was a Development Stage Company for the year ended
December 31, 1996. The Company is now carrying out active business operations
and generating landfill and other sites, and is no longer in the development
stage.
Prior to March 27, 1996, the Company had been actively developing
environmental technologies with potential application in a number of business
areas. On March 27, 1996, the Company announced its intention to take meaningful
actions to conserve cash and working capital, including restructuring the
Company's operations to focus its resources and activities on developing an
integrated solid waste management operation. See Note 4 for discussion of
non-recurring charges related to the restructuring and discontinued operations.
Since inception, the Company has devoted substantial resources to
various development projects and related activities. The Company has under
definitive agreement certain acquisitions (See Notes 6 and 15) and is
undertaking negotiations with a number of additional acquisitions, which would
increase the Company's capital requirements accordingly. In addition, the
Company requires cash to fund its corporate staff and other overhead expenses,
which may grow significantly as the Company expands the scope of its operations.
Although the Company is producing revenue and cash flows from its Vermont
operations, additional financing will be necessary to satisfy existing and
pending commitments.
The Independent Auditors' Report of KPMG Peat Marwick LLP
for the fiscal year ended December 31, 1997, states that "the Company must
raise substantial additional capital and must achieve a level of revenues
adequate to support the Company's cost structure, which raises substantia
doubt about its ability to continue as a going concern." On May 13, 1998,
the Company closed an offering of $60.0 million in Subordinated Notes
(the "Notes"), which resulted in net proceeds to the Company of approximately
$58.3 million and during the fourth quarter of 1997, the Company began
generating positive cash flows, excluding non-recurring charges, and expects
to continue generating positive cash flows, excluding non-recurring charges,
in 1998. The Company used the proceeds from the Notes to repay existing
debt, complete several acquisitions and to increase working capital for general
corporate purposes. The Company believes that a combination of internally
generated funds, the proceeds from the Notes and an anticipated expanded bank
facility will provide adequate funds to support the Company's cost structure
(including repayment of the Notes if that is required), acquisition strategy and
working capital requirements for the foreseeable future. The Company does not
believe that the going concern uncertainty has materially affected its ability
to finance and conduct its business operations.
Note 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 represents 20% of WSI's Vermont operations through
June 30, 1997. On June 30, 1997, the Company purchased the 20% minority
interest. See Note 12.
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.
Cash and Cash Equivalents: All short-term investments which have an
original maturity of 90 days or less, and are valued at cost plus accrued
interest which approximates market, are considered to be cash equivalents.
31
<PAGE>
Restricted Cash and Securities: Restricted cash and securites consist
principally of funds or securities deposited in connection with the future
financial obligation of landfill or transfer station closure and post-closure.
Amounts are principally invested in fixed income securities of U.S. governmental
and financial institutions. The Company considers its investments to be held to
maturity. Substantially all of these investments mature within one year. The
investments are valued at cost plus accrued interest, which approximates market.
Fair Value of Financial Instruments: Statement of Financial Accounting
Standards No. 107, "Disclosures About the Fair Value of Financial Instruments",
requires disclosure of informaition about the fair value of certain financial
instruments for which it is practicable to estimate that value. For purposes of
the following disclosure the fair value of a financial instrument is the amount
at which the instrument could be exchanged in a current transaction between
willing parties other than in a forced sale or liquidation. Management has
determined that the carrying value of its financial assets and liabilities
approximates fair value at December 31, 1997.
Property and Equipment: Property and equipment are stated at cost. The
cost of all maintenance and repairs are charged to operations as incurred.
Depreciation for financial reporting purposes is provided using the
straight-line method over the estimated useful lives of the assets as follows:
Buildings, facilities and improvements 10-30 years
Machinery and equipment 3-10 years
Rolling stock 3-10 years
Containers 5-10 years
Capitalization of landfill development costs begins 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 and with the signing of landfill management contracts for facilities
operated by the Company that are not owned. 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 and not amortized until all permits are
obtained and operations have commenced.
Interest is capitalized on landfill development 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 approximately $24,000, $42,000 and $82,000 were capitalized
during 1997, 1996 and 1995, respectively.
Landfill 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 years 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.
Landfill Closure and Post-Closure Costs: The Company has a material
financial obligation relating to closure and post-closure activities for
landfills it owns or operates. Accordingly, the Company estimates and accrues
closure and post-closure costs on a unit-of-production basis over each
landfill's estimated remaining permitted airspace capacity. The accrual is based
on final capping of the site, site inspection, leachate management, methane gas
32
<PAGE>
control and recovery, groundwater monitoring, and operation and maintenance
costs to be incurred during the period after the facility closes. The estimated
costs are expressed in current dollars and are not discounted to reflect timing
of future expenditures. The Company has accrued approximately $1.6 million and
$1.5 million for closure and post-closure costs at December 31, 1997 and 1996,
respectively. The engineering and accounting staff of the Company periodically
review its future obligation for closure and post-closure costs. If estimates of
the permitted air space capacity or the estimated costs of closure and
post-closure have changed, the Company revises the rates at which it accrues the
future costs.
The Company records reserves for landfill closure and post-closure
costs, 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.
Deferred Financing Costs: Deferred financing costs are amortized on a
straight-line basis over the life of the related notes payable or debt. There is
not a material difference between using the straight-line method and the
effective interest method.
Income Taxes: The Company uses the asset and liability method of
accounting for deferred income taxes.
Revenue Recognition: The Company's revenues are derived primarily
from its collection, recycling, transfer and disposal services. The Company
records revenues when the services are performed.
The Company recognizes royalty revenue from its medical waste
technology business based on the terms of the license agreement and for
consulting services when rendered.
Cost of Operations: Cost of operations includes direct labor, fuel,
equipment maintenance, insurance, depreciation and amortization of equipment and
landfill development costs, accruals for ongoing closure and post-closure
regulatory compliance (for landfills owned), and other routine maintenance and
operating costs directly related to landfill operations. Also included in cost
of revenues 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 Towns where landfills are operated under
management contracts, the Town is responsible for the closure and post-closure
costs related to the landfill.
Earnings Per Share: In 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, Earnings Per Share
(SFAS 128). SFAS 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. Earnings
per share amounts for all periods have been presented and where appropriate,
restated to conform to the SFAS 128 requirements. Weighted average number of
common and common equivalent shares outstanding and earnings per common and
common equivalent shares have been restated to give effect to a one-for-five
reverse stock split effective Februray 13, 1998.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
Of: The Company adopted the provisions of SFAS No. 121, "Accounting for the
impairment of Long-Lived Assets to Be Disposed Of", on January 1, 1996. This
Statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. Adoption of this Statement
did not have a material impact on the Company's financial position, results of
operations, or liquidity in 1997.
Reclassifications: Certain amounts in prior year financial statements
have been reclassified to conform to their 1997 presentation.
33
<PAGE>
Note 3. Accounts and Notes Receivable
Accounts and notes receivable consist of the following:
December 31,
1997 1996
------------- -----------
Trade $ 990,626 $ 353,862
ScotSafe Limited - 719,703
Other - 558,781
------------- ------------
990,626 1,632,346
Allowance for doubtful accounts (45,833) (22,500)
------------- ------------
944,793 1,609,846
Less current portion (944,793) (1,158,677)
------------- ------------
Long-term portion $ - $ 451,169
============= ============
Trade: Trade accounts receivable consists primarily of fees due
from third parties for collection, recycling, transfer and disposal services.
ScotSafe Limited: On February 9, 1996, the Company entered into a
licensing and royalty agreement with ScotSafe Limited (ScotSafe), a Glasgow,
Scotland based company, for the exclusive rights to use WSI's CFA medical waste
processing technology in the British Isles and Ireland. On November 6, 1996 the
Company and ScotSafe expanded their licensing agreement throughout Europe. The
initial licensing agreement contemplated that ScotSafe would establish as many
as nine CFA plants, each of which would result in additional licensing fees to
WSI. In accordance with the agreement, the Company would provide technical
assistance in connection with these facilities including facility design,
installation, testing and training. In addition to royalty payments for each
plant, ScotSafe agreed to pay WSI for consulting and other services, and would
reimburse the Company for its out-of-pocket expenses and disbursements in
connection with these services. In December of 1997, ScotSafe began operating
under bankruptcy protection, and as a result of this development the Company
terminated its licensing agreement with ScotSafe and wrote off the receivable
due from ScotSafe of approximately $570,000. Subsequent to ScotSafe entering
bankruptcy the assets of ScotSafe were purchased by Eurocare Environmental
Services, Ltd. ("Eurocare"). Eurocare is currently operating the three
facilities the Company constructed for ScotSafe without a licensing agreement.
The Company petitioned Scottish Courts for an interim interdict, which would
have required Eurocare to cease operations until proper licensing of the CFA
process was obtained from WSI. The Company's petition to the Court was denied
since the Company currently does not hold a European patent on the CFA process.
However, since the Company does have a European patent application pending, the
Scottish courts have required that Eurocare track all waste processed at the
plants and to remove some of the recommended modifications to the standard CFA
process which were recommended by WSI while under agreement with ScotSafe. The
Company expects to be granted its European patents during 1998, at which time,
the Company will act vigorously to protect its rights to the CFA technology
against Eurocare and seek substantial damages. As of December 31, 1997 the
Company has set up a reserve for these litigation costs of $300,000. See Note 8.
Note 4. Restructuring of Operations, Discontinued Operations and Assets Held
for Sale
On March 27, 1996, the Company announced its intention to take
meaningful action to conserve cash and working capital, including the
restructuring of the Company's operations to focus its resources and activities
on developing a fully integrated solid waste management company. Also on that
date, Richard H. Rosen ("Rosen") resigned from the offices of Chairman of the
Board of Directors, President, Chief Executive Officer, and Treasurer of the
Company and all of its subsidiaries and affiliates (See Note 5 - Prepaid
expenses and other current assets). The Board of Directors named Philip Strauss,
Chief Operating Officer, to the additional positions of Chief Executive Officer,
and President of the Company, and on June 24, 1996 the Company also named Philip
Strauss, Chairman of the Board of Directors.
Restructuring of Operations: During the years ended December 31, 1997
and 1996, the Company recorded restructuring charges of $596,426 and $1,741,729,
respectively, for costs associated with management's plan to focus on the
development of an integrated solid waste management company. These costs
included accruals for employee severance, non-cancelable lease commitments,
34
<PAGE>
professional fees and litigation costs. The restructuring plan has resulted in
annual savings of approximately $4.0 million. At December 31, 1997 and 1996, the
Company had reserves and liabilities associated with restructuring activities of
$778,609 and $1,414,625, respectively.
Discontinued Operations: On March 27, 1996, as part of the announced
restructuring, the Company ceased operations at its technology center in Woburn,
Massachusetts, and discharged all employees and consultants previously engaged
in developing technologies with potential application in activities including
the manufacture of useful materials from tires and other recycled materials,
contaminated soil cleanup and recycling, industrial sludge disposal, size
reduction equipment design and manufacture (the "Ancillary Technologies"), and
Major Sports Fantasies, Inc. ("MSF"), a business unrelated to the environmental
industry. No substantial revenues were received from the technology center
operations or MSF activities.
The expenses associated with operating the Ancillary Technologies and
MSF for all periods presented are reported in the accompanying consolidated
statements of operations and cash flows under discontinued operations. The
charge for discontinued operations relates primarily to losses from operations
and the costs associated with the termination of these operations. There were no
material asset sales from these operations and no interest costs or general
corporate overhead costs have been allocated to the discontinued operations. At
December 31, 1997 and 1996, the Company has reserves and liabilites associated
with discontinued operations of $0 and $370,472, respectively.
Assets Held for Sale: During the fourth quarter of 1995, the Company
recorded a non-recurring charge to 1995 earnings of $2,303,835 primarily related
to the write-down of the assets of the discontinued operations to their
estimated net realizable value. During 1996 the Company recorded an additional
charge of $2,260,963 to reduce the carrying value of the assets to their net
realizable value and to complete the discontinuance of the Anciliary
Technologies and MSF operations. No income tax expense or benefit was recognized
due to the Company's net operating loss carryforwards. The Company disposed of
the remaining assets held for sale from the discontinued operations during 1997.
As of December 31, 1997 the remaining asset held for sale represents property
owned in the area of the Fairhaven landfill project which the Company expects to
dispose of during 1998. See Note 6.
Note 5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
December 31,
1997 1996
------------ ------------
Prepaid permits $ 502,974 -
Due from former employee 300,000 -
Prepaid other 438,119 $ 499,000
------------ -------------
Total prepaid expenses
and other current assets $ 1,241,093 $ 499,000
============ ============
Prepaid permits represent operating permits to commence operations at
the transfer station in Burlington, Vermont and a permit application fee related
to Cell 2 at the Company's landfill in Moretown Vermont which will be offset by
a per ton state waste tax.
In July 1996, the Company commenced arbitration proceedings against Dr.
Richard Rosen (Rosen), former Chairman, Chief Executive Officer and Treasurer 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 of the Board appointed to investigate Rosen's
financial dealings with the Company, in consultation with independent counsel
retained 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
35
<PAGE>
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, which is now non-appealable, in an amount of
approximately $830,000. The Company is currently pursuing discovery against
Rosen through this forum to identify all of the assets that Rosen may have
available to satisfy the outstanding judgment. In August of 1996, the Company
secured a preliminary injunction in Middlesex Superior Court with respect to any
future sales of the Company's stock by Rosen. The Company has filed a Motion in
such action asking the Court to issue a broader form of permanent injunction in
the case. Finally, on September 8, 1997 the Company commenced a supplementary
process action in Cambridge District Court to collect on such judgment,
including seeking foreclosure of all shares of the Company's stock owned by
Rosen. On March 5, 1998, the judge granted the Company's supplementary action
and the Company is in the process of obtaining all the shares held by Rosen. No
assurance can be given that the Company will be able to collect the entire
balance of any amounts awarded in arbitration including interest and legal fees
which continue to accrue. The Company is carrying on its December 31, 1997
balance sheet an amount of approximately $300,000 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. The Company anticipates receiving a
minimum of $300,000 from Rosen in cash or stock by March 31, 1998. The amount
due from Rosen is classified in prepaid expenses and other current assets. At
December 31, 1996, the receivable from Rosen amounted to $500,000 and was
classified as other assets.
Note 6. Property and Equipment
Property and equipment are stated at cost and consist of the following;
December 31,
1997 1996
----------- -----------
Landfills $8,412,010 $8,015,606
Landfill development projects 691,225 427,357
Buildings, facilities and improvements 1,823,981 1,123,001
Machinery and equipment 1,513,720 2,656,789
Rolling stock 662,595 -
Containers 401,941 16,716
----------- -----------
13,505,472 12,239,469
Less accumulated depreciation and
amortization (1,018,289) (533,757)
----------- -----------
Property and equipment, net $12,487,183 $11,705,712
=========== ===========
Moretown, Vermont. The Company established its first integrated solid
waste management operations in the geographical area surrounding its landfill in
Moretown, Vermont. In addition to the landfill in Moretown, Vermont, the Company
currently owns and/or operates three transfer stations and collection operations
serving over 4,400 commercial and residential customers in the Burlington, St.
Albans, St. Johnsbury and Barre-Montpelier, Vermont areas. The first cell ("Cell
1") at the Company's landfill is currently operating at approximately 300-350
tons per day ("TPD") with remaining estimated permitted capacity as of December
31, 1997 of approximately 215,000 cubic yards. A permit application was filed
with the Vermont Agency of Natural Resources for the development of a second
cell ("Cell 2") on April 3, 1997. On March 11, 1998 WSI received its draft
certification for Cell 2 from the Vermont Agency of Natural Resources. The
Company expects to receive all of the permits required for Cell 2 by the end of
the second quarter of 1998. When all of the permits are granted, the Company
will begin construction on Cell 2 which will increase the permitted landfill
capacity by an estimated additional 1.3 million cubic yards.
Hopewell, Pennsylvania. In November 1997, WSI signed a definitive
agreement to acquire the 700-acre, 3 million cubic yard permitted municipal
solid waste landfill in Hopewell, Pennsylvania. The purchase price of
approximately $6.0 million will be paid primarily by the assumption of debt on
the facility. The existing landfill consists of five permitted cells, one of
which is currently operating. The Hopewell project represents a new market for
the Company, in which it intends to build a network of adjoining collection
companies and transfer stations within the central Pennsylvania region. This
transaction is expected to close by the end of May 1998.
South Hadley, Massachusetts. WSI and the Town of South Hadley,
Massachusetts have entered into a contract whereby the Company will operate and
remodel the Town's 30-acre municipal solid waste landfill. The Town of South
Hadley will retain full ownership of the landfill while the Company operates and
36
<PAGE>
remodels the facility. The Company received a landfill disruption permit from
the MDEP which enabled WSI to begin engineering work and feasibility studies at
the South Hadley landfill. On March 16, 1998 the Company filed its draft
environmental impact report with the MDEP and anticipates receiving all of its
operating and construction permits during the second or third quarter of 1998,
which would allow WSI to begin accepting solid waste at the first 6-acre lined
cell during the first or second quarter of 1999. The South Hadley landfill
project is currently expected to have in excess of 2 million cubic yards of new
capacity for future disposal.
Fairhaven, Massachusetts. On July 24, 1994, WSI entered into a contract
with the Town of Fairhaven, Massachusetts to operate and remodel the Town's
existing 26-acre landfill. The Company began operating the landfill in June
1995, and commenced the operations after obtaining necessary remodeling permits
in October 1995. On November 8, 1995, an action was brought against various
parties including the Company relating to the remodeling permits issued at the
Fairhaven landfill, seeking among other things, to appeal the permits that had
been issued. On June 2, 1997, the judge ruled in the Company's favor. However,
based on the extensive delays associated with the litigation and the engineering
impacts of the delays associated with the litigation, which resulted in the
uncertainty of the long-term economic viability of the project, the Company
terminated the Fairhaven landfill project. On February 24, 1998, the Company
entered into a termination agreement with the Town of Fairhaven that required
the Company to perform a certain amount of construction and closure work at the
landfill. The estimated costs to terminate this project have been reserved for
and are included in accrued expenses at December 31,1997. See Note 8.
Write-off of landfill development costs in 1997 primarily represent the
Company's cost to liquidate the equipment which was used at the Fairhaven
landfill and the costs to physically close the landfill under the Company's
Termination Agreement with the Town of Fairhaven. The Company wrote-off its
capital investment in the project at December 31, 1996.
Note 7. Long-term Debt and Notes Payable
Long-term debt and notes payable consists of:
December 31,
1997 1996
----------- ------------
Convertible subordinated debentures $ 4,425,000 $ 8,525,000
Capital leases and equipment notes payable 2,626,700 1,589,989
Howard Bank Term Loan 748,000 -
Mortgages 189,350 195,372
FDIC and Boston Private Bank - 661,826
Other notes payable 56,043 643,564
----------- -------------
8,045,093 11,615,751
Less current portion 843,831 2,165,378
----------- -------------
Long-term portion $ 7,201,262 $ 9,450,373
============ =============
37
<PAGE>
Scheduled maturities of long-term debt and notes payable, excluding
capital leases are as follows:
Payments due in the year ending December 31,
1998 $ 398,679
1999 343,309
2000 4,509,052
2001 8,870
2002 9,772
Thereafter: 148,711
---------------
$ 5,418,393
===============
Convertible Subordinated Debt: On October 6 and 12, and November 7,
1995, the Company closed a "Regulation S" offering of $11,225,000 in Convertible
Subordinated Notes and Warrants to overseas investors, which resulted in net
proceeds to the Company of $10,085,587. The offering consisted of 449 units.
Each unit sold for $25,000, and consisted of one Convertible Subordinated Note
("Note") along with Series F Warrants ("Warrants") to purchase shares of Common
Stock at a price of $12.20. The Notes mature on September 30, 2000, and bear
interest at 10%, payable quarterly. The Notes are convertible into Common Stock
at $9.20 per share. The Notes are callable at the option of the Company at any
time after October 6, 1996, if the closing sale price of the Common Stock has
exceeded $50.00 per share for a period of 20 consecutive trading days prior to
redemption notice. The Warrants expire on September 30, 1998. The Notes and
Warrants 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. Under most circumstances, resale in the United
States of Notes and shares of Common Stock acquired on conversion of Notes or
exercise of Warrants is exempt from registration under prevailing
interpretations of Regulation S. In connection with the offering, the Company
issued to the Placement Agent warrants to purchase up to 140,313 shares of
Common Stock at $50 per share. These warrants were subsequently exchanged into
70,000 warrants at $17.50 as part of a subsequent financing in June 1996, see
Note 13 - Common Stock.
As of December 31, 1996, $2,850,000 of notes plus $27,425 of accrued
interest had been converted into 313,992 shares of common stock. On December 31,
1997, the Company converted $3,950,000 of Convertible Subordinated Debentures
and $110,625 of accrued interest into 40,488 shares of Series B Convertible
Preferred Stock. See Note 12.
Capital Leases and Equipment Notes Payable: The Company leases certain
facilities, equipment, and vehicles under agreements which are classified as
capital leases.
Leased capital assets included in property and equipment are as follows:
Dececember 31,
1997 1996
------------- -------------
Land and Buildings $ 1,634,078 $ 56,250
Machinery and equipment 1,881,630 2,378,560
------------- -------------
3,515,708 2,434,810
Accumulated depreciation (207,053) (202,714)
------------- -------------
$ 3,308,655 $ 2,232,096
============= =============
38
<PAGE>
Future minimum lease payments, by year and in the aggregate, under
non-cancelable capital leases and operating leases with initial or remaining
terms of one year or more at December 31, 1997 are as follows:
Capital Operating
Leases Leases
------------ -------------
Payments due in the year ending December 31,
1998 $ 672,030 $ 197,058
1999 669,420 255,163
2000 643,051 276,879
2001 389,618 298,595
2002 200,040 304,024
Thereafter 1,225,229 76,006
------------- ------------
Minimum lease payments 3,799,388 $ 1,407,725
============
Less: interest 1,172,688
-------------
Present value of net minimum lease payments 2,626,700
Less current portion 445,153
-------------
Long-term portion $ 2,181,547
=============
The Company's rental expense for operating leases was $81,757,
$293,766, and $292,492 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Howard Bank Term Loan: On March 31, 1997, the Company closed a $1.0
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. The proceeds from the loan were used for the initial costs of development
of Cell 2 at the Moretown landfill (See Note 6) and for general working capital
purposes at its operations in Vermont.
Mortgages: Mortgage notes are secured by the respective assets, and
are due in various amounts through 2015.
Note 8. Accrued Expenses
Accrued expenses consisted of the following:
December 31,
1997 1996
------------ -------------
Interest $ 103,578 $ 242,185
Professional and consulting fees 265,024 237,399
Fairhaven landfill (See Note 6) 756,000 500,000
ScotSafe litigation (See Note 3) 300,000 -
Other 341,784 246,131
------------ -------------
$ 1,766,386 $ 1,225,715
============= =============
39
<PAGE>
Note 9. Income Taxes
<TABLE>
<CAPTION>
Income tax expense (benefit) consists of:
Current Deferred Total
<C> <C> <C>
Year ended December 31, 1997:
Federal $ - $ - $ -
State 5,622 - 5,622
------------- ------------- -------------
$ 5,622 $ - $ 5,622
============= ============= =============
Year ended December 31, 1996:
Federal $ - $ - $ -
State (23,456) - (23,456)
------------- ------------- --------------
$ (23,456) $ - $ (23,456)
============= ============= ==============
Year ended December 31, 1995:
Federal $ - $ (141,358) $ (141,358)
State 75,535 (43,642) 31,893
------------- ------------- --------------
$ 75,535 $ (185,000) $ (109,465)
============= ============= ==============
A reconciliation between federal income tax expense (benefit) at the
statutory rate and the Company's federal tax expense (benefit) is as follows for
the year ended December 31:
1997 1996 1995
---- ---- ----
Statutory Federal income tax (benefit) $ (1,898,217) $ (4,717,894) $(2,708,925)
State taxes, net of Federal income tax benefit (530,947) (1,210,466) (704,604)
Valuation allowance 2,432,087 5,898,245 3,294,764
Other 2,699 6,659 9,300
------------- ------------- ------------
$ 5,622 $ (23,456) $ (109,465)
============= ============= ============
</TABLE>
The tax effects of temporary differences between financial statement
and tax accounting that gave rise to significant portions of the Company's net
deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996
are presented below.
1997 1996
---- ----
Deferred tax assets:
Accounts receivable $ 11,528 $ 9,788
Property and equipment 194,942 236,323
Other accrued liabilities 4,371,736 4,320,664
Operating loss and credit carryforwards 4,543,738 4,626,234
---------- -----------
Gross deferred tax assets 9,121,944 9,193,009
Less: valuation allowance (9,121,944) (9,193,009)
---------- -----------
Net deferred tax assets - -
---------- -----------
Deferred tax liabilities:
Total deferred tax liabilities - -
---------- -----------
Net deferred tax liability $ - $ -
========== ===========
At December 31, 1997 the Company had net operating loss carryforwards
for Federal income tax purposes of approximately $10 million which generally are
available to offset future Federal taxable income, if any, and which expire
during the years ending December 31, 2009 through 2012. The Company underwent an
ownership change as defined in Internal Revenue Code Section 382 on June 30,
1997 and as a result will be restricted in its ability to use net operating loss
carryforwards generated prior to the ownership to offset future taxable income.
The Company's future use of net operating loss carryforwards generated prior to
40
<PAGE>
the ownership change will be subject to an annual limitation generally equal to
the product of the long-term tax exempt rate for June 1997 of 5.64% and the
value of the Company as of June 30, 1997. As a result of this limitation a
portion of its Federal and state net operating loss carryforwards may expire
unused.
Note 10. 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 the cell is filled and the operating life of the landfill is
over, the final cell 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 December 31, 1997, that the total costs
for final closure and post-closure of Cells I and II 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 $4.2 million. Based upon the capacity of Cells I
and II, approximately $1.6 million has been accrued for at December 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 Landfill Closure and
Post-Closure Costs.
Note 11. Commitments and 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 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 10 Landfill Closure and Post Closure Costs.
The Company has a $5.0 million environmental impairment liability
insurance policy 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.
Employment Contracts. The Company has entered into employment
agreements with its two senior executives which expire on June 10, 1999 and
subsequently provide for employment until terminated by either party at annual
salaries of $175,000.
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
41
<PAGE>
material adverse effect on the Company's financial position, results of
operations or liquidity.
Richard Rosen. In July 1996, the Company commenced arbitration
proceedings against 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 of the Board appointed to
investigate Rosen's financial dealings with the Company, in consultation with
independent counsel retained 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, which is now non-appealable, in an amount in excess of
$833,000. The Company is currently pursuing discovery against Rosen through this
forum to identify assets that Rosen may have available to satisfy the
outstanding judgment. In August of 1996, the Company secured a preliminary
injunction in Middlesex Superior Court with respect to any future sales of the
Company's stock by Rosen. The Company has filed a Motion in such action asking
the Court to issue a broader form of permanent injunction in the case. On
September 8, 1997 the Company commenced a supplementary process action in
Cambridge District Court to collect on such judgment, including seeking
foreclosure on all shares of the Company's stock owned by Rosen. On March 5,
1998 the judge granted the Company's motion and the Company is in the process of
obtaining all the shares held by Rosen. No assurance can be given that the
Company will be able to collect the entire balance of any amounts awarded in
arbitration including interest and litigation costs. The Company is carrying on
its December 31, 1997 balance sheet an amount of $300,000 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. The Company
anticipates receiving a minimum of approximately $300,000 from Rosen in cash or
stock by March 31, 1998.
On March 27, 1997, Rosen commenced an action against the Company in
Middlesex County (Massachusetts) Superior Court, seeking an award of damages
resulting from the Company's alleged breach of a Memorandum of Understanding
entered into between the Company and Rosen in connection with the termination of
Rosen's employment with the Company, in which Rosen had been granted an option
to purchase certain assets of the Company not related to its core business. The
Company believes this claim to be frivolous and is vigorously defending this
action.
Marguerite Piret. In October 1997 in the Middlesex Superior Court, the
Company commenced an action against Marguerite A. Piret, a former director of
the Company and the wife of Rosen, seeking damages against Ms. Piret for her
independent breaches of fiduciary duty as a former director of the Company. The
case is in the discovery stage and no trial date has yet been set. If the
Company is successful in its claims, the Company may recover direct and
consequential damages from Ms. Piret.
Other Proceedings. As of the beginning of fiscal 1997, the Company had
pending against it four complaints with the Massachusetts Commission Against
Discrimination ("MCAD"). Currently, the Company has pending against it two
ongoing complaints with the Massachusetts Commission Against Discrimination. 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.
With respect to the two other MCAD complaints, one has been settled for an
amount not material to the Company and the other has been dismissed by MCAD
(with leave to file a claim in Massachusetts Superior Court expiring as of
September 21, 1998).
Note 12. Preferred Stock
On June 30, 1997, the Company closed a Regulation "D" private placement
of Series A Convertible Preferred Stock, which raised gross proceeds of
approximately $9.7 milion. As part of the private placement, the Company
42
<PAGE>
converted approximately $570,000 in bank debt into preferred stock and acquired
the minority interest in its Vermont operations for $850,000 in preferred stock.
During the six months ended December 31, 1997, holders of $480,000 in
face amount of Series A Preferred Stock converted their preferred shares into
341,334 shares of common stock.
The Series A Preferred Stock bears an 8.0% annual cumulative dividend,
and is convertible into common stock at a conversion price of $1.406 per share
of common stock, which conversion price may be 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 Series A Preferred Stock is also redeemable(a) at
the Company's option for Common Stock, if the Company's average closing Common
Stock price for any 20 consecutive trading days occurring after June 26, 1998
equals or exceeds $2.8125 and (b) at the Company's option for cash equal to the
redemption price as set forth in the Certificate of Designation of the Series A
Preferred Stock, if any Series A Preferred Stock is outstanding on June 26,
2002, in each case , subject to certain trading requirements. Cumulative
dividends on the Series A Preferred Stock, as of December 31, 1997 which have
not been declared or paid are approximately $395,000. The purchasers of the
Series A Preferred Stock were granted registration rights covering the
underlying Common Stock into which such preferred stock is convertible, and a
registration statement for the resale of such common stock has been filed with
the Securities and Exchange Commission but is not yet effective.
On December 31, 1997, WSI retired approximately $4.0 million of its
outstanding 10% Convertible Debentures in exchange for the issuance of a like
amount of 40,488 shares of Series B Preferred Stock. See Note 7 to the
Consolidated Financial Statements presented in Item 8.
The Series B Preferred Stock bears a 6.0% annual cumulative dividend,
and is convertible into common stock at a conversion price of $6.25 per share of
common stock. The dividend is payable in cash or in additional shares of Series
B Preferred Stock at the Company's option if the Company's closing stock price
for 20 consecutive days equals or exceeds $6.25 per share. The Series B
Preferred Stock is also redeemable (a) at the Company's option for Common Stock
if the Company's average closing Common Stock price for 20 consecutive trading
days equals or exceeds $6.25 and (b) at the Company's option for cash equal to
the redemption price as set forth in the Certificate of Designation of the
Series B Preferred Stock, if any Series B Preferred Stock is outstanding on
October 6, 2000. Cumulative dividends on the Series B Preferred Stock, as of
December 31, 1997 which have not been declared or paid are approximately $1,000.
The purchasers of the Series B Preferred Stock were granted registration rights
covering the underlying Common Stock into which such preferred stock is
convertible.
Note 13. Common Stock
On January 21, 1997, the Company closed a Regulation "D" private
placement of 172,000 shares of common stock at $2.50 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 form the requirement of registration.
In September 1997, the Company issued 18,667 shares of common stock in
conection with the purchase of the minority interest in the Company's Vermont
hauling business for $70,000.
On October 7, 1997, the Company filed an S-3 Registration Statement
with the Securities and Exchange Commission to register approximately 7,100,000
shares of common stock primarily consisting of shares which are reserved for the
issuance to holders of Series A Preferred Stock upon conversion of their
preferred shares to common stock and the shares issued in the January 1997
private placement.
In December 1997, the Company's Board of Directors approved a one for
five reverse stock split of the Company's Common Stock. On February 13, 1998,
the stockholders of the Company approved the reverse stock split at a special
stockholders' meeting. No fractional shares will be issued in connection with
the reverse stock split, and stockholders will receive cash in payment for any
fractional shares otherwise issuable. The Company's financial statements have
been restated to reflect the one-for -five reverse split.
43
<PAGE>
Note 14. Stock Options
Employee Stock Option Plan. Pursuant to the Company's 1995 Stock Option
and Incentive Plan as amended (the "Plan"), options to purchase up to 1,700,000
shares of Common Stock were reserved for issuance to employees and consultants
of the Company. Options granted under the Plan may be either Incentive Stock
Options or Non-Qualified Stock Options for purposes of federal income tax law.
Options are generally subject to vesting over a period of four years from the
date of grant and are exercisable only to the extent vested from time to time,
although certain options have provided for earlier vesting. The selection of
individuals to receive awards of options under the Plan and the amount and terms
of such awards may be determined by the Board of Directors of the Company or an
Administering Committee appointed by the Board of Directors.
As of December 31, 1997, options to purchase 1,327,417 shares of Common
Stock had been granted and options to purchase up to an additional 372,583
shares remained available for grant. The per share weighted average fair value
of stock options granted during 1997 and 1996 was approximately $4.08 and
$15.34, respectively, using the Black Scholes option-price model with the
following weighted average assumptions: volatility, 30%; expected dividend
yield, 0%; risk free interest rate, 5.5%; and expected life, 5 years.
The Company applies APB Opinion No. 25 in accounting for stock options
and, accordingly, no compensation cost has been recorded in the financial
statements. If the Company had determined compensation costs based on the fair
value of its stock options at their grant date under SFAS No. 123, the Company's
net losses in 1997 and 1996 would have increased to the amounts shown below.
1997 1996
-------------- --------------
Net loss
- as reported $ (5,983,847) $ (13,889,772)
- pro forma (6,401,550) (14,334,772)
Net loss per share
- as reported $ (1.66) $ (4.90)
- pro forma (1.77) (5.06)
Pro forma net income reflects only the effects of options granted in
1997 and 1996. Therefore, it does not reflect the full effect of calculating the
cost of stock options under SFAS No. 123 because the cost of options issued
prior to January 1, 1995 are not considered. As a result, it may not be
representative of the pro forma effects on operating results that will be
disclosed in future years.
44
<PAGE>
Changes in options and option shares under the plan during the
respective years were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ------------------------
<C> <C> <C> <C> <C> <C>
Weighted ave. Weighted ave. Weighted ave.
exercise price Number exercise price Number exercise price Number
per share of shares per share of shares per share of shares
--------- --------- --------- --------- --------- ---------
Options outstanding,
beginning of year $2.23 806,000 $6.19 619,125 $2.00 555,625
Options granted 0.47 7,984,505 2.25 741,250 5.50 287,500
Options exercised - - 2.00 (6,562) - -
Options canceled 0.50 (7,463,088) 3.83 (547,813) 2.00 (224,000)
---------- --------- ---------
Options outstanding,
end of year $1.42 1,327,417 $2.23 806,000 $6.19 619,125
Shares reserved for future grants 372,583 694,000 880,875
---------- ---------- ---------
Total options in the plan 1,700,000 1,500,000 1,500,000
========== ========= =========
Options exercisable,
end of year $1.41 114,900 $2.23 511,125 $2.00 147,656
========== ========= =========
</TABLE>
Effective June 30, 1997, the Board of Directors offered all employee
participants in the Stock Option Plan the opportunity to reprice to $0.28125 per
share any currently outstanding stock options with exercise prices in excess of
$0.28125 per share. Each repriced option retained the vesting schedule
associated with the original grant. Additionally, on February 13, 1998, the
stockholders of the Company approved a one for five reverse stock split at a
special meeting effective December 31, 1997.
The total exercise proceeds for employee stock options outstanding at December
31, 1997 is $1,896,168.
<TABLE>
<CAPTION>
<C> <C> <C> <C> <C> <C>
Exercisable
Weighted average Weighted -------------------------------
Range of Number remaining average Number Weighted average
exercise prices outstanding contractual life exercise price of options exercise price
- -----------------------------------------------------------------------------------------------------
$ 1.41 - 1.41 1,298,417 9.37 $ 1.41 114,900 $ 1.41
1.88 - 1.88 22,000 9.74 1.88 - -
2.19 - 2.19 1,000 9.58 2.19 - -
3.13 - 3.13 1,000 9.92 3.13 - -
3.75 - 3.75 5,000 9.75 3.75 - -
- -----------------------------------------------------------------------------------------------------
$ 1.41 - 3.75 1,327,417 9.37 $ 1.42 114,900 $ 1.41
=====================================================================================================
</TABLE>
Non-Employee Directors Stock Option Plan. Pursuant to the Company's
1995 Stock Option Plan for Non-Employee Directors as amended, each Director is
entitled to receive a grant of a Non Qualified Stock Options to purchase 2,000
shares of the Company's Common Stock for each calendar year of service as a
director of the Company commencing January 1, 1996. Each such option is subject
to vesting at a rate of 400 shares for each year that the holder remains a
Director of the Company. In addition, the plan provides for the issuance of
4,000 fully vested options upon the election of each new member of the Board of
Directors initially elected after December 24, 1997, excluding employees of the
Company.
45
<PAGE>
Changes in options and option shares under the plan during the respective years
were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ---------------------------- --------------------------
<C> <C> <C> <C> <C> <C>
Weighted ave. Weighted ave. Weighted ave.
exercise price Number exercise price Number exercise price Number
per share of shares per share of shares per share of shares
--------- --------- --------- --------- ------------- ---------
Options outstanding,
beginning of year $2.86 97,084 $2.00 43,750 $2.00 43,750
Options granted 0.60 224,880 3.56 53,334 - -
Options canceled 1.45 (294,484) - - - -
--------- ---------- ---------
Options outstanding,
end of year $1.41 27,480 $2.86 97,084 $2.00 43,750
========= ========== =========
Options exercisable,
end of year $1.41 21,500 $2.59 35,208 $2.00 10,937
========= ========== =========
</TABLE>
The total exercise proceeds for non-employee director stock options outstanding
at December 31, 1997 is $49,261.
<TABLE>
<CAPTION>
<C> <C> <C> <C> <C> <C>
Exercisable
Weighted average Weighted ------------------------------------
Range of Number remaining average Number Weighted average
exercise prices outstanding contractual life exercise price of options exercise price
- ----------------------------------------------------------------------------------------------------------
$1.41 - 1.41 14,000 9.21 $ 1.41 13,500 $ 1.41
2.19 - 2.19 13,480 9.67 2.19 8,000 2.19
- ----------------------------------------------------------------------------------------------------------
$1.41 - 2.19 27,480 9.37 $ 1.79 21,500 $ 1.73
==========================================================================================================
</TABLE>
Note 15. Subsequent Events
In January 1998, the Company entered into an additional credit
facility with The Howard Bank in Vermont for $2.25 million to fund the
development and expansion of its integrated solid waste management operations in
Vermont and for general working capital purposes.
On February 12, 1998, the Company closed a $5 million bridge
loan for use in closing certain acquisitions.
On February 13, 1998, the stockholders of the Company approved a one
for five reverse stock split at a special stockholders' meeting. No fractional
shares were issued in connection with the reverse stock split, and stockholders
received cash in payment for any fractional shares otherwise issuable. See Note
13.
As of February 16, 1998, WSI had closed 3 acquisitions of collection
companies and a transfer station, and signed definitive agreements to acquire 2
additional collection companies in the State of Vermont. The acquisitions have
combined annual revenues of approximately $5 million. The remaining 2
acquisitions are expected to close by March 31, 1998. The Company plans to
integrate these acquisitions with its current operations in Vermont. The
acquisitions will be accounted for using the purchase method of accounting.
On March 24, 1998, the Company signed a definitive agreement to acquire
Horvath Sanitation, Inc., D/B/A Eagle Waste ("Eagle"), which is based in
Altoona, PA. Eagle has approximately $8 million in annual revenue and collects
approximately 200 tons per day of solid waste.
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
WASTE SYSTEMS INTERNATIONAL, INC.
Date: June 29, 1998 By:/s/ Philip Strauss
--------------------- ------------------
Philip Strauss
Chairman, Chief Executive
Officer and President
(Principal Executive Officer)
Date: June 29, 1998 By:/s/ Robert Rivkin
--------------------- -----------------
Robert Rivkin
Vice President, Chief
Financial Officer, Treasurer
and Secretary (Principal
Financial and Accounting
Officer)
47
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