UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
FORM 10-K/A
Amendment No. 3
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 0-25998
WASTE SYSTEMS INTERNATIONAL, INC.
(formerly BioSafe International, Inc.)
(Exact name of registrant as specified in its charter)
--------------------
Delaware 95-4203626
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Fawcett Street
Cambridge, Massachusetts 02138
(Address of principal executive offices) (Zip Code)
(617) 497-4500
Fax (617) 497-6355
(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, $.001 par value per share
Series A Warrants
Series C Warrants
Series D Warrants
Series E 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 26, 1997, the market value of the voting stock of the
Registrant held by non-affiliates of the Registrant was $ 5,519,553.
The number of shares of the Registrant's common stock, par value $.001
per share, outstanding as of March 26, 1997 was 17,662,569.
<PAGE>
TABLE OF CONTENTS
Explanatory Note: This is amendment No. 3 to Form 10-K Filed with the
Securities and Exchange Commission for the year ended
December 31, 1996.
PAGE
----
PART I
Item 1. Is unchanged
Item 2. Is unchanged
Item 3. Is unchanged
Item 4. Is unchanged
PART II
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters 1
Item 6. Is unchanged
Item 7. Is unchanged
Item 8. Financial Statements and Supplementary Data 3
Item 9. Is unchanged
PART III
Item 10. Directors and Executive Officers 4
Item 11. Executive Compensation 6
Item 12. Is unchanged
Item 13. Is unchanged
PART IV
Item 14. Is unchanged
Signatures 10
<PAGE>
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
The Common Stock has been quoted on the NASDAQ Small-Cap Market under
the symbol "WSII" since November 14, 1995 and previously had been quoted in the
NASD Over-the-Counter market since March 29, 1995. Prior to that date, 49,496
shares of Common Stock had been issued and registered pursuant to a registration
statement under the Securities Act of 1933 as amended, and were eligible for
resale without restriction, although no active trading market existed for the
Company's Common Stock. On March 26, 1997, the reported last sale price of the
Common Stock on the NASDAQ Small-Cap Market was $.3125 per share, and there were
307 holders of record of Common Stock. The Company has not paid dividends and
has no present intention to pay dividends. The following table sets forth the
high and low bid information of the Common Stock for the periods indicated.
High Low
Quarter Ended Closing Bid Closing Ask
1995
------------- ------------ ------------
March 31(1) $3.65
June 30 $8.50 $7.50
September 30 $8.00 $4.87
December 31 $7.63 $4.06
1996
----
March 31 $3.12 $2.62
June 30 $2.25 $3.18
September 30 $1.50 $1.31
December 31 $0.75 $0.56
(1) As adjusted to reflect a 1 for 73.083 reverse stock split effected
on March 29, 1995
In March and April of 1995, the Company issued in a private placement
Units consisting of (a) an aggregate of 4,510,000 shares of Common
Stock and (b) Series D Warrants to purchase an aggregate of 2,255,000
shares of Common Stock at $4.75 per share, for total proceeds of
$9,022,510. Simultaneously, the Company issued 558,578 shares of Common
Stock upon conversion of the convertible notes issued in November 1994.
These issuances were made to accredited unaffiliated private investors
and was exempt from registration under Regulation D.
Also in March 1995, the Company issued to U.S. Sachem Financial
Consultants L.P. and Liviakis Financial Communications, Inc. an
aggregate of 1,090,000 shares of Common Stock and warrants to
purchase 720,000 shares of Common Stock at $2.30 per share in
consideration of investment banking and financial public
relations services. These issuances were exempt from registration
under Setion 4(2) of the Securities Act.
Also in March 1995, the Company issued an aggregate of 237,500 shares
of Common Stock upon conversion of outstanding shares of its Preferred
Stock. The Preferred Stock was issued in 1993 in exchange for the
retirement of $775,000 of debt. This issuance was made to former
directors of the Company under Section 3(a)(9) of the Securities Act.
During the balance of 1995, the Company sold an aggregate of 133,705
shares of Common Stock upon exercise of outstanding Warrants for
aggregate proceeds of $325,896. These issuances were exempt from
registration under Regulation D and under Section 4(2) of the
Securities Act. These issuances were made to accredited private
investors.
Also during the balance of 1995, the Company issued 20,000 additional
shares of Common Stock to Liviakis Financial Communications, Inc. for
consulting services. This issuance was exempt from registration under
Section 4(2) of the Securities Act.
1
<PAGE>
In June 1996, the Company issued an aggregate of 3,304,744 shares of
Common Stock in a private placement for aggregate proceeds of
$6,411,200. This issuance was made to approximately 30 unaffiliated
investors and was exempt from registration under Regulation D. The
names of the investors are as follows: Rosebud Fund, BA II, Norway,
Edgeport Nominees, Capital Trust, Capital Trust S.A., Napier Brown
Holdings, Patrick Ridgewell, Cameo Trust, Walter Prime, Sereen Intl,
Seif Limited, Henley Group, W&P Bank and Trust, Kenmar Gems Op Fund,
Oscar Garzatto, Fenwich Assets, Intragalactic Fund, BUS Systems, The
Shelby Group, Arbinator, Faisal Fionance, Banque Genevoise, Heritage
Finance, Credit Suisse, CUF Finance, Comptoir Prive Gestion, Cramer &
Cie and Gifford Investments.
In July 1996, the Company issued an aggregate of 1,569,960 shares of
Common Stock to holders of outstanding Convertible Subordinated Notes
of the Company which had previously been issued in an overseas
offering, pursuant to conversion of such Notes. This issuance was
exempt from registration under Section 3(a)(9) of the Securities Act.
Also in 1996, the Company issued an aggregate of 51,635 shares of
Common Stock to holders of outstanding warrants for aggregate proceeds
of $118,075 upon exercise of such warrants. These issuances were exempt
from registration under Regulation D and Section 4(2) of the Securities
Act.
In November 1996, the Company issued an aggregate of 145,455 shares of
Common Stock to LandTech, Inc. in settlement of an outstanding account
payable of the Company. This issuance was exempt from registration
under Section 4(2) of the Securities Act.
In 1996, the Company issued 7,875 shares of its common stock for $1.50
per share less a 50% discount, due to restrictions on the sale. The
shares were issued as director fees compensation.
Also in 1996, the Company issued 10,000 shares of Common Stock for
$2.25 per share less a 50% discount, due to restrictions on the sale.
The shares were issued as director fees compensation.
Also in 1996, 6,562 options were exercised at $2.00 per share.
2
<PAGE>
Item 8. Financial Statements and Supplementary Data
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets at December 31, 1996 and 1995 F-2 to F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 and for the period from
April 23, 1990 (inception) through December 31, 1996 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 and for the period from
April 23, 1990 (inception) through December 31, 1996 F-5 to F-6
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1996, 1995 and 1994 and
for the period from April 23, 1990 (inception) through
December 31, 1996 F-7 to F-12
Notes to Consolidated Financial Statements F-13 to F-35
All Schedules have been omitted as they are inapplicable or not required, or the
information has been included in the consolidated financial statements or in the
notes thereto
<PAGE>
Independent Auditors' Report
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 (a Development
Stage Company) as of December 31, 1996 and 1995, 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, 1996, and for the
period from April 23, 1990 (inception) through December 31, 1996. 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 (a Development Stage Company) as of
December 31, 1996 and 1995, and the consolidated results of their operations and
their cash flows for each of the years in the three-year period ended December
31, 1996, and for the period from April 23, 1990 (inception) through December
31, 1996, 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
any adjustments that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 28, 1997
F-1
<PAGE>
<TABLE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
<CAPTION>
December 31, December 31,
Assets 1996 1995
------ ------------ ------------
<S> <C> <C>
Current assets:
Cash $ 264,776 $ 5,237,064
Accounts and notes receivable, net (Note 3) 1,158,677 2,047,065
Assets held for sale (Note 4) 275,000 --
Prepaid expenses and other current assets 499,000 515,558
------------ ------------
Total current assets 2,197,453 7,799,687
Accounts and notes receivable (Note 3) 451,169 --
Assets held for sale (Note 4) -- 505,980
Restricted cash and securities 1,210,017 187,500
Due from former employee (Note 5) 500,000 385,425
Property and equipment, net (Note 7) 11,705,712 12,503,091
Deferred financing costs 664,105 1,182,251
Other assets 129,634 99,772
Investment in Affiliate (Note 6) -- 10,029
Prepaid consulting fees (Note 8) -- 834,375
------------ ------------
Total assets $ 16,858,090 $ 23,508,110
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
<CAPTION>
December 31, December 31,
Liabilities and Stockholders' Equity 1996 1995
------------------------------------ ------------ ------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt and notes payable (Note 9) $ 2,165,378 $ 1,526,188
Accounts payable 1,529,076 2,483,510
Accrued expenses (Notes 7, 10 and 13) 1,225,715 698,538
Restructuring and current liabilities related to
discontinued operations (Note 4) 1,785,097 622,624
Income and franchise taxes payable (Note 11) -- 75,535
------------ ------------
Total current liabilities 6,705,266 5,406,395
Long-term debt and notes payable (Note 9) 9,450,373 12,266,003
Landfill closure and post-closure costs (Notes 7 and 12) 1,520,000 1,500,000
------------ ------------
Total liabilities 17,675,639 19,172,398
------------ ------------
Commitments and Contingencies (Note 13)
Minority interest 1,031,456 1,044,111
------------ ------------
Stockholders' equity (deficit): (Notes 14, 15, 16 and 18)
Common stock, $.001 par value. Authorized
100,000,000 shares; 16,802,569 and
11,706,338 shares issued and outstanding
at December 31, 1996 and December 31, 1995,
respectively 16,802 11,706
Additional paid-in capital 21,351,280 12,607,210
Deficit accumulated during the development stage (23,217,087) (9,327,315)
------------ ------------
Total stockholders' equity (deficit) (1,849,005) 3,291,601
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 16,858,090 $ 23,508,110
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
<CAPTION>
Period from
April 23, 1990
(inception) to
Years ended December 31, December, 31
-------------------------------------------------------------
1996 1995 1994 1996
<S> <C> <C> <C> <C>
Landfill Revenues $ 1,495,606 $ 1,344,397 -- $ 2,840,003
------------- ------------- ------------- -------------
Cost of landfill operations:
Operating expenses 920,553 766,012 -- 1,686,565
Depreciation and amortization of landfill costs 369,785 71,649 -- 441,434
Write-off of landfill development costs (Note 7) 6,652,075 -- -- 6,652,075
------------- ------------- ------------- -------------
Total cost of landfill operations 7,942,413 837,661 -- 8,780,074
------------- ------------- ------------- -------------
Gross profit (6,446,807) 506,736 -- (5,940,071)
Selling, general and administrative expenses 2,442,816 3,286,680 1,484,554 10,468,503
Amortization of prepaid consulting fees 834,375 500,625 -- 1,335,000
Restructuring (Note 4) 1,741,729 -- -- 1,741,729
------------- ------------- ------------- -------------
Income (loss) from operations (11,465,727) (3,280,569) (1,484,554) (19,485,303)
------------- ------------- ------------- -------------
Other income (expense):
Royalty and other income, net (Note 3) 922,703 865,220 1,850,000 5,847,922
Interest income 178,224 289,145 13,708 562,154
Gain on sale of assets -- -- 222,728 222,728
Interest expense and financing costs (1,182,118) (471,763) (166,085) (2,210,302)
Equity in loss of affiliate (Note 6) (96,144) -- -- (96,144)
Write-off of accounts and notes receivable (Note 3) -- (2,975,001) -- (2,975,001)
Loss on investment in marketable securities -- (90,625) (9,375) (100,000)
Write-off of assets (21,858) -- -- (263,403)
------------- ------------- ------------- -------------
Total other income (expense) (199,193) (2,383,024) 1,910,976 987,954
------------- ------------- ------------- -------------
Income (loss) before income taxes , minority interest
and discontinued operations (11,664,920) (5,663,593) 426,422 (18,497,349)
Federal and state income tax expense (benefit) (Note 11) (23,456) (109,465) 185,000 154,579
------------- ------------- ------------- -------------
Income (loss) before minority interest
and discontinued operations (11,641,464) (5,554,128) 241,422 (18,651,928)
Minority interest (12,655) 13,016 -- 361
------------- ------------- ------------- -------------
Income (loss) from continuing operations (11,628,809) (5,567,144) 241,422 (18,652,289)
Discontinued operations (Note 4) (2,260,963) (2,303,835) -- (4,564,798)
------------- ------------- ------------- -------------
Net income (loss) (13,889,772) (7,870,979) 241,422 $ (23,217,087)
=============
Preferred stock dividend -- 9,500 107,834
------------- ------------- -------------
Net income (loss) available for
common shareholders $ (13,889,772) (7,880,479) 133,588
============= ============= =============
Net income (loss) per share:
Income (loss) from continuing operations $ (0.82) (0.58) 0.03
Discontinued operations (0.16) (0.24) --
------------- ------------- -------------
Net income (loss) per share $ (0.98) (0.82) 0.03
============= ============= =============
Weighted average number of shares used in
computation of net income (loss) per share 14,174,207 9,664,046 4,498,635
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
<CAPTION>
Period from
April 23, 1990
(inception) to
Years ended December 31, December, 31
-------------------------------------------------------------
1996 1995 1994 1996
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (13,889,772) $(7,870,979) $ 241,422 $ (23,217,087)
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Discontinued operations 2,260,963 2,303,835 -- 4,564,798
Depreciation and amortization 1,556,380 689,186 8,770 2,369,773
Deferred income taxes -- (185,000) 185,000 --
Loss on investment in marketable securities -- 90,625 9,375 100,000
Equity on loss in affiliate 96,144 -- -- 96,144
Minority interest (12,655) 13,016 -- 361
Allowance for doubtful accounts - non -trade -- 334,926 -- 334,926
Allowance for doubtful accounts - trade 10,000 12,500 -- 22,500
Write-off of accounts and notes receivable -- 2,975,001 -- 2,975,001
Issuance of common stock for services 17,157 303,300 80,000 400,457
Write-off of landfill development costs 6,652,075 -- -- 6,652,075
Write-off of assets 21,858 -- -- 263,404
Changes in assets and liabilities:
Accounts and notes receivable 375,519 (1,695,436) (1,329,770) (3,228,692)
Prepaid expenses and other current assets 16,558 (512,653) 14,595 (499,000)
Accounts payable (1,253,507) 2,157,252 507,637 1,763,527
Accrued expenses 845,629 129,163 78,005 1,194,347
Income and franchise taxes payable (75,535) (22,470) (4,495) --
Deferred income -- -- -- (500,000)
------------- ------------- ------------- -------------
Net cash used by continuing operations (3,379,186) (1,277,734) (209,461) (6,707,466)
Net cash used by discontinued operations (560,377) (1,689,906) -- (2,250,283)
------------- ------------- ------------- -------------
Net cash used by operating activities (3,939,563) (2,967,640) (209,461) (8,957,749)
------------- ------------- ------------- -------------
Cash flows from investing activities:
Assets held for sale 127,500 (402,500) -- (275,000)
Restricted cash and securities (1,022,517) (187,500) -- (1,210,017)
Receivable from One, Three, Six, Inc. -- -- (800,000) (800,000)
Investment in affiliate (86,115) (10,029) -- (96,144)
Construction in progress (5,199,493) (8,699,803) (634,094) (14,609,398)
Future landfill development projects (467,855) (324,752) (21,725) (814,332)
Operating equipment at landfills (669,263) (31,814) -- (701,077)
Other property and equipment (262,053) (693,008) (135,726) (1,219,711)
Patents (35,261) (20,795) (15,253) (98,646)
Other assets (26,162) (12,316) 18,765 (60,704)
Licenses and permits -- -- -- (78,807)
------------- ------------- ------------- -------------
Net cash provided (used) by investing activities (7,641,219) (10,382,517) (1,588,033) (19,963,836)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Deferred financing and registration costs (86,074) (1,216,480) (27,416) (1,503,866)
Net borrowings and advances
from stockholders and related parties (114,575) (662,072) 72,269 266,806
Repayments of notes payable and long-term debt (426,734) (1,000,984) (93,580) (1,621,298)
Borrowings from notes payable and long-term debt 1,117,982 568,271 980,500 3,366,407
Issuance of subordinated notes payable -- 11,225,000 900,000 12,405,000
Repayments of subordinated notes payable -- (490,000) (300,000) (790,000)
Minority interest 1,031,095 -- 1,031,095
Net proceeds from issuance of common stock 6,117,895 8,970,998 841,229 16,449,551
Redemption of preferred stock -- -- (300,000) (300,000)
Preferred stock dividends -- (9,500) (107,834) (117,334)
------------- ------------- ------------- -------------
Net cash provided by financing activities 6,608,494 18,416,328 1,965,168 29,186,361
------------- ------------- ------------- -------------
Increase (decrease) in cash (4,972,288) 5,066,171 167,674 264,776
Cash, beginning of period 5,237,064 170,893 3,219 --
------------- ------------- ------------- -------------
Cash, end of period $ 264,776 $ 5,237,064 $ 170,893 $ 264,776
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
Supplemental disclosures of cash flow information:
During the years ended December 31, 1996, 1995 and 1994, cash paid for
interest was $1,201,864, $221,458, and $192,243, respectively.
Supplemental disclosures of noncash activities:
In 1991, 1992, 1993 and 1994, the Company issued 270,750, 1,075,125, 62,310
and 20,000 shares of common stock for no cash consideration. Shares were
granted to related parties, including stockholders, and outsiders for
various investment considerations and consulting services.
In 1992, the Company sold certain technology and entered into various
royalty agreements in exchange for a note receivable in the amount of
$500,000.
In 1993, the Company acquired assets of $20,498 under a capital lease
obligation.
In 1993, the Company issued 7,750 shares of preferred stock in exchange for
retirement of $775,000 of debt.
In 1994, the Company exchanged $240,000 of subordinated notes payable
and $5,952 of accrued interest for 61,488 shares of common stock.
In 1994, the Company received a note for $450,000 in payment of accounts
receivable and issued a note payable for $57,394 in satisfaction of
accounts payable.
As part of the merger on March 29, 1995, all of the 4,750 outstanding
shares of $100 par value preferred stock were converted into 237,500 shares
of common stock of the Company, the Company converted 1,100 units of $1,000
face amount 10% convertible subordinated notes plus accrued interest into
558,578 shares of common stock, the Company issued 200,000 shares of common
stock, and charged to stockholder's equity at $2.00 per share, to US Sachem
LP for investment banking services, the Company issued 890,000 shares of
common stock, and recorded as prepaid consulting fees at $1.50 per share,
to Liviakis Financial Communications, Inc. to provide ongoing assistance
and consultation to the Company. See Notes 8, 14 and 15.
In 1995, in connection with the acquisition of Waste Professionals of
Vermont, Inc., the Company recorded a receivable for the purchase of rights
to $850,000 in escrow funds held by the State of Vermont (see Note 3) and
provided for $1,500,000 for estimated closure and post-closure costs
existing at acquisition. See Note 12.
In 1996 and 1995, the Company acquired assets of $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 1,569,960 shares of common stock. See
Note 9.
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
(1) Business Combination and Nature of Operations
Waste Systems International, Inc. (a Delaware Corporation) (the "Company"
or "BioSafe"), (formerly Zoe Capital, Corp.), is a Development Stage
Company. The Company is a nonhazardous solid waste management company
currently engaged in the business of rehabilitating landfills to permit
their continued operation with increased capacity in an environmentally
sound manner, referred to by BioSafe as "landfill remodeling", and
landfill operation.
Prior to March 27, 1996, the Company had been actively developing other
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 its core business of landfill remodeling and operation.
See Note 4 for discussion of nonrecurring charges related to the
restructuring and discontinued operations.
The Company has generated limited revenue since its organization and has
been engaged in activities such as project development, engineering,
permitting, and marketing and sales efforts. The Company will continue
to seek out landfill remodeling and operating landfill projects for
investment and will require substantial additional funds to fully
develop and bring to commercial viability all of its currently planned
projects. Successful completion of the Company's development program is
dependent on raising substantial additional capital and achieving a
level of revenues adequate to support the Company's cost structure.
There can be no assurance that the Company will be successful in
developing and implementing commercial landfill remodeling and
operation projects, or that any such development can be accomplished
without excessive cost or delay.
(2) Summary of Significant Accounting Policies
Basis for Presentation
Theaccompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Minority interest consists of 20% of Waste Professionals of Vermont, Inc.
Revenue Recognition
TheCompany's revenues from its landfill operations consist of disposal
fees (known as tipping fees) charged to customers. Tipping fees are
recognized as revenue based on the volume or weight of solid waste
disposed of at the Company's operated or owned landfill sites. The
daily volume of waste disposed at the Company's disposal facilities may
vary according to market and weather conditions.
The Company recognizes royalty revenue from its medical waste technology
business based on the terms of the license agreements as plants are
completed and for consulting services when rendered.
Cost of Landfill Operations
Cost of operations includes direct labor, fuel, equipment maintenance,
insurance, depreciation and amortization of equipment and project
development costs, accruals for ongoing closure and post-closure
regulatory compliance (for landfills owned), and other routine
F-13
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
maintenance and operating costs directly related to landfill
operations. Also included in the cost of landfill operations are
payments made to the Towns in which each landfill is located in the
form of "Host Town Fees" and "Closure Fees" (for landfills operated
under management contracts), which are negotiated on a rate per ton
basis as part of the contract with the Town. In such Towns, the Town is
responsible for the closure and post-closure costs related to the
landfill.
Landfill Closure and Post-Closure Costs
The Company estimates and accrues closure and post-closure costs for
landfills owned or acquired on a unit-of-production basis over each
facility's estimated remaining airspace capacity. The Company records
reserves, as necessary, as a component of the purchase price of
facilities acquired, in acquisitions accounted for under the purchase
method, when the acquisition is consummated.
Property and Equipment
Capitalization of landfill development costs begins with the signing of
landfill management contracts for facilities operated by the Company
that are not owned, or upon determination by the Company of the
economic feasibility or extended useful life of each landfill acquired
as a result of comprehensive engineering and profitability studies.
Capital costs include acquisition, engineering, legal, and other direct
costs associated with the permitting and development of new landfills,
expansions at existing landfills, and cell development. These costs are
capitalized pending receipt of all necessary operating permits or
commencement of operations.
Interest is capitalized on landfill costs related to permitting, site
preparation, and facility construction during the period that these
assets are undergoing activities necessary for their intended use.
Interest costs of $42,014 and $82,195 were capitalized during 1996 and
1995, respectively.
Landfill project development costs are amortized using the
unit-of-production method, which is calculated using the total units of
airspace filled during the year in relation to total estimated
permitted airspace capacity. The determination of airspace usage and
remaining airspace capacity is an essential component in the
amortization calculation. The determination is performed by conducting
annual topography surveys of the Company's landfill facilities to
determine remaining airspace capacity in each landfill. The surveys are
reviewed by the Company's consulting engineers, the Company's internal
operating and engineering staff, and its financial and accounting
staff. Current year-end remaining airspace capacity is compared with
prior year-end remaining airspace capacity to determine the amount of
airspace used during the current year. The result is compared against
the airspace consumption figures used during the current year for
accounting purposes to ensure proper recording of the amortization
provision. The reevaluation process did not 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 depletion is
justified. Capitalized costs related to landfill development for which
no future economic benefit is determined by the Company are expensed in
the period in which such determination is made.
F-14
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
All other property and equipment are stated at cost. Depreciation and
amortization is provided using the straight-line method over the
estimated useful lives of the respective assets as follows:
Buildings, facilities and improvements 10 to 30 years
Vehicles and equipment 5 to 10 years
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 are considered to be cash equivalents.
Restricted Cash and Securities
Restricted Cash and Securites consist principally of funds or securities
deposited in connection with landfill closure and post-closure
obligations. Amounts are principally invested in fixed income
securities of federal, state and local governmental entities and
financial institutions. The Company considers its landfill closure and
post-closure investments to be held to maturity. Substantially all of
these investments mature within one year. The market value of these
investments approximates their aggregate cost basis at December 31,
1996.
Prepaid Consulting Fees
Prepaid consulting fees are amortized on a straight-line basis over the
term of the related consulting agreement.
Deferred Financing Costs
Deferred financing costs are amortized on a straight-line basis over the
life of the related notes payable or debt.
Income Taxes
Effective January 1, 1993, WSI became a C corporation for Federal and
state income tax purposes. Previously, WSI had elected Subchapter S
status.
WSI has adopted the provisions of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("SFAS 109"). SFAS 109
requires recognition of deferred tax liabilities and assets for the
estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Measurements of deferred
tax liabilities and assets are based upon provisions of enacted tax
laws and the effects of future changes in tax laws or rates are not
anticipated.
Earnings Per Share
Primary earnings per common share are based on the weighted average number
of common shares and dilutive common stock equivalent shares
outstanding during each period. Fully diluted earnings per share have
been omitted since they are either the same as primary earnings per
share or are anti-dilutive.
F-15
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable, and
accrued expenses approximates fair value because of the short maturity
of these items. The carrying amount of debt, notes and balances with
bank lines of credit with interest rates related to the prime rate
approximate fair value because the interest rates change with the
market interest rates. Other debt approximates fair value as the
interest rates charged approximate the Company's external borrowing
rate.
Reclassifications
Certain amounts in prior year financial statements have been reclassified
to conform to the 1996 presentation.
New Accounting Pronouncements
In 1995 the Financial Accounting Standards Board issued Statement Of
Financial Accounting Standards No. 121, Accounting for the Impairment
of Long-Lived Assets to be Disposed Of, (SFAS No. 121). SFAS No. 121
sets forth standards for recognition and measurement of impairment
of long-lived assets. The adoption of SFAS No. 121 did not have a
material effect on the Company's consolidated financial statements in
1996.
In 1995 the Financial Accounting Standards Board issued FASB Statement
123, "Accounting for Stock-Based Compensation" (SFAS 123) where the
fair value of stock options is determined using an option pricing model
and included in operations. As permitted under SFAS 123 the Company has
elected to continue to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options where no
compensation expense is recognized on employee stock options if the
exercise price equals the market price at the date of grant. As
required under SFAS 123, pro forma information regarding net income and
earning (loss) per share is disclosed as if SFAS 123 had been adopted.
(3) Accounts and Notes Receivable
Accounts and notes receivable consist of the following:
December 31,
1996 1995
Trade $ 353,862 $ 352,524
ScotSafe Limited 719,703 78,000
One, Three, Six, Inc. 400,000 400,000
State of Vermont - 850,000
Interest - 151,041
Other 158,781 447,646
------------ ------------
1,632,346 2,279,211
Allowance for doubtful accounts (22,500) (232,146)
------------ ------------
1,609,846 2,047,065
Less current portion 1,158,677 2,047,065
------------ ------------
Long-term portion $ 451,169 $ -
============ ============
F-16
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
Trade
On July 31, 1995, the Company entered into a contract with Waste
Management of Rhode Island, Inc. ("WMRI"). The contract requires WMRI
to provide a fixed annual quantity of waste, approximately 95% of the
available annual permitted capacity of the Fairhaven landfill for seven
years. At December 31, 1996 and 1995, the balance due from WMRI was
$4,500 and $130,500, or .1% and 45%, respectively, of the total trade
accounts receivable balance. For the years ended December 31, 1996 and
1995, revenues from WMRI were approximately $387,800 and $586,000, or
26% and 44%, repectively of landfill revenues.
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 continuous flow auger
("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, WSI will provide technical assistance in
connection with these facilities including facility design,
installation, testing and training. In addition to royalty payments for
each plant, ScotSafe has agreed to pay WSI for consulting and other
services, and will reimburse the Company for its out-of-pocket expenses
and disbursements in connection with these services. As of December
1996, the Company has completed two plants for ScotSafe under this
agreement and has generated approximately $1,000,000 in gross revenues
in 1996. The royalty per plant is payable on a monthly basis over a two
year period.
One, Three, Six, Inc.
During 1994, WSI made a refundable deposit for the option to purchase 80
percent of the common stock of Shred Pax Corporation (now known as One,
Three, Six, Inc.) ("OTS"), a manufacturer of shredding and grinding
equipment. The option expired on March 31, 1994, but was extended by
WSI under the option agreement which in turn resulted in the deposit
being used to purchase 16 percent of OTS common stock. OTS sold
substantially all of its assets to a third party on August 31, 1994,
and adopted a plan of liquidation. Pursuant to the plan of liquidation,
the Company had the right to receive its share of the net proceeds of
liquidation upon completion of winding up the affairs of OTS. The
Company recognized a gain of $222,728 in 1994 from this transaction.
During 1996, the Company entered into litigation with OTS to settle on
monies due the Company under OTS's plan of liquidation. See Note 13 -
Commitments and Contingencies.
State of Vermont
In connection with the acquisition of a landfill in Moretown, Vermont, the
Company purchased the rights to certain funds held by the State for
closure and post-closure costs which were set aside in escrow by the
prior owner to obtain a landfill operating permit. The Company actually
realized approximately $400,000 from this amount after the State of
Vermont's Agency of Natural Resources and Department of Taxes offset
claims against the previous bankrupt owner of the landfill.
BioMedical Waste Systems, Inc.
The Company had previously licensed its medical waste processing
technology to BioMedical Waste Systems, Inc. ("BioMed"). As a result of
the financial, legal and operating difficulties experienced by BioMed,
BioMed did not pay the Company the outstanding amounts owed at July 31,
1995, and the Company elected to terminate the technology agreement
with BioMed effective August 1, 1995. As a result of the termination,
F-17
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
BioMed was no longer contractually obligated to repay the outstanding
accounts receivable balance to the Company, and the outstanding March
31, 1995 balance of $2,575,000, as well as the outstanding note
receivable balance of $400,000, was written off as of June 30, 1995.
The Company recognized revenues under the technology agreement of
$1,850,000 and $1,300,000 in the years ended December 31, 1994 and
1993, respectively, and $725,000 in the quarter ended March 31, 1995,
and ceased accruing revenues thereafter. The Company's medical waste
technology was then relicensed to ScotSafe in the European territory.
(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 its core business of landfill remodeling and operation.
Also on that date, Dr. 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 - Due from Former Employee).
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 year ended December 31, 1996, the Company recorded
restructuring charges of $1,741,729 for costs associated with
management's plan to focus on the core business of landfill remodeling
and operation. These costs included accruals for employee severance,
non-cancelable lease commitments, professional fees and litigation
costs. The restructuring plan is expected to result in annual savings
in excess of $1.0 million. As of December 31, 1996, a reserve of
$175,000 has been recorded for additional estimated costs to complete
the restructuring. At December 31, 1996 and 1995, the Company has
reserves and liabilities associated with restructuring activities of
approximatley $1,415,000 and $0, respectivley.
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 reclassified
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 discontinued operations. . At December 31, 1996
and 1995, the Company has reserves and liabilites associated with
discontinued operations of approximatley $370,000 and $622,624,
respectively.
F-18
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
Assets Held for Sale
During the fourth quarter of 1995, the Company recorded a non-recurring
charge to 1995 earnings of approximately $1.3 million primarily related
to the write-down of the assets of the discontinued operations to their
then 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. As a result of discontinuance of these operations, the
Company expects annual savings in excess of $2.0 million. The Company
expects to dispose of the remaining assets held for resale during 1997.
As of December 31, 1996 a reserve of $125,000 has been recorded for
additional estimated costs to complete the disposal of the Ancillary
Technologies and MSF in 1997.
(5) Due From Former Employee
In July 1996, the Company commenced arbitration proceedings against Rosen,
former Chairman, Chief Executive Officer and President of the Company,
seeking to recover amounts, excluding interest, which the Company
believes it was owed by Rosen. This action was undertaken at the
direction of the Board of Directors following its receipt of a report
by a special committee which had been appointed to investigate Rosen's
financial dealings with the Company. The Special Committee retained
independent counsel in connection with its investigation. Rosen
resigned from all offices with the Company on March 27, 1996. Amounts
which the Company sought to recover included among other things,
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 Arbitration, 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 judgement
against Rosen. No assurance can be given that the Company will be able
to collect any amounts awarded in arbitration. The Company is carrying
on its December 31, 1996 consolidated balance sheet an amount of
$500,000 due from Rosen, but the Company's other claims and additional
advances have not been reflected on the balance sheet at this time.
(6) Investment in Affiliate
In December 1995, the Company entered an agreement to form WSI Europe PLC
to introduce the Company's landfill remodeling technology throughout
Europe and certain other territories. Subsequent to the restructuring
announced by the Company on March 27, 1996, the Company determined it
was best to terminate this agreement in order to focus all of its
attention and resources on the successful completion of the
restructuring of the Company's domestic operations.
F-19
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
(7) Property and Equipment
Property and equipment are stated at cost and consist of the following;
December 31,
1996 1995
------------------------------------
Landfills - owned $ 7,937,307 $ 5,152,750
Landfills - operated - 3,774,659
Landfill development projects 427,357 269,381
Machinery and equipment 2,673,505 2,285,142
Buildings, facilities and improvements 792,255 552,060
Other property and equipment 330,746 702,821
---------------- ----------------
12,161,170 12,736,813
Less accumulated depreciation and
amortization (455,458) (233,722)
---------------- ----------------
Property and Equipment net $ 11,705,712 $ 12,503,091
================ ================
Town of Fairhaven
On July 24, 1994, WSI entered into a contract with the Town of Fairhaven,
Massachusetts to remodel the Town's existing 26 acre landfill. On June
22, 1995, the Company commenced operations and began accepting waste at
the landfill utilizing existing capacity. Since then, the Company has
remodeled and constructed an initial cell at the landfill, and on
August 12, 1996, the Company received final authorization from the
Massachusetts Department of Environmental Protection to operate the
cell under the Town's current existing permit at 150 TPD. On November
8, 1995, an action was brought against various parties including the
Company relating to the Fairhaven landfill. See Note 13 - Commitments
and Contingencies. On September 9, 1996, pursuant to the Massachusetts
Administrative Procedures Act, the action was heard by a Bristol County
Superior Court Judge. As of March 26, 1997, a ruling has not been
issued. The Company, until the outcome of this litigation is
determined, has ceased making additional capital investments in this
project and has operated the landfill at a reduced capacity. Based on
the extensive delays and additional operating costs to the project
because of this litigation and engineering impacts of delays associated
with the litigation, resulting in the current uncertainty of the
long-term economic viability of the project, the Company has decided to
write-off its capital investment in the project at December 31, 1996 of
$6,342,196. Included in the $6,342,196 is a reserve of $500,000 for
additional litigation and ongoing site construction costs. When the
litigation is resolved, the Company at that time will reassess the
continued feasibility of the project.
The contract requires the Company to pay a "Host Town Fee" of $2.00 per
ton or 5% of the tipping fees for solid waste and $3.00 per ton to
contribute to the Town's closure and post-closure costs, excluding
waste from the Town and waste for "beneficial reuse." The term of the
Company's agreement with the Town of Fairhaven is twenty years.
Acquisition of Landfill in Moretown, Vermont
In May 1995, the Company submitted a successful bid through the Company's
80%-owned subsidiary, Waste Professionals of Vermont, Inc. ("WPV"), to
purchase a landfill located in Moretown, Vermont, and certain related
assets at an auction conducted by the United States Bankruptcy Court
for the District of Vermont. On June 2, 1995, the Bankruptcy Court
entered its order authorizing and directing the sale of this landfill
and certain related assets to WPV, which transaction closed on July 5,
1995.
F-20
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
On September 9, 1996 the Company received its Full Certification from the
Vermont Department of Natural Resources (VDNR) to commence operations
at the Moretown landfill using available capacity and to begin
construction of Cell One, Phase II. The Act 250 Land Use Permit was
received on September 30, 1996 which enabled the Company to commence
operations at an average of 350 tons of waste per day. The Company
commenced operation at the landfill on October 7, 1996. Revenues from
October 7, 1996 through December 31, 1996 were $338,225.
In October, 1996, the Company signed a host town agreement with the Town
of Moretown, Vermont which requires the Company to pay a host town fee
of $2.00 per ton plus an annual CPI increase. The term of this
agreement is for five years.
The Company's ownership of the landfill through its subsidiary WPV
involves a greater degree of exposure to potential environmental
liabilities than is involved with landfills operated under a management
contract. In conjunction with the acquisition, the Company recorded
$1.5 million in estimated closure and post-closure costs based on
engineering estimates of the current condition of the landfill. See
Note 12.
(8) Consulting Agreement
On March 29, 1995, contemporaneous with the merger (see Note 15), 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 finance, investor
relations and financial public relations. As compensation for services
to be rendered by Liviakis, the Company issued Liviakis 890,000 shares
of the Company's common stock. As a result, on March 29, 1995, the
Company recorded a prepaid asset of $1,335,000 representing a 25%
discount from the private placement share value since, under the
agreement, the Liviakis shares are restricted and may not be sold or
transferred without the Company's consent before March 29, 1997.
Amortization of prepaid consulting fees for each of the years ended
December 31, 1996 and 1995 was $500,625.
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. As part of the termination
agreement, the Company released all restrictions on the resale of the
stock held by Liviakis.
F-21
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
(9) Long-term Debt and Notes Payable
Long-term debt and notes payable consists of:
December 31,
1996 1995
--------------------------------
Capital leases and equipment notes
payable $ 1,589,989 $ 1,022,377
FDIC 511,093 511,093
Boston Private Bank 150,733 211,065
Mortgages 195,372 200,037
One, Three, Six, Inc. 400,000 400,000
Other notes payable 243,564 72,619
Convertible subordinated debt 8,525,000 11,375,000
-------------- ------------
11,615,751 13,792,191
Less current portion 2,165,378 1,526,188
-------------- --------------
Long-term portion $ 9,450,373 $ 12,266,003
============== ==============
Maturity of Long Term Debt and Notes Payable, Excluding Capital Leases and
Equipment Notes Payable
Scheduled maturities of long-term debt and notes payable are as follows:
Payments due in the year ending December 31,
1997 $ 1,334,638
1998 133,410
1999 7,309
2000 8,382,964
2001 8,958
Thereafter 158,483
--------------
$ 10,025,762
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 are as follows:
December 31,
1996 1995
---------------------------------
Buildings $ 56,250 $ 56,250
Machinery and equipment 2,378,560 1,360,560
-------------- -------------
2,434,810 1,416,810
Accumulated amortization (202,714) (58,966)
--------------- -------------
$ 2,232,096 $ 1,357,844
=============== =============
F-22
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
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, 1996 are as
follows:
Capital Operating
Leases Leases
Payments due in the year ending December 31,
1997 $ 1,028,972 $ 76,116
1998 320,194 74,102
1999 317,089 -
2000 219,604 -
------------ ------------
Total minimum lease payments 1,885,859 $ 150,218
============
Amounts representing interest 295,870
------------
Present value of net minimum
lease payments 1,589,989
Less current portion 830,740
Long-term portion $ 759,249
============
The Company's rental expense for operating leases was $293,766,
$292,492, and $66,648 for the years ended December 31, 1996, 1995
and 1994, respectively.
The Company has reclassified approximately $380,785 and $582,000 of
capitalized lease obligations to current since it was not in compliance
with certain financial covenants at December 31, 1996 and 1995,
respectively.
Bank Debt
During 1994, the Company renegotiated its existing FDIC line of credit and
extended the due date on the note to May 1, 1997. Interest is due
monthly at prime plus 1.5 (9.75% and 10.% at December 31, 1996 and
1995, respectively). The debt is secured by the Company's assets.
During 1994, the Company entered into a term loan agreement with Boston
Private Bank and borrowed $300,000. The note is payable in monthly
installments of $6,667, plus interest at prime plus 2.0% (10.25% and
10.5% at December 31, 1996 and 1995, repectively) through June 6, 1998.
The debt is secured by the Company's assets and the principal residence
of Rosen and Marguerite Piret, wife of Rosen, See Note 5 - Due From
Former Employee.
Mortgages
Mortgage notes are secured by the respective assets, and are due in
various amounts through 2015.
One, Three, Six, Inc.
In 1994, the Company received $400,000 in the form of a note as an advance
against the initial distribution of proceeds from the sale of the
assets of OTS. The note, which bears interest at 10% payable quarterly,
was due in March, 1996. During 1996, the Company entered litigation to
settle monies due the Company under OTS's plan of liquidation, See Note
13 - Commitments and Contingencies.
F-23
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
Convertible Subordinated Debt
The Company issued a three-year $150,000 Convertible Subordinated Note to
an investor in August 1994. The note may be converted into common stock
at the option of the holder at the rate of one share of common stock
for each $2.44 in outstanding principal and interest.
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 $2.44. The Notes mature
on September 30, 2000, and bear interest at 10%, payable quarterly. The
Notes are convertible into Common Stock at $1.84 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 $10.00
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, resales 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 701,563 shares of Common Stock at $10
per share. These warrants were subsequently exchanged into 350,000
warrants at $3.50 as part of a subsequent financing in June 1996, see
Note 15 - Common Stock.
Through December 31, 1996, $2,850,000 of notes plus $27,425 of accrued
interest have been converted into 1,569,960 shares of common stock.
Stockholders and Related Parties
On March 31, 1995, all notes payable to stockholders and related parties
were repaid. Interest expense on notes to stockholders and related
parties for years ended December 31, 1995, and 1994 amounted to $2,701
and $16,733, respectively.
(10) Accrued Expenses
Accrued expenses consisted of the following:
December 31,
1996 1995
---------------------------
Interest $ 242,185 $ 209,631
Professional and consulting fees 237,399 421,500
Fairhaven landfill reserve (See Note 7) 500,000 -
Litigation settlement (See Note 13) 125,000 -
Salaries and wages - 37,809
Insurance - 25,345
Other 121,131 4,253
------------ ------------
$ 1,225,715 $ 698,538
============ ============
F-24
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
(11) Income Taxes
As discussed in Note 2, effective January 1, 1993, the Company became
taxable as a C Corporation for Federal and State income tax purposes.
The Company has adopted SFAS 109. The cumulative effect of this change
in accounting for income taxes was not material.
Income tax expense (benefit) consists of:
Current Deferred Total
------- -------- -----
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)
=========================================
Year ended December 31, 1994:
Federal $ - $ 141,358 $ 141,358
State - 43,642 43,642
-----------------------------------------
$ - $ 185,000 $ 185,000
=========================================
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:
1996 1995 1994
---- ---- ----
Statutory Federal
income tax (benefit)$ (4,717,894) $ (2,708,925) $ 144,983
State taxes, net of
Federal income tax
benefit (1,210,466) (704,604) 35,211
Valuation allowance 5,898,245 3,294,764 -
Other 6,659 9,300 4,806
--------------- ---------------- ------------
$ (23,456) $ (109,465) $ 185,000
=============== ================ ===========
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,
1996 and 1995 are presented below.
F-25
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
1996 1995
---- ----
Deferred tax assets:
Accounts receivable $ 9,788 $ 116,001
Inventories - 80,899
Long-term contracts - 191,559
Property and equipment 236,323 12,990
Other accrued liabilities - 174,370
Operating loss and credit
carryforwards 8,946,898 2,953,174
------------- --------------
Gross deferred tax assets 9,193,009 3,528,993
Less: valuation allowance (9,193,009) (3,294,764)
-------------- ---------------
Net deferred tax assets - 234,229
------------- --------------
Deferred tax liabilities:
Deferred income and capitalized costs - 234,229
------------- --------------
Total deferred tax liabilities - 234,229
------------- --------------
Net deferred tax liability $ - $ -
============= ==============
At December 31, 1996, the Company has net operating loss carryforwards for
Federal income tax purposes of approximately $21 million which are
available to offset future federal taxable income, if any, and which
expire through December 31, 2011. The Company's ability to utilize its
existing net operating loss carryforwards, under certain circumstances
may be limited if there is change in ownership of the Company of
greater than 50% within a three-year period.
(12) 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, 1996, that the total costs
for final closure and post-closure of Cell I at the Moretown, Vermont
landfill, including capping costs, cap maintenance, groundwater
monitoring, methane gas monitoring, and leachate treatment and disposal
for up to 30 years after closure, is approximately $2.1 million. Based
upon the capacity of Cell I under the current permit and existing
conditions of the landfill at acquisition, approximately $1.5 million
has been accrued for at December 31, 1996.
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, significant accounting policies.
F-26
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
(13) 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 hazardous
waste. The Company's operation of landfills subjects it to certain
operational, monitoring, site maintenance, closure and post-closure
obligations which could give rise to increased costs for monitoring and
corrective measures. See Note 12 - Landfill Closure and Post Closure
Costs.
The Company has obtained environmental impairment liability insurance
covering claims for sudden or gradual onset of environmental damage. If
the Company were to incur liability for environmental damage in excess
of its insurance limits, its financial condition could be adversely
affected. The Company carries a comprehensive general liability
insurance policy which management considers adequate at this time to
protect its assets and operations from other risks.
None of the Company's landfills are currently connected with the Superfund
National Priorities List or potentially responsible party issues.
Employment Contracts
The Company has entered into an employment agreement with one of its
senior executives. The agreement provides for employment until
terminated by either party at an annual salary of $150,000.
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 material adverse effect on the Company's financial position,
results of operations or liquidity, and are summarized as follows:
a) In July 1996, the Company commenced arbitration proceedings against Dr.
Richard Rosen (Rosen), former Chairman, Chief Executive Officer and
President of the Company, seeking to recover amounts, excluding
interest, which the Company believes it was owed by Rosen. This action
was undertaken at the direction of the Board of Directors following its
receipt of a report by a special committee which had been appointed to
investigate Rosen's financial dealings with the Company. The Special
Committee retained independent counsel in connection with its
investigation. Rosen resigned from all offices with the Company on
March 27, 1996. Amounts which the Company sought to recover included
unreimbursed advances and amounts which the Company believed
constituted improper expense reimbursements and payments of Company
funds for personal benefit.
An arbitration hearing was completed on October 25, 1996. On January 2,
1997, the arbitrator issued the Award of Arbitrator, directing Rosen to
pay $780,160, excluding interest and litigation costs, for breaches by
F-27
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
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. No assurance can be given that the Company will be able
to collect any amounts awarded in arbitration. The Company is carrying
on its December 31, 1996 balance sheet an amount of $500,000 in
unreimbursed advances due from Rosen, but the Company's other claims
and additional advances have not been reflected on the balance sheet at
this time.
b) Susan Allua, et al. v. Massachusetts Department of Environmental
Protection, Town of Fairhaven and BioSafe, Inc. Two cases involving the
same parties were brought in Bristol Superior Court by sixteen
residents of Fairhaven, Massachusetts who reside in the vicinity of the
landfill owned by the Town of Fairhaven (the "Landfill") which is being
remodeled and operated by the Company. The first case commenced on
November 8, 1995. In that case, Plaintiffs appealed a permit issued by
the Massachusetts Department of Environmental Protection (the "DEP")
authorizing the construction of a component of the remodeling project
(the "Authorization to Construct" or "ATC"). Plaintiffs also have
brought claims alleging that the DEP violated the Massachusetts
Environmental Policy Act in issuing the ATO (the "MEPA Claim").
Further, Plaintiffs have brought common law claims against the Company
for nuisance, trespass and strict liability based principally on
alleged dust and odor conditions resulting from the Company's
excavation activities at the Landfill. The Company is contesting all
claims, and is receiving the cooperation of the Town of Fairhaven and
the DEP in opposing the claims in which those parties are involved.
Pursuant to the Massachusetts Administrative Procedures Act, the ATO
Appeal was heard by a Bristol County Superior Court Judge. The Court
had a hearing on the Permit Appeal on September 5, 1996, but has not
yet announced its findings.
The Company believes that the Plaintiffs' stated grounds in the ATC appeal
are without merit and that the ATC will be upheld as a result of the
hearing. However, if the DEP's granting of the permit were reversed the
Company's plans with respect to the Fairhaven landfill project would be
materially adversely affected. The ATC permit remains in effect during
the pendency of the appeal.
Previously on January 12, 1996, the Company filed a motion to dismiss the
MEPA Claims. The Town and DEP have filed a similar motion. The Court
heard oral argument on the motions to dismiss on April 9, 1996. On May
1, 1996, the Court issued a decision on the motions to dismiss in favor
of WSI and the Town, dismissing the MEPA claims in their entirety.
Plaintiffs' common law claims for nuisance, trespass and strict liability
are based principally on allege dust and odor conditions resulting from
the Company's excavation activities at the Fairhaven Landfill during
the summer and early fall of 1995. The Company is pursuing factual
discovery with regards to these claims. If the Plaintiffs pursue these
claims after disposition of the ATC appeal, a period of additional
discovery and other pre-trial proceedings would take place prior to
trial on the merits.
The second case was commenced September 9, 1996. In that case, the same
Plaintiffs appealed a permit issued by the DEP authorizing the
operation of a component of the remodeled landfill (the "Authorization
to Operate" or "ATO"). The plaintiffs challenge to the ATO raises
issues similar, and in some instances identical, to those raised in the
ATC appeal. Accordingly, as a legal or practical matter, a decision in
the ATC appeal may resolve the ATO appeal, and this case is essentially
on hold pending the outcome of the ATC appeal. As with the ATC permit,
the ATO permit remains in effect during the pendency of the appeal.
F-28
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
c) During 1994, the Company made a refundable deposit for the option to
purchase 80 percent of the common stock of Shred Pax Corporation (now
known as One, Three, Six, Inc.)("OTS"), a manufacturer of shredding and
grinding equipment. The option expired on March 31, 1994 but was
extended by the Company under the option agreement which in turn
resulted in the deposit being used to purchase 16 percent of OTS common
stock. OTS sold substantially all of its assets to a third party on
August 31, 1994, and adopted a plan to liquidate OTS. Pursuant to the
plan of liquidation, the Company had the right to receive its share of
the net proceeds of liquidation upon completion of winding up the
affairs of OTS.
In December 1994, the Company received $400,000 in the form of a note as
an advance against the initial distribution of proceeds from the sale
of the assets of OTS. In September 1996, OTS filed a lawsuit against
the Company in the Circuit Court of DuPage County, Illinois, seeking
recovery of $433,000 in principal and interest allegedly due under the
promissory note. Pursuant to a confession-of-judgment provision in the
promissory note, on or about September 26, 1996, OTS obtained an order
of judgment in its favor for the amount at issue plus costs. The
Company contended that OTS obtained the promissory note by
misrepresentations and had violated the Company's rights as a minority
stockholder. The Company filed the necessary paperwork to re-open the
judgment and to assert its affirmative defenses and counterclaims. By a
Complaint filed October 17, 1996, in Massachusetts Superior Court, OTS
commenced proceedings to enforce the judgment entered by the Illinois
Court.
In early March 1997, the parties entered into an agreement to settle both
the Illinois and Massachusetts actions, and they have both been
dismissed with prejudice. As part of the settlement, in addition to
general releases, the Company exchanged its 16% interest in OTS for all
claims under the note.
d) On or about August 1, 1996, the Company became aware that it had been
joined as a defendant in a lawsuit pending in the State of Vermont in
Washington Superior Court, Docket No. 579-10-95 Wncv, Caption Stuart
Savage, John Savage, Adelle Savage and Andrew R Field, Trustee v. Major
Sport Fantasies, Inc. a Vermont Corporation, Robert Dowdell, Jr.
BioSafe, Inc. and Major Sports Fantasies, Inc., a Delaware Corporation,
(the "Vermont Litigation"). The Plaintiff sought damages in an amount
in excess of $480,000, plus punitive damages, attorneys' fees and court
costs. On or about August 1, 1996, the Company also learned that the
Plaintiffs had obtained an attachment , in the amount of $850,000, on
the Company's property known as the WPV Solid Waste Facility, located
on Route 2, Moretown, Vermont (the "Attachment").
On March 26, 1997, the Company settled the Vermont Litigation on the
following terms: The Company will deliver to the Plaintiffs (a)
$35,000, (b) a note in the amount of $225,000 and (c) general releases
of, and covenants not to sue, the Plaintiffs; in exchange, the Company
received (a) general release and covenants not to sue by the
plaintiffs, (b) discharge of the Attachment, and (c) dismissal of the
Vermont Litigation.
e) The Company currently has ongoing four complaints with the
Massachusetts Commission Against Discrimination, principally as the
result of actions of the Company's ex-operator of the Fairhaven
landfill, Gary Rogers. The Company is not in a position to evaluate the
likelihood that damages or other relief will be awarded, or that the
amount of damages awarded could be material. The Company has set up an
estimated reserve of $125,000 for litigation costs for these matters as
of December 31, 1996.
F-29
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
(14) Preferred Stock
In 1993, the Company issued 7,750 shares of newly created Series A 8%
preferred stock to related and unrelated parties, in exchange for the
retirement of $775,000 of debt.
During 1994, the Company redeemed from a principal stockholder 3,000
shares of preferred stock for a purchase price of $300,000.
On March 29, 1995 all outstanding shares of preferred stock were converted
into 237,500 shares of common stock.
(15) Common Stock
During 1993, the Company issued 280,000 shares and received gross proceeds
of $420,000.
During 1994, the Company circulated a private placement memorandum that
raised gross proceeds of $1,025,000 through the issuance of 256,250
shares of common stock at a price of $4.00 per share (before adjustment
for the 1.75 to 1 stock split).
On December 1, 1994, the Company converted 240,000 of subordinated notes
payable and $5,952 accrued interest into 61,488 shares of common stock.
During 1991, 1992, 1993, and 1994, the Company issued 270,750, 1,075,125,
62,310 and 20,000 shares of common stock, respectively, in exchange for
various investment considerations and consulting services. No value was
assigned by the Company to the shares that were issued in 1991, 1992,
and 1993 since, at the time of issuance, the Company had not sold any
stock since inception and the Company had a substantial stockholders'
deficit. The 1994 shares were recorded at a current value of $4.00 per
share (before adjustment for the 1.75-to-1 stock split).
From January 1 through March 29, 1995, the Company issued 2,450 shares for
employee bonuses, 31,500 shares in exchange for Directors' fees, and
11,250 shares for consulting services at $4.00 per share (before
adjustment for the 1.75 to 1 stock split).
On February 1, 1995, WSI closed a private placement of 1,100 units with
net proceeds of $997,250. Each unit consisted of a $1,000 face amount
10% convertible subordinated note, a Series C Warrant to purchase 500
shares of Common Stock at $2.00 per share, and a Series D Warrant to
purchase 500 shares of Common Stock at $4.75 per share. The convertible
notes and all accrued interest were then converted into 558,578 shares
of the Company's Common Stock on March 29, 1995, as part of the merger
transaction described below.
On February 17, 1995, WSI began offering units consisting of four shares
of Common Stock with a Series D Warrant to purchase two shares of
Common Stock at $4.75 a share. Contemporaneous with the merger on March
29, 1995, described below, WSI completed an initial closing of its
private placement with gross proceeds of $4.0 million from the sale of
500,000 units at $8.00 per unit. After the merger, on April 18, 1995
and April 24, 1995, the Company closed an aggregate of $5,000,000 in
additional gross proceeds with respect to the private placement from
the sale of 625,000 units at $8.00 per unit.
F-30
<PAGE>
In March, 1995, the Company issued warrants to purchase 114,625 shares at
$2.29 per share and 50,000 shares at $3.50 per share to certain
investors for investment considerations and professional services
rendered.
On March 29, 1995, the Company acquired BioSafe in a merger accounted for
as a reverse recapitalization. The acquisition was consummated through
an exchange of shares of the Company for an equal number of shares of
BioSafe. To accomplish this, the stockholders of the Company approved a
1 for 73.083 reverse stock split while the stockholders of BioSafe
approved a 1.75 to 1 forward stock split. Since stockholders of BioSafe
received the majority stock of the resulting combined enterprise,
management of BioSafe became management of the combined enterprise. The
name of the Company was then changed from Zoe Capital Corp. to BioSafe
International, Inc. The financial statements presented treat BioSafe as
the surviving entity in the combination. The financial statements for
December 31, 1994 and prior periods exclude BioSafe International, Inc.
since such financial statements are not material.
As part of the merger agreement, all of the outstanding shares of
BioSafe's Preferred Stock (total of 4,750 shares with $100 par value)
were converted into 237,500 shares of Common Stock of the Company. On
March 29, 1995, the Company also issued to the existing BioSafe
stockholders Series E Warrants on a pro-rata basis to purchase an
aggregate of 500,000 shares of the Company's Common Stock at $3.50 a
share.
The Company has the right to accelerate the expiration of the Warrants in
the event that the average market price of the Common Stock for 20
consecutive trading days exceeds $4.625 per share in the case of Series
A Warrants and $5.75 per share in the case of Series C Warrants, Series
D Warrants and Series E Warrants. In the event that the Company
accelerates the expiration of any Warrants, the holders of such
Warrants would be permitted to exercise the Warrants during a period of
not less than 20 days following notice of such event.
On March 30, 1995, the Company issued three-year non-callable Warrants to
purchase 720,000 shares of the Company's Common Stock at $2.30 per
share and 200,000 shares of Common Stock, issued and charged to
stockholder's equity at $2.00 per share, to Capital Growth
International, Inc. ("Capital Growth") as compensation for investment
banking services rendered in connection with the private placement and
the merger.
On March 30, 1995, the Company issued 890,000 shares of Common Stock and
recorded the issuance as prepaid consulting expense at $1.50 per share,
to Liviakis Financial Communications, Inc. in conjunction with the two
year consulting agreement described more fully in Note 8 to these
consolidated financial statements.
The Company used a portion of the proceeds from the merger and private
placement to repay notes payable, notes payable to stockholders and
related parties and subordinated notes payable.
On November 6, 1995, the SEC declared effective the Company's registration
Statement on Form S-1 relating to the resale by certain security
holders of up to 16,606,356 shares of Common Stock, 122,719 Series A
Warrants and 550,000 Series C Warrants, 2,800,000 Series D Warrants,
and 500,000 Series E Warrants. The Company did not receive any proceeds
from the sale of shares of Common Stock or Warrants from the selling
security holders. The Company will receive proceeds from the issuance
of Secondary Warrant Stock when, and if, any of the Warrants are
exercised by the warrant holders.
F-31
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
On June 28, 1996, the Company closed an offering to overseas investors
under Regulation S of the Securities Act of approximately 3.3 million
shares of common stock at approximately $2.00 per share raising net
proceeds of approximately $5.9 million. The purchasers were all non
U.S. persons and were primarily existing institutional WSI shareholders
and internationally recognized environmental mutual funds. These shares
have not been registered under the Securities Act and may not be sold
in the United States without such registration or an applicable
exemption from the requirement of registration.
In 1996 and 1995 the Company issued additional warrants to purchase common
stock in connection with various financing transactions.
(16) Stock Options
Employee Stock Option Plan
On March 27, 1995, the WSI 1993 Stock Option Plan was assumed by the
Company, adjusted to reflect the 1.75 to 1 stock split. The Plan
provides for the issuance of options to purchase up to 1,500,000 shares
of Common Stock to employees, directors, 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, 1996, options to purchase 806,000 shares of Common
Stock had been granted and options to purchase up to an additional
694,000 shares remained available for grant. The per share weighted
average fair value of stock options granted during 1996 and 1995 was
approximately $.82 and $2.15, respectively, using the Black Scholes
option-price model with the following weighted average assumptions:
volativity, 30%; expected dividend yield, 0%; risk free interest rate,
5.3%; 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 1996 and 1995 would have
increased to the amounts shown below.
1996 1995
---- ----
Net loss - as reported $ (13,889,772) $ (7,870,979)
- pro forma $ (14,334,772) $ (8,303,479)
Net loss per share - as reported $ (0.98) $ (0.82)
- pro forma $ (1.01) $ (0.86)
Proforma net income reflects only the effects of options granted in 1996
and 1995. 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 is 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.
F-33
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
Changes in options and option shares under the plan during the respective
years were as follows:
1996 1995
Weighted ave. Weighted ave.
exercise price Number exercise price Number
per share of shares per share of shares
Options outstanding,
beginning of year $6.19 619,125 $2.00 555,625
Options granted $2.25 741,250 $5.50 287,500
Options exercised $2.00 6,562 -
Options canceled $3.83 547,813 $2.00 224,000
---------- ---------
Options outstanding,
end of year $2.23 806,000 $6.19 619,125
Shares reserved for future grants 694,000 880,875
---------- ---------
Total options in the plan 1,500,000 1,500,000
========== =========
Options exercisable,
end of year $2.23 511,125 $2.00 147,656
========== =========
Options outstanding at December 31, 1996 and market value at date of grant
were as follows:
Number Price
of shares per share Amount
--------- --------- ------
Year of grant:
1994 47,250 $ 2.00 $ 94,500
1995 17,500 $ 2.00 35,000
1996 741,250 $ 2.25 1,667,813
---------- ------------
806,000 $ 1,797,313
========== ============
Non - Employee Directors Stock Option Plan
On June 24, 1996, WSI adopted the 1995 Stock Option Plan for Non Employee
Directors. The plan entitles each Director to receive a grant of Non
Qualified Options to purchase 10,000 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 2,500 shares for each year that the holder remains a Director
of the Company.
F-33
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
In 1994 options to purchase 43,750 shares of Common Stock were granted
outside of the Option Plan to a director. Fifty percent of these are
exercisable at $2.00 per share at December 31, 1996.
Changes in options and option shares under the plan during the respective
years were as follows:
1996 1995
---------------------------- --------------------------
Weighted ave. Weighted ave.
exercise price Number exercise price Number
per share of shares per share of shares
------------- ---------- --------------- ---------
Options outstanding,
beginning of year $2.00 43,750 $2.00 43,750
Options granted $3.56 53,334 - -
Options exercised - - - -
Options canceled - - - -
---------- ---------
Options outstanding,
end of year $2.86 97,084 $2.00 43,750
=========== =========
Options exercisable,
end of year $2.59 35,208 $2.00 10,937
========== =========
Options outstanding at December 31, 1996 and market value at date of grant
were as follows:
Number Price
of shares per share Amount
--------- --------- ------
Year of grant:
1994 43,750 $ 2.00 $ 87,500
1995 40,000 $ 3.91 156,400
1996 13,334 $ 2.56 34,135
---------- ------------
97,084 $ 278,035
========== ============
(17) Related Party Transactions
During the years ended December 31, 1996, 1995 and 1994 the Company paid
and accrued investment advisory fees of $29,430, $45,936 and $45,740,
respectively, to Newbury, Piret & Company, Inc., a Company owned by
Marguerite A. Piret, a stockholder, ex-director of the Company and the
wife of Rosen, See Note 5 - Due From Former Employee.
As part of the merger discussed in Note 15, the Company entered into a
one-year investment banking agreement with Capital Growth
International, Inc. at $4,500 per month, which expired in March, 1996.
(18) Subsequent Events
In January 1997, the Company closed a private placement of 860,000 shares
of common stock at $.50 per share with net proceeds of $430,000. These
shares have not been registered under the Securities Act and may not be
sold in the United States without such registration or an applicable
exemption from the requirement of registration.
F-34
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
On or about March 31, 1997, the Company's subsidiary, Waste Professionals
of Vermont, Inc.("WPV") expects to close a $1 million term loan with
The Howard Bank of Burlington, Vermont. The term of the loan is for 36
months with an initial rate of 15%. The initial rate shall be reduced
when the Company raises additional equity as outlined in the agreement.
The loan is primarily secured by a first mortgage on WPV's landfill and
the royalties due the Company under its licensing agreement with
ScotSafe (See Note - 3), and is guaranteed by the Company.
F-35
<PAGE>
PART III
Item 10. Directors and Executive Officers
Information Regarding Directors and Executive Officers
- ------------------------------------------------------
The following table and biographical descriptions set forth
certain information as of March 31, 1997, unless otherwise specified, with
respect to the directors and the executive officers who are not directors, based
on information furnished to the Company by each director and officer.
Directors and Executive Officers
--------------------------------
Amount and
Directors Nature of
or Officers Beneficial Ownership Percent
Name Age Since of Common Stock of Class
- -------------------------------------------------------------------------------
Richard S. Golob 45 1996 21,355 *
Jay Matulich 43 1995 17,500 *
William B. Philipbar 71 1996 1,667 *
Daniel J. Shannon 62 1994 46,250 *
Barry D. Simmons 57 1990 217,875 1.2%
Philip W. Strauss 48 1995 250,000 1.4%
B.G. Taylor 72 1990 222,875 1.2%
Robert Rivkin 38 1994 250,875 1.4%
Joseph Motzkin 53 1996 30,000 *
* Less than one percent.
Jay J. Matulich. Since 1994, Mr. Matulich has been a
Senior Vice-President of Capital Growth International L.L.C., formerly U.S.
Sachem Financial Consultants, L.P. ("Capital Growth"). From May 1990 to October
1994, Mr. Matulich was a Vice President of Gruntal & Co., Incorporated,
investment bankers. Mr. Matulich was elected to the Board of Directors in March
1995 pursuant to an agreement between the Company and Capital Growth, in
connection with Capital Growth's role as placement agent for certain securities
of the Company.
Philip W. Strauss. Mr. Strauss has been the Chief Executive
Officer and President since March 27, 1996 and previously had been Executive
Vice President and Chief Operating Officer of the Company since September 1995.
He has 24 years of experience in project, business and corporate development.
Mr. Strauss was co-founder of BioMedical Waste Systems, Inc., a publicly-held
waste management firm, where he served as Executive Vice President from its
inception in 1987 until May 1992 and as a Director from inception until
May 1993.
Richard S. Golob. Mr. Golob has been a Director of the Company
since May 8, 1996. He is President of World Information Systems, a private
consulting and publishing company in the environmental industry. He has held
this position for more than five years. Through World Information Systems and
his two newsletters, Hazardous Materials Intelligence Report and Oil Pollution
Bulletin, Mr.Golob provides information and advisory services to environmental
companies on business development, marketing and financing. He is also founder
and chairman of the Environmental Business Conferences, which provides biannual
forums for environmental business executives to discuss critical business
issues. He served as a member of the Environmental Advisory Board of Charles
River Partnership IV, a venture capital fund that invests in the environmental
industry.
4
<PAGE>
William B. Philipbar. Mr. Philipbar has been a Director of
the Company since May 8, 1996. He has been a director of Matlack Systems, Inc.
and Rollins Leasing Corp. since 1993. He has also been serving as a
director of Rollins Environmental Services, Inc. since 1972. Until 1995 he
was also a director of Charles River Ventures, a company that he continues to
serve as an advisor.
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<PAGE>
Daniel J. Shannon. Mr. Shannon has been a Director of the
Company since 1994. He is a certified public accountant with experience in
public and private finance, public service, health care, and pension
management. Since March of 1991, Mr. Shannon has been a Director of LaSalle
Street Capital Management, Ltd. ("LaSalle Capital"), a subsidiary of LaSalle
National Trust, a financial institution headquartered in Chicago, Illinois.
Mr. Shannon's duties as Director of LaSalle Capital are primarily those of an
advisor to clients in the marketing of investment products.
Barry D. Simmons, MD. Dr. Simmons has been a Director
of the Company since 1990. He is an orthopedic surgeon and has been
associated with Brigham Orthopedic Associates, Inc. at the Brigham and
Women's Hospital since 1974. Dr. Simmons has been the Chief, Hand Surgery
Service, at the Brigham and Women's Hospital since 1982. In 1985, Dr. Simmons
was appointed an Associate Clinical Professor of Orthopedic Surgery at
Harvard Medical School, and in that same year, he began his association with
Waterville Valley Medical Associates, Inc. situated at the Waterville Valley
Ski Area.
B.G. Taylor. Mr. Taylor has been a Director of the Company
since 1990. He is a private investor and has been retired for the past five
years. Prior to that, he was President and Chief Operating Officer of The
Halliburton Services Company and Executive Vice President of The Halliburton
Company. Mr. Taylor has over 40 years of diverse operating experience in large
organizations.
Senior Executive Officers Who Are Not Directors
Robert Rivkin. Mr. Rivkin, a Certified Public Accountant, has
been Vice President of WSI since July 1994, Chief Financial Officer since March
1995, Secretary since May 1995 and Treasurer since June 1996. From 1989 to 1994,
Mr. Rivkin was a principal at The Envirovision Group Inc., a full service
environmental engineering, consulting and contracting company, where he was
responsible for marketing and strategic planning, finance and overall business
management. Previously, Mr. Rivkin practiced public accounting in New York where
he specialized in mergers and acquisitions, IPO's and SEC reporting.
Joseph E. Motzkin. Mr. Motzkin has been a Vice President of
WSI since August 1996. From 1994 to 1996, he was a General Manager at Prins
Recycling Corporation, where he operated landfills, established recycling
programs, and directed sales programs and customer service activities. From
1989 to 1994, he was a General Manager for Laidlaw Waste Systems, where he was
responsible for their New England operations. Mr. Motzkin has 26 years of
experience in the solid waste management business.
The Board of Directors and Its Committees
- -----------------------------------------
Board of Directors
The Company is currently managed by a seven-member Board of
Directors, a majority of whom are independent of the Company's management. Each
director will hold office for the term to which he is elected and until his
successor is duly elected and qualified.
The Board of Directors held 10 meetings during fiscal year
1996. Each of the directors attended at least 75% of the total number of
meetings of the Board of Directors and of the committees of the Company of which
he was a member.
5
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The Board of Directors has appointed an Audit Committee,
Compensation Committee and an Executive Committee.
Compensation Committee. The Compensation Committee, which
consisted of Messrs. Matulich and Simmons as of December 31, 1996, makes
recommendations and exercises all powers of the Board of Directors in connection
with certain compensation matters, including incentive compensation and benefit
plans. The Compensation Committee administers, and has authority to grant awards
under, the Waste Systems International, Inc. 1995 Stock Option and Incentive
Plan (the "Plan") to the employee directors and management of the Company and
its subsidiaries and other key employees. The Compensation Committee met one
time in 1996.
Executive Committee. The Executive Committee, which consists of
Messrs. Strauss, Golob, and Philipbar, is authorized to manage and direct
the affairs of the Company between meetings of the Board of Directors,
subject to limitations imposed by applicable law and other resolutions of the
Board of Directors. The Executive Committee met six times in 1996.
Audit Committee. The Audit Committee which currently consists
of Messrs. Matulich, Philipbar and Shannon, is empowered to recommend to the
Board the appointment of the Company's independent public accountants and to
periodically meet with such accountants to discuss their fees, audit and
non-audit services, and the internal controls and audit results for the Company.
The Audit Committee also is empowered to meet with the Company's accounting
personnel to review accounting policies and reports. The Audit Committee met one
time during 1996.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the SEC and the Nasdaq Small-Cap Market. Officers, directors and
greater than 10% stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file. To the Company's
knowledge, based solely on review of the copies of such reports furnished to the
Company and written representations that no other reports were required during
the fiscal year ended December 31, 1996, all Section 16(a) filing requirements
applicable to its executive officers, directors and greater than 10% beneficial
owners were satisfied except that Mr. Joseph Motzkin inadvertently filed a Form
3 Statement of Beneficial Ownership Securities, which was due August 11, 1996,
approximately 30 days late.
Item 11. Executive Compensation
Director Compensation
- ---------------------
Pursuant to a Resolution adopted by the Directors in January 1996,
the Company is not paying cash compensation to its Directors. Non-Employee
Directors are entitled to stock option grants under the 1995 Stock Option Plan
for Non-Employee Directors. The Board may reconsider the payment of cash
compensation to Directors at a future date.
Summary Compensation Table. The following table sets forth the
aggregate cash compensation paid by the Company with respect to the fiscal years
ended December 31, 1996, 1995 and 1994 to the Company's Chief Executive Officer
and the one other senior executive officer in office on December 31, 1996 who
earned at least $100,000 in cash compensation during 1996 (the "Named Executive
Officers").
6
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SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
------
Annual Shares
Compensation Underlying
Name and Principal Position Year Salary Options
($) (#)
- ---------------------------- ----- ---------- --------------
Philip Strauss (1) 1996 150,000 250,000
President and Chief 1995 43,750 200,000
Executive Officer
Robert Rivkin 1996 150,000 206,250
Vice President, Chief
Financial 1995 150,000 0
Officer, Secretary and
Treasurer 1994 75,000 43,750
Richard H. Rosen (2) 1996 45,000 0
Chief Executive Officer,
President 1995 180,000 0
and Treasurer 1994 180,000 175,000
- -----------------
(1)Mr. Strauss became Chief Executive Officer on March 27, 1996. Prior to that,
Mr. Strauss was Executive Vice President and Chief Operating Officer which
offices he had held since September 19, 1995.
(2)Dr. Richard H. Rosen resigned from all offices and positions with the Company
on March 27, 1996.
7
<PAGE>
Option Grants in Fiscal Year 1996. The following table sets forth the
options granted during fiscal year 1996 and the value of the options held on
December 31, 1996 by the Company's named executive officers.
OPTION GRANTS IN FISCAL YEAR 1996
---------------------------------
Percent of
Total Options Exercise [Grant
Number of Granted to or Base Date
Shares Underlying Employees in Price Expiration Present
Name Options Granted Fiscal Year ($/share) Date Value $]
- --------------------------------------------------------------------------------
Philip Strauss 250,000 34% $2.25 2006 $204,250
Robert Rivkin 206,250 28% $2.25 2006 $168,506
Option Exercises and Year-End Holdings. The following table sets forth
the options exercised during fiscal year 1996 and the value of the options held
on December 31, 1996 by the Company's Named Executive Officers.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1996
AND FISCAL YEAR-END 1996 OPTION VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Options Options
at fiscal at fiscal
Shares Year-End (#) Year-End ($)
Acquired Value ------------- -------------
On Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- -------------- ----------- -------- ------------- -------------
Philip Strauss 0 0 250,000/0 0
Robert S. Rivkin 0 0 250,000/0 0
Richard H. Rosen 0 0 0 0
Option Repricings The following table sets forth the options repriced
during fiscal year 1996.
10-YEAR OPTION REPRICING
Length of
Original
Number of Market Option
Securities Price of Exercise Term
Underlying Stock at Price at Remaining
Options Time Time New at Date
Repriced of of Exercise of
Name Date (#) Repricing Repricing Price Repricing
- --------------------------------------------------------------------------------
Philip Strauss 6/28/96 200,000 $5.44 $5.44 $2.25 9 years
8
<PAGE>
Employment Agreements. As of December 31, 1996, the Company was a party
to an employment agreement with Mr. Rivkin. The terms of the Company's
employment agreement with Mr. Rivkin, provides (i) that Mr. Rivkin receive a
salary of $150,000 per year; and (ii) that he agree not to compete with WSI
following termination of his employment by WSI for a period of one year
following such termination. The terms of this agreement shall continue in effect
until terminated by either party. WSI may exercise the right to terminate the
agreement with or without cause at any time and Mr. Rivkin may exercise the
right to terminate the agreement on 30 days' written notice at any time.
Stock Performance Graph
- -----------------------
The Securities and Exchange Commission requires the Company to
present a chart comparing the cumulative total shareholder return on its Common
Stock with the cumulative total shareholder return of (i) a broad equity market
index and (ii) a published industry index or peer group. Although such a chart
would normally be for a five-year period, the Common Stock has been listed on
the Nasdaq Small-Cap Market only since November 14, 1995 and, as a result, the
following chart reflects only the period during which the Common Stock has been
listed on that market. The chart compares the Common Stock with (i) the Media
General Nasdaq Market Value Index (the "Nasdaq Index") and (ii) the Media
General Waste Management Industry Index (the "Waste Management Index"). The
total return for each of the Common Stock, the Nasdaq Index and the Waste
Management Index, assumes the reinvestment of dividends, although dividends have
not been declared on the Company's Common Stock. This chart assumes an
investment of $100 on November 14, 1995 in each of the Common Stock, the stocks
comprising the Nasdaq Index and the stocks comprising the Waste Management
Index. The Nasdaq Index tracks the aggregate price performance of all domestic
equity securities traded on the Nasdaq Market.
Industry
WSI Index Broad Market
------ -------- ------------
November 14, 1995 100.00 100.00 100.00
December 31, 1995 89.33 107.37 101.13
December 31, 1995 14.00 133.17 125.67
9
<PAGE>
Report of the Compensation Committee
- ------------------------------------
The Compensation Committee's executive compensation philosophy is
to establish competitive levels of compensation, link management's pay to the
achievement of the Company's performance goals, and enable the Company to
attract and retain qualified management. The Company's compensation policies
seek to align the financial interests of senior management of the Company with
those of the stockholders.
Base Salary. The Company has established base salary levels for
senior management based on a number of factors, including market salaries for
such positions, the responsibilities of the position, the experience, and the
required knowledge of the individual. The Compensation Committee attempts to fix
base salaries on a basis generally in line with base salary levels for
comparable companies.
Incentive Compensation. During each fiscal year the non-employee
directors who are members of the Compensation Committee may consider granting
senior executives of the Company awards of stock or options under the Plan. Such
awards are based on various factors, including both corporate and individual
performance during the preceding year and incentives to reach certain goals
during future years. During 1996, the Company lowered the exercise price of
options granted to all Company employees, including the Named Executives, in
lieu of raising salaries. The new exercise price is $2.25.
Chief Executive Officer Compensation. Base compensation of the
Chief Executive Officer, Philip Struass, for fiscal year 1995 and 1996 was
$150,000 which was based on a number of factors as noted above in "Report of
Compensation Committee - Base Salary". Mr. Strauss did not receive any bonus
for 1995 or 1996 as there was no bonus plan in place.
Submitted by the Compensation Committee:
Jay Matulich and Barry D. Simmons
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
Jay Matulich and Dr. Simmons served on the Compensation
Committee in 1996. No member of the Compensation Committee has ever served as
an officer of the Company.
<PAGE>
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.
---------------------------------
/s/ Philip Strauss
Date:February 9, 1998 By: -----------------------
----------------- Philip Strauss
Chairman, Chief Executive Officer
and President
Date:February 9, 1998 By: /s/ Robert Rivkin
----------------- -----------------------
Robert Rivkin
Vice President, Chief Financial
Officer, Treasurer and Secretary
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
10
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