UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (For the quarterly period ended March 31, 1998).
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
(For the transition period from to ).
--------------- -----------------
WASTE SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4203626
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
420 Bedford Street, Suite 300
Lexington, Massachusetts 02173
(Address of principal executive offices) (zip code)
(781) 862-3000 Phone
(781) 862-2929 Fax
(Registrant's telephone number, including area code)
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 ___
The number of shares of the Registrant's common stock, par value
$.01 per share, outstanding as of May 14, 1998 was 3,912,931.
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WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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PAGE
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997. 1-2
Consolidated Statements of Operations for the Three Months
Ended March 31, 1998 and 1997. 3
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997. 4-5
Notes to Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations. 13-20
PART II. Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 22
Item 3. Defaults on Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
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Waste Systems International, Inc.and Subsidiaries
Consolidated Balance Sheets
,
Assets March 31, 1998 December 31,
------ (Unaudited) 1997
---------------- ----------------
Current assets:
Cash and cash equivalents $ 894,047 $ 2,964,274
Accounts and notes receivable, net 1,066,296 944,793
Assets held for sale 125,000 125,000
Due from former employee (Note8) 274,174 300,000
Prepaid expenses and other current assets 1,137,195 941,092
---------------- ----------------
Total current assets 3,496,712 5,275,159
Restricted cash and securities 229,000 254,000
Property and equipment, net (Notes 2 and 4) 14,338,679 12,487,183
Intangible assets, net (Note 3) 2,817,303 96,832
Advances and deposits - Acquisition (Note 3) 2,301,957 -
Other assets 694,764 447,080
---------------- ----------------
Total assets $ 23,878,415 $ 18,560,254
================= ================
See accompanying notes to consolidated statements.
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1
Waste Systems International, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 1998 December 31,
(Unaudited) 1997
----------------- ------------------
Liabilities and Stockholders' Equity
- -------------------------------------
Current liabilities:
Current portion of long-term debt
and notes payable (Note 5) $ 7,904,435 $ 843,831
Accounts payable 1,005,379 353,937
Accrued expenses 1,312,525 1,766,386
Restructuring and current
liabilities related to
discontinued operations 195,319 778,609
------------- --------------
Total current liabilities 10,417,658 3,742,763
Long-term debt and notes payable (Note 5) 6,970,164 7,201,262
Landfill closure and post-closure costs 1,691,000 1,644,000
------------ ---------------
Total liabilities 19,078,822 12,588,025
------------ ---------------
Commitments and Contingencies (Note8)
Stockholders' equity (Notes 6 and 7):
Common stock, $.01 par value. Authorized
30,000,000 shares; 3,912,431 and
3,893,415 shares issued and
outstanding at March 31, 1998
and December 31, 1997, respectively 39,124 38,934
Preferred stock, $.001 par value.
Authorized 1,000,000 shares:
Series A Convertible Preferred
Stock; 200,000 shares designated,
92,580 shares issued and
outstanding at March 31, 1998
and December 31, 1997 9,257,807 9,257,807
Series B Convertible Preferred
Stock; 100,000 shares designated,
40,488 shares issued and
outstanding at March 31, 1998
and December 31, 1997 4,048,750 4,048,750
Additional paid-in capital 21,366,862 21,432,437
Accumulated deficit (29,912,950) (28,805,699)
------------- --------------
Total stockholders' equity 4,799,593 5,972,229
-------------- --------------
Total liabilities and
stockholders' equity $ 23,878,415 $ 18,560,254
=========== ==============
See accompanying notes to consolidated financial statements.
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2
Waste Systems International, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three months ended March 31,
-------------------------------------
1998 1997
Revenues $ 1,527,970 $ 396,309
Cost of operations:
Operating expenses 863,580 242,482
Depreciation and amortization 374,242 112,177
Acquisition integration costs (Note 3) 320,000 -
-------------- ---------------
Total cost of operations 1,557,822 354,659
--------------- ---------------
Gross profit(loss) (29,852) 41,650
Selling, general and administrative expenses 657,213 562,605
---------------- ---------------
Loss from operations (687,065) (520,955)
---------------- ---------------
Other income (expense):
Royalty and other income (expense), net (14,126) (2,718)
Interest income 27,985 34,652
Interest expense and financing costs (434,045) (304,676)
--------------- ---------------
Total other income (expense) (420,186) (272,742)
--------------- --------------
Loss before minority interest (1,107,251) (793,697)
Minority interest - 4,771
-------------- ---------------
Net loss (1,107,251) (788,926)
Preferred stock dividends
(Not declared - Note 6) 242,524 -
-------------- --------------
Net loss available for common
shareholders $ (1,349,775) $ (788,926)
============== =============
Basic net loss per share $ (0.35) $ (0.23)
============== =============
Weighted average number of shares used in
computation of basic net loss per share 3,904,969 3,490,931
See accompanying notes to consolidated financial statements.
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3
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended March 31,
----------------------------------
1998 1997
Cash flows from operating activities:
Net loss $(1,107,251) $ (788,926)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 406,116 124,573
Equity in loss of affiliate - (4,574)
Landfill closure and post-closure cots 47,000 21,000
Changes in assets and liabilities:
Accounts and notes receivable 155,605 452,169
Due from former employee 25,826 20,000
Prepaid expenses and other
current assets (215,660) (89,595)
Accounts payable 586,484 (80,099)
Accrued expenses (453,861) (316,309)
-------------- --------------
Net cash used by continuing operations (555,741) (661,761)
Net cash used by discontinued operations
and restructuring (583,290) (44,084)
-------------- --------------
Net cash used by operating activities(1,139,031) (705,845)
------------- -------------
Cash flows from investing activities:
Assets held for sale 125,000 -
Restricted cash and securities 25,000 (17,078)
Landfills (14,392) -
Landfill development projects (67,840) 26,069
Machinery and equipment (112,321) (148,926)
Rolling stock (5,412) (246,805)
Containers (1,543) (77,226)
Other property and equipment (141,983) (8,315)
Advances and deposits - acquisitions (2,301,957) -
Net assets acquired through acquisition (4,538,165) -
Intangible assets (3,964) (1,679)
Other assets (124,272) 1,426
------------ -------------
Net cash used by investing
activities (7,161,849) (472,534)
------------- --------------
Cash flows from financing activities:
Deferred financing and registration costs (253,879) -
Repayments of notes payable and
long-term debt (1,541,420) (252,815)
Borrowings from notes payable
and long-term debt 8,009,369 1,234,064
Proceeds from issuance of common stock 16,583 399,000
-------------- -------------
Net cash provided by
financing activities 6,230,653 1,380,249
-------------- -------------
Increase (decrease) in cash (2,070,227) 201,870
Cash, beginning of period 2,964,274 264,776
-------------- -------------
Cash, end of period $ 894,047 $ 466,646
============= =============
See accompanying notes to consolidated financial statements.
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4
Supplemental disclosures of cash flow information:
For the three months ended March 31, 1998 and 1997, cash paid for
interest was $299,059 and $527,111, respectively.
Supplemental disclosures of noncash activities:
During the quarters ended March 31, 1998 and 1997, the Company
acquired assets of $0 and $449,330,
respectively, under capital lease obligations.
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5
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Waste
Systems International, Inc. and its subsidiaries ("WSI" or the "Company")
include the accounts of the Company after elimination of all significant
intercompany accounts and transactions. These consolidated financial statements
have been prepared by the Company without audit. In the opinion of management,
all adjustments (which include only normal recurring adjustments) considered
necessary to present fairly the financial position, results of operations and
cash flows at March 31, 1998 and for all periods presented have been made. The
results of operations for the period ended March 31, 1998 are not necessarily
indicative of the operating results for the full year. Certain information and
footnote disclosure normally included in consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. It is suggested that these consolidated financial
statements presented herein be read in conjunction with the Company's
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 1997.
Note 2. Summary of Significant Accounting Policies
For a complete description of the Company's accounting policies in
addition to the policies listed below, see Note 2 to Consolidated Financial
Statements in the Company's 1997 Annual Report on Form 10-K.
Basis of Presentation: The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the 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.
Property and Equipment: Property and equipment are stated at cost. The
cost of all maintenance and repairs are charged to operations as incurred.
Depreciation for financial reporting purposes is provided using the
straight-line method over the estimated useful lives of the assets as follows:
Buildings, facilities and improvements 10-30 years
Machinery and equipment 3-10 years
Rolling stock 3-10 years
Containers 5-10 years
Capitalization of landfill development costs begins upon determination
by the Company of the economic feasibility or extended useful life of each
landfill acquired as a result of comprehensive engineering and profitability
studies and with the signing of landfill management contracts for facilities
operated by the Company that are not owned. Capital costs include acquisition,
engineering, legal, and other direct costs associated with the permitting and
development of new landfills, expansions at existing landfills, and cell
development. These costs are capitalized and not amortized until all permits are
obtained and operations have commenced.
Interest is capitalized on landfill development costs related to
permitting, site preparation, and facility construction during the period that
these assets are undergoing activities necessary for their intended use No
interest costs were capitalized during the three months ended March 31, 1998 and
1997.
Landfill development costs are amortized using the unit-of-production
method, which is calculated using the total units of airspace filled during the
year in relation to total estimated permitted airspace capacity. The
determination of airspace usage and remaining airspace capacity is an essential
component in the amortization calculation. The determination is performed by
<PAGE>
6
conducting annual topography surveys of the Company's landfill facilities to
determine remaining airspace capacity in each landfill. The surveys are reviewed
by the Company's consulting engineers, the Company's internal operating and
engineering staff, and its financial and accounting staff. Current year-end
remaining airspace capacity is compared with prior year-end remaining airspace
capacity to determine the amount of airspace used during the current year. The
result is compared against the airspace consumption figures used during the
current year for accounting purposes to ensure proper recording of the
amortization provision. The reevaluation process did not materially impact
results of operations for any periods presented.
The Company performs assessments for each landfill of the
recoverability of capitalized costs which requires considerable judgment by
management with respect to certain external factors, including, but not limited
to, anticipated future revenues, estimated economic life and changes in
environmental regulation. It is the Company's policy to periodically review and
evaluate that the benefits associated with these costs are expected to be
realized and therefore capitalization and amortization is justified. Capitalized
costs related to landfill development for which no future economic benefit is
determined by the Company are expensed in the period in which such determination
is made.
Landfill Closure and Post-Closure Costs: The Company has a material
financial obligation relating to closure and post-closure activities for
landfills it owns or operates. Accordingly, the Company estimates and accrues
closure and post-closure costs on a unit-of-production basis over each
landfill's estimated remaining permitted airspace capacity. The accrual is based
on final capping of the site, site inspection, leachate management, methane gas
control and recovery, groundwater monitoring, and operation and maintenance
costs to be incurred during the period after the facility closes. The estimated
costs are expressed in current dollars and are not discounted to reflect timing
of future expenditures. The Company has accrued approximately $1.7 million and
$1.6 million for closure and post-closure costs at March 31, 1998 and December
31, 1997, respectively. The engineering and accounting staff of the Company
periodically review its future obligation for closure and post-closure costs. If
estimates of the permitted air space capacity or the estimated costs of closure
and post-closure have changed, the Company revises the rates at which it accrues
the future costs.
The Company records reserves for landfill closure and post-closure
costs, as necessary, as a component of the purchase price of facilities
acquired, in acquisitions accounted for under the purchase method, when the
acquisition is consummated.
Revenue Recognition: The Company's revenues are derived primarily
from its collection, recycling, transfer and disposal services. The Company
records revenues when the services are performed.
Cost of Revenues: Cost of revenues includes direct labor, fuel,
equipment maintenance, insurance, depreciation and amortization of equipment and
landfill development costs, accruals for ongoing closure and post-closure
regulatory compliance (for landfills owned), and other routine maintenance and
operating costs directly related to landfill operations. Also included in cost
of revenues are payments made to the towns in which each landfill is located in
the form of "Host Town Fees" (for landfills operated under management
contracts), which are negotiated on a rate per ton basis as part of the contract
with the Town. In Towns where landfills are operated under management contracts,
the Town is responsible for the closure and post-closure costs related to the
landfill.
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7
Earnings Per Share: In 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, Earnings Per Share
(SFAS 128). SFAS 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. Loss per
share amounts for all periods have been presented and where appropriate,
restated to conform to the SFAS 128 requirements. Weighted average number of
common and common equivalent shares outstanding and loss per common and common
equivalent shares have been restated to give effect to a one-for-five reverse
stock split effective Februray 13, 1998. See Note 6.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
Of: The Company adopted the provisions of SFAS No. 121, "Accounting for the
impairment of Long-Lived Assets to Be Disposed Of", on January 1, 1997. This
Statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. Adoption of this Statement
did not have a material impact on the Company's financial position, results of
operations, or liquidity in 1997.
Intangible Assets: The Company records the excess of the purchase price
over the fair market value of the net identifiable assets of an acquired company
as goodwill. Goodwill is amortized on a straight-line basis over forty years.
Other intangible assets include customer lists and covenants not to compete
which are amortized on a straight-line basis over five years and over the term
of the agreement, respectively. The Company will evaluate the periods of
amortization continually to determine whether latter events and circumstances
warrant revised estimates of useful lives. If estimates are changed, the
unamortized cost shall be allocated to the remaining period in the revised
useful life.
Reclassifications: Certain amounts in prior year financial statements
have been reclassified to conform to their 1998 presentation.
Note 3. Acquisitions
During the quarter ended March 31, 1998, WSI acquired 5 collection
companies and a transfer station in the State of Vermont. The aggregate cost of
the acquisitions was approximately $4.83 million consisting of $4.4 million in
cash and $430,000 in assumed liabilities. The acquisitions have combined annual
revenues of approximately $5.0 million. The Company is integrating these
acquisitions with its current operations in Vermont. The acquisitions have been
accounted for using the purchase method of accounting. The excess of the
purchase price over the fair value of the net identifiable assets acquired of
approximately $1,643,000 has been recorded as goodwill and is being amortized on
a straight-line basis over 40 years.
All acquisition integration costs, which include relocation, severance
and other termination benefits as well as costs related to integrating the
acquired companies into the Company's operations are expensed. During the three
months ended March 31, 1998, the Company expensed approximately $320,000 related
to acquisition integration costs.
The following table sets forth the acquisitions completed by the
Company during the first quarter of 1998:
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Acquisition Month Acquired Principal Business Location Market Area
- ----------- -------------- ---------------------- ---------- ---------------
Doyle Disposal January 1998 Solid waste collection Barre, VT Central Vermont
Perkins Disposal January 1998 Solid waste collection St. Johnsbury, VT N. E. Vermont
Rapid Rubbish Solid waste collection/
moval , Inc. February 1998 Transfer Station St. Johnsbury, VT N. E. Vermont
Greenia Trucking February 1998 Solid waste collection St. Albans, VT N. W. Vermont
John Leo & Sons, LTD. March 1998 Solid waste collection Essex, VT N .W. Vermont
</TABLE>
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8
The following unaudited pro forma financial information presents the
combined results of operations of the Company and the aggregate of the acquired
entities for the first quarter of 1998 as if the acquisitions had occurred as of
the beginning of 1998, after giving effect to certain adjustments, including
amortization of intangibles and additional depreciation of property and
equipment. The pro forma financial information does not necessarily reflect the
results of operations that would have occurred had the Company and the aggregate
of the acquired entities constituted a single entity during such period.
March 31,1998
(unaudited)
Net revenues $ 1,984,040
===============
Net loss available for common shareholders $ (1,051,519)
===============
Basic loss per share $ (0.27)
===============
In November 1997, WSI signed a definitive agreement to acquire the
700-acre, 3 million cubic yard permitted municipal solid waste landfill in
Hopewell, Pennsylvania. The purchase price of approximately $5.0 million will be
paid primarily by the assumption of on the facility. The existing landfill
consists of five permitted cells, one of which is currently operating. This
transaction is expected to close by the end of June 1998.
On March 24, 1998, the Company signed a definitive agreement to acquire
Horvath Sanitation, Inc. D/B/A Eagle Waste ("Eagle"), which is based in Altoona,
Pennsylvania. Eagle has approximately $8 million in annual revenue and collects
approximately 200 tons per day of solid waste. In connection with the
acquisition, the Company was required to advance a deposit, held by an escrow
agent, of approximately $2.2 million on March 25, 1998. The deposit will be
credited to the acquisition price upon closing of the transaction. The
transaction is expected to close by the end of May 1998.
Note 4. Property and Equipment
Property and equipment are stated at cost and consist of the following;
March 31, 1998 December 31, 1997
-------------- -----------------
Landfills $ 8,426,402 $ 8,412,010
Landfill development projects 759,065 691,225
Buildings, facilities and improvements 2,306,136 1,823,981
Machinery and equipment 1,635,869 1,513,720
Rolling stock 1,540,257 662,595
Containers 1,019,225 401,941
--------------- -------------------
15,686,954 13,505,472
Less accumulated depreciation
and amortization (1,348,275) (1,018,289)
--------------- -------------------
Property and equipment, net $ 14,338,679 $ 12,487,183
============= ===================
<PAGE>
9
Note 5. Long-term debt and notes payable
Long-term debt and notes payable consists of:
March 31, December 31,
1998 1997
Bridge loan $ 5,000,000 $ -
Subordinated debentures 4,425,000 4,425,000
Capital leases and equipment
notes payable 2,814,583 2,626,700
Howard Bank Term Loan 664,000 748,000
Howard Bank Term Loan 1,550,000 -
Mortgages 187,750 189,350
Other notes payable 233,266 56,043
------------- -------------
14,874,599 8,045,093
Less current portion 7,904,435 843,831
------------- -------------
Long-term portion $ 6,970,164 $ 7,201,262
============= =============
On January 17, 1998 and April 17, 1998, the Company entered into
additional credit facilities with the Howard Bank in Vermont for $4.2 million to
fund the development and expansion of its integrated solid waste management
operations in Vermont and for general working capital purposes. All advances
under these facilities were repaid on May 14, 1998.
On February 12, 1998, the Company closed on a $5.0 million bridge
loan. The bridge loan was repaid May 13, 1998.
On May 13, 1998, the Company closed on an offering of $60.0 million in
Subordinated Notes (the "Notes") which resulted in net proceed to the Company of
approximately $58.3 million. See Note 9.
Note 6. Common Stock
On February 13, 1998, the shareholders of the Company approved a one
for five reverse stock split of the Company's Common Stock at a special
shareholders' meeting. No fractional shares were issued in connection with the
reverse stock split, and shareholders received cash in payment for any
fractional shares otherwise issuable. The weighted average shares outstanding as
of March 31, 1997 have been restated to reflect the one for five reverse stock
split.
Note 7. Preferred Stock
The Series A Convertible Preferred Stock ("Series A Preferred Stock")
bears an 8.0% annual cumulative dividend, and is convertible into common stock
at a conversion price of $1.406 per share of common stock, which conversion
price may be reset to a lower conversion price upon the occurrence of certain
events. The dividend is payable in cash or in additional shares of preferred
stock at the Company's option and is subject to adjustment after 3 years. The
preferred stock is also redeemable at the Company's option after 1 year, subject
to certain trading requirements. Cumulative dividends on the Series A Preferred
Stock, as of March 31, 1998 which have not been declared or paid are
approximately $577,000.
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10
The Series B Preferred Stock, ("Series B Preferred Stock") bears a 6.0%
annual cumulative dividend, and is convertible into common stock at a conversion
price of $6.25 per share of common stock. The dividend is payable in cash or in
additional shares of Series B Preferred Stock at the Company's option if the
Company's closing stock price for 20 consecutive days equals or exceeds $6.25
per share. The Series B Preferred Stock is also mandatorily convertible at the
Company's option for Common Stock if the Company's average closing Common Stock
price for 20 consecutive trading days equals or exceeds $6.25 per share. The
Company met the mandatory conversion trading requirements and elected to convert
all of the shares of the Series B Preferred Stock and the accumulated unpaid
dividends into Common Stock on May 14, 1998. Cumulative dividends on the Series
B Preferred Stock, as of March 31, 1998, which have not been declared or paid
are approximately $61,000.
Note 8. Commitments and Contingencies
In the normal course of its business, and as a result of the extensive
governmental regulation of the solid waste industry, the Company periodically
may become subject to various judicial and administrative proceedings involving
federal, state, or local agencies. In these proceedings, the agency may seek to
impose fines on the Company or to revoke or deny renewal of an operating permit
held by the Company. From time to time, the Company also may be subjected to
actions brought by citizens' groups in connection with the permitting of its
landfills or transfer stations, or alleging violations of the permits pursuant
to which the Company operates. Certain federal and state environmental laws
impose strict liability on the Company for such matters as contamination of
water supplies or the improper disposal of waste. The Company's operation of
landfills subjects it to certain operational, monitoring, site maintenance,
closure and post-closure obligations which could give rise to increased costs
for monitoring and corrective measures.
The Company has obtained environmental impairment liability insurance
in the amount of $5.0 million 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.
The Company is party to pending legal proceedings and claims. Although
the outcome of such proceedings and claims cannot be determined with certainty,
the Company's management, after consultation with outside legal counsel, is of
the opinion that the expected final outcome should not have a material adverse
effect on the Company's financial position, results of operations or liquidity,
and are summarized as follows:
a) In July 1996, the Company commenced arbitration proceedings against
Dr. Richard Rosen (Rosen), former Chairman, Chief Executive Officer and
President of the Company, seeking to recover amounts, excluding interest and
litigation costs, which the Company believes it was owed by Rosen. This action
was undertaken at the direction of the Board of Directors following its receipt
of a report by a special committee of the Board appointed to investigate Rosen's
financial dealings with the Company, in consultation with independent counsel
retained in connection with its investigation. Rosen resigned from all offices
with the Company on March 27, 1996. Amounts which the Company sought to recover
included unreimbursed advances and amounts which the Company believed
constituted improper expense reimbursements and payments of Company funds for
personal benefit.
An arbitration hearing was completed on October 25, 1996. On January 2,
1997, the arbitrator issued the Award of Arbitrator, directing Rosen to pay
$780,160, excluding interest and litigation costs, for breaches by Rosen of his
employment agreement with the Company "in failing to discharge in good faith the
duties of his positions and failing to act under the direction of the Board of
Directors of the Company". On February 25, 1997 the Middlesex Superior Court in
Cambridge, Massachusetts confirmed the arbitration award and entered the
judgment against Rosen, which is now non-appealable, in an amount in excess of
approximately $833,000. The Company is currently pursuing discovery against
Rosen through this forum to identify the assets that Rosen may have available to
satisfy the outstanding judgment. In August of 1996, the Company secured a
preliminary injunction in Middlesex Superior Court with respect to any future
sales of the Company's stock by Rosen. The Company has filed a Motion in such
action asking the Court to issue a broader form of permanent injunction in the
case. On September 8, 1997 the Company commenced a supplementary process action
in Cambridge District Court to collect on such judgment, including seeking
foreclosure on all shares of the Company's stock owned by Rosen. On March 5,
1998, the judge granted the Company's motion and the Company obtained the
remaining 49,441 Common Shares held by Rosen. As of May 14, 1998, these shares
had a market value of approximately $460,000 based on the closing price of the
Company's stock as of that date. The Company is carrying on its March 31, 1998
balance sheet an amount of approximately $274,000 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.
<PAGE>
11
On March 27, 1997, Rosen commenced an action against the Company in
Middlesex County (Massachusetts) Superior Court, seeking an award of damages
resulting from the Company's alleged breach of a Memorandum of Understanding
entered into between the Company and Rosen in connection with the termination of
Rosen's employment with the Company, in which Rosen had been granted an option
to purchase certain assets of the Company not related to its core business. The
Company believes this claim to be frivolous and is vigorously defending this
action.
b) In October 1997 in the Middlesex Superior Court, the Company
commenced an action against Marguerite A. Piret, a former director of the
Company and the wife of Rosen, seeking damages against Ms. Piret for her
independent breaches of fiduciary duty as a former director of the Company. The
case is in the discovery stage and no trial date has yet been set. If the
Company is successful in its claims, the Company may recover direct and
consequential damages from Ms. Piret.
Note 9. Subsequent Events
On May 13, 1998, the Company closed an offering of $60.0 million in
Subordinated Notes (the "Notes"), which resulted in net proceeds to the Company
of approximately $58.3 million. The Notes will mature in May 2005, and bear
interest at 7.0%, payable semi-annually in arrears on each June 30 and December
31, commencing June 30, 1998. Subsequent to prior approval of the stockholders
of the Company on or before December 31, 1998, the Notes and any accrued but
unpaid interest will be convertible into Common Stock at a conversion price of
$10.00 per share, representing an approximate 22% premium over the closing price
of $8.25 on May 7, 1998, the transaction pricing date. Following receipt of
stockholder approval, the shares will be convertible at the option of the holder
at any time and can be mandatorily converted by the Company after 2 years if the
Company's Common Stock closing price equals or exceeds the conversion price of
$10.00 per share for a period of 20 consecutive trading days. If the
stockholders approval is not received by December 31, 1998, the interest rate of
the Notes will increase to 12.0% effective September 1, 1998.
<PAGE>
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, with respect to, among other things, the
Company's future revenues, operating income, or earnings per share. These
forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes,"
"anticipates," "expects" or words of similar expression. The Company's actual
results could differ materially from those set forth in the forward-looking
statements. Certain factors that might cause such a difference are discussed
herein.
See "Certain Factors Affecting Future Operating Results".
Introduction
Waste Systems International, Inc. (the "Company" or "WSI") is a
regional integrated non-hazardous solid waste management company that provides
solid waste collection, recycling, transfer and disposal services to commercial,
industrial, residential and municipal customers.
WSI's objective is to expand the current geographic scope of its local
operations primarily within the Northeast and Mid-Atlantic regions of the United
States and to become one of the leading providers of non-hazardous solid waste
management services in each market that is serves. The Company's primary growth
strategy is to acquire landfills in or near urban metropolitan areas, and to
secure dedicated waste streams for such landfills by acquisition or development
of collection operations and transfer stations. The internalization of waste
streams is a major component of the Company's strategy. The Company believes
that significant opportunities exist to expand its operations in each of its
current and targeted markets.
In connection with its growth strategy, the Company currently is and at
any given time will be involved in potential acquisitions that are in various
stages of negotiation and consummation (ranging from initial discussions to the
execution of definitive agreements), some of which may be material. In
particular, in November 1997, the Company signed a definitive agreement to
acquire the Hopewell Landfill, a 700-acre, 3 million cubic yard permitted
municipal solid waste landfill in Hopewell, Pennsylvania, and in March 1998,
signed a definitive agreement to acquire Horvath Sanitation, Inc. (D/B/A Eagle
Waste), a solid waste collection company based in Altoona, Pennsylvania. The
Company expects to close both transactions during May and June 1998 and to
integrate Eagle Waste's operations with the Hopewell landfill. Together, the
Hopewell landfill and Eagle Waste are comparable in size and scope to the
Company's current operations, which include five solid waste collection
companies and a transfer station in Vermont acquired during the first quarter of
1998.
The Company established its first integrated solid waste management
operations in the geographical area surrounding its landfill in Moretown,
Vermont. In addition to the landfill in Moretown, Vermont, the Company currently
owns and/or operates three transfer stations and collection operations serving
over 4,400 commercial, industrial, residential and municipal customers in the
Burlington, St. Albans, St. Johnsbury and Barre-Montpelier, Vermont areas. The
first cell ("Cell 1") at the Company's landfill is currently operating at
approximately 300-350 tons per day ("TPD") with remaining estimated permitted
capacity as of March 31, 1998 of approximately 196,000 cubic yards. A permit
application was filed with the Vermont Agency of Natural Resources for the
development of a second cell ("Cell 2") on April 3, 1997. The Company expects to
receive all of the permits required for Cell 2 by the end of the second quarter
of 1998. When all of the permits are granted, the Company will begin
construction on Cell 2 which will increase the permitted landfill capacity by an
estimated additional 1.3 million cubic yards.
WSI and the Town of South Hadley, Massachusetts have entered into a
contract whereby the Company will operate and remodel the Town's 30-acre
municipal solid waste landfill. The Town of South Hadley will retain full
ownership of the landfill while the Company operates and remodels the facility.
In March 1997, the Company received a landfill disruption permit from the MDEP
which enabled WSI to begin engineering work and feasibility studies at the South
Hadley landfill. On March 16, 1998 the Company filed its draft environmental
impact report with the MDEP and anticipates receiving all of its operating and
construction permits during the second or third quarter of 1998, which would
allow WSI to begin accepting solid waste at the first 6-acre lined cell during
the first or second quarter of 1999. The South Hadley landfill project is
currently expected to have in excess of 2 million cubic yards of new capacity
for future disposal.
During the first quarter of 1998, WSI acquired 5 collection companies
and a transfer station, in the State of Vermont. The aggregate cost of the
acquisitions was approximately $4.8 million consisting of $4.4 million in cash
and $430,000 in assumed liabilities. The acquisitions have combined annual
revenues of approximately $5.0 million. The Company is integrating these
acquisitions with its current operations in Vermont.
WSI and the Town of South Hadley, Massachusetts have entered into a
contract whereby the Company will operate and remodel the Town's 30-acre
municipal solid waste landfill. The Town of South Hadley will retain full
ownership of the landfill while the Company operates and remodels the facility.
In March 1997, the Company received a landfill disruption permit from the MDEP
which enabled WSI to begin engineering work and feasibility studies at the South
Hadley landfill. On March 16, 1998 the Company filed its draft environmental
impact report with the MDEP and anticipates receiving all of its operating and
construction permits during the second or third quarter of 1998, which would
allow WSI to begin accepting solid waste at the first 6-acre lined cell during
the first or second quarter of 1999. The South Hadley landfill project is
currently expected to have in excess of 2 million cubic yards of new capacity
for future disposal.
<PAGE>
13
Three Months Ended March 31, 1998 Compared to Three months Ended March 31, 1997
Over the past two years, the Company has restructured its operations, commenced
operations in Vermont, operated the Fairhaven landfill, which has been
terminated, and made several acquisitions. These acquisitions, dispositions and
restructuring activities affect the comparability of the financial information
herein.
Results of Operations
Revenues:
Revenues represent fees charged to customers for solid waste
collection, transfer, recycling and disposal services provided. Revenues for the
three months ended March 31, 1998 increased 286% to $1,528,000 over the same
period in 1997. The increase was due primarily to increased waste volume
accepted at the Company's Moretown, Vermont landfill, the acquisition of the
Chittenden Solid Waste District transfer station located in Essex, Vermont, and
several waste collection companies. See Note 3. All of the first quarter 1998
and 1997 revenues were generated from the Company's Vermont operations. During
the three months ended March 31, 1998 and 1997, revenue was received from the
following sources:
Three Months Ended March 31,
1998 1997
Collection 40.7% 13.1%
Landfill 27.8 86.9
Transfer 31.5 -
--------- -------
Total Revenue 100.0% 100.0%
======== ========
<PAGE>
14
Operating Expenses:
The following table sets forth, for the periods indicated, certain data
derived from the Company's Consolidated Statement of Operations, expressed as a
percentage of net revenues:
Three Months Ended March 31,
1998 1997
Revenues 100.0% 100.0%
---------- ----------
Operating expenses 56.6 61.2
Depreciation and amortization 25.0 28.4
Integration costs 20.9 -
----------- ---------
Total operating costs 102.5 89.6
----------- ---------
Gross margin (loss) (2.5) 10.4
Selling, general and administrative 42.6 141.9
----------- ---------
Loss from operations (45.1) (131.5)
Minority interest - 1.2
Interest income 1.8 8.7
Interest expense (28.5) (76.9)
Other expense (0.9) (0.6)
----------- ----------
Net loss (72.7%) (199.1%)
=========== ==========
Cost of revenues includes direct labor, fuel, equipment maintenance,
insurance, depreciation and amortization of equipment and landfill development
costs, accruals for ongoing closure and post-closure regulatory compliance (for
landfills owned), and other routine maintenance and operating costs directly
related to landfill operations. Also included in cost of revenues are payments
made to the towns in which each landfill is located in the form of "Host Town
Fees" (for landfills operated under management contracts), which are negotiated
on a rate per ton basis as part of the contract with the Town. In Towns where
landfills are operated under management contracts, the Town is responsible for
the closure and post-closure costs related to the landfill.
Operating expenses for the three months ended March 31, 1998 increased
$621,000, or 256% to $864,000 from $242,000 for the three months ended March 31,
1997. As a percentage of revenues, cost of operations decreased from 61% to 57%
primarily due the acquisition of several collection companies and an expanding
customer base which resulted in higher waste volumes at the Company's landfill
creating better economies of scale.
Depreciation and amortization expense includes depreciation of property
and equipment over their useful lives using the straight-line method,
amortization of goodwill and other intangibles assets over their useful lives
using the straight-line method, and amortization of landfill airspace assets
using the units-of-production method. Depreciation and amortization expense for
the three months ended March 31, 1998 increased $262,000, or 234% to $374,000
from $112,000 for the three months ended March 31, 1997. Depreciation expense
for the period ended March 31, 1998 increased as a percentage of revenues over
the same period in 1997 due to (i) the increase in the amount of waste accepted
at the Company's Vermont landfill which resulted in increased amortization of
capitalized landfill costs and, (ii) a substantial increase in capital equipment
from the acquired operation and the internal growth of the Company's Vermont
collection and transfer operations which resulted in increased depreciation
expense of property and equipment.
Selling, general and administrative expenses consist of corporate
development activities, marketing and public relations costs, administrative
compensation and benefits, legal and accounting and other professional fees as
well as other administrative costs and overhead. Selling, general and
administrative costs increased $95,000 for the first quarter of 1998 to $657,000
from $562,000 in the same period of 1997. The increase was due to the building
of an infrastructure necessary to support increases in acquisition, operating
and administrative activities. As a percent of revenues for the first quarter of
1998, selling, general and administrative costs were 43% of revenues as compared
to 142% for the same period in 1997.
<PAGE>
15
Royalty and other income (expense) remained a relatively consistent
percent of revenue at (0.9%) and (0.7%) for the three month period ended March
31, 1998 and 1997, respectively
Interest income for the quarter ended March 31, 1998 decreased $7,000
or 7% to $28,000 from $35,000 for the three months ended March 31, 1997. The
decrease was the result of lower average cash and investment balances.
Interest expense for the three months ended March 31, 1998 increased
$129,000 to $434,000 from $305,000 for the three months ended March 31, 1997.
The increase resulted primarily from increased indebtedness incurred in
connection with the $5.0 million bridge loan.
EBITDA:
EBITDA is defined as operating income from continuing operations plus
depreciation and amortization, which includes depreciation and amortization
included in selling, general and administrative expenses. EBITDA does not
represent, and should not be considered as an alternative to net income or cash
flows from operating activities, each as determined in accordance with generally
accepted accounting principles ("GAAP"). Moreover, EBITDA does not necessarily
indicate whether cash flow will be sufficient for such items as working capital
or capital expenditures, or to react to changes in the Company's industry or to
the economy in general. The Company believes that EBITDA is a measure commonly
used by lenders and certain investors to evaluate a company's performance in the
solid waste industry. The Company also believes that EBITDA data may help to
understand the Company's performance because such data may reflect the company's
ability to generate cash flows, which is an indicator of its ability to satisfy
its debt service, capital expenditures and working capital requirements. Because
EBITDA is not calculated by all companies and analysts in the same fashion,
investors should consider, among other factors: the non-GAAP nature of EBITDA;
actual cash flows; the actual availability of funds for debt service, capital
expenditures and working capital; and the comparability of the Company's EBITDA
data to similarly-titled measures reported by other companies.
The following table sets forth, for the periods indicated, certain data
derived from the Company's Consolidated Statement of Operations, to determine
EBITDA:
Three Months Ended March 31,
1998 1997
Operating loss ($687,065) ($520,955)
Depreciation and amortization 406,116 124,573
EBITDA ($280,949) ($396,382)
Acquisition integration costs 320,000 -
------------- ------------
Adjusted EBITDA $39,051 ($392,382)
============= =============
Adjusted EBITDA as % of revenue 2.6% (100.0%)
============= =============
<PAGE>
16
Financial Position
WSI had $894,000 in cash as of March 31, 1998. This represented a
decrease of $2,070,000 from December 31, 1997. Working capital as of March 31,
1998, was ($6,921,000), a decrease of $8,453,000 over December 31, 1997. This
decrease was primarily due to the use of cash to fund the net loss for the
period, the increase in short term borrowings to fund the Vermont acquisitions
and Eagle Waste deposit.
At March 31, 1998, the Company had approximately $1.1 million in trade
accounts receivables related to waste collection and disposal services at its
Vermont operations. The Company has estimated an allowance for doubtful accounts
of approximately $46,000 or 4% of gross accounts receivable which is considered
sufficient to cover future bad debts.
During the quarter ended March 31, 1998, the Company devoted
substantial resources to various project development and related activities.
Additions to property and equipment, excluding assets purchased through
acquisition of approximately $343,000 were made during the three months ended
March 31, 1998.
Liquidity and Capital Resources
The Company's business is capital intensive. The Company's capital
requirements, which are substantial, include acquisitions, property and
equipment purchases and capital expenditures for landfill cell construction,
landfill development and landfill closure activities. Principally due to these
factors, the Company may incur working capital deficits. The Company plans to
meet its capital needs through various financing sources, including internally
generated funds, equity securities and debt, including the net proceeds of WSI's
$60.0 million Subordinated Notes offering and through an anticipated expanded
bank credit facility that the Company expects to obtain.
To date, WSI has financed its activities primarily through the issuance
of debt and equity securities, including convertible subordinated notes and
preferred stock. The Company has raised, from inception through March 31, 1998,
cumulative net proceeds of approximately $39.3 million through private
placements of equity securities and the issuance of long-term debt. Utilizing
the raising of $58.3 million in net proceeds from the Subordinated Notes in May
1998, WSI intends to aggressively pursue and develop an integrated solid waste
management company. There can be no assurance that additional debt or equity
financing will be available, or available on terms acceptable to the Company.
Any failure of the Company to obtain required financing would have a material
adverse effect on the Company's financial condition and operation.
Net cash used by operating activities for the three months ended March
31, 1998 and 1997 was $1.0 million and $706,000, respectively. The use of $1.0
million in 1998 consisted of the net loss, the payment of the restructuring and
related liabilities, the termination of the Fairhaven landfill project and the
growth of the Company's Vermont operations.
Net cash used by investing activities for the three months ended March
31, 1998 and 1997 was $7.3 million and $473,000, respectively. Of the net cash
used by investing activities in 1998, approximately $7.1 million was primarily
due to the acquisition of the collection and transfer operations in Vermont as
well as increases in capital expenditures to increase operating efficiencies at
the Company's Vermont operations. Also a deposit of $2.2 million was made on the
Eagle Waste acquisition. The net cash used by investing activities for the same
period in 1997 was primarily the result of the increasing operating activities
at the Moretown, Vermont landfill.
The Company's capital expenditures and capital needs for acquisitions
have increased significantly, reflecting the Company's rapid growth by
acquisition and development of revenue producing assets, and will increase
further as the Company continues to complete acquisitions. Total capital
expenditures are expected to further increase in 1998 due to acquisitions. The
total amount to be paid by the Company (including assumption of debt) in
connection with the Hopewell Landfill and Eagle Waste acquisitions is expected
to be approximately $26.0 million. Once the acquisitions are complete,
substantial additional capital expenditures will be required in connection with
the acquired business.
Net cash provided by financing activities for the quarter ended March
31, 1998 and 1997 was approximately $6.2 million and $1.4 million, respectively.
The increase in financing activities for the first three months of 1998 is due
primarily to the $5.0 million bridge loan and the use of approximately $2.8
million from the Howard Bank credit facility which was offset by the repayment
of both short and long term debt.
<PAGE>
17
At March 31, 1998, the Company had approximately $14.9 million of
long-term and short-term debt, including a $5.0 million bridge loan, which the
Company closed on February 12, 1998. In April 1998, the Company obtained
additional credit facilities with the Howard Bank in Vermont for $1.95 million,
to fund the development and expansion of its integrated waste management
operations in Vermont and for general working capital purposes. Additionally,
the Company closed a private placement of $60.0 million in Subordinated Notes
(the "Notes") on May 13, 1998, which resulted in net proceeds to the Company of
approximately $58.3 million. See Note 9 to the Consolidated Financial Statements
Subsequent Events.
WSI does not believe its operations have been materially affected by
inflation.
Certain Factors Affecting Future Operating Results
The following factors, as well as others mentioned in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, could cause
actual results to differ materially from those indicated by forward-looking
statements made in this Quarterly Report on Form 10-Q.
History of Losses. Prospects for future profitability are heavily
dependent upon the success of the Company's acquisition strategy and in its
ability to continue to build integrated solid waste management operations. There
can be no assurance that WSI will generate sufficient revenue to be profitable
or, if profitable, to maintain profitability in future years.
Uncertain Ability to Finance the Company's Growth. The Company has
limited liquidity in relation to its short-term capital commitments and
operating cash requirements. Additionally, WSI will require substantial funds to
complete and bring to commercial viability all of its currently planned
projects. The Company also anticipates that any future business acquisitions
will be financed through cash from operations, borrowings under its bank line of
credit, the issuance of the Company's common stock or seller financing, or
additional equity or debt financings. Therefore, WSI's ability to satisfy its
capital commitments and operating requirements are dependent on a number of
pending or future financing activities, none of which are assured successful
completion. Any failure of the Company to obtain sufficient financing in the
future would have a material adverse effect on the Company's financial condition
and operations.
Dependence on Management. The Company's future success is highly
dependent upon the services of its executive officers, particularly, Philip
Strauss, Chairman, Chief Executive Officer and President of the Company, and
Robert Rivkin, Executive Vice President - Acquisitions, Chief Financial Officer,
Treasurer and Secretary of the Company. The loss of the services of Mr. Strauss
or Mr. Rivkin could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's future success is also highly dependent upon its
continuing ability to identify, hire, train and motivate highly qualified
personnel. The inability to attract and retain qualified personnel could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
Ability to Manage Growth. The Company's objective is to contiue to grow
by expanding its services in markets where it can be one of the largest and most
profitable fully-integrated solid waste management companies. Accordingly, the
Company may experience periods of significant rapid growth. Such growth, if it
were to occur, could place a significant strain on the Company's management and
its operational, financial and other resources. Any failure to expand its
operational, and financial systems and controls or to recruit appropriate
personnel in an efficient manner at a pace consistent with such growth could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Ability to Identify, Acquire and Integrate Acquisition Targets. The
future success of the Company is highly dependent upon the Company's continued
ability to successfully identify, acquire and integrate additional solid waste
landfills, collection, transportation and disposal businesses. As competition
for acquisition candidates increases within the solid waste management industry,
the availability of suitable candidates at terms favorable to the Company
decreases. The Company competes for acquisition candidates with larger, more
established companies that may have significantly greater capital resources,
which can further decrease the availability of suitable acquisition candidates.
There can be no assurance that the Company will be able to identify suitable
acquisition candidates and if available, will be able to obtain necessary
financings at a price or on terms and conditions favorable to the Company, or to
successfully integrate the acquisitions with current operations.
<PAGE>
18
Competition. The solid waste management industry is highly competitive,
very fragmented and requires substantial labor and capital resources.
Competition exists for collection, transportation and disposal volume, and
acquisition targets. The markets the Company competes or is likely to compete in
are usually served by one or more of the large national, regional or local solid
waste companies who may have accumulated substantial goodwill and or have
greater financial, marketing or technical resources than WSI. The Company also
competes with counties, municipalities and operators of alternative disposal
facilities that operate their own waste collection and disposal facilities. The
availability of user fees, charges or tax revenues and the availability of
tax-exempt financing may provide a competitive advantage to the public sector.
Additionally, alternative disposal facilities such as recycling and incineration
may reduce the demand for the disposal of solid waste in landfills. Competition
for waste collection and disposal business is based on the quality of operation,
price and geographical location. From time to time, competitors may reduce the
price of their services in an effort to expand or maintain market share or to
win competitively bid contracts. There can be no assurance that the Company will
be able to successfully bid such contracts or compete with the larger and better
capitalized companies.
Limitations on Landfill Permitting and Expansion. The Company's
operations depend on its ability to expand the landfills it owns or operates and
develop new landfill sites. There can be no assurances that the Company will be
successful in obtaining new landfill sites or expanding the permitted capacity
of its landfill. The process of obtaining required permits and approvals to
operate and expand landfills and transfer stations has become increasingly
difficult and expensive. The process can take several years and involves
hearings and compliance with zoning, environmental and other requirements. There
can be no assurance that the Company will be successful in obtaining and
maintaining required permits. Even when granted, final permits to expand are
often not approved until the remaining capacity of the landfill is very low. In
the event the Company exhausts its permitted capacity at its landfill, the
Company's ability to expand internally will be limited and the Company will be
required to cap and close the landfill. In addition, the Company could be forced
to dispose of its waste at landfills operated by its competitors. The additional
costs could have a material adverse effect on the Company's business.
Geographic Concentration of Operations. The Company has established an
integrated solid waste management operation located in central Vermont. Since
the Company's primary source of revenues is concentrated to this geographic
location, the Company's business, financial condition and results of operations
can be materially effected by, but not limited to, the following: (i) downturns
in the local economy, (ii) severely harsh weather conditions, (iii) and state
regulations. Additionally, the growing competition within the local economy for
waste streams makes it increasingly difficult to expand within this region.
There can be no assurance that the Company will be able to continue to increase
the waste stream to its landfill in Vermont, or be able to expand its geographic
location to lessen the effects of adverse events that may occur in this region.
Seasonality. The Company's revenues and results of operations tend to
vary seasonally. The winter months of the fourth and first quarters of the
fiscal year tend to yield lower revenues than those experienced in the warmer
months of the second and third quarters. The primary reasons for slower revenues
in the winter months include, but are not limited to: (i) harsh winter weather
conditions which can interfere with collection and transportation; (ii)
construction and demolition activities are primarily performed in the warmer
seasons; (iii) the volume of waste in the region is generally lower in
comparison to that which occurs in warmer months. The Company believes that the
seasonality of the revenue stream will not have a material adverse effect on the
Company's business, financial condition and results of operations on an
annualized basis.
Environmental and Government Regulations. The Company and its customers
operate in a highly regulated environment, and in general the Company's landfill
projects will be required to have federal, state and/or local government permits
and approvals (see "Business-Government Regulation."). Any of these permits or
approvals may be subject to denial, revocation or modification under various
circumstances. In addition, if new environmental legislation or regulations are
enacted or existing legislation or regulations are amended or are interpreted or
enforced differently, WSI or its customers may be required to obtain additional
operating permits or approvals. There can be no assurance that WSI will meet all
of the applicable regulatory requirements. Any delay in obtaining required
permits or approvals will tend to cause delays in the Company's ability to
obtain bond or other project financing, resulting in increases in the Company's
needs to invest working capital in projects prior to obtaining more permanent
financing, and will also tend to reduce project returns by deferring the receipt
of project revenues. In the event that the Company is required to cancel any
planned project as a result of the inability to obtain required permits or other
regulatory impediments, the Company may lose any investment it has made in the
project up to that point, and the cancellation of any landfill projects, may
have a materially adverse effect on the Company's financial condition and
results of operations.
<PAGE>
19
Potential Environmental Liability and Adverse Effect of Environmental
Regulation. WSI's business exposes it to the risk that it will be held liable if
harmful substances escape into the environment and cause damages or injuries as
a result of its operating activities. Moreover, federal, state and local
environmental legislation and regulations require substantial expenditures and
impose significant liabilities for noncompliance.
Potential Adverse Community Relations. The potential exists for
unexpected delays, costs and litigation resulting from community resistance and
concerns relating to specific projects in various communities.
Performance or Surety Bonds, Letters of Credit or Insurance. The
Company may be required to post a performance or surety bond, or letter of
credit to ensure proper closure and post-closure monitoring and maintenance at
its landfills. Additionally, adequate insurance coverage is necessary for the
Company to secure certain contracts. Failure to obtain performance or surety
bonds, or letters of credit in sufficient amounts or at acceptable rates, or
adequate insurance coverage may have a material adverse impact on the Company's
business, financial condition and results of operations.
Limits on Insurance. The Company has obtained environmental impairment
liability insurance covering claims for sudden or gradual onset of environmental
damage. If the Company were to incur a liability for environmental damage in
excess of its insurance limits, its financial condition could be adversely
affected. The Company carries a comprehensive general liability insurance policy
which management considers adequate at this time to protect its assets and
operations from other risks.
Adequacy of Accruals for Closure and Post-Closure Costs. The Company
has material financial obligations relating to closure and post-closure costs of
its existing landfills and any landfill it may purchase or operate in the
future. The Company estimates and accrues closure and post-closure costs based
on engineering estimates of airspace usage and remaining airspace capacity.
There can be no assurances that the Company's financial obligations for closure
and post-closure costs will not exceed the amount accrued, and that this may
have a material adverse effect on the Company's business, financial condition
and results of operations.
Capital Expenditures. The Company capitalizes, in accordance with
generally accepted accounting principles, certain expenditures and advances
relating to acquisitions, pending acquisitions and landfill projects. The
Company's policy is to expense in the current period, all unamortized capital
expenditures and advances relating to any operation that is permanently shut
down or any acquisition that will not be consummated and any landfill project
that is terminated. Thus, the Company may be required to incur a charge against
earnings in future periods that could have a material adverse effect on the
Company's business, financial condition and results of operations.
<PAGE>
20
PART II
Item 1. Legal Proceedings
The Company is party to pending legal proceedings and claims. Although
the outcome of such proceedings and claims cannot be determined with certainty,
the Company's management, after consultation with outside legal counsel, is of
the opinion that the expected final outcome should not have a material adverse
effect on the Company's financial position, results of operations or liquidity,
and are summarized as follows:
a) In July 1996, the Company commenced arbitration proceedings against
Dr. Richard Rosen (Rosen), former Chairman, Chief Executive Officer and
President of the Company, seeking to recover amounts, excluding interest and
litigation costs, which the Company believes it was owed by Rosen. This action
was undertaken at the direction of the Board of Directors following its receipt
of a report by a special committee of the Board appointed to investigate Rosen's
financial dealings with the Company, in consultation with independent counsel
retained in connection with its investigation. Rosen resigned from all offices
with the Company on March 27, 1996. Amounts which the Company sought to recover
included unreimbursed advances and amounts which the Company believed
constituted improper expense reimbursements and payments of Company funds for
personal benefit.
An arbitration hearing was completed on October 25, 1996. On January 2,
1997, the arbitrator issued the Award of Arbitrator, directing Rosen to pay
$780,160, excluding interest and litigation costs, for breaches by Rosen of his
employment agreement with the Company "in failing to discharge in good faith the
duties of his positions and failing to act under the direction of the Board of
Directors of the Company". On February 25, 1997 the Middlesex Superior Court in
Cambridge, Massachusetts confirmed the arbitration award and entered the
judgment against Rosen, which is now non-appealable, in an amount in excess of
approximately $833,000. The Company is currently pursuing discovery against
Rosen through this forum to identify the assets that Rosen may have available to
satisfy the outstanding judgment. In August of 1996, the Company secured a
preliminary injunction in Middlesex Superior Court with respect to any future
sales of the Company's stock by Rosen. The Company has filed a Motion in such
action asking the Court to issue a broader form of permanent injunction in the
case. On September 8, 1997 the Company commenced a supplementary process action
in Cambridge District Court to collect on such judgment, including seeking
foreclosure on all shares of the Company's stock owned by Rosen. On March 5,
1998, the judge granted the Company's motion and the Company obtained the
remaining 49,441 Common Shares held by Rosen. As of May 14, 1998, these shares
had a market value of approximately $460,000 based on the closing price of the
Company's stock at that date. The Company is carrying on its March 31, 1998
balance sheet an amount of approximately $274,000 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.
On March 27, 1997, Rosen commenced an action against the Company in
Middlesex County (Massachusetts) Superior Court, seeking an award of damages
resulting from the Company's alleged breach of a Memorandum of Understanding
entered into between the Company and Rosen in connection with the termination of
Rosen's employment with the Company, in which Rosen had been granted an option
to purchase certain assets of the Company not related to its core business. The
Company believes this claim to be frivolous and is vigorously defending this
action.
b) In October 1997 in the Middlesex Superior Court, the Company
commenced an action against Marguerite A. Piret, a former director of the
Company and the wife of Rosen, seeking damages against Ms. Piret for her
independent breaches of fiduciary duty as a former director of the Company. The
case is in the discovery stage and no trial date has yet been set. If the
Company is successful in its claims, the Company may recover direct and
consequential damages from Ms. Piret.
The Company is not aware of any other non-routine or incidental
material legal proceedings.
<PAGE>
21
Item 2. Changes in Securities
None.
Item 3. Defaults on Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Approval of a 1-for-5 Reverse Stock Split: The stockholders of the
Company approved a one-for-five reverse stock split. There were 40,166,667 votes
cast for, 353,274 votes against, 61,005 votes eligible abstaining and 11,803,434
votes eligible but not voted. No fractional shares will be issued in connection
with the reverse split, and stockholders will receive cash in payment for any
fractional shares otherwise issuable.
Item 5. Other Information
None.
Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(A) 1. Financial Statements
The financial statements are listed under Part I, Item 1 of this
Report.
2. Financial Statement Schedules
None.
3. Exhibits
None.
(B) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
1998.
<PAGE>
22
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
WASTE SYSTEMS INTERNATIONAL, INC.
Date: May 15, 1998 By: /S/ Philip Strauss
--------------------------
Philip Strauss
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
Date: May 15, 1998 By: /S/ Robert Rivkin
--------------------------
Robert Rivkin
Executive Vice president -
Acquisitions Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and Accounting Officer)
<PAGE>
23
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