SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 0-25998
WASTE SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4203626
(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or organization) No.)
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
(Address of principal executive offices) (zip code)
(781) 862-3000 Phone
(781) 862-2929 Fax
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, $.01 par value per share
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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 or any amendment to this
Form 10-K X
As of March 24, 1999, the market value of the voting stock of the
Registrant held by non-affiliates of the Registrant was $50,492,453
The number of shares of the Registrant's common stock, par value $.01 per
share, outstanding as of March 24, 1999 was 11,220,545.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
Portions of the Registration Statement on Form S-1 of Waste Systems
International, Inc. (No. 33-93966) are incorporated by reference into Part IV
of this Form 10-K.
<PAGE>
TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a
Vote of Security Holders 11
PART II
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 49
PART III
Item 10. Directors and Executive Officers 49
Item 11. Executive Compensation 52
Item 12. Security Ownership of Certain Beneficial
Owners and Management 55
Item 13. Certain Relationships and Related Transactions 57
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 58
Signatures 59
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Note Regarding Forward Looking Statements:
This Annual Report on Form 10-K contains forward-looking statements concerning
among other things, the Company's expected future revenues, operations and
expenditures and estimates of the potential markets for the Company's services.
Such statements made by the Company fall within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All such forward-looking statements are
necessarily only estimates of future results and the actual results achieved by
the Company may differ materially from these projections due to a number of
factors as discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Certain Factors
Affecting Future Operating Results" of this Form 10-K.
PART I
Item 1. Business
The Company
Waste Systems International, Inc. (the "Company" or "WSI") is an
integrated non-hazardous solid waste management company that provides solid
waste collection, recycling, transfer and disposal services to commercial,
industrial, residential and municipal customers within certain regional markets
in the Northeast and Mid-Atlantic States where it operates. The Company is
achieving significant growth by implementing an active acquisition strategy.
During 1998, the Company completed 34 acquisitions of landfills, collection
companies and transfer stations. At December 31, 1998, the Company owned three
landfills in Vermont and Central Pennsylvania. Subsequent to December 31, 1998,
the Company acquired a fourth landfill located in Central Pennsylvania which
significantly increased the Company's disposal capacity in that region. The
Company's Moretown Landfill in Vermont and Sandy Run Landfill in Central
Pennsylvania are currently operating and permitted to accept 120,000 and 86,000
tons per year, respectively. The Company's Mostoller Landfill in Central
Pennsylvania is permitted to accept 624,000 tons per year and is scheduled to
commence operations in the second half of 1999, subject to receipt of certain
incidental permits and final construction. As of December 31, 1998, the
aggregate remaining estimated permitted capacity of the Company's three owned
landfills was approximately 18.5 million cubic yards. In addition, the Company
has contracted with the Town of South Hadley, Massachusetts to operate that
Town's landfill which has estimated capacity of approximately 1.87 million cubic
yards available for future disposal, subject to receipt of required permits. The
Company also owns four operating transfer stations and has acquired another that
is permitted and is ready to begin construction. As of December 31, 1998, the
Company's collection operations serve a total of approximately 52,000
commercial, industrial, residential and municipal customers in the Vermont,
Central Pennsylvania, Central Massachusetts and Central Upstate New York
markets.
The Company has completed 6 acquisitions since January 1, 1999 (See
Management's Discussion And Analysis Of Financial Condition And Results Of
Operations - Recent Business Developments- Acquisitions) which have
significantly increased the Company's presence within the geographic regions in
which it operates. Included in the 6 acquisitions are Community Refuse Services,
Inc., which is a landfill located in Central Pennsylvania, and Cumberland Waste
Service, Inc., a collection operation serving over 2,300 customers in the
geographical area surrounding the landfill. The landfill acquisition will add
approximately 6.0 million cubic yards of capacity for the region and is
permitted to accept 306,000 tons of municipal solid waste per year. As a result,
management believes that the Company is poised to continue its growth in these
areas and to enhance its profitability through the implementation of operating
efficiencies.
The Company focuses on the operation of an integrated non-hazardous
solid waste management business, including the ownership and operation of
landfills, solid waste collection services and transfer stations. The Company's
objective is to expand the current geographic scope of its 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 local market that it serves. The key elements of the Company's
strategy for achieving its objective are: (i) to acquire and integrate solid
waste disposal capacity, transfer stations and collection operations in its
targeted new markets, (ii) to generate internal growth through increased sales
penetration and the marketing of additional services to existing customers and
(iii) to enhance profitability by increasing operating efficiency.
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Industry Overview
Based on published industry information, the solid waste management
industry generated approximately $38 billion in revenue during 1997. Of this $38
billion aggregate revenue, approximately 44% was generated by public companies,
approximately 33% was generated by municipal governments, and the remaining 23%
was generated by numerous private solid waste operators.
The solid waste management industry is generally experiencing
significant consolidation and integration. The Company believes that the
consolidation and integration is a result of the following factors, among
others: (i) increasingly stringent environmental regulations which have resulted
in an increased need for substantial capital to maintain regulatory compliance;
(ii) the inability of many smaller operators to achieve the economies of scale
necessary to compete with larger providers; (iii) the competitive and economic
benefits of providing integrated collection, recycling, transfer and disposal
services; and (iv) the privatization of solid waste assets and services by
municipalities. Although significant consolidation has occurred within the solid
waste management industry, the Company believes the industry remains highly
fragmented and that a substantial number of potential acquisition opportunities
remain, including within the Northeast and Mid-Atlantic regions where it
operates.
Stringent environmental regulations have resulted in rising costs for
owners of landfills while permits required for landfill development, expansion
or construction have also become increasingly difficult to obtain. These ongoing
costs are coupled with increased financial reserve requirements for closure and
post-closure monitoring. Certain of the smaller industry participants have found
these costs and regulations burdensome and have decided either to close their
operations or to sell them to larger operators. As a result, the number of
operating landfills has decreased while the size of landfills has increased.
Economies of scale, driven by the high fixed costs of landfill assets
and the associated profitability of each incremental ton of waste, have led to
the development of higher volume, regional landfills. Integrated operators
achieve economies of scale in the solid waste collection and disposal industry
through vertical integration of their operations that may generate a significant
waste stream for these high-volume landfills. Integrated companies gain further
competitive advantage over non-integrated operators by being able to control the
waste stream. The ability of larger integrated companies to internalize the
collected solid waste (i.e., collecting the waste at the source, transferring it
through their own transfer stations and disposing of it at their own disposal
facility), coupled with access to significant capital resources to make
acquisitions, has created an environment in which large integrated companies can
operate more cost effectively and competitively than non-integrated operators.
The trend toward consolidation in the solid waste industry is further
supported by the increasing tendency of a number of municipalities to privatize
their waste disposal operations. Privatization is often an attractive
alternative for municipalities due, among other reasons, to the ability of
integrated operators to leverage their economies of scale to provide the
community with a broader range of services while enabling the municipality to
reduce its own capital asset requirements. The Company believes that the
financial condition of municipal landfills was adversely affected by the 1994
United States Supreme Court decision which declared "flow control" laws
unconstitutional, particularly in the Northeastern states. These laws had
required waste generated in counties or districts to be disposed of at the
respective county or district-owned landfills or incinerators. The reduction in
the captive waste stream to these facilities, resulting from the invalidation of
such laws, forced the counties that owned them to increase their per ton tipping
fees to meet municipal bond payments. The Company believes that these market
dynamics are factors causing municipalities throughout the northeastern states
to consider the privatization of public facilities.
Strategy
The Company's objective is to expand the current geographic scope of its
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 local market that it serves. The key elements of the
Company's strategy for achieving its objective are: (i) to acquire and integrate
solid waste disposal capacity, transfer stations and collection operations in
its targeted new markets, (ii) to generate internal growth through increased
sales penetration and the marketing of additional services to existing customers
and (iii) to enhance profitability by increasing operating efficiency. The
Company intends to implement this strategy as follows:
2
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Expansion Through Acquisitions. During 1998, the Company completed 34
acquisitions within 4 states in the Northeast and Mid-Atlantic regions. The
Company intends to continue to expand by acquiring solid waste disposal capacity
and collection companies in new and existing markets. In considering new
markets, the Company evaluates opportunities to acquire or otherwise control
sufficient landfills, transfer stations and collection operations which would
enable it to generate an integrated waste stream and achieve the disposal
economies of scale necessary to meet its market share and financial objectives.
The Company has established criteria, which enable it to evaluate the
prospective acquisition opportunity and the target market. Historically, the
Company has entered new markets, which are adjacent to its existing markets;
however, the Company is considering new markets in non-contiguous geographic
areas, which meet its criteria.
Internal Growth. In order to generate continued internal growth, the
Company has focused on increasing sales penetration in its current and adjacent
markets, soliciting new commercial, industrial and residential customers,
marketing upgraded services to existing customers and, where appropriate,
raising prices. As customers are added in existing markets, the Company's
revenue per routed truck is improved, which generally increases the Company's
collection efficiencies and profitability. The Company uses transfer stations,
which serve to link disparate collection operations with Company landfills, as
an important part of its internal growth strategy.
Operating Enhancements for Acquired and Existing Businesses. The Company
has implemented a system that establishes standards for each of its markets and
tracks operating criteria for its collection, transfer, disposal and other
services to facilitate improved profitability in existing and acquired
operations. These measurement criteria include collection and disposal routing
efficiency, equipment utilization, cost controls, commercial weight tracking and
employee training and safety procedures. The Company believes that by
establishing standards and closely monitoring compliance, it is able to improve
existing and acquired operations. Moreover, where the Company is able to
internalize the waste stream of acquired operations, it is further able to
increase operating efficiencies and improve capacity utilization.
Acquisition Program
The Company is pursuing an active acquisition strategy to achieve its
objective of expanding the current geographical scope of its operations and
becoming a leading provider of integrated solid waste management services in
each of the markets it serves. The Company seeks acquisitions that are
consistent with its three-step acquisition program designed to (i) acquire
long-term disposal capacity in targeted regional markets, (ii) acquire
collection companies and transfer stations which will serve as platforms in the
targeted regions to secure a stable long-term waste flow, and (iii) secure
"tuck-in acquisitions" of small but complementary collection companies to
increase a regional operation's profitability.
The following table sets forth acquisitions completed by the Company
through March 24, 1999:
<TABLE>
<S> <C> <C> <C>
Acquisition Month Acquired Principal Business Location
- ----------- --------------- ------------------ ---------
Vermont Region
Grady Majors Rubbish Removal September 1998 Collection St. Albans, VT
Cota Sanitation June 1998 Collection Newport, VT
Vincent Moss June 1998 Collection Newport, VT
Austin Rubbish Removal June 1998 Collection Newport, VT
Surprenant Rubbish, Inc. June 1998 Collection Newport, VT
Fortin's Trucking of Williston May 1998 Collection Williston, VT
John Leo & Sons, Ltd. March 1998 Collection Burlington, VT
Rapid Rubbish Removal, Inc. February 1998 Collection/Transfer Station St. Johnsbury, VT
Greenia Trucking February 1998 Collection St. Albans, VT
Doyle Disposal January 1998 Collection Barre, VT
Perkins Disposal January 1998 Collection St. Johnsbury, VT
CSWD Transfer Station* October 1997 Transfer Station Williston, VT
The Hartigan Company January 1997 Collection Stowe, VT
Waitsfield Transfer Station November 1995 Transfer Station Waitsfield, VT
Moretown Landfill July 1995 Landfill Moretown, VT
3
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Acquisition Month Acquired Principal Business Location
- ----------- -------------- ------------------ ----------
Central Pennsylvania Region
Cumberland Waste Service, Inc March 1999 Collection Cumberland, PA
Community Refuse Service, Inc March 1999 Landfill Cumberland, PA
Koontz Disposal January 1999 Collection Boswell, PA
Jim's Hauling, Inc. January 1999 Collection Duncansville, PA
Mostoller Landfill, Inc. August 1998 Landfill Somerset, PA
Worthy's Refuse Service August 1998 Collection McVey Town, PA
Sandy Run Landfill July 1998 Landfill Hopewell, PA
Patterson's Hauling May 1998 Collection Altoona, PA
Pleasant Valley Hauling May 1998 Collection Altoona, PA
Horvath Sanitation, Inc./
Eagle Recycling, Inc. May 1998 Collection Altoona, PA
McCardle Refuse Company May 1998 Collection Burham, PA
Central Massachusetts Region
Troiano Trucking, Inc. March 1999 Collection Worcester, MA
Steve Provost Rubbish Removal December 1998 Collection Rochdale, MA
Sunrise Trucking December 1998 Collection Spencer, MA
Trashworks November 1998 Collection Worcester, MA
Mattei-Flynn Trucking, Inc. August 1998 Collection Auburn, MA
Mass Wood Recycling, Inc. July 1998 Transfer Station Oxford, MA
Central Upstate New York Region
Santaro Trucking Co., Inc. January 1999 Collection Syracuse, NY
Richard A. Bristol, Sr. November 1998 Collection Rome, NY
Bristol Trash and Recycling II November 1998 Collection Rome, NY
Shepard Disposal Service October 1998 Collection Oneida, NY
Emmons Trash Removal October 1998 Collection Sherill, NY
Wayne Wehrle September 1998 Collection Clinton, NY
Phillip Trucking September 1998 Collection Wampsville, NY
Mary Lou Mauzy September 1998 Collection Cazenovia, NY
Costello's Trash Removal September 1998 Collection Cazenovia, NY
Bliss Rubbish Removal, Inc.* September 1998 Collection/Transfer Station Camden, NY
Besig & Sons September 1998 Collection Westmoreland, NY
Larry Baker Disposal, Inc. September 1998 Collection Oneida, NY
- -----------------------
</TABLE>
* Acquisition pursuant to lease/purchase arrangement.
4
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Integrated Solid Waste Management Operations
The Company's operations include the ownership and/or operation of
landfills, solid waste collection services and transfer stations. As the Company
has executed its acquisition strategy and integrated the solid waste management
assets acquired, the Company's rate of internalization of its operations has
increased. Throughout 1998, the Company increased the amount waste collected by
the Company that was subsequently disposed at Company landfills and increased
the amount of the solid waste delivered for disposal at the Company's landfills
that was collected by the Company.
Solid Waste Collection. The Company's solid waste collection operations
served approximately 52,000 commercial, industrial, residential and municipal
customers at December 31, 1998. A majority of the Company's commercial and
industrial collection services are performed under service agreements with terms
ranging from one to three years, and fees are determined by such factors as
collection frequency, type of equipment and containers furnished, the type,
volume and weight of the solid waste collected, the distance to the disposal or
processing facility and the cost of disposal or processing. The Company's
residential collection and disposal services are performed either on a
subscription basis (i.e., with no underlying contract) with individuals, or
under contracts with municipalities, homeowners associations, apartment owners
or mobile home park operators. Revenues from collection operations accounted for
approximately 73.5% of the Company's revenues for the year ended December 31,
1998.
Landfills. At December 31, 1998, the Company owned three landfills and
has an agreement to operate a fourth landfill under a long-term operating
agreement. The Moretown Landfill and Sandy Run Landfill, which are the Company's
only operating landfills at December 31, 1998, include leachate collection
systems, groundwater monitoring systems and, where required, active methane gas
extraction and recovery systems.
During 1998, over 95% of the solid waste from the Company's Vermont
operations was delivered for disposal at the Moretown Landfill and approximately
63% of the solid waste delivered for disposal at the Moretown Landfill during
this period was collected by the Company. During 1998, approximately 59% of the
solid waste from the Company's Central Pennsylvania operations was delivered for
disposal at the Sandy Run Landfill and approximately 58% of the solid waste
delivered for disposal at the Sandy Run Landfill during this period was
collected by the Company. Revenue from landfill operations accounted for
approximately 20.1% of the Company's revenues for the year ended December 31,
1998.
The following table provides certain information regarding the landfills
that the Company owns or operates. All information is provided as of December
31, 1998, except for Community Refuse Service, Inc. which is as of March 12,
1999.
Remaining Estimated Permitted Capacity
Estimated Capacity in
Total Remaining Permitting
Permitted Capacity Process
Landfill Location (Cubic Yards) (Cubic Yards)(1)
- --------------------------------------------------------------------------------
Mostoller Somerset, PA 14,200,000 -
Sandy Run Hopewell, PA 2,865,000 -
Moretown Moretown, VT 1,478,000 -
South Hadley(2) South Hadley, MA - 2,000,000
Community Refuse
Service, Inc. Cumberland, PA 6,000,000 -
- ------------
(1) Represents capacity for which the Company has begun the permitting
process. Does not include additional available capacity at the site for
which permits have not yet been sought.
(2) The South Hadley Landfill will be operated pursuant to an operating
agreement expiring in 2015.
Once the permitted capacity of a particular landfill is reached, the
landfill must be closed and capped if additional capacity is not authorized. The
Company establishes reserves for the estimated costs associated with such
closure and post-closure costs over the anticipated useful life of such
landfill. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Certain Factors Affecting Future Operating Results
- -Adequacy of Accruals for Closure and Post-Closure Costs."
5
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Transfer Station Services. At December 31, 1998, the Company owned four
operating transfer stations. In addition, the Company has acquired another
transfer station that is permitted and in the process of construction. The
transfer stations receive, compact and transfer solid waste collected from the
Company's various collection operations and from third parties to long-haul
vehicles for transport to landfills. The Company believes that transfer stations
benefit the Company by (i) increasing the size of the waste shed, which has
access to the Company's landfills and (ii) reducing costs by improving
utilization of collection personnel and equipment. Revenues from transfer
station services accounted for approximately 6.4% of the Company's revenues for
the year ended December 31, 1998.
Regional Operations
The Company's current or planned solid waste management operations are
as follows:
Vermont Operations. The Company established its first integrated solid
waste management operations in the geographical area surrounding its Moretown
Landfill. In addition to the Moretown Landfill, the Company currently owns
and/or operates three transfer stations and collection operations serving
commercial, industrial, residential and municipal customers in the Burlington,
St. Albans, St. Johnsbury, Newport and Barre-Montpelier, Vermont areas. The
Vermont operations serve approximately 6,200 residential customers and
approximately 2,600 other customers, including commercial, industrial and
municipal customers. The first cell ("Cell 1") at the Moretown Landfill is
permitted to receive approximately 120,000 tons per year and had remaining
estimated permitted capacity at December 31, 1998 of approximately 78,000 cubic
yards. The Company received all of the permits required for development and
operation of the second cell ("Cell 2") and began construction on Cell 2 in July
1998. Cell 2 will increase the permitted landfill capacity by an estimated
additional 1.4 million cubic yards. The Company expects that Cell 2 will be
available to receive solid waste late in the second quarter of 1999. During
1998, over 95% of the solid waste from the Company's Vermont operations was
delivered for disposal at the Moretown Landfill and approximately 63% of the
solid waste delivered for disposal at the Moretown Landfill during this period
was collected by the Company.
Central Pennsylvania Operations. In May 1998, the Company commenced
operations in Central Pennsylvania, through the acquisition of Horvath
Sanitation, Inc. and Eagle Recycling, Inc. ("Eagle"), which are based in
Altoona, Pennsylvania. Subsequently, the Company completed four tuck-in
acquisitions which have been integrated with Eagle's operations. At December 31,
1998, the Central Pennsylvania operations serve approximately 24,000 residential
customers and 2,500 other customers, including commercial, industrial and
municipal customers. In July 1998, the Company acquired the Sandy Run Landfill,
a 700-acre, 3.0 million cubic yard permitted solid waste landfill in Hopewell,
Pennsylvania and began the process of integrating Eagle's operations with the
Sandy Run Landfill. The Sandy Run Landfill is currently permitted to receive
approximately 86,000 tons per year and had remaining estimated permitted
capacity at December 31, 1998 of approximately 2.9 million cubic yards. During
1998, approximately 59% of the solid waste from the Company's Central
Pennsylvania operations was delivered for disposal at the Sandy Run Landfill and
approximately 58% of the solid waste delivered for disposal at the Sandy Run
Landfill during this period was collected by the Company. In August 1998, the
Company acquired the Mostoller Landfill in Somerset County, Pennsylvania. The
Mostoller Landfill is permitted to receive approximately 624,000 tons of waste
per year (subject to receiving certain pending incidental permits as disclosed
below), including municipal solid waste, construction and demolition waste,
sludge and residual wastes. This landfill consists of 7 cells having
approximately 14.2 million cubic yards of permitted capacity with expected
additional room for expansion on the 513 acre permitted "greenfields" site. The
Company has obtained the principal permits for the construction and operation of
the Mostoller Landfill, subject to commencing operations prior to December 31,
1999. Applications are pending for incidental air quality and state highway
occupancy permits required in connection with the operation of the landfill, and
the Company expects these permits will be received in a timely fashion. The
Company expects to carry out construction of the Mostoller Landfill during the
first half of 1999 with operations expected to commence during the third quarter
of 1999. In January 1999, the Company completed the tuck-in collection company
acquisitions of Jim's Hauling, Inc. and Koontz Disposal in Central,
Pennsylvania. These have been integrated into the Eagle operation. On March 11,
1999, the Company acquired Community Refuse Services, Inc., which is a landfill
located in Central Pennsylvania, and Cumberland Waste Service, Inc., a
collection operation serving over 2,300 customers in the geographical area
surrounding the landfill. The landfill acquisition will add approximately 6.0
million cubic yards of capacity for the region and is permitted to accept
306,000 tons of municipal solid waste per year.
Central Massachusetts Operations. The Company and the Town of South
Hadley, Massachusetts have entered into a contract whereby the Company will
operate the Town's 30-acre municipal solid waste landfill. The Town of South
Hadley will retain full ownership of the South Hadley Landfill while the Company
operates the facility. The Company is currently in the permitting process for
the South Hadley Landfill and expects to have received all of its operating and
construction permits by the third quarter of 1999. The Company anticipates that
the South Hadley Landfill will be available to begin accepting solid waste at
the first 10-acre lined cell during the second half of 1999. The South Hadley
Landfill is currently expected to have approximately 2.00 million cubic yards of
new capacity for future disposal. In July 1998, the Company acquired Mass Wood
Recycling, Inc. in Oxford, Massachusetts, a permitted transfer station, with
construction expected to commence during the first half of 1999. In August 1998,
the Company acquired Mattei-Flynn Trucking, Inc. in Auburn, Massachusetts. This
waste collection operation currently has an established customer base of
approximately 1,500 residential customers and 2,300 other customers, including
commercial, industrial and municipal customers and serves as a platform for
company growth in this targeted regional market. Subsequently, the Company
completed four tuck-in acquisitions, and has integrated these acquisitions with
Mattei-Flynn's operations. The Company intends to integrate these collection
operations with the Oxford Transfer Station and to eventually internalize the
waste at the South Hadley Landfill. In addition, the Company has a long-term
disposal agreement with a third party landfill in Southbridge, Massachusetts at
very favorable rates through the year 2019. As a part of the agreement, the
Company has a "Right of First Refusal" to purchase the landfill.
6
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Central Upstate New York Operations. During the four months ended
December 31, 1998, the Company entered the Central Upstate New York market with
the acquisition of eleven collection operations and a transfer station in the
general area between Syracuse and Utica, New York. At December 31, 1998, these
waste collection operations serve approximately 11,300 residential customers and
1,600 other customers, including commercial, industrial and municipal customers.
The Company selected the Central Upstate New York market for acquisition of
collection operations and transfer stations in anticipation of the privatization
of nearby landfills. The Company is currently evaluating opportunities for
expansion and integration of its Central Upstate New York operations. In January
1999, the Company completed the acquisition of Santaro Trucking Co., Inc., a
collection company located in Syracuse, New York which serves over 400
commercial customers.
Competition
Though the solid waste management industry has been substantially
consolidated in certain markets, it generally is highly competitive and very
fragmented and requires substantial labor and capital resources. Competition
exists for collection, recycling, transfer and disposal services. The markets in
which the Company competes or is likely to compete in are usually served by one
or more of the large national, regional or local solid waste companies who may
have greater financial, marketing or technical resources than the Company and
may be able to achieve greater economies of scale than the Company. The Company
also competes with counties, municipalities and operators of alternative
disposal facilities that operate their own waste collection and disposal
facilities. The availability of user fees, charges or tax revenues and the
availability of tax-exempt financing may provide a competitive advantage to the
public sector. Additionally, alternative disposal facilities such as recycling
and incineration may reduce the demand for the disposal of solid waste in
landfills.
The Company competes for waste collection and disposal business on the
basis of price, quality of service and geographical location. From time to time,
competitors may reduce the price of their services in an effort to expand or
maintain market share or to win competitively bid contracts. Competition also
exists within the industry for acquisition targets where the Company may compete
with publicly-owned national or regional solid waste management companies.
Marketing and Sales
The Company has a coordinated marketing and sales strategy to obtain
solid waste streams which is formulated at the corporate level and implemented
through regional management. The Company markets its services locally through
regional managers and direct sales representatives who focus on commercial,
industrial, municipal and residential customers. The Company markets its
commercial, industrial and municipal services through its sales representatives
who visit customers on a regular basis and make sales calls to potential new
customers. These sales representatives receive a significant portion of their
compensation based upon meeting certain incentive targets. The Company also
obtains new customers from referral sources, its general reputation and local
market print advertising. Leads are also developed from new building permits,
business licenses and other public records. Additionally, each regional
operation generally advertises in the yellow pages and other local business
print media that cover its service area. The Company emphasizes customer
satisfaction and retention, and believes that its focus on quality service will
help retain existing and attract additional customers.
Maintenance of a local presence and identity is an important aspect of
the Company's marketing plan, and many of the Company's managers are involved in
local governmental, civic and business organizations. The Company's name and
logo, or, where appropriate, that of the Company's regional operations, are
displayed on all Company containers and trucks. Additionally, the Company
attends and makes presentations at municipal and state conferences and
advertises in governmental associations' membership publications.
No single customer of the Company individually accounted for more than
10% of Company revenues in the year ended December 31, 1998.
7
<PAGE>
Government Regulation
The Company and its customers are subject to extensive and evolving
environmental laws and regulations that have been enacted in response to
increased concern over environmental issues and technological advances. These
regulations are administered by the U.S. Environmental Protection Agency ("EPA")
and various other federal, state and local environmental, transportation and
health and safety agencies. The Company believes that such laws and regulations
have the effect of enhancing the potential market in which the Company operates
by allowing the Company to offer economical solutions for regulatory problems to
its customers and acquisition candidates. On the other hand, such laws and
regulations represent a potential constraint on, and added expense with respect
to, the Company's operation of projects for its customers or for its own
account.
In order to develop and operate a landfill project, the Company must go
through several governmental review processes and obtain one or more permits and
often zoning or other land use approvals. These permits and zoning or land use
approvals are difficult and time consuming to obtain and may be opposed by
various local authorities, abutters, and ad hoc citizens' groups. In connection
with the Company's preliminary development of landfill projects, the Company
will expend considerable time, effort and resources in complying with the
governmental review and permitting process necessary to develop or increase the
capacity of these landfills. Once obtained, operating permits generally must be
periodically renewed and are subject to modification and revocation by the
issuing agency. Furthermore, landfill operations are subject to challenge under
statutory and common law regulation of "nuisances," in addition to statutes and
regulations with respect to permits and other approvals. Similar permits and
approvals are required for the development and operation of transfer stations,
although the regulatory reviews of applications pertaining to transfer stations
are generally less costly and time-consuming than the procedures conducted with
respect to the permitting of landfills.
The Company's landfill operations and transfer stations subject it to
certain laws and regulations governing operational, monitoring, site
maintenance, closure and post-closure, and financial assurance obligations which
change from time to time and which could give rise to increased capital
expenditures and operating costs. In connection with the Company's operation of
landfills and transfer stations, the Company will expend considerable time,
effort and resources in complying with these laws and regulations. Governmental
authorities have the power to enforce compliance with these laws and regulations
and to obtain injunctions or impose civil or criminal penalties in the case of
violations. Failure to correct the problems to the satisfaction of the
authorities could lead to curtailed operations, additional costs or even closure
of a landfill or transfer station.
The principal federal, state, and local statutes and regulations
applicable to the Company's operations are as follows:
The Resource Conservation and Recovery Act of 1976 ("RCRA"). RCRA
regulates the generation, treatment, storage, handling, transportation and
disposal of solid waste and requires states to develop programs to ensure the
safe disposal of solid waste. RCRA divides solid waste into two groups,
hazardous and non-hazardous. Wastes are generally classified as hazardous wastes
if they (i) either (a) are specifically included on a list of hazardous wastes
or (b) exhibit certain hazardous characteristics and (ii) are not specifically
designated as non-hazardous. Wastes classified as hazardous under RCRA are
subject to much stricter regulation than wastes classified as non-hazardous, and
businesses that deal with hazardous waste are subject to regulatory obligations
in addition to those imposed on handlers of non-hazardous waste.
Among the wastes that are specifically designated as non-hazardous waste
are household waste and "special" waste, including items such as petroleum
contaminated soils, asbestos, shredder fluff and most non-hazardous industrial
waste products.
The EPA regulations issued under Subtitle C of RCRA (the "Subtitle C
Regulations") impose a comprehensive "cradle to grave" system for tracking the
generation, transportation, treatment, storage and disposal of hazardous wastes.
The Subtitle C Regulations impose obligations on generators, transporters and
disposers of hazardous waste, and require permits that are costly to obtain and
maintain for sites where such material is treated, stored or disposed. Subtitle
C requirements include detailed operating, inspection, training and emergency
preparedness and response standards, as well as requirements for manifesting,
record keeping and reporting, corrective action, facility closure, post-closure
and financial responsibility. Most states have promulgated regulations modeled
on some or all of the Subtitle C provisions issued by the EPA. Some state
regulations impose different, additional or more stringent obligations.
The Company is not involved with transportation or disposal of hazardous
wastes, except for the occasional collection, at certain transfer stations, of
hazardous wastes generated by "conditionally exempt small quantity generators"
(as defined by RCRA). These hazardous wastes are then transported by properly
permitted hazardous waste transporters for disposal at properly permitted
hazardous waste disposal facilities that are owned by third parties.
8
<PAGE>
In October 1991, the EPA adopted new regulations pursuant to Subtitle D
of RCRA (the "Subtitle D Regulations"). These new regulations became generally
effective in October 1993 (except for certain municipal solid waste landfills
accepting less than 100 TPD, as to which the effective date was April 9, 1994,
and new financial assurance requirements, which became effective April 9, 1997)
and include location restrictions, facility design standards, operating
criteria, closure and post-closure requirements, financial assurance
requirements, groundwater monitoring requirements, groundwater remediation
standards and corrective action requirements. In addition, these regulations
require that new landfills meet more stringent liner design criteria (typically,
composite soil and synthetic liners or two or more synthetic liners) designed to
keep leachate out of groundwater and have extensive collection systems to
control leachate for treatment prior to disposal. Groundwater wells must also be
installed at virtually all landfills to monitor groundwater quality. The
regulations also require, where threshold test levels are present, that methane
gas generated at landfills be controlled in a manner that protects human health
and the environment. Each state is required to revise its landfill regulations
to meet these requirements or such requirements will be automatically imposed
upon it by the EPA. Each state is also required to adopt and implement a permit
program or other appropriate system to ensure that landfills within the state
comply with the Subtitle D criteria. Many states, including Massachusetts, have
adopted regulations or programs more stringent than the Subtitle D Regulations.
The Federal Water Pollution Control Act of 1972 (the "Clean Water Act").
The Clean Water Act establishes rules regulating the discharge of pollutants
from a variety of sources, including solid waste disposal sites, into waters of
the United States. If runoff or collected leachate from the Company's landfills
and transfer stations are discharged into streams, rivers or other surface
waters of the United States, the Clean Water Act would require the Company to
apply for and obtain a discharge permit, conduct sampling and monitoring and,
under certain circumstances, reduce the quantity of pollutants in such
discharge. Also, virtually all landfills are required to comply with federal
storm water regulations, which are designed to prevent possibly contaminated
storm water from flowing into surface waters. The Company is working with the
appropriate regulatory agencies to ensure that its facilities are in compliance
with Clean Water Act requirements, particularly as they apply to treatment and
discharge of leachate and storm water. The Company has secured or has applied
for the required discharge permits under the Clean Water Act or comparable
state-delegated programs. To ensure compliance with the Clean Water Act
pretreatment and discharge requirements, the Company has either installed
wastewater treatment systems at its facilities to treat its effluent to
acceptable levels before discharge or has arranged to discharge its effluent to
municipal wastewater treatment facilities.
The Comprehensive Environmental Response, Compensation, and Liability
Act of 1980 ("Superfund" or "CERCLA"). CERCLA establishes a regulatory and
remedial program intended to provide for the investigation and cleanup of
facilities from which there has been, or is threatened, a release of any
hazardous substance into the environment. CERCLA's primary mechanism for
remedying such problems is to impose strict joint and several liability for
cleanup of facilities on current owners and operators of the site, former owners
and operators of the site at the time of the disposal of the hazardous
substances, as well as the generators of the hazardous substances and the
transporters who arranged for disposal or transportation of the hazardous
substances. The costs of CERCLA investigation and cleanup can be very
substantial. Liability under CERCLA does not depend upon the existence or
disposal of "hazardous waste" but can also be based upon the existence of even
very small amounts of the numerous "hazardous substances" listed by the EPA,
many of which can be found in household waste. If, for example, the Company were
to be found to be a responsible party for a CERCLA cleanup at one of the
Company's owned or operated facilities, the enforcing agency could hold the
Company completely responsible for all investigative and remedial costs even if
others may also be liable. CERCLA also authorizes the imposition of a lien in
favor of the United States upon all real property subject to or affected by a
remedial action for all costs for which a party is liable. The Company's ability
to obtain reimbursement from others for their allocable share of such costs
would be limited by the Company's ability to find other responsible parties and
prove the extent of their responsibility and by the financial resources of such
other parties. In the past, legislation has been introduced in Congress to limit
the liability of municipalities and others under CERCLA as generators and
transporters of municipal solid waste. Although such legislation has not been
enacted, if it were to pass it would limit the Company's ability to seek full
contribution from municipalities for CERCLA cleanup costs even if the hazardous
substances that were released and caused the need for cleanup at one of the
Company's facilities were generated by or transported to the facility by a
municipality.
The Clean Air Act. The Clean Air Act provides for regulation, through
state implementation of federal requirements, of the emission of air pollutants
from certain landfills based upon the date of the landfill construction and
volume per year of emissions of regulated pollutants. The EPA has recently
promulgated new source performance standards regulating air emissions of certain
regulated pollutants (methane and non-methane organic compounds) from solid
waste landfills. The EPA may also issue regulations controlling the emissions of
particular regulated air pollutants from solid waste landfills. Landfills
located in areas with air pollution problems may be subject to even more
extensive air pollution controls and emission limitations. In addition, the EPA
has issued standards regulating the removal, handling and disposal of
asbestos-containing materials.
9
<PAGE>
Each of the federal statutes described above contains provisions
authorizing, under certain circumstances, the bringing of lawsuits by private
citizens to enforce the requirements of the statutes.
The Hazardous Materials Transportation Act. The transportation of
hazardous waste is regulated both by the EPA pursuant to RCRA and by the federal
Department of Transportation ("DOT") pursuant to the Hazardous Materials
Transportation Act ("HMTA"). Pursuant to the HMTA, DOT has enacted regulations
governing the transport of hazardous waste. These regulations govern, among
other things, packaging of the hazardous waste during transport, labeling and
marking requirements, and reporting of and response to spills of hazardous waste
during transport. In addition, under both the HMTA and RCRA, transporters of
hazardous waste must comply with manifest and record keeping requirements, which
are designed to ensure that a shipment of hazardous waste is properly identified
and can be tracked from its point of generation to point of disposal at a
permitted hazardous waste treatment, storage or disposal facility.
The Occupational Safety and Health Act of 1970 ("OSHA"). OSHA authorizes
the Occupational Safety and Health Administration to promulgate occupational
safety and health standards. Various of those promulgated standards, including
standards for notices of hazards, safety in all aspects of the workplace, and
specific standards relating to excavation, and the handling of asbestos, may
apply to certain of the Company's operations. OSHA regulations set forth
requirements for the training of employees handling, or who may be exposed in
the workplace to, concentrations of asbestos-containing materials that exceed
specified action levels. The OSHA regulations also set standards for employee
protection, including medical surveillance, the use of respirators, protective
clothing and decontamination units, during asbestos demolition, removal or
encapsulation as well as its storage, transportation and disposal. In addition,
OSHA specifies a maximum permissible exposure level for airborne asbestos in the
workplace. Apart from receiving asbestos waste at the Company's landfills and
transfer stations, the Company has no direct involvement in asbestos removal or
abatement projects.
State and Local Regulation. Each state in which the Company now operates
or may operate in the future has laws and regulations governing the generation,
storage, treatment, handling, transportation and disposal of solid and hazardous
waste, water and air pollution and, in most cases, the siting, design,
operation, maintenance, closure and post-closure maintenance of landfills and
transfer stations. Certain state laws also contain provisions authorizing, under
certain circumstances, the bringing of lawsuits by private citizens to enforce
the requirements of those laws. In addition, many states have adopted
"Superfund" statutes comparable to, and in some cases more stringent than,
CERCLA. These statutes impose requirements for investigation and cleanup of
contaminated sites and liability for costs and damages associated with such
sites, and some provide for the imposition of liens on property owned by
responsible parties. Furthermore, many municipalities also have ordinances,
local laws and regulations affecting Company operations. These include zoning
and health measures that limit solid waste management activities to specified
sites or activities, flow control provisions that direct the delivery of solid
wastes to specific facilities, laws that grant the right to establish franchises
for collection services and then put out for bid for the right to provide
collection services, and bans or other restrictions on the movement of solid
wastes into a municipality.
Certain permits and approvals may limit the types of waste that may be
accepted at a landfill or the quantity of waste that may be accepted at a
landfill during a given time period. In addition, certain permits and approvals,
as well as certain state and local regulations, may limit a landfill to
accepting waste that originates from specified geographic areas or seek to
restrict the importation of out-of-state waste or otherwise discriminate against
out-of-state waste. Generally, restrictions on the importation of out-of-state
waste have not withstood judicial challenge. However, proposed federal
legislation would allow individual states to prohibit the disposal of
out-of-state waste or to limit the amount of out-of-state waste that could be
imported for disposal and would require states, under certain circumstances, to
reduce the amounts of waste exported to other states. If this or similar
legislation is enacted, states in which the Company operates landfills could act
to limit or prohibit the importation of out-of-state waste. Such state actions
could adversely affect landfills within those states that receive a significant
portion of waste originating from out-of-state.
In addition, certain states and localities may for economic or other
reasons restrict the exportation of waste from their jurisdiction or require
that a specified amount of waste be disposed of at facilities within their
jurisdiction. In 1994, the United States Supreme Court held unconstitutional,
and therefore invalid, a local ordinance that sought to impose flow controls on
taking waste out of the locality. However, certain state and local jurisdictions
continue to seek to enforce such restrictions and, in certain cases, the Company
may elect not to challenge such restrictions based upon various considerations.
In addition, the aforementioned proposed federal legislation would allow states
and localities to impose certain flow control restrictions. These restrictions
could result in the volume of waste going to landfills being reduced in certain
areas, which may adversely affect the Company's ability to operate its landfills
at their full capacity and/or affect the prices that can be charged for landfill
disposal services.
10
<PAGE>
There has been an increasing trend at the federal, state and local level
to mandate and encourage waste reduction at the source and waste recycling and
to prohibit the disposal of certain types of solid wastes, such as yard wastes,
in landfills. The enactment of regulations reducing the volume and types of
wastes available for transport to and disposal in landfills could affect the
Company's ability to operate its facilities at their full capacity.
The Company believes that it is in material compliance with federal,
state and local regulations based on the Company's internal review process which
has not identified any material non-compliance and the Company has not received
any verbal or written notification from any governmental agency to the contrary.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Factors Affecting Future Operating Results -Potential
Environmental Liability and Adverse Effect of Environmental Regulation."
Employees
As of December 31, 1998, the Company had 303 full time employees. As a
result of the acquisitions subsequent to December 31, 1998, at March 24, 1999,
the Company had 357 full time employees. The Company believes its future success
will depend in part on its continued ability to recruit and retain highly
qualified technical and managerial personnel. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Certain Factors
Affecting Future Operating Results -Dependence on Management" and "-Ability to
Manage Growth." The Company's employees are not subject to any collective
bargaining agreement. The Company considers its relations with its employees to
be good.
Item 2. Properties
The Company owns or leases and operates landfills, transfer stations,
offices and other facilities in connection with its integrated solid waste
management operations as described under "Business-Integrated Solid Waste
Management Operations." In addition, the Company leases its corporate
headquarters, located at 420 Bedford Street, Suite 300, Lexington,
Massachusetts. The Company currently occupies approximately 11,000 square feet
at the Lexington location under the terms of a lease expiring in March 2003,
with annual rent of approximately $200,000 subject to escalation in future
years.
Item 3. Legal Proceedings
Richard Rosen. Richard Rosen ("Rosen"), former Chairman, Chief Executive
Officer and President of the Company, 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. The Company has previously received an arbitration award against Rosen
directing Rosen to pay $780,160 for breach by Rosen of his employment agreement
with the Company. On February 25, 1997 the Middlesex Superior Court in
Cambridge, Massachusetts confirmed the arbitration award and entered judgment
against Rosen.
In addition to the matter set forth above, from time to time, in the
ordinary course of its business, the Company is subject to legal proceedings and
claims arising from the conduct of its business operations. In the opinion of
the Company, the ultimate disposition of such matters on an aggregate basis will
not have a material adverse effect on the Company's financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None
11
<PAGE>
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is currently quoted on the NASDAQ Small-Cap Market
under the symbol "WSII". The following table sets forth the high and low closing
price of the common stock for the periods indicated and restated to reflect a
one-for five reverse stock split effective February 13, 1998.
High Low
Fourth quarter ended December 31, 1998 $ 6.25 $ 4.38
Third quarter ended September 30, 1998 9.69 5.00
Second quarter ended June 30, 1998 9.81 5.94
First quarter ended March 31, 1998 7.38 3.00
Fourth quarter ended December 31, 1997 $ 5.00 $ 2.80
Third quarter ended September 30, 1997 3.15 1.40
Second quarter ended June 30, 1997 2.35 1.25
First quarter ended March 31, 1997 2.80 1.55
On March 24, 1999, the reported last sale price of the common stock on the
NASDAQ Small-Cap Market was $4.50 per share, and there were 257 holders of
record of common stock.
The Company has never paid dividends on its Common Stock and has no present
intention to pay dividends. The Company's intention is to retain future
anticipated earnings to finance the expansion of its business.
At December 31, 1997, the Company had outstanding $9,257,807 of principal amount
Series A Convertible Preferred Stock, par value $0.001 per share ("Series A
Preferred Stock"), which was issued in a private placement on June 26, 1997,
bearing an 8.0% annual cumulative dividend and was convertible into common stock
at a conversion price of $1.40625 per share of common stock. On July 27, 1998,
the Company met the mandatory conversion trading requirements and elected to
convert all of the remaining shares of Series A Preferred Stock into 6,590,577
shares of the Company's Common Stock and the Board of Directors declared and
paid cash dividends of approximately $787,000.
At December 31, 1997, the Company also had outstanding $4,048,750 of principal
amount Series B Convertible Preferred Stock, par value $0.001 per share ("Series
B Preferred Stock"). The Series B Preferred Stock was issued on December 31,
1997 in a private placement in exchange for outstanding convertible notes of the
Company, bearing a 6.0% annual cumulative dividend, and was convertible into
common stock at a conversion price of $6.25 per share of common stock. On May
14, 1998, the Company met the mandatory conversion trading requirements and
elected to convert all of the shares of the Series B Preferred Stock into
623,808 shares of the Company's Common Stock and the Board of Directors declared
and paid cash dividends of approximately $101,000.
12
<PAGE>
Item 6. Selected Consolidated Financial and Operating Data
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except share and per share data)
The following selected consolidated financial data for the five years
ended December 31, 1998 have been derived from the Company's Consolidated
Financial Statements, which have been audited by KPMG Peat Marwick LLP. The
selected consolidated financial data presented below should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which is included elsewhere in this Form 10-K. During
1998, the Company acquired two landfills, 31 solid waste collection companies
and three transfer stations. Due to the significance of the acquired business
operations to the Company's financial performance, the Company does not believe
that its historical financial statements are necessarily indicative of future
performance and as a result will affect the comparability of the financial
information included herein.
<TABLE>
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended December 31
1998 1997 1996 1995 1994
-------- ------- -------- -------- ------
Statement of Operations Data:
Revenues........................ $ 21,045 $ 3,458 $ 1,496 $ 1,344 $ --
Cost of operations:
Operating expenses............ 12,400 1,719 921 766 --
Depreciation and amortization. 4,501 692 370 72 --
Acquisition integration costs(1) 1,864 -- -- -- --
Write-off of project development costs 236 1,495 6,652 -- --
-------- --------- --------- -------- ---------
Total cost of operations... 19,001 3,906 7,943 838 --
--------- --------- --------- --------- ---------
Gross profit (loss) ....... 2,044 (448) (6,447) 506 --
Selling, general and administrative expenses 4,483 2,138 2,433 3,286 1,485
Amortization of prepaid consulting fees -- -- 834 501 --
Restructuring(2)................ -- 596 1,741 -- --
--------- --------- --------- --------- ---------
Loss from operations.......... (2,439) (3,182) (11,465) (3,281) (1,485)
Other income (expense):
Royalty and other income (expense), net (134) (516) 817 761 2,064
Interest expense and financing costs (4,074) (1,355) (1,182) (471) (152)
Interest income............... 441 172 178 289 --
Write-off of accounts and notes receivable -- (568) -- (2,975) --
-------- --------- --------- --------- --------
Total other income (expense).. (3,767) (2,267) (187) (2,396) 1,912
--------- --------- --------- --------- --------
Income (loss) before income taxes,
discontinued operations and
extraordinary item............ (6,206) (5,449) (11,652) (5,677) 427
Federal and state income tax expense
(benefit)..................... 43 6 (23) (110) 185
Discontinued operations......... -- -- (2,261) (2,303) --
Extraordinary item - loss on extinguishment
of debt....................... (247) (134) -- -- --
-------- -------- --------- --------- ---------
Net income (loss)............... $ (6,496) $ (5,589) $(13,890) $ (7,870) $ 242
Preferred stock dividends (3)... 888 -- -- 10 108
--------- --------- -------- --------- ---------
Net income (loss) available for common
stockholders(3)............ $ (7,384) $ (5,589) $(13,890) $ (7,880) $ 134
======== ======== ========= ======== =========
Basic net income (loss) per share from
continuing operations ........ $ (0.97) $ (1.51) $ (4.10) $ (2.88) $ 0.15
Weighted average number of shares used in
computation of basic net income
(loss) per share.............. 7,389,547 3,612,623 2,834,841 1,932,809 899,727
EBITDA (4)......................... $ 2,130 $(2,469) $ (9,909) $ (2,592) $(1,476)
Adjusted EBITDA (5)................ $ 4,230 $ (378) $ (1,516) $ (2,592) $(1,476)
Capital expenditures (excluding acquisitions) $ 9,032 $ 998 $ 6,599 $ 9,749 $ 807
Cash flow from operating activities $ 592 $(4,586) $ (3,912) $ (3,083) $ (209)
Cash flow from investing activities $(71,939) $ 706 $ (7,641) $(10,267) $(1,588)
Cash flow from financing activities $ 68,576 $ 6,579 $ 6,581 $ 18,416 $ 1,965
December 31,
1998 1997 1996 1995 1994
-------- ------- ------- ------- ------
Balance Sheet Data:
Cash and cash equivalents.......... $ 194 $ 2,964 $ 265 $ 5,237 $ 171
Working capital.................... (6,520) 1,532 (4,508) 2,393 659
Total assets....................... 96,117 18,560 16,858 23,508 4,369
Long-term debt, less current portion 74,861 7,201 9,450 12,266 1,263
Total stockholders' equity (deficit) 1,739 5,972 (1,849) 3,292 597
</TABLE>
13
<PAGE>
(1) Acquisition integration costs consist of one-time, non-recurring
costs, which in the opinion of management have no future value
and, therefore, are expensed. Such costs include termination and
retention of employees, lease termination costs, costs related to
the integration of information systems and costs related to the
change of name of the acquired company or business.
(2) Prior to March 27, 1996, the Company had been actively developing
environmental technologies with potential application in a number
of business areas. On March 27, 1996, the Company announced its
intention to take meaningful actions to conserve cash and working
capital, including restructuring the Company's operations to
focus its resources and activities on developing an integrated
solid waste management operation.
(3) In May and July 1998 the Company met the mandatory conversion
trading requirements and elected to convert all of the remaining
shares of the Company's Preferred Stock into shares of the
Company's Common Stock and the Board of Directors declared and
paid cash dividends of approximately $888,000.
(4) EBITDA is defined as operating income or loss from continuing
operations excluding 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 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 investors 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, the EBITDA measures
presented by the Company may not be comparable to the similarly
titled measures reported by other companies. Therefore, in
evaluating EBITDA data, investors should consider, among other
factors: the non-GAAP nature of EBITDA; actual cash flows; the
actual availability of funds for debt service, capital
expenditures and working capital; and the comparability of the
Company's EBITDA data to similarly-titled measures reported by
other companies.
(5) Adjusted EBITDA is EBITDA after adjusting for one-time charges
for write-off of landfill development costs, acquisition
integration costs and restructuring charges.
14
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto. This Annual Report on
Form 10-K contains forward-looking statements concerning among other things, the
Company's expected future revenues, operations and expenditures and estimates of
the potential markets for the Company's services. Such statements made by the
Company fall within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
such forward-looking statements are necessarily only estimates of future results
and the actual results achieved by the Company may differ materially from these
projections due to a number of factors as discussed in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Factors Affecting Future Operating Results" of this Form
10-K.
Introduction
The Company is an integrated non-hazardous solid waste management
company that provides solid waste collection, recycling, transfer and disposal
services to commercial, industrial, residential and municipal customers within
certain regional markets in the Northeast and Mid-Atlantic states, where it
operates. The Company focuses on the operation of an integrated non-hazardous
solid waste management business, including the ownership and operation of solid
waste disposal facilities (landfills), transfer stations and solid waste
collection services. The Company derives revenue from collecting solid waste
from its customers, which it delivers for disposal in its own landfills, and
also from unaffiliated waste collection companies who pay to dispose of waste in
the Company's landfills. The Company seeks through its acquisition strategy to
acquire substantial collection operations and transfer stations in association
with its landfills in order to enhance its overall profitability and to increase
its control over its sources of revenue. See "Business - Strategy"
During 1998, the Company acquired a total of 34 companies including two
landfills, 31 collection companies (2 of which included a transfer station) and
one transfer station. Due to the significance of the acquired business
operations to the Company's financial performance, the Company does not believe
that its historical financial statements are necessarily indicative of future
performance and as a result will affect the comparability of the financial
information included herein.
Revenues:
Revenues represent fees charged to customers for solid waste
collection, transfer, recycling and disposal services provided. Arrangements
with customers include both long-term contractual arrangements and as-received
disposal at prices quoted by the Company. Revenues for the periods presented in
the consolidated statements of operations were derived from the following
sources:
Year ended December 31,
1998 1997 1996
------- ------- -------
Collection 73.5% 12.8% - %
Landfill 20.1 78.1 100.0
Transfer 6.4 9.1 -
---------- ---------- -------
Total Revenue 100.0% 100.0% 100.0%
========= ======== ======
For the purpose of this table, revenue is attributed fully to the
operation where the Company first receives the waste. For example, revenue
received from waste collected by the Company and disposed in a Company landfill
is entirely attributed to collection. The increase in the Company's collection
revenues as a percentage of total revenues during 1998 compared to 1997 is due
primarily to the impact of the 31 collection companies acquired during 1998. The
decrease in landfill and transfer station revenue as a percentage of revenues in
1998 compared to 1997 is due primarily to the acquisition of collection
companies that had been disposing of their waste at the Company's transfer
stations and landfills. These acquired revenues are now being recorded as
collection revenue.
15
<PAGE>
Recent Business Developments
Senior Notes Offering and Debt Repayment. On March 2, 1999, the Company
completed a private placement of $100.0 million of 11.5% Senior Notes (the
"Senior Notes") and warrants to purchase an aggregate of 1,500,000 shares of
common stock at an exercise price of $6.25 per share (the "Warrants"). The
Senior Notes mature on January 15, 2006 and bear interest at 11.5% per annum,
payable semi-annually in arrears on each January 15 and July 15, commencing July
15, 1999, subject to prepayment in certain circumstances. The interest rate on
the Senior Notes is subject to adjustment upon the occurrence of certain events
as provided in the Senior Notes Indenture. The Senior Notes may be redeemed at
the option of the Company after March 2, 2003 at redemption prices set forth in
the Senior Notes Indenture, together with accrued and unpaid interest. The
Warrants are exercisable from September 2, 1999, through March 2, 2004. The
number of shares for which, and the price per share at which, a Warrant is
exercisable, are subject to adjustment upon the occurrence of certain events as
provided in the Warrant Agreement. The net proceeds to the Company, after
deducting the discount to the initial purchaser and related issuance costs, was
approximately $97.3 million. The Company used a portion of the proceeds from the
Senior Notes to repay $20.0 million of the Company's 13% short term notes due
June 30, 1999, (the outstanding balance of the 13% short-term notes was $7.5
million at December 31, 1998) $10.0 million of the Howard Bank credit facility
and approximately $1.7 million of capital leases and other notes payable. In
addition, the Company redeemed approximately $1.45 million principal amount of
the Company's 10% Convertible Subordinated Debentures due October 6, 2000 and
completed several acquisitions as described below. The Company intends to use
the balance of the proceeds for general corporate purposes, including possible
future acquisitions and working capital.
Conversion of Debt into Equity On March 3, 1999, the Company offered to
exchange up to 2,244,109 shares of the Company's Common Stock for a portion of
the Company's 7% Subordinated Notes due May 13, 2005. The exchange price per
share of $4.63 was equal to the closing price of the Common Stock on the Nasdaq
SmallCap Market on the first interim closing as reported by NASDAQ. Any accrued
but unpaid interest on the Notes will be paid in cash. As a result of the
exchange offer, the Company retired $10,390,000 of its 7% Convertible
Subordinated Notes. The remaining 7% Convertible Subordinated Notes are
convertible by holders into Common Shares at $10.00 per share.
Stock Repurchase With the proceeds of the Senior Notes, the Company
repurchased 497,778 shares of the Company's common stock from the Federal
Deposit Insurance Corporation (FDIC) for an aggregate purchase price of
approximately $2.8 million.
Acquisitions Since December 31, 1998 through March 24, 1999, the
Company has completed six acquisitions, consisting of 5 collection operations
and one landfill. The aggregate purchase price for these acquisitions was
approximately $38 million which was paid in cash and the assumption of
approximately $3 million of debt. These acquisitions have combined annual
revenue of approximately $12 million. The acquisitions have all been recorded
using the purchase method of accounting.
16
<PAGE>
The following table sets forth, for the periods indicated, certain data
derived from the Company's Consolidated Statements of Operations, expressed as a
percentage of revenues:
<TABLE>
<S> <C> <C> <C>
Year ended December 31,
1998 1997 1996
------------- ----------- ------------
Revenues 100.0 % 100.0 % 100.0%
Operating expenses 58.9 49.7 61.6
Depreciation and amortization 21.4 20.0 24.7
Acquisition integration costs 8.9 - -
Write-off of project development costs 1.1 43.3 444.7
---------- --------- --------
Total cost of operations 90.3 113.0 531.0
----------- --------- --------
Gross profit (loss) 9.7 (13.0) (431.0)
Selling, general and administrative expenses 21.3 61.8 163.3
Restructuring - 17.2 116.5
Amortization of prepaid consulting fees - - 55.8
----------- ---------- --------
Loss from operations (11.6) (92.0) (766.6)
Royalty and other income (expense), net (0.6) (14.9) 62.5
Interest income 2.1 5.0 11.9
Interest expense and financing costs (19.4) (39.2) (79.0)
Equity in loss of affiliate - - (6.4)
Write off of assets - - (1.5)
Write off of accounts receivable - (16.4) -
---------- ---------- --------
Total other income (expense) (17.9) (65.5) (12.5)
Income tax expense 0.2 0.2 (1.6)
Loss from continuing operations (29.7) (157.7) (777.5)
Discontinued operations - - (151.2)
----------- ------- --- --------
Loss before extraordinary item (29.7) (157.7) (928.7)
Extraordinary item (1.2) (3.9) -
------------- ----------- -------
Net loss (30.9)% (161.6)% (928.7)%
============ ======== =========
EBITDA 10.1% (71.4)% (662.0)%
============ =========== ==========
Adjusted EBITDA 21.9% (10.9%) (101.3)%
============ =========== ===========
</TABLE>
17
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Revenues for 1998 increased by $17,587,000 or 509% to
$21,045,000 from $3,458,000 in 1997. Thirty-four acquisitions completed by the
Company in 1998 accounted for approximately $15.8 million or 90% of the
increase. The balance of the increase is the result of the internal growth
within the Vermont operations during 1998. The growth in the Vermont operations
was due to the full year's operation of the CSWD Transfer Station, which was
acquired in the fourth quarter of 1997, increased volume and prices at the
Moretown Landfill and internal growth at the Company's collection operations.
Cost of operations. Operating expenses for 1998 was approximately
$12,400,000 compared to $1,719,000 for 1997. The increase of $10,681,000 was
primarily due to the 34 acquisitions completed by the Company in 1998 and the
related increase in revenue. As a percentage of sales, operating expenses
increased to approximately 59% in 1998 from approximately 50% in 1997. This
increase was primarily due to the change in revenue mix, with a much larger
portion of the revenue coming from collection operations, which typically
experience much higher operating expenses than landfill operations. The Company
internalizes a significant portion of its waste collected in Vermont and
Pennsylvania, which significantly reduces costs of operations as a percentage of
revenue. The Company's New York and Massachusetts operations do not yet have
landfills where waste can be internalized.
Operating costs, disposal costs, and collection fees vary widely
throughout the geographic areas in which the Company operates. The prices that
the Company charges are determined locally, and typically vary by the volume or
weight, type of waste collected, frequency of collections, distance to final
disposal sites, labor costs and amount and type of equipment furnished to the
customer.
Depreciation and amortization. Depreciation and amortization expense was
$4,501,000 and $692,000 for the years ended 1998 and 1997, respectively. The
increase of $3,809,000 was primarily due to the additional depreciation and
amortization related to the Company's 34 acquisitions completed during 1998.
During 1998, the Company purchased property and equipment of approximately
$24,298,000 related to the acquisitions. ($7,522,000 of this amount was for
assets under development not placed into service in 1998.) Goodwill and other
intangible assets totaling approximately $35,171,000 were also recorded in
connection with the acquisitions. In addition, the Company purchased
approximately $3,094,000 of property and equipment necessary for its ongoing
operations, including costs to improve efficiencies at several of the acquired
companies. Finally, landfill amortization costs in Vermont increased due to
increased usage of the Moretown landfill in 1998. The Company had costs of
approximately $5,456,000 for construction of Cell 2 at the Moretown landfill and
other development costs related to the Mostoller and South Hadley landfill and
the Transfer Station in Oxford Massachusetts totaling approximately $480,000.
These costs did not impact operating results as they were not placed into
service in 1998.
Acquisition integration costs. Acquisition integration costs consist of
one-time, non-recurring costs, which in the opinion of management have no future
value and, therefore, are expensed. Such costs include termination and retention
of employees, lease termination costs, costs related to the integration of
information systems and costs related to the change of name of the acquired
company or business.These charges are estimated and accrued at the time the
acquisition is closed. The estimates are reviewed frequently by Company
management and the related operation teams integrating the new acquisitions and
adjusted as required. Acquisition integration costs totaled $1,864,000 for 1998.
Write-off of landfill development costs. Write-off of landfill
development costs were $236,000 and $1,495,000 for 1998 and 1997, respectively.
The write-off of landfill development costs is related to the termination of the
Company's contract for remodeling and operation of a landfill in Fairhaven,
Massachusetts. See footnote 17 "Fairhaven Massachusetts Operation" in the
financial statements included in Item 8. The 1998 expense of $236,000 represents
the final charges related to the termination of the project. There are no
remaining accruals at December 31, 1998.
18
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $2,344,000 in 1998 to $4,482,000 from
$2,138,000 in 1997. As a percentage of revenue, selling, general and
administrative expenses decreased to 21.3% in 1998 from 61.8% in 1997. The
dollar increase was due to efforts by the Company to build infrastructure to
sustain its significant growth through acquisition and to support the several
corporate initiatives designed to implement its strategy. The Company expects
spending growth to continue moderately into 1999 as the Company continues to
implement its growth through acquisition strategy. The decrease as a percentage
of revenue was primarily due to the expanded revenue base and related
efficiencies, as the Company is able to purchase "tuck-in" acquisitions that
increase revenues and improve margins without adding significant administrative
costs. The Company anticipates that in future periods its selling, general and
administrative expenses should continue to decrease as a percentage of revenue
as it leverages its current corporate overhead to revenue growth primarily
through acquisitions.
Restructuring. During 1996, the Company announced its intention to
restructure the Company's operations to focus its resources and activities on
developing an integrated solid waste management operation. See footnote 16
"Restructuring and Discontinued Operations" in the financial statements included
in Item 8. The restructuring was completed in 1997. Restructuring charges for
1997 totaled $596,000 which consisted of costs incurred for employee severance,
non-cancelable lease commitments, professional fees and litigation costs. No
charges were recorded in 1998.
Royalty and other income (expense). Royalty and other income (expense)
was approximately ($134,000) and ($516,000) in 1998 and 1997, respectively.
Royalty and other income (expense) primarily relates to the Company's medical
waste treatment proprietary technologies.
Interest expense and financing costs, net. Interest expense for 1998 was
approximately $3,633,000, net of interest income of $441,000 as compared to
approximately $1,182,000 net of interest income of $172,000 for 1997. The
increase resulted primarily from significant increases in debt necessary to
finance the acquisitions and capital needs of the Company. During 1998 and 1997,
the Company capitalized interest expense of $360,000 and $24,000, respectively
related to construction costs for the Mostoller and South Hadley landfills and
the Transfer Station in Oxford Massachusetts discussed above..
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. Revenues for 1997 increased by $1,962,000 to $3,458,000 from
$1,496,000 in 1996. The increase of 131% was due primarily to the increased
waste volume accepted at the Moretown Landfill, in its first full year of
operation, the acquisition through a lease/purchase arrangement on October 6,
1997 of the Chittenden Solid Waste District ("CSWD") transfer station located in
Williston, Vermont and the internal growth of the Company's collection
operations. All 1997 revenues were generated from the Company's Vermont
operations as compared to 1996, where approximately $1,157,000 or 77% was
generated from the Company's operations at the Fairhaven Landfill.
Cost of operations. Operating expenses for 1997 was approximately
$1,718,000 compared to $921,000 in 1996. The increase of $797,000 was primarily
due to the growth of the Company's Vermont operations. During 1997, the
Company's Vermont operations expanded as a result of the Company's purchase of a
collection company and its acquisition through a lease/purchase arrangement of
the CSWD transfer station.
Depreciation and amortization. Depreciation and amortization expense was
$692,000 and $370,000 for the years ended 1997 and 1996, respectively. The
increase of $322,000 or 87% was due primarily to the growth in the operation at
the Moretown Landfill which resulted in increased amortization of capitalized
landfill costs and to a substantial increase in capital equipment used in the
Company's other Vermont operations.
Write-off of landfill development costs. Write-off of landfill
development costs were $1,495,000 and $6,652,000 for the years ended 1997 and
1996, respectively. The write-off of landfill development costs is related to
the Fairhaven Landfill.
Selling, general and administrative expenses. Selling, general and
administrative expenses for 1997 were approximately $2,138,000, a decrease of
12.5% from 1996. The decrease was due to the restructuring undertaken in March
of 1996 and to the cessation of operations at the Fairhaven Landfill. The
decrease was partially offset by increases in selling, general and
administrative expenses at the Company's Vermont operations and general
corporate expenses due to the building of an infrastructure necessary to support
increases in acquisition, operating and administrative activities.
19
<PAGE>
Restructuring. Prior to March 27, 1996, the Company had been actively
developing environmental technologies with potential application in a number of
business areas. On March 27, 1996, the Company announced its intention to take
meaningful actions to conserve cash and working capital, including restructuring
the Company's operations to focus its resources and activities on developing an
integrated solid waste management operation. As part of the 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 certain environmental related
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. Restructuring charges for 1997
and 1996 were $596,000 and $1,742,000, respectively, which consisted of costs
incurred for employee severance, non-cancelable lease commitments, professional
fees and litigation costs.
Royalty and other income (expense). Royalty and other income (expense)
decreased approximately $1,451,000 in 1997 to ($516,000) from $935,000 in 1996.
The decrease in 1997 was due to the termination of one of the Company's
licensing agreements with ScotSafe Limited ("ScotSafe").
Interest expense and financing costs. Interest expense for 1997 was
approximately $1,182,000 net of interest income of $172,000 as compared to
approximately $1,004,000 net of interest income of $178,000 for 1996. The
increase resulted primarily from additional indebtedness incurred in connection
with acquisitions and capital expenditures for the Company's Vermont operations.
During 1997 and 1996, the Company capitalized interest expense of $24,000 and
$42,000, respectively related to construction costs.
Write-off of accounts receivable. During the fourth quarter of 1997, the
Company wrote-off an uncollectible receivable due from ScotSafe of approximately
$568,000.
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. On May 13, 1998, the Company closed
on an offering of $60.0 million 7% Convertible Subordinated Notes which resulted
in net proceeds to the Company of approximately $58.3 million. As discussed in
"Recent Business Developments", on March 2, 1999, the Company completed a
private offering of 11 1/2% Senior Notes in the aggregate principal amount of
$100 million due January 15, 2006 which resulted in net proceeds to the Company
of approximately $97.3 million. The Company has used the proceeds from these
Debt offerings to complete various acquisitions during 1998 and 1999. In
addition, the Company has repaid other outstanding debt obligations, repurchased
497,778 shares of the Company's common stock from the Federal Deposit Insurance
Corporation (FDIC) for an aggregate purchase price of approximately $2.8
million, and fund the Company's growth, including infrastructure. The Company
intends to use the balance of the proceeds for general corporate purposes,
including possible future acquisitions and working capital. In addition,
approximately $10,390,000 of the 7% Convertible Subordinated Notes were
exchanged into common stock during March 1999 through an exchange offering. The
Company intends to continue its strategy to aggressively pursue and develop an
integrated solid waste management company, primarily through acquisitions. 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 results of operations.
The Company maintains an acquisitions department that is responsible for
the identification, due diligence, negotiation and closure of acquisitions. The
Company believes that a combination of internally generated funds, additional
debt and equity financing and the proceeds from the Notes will provide adequate
funds to support the Company's cost structure, acquisition strategy and working
capital requirements for the foreseeable future.
20
<PAGE>
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 exploration and negotiation (ranging from initial discussions to the
execution of letters of intent and the preparation of definitive agreements),
some of which may, if consummated, be material. No assurance can be given,
however, that the Company will be successful in completing further acquisitions
in accordance with its growth strategy, or that such acquisitions, if completed,
will be successful.
During 1998, the Company acquired a total of 34 companies, including
eleven collection companies (one of which included a transfer station) in
Vermont, five collection companies and two landfills in Central Pennsylvania,
three collection companies and a transfer station in Central Massachusetts and
twelve collection companies (one of which included a transfer station) in
Central Upstate New York. The aggregate cost of these acquisitions was
approximately $61.4 million consisting of approximately $58.3 million in cash,
$3.4 million in common stock and approximately $1.5 million in assumed
liabilities. Acquisition integration costs for the year ended December 31, 1998,
related to the acquisitions in Vermont, Central Pennsylvania, Central
Massachusetts and Central Upstate New York, were approximately $1,865,000.
The Company generated net cash from operating activities for 1998
approximately $592,000. In 1997, the Company used approximately ($4,586,000) for
operating activities. The improved cash flow from operations in 1998 was due
primarily to the increased revenues which were offset by related increases in
cost of operations, integration costs and selling, general and administrative
expenses. The remainder of the cash flow increase was due to changes in the
operating assets and liabilities including increases in accounts payable,
accrued expenses and deferred revenue. These were offset by an increase in
accounts receivable.
EBITDA increased by approximately $4,599,000 during 1998 to
approximately $2,130,000 from negative EBITDA of approximately ($2,469,000) in
1997. As a percentage of revenue, EBITDA increased to 10.1% during 1998 from
(71.4%) in 1997. Adjusted EBITDA increased by approximately $4,608,000 during
1998 to approximately $4,230,000 from negative Adjusted EBITDA of approximately
($378,000) in 1997. As a percentage of revenue, Adjusted EBITDA increased to
21.9% in 1998 compared to (10.9%) in 1997.
Net cash used by investing activities during 1998 was approximately
$71,939,000 compared to cash generated of approximately $706,000 in 1997. Of the
net cash used by investing activities in 1998, approximately $58,340,000 million
was used for the acquisition of landfill, collection and transfer operations in
Vermont, Central Pennsylvania, Central Massachusetts and Central Upstate New
York. In addition, the Company placed deposits for future acquisitions totaling
$2,211,000. Additional capital expenditures of approximately $9,032,000 were
made to develop Cell 2 at the Company's Moretown landfill and to increase
operating efficiencies at the Company's Vermont, Central Pennsylvania, Central
Massachusetts and Central Upstate New York operations. Other investing activity
included the acquisition of various long-term permits necessary to operate the
landfills and for long-term prepaid disposal costs. The net cash generated by
investing activities for 1997 was primarily due to the reduction in collateral
requirements on the Vermont Landfill closure and post-closure performance bond
of approximately $1,000,000 and the proceeds from the sale of the Fairhaven
equipment for approximately $800,000.
These were offset by capital expenditures at the Company's Vermont operation.
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 during 1999 due to acquisitions,
ongoing construction of Cell 2 at the Moretown Landfill, the development and
construction of the Mostoller and South Hadley Landfills and construction of the
transfer station in Central Massachusetts.
Net cash provided by financing activities during 1998 was approximately
$68,576,000 compared to $6,579,000 in 1997. The increase in 1998 was due
primarily to the receipt of the net proceeds of $58.3 million related to the 7%
Convertible Subordinated Notes, borrowings under the Company's bank credit
facility of $10 million, $7.5 million in additional short-term financing from a
related party stockholder and borrowings for equipment purchases of
approximately $9.0 million. The proceeds were offset by principal repayments of
debt of approximately $15.2 million and dividend payments on the Preferred Stock
of approximately $888,000.
The Company has a $10 million line of credit facility with The Howard
Bank, N.A. which was fully drawn as of December 31. The entire balance was
repaid on March 2, 1999 with the proceeds from the Senior Notes. The Company is
currently negotiating an expansion of this facility with The Howard Bank.
At December 31, 1998, the Company had approximately $83.1 million of
short-term and long-term debt.
Based upon its current operating plan, the Company believes that its
cash and cash equivalents, available borrowings, future cash flow from
operations and the proceeds of future debt and equity financings will satisfy
the Company's working capital needs for the foreseeable future. However, there
can be no assurances in this regard. See Certain Factors Affecting Future
Operating Results-Substantial Increased Leverage," and "-Uncertain Ability to
Finance the Company's Growth."
21
<PAGE>
Certain Factors Affecting Future Operating Results
History of Losses
During the fiscal years ending December 31, 1998, 1997 and 1996, the
Company suffered net losses (including non-recurring charges) of approximately
($6,496,000), ($5,589,000), and ($13,890,000), respectively, on revenues of
$21,045,000, $3,458,000, and $1,496,000, respectively. Following its
restructuring in 1996 in which the Company directed its focus on becoming an
integrated solid waste management company, the Company implemented a business
strategy based on aggressive growth through acquisitions. The Company's ability
to become profitable, and to maintain such profitability, as it pursues its
business strategy will depend upon several factors, including its ability to (i)
execute its acquisition strategy and expand its revenue generating operations
while not proportionately increasing its administrative overhead, (ii) locate
sufficient additional financing to fund acquisitions, and (iii) continually
adapt to changing conditions in the competitive market in which it operates.
Outside factors, such as the economic and regulatory environments in which it
operates will also have an effect on the Company's business.
Substantial Increased Leverage
In connection with its business strategy, the Company has incurred and
expects to incur substantial indebtedness, resulting in a highly leveraged
capital structure. The Company's substantial indebtedness could have important
consequences, including limiting the Company's ability to fund future working
capital, capital expenditures and other general corporate requirements. This may
increase the Company's vulnerability to adverse economic and industry
conditions; requiring the Company to dedicate a substantial portion of its cash
flow from operations to payments on the Company's indebtedness, thereby reducing
the availability of the Company's cash flow to fund working capital, capital
expenditures and other general corporate purposes; limiting the Company's
flexibility in planning for, or reacting to, changes in the Company's business
and the industry in which the Company operates; placing the Company at a
competitive disadvantage compared to the Company's competitors that have less
indebtedness and limiting the Company's ability to borrow additional funds.
Uncertain Ability to Finance the Company's Growth
The Company will require substantial funds to complete and bring to
commercial viability all of its currently planned projects. The Company also
anticipates that future business acquisitions will be financed through cash from
operations, the proceeds from the Senior Notes, borrowings under its bank credit
facility, offering the Company's stock as consideration for acquisitions or
additional equity or debt financings. Therefore, the Company's ability to
satisfy its future capital and operating requirements is dependent on a number
of pending or future financing activities, none of which is assured successful
completion.
Ability to Identify, Acquire and Integrate Acquisition Targets
The future success of the Company is highly dependent upon the Company's
continued ability to successfully identify, acquire and integrate additional
solid waste collection, recycling, transfer and disposal businesses. As
competition for acquisition candidates increases within the solid waste
management industry, the availability of suitable candidates at terms favorable
to the Company may decrease. The Company competes for acquisition candidates
with larger, more established companies that may have significantly greater
capital resources than the Company, 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, obtain necessary
financings on favorable terms or successfully integrate any acquisitions with
current operations.
The Company believes that a significant factor in its ability to
consummate acquisitions will be the attractiveness of the Company's Common Stock
as consideration for potential acquisition targets. This attractiveness may, in
large part, be dependent upon the relative market price and capital prospects of
the Company's equity securities as compared to the equity securities of its
competitors. If the market price of the Company's Common Stock were to decline,
the Company's ability to implement its acquisition program through the issuance
of its Common Stock could be materially adversely affected.
Ability to Manage Growth
The Company's objective is to continue 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.
The Company's future success is also highly dependent upon its
continuing ability to identify, hire, train and motivate highly qualified
personnel. The Company faces competition for hiring such personnel from other
companies, government entities and other organizations. There can be no
assurance that the Company will be successful in attracting and retaining
qualified personnel as required for its projected operations. The inability to
attract and retain qualified personnel could have a material adverse effect upon
the Company's business, financial condition and results of operations.
22
<PAGE>
Limitations on Landfill Permitting and Expansion
The Company's operations depend on its ability to expand the landfills it owns
or operates and develop or acquire new landfill sites. There can be no assurance
that the Company will be successful in obtaining new landfill sites or expanding
the permitted capacity of its existing landfills. 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 a
landfill is very low. In the event the Company exhausts its permitted capacity
at one of its landfills, the Company's ability to expand internally will be
limited and the Company will be required to cap and close such 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.
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 Company has obtained key executive insurance policies in the amount
of $1.0 million with respect to each of Messrs. Strauss and Rivkin. 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.
Competition
The solid waste management industry is highly competitive, very
fragmented and requires substantial labor and capital resources. Competition
exists for collection, recycling, transfer and disposal services, and
acquisition targets. The markets the Company competes or is likely to 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 those available to the
Company. The Company also competes with counties, municipalities and operators
of alternative disposal facilities that operate their own waste collection and
disposal facilities. The availability of user fees, charges or tax revenues and
the availability of tax-exempt financing may provide a competitive advantage to
the public sector. Additionally, alternative disposal facilities such as
recycling and incineration may reduce the demand for the disposal of solid waste
in landfills. Competition for waste collection and disposal business is based on
price, the quality of service 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. Geographic
Concentration of Operations
The Company has established solid waste management operations in
Vermont, Central Pennsylvania, Central Massachusetts and Central Upstate New
York. Since the Company's current primary source of revenues will be
concentrated in these geographic locations, the Company's business, financial
condition and results of operations could be materially affected by, without
limitation, the following: (i) downturns in these local economies, (ii) severely
harsh weather conditions and (iii) state regulations. Additionally, the growing
competition within the local economies for waste streams may make it
increasingly difficult to expand within these regions. There can be no assurance
that the Company will be able to continue to increase the waste stream to its
landfills or be able to expand its geographic markets to mitigate the effects of
adverse events that may occur in these regions.
Seasonally
The Company's revenues and results of operations tend to vary
seasonally. The winter months of the fourth and first quarters of the calendar
year tend to yield lower revenues than those experienced in the warmer months of
the second and third quarters. The primary reasons for lower revenues in the
winter months include, without limitation: (i) harsh winter weather conditions
which can interfere with collection and transportation, (ii) the construction
and demolition activities which generate landfill waste are primarily performed
in the warmer seasons and (iii) the volume of waste in the region is generally
lower than that which occurs in warmer months. The Company believes that the
seasonally 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.
23
<PAGE>
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. 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
adopted or existing legislation or regulations are amended or are interpreted or
enforced differently, the Company or its customers may be required to obtain
additional operating permits or approvals. There can be no assurance that the
Company will meet all of the applicable regulatory requirements. Any delay in
obtaining required permits or approvals will tend to cause delays in the
Company's ability to obtain project financing, resulting in increases in the
Company's need 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.
Potential Environmental Liability and Adverse Effect of Environmental Regulation
The Company'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 non-compliance. The Company believes that
it is currently in material compliance with all applicable environmental laws.
Potential Adverse Community Relations
The potential exists for unexpected delays, costs and litigation
resulting from community resistance and concerns relating to existing and
acquired operations and proposed future development of solid waste facilities.
Performance or Surety Bonds and Letters of Credit
The Company may be required to post a performance bond, surety bond or letter of
credit to ensure proper closure and post-closure monitoring and maintenance at
its landfills and transfer stations. Failure to obtain performance bonds, surety
bonds or letters of credit in sufficient amounts or at acceptable rates may have
a material adverse effect on the Company's business, financial condition and
results of operations.
Environmental Impairment Liability Insurance
The Company has obtained environmental impairment liability insurance
covering claims for the sudden or gradual onset of environmental damage to the
extent of $5 million per landfill. 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 also 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 landfill usage and
remaining landfill capacity. There can be no assurance that the Company's
financial obligations for closure and post-closure costs will not exceed the
amount accrued, which, if it occurs, may have a material adverse effect on the
Company's business, financial condition and results of operations.
24
<PAGE>
Capital Expenditures
The Company capitalizes, in accordance with GAAP, 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.
Year 2000 Compliance
The statements in the following section include the "Year 2000
readiness disclosure" within the meaning of the Year 2000 Information and
Readiness Disclosure Act. Please refer to the information located at the
beginning of this Item 7 regarding forward-looking statements contained in this
section.
The Company is assessing the readiness of its systems for handling the
Year 2000. Although the assessment is still underway, management currently
believes that all material systems will be compliant by Year 2000 and that the
costs associated with this are not material. The Company has incurred only
minimal costs to date associated with the Year 2000 issue.
The Company is in the process of identifying key third-party vendors to
understand their ability to continue providing services through Year 2000. The
Company uses well-regarded nationally known software vendors for both its
general accounting applications and industry-specific customer information and
billing systems. The Company is implementing a new general accounting package
which will be fully Year 2000 compatible, and the provider of the solid waste
industry customer information and billing system is Year 2000 compatible. The
Company's banking arrangements are with national banking institutions, which are
taking all necessary steps to insure its customers' uninterrupted service
throughout applicable Year 2000 timeframes. The Company's payroll is performed
out-of-house by the largest provider of third party payroll services in the
country, which has made a commitment of uninterrupted service to their customers
throughout applicable Year 2000 timeframes.
While the Company currently expects that the Year 2000 issue will not
cause significant operational problems, delays in the implementation of new
information systems, or failure to fully identify all Year 2000 dependencies in
the Company's systems and in the systems of suppliers and financial institutions
could have material adverse consequences. Therefore, the Company is developing
contingency plans for continuous operations in the event such problems arise.
Inflation
The Company does not believe its operations have been materially
affected by inflation.
25
<PAGE>
Item 8. Financial Statements and Supplementary Data
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Independent Auditors' Report 27
Consolidated Balance Sheets at December 31, 1998 and 1997 28
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 29
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 30-31
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1998, 1997 and 1996 32
Notes to Consolidated Financial Statements 33-48
26
<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. and subsidiaries as of December 31, 1998 and 1997, 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,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Waste Systems
International, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 12, 1999
27
<PAGE>
<TABLE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, December 31,
Assets 1998 1997
------
---------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 193,613 $ 2,964,274
Accounts receivable, less allowance for doubtful accounts of - -
$222,028 and $45,833 in 1998 and 1997, respectively 5,235,534 944,793
Prepaid expenses and other current assets (Note 4) 4,769,285 1,366,092
---------------- ----------------
Total current assets 10,198,432 5,275,159
Restricted cash and securities 39,842 254,000
Property and equipment, net (Notes 2, 3 and 5) 44,685,735 12,487,183
Intangible assets, net (Notes 2, 3 and 6) 38,059,374 96,832
Other assets 3,133,316 447,080
---------------- ----------------
Total assets $ 96,116,699 $ 18,560,254
================ ================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt and notes payable (Note 7) $ 8,259,922 $ 843,831
Accounts payable 3,849,632 353,937
Accrued expenses (Note 8) 2,742,409 2,544,995
Deferred revenue 1,866,128 -
---------------- ----------------
Total current liabilities 16,718,091 3,742,763
Long-term debt and notes payable (Note 7) 64,861,187 7,201,262
Landfill closure and post-closure costs (Notes 2 and 10) 2,798,597 1,644,000
---------------- ----------------
Total liabilities 94,377,875 12,588,025
---------------- ----------------
Commitments and Contingencies (Note 11)
Stockholders' equity (Notes 12, 13, 14 and 20):
Common stock, $.01 par value. Authorized 30,000,000 shares;
11,718,323 and 3,893,415 shares issued and outstanding at
December 31, 1998 and 1997, respectively 117,184 38,934
Preferred stock, $.001 par value. Authorized 1,000,000 shares:
Series A Convertible Preferred Stock; 200,000 shares designated,
0 and 92,580 shares issued and outstanding at December 31, 1998
and 1997, respectively - 9,257,807
Series B Convertible Preferred Stock; 100,000 shares designated,
0 and 40,488 shares issued and outstanding at December 31, 1998
and 1997, respectively - 4,048,750
Additional paid-in capital 37,810,712 21,432,437
Accumulated deficit (36,189,072) (28,805,699)
---------------- ----------------
Total stockholders' equity 1,738,824 5,972,229
---------------- ----------------
Total liabilities and stockholders' equity $ 96,116,699 $ 18,560,254
================ ================
See accompanying notes to consolidated financial statements.
</TABLE>
28
<PAGE>
<TABLE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31,
-----------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenues $ 21,044,584 $ 3,457,692 $ 1,495,606
--------------- --------------- ---------------
Cost of operations:
Operating expenses 12,399,529 1,718,214 920,553
Depreciation and amortization 4,501,424 692,224 369,785
Acquisition integration costs (Note 3) 1,864,535 - -
Write-off of project development costs (Note 17) 235,464 1,495,388 6,652,075
--------------- --------------- ---------------
Total cost of operations 19,000,952 3,905,826 7,942,413
--------------- --------------- ---------------
Gross profit (loss) 2,043,632 (448,134) (6,446,807)
Selling, general and administrative expenses 4,482,478 2,138,180 2,442,816
Amortization of prepaid consulting fees - - 834,375
Restructuring (Note 16) - 596,426 1,741,729
--------------- --------------- ---------------
Loss from operations (2,438,846) (3,182,740) (11,465,727)
--------------- --------------- ---------------
Other income (expense):
Royalty and other income (expense), net (134,455) (515,875) 935,358
Interest income 441,069 172,363 178,224
Interest expense and financing costs (4,073,693) (1,354,614) (1,182,118)
Write-off of accounts receivable (Note 15) - (568,217) -
Equity in loss of affiliate - - (96,144)
Write-off of assets - - (21,858)
--------------- --------------- ---------------
Total other income (expense) (3,767,079) (2,266,343) (186,538)
--------------- --------------- ---------------
Loss before income tax expense (benefit), discontinued
operations and extraordinary item (6,205,925) (5,449,083) (11,652,265)
Income tax expense (benefit) (Note 9) 43,174 5,622 (23,456)
Loss from continuing operations (6,249,099) (5,454,705) (11,628,809)
Discontinued operations (Note 16) - - (2,260,963)
--------------- --------------- ---------------
Loss before extraordinary item (6,249,099) (5,454,705) (13,889,772)
Extraordinary item - loss on extinguishment of debt (Note 7) (246,535) (133,907) -
--------------- --------------- ---------------
Net loss (6,495,634) (5,588,612) (13,889,772)
Preferred stock dividends (Note 13) 887,869 - -
--------------- --------------- ---------------
Net loss available for common shareholders $ (7,383,503) $ (5,588,612) $ (13,889,772)
=============== =============== ===============
Basic net loss per share:
Loss from continuing operations $ (0.85) $ (1.51) $ (4.10)
Discontinued operations - - (0.80)
Extraordinary item (0.03) (0.04) -
--------------- --------------- ---------------
Basic net loss per share (0.88) (1.55) (4.90)
Preferred stock dividends (0.12) - -
--------------- --------------- ---------------
Basic net loss available for common shareholders $ (1.00) $ (1.55)$ $ (4.90)
Weighted average number of shares used in
computation of basic net loss per share 7,389,547 3,612,623 2,834,841
=============== =============== ===============
See accompanying notes to consolidated financial statements.
</TABLE>
29
<PAGE>
<TABLE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31,
-----------------------------------------------------
1998 1997 1996
------------------ ---------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (6,495,634) $ (5,588,612) $ (13,889,772)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 5,248,354 900,549 1,556,380
Extraordinary loss on extinguishment of debt 246,535 133,907 -
Accrued landfill closure and post-closure costs 1,154,597 124,000 20,000
Write-off of project development costs 235,284 1,495,388 6,652,075
Write-off of accounts receivable and other assets - 568,217 21,858
Discontinued operations - - 2,260,963
Minority interest - - (12,655)
Equity in loss of affiliate - - 96,144
Issuance of common stock for services 12,500 44,854 17,157
Allowance for doubtful accounts 176,195 23,333 10,000
Changes in assets and liabilities:
Accounts and notes receivable (2,004,616) 73,503 375,519
Prepaid expenses and other current assets (861,529) (242,092) 16,558
Accounts payable 1,372,730 (1,175,139) (1,253,507)
Accrued expenses 640,869 62,463 777,516
Deferred revenue 1,645,124 - -
------------------ ---------------- ---------------
Net cash used by continuing operations 1,370,409 (3,579,629) (3,351,764)
Net cash used by discontinued operations and restructuring (778,609) (1,006,488) (560,377)
------------------ ---------------- ---------------
Net cash provided (used) by operating activities 591,800 (4,586,117) (3,912,141)
------------------ ---------------- ---------------
Cash flows from investing activities:
Proceeds from sale of assets - 800,000 127,500
Net assets acquired through acquisitions (58,340,223) -
Restricted cash and securities 214,158 956,017 (1,022,517)
Investment in affiliate - - (86,115)
Landfills (5,372,481) (307,552) (5,199,493)
Landfill and other development projects (99,655) (263,868) (467,855)
Land, buildings, facilities and improvements (664,264) -
Machinery and equipment (189,215) (114,330) (914,600)
Rolling stock (1,403,747) (122,905) -
Containers (617,813) (189,109) (16,716)
Office furniture and equipment (684,515) -
Deposits for future acquisitions (2,210,667) - -
Intangible assets (709,881) - (35,261)
Other assets (1,860,527) (52,127) (26,162)
------------------ ---------------- ---------------
Net cash provided (used) by investing activities (71,938,830) 706,126 (7,641,219)
------------------ ---------------- ---------------
Cash flows from financing activities:
Deferred financing and registration costs (1,808,962) (56,098) (86,074)
Net borrowings and advances
from stockholders and related parties - - (114,575)
Repayments of notes payable and long-term debt (15,217,063) (2,445,476) (426,734)
Borrowings from notes payable and long-term debt 86,449,857 1,143,861 1,117,982
Proceeds from issuance of common stock 40,406 686,724 6,090,473
Proceeds from issuance of Series A preferred stock - 7,250,478 -
Dividends paid (887,869) -
------------------ ---------------- ---------------
Net cash provided by financing activities 68,576,369 6,579,489 6,581,072
------------------ ---------------- ---------------
Increase (decrease) in cash and cash equivalents (2,770,661) 2,699,498 (4,972,288)
Cash and cash equivalents, beginning of year 2,964,274 264,776 5,237,064
------------------ ---------------- ---------------
Cash and cash equivalents, end of year $ 193,613 $ 2,964,274 $ 264,776
================== ================ ===============
See accompanying notes to consolidated financial statements.
</TABLE>
30
<PAGE>
Supplemental disclosures of cash flow information:
During the years ended December 31, 1998, 1997 and 1996, cash paid for
interest was $3,715,304, $1,493,221, and $1,201,864, respectively.
Supplemental disclosures of non-cash activities:
During 1998, 1997 and 1996 the Company acquired assets of $2,113.591,
$2,190,050 and $683,777 respectively, under capital lease obligations.
In connection with the Company's acquisitions, during 1998, the Company
acquired property and equipment of $24,297,759, intangible assets of $35,170,590
and other assets of $336,619. The Company paid $58,340,233 in cash and assumed
liabilities from the acquired companies of $1,464,735.
During 1998, the Company converted 92,580 shares or $9,257,807 of its
Series A Preferred Stock into 6,590,577 shares of its Common Stock.
On September 22, 1998, the Company issued 455,922 shares of its Common
Stock in connection with the acquisition of Mattei-Flynn Trucking, Inc.
On May 22, 1998, the Company issued 111,110 shares of its Common Stock in
connection with the acquisition of Eagle Recycling, Inc. and Horvath S
anitation, Inc.
On May 14, 1998, the Company converted 40,488 shares or $4,048,750 of its
Series B Preferred Stock into 623,808 shares of its Common Stock.
In December 1997, the Company converted $3,950,000, plus accrued interest,
of its 10% Convertible, Redeemable, Subordinated Notes due October 6, 2000 for
40,488 shares of its Series B Convertible Preferred Stock.
In October 1997, the Company converted 4,800 shares valued at $480,000, of
its Series A Preferred Stock into 341,334 shares of its Common Stock.
In June 1997, the Company issued Series A Preferred Stock valued at
$850,000 in exchange for the remaining 20% minority interest in the Moretown,
Vermont landfill.
In June 1997, the Company issued Series A Preferred Stock valued at $44,854
in exchange for consulting services.
In June 1997, the Company wrote down assets to their net realizable value
of $863,428 related to the Fairhaven landfill project. This was charged against
the restructuring and current liabilities accrual.
In June 1997, the Company issued Series A Preferred Stock at a value of
$700,000 and retired the FDIC loan of $511,093 and accrued interest of $55,000.
The pay off resulted in a realized loss on the early retirement of debt of
$133,907.
In 1996, the Company exchanged $2,850,000 of convertible subordinated debt
and $27,425 of accrued interest for 313,992 shares of common stock.
See accompanying notes to consolidated financial statements.
31
<PAGE>
<TABLE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Preferred Stock Preferred Stock Additional Stockholders'
Series A Series B Common Stock paid-in Accumulated equity
Shares Amount Shares Amount Shares Amount capital deficit (deficit)
--------- ---------- ---------- ---------- ---------- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 - - - - 2,341,268 $ 23,413 $12,595,504 $ (9,327,315) $ 3,766,601
Exercise of Warrants to purchase
1,728 shares of common stock
at $11.45 per share - - - - 1,728 17 19,769 - 19,786
Exercise of merger-related Placement
Agent Warrants to purchase 1,755
shares of common stock at
$11.50 per share - - - - 1,755 18 20,165 - 20,183
Exercise of merger-related Placement
Agent Warrants to purchase 6,444
shares of common stock at
$11.50 per share - - - - 6,444 64 74,042 - 74,106
Exercise of Options to purchase
656 shares of common stock
at $10.00 per share - - - - 656 7 6,555 - 6,562
Issuance of common stock at $9.70
per share, through private placement
in June, 1996 - - - - 660,949 6,609 6,404,591 - 6,411,200
Expenses incurred in connection with
the private placement in
June, 1996 - - - - - - (651,926) - (651,926)
Exercise of Options to purchase
656 shares of common stock
at $10.00 per share - - - - 656 7 6,555 - 6,562
Issuance of common stock at $11.25
per share, net of 50% discount
due to restrictions on sale,
for director's fee - - - - 2,000 20 11,230 - 11,250
Conversion of convertible debentures,
plus accrued interest at a conversion
price of $9.16 313,992 3,140 2,874,285 2,877,425
Reclassification of deferred financing
costs related to convertible debentures
converted to common stock (235,888) (235,888)
Exercise of Series C Warrants to purchase
400 shares of common stock at
$10.00 per share - - - - 400 4 3,996 - 4,000
Issuance of common stock at $7.50
per share, net of 50% discount
due to restrictions on sale,
for directors fee 1,575 $ 16 $ 5,890 5,906
Issuance of common stock at $6.85
per share, in exchange for debt
in November 1996 - - - - 29,091 291 199,709 - 200,000
Net loss for the year ended
December 31, 1996 - - - - - - - (13,889,772) (13,889,772)
-------- ---------- ---------- ---------- ---------- ---------- ------------ ------------- ------------
Balance, December 31, 1996 - - - - 3,360,514 33,606 21,334,477 (23,217,087) (1,374,005)
Issuance of common stock at
$2.50 per share, in connection
with a private placement,
January 1997 - - - - 172,000 1,720 428,280 - 430,000
Issuance of Series A Convertible
Preferred Stock, 8% cumulative
annual dividend, convertible
into common stock at a price
of $1.406 per share,
June 1997 97,380 9,737,807 - - - - (892,475) - 8,845,332
Issuance of common stock at $3.75
per share, in connection with the
purchase of minority interest in
the Company's collection operations
in Vermont, September 1997 - - - - 18,667 187 69,813 - 70,000
Exercise of Series E Warrants to
purchase 901 shares of common
stock at $17.50 per share,
November 1997 - - - - 901 9 15,755 - 15,764
Conversion of Series A Convertible
Preferred Stock for common stock
at $1.406 per share, September
and October 1997 (4,800) (480,000) - - 341,334 3,413 476,587 - -
Issuance of Series B Convertible
Preferred Stock, 6% cumulative
annual dividend, convertible into
common stock at a price of $6.26
per share, December 30, 1997 - - 40,488 4,048,750 - - - - 4,048,750
Net loss for the year ended
December 31, 1997 - - - - - - - (5,588,612) (5,588,612)
-------- ---------- ---------- ---------- ---------- ---------- ------------ ------------- ------------
Balance, December 31, 1997 92,580 9,257,807 40,488 4,048,750 3,893,415 38,935 21,432,437 (28,805,699) 5,972,230
Conversion of Series B Preferred
Stock to equity - - (40,488)(4,048,750) 623,808 6,238 4,042,512 - -
Conversion of Series A Preferred
Stock to equity (92,580)(9,257,807) - - 6,590,577 65,906 9,191,901 - -
Expenses associated with
equity transactions (256,101) (256,101)
Common Stock issued for services 14,766 148 12,352 12,500
Common Stock issued in business
combinations
567,032 5,670 3,347,494 3,353,164
Exercise of options to purchase
common stock 28,725 287 40,117 40,404
Dividends paid on preferred stock (887,869) (887,869)
Net loss for the year ended
December 31, 1998 (6,495,634) (6,495,634)
-------- ---------- ---------- ---------- ---------- ---------- ------------ ------------- ------------
Balance, December 31, 1998 - $ - - $ - 11,718,323 $ 117,184 $37,810,712 $(36,189,202) $ 1,738,694
-------- ---------- ---------- ---------- ---------- ---------- ------------ ------------- ------------
See accompanying notes to consolidated financial statements
</TABLE>
32
<PAGE>
WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business and Nature of Operations
The Company is an integrated solid waste management company providing
non-hazardous waste collection, recycling, transfer and disposal services to
approximately 52,000 commercial, industrial, residential and municipal customers
located in 4 states in the Northeast and Mid-Atlantic regions of the country as
of December 31, 1998.
On March 2, 1999, the Company completed an offering of $100.0 million in 11.5%
Senior Notes (the "Senior Notes") and warrants to purchase an aggregate of
1,500,000 shares of common stock at an exercise price of $6.25 per share (the
"Warrants"). The Company used a portion of the proceeds from the Senior Notes to
repay certain debt obligations and to repurchase 497,778 shares of the Company's
common stock from the Federal Deposit Insurance Corporation (FDIC). The Company
intends to use the balance of the proceeds for general corporate purposes,
including possible future acquisitions and working capital. In addition, since
December 31, 1998 the Company has completed six acquisitions, consisting of 5
collection operations and one landfill. See Footnote 20 "Subsequent Events".
Note 2. Summary of Significant Accounting Policies
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.
Cash and Cash Equivalents: All short-term investments which have an original
maturity of 90 days or less, and are valued at cost plus accrued interest which
approximates market, are considered to be cash equivalents.
Restricted Cash and Securities: Restricted cash and securities consist
principally of funds or securities deposited in connection with the future
financial obligation of landfill or transfer station closure and post-closure.
Amounts are principally invested in fixed income securities of U.S. governmental
and financial institutions. The Company considers its investments to be held to
maturity. Substantially all of these investments mature within one year. The
investments are valued at cost plus accrued interest, which approximates market.
Fair Value of Financial Instruments: Statement of Financial Accounting Standards
No. 102, "Disclosures About the Fair Value of Financial Instruments", requires
disclosure of information about the fair value of certain financial instruments
for which it is practicable to estimate that value. For purposes of the
following disclosure the fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction between willing
parties other than in a forced sale or liquidation. Management has determined
that the carrying value of its financial assets and liabilities approximates
fair value at December 31, 1998.
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
Office equipment 3-5 years
33
<PAGE>
Capitalization of landfill development costs begins upon determination by the
Company of the economic feasibility or extended useful life of each landfill
acquired as a result of comprehensive engineering and profitability studies and
with the signing of landfill management contracts for facilities operated by the
Company that are not owned. Capital costs include acquisition, engineering,
legal, and other direct costs associated with the permitting and development of
new landfills, expansions at existing landfills, and cell development. These
costs are capitalized and not amortized until all permits are obtained and
operations have commenced.
Interest is capitalized on landfill development costs related to permitting,
site preparation, and facility construction during the period that these assets
are undergoing activities necessary for their intended use. Interest costs of
approximately $360,000, $24,000 and $42,000 were capitalized during 1998, 1997
and 1996, respectively.
Landfill development costs are amortized using the unit-of-production method,
which is calculated using the total units of airspace filled during the year in
relation to total estimated permitted airspace capacity. The determination of
airspace usage and remaining airspace capacity is an essential component in the
amortization calculation. The determination is performed by conducting annual
topography surveys of the Company's landfill facilities to determine remaining
airspace capacity in each landfill. The surveys are reviewed by the Company's
consulting engineers, the Company's internal operating and engineering staff,
and its financial and accounting staff. Current year-end remaining airspace
capacity is compared with prior year-end remaining airspace capacity to
determine the amount of airspace used during the current year. The result is
compared against the airspace consumption figures used during the current year
for accounting purposes to ensure proper recording of the amortization
provision. The reevaluation process did not materially impact results of
operations for any years presented.
The Company performs assessments for each landfill of the recoverability of
capitalized costs which requires considerable judgment by management with
respect to certain external factors, including, but not limited to, anticipated
future revenues, estimated economic life and changes in environmental
regulation. It is the Company's policy to periodically review and evaluate that
the benefits associated with these costs are expected to be realized and
therefore capitalization and amortization is justified. Capitalized costs
related to landfill development for which no future economic benefit is
determined by the Company are expensed in the period in which such determination
is made.
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 a period not to exceed ten years and
over the term of the agreement, respectively. The Company evaluates the periods
of amortization continually to determine whether subsequent 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.
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 $2.8 million and $1.6
million for closure and post-closure costs at December 31, 1998 and 1997,
respectively. The engineering and accounting staffs of the Company periodically
review its future obligation for closure and post-closure costs. If estimates of
the permitted air space capacity or the estimated costs of closure and
post-closure have changed, the Company revises the rates at which it accrues the
future costs.
The Company records reserves for landfill closure and post-closure costs, as
necessary, as a component of the purchase price of facilities acquired, in
acquisitions accounted for under the purchase method, when the acquisition is
consummated.
Deferred Financing Costs: Deferred financing costs are amortized on a
straight-line basis over the life of the related notes payable or debt. There is
not a material difference between using the straight-line method and the
effective interest method.
34
<PAGE>
Income Taxes: The Company uses the asset and liability method of accounting
for deferred income taxes.
Revenue Recognition: The Company's revenues are derived primarily from its
collection, recycling, transfer and disposal services. The Company records
revenues when the services are performed. The Company occasionally bills
customers in advance of providing the services. Advanced billings are recorded
as deferred revenue.
Cost of operations: Cost of operations includes direct labor, fuel, equipment
maintenance, insurance, depreciation and amortization of equipment and landfill
development costs, accruals for ongoing closure and post-closure regulatory
compliance (for landfills owned), and other routine maintenance and operating
costs directly related to landfill operations. Also included in cost of
operations are payments made to the towns in which each landfill is located in
the form of "Host Town Fees", which are negotiated on a rate per ton basis as
part of the contract with the Town. In Towns where landfills are operated under
management contracts, the Town is responsible for the closure and post-closure
costs related to the landfill.
Earnings Per Share: In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS
128). SFAS 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. Earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the SFAS 128 requirements. Weighted average number of common and
common equivalent shares outstanding and earnings per common and common
equivalent shares have been restated to give effect to a one-for-five reverse
stock split effective February 18, 1998.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of: The
Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets to Be Disposed Of", on January 1, 1997, for the year ended
December 31, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amounts 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 cost to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity in 1998 or 1997.
Reclassifications: Certain amounts in prior year financial statements have been
reclassified to conform to their 1998 presentation.
35
<PAGE>
Note 3. Acquisitions
During 1998, the Company acquired a total of 34 companies, including eleven
collection companies (one of which included a transfer station) in Vermont, five
collection companies and two landfills in Central Pennsylvania, three collection
companies and a transfer station in Central Massachusetts and twelve collection
companies (one of which included a transfer station) in Central Upstate New
York. The aggregate cost of these acquisitions was approximately $63.2 million
consisting of approximately $58.3 million in cash, $3.4 million in stock and
approximately $1.5 million in assumed liabilities. The acquisitions have all
been recorded using the purchase method of accounting and accordingly, the
results of operations of the acquired companies are included in the consolidated
statements of operations since the respective dates of acquisition. The
purchases prices were allocated to the assets and liabilities of the acquired
companies based on their respective fair values at the dates of acquisition as
follows: the Company acquired property and equipment of $24,298,000, intangible
assets of $35,171,000 and other assets of $337,000.
Acquisition integration costs consist of one-time, non-recurring costs, which in
the opinion of management have no future value and, therefore, are expensed.
Such costs include termination and retention of employees, lease termination
costs, costs related to the integration of information systems and costs related
to the change of name of the acquired company or business. These charges are
estimated and accrued at the time the acquisition is closed. The estimates are
reviewed frequently by Company management and the related operation teams
integrating the new acquisitions and adjusted as required. Acquisition
integration costs totaled $1,865,000 for 1998.
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 years ended December 31, 1998 and 1997 as if the acquisitions had
occurred as of January 1, 1998 and 1997, respectively, 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.
December 31,1998 December 31, 1997
(unaudited) (unaudited)
Net revenue $ 31,546,000 $31,018,000
============ ===========
Net loss $ (4,631,000) $(5,128,000)
============= ============
Basic loss per share $ (0.63) $ (1.42)
============ ============
Note 4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following;
December 31,
1998 1997
-----------------------------------
Deposits for future acquisitions $ 2,210,667 $ 132,893
Prepaid disposal costs 1,922,792 -
Prepaid permit costs - 502,974
Due from former employee - 300,000
Other prepaid expenses 635,826 430,225
-------------- -----------
Total prepaid expenses and
other current assets $ 4,769,285 $ 1,366,092
============== ============
36
<PAGE>
Note 5. Property and Equipment
Property and equipment are stated at cost and consist of the following;
December 31,
1998 1997
--------------------------------
Landfills $ 18,631,409 $ 8,412,010
Landfill and other development projects 8,778,901 691,225
Buildings, facilities and improvements 4,701,245 1,490,964
Machinery and equipment 3,038,700 1,513,720
Rolling stock 8,980,626 662,595
Containers 4,104,397 401,941
Office furniture and equipment 713,235 333,017
------------ ----------
48,948,513 13,505,472
Less accumulated depreciation
and amortization (4,262,778) (1,018,289)
----------- -------------
Property and equipment, net $44,685,735 $12,487,183
=========== ===========
Note 6. Intangible Assets
Intangible assets consist of the following;
December 31,
1998 1997
-------------------------------
Goodwill $ 30,441,948 $ 94,873
Non-compete agreements 4,333,685 -
Customer lists 3,841,599 -
Other 713,235 3,354
------------ -----------
39,330,467 98,227
Less accumulated amortization (1,271,093) (1,395)
----------- ----------
Total intangible assets $ 38,059,374 $ 96,832
============ ===========
Note 7. Long-term Debt and Notes Payable
Long-term debt and notes payable consists of:
December 31,
1998 1997
---------------------------
7% Convertible Subordinated Notes $ 60,000,000 $ -
Howard Bank Credit Facility 10,000,000 748,000
13% Short-term Notes 7,500,000 -
10% Convertible Subordinated Debentures 1,850,000 4,425,000
Capital Leases 1,201,516 2,626,700
Equipment and Other Notes Payable 2,569,593 245,393
------------- -----------
83,121,109 8,045,093
Less current portion 8,259,922 843,831
------------- -----------
Long-term portion $ 74,861,187 $ 7,201,262
============ ===========
Scheduled maturities of long-term debt and notes payable, excluding capital
leases are as follows:
Payments due in the year ending December 31,
1999 $ 8,176,268
2000 12,536,690
2001 530,953
2002 427,261
2003 248,421
Thereafter 60,000,000
-------------
$ 81,919,593
37
<PAGE>
7% Convertible Subordinated Notes: On May 13, 1998, the Company closed an
offering of $60.0 million in 7% Convertible Subordinated Notes (the "Notes" or
"7% Subordinated Notes"), which resulted in net proceeds to the Company of
approximately $58.3 million. The Notes mature in May 2005, and bear interest at
7.0% per annum, payable semi-annually in arrears on each June 30 and December
31. The Notes and any accrued but unpaid interest are convertible into Common
Stock at a conversion price of $10.00 per share. The shares are 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. The Company used the majority of the proceeds from the Notes to
repay existing debt of approximately $11.7 million and complete several
acquisitions. As a result of the debt payoffs, the Company recorded an
extraordinary loss on extinguishment of debt of approximately $247,000 during
1998. In March 1999, the Company exchanged 2,244,109 shares of the Company's
Common Stock for $10,390,000 of the Notes. (See Footnote 20 "Subsequent Events")
Howard Bank Credit Facility: On March 31, 1997, the Company closed a $1.0
million term loan with The Howard Bank of Burlington, Vermont. During 1998, the
loan was renegotiated as part of a line of credit for $10,000,000. The line of
credit was repaid in full in March 1999, with the proceeds of the Senior Notes.
See Footnote 20 "Subsequent Events". The Company is currently negotiating an
expansion of this facility with The Howard Bank.
13% Short-term Notes. At December 31, 1998 the Company had outstanding debt in
the principal amount of approximately $7.5 million to BIII Capital Partners,
L.P., a significant shareholder of the Company. The debt consisted of 13% Short
Term Notes due June 30, 1999. The Short Term Notes were repaid in full in March
1999, with the proceeds of the Senior Notes. See Footnote 20 "Subsequent
Events".
10% Convertible Subordinated Notes. During 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 Notes mature on September 30, 2000, and bear interest at 10%,
payable quarterly. The Notes are convertible into Common Stock at $9.20 per
share and are callable at the Company's option at any time if the closing sale
price of the Common Stock exceeds $50.00 per share for a period of 20
consecutive trading days prior to redemption notice. The Notes 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.
On December 31, 1997, the Company converted $3,950,000 of Convertible
Subordinated Debentures and $110,625 of accrued interest into 40,488 shares of
Series B Convertible Preferred Stock. See Footnote 13 "Preferred Stock".
Capital Leases. The Company leases certain facilities, equipment, and
vehicles under agreements which are classified as capital leases.
38
<PAGE>
Leased capital assets included in property and equipment are as follows:
December 31,
1998 1997
Land and Buildings $ 1,327,161 $ 1,634,078
Machinery and equipment - 1,881,630
------------ ---------
1,327,161 3,515,708
Accumulated depreciation (38,667) (207,053)
---------- ---------
$ 1,288,494 $ 3,308,655
============ ===========
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, 1998 are as follows:
Capital Operating
Leases Leases
Payments due in the year ending December 31,
1999 $ 200,040 $ 313,883
2000 200,040 327,719
2001 200,040 351,215
2002 200,040 358,484
2003 200,040 94,366
Thereafter 766,820 -
---------- ----------
Minimum lease payments 1,767,020 $ 1,445,667
==========
Less: amount representing interest 565,504
Present value of net minimum lease payments 1,201,516
Less current portion 83,654
Long-term portion $ 1,117,862
===========
The Company's rental expense for operating leases was $388,630, $81,757 and
$293,766 for the years ended December 31, 1998, 1997 and 1996, respectively.
Equipment and Other Notes Payable, Equipment and other notes payable are secured
by the respective equipment, and are payable monthly in varying amounts ranging
from $1,686 To $18,524 With interest rates ranging from 8.0% to 8.5%. Most of
the notes were repaid in March 1999 with the proceeds of the Senior Notes. See
Footnote 20 "Subsequent Events".
Note 8. Accrued Expenses
Accrued expenses consisted of the following:
December 31,
1998 1997
---------------------------------
Acquisition integration costs $ 676,703 $ -
Interest 123,872 103,578
Professional and consulting fees 125,410 265,024
Compensation and benefits 432,089 64,451
Other taxes and fees 449,509 271,718
Due to sellers 260,000 -
Accrued disposal costs 210,021 -
Medical Waste litigation (See Note 15) 88,189 300,000
Other 376,616 5,615
Fairhaven landfill (See Note 17) - 756,000
Restructuring (See Note 16) - 778,609
----------- -------
$ 2,742,409 $ 2,544,995
=========== ==========
39
<PAGE>
Note 9. Income Taxes
Income tax expense
(benefit) consists of: Current Deferred Total
Year ended December 31, 1998: ----------------------------------------
Federal $ - $ - $ -
State 43,174 - 43,174
----------------------------------------
$ 43,174 $ - $ 43,174
========================================
Year ended December 31, 1997:
Federal $ - $ - $ -
State 5,622 - 5,622
-----------------------------------------
$ 5,622 $ - $ 5,622
========================================
Year ended December 31, 1996:
Federal $ - $ - $ -
State (23,456) - (23,456)
----------------------------------------
$ (23,456) $ - $ (23,456)
=========================================
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 years
ended December 31:
1998 1997 1996
---------------------------------------
Statutory Federal income tax
(benefit) $ (2,193,836) $ (1,898,217) $ (4,717,894)
State taxes, net of Federal income
tax benefit (3,460,328) (530,947) (1,210,466)
Valuation allowance 5,533,239 2,432,087 5,898,245
Other 164,100 2,699 6,659
------------- -------------- -------------
$ 43,174 $ 5,622 $ (23,456)
=========== ============== ============
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, 1998 and 1997 are
presented below.
1998 1997
------------- ----------
Deferred tax assets:
Accounts receivable allowance $ 303,207 $ 11,528
Property and equipment depreciation - 194,942
Other accrued liabilities 334,102 4,371,736
Operating loss and credit carryforwards 14,864,820 4,543,738
---------- ---------
Gross deferred tax assets 15,502,129 9,121,944
Less: valuation allowance (14,655,182) (9,121,944)
------------ -----------
Net deferred t 846,947 -
Deferred tax liabilities:
Total deferred tax liabilities (846,947) -
Net deferred tax liability $ - $ -
=============== ==============
40
<PAGE>
At December 31, 1998 the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $34 million which generally are
available to offset future Federal taxable income, if any, and which expire
during the years ending December 31, 2010 through 2018. The Company underwent an
ownership change as defined in Internal Revenue Code Section 382 on June 30,
1997 and as a result will be restricted in its ability to use net operating loss
carryforwards generated prior to the ownership change to offset future taxable
income. The Company's future use of net operating loss carryforwards generated
prior to the ownership change will be subject to an annual limitation generally
equal to the product of the long-term tax exempt rate for June 1997 of 5.64% and
the value of the Company as of June 30, 1997. As a result of this limitation a
portion of the Company's Federal and state net operating loss carryforwards may
expire unused.
Note 10. Landfill Closure and Post-Closure Costs
Landfills are typically developed in a series of cells, each of which is
constructed, filled, and capped in sequence over the operating life of the
landfill. When the cell is filled and the operating life of the landfill is
over, the final cell must be capped, the entire site must be closed and
post-closure care and monitoring activities begin. The Company will have
material financial obligations relating to the final closure and post-closure
costs of each landfill the Company owns.
The Company has estimated at December 31, 1998, that the total costs for final
closure and post-closure of Cells I and II at the Moretown, Vermont landfill,
including capping costs, cap maintenance, groundwater monitoring, methane gas
monitoring, and leachate treatment and disposal for up to 30 years, is
approximately $4.2 million. Based upon the capacity of Cells I and II,
approximately $1.8 million and $1.6 million were accrued at December 31, 1998
and 1997, respectively for final closure and post closure costs. In July 1998,
the Company acquired the Sandy Run landfill located in Hopewell, Pennsylvania.
The Company has estimated at December 31, 1998, that the total costs for final
closure and post-closure of Cells I through IV at Sandy Run, including capping
costs, cap maintenance, groundwater monitoring, methane gas monitoring, and
leachate treatment and disposal for up to 30 years, is approximately $4.1
million. Based upon the capacity of Cells I and II, approximately $1.0 million
was accrued at December 31, 1998 for final closure and post closure costs.
The Company bases its estimates for these accruals on respective State
regulatory requirements, including input from its internal and external
consulting engineers and interpretations of current requirements and proposed
regulatory changes. The closure and post-closure requirements are established
under the standards of the U.S. Environmental Protection Agency's Subtitle D
regulations as implemented and applied on a state-by-state basis.
The determination of airspace usage and remaining airspace capacity is an
essential component in the calculation of closure and post-closure accruals. See
Note 2 - Summary of Significant Accounting Policies - Landfill Closure and
Post-Closure Costs.
Note 11. Commitments and Contingencies
Landfill related activities. In the normal course of its business, and as a
result of the extensive governmental regulation of the solid waste industry, the
Company periodically may become subject to various judicial and administrative
proceedings involving federal, state, or local agencies. In these proceedings,
the agency may seek to impose fines on the Company or to revoke or deny renewal
of an operating permit held by the Company. From time to time, the Company also
may be subjected to actions brought by citizens' groups in connection with the
permitting of its landfills or transfer stations, or alleging violations of the
permits pursuant to which the Company operates. Certain federal and state
environmental laws impose strict liability on the Company for such matters as
contamination of water supplies or the improper disposal of waste. The Company's
operation of landfills subjects it to certain operational, monitoring, site
maintenance, closure and post-closure obligations which could give rise to
increased costs for monitoring and corrective measures. See Note 10 - Landfill
Closure and Post Closure Costs.
The Company has a $5 million environmental impairment liability insurance
covering claims for sudden or gradual onset of environmental damage at each of
its landfills. 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.
41
<PAGE>
None of the Company's landfills are currently connected with the Superfund
National Priorities List or potentially responsible party issues.
Employment Contracts. The Company has entered into employment agreements with
its two senior executives, which expire on July 1, 2000 and subsequently provide
for employment until terminated by either party at annual salaries of $200,000
through July 1, 1999 and $225,000 through July 1, 2000.
Legal Matters. Richard Rosen ("Rosen"), former Chairman, Chief Executive Officer
and President of the Company, 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. The Company has previously received an arbitration award against Rosen
directing Rosen to pay $780,160 for breach by Rosen of his employment agreement
with the Company. On February 25, 1997 the Middlesex Superior Court in
Cambridge, Massachusetts confirmed the arbitration award and entered judgment
against Rosen.
In addition to the matter set forth above, from time to time, in the ordinary
course of its business, the Company is subject to legal proceedings and claims
arising from the conduct of its business operations. In the opinion of the
Company, the ultimate disposition of such matters on an aggregate basis will not
have a material adverse effect on the Company's financial position or results of
operations.
Note 12. Common Stock
During 1998, the Company converted 92,580 shares or $9,257,807 of its
Series A Preferred Stock into 6,590,577 shares of its Common Stock.
On September 22, 1998, the Company issued 455,922 shares of its Common Stock in
connection with the acquisition of Mattei-Flynn Trucking, Inc.
On May 22, 1998, the Company issued 111,110 shares of its Common Stock in
connection with the acquisition of Eagle Recycling, Inc. and Horvath
Sanitation, Inc.
On May 14, 1998, the Company converted 40,488 shares or $4,048,750 of its
Series B Preferred Stock into 623,808 shares of its Common Stock.
In December 1997, the Company's Board of Directors approved a one for five
reverse stock split of the Company's Common Stock. On February 13, 1998, the
stockholders of the Company approved the reverse stock split at a special
stockholders' meeting. No fractional shares were issued in connection with the
reverse stock split, and stockholders received cash in payment for any
fractional shares otherwise issuable. The Company's financial statements have
been restated to reflect the one-for-five reverse split.
In September 1997, the Company issued 18,667 shares of common stock in
connection with the purchase of the minority interest in the Company's Vermont
hauling business for $70,000.
On January 21, 1997, the Company closed a Regulation "D" private placement of
172,000 shares of common stock at $2.50 per share with gross proceeds of
$430,000.
42
<PAGE>
Note 13. Preferred Stock
At December 31, 1997, the Company had outstanding $9,257,807 of principal amount
Series A Convertible Preferred Stock, par value $0.001 per share ("Series A
Preferred Stock"), which was issued in a private placement on June 26, 1997,
bearing an 8.0% annual cumulative dividend. The Series A Preferred Stock was
convertible into common stock at a conversion price of $1.40625 per share of
common stock. On July 27, 1998, the Company met the mandatory conversion trading
requirements and elected to convert all of the remaining shares of Series A
Preferred Stock into 6,590,577 shares of the Company's Common Stock and the
Board of Directors declared and paid cash dividends of approximately $787,000.
At December 31, 1997, the Company also had outstanding $4,048,750 of principal
amount Series B Convertible Preferred Stock, par value $0.001 per share ("Series
B Preferred Stock"). The Series B Preferred Stock was issued on December 31,
1997 in a private placement in exchange for outstanding 10% Convertible
Debentures of the Company, bearing a 6.0% annual cumulative dividend, and was
convertible into common stock at a conversion price of $6.25 per share of common
stock. On May 14, 1998, the Company met the mandatory conversion trading
requirements and elected to convert all of the shares of the Series B Preferred
Stock into 623,808 shares of Common Stock and the Board of Directors declared
and paid cash dividends of approximately $101,000.
Note 14. Stock Options
Employee Stock Option Plan. Pursuant to the Company's 1995 Stock Option and
Incentive Plan as amended (the "Plan"), options to purchase up to 3,000,000
shares of Common Stock were reserved for issuance to employees and consultants
of the Company. Options granted under the Plan may be either Incentive Stock
Options or Non-Qualified Stock Options for purposes of federal income tax law.
Options are generally subject to vesting over a period of four years from the
date of grant and are exercisable only to the extent vested from time to time,
although certain options have provided for earlier vesting. The selection of
individuals to receive awards of options under the Plan and the amount and terms
of such awards may be determined by the Board of Directors of the Company or an
Administering Committee appointed by the Board of Directors. At the Annual
Meeting of the Stockholders of the Company, held August 19, 1998, the number of
shares reserved for issuance under the Plan was increased from 1,700,000 to
3,000,000.
As of December 31, 1998, options to purchase 2,341,793 shares of Common Stock
had been granted and options to purchase up to an additional 658,207 shares
remained available for grant. The per share weighted average fair value of stock
options granted during 1998, 1997 and 1996 was approximately $3.28, $3.73, and
$4.08, respectively, using the Black Scholes option-price model with the
following weighted average assumptions: volatility, 50% in 1998 and 30% in both
1997 and 1996; expected dividend yield, 0% for all years; risk free interest
rate, 4.75% in 1998 and 5.5% in both 1997 and 1996; and expected life, 5 years
for all 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 1998, 1997 and 1996 would have increased to the amounts shown below.
43
<PAGE>
1998 1997 1996
---- ---- ----
Net loss available for
common shareholders
- as reported $ (7,383,503) $ (5,588,612) $ (13,889,772)
- pro forma (8,662,888) (6,006,315) (14,334,772)
Basic net loss per share
- as reported $ (1.00) $ (1.55) $ (4.90)
- pro forma $ (1.17) $ (1.66) $ (5.06)
Pro forma net loss reflects only the effects of options granted in 1998, 1997
and 1996. Therefore, it does not reflect the full effect of calculating the cost
of stock options under SFAS No. 123 because the cost of options issued prior to
January 1, 1996 are not considered. As a result, it may not be representative of
the pro forma effects on operating results that will be disclosed in future
years.
Changes in options and option shares under the plan during the respective years
were as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
------------------------------------------------------------------------------------------------
Weighted Avg. Weighted Avg. Weighted Avg.
exercise price Number exercise price Number exercise price Number
per share of shares per share of shares per share of shares
Options outstanding,
beginning of year $1.42 1,327,417 $1.41 161,200 $1.41 123,825
Options granted 6.68 1,121,351 1.43 1,179,217 1.41 148,250
Options exercised 1.41 (28,725) - 1.41 (1,312)
Options canceled 6.82 (78,250) 1.64 (13,000) 1.41 (109,563)
Options outstanding,
end of year 3.75 2,341,793 1.42 1,327,417 1.41 161,200
Shares reserved for future grants 658,207 372,583 1.41 138,800
Total options in the plan 3,000,000 1,700,000 300,000
Options exercisable, end of year $1.42 340,573 $1.42 114,900 $1.41 102,225
======= ======= =======
</TABLE>
On June 30, 1997, the Board of Directors repriced to $1.406 per share any
currently outstanding stock options with exercise prices in excess of $1.406 per
share for all employee participants in the Stock Option Plan at that time. Each
repriced option retained the vesting schedule associated with the original
grant.
44
<PAGE>
Options outstanding at December 31, 1998 and related proceeds to the Company
were as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Remaining Weighted Avg. Number of
Shares Price Exercise Contractual Exercise Options
Under Option Per Share Proceeds Life Price Exercisable
1,264,043 $1.41 $1,830,768 8.38 $ 1.41 334,823
23,000 1.88 - 2.19 43,438 8.73 1.89 5,750
30,000 3.44 103,140 9.17 3.44 -
43,750 3.75 - 5.88 237,450 9.72 5.28 -
762,500 6.25 4,765,625 9.33 6.25 -
47,000 6.50-8.88 368,668 9.49 7.84 -
86,500 9.00 778,500 9.42 9.00 -
85,000 9.23 - 9.25 786,172 9.57 9.25 -
----------- ----------- ----------- -------------- ------------------- ------------
2,341,793 $8,913,761 8.84 $ 3.78 340,573
========= ========== =======
</TABLE>
Non-Employee Directors Stock Option Plan. Pursuant to the Company's 1995 Stock
Option Plan for Non-Employee Directors as amended, each Director is entitled to
receive a grant of Non Qualified Stock 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. In addition, the plan provides for the issuance of 20,000 fully vested
options upon the election of each new member of the Board of Directors initially
elected after December 24, 1997, excluding employees of the Company. At the
Annual Meeting of the Stockholders of the Company, held August 19, 1998, the
number of shares granted to each Director under the Non-Qualified Stock Option
Plan for Non-Employee Directors as amended was increased to 10,000 from 2,000
for each year that the holder remains a Director of the Company. In addition,
the number of fully vested options upon the election of each new member of the
Board of Directors initially elected after December 24, 1997, excluding
employees of the Company was increased to 20,000 from 4,000.
Changes in options and option shares under the plan during the respective years
were as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
Weighted Avg. Weighted Avg. Weighted Avg.
exercise price Number exercise price Number exercise price Number
per share of shares per share of shares per share of shares
Options outstanding,
beginning of year $1.79 27,480 $1.41 19,416 $1.41 8,750
Options granted 3.75 50,000 2.28 35,480 1.41 10,666
Options exercised - - - - - -
Options canceled - - 2.15 (27,416) - -
--------- -------- --------
Options outstanding,
end of year 3.05 77,480 1.79 27,480 1.41 19,416
====== ====== ======
Options exercisable, end of year $1.84 22,370 $1.84 21,500 1.41 7,041
====== ====== =====
</TABLE>
45
<PAGE>
Options outstanding at December 31, 1998 and related proceeds to the Company
were as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Remaining Weighted Avg. Number of
Shares Price Exercise Contractual Exercise Options
Under Option Per Share Proceeds Life Price Exercisable
14,000 $ 1.41 $ 19,684 8.67 $ 1.41 10,000
13,480 2.19 29,454 8.33 2.19 12,370
10,000 3.75 37,500 9.00 3.75 -
40,000 6.25 250,000 9.67 6.25 -
----------- -------- --------- -------------- ------------------- ------------
77,480 $ 4.34 $ 336,638 9.09 $ 4.34 22,370
=========== ========= ======
</TABLE>
Note 15. Accounts Receivable Write-off
During 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 the Company's CFA medical waste processing technology
throughout Europe. In accordance with the agreement, the Company would provide
technical assistance including facility design, installation, testing and
training. In addition to royalty payments for each plant, ScotSafe agreed to pay
the Company for consulting and other services including out-of-pocket expenses.
During the fourth quarter of 1997 the Company terminated its licensing
agreements with ScotSafe and wrote off the receivable due from ScotSafe of
approximately $570,000 because ScotSafe was in default for failure to pay the
Company royalties due under the terms of the agreement.
Subsequent to the termination, ScotSafe was placed into receivership and
Eurocare Environmental Services, Ltd. (Eurocare) purchased its assets in
December 1997. Eurocare continues to operate the three facilities the Company
constructed for ScotSafe without a licensing agreement. The Company is
continuing to pursue an action against Eurocare through the Court of Session in
Scotland to restrict Eurocare's use of the Company's confidential information
embodied within the plant equipment. The Company also has a patent pending with
the European Patent Office and expects grant on April 21, 1999, at which time,
the Company will act vigorously to protect its rights to the CFA technology
against Eurocare and seek substantial damages.
Note 16. Restructuring and Discontinued Operations
Restructuring of Operations. In March 1996, the Company announced its intention
to restructure the Company's operations to focus its resources and activities on
developing a fully integrated solid waste management company. During the years
ended December 31, 1997 and 1996, the Company recorded restructuring charges of
$596,426 and $1,741,729, respectively, for costs associated with the plan to
focus on the development of an integrated solid waste management company. The
costs included accruals for employee severance, non-cancelable lease
commitments, professional fees and litigation costs. The restructuring was
completed in 1997; no restructuring charges were recorded in 1998.
Discontinued Operations. In March 1996, as part of the restructuring, the
Company ceased operations at its technology center and discharged all employees
and consultants engaged in various research and development projects. The
Company also ceased operations at 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 operations at the technology center and MSF for all periods
presented are reported in the accompanying consolidated statements of operations
and cash flows under discontinued operations. The charge for discontinued
operations relates primarily to losses from operations and the costs associated
with the termination of these operations.
At December 31, 1998 and 1997, the Company had reserves and liabilities
associated with restructuring activities and discontinued operations of $0 and
$778,609, respectively.
Note 17. Fairhaven, Massachusetts Operation
In 1994, WSI entered into a contract with the Town of Fairhaven,
Massachusetts to operate and remodel the Town's existing 26-acre landfill. The
Company began operations at the landfill in 1995. On November 8, 1995, an action
was brought against various parties including the Company relating to the
remodeling permits issued at the Fairhaven landfill, seeking among other things,
to appeal the permits that had been issued. On June 2, 1997, the judge ruled in
the Company's favor. However, based on the extensive delays associated with the
litigation and the engineering impacts of the delays associated with the
litigation, which resulted in the uncertainty of the long-term economic
viability of the project, the Company terminated the project. On February 24,
1998, the Company entered into a termination agreement with the Town of
Fairhaven that required the Company to perform a certain amount of construction
and closure work at the landfill. Write-off of project development costs in 1998
and 1997 primarily represent the Company's cost to liquidate the equipment that
was used at the Fairhaven landfill and the costs to close the landfill under the
Company's Termination Agreement with the Town of Fairhaven. The Company wrote
off its capital investment in the project at December 31, 1996. The termination
of this project was completed in 1998. No other amounts are accrued at December
31, 1998.
46
<PAGE>
Note 18. Segment Information
The Company adopted the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information ", on January 1, 1999, for the year
ended December 31, 1998. SFAS No. 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Operating segments
are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker, or decision making group, in deciding how to allocate resources
and in assessing their performance. The Company's chief operating decision-maker
is the Chief Executive Officer (CEO).
The Company manages its business segments primarily on a regional basis. The
Company's reportable segments are comprised of Central Massachusetts, Central
Upstate New York, Central Pennsylvania and Vermont. Each operating segment
provides services as further described in Note 1. The accounting policies of the
various segments are the same as those described in the "Summary of Significant
Accounting Policies" in Note 2. The Company evaluates the performance of its
segments based on operating income (loss), EBITDA and Adjusted EBITDA. Operating
income (loss) for each segment includes all expenses directly attributable to
the segment, including acquisition related costs, and excludes certain expenses
that are managed outside the reportable segments. Costs excluded from segment
profit primarily consist of corporate expenses. Corporate expenses are comprised
primarily of information systems and other general and administrative expenses
separately managed. EBITDA is defined as operating income or loss from
continuing operations excluding 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 GAAP. Adjusted EBITDA represents EBITDA plus
one-time charges associated with the write-off of landfill development costs,
acquisition integration costs and restructuring costs. Acquisition integration
costs consist of one-time, non-recurring costs, which in the opinion of
management have no future value and, therefore, are expensed. Such costs include
termination and retention of employees, lease termination costs, costs related
to the integration of information systems and costs related to the change of
name of the acquired company or business. The Company does not include
intercompany transfers between segments for management reporting purposes.
Segment assets exclude corporate assets. Corporate assets include cash and cash
equivalents, office equipment and other assets. Capital expenditures for
long-lived assets are not reported to management by segment and are excluded, as
presenting such information is not practical.
Summary information by segment as of and for the years ended December 31, 1998,
1997 and 1996 is as follows:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Vermont
Revenue $10,430,732 $3,457,692 $338,225
Income (loss) from continuing operations 1,603,205 761,433 (95,363)
Depreciation and amortization 2,307,776 692,224 104,961
Acquisition integration costs 477,328 - -
EBITDA 3,910,981 1,453,657 9,598
Adjusted EBITDA 4,388,309 1,453,657 9,598
Net interest expense 298,369 177,917 -
Segment assets 26,105,235 14,986,994 11,124,803
Central Pennsylvania
Revenue $6,644,099 $ - $ -
Income (loss) from continuing operations (418,827) - -
Depreciation and amortization 1,786,435 - -
Acquisition integration costs 617,403 - -
EBITDA 1,367,609 - -
Adjusted EBITDA 1,985,012 - -
Net interest expense 46,586 - -
Segment assets 44,613,001 132,893 -
Central Massachusetts
Revenue $1,831,027 $ - $ 1,157,381
Income (loss) from continuing operations (188,864) (1,930,008) (8,886,925)
Depreciation and amortization 167,663 - 264,824
Acquisition integration costs 84,276 - -
EBITDA (21,202) (1,930,008) (8,622,101)
Adjusted EBITDA 298,538 (434,620) (1,970,026)
Net interest expense - - 183,499
Segment assets 11,699,773 1,090,170 3.288.827
Central Upstate New York
Revenue $2,138,726 $ - $ -
Income (loss) from continuing operations (573,510) - -
Depreciation and amortization 239,551 - -
Acquisition integration costs 685,528 - -
EBITDA (333,959) - -
Adjusted EBITDA 351,569 - -
Net interest expense - - -
Segment assets 9,118,715 - -
Corporate
Revenue $ - $ - $ -
Income (loss) from continuing operations (2,860,851) (2,014,165) (2,483,439)
Depreciation and amortization 67,396 21,516 1,186,595
Acquisition integration costs - - -
EBITDA (2,793,455) (1,992,649) (1,296,844)
Adjusted EBITDA (2,793,455) (1,396,223) (444,885)
Net interest expense 2,949,574 1,004,334 820,395
Segment assets 4,579,975 2,483,090 2,444,460
</TABLE>
47
<PAGE>
Note 19. Year 2000
The Company is assessing the readiness of its systems for handling the Year
2000. Although the assessment is still underway, management currently believes
that all material systems will be compliant by Year 2000 and that the costs
associated with this are not material. The Company has incurred only minimal
costs to date associated with the Year 2000 issue.
The Company is in the process of identifying key third-party vendors to
understand their ability to continue providing services through Year 2000. The
Company uses well-regarded nationally known software vendors for both its
general accounting applications and industry-specific customer information and
billing systems. The Company is implementing a new general accounting package
which will be fully Year 2000 compatible, and the provider of the solid waste
industry customer information and billing system is Year 2000 compatible. The
Company's banking arrangements are with national banking institutions, which are
taking all necessary steps to insure its customers' uninterrupted service
throughout applicable Year 2000 timeframes. The Company's payroll is performed
out-of-house by the largest provider of third party payroll services in the
country, which has made a commitment of uninterrupted service to their customers
throughout applicable Year 2000 timeframes.
While the Company currently expects that the Year 2000 issue will not cause
significant operational problems, delays in the implementation of new
information systems, or failure to fully identify all Year 2000 dependencies in
the Company's systems and in the systems of suppliers and financial institutions
could have material adverse consequences. Therefore, the Company is developing
contingency plans for continuous operations in the event such problems arise.
Note 20. Subsequent Events
Senior Notes Offering and Debt Repayment. On March 2, 1999, the Company
completed a private placement of $100.0 million of 11.5% Senior Notes (the
"Senior Notes") and warrants to purchase an aggregate of 1,500,000 shares of
common stock at an exercise price of $6.25 per share (the "Warrants"). The
Senior Notes mature on January 15, 2006 and bear interest at 11.5% per annum,
payable semi-annually in arrears on each January 15 and July 15, commencing July
15, 1999, subject to prepayment in certain circumstances. The interest rate on
the Senior Notes is subject to adjustment upon the occurrence of certain events
as provided in the Senior Notes Indenture. The Senior Notes may be redeemed at
the option of the Company after March 2, 2003 at redemption prices set forth in
the Senior Notes Indenture, together with accrued and unpaid interest. The
Warrants are exercisable from September 2, 1999, through March 2, 2004. The
number of shares for which, and the price per share at which, a Warrant is
exercisable, are subject to adjustment upon the occurrence of certain events as
provided in the Warrant Agreement. The net proceeds to the Company, after
deducting the discount to the initial purchaser and related issuance costs, was
approximately $97.3 million. The Company used a portion of the proceeds from the
Senior Notes to repay $20.0 million of the Company's 13% short term notes due
June 30, 1999, (the outstanding balance of the 13% short-term notes was $7.5
million at December 31, 1998) $10.0 million of the Howard Bank credit facility
and approximately $1.7 million of capital leases and other notes payable. In
addition, the Company redeemed approximately $1.45 million principal amount of
the Company's 10% Convertible Subordinated Debentures due October 6, 2000 and
completed several acquisitions as described below. The Company intends to use
the balance of the proceeds for general corporate purposes, including possible
future acquisitions and working capital.
Conversion of Debt into Equity On March 3, 1999, the Company offered to
exchange up to 2,244,109 shares of the Company's Common Stock for a portion of
the Company's 7% Subordinated Notes due May 13, 2005. The exchange price per
share of $4.63 was equal to the closing price of the Common Stock on the Nasdaq
SmallCap Market on the first interim closing as reported by NASDAQ. Any accrued
but unpaid interest on the Notes will be paid in cash. As a result of the
exchange offer, the Company retired $10,390,000 of its 7% Convertible
Subordinated Notes. The remaining 7% Convertible Subordinated Notes are
convertible by holders into Common Shares at $10.00 per share.
Stock Repurchase With the proceeds of the Senior Notes, the Company
repurchased 497,778 shares of the Company's common stock from the Federal
Deposit Insurance Corporation (FDIC) for an aggregate purchase price of
approximately $2.8 million.
Acquisitions Since December 31, 1998 through March 24, 1999, the Company has
completed six acquisitions, consisting of 5 collection operations and one
landfill. The aggregate purchase price for these acquisitions was approximately
$38 million which was paid in cash and the assumption of approximately $3
million of debt. These acquisitions have combined annual revenue of
approximately $12 million. The acquisitions have all been recorded using the
purchase method of accounting.
48
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information Regarding Directors
The following table and biographical descriptions set forth certain
information as of March 15, 1999, unless otherwise specified, with respect to
the seven Directors of the Company, all of whom are nominees for reelection at
the 1999 Annual Meeting of Stockholders, based on information furnished to the
Company by each Director.
Directors
Director
Age Since
-----------------------------------
Philip W. Strauss 50 1996
Robert Rivkin 40 1997
Jay Matulich 44 1995
David J. Breazzano 42 1997
Charles Johnston 64 1997
Judy K. Mencher 42 1997
William B. Philipbar 73 1997
- --------------
Philip W. Strauss. Mr. Strauss has been the Chief Executive Officer
and President since March 27, 1996 and Chairman of the Board since June 24,
1996. Previously Mr. Strauss had been Executive Vice President and
Chief Operating Officer of the Company since September 19, 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.
Robert Rivkin. Mr. Rivkin, a Certified Public Accountant, has been
Executive Vice President Acquisitions of the Company since April 1998, Vice
President and Chief Financial Officer since March 1995, Secretary since May 1995
and Treasurer since June 1996. Mr. Rivkin was first elected to the Board of
Directors in June 1997. For the six years prior to joining the Company, Mr.
Rivkin was a principal at The Envirovision Group Inc., a full service
environmental engineering, consulting and contracting company, where he was
responsible for finance, marketing and strategic planning. Previously, Mr.
Rivkin practiced public accounting in New York, where he specialized in mergers
and acquisitions, initial public offerings and SEC reporting.
Jay J. Matulich. Mr. Matulich has been a member of the Board of
Directors since March 1995. Mr. Matulich is a Managing Director of
International Capital Growth Limited ("ICG"), formerly Capital Growth
International L.L.C. and U.S. Sachem Financial Consultants, L.P. He has held
this position since 1994. From May 1990 to October 1994, Mr. Matulich was a Vice
President of Gruntal & Co., Incorporated, investment bankers.
David J. Breazzano. Mr. Breazzano has been a member of the Board of
Directors since June 1997. Mr. Breazzano is one of the two principals at
DDJ Capital Management, LLC, which was established in 1996. He has
over 18 years of investment experience and served as a Vice President and
Portfolio Manager at Fidelity Investments ("Fidelity") from 1990 to 1996.
Prior to joining Fidelity, Mr. Breazzano was President and Chief
Investment Officer of the T. Rowe Price Recovery Fund. Mr. Breazzano also
serves as a Director of Key Energy Group, Inc. and Samuel Jewelers, Inc.
Charles Johnston. Mr. Johnston has been a member of the Board of
Directors since June 1997. During the past 10 years he has served on various
boards. Mr. Johnston is currently Chairman of Ventex Technology in Riviera
Beach, Florida and has held that position since 1993. He is also currently
Chairman of AFD Technologies in Jupiter, Florida. He was previously founder,
Chairman, and CEO of ISI Systems, a public company on the American Stock
Exchange prior to being sold to Teleglobe Corporation of Montreal, Canada. Mr.
Johnston also serves as Trustee of Worcester Polytechnic Institute in Worcester,
Massachusetts as well as Trustee for the Institute of Psychiatric Research,
University of Pennsylvania in Philadelphia, Pennsylvania. In addition, he serves
as director of the following companies - Kideo Productions and Infosafe Systems
both of New York City, Hydron Technologies Inc. of Boca Raton, Florida and
Spectrum Signal Processing of Vancouver, British Columbia.
49
<PAGE>
Judy K. Mencher. Ms. Mencher has been a member of the Board of
Directors since August 1997. Ms. Mencher is one of the two principals at DDJ
Capital Management, LLC, which was established in 1996. From 1990 to
1996, Ms. Mencher was at Fidelity working in the Distressed Investing Group.
Prior to joining Fidelity in 1990, Ms. Mencher was a Partner at the law
firm of Goodwin, Procter & Hoar LLP specializing in bankruptcy and
creditors' rights.
William B. Philipbar. Mr. Philipbar was first elected a Director
of the Company on May 8, 1996. He resigned as a Director of the Company on
June 24, 1997 and was reelected to the Board on August 20, 1997. Since
December 1997, Mr. Philipbar has been a part-time consultant for the Company
in connection with the Company's consideration of proposed acquisitions and
other strategic matters. Prior to becoming a Director of the Company,
Mr. Philipbar served as Chairman of the Delaware Solid Waste Authority fro
1977 to 1987 and was President and Chief Executive Officer of Rollins
Environmental Corp. from 1973 to 1984. He has been a Director of Matlack
Systems, Inc. and Rollins Truck Leasing Corp. since 1993. Until 1995 he
was also an advisor to Charles River Ventures.
The Board of Directors and Its Committees
Board of Directors
The Company's Board of Directors consists of seven members, a majority
of whom is independent of the Company's management. Each director holds office
for a term from election until the next Annual Meeting of the Company's
stockholders and until his or her successor is duly elected and qualified.
The Board of Directors held 5 meetings during fiscal year 1998. Each of
the Company's directors attended at least 80% of the total number of meetings of
the Board of Directors and of the committees of the Company of which he or she
was a member.
The Board of Directors has appointed a Compensation Committee and an
Audit Committee.
Compensation Committee. The Compensation Committee currently
consists of Messrs. Johnston and Strauss and Ms. Mencher. The Compensation
Committee 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 (excluding Mr.
Strauss) administers, and has authority to grant awards under, the
Directors' Plan to the employee directors and management of the Company
and its subsidiaries and other key employees. The Compensation Committee held
2 meetings during fiscal year 1998.
Audit Committee. The Audit Committee currently consists of Messrs.
Breazzano, Matulich and Philipbar. The Audit Committee 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 held 2
meetings during fiscal year 1998.
50
<PAGE>
Information Regarding Executive Officers
Set forth below is certain information regarding each of the executive
officers of the Company, including their principal occupation and business
experience for at least the last five years.
Name Age Position
Philip W. Strauss............ 50 Chief Executive Officer and President
Robert Rivkin................ 40 Executive Vice President -
Acquisitions,Chief Financial Officer,
Secretary and Treasurer
Michael J. Leannah........... 46 Senior Vice President and Chief
Operating Officer
Joseph E. Motzkin............ 56 Vice President - Acquisitions
Arthur Streeter.............. 38 Vice President and General Counsel
- -----------------
The principal occupation and business experience for at least the last
five years of each executive officer of the Company, other than executive
officers also serving as Directors, is set forth below.
Michael J. Leannah. Mr. Leannah has been a Senior Vice President and
the Chief Operating Officer of the Company since July 1998. Prior to joining
the Company, he was an Operating Vice President at Superior Services,
Inc. From 1986 to 1997, he held various management positions at Waste
Management, Inc., most recently serving as Vice President, Operations and
State President.
Joseph E. Motzkin. Mr. Motzkin has been a Vice President of the Company
since August 1996. From 1994 to 1996, Mr.Motzkin was a General Manager at Prins
Recycling Corporation where he established recycling programs,
and directed sales programs and customer service activities.
From 1989 to 1994, he was a General Manager at 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.
Arthur Streeter. Mr. Streeter has been Vice President and General
Counsel since February 1998. Prior to joining the Company he was a Partner at
Goldstein and Manello, a 60 lawyer firm based in Boston, Massachusetts
where he gained 12 years of experience representing both private and public
companies.
Each of the executive officers holds his or her respective office until
the regular annual meeting of the Board of Directors following the annual
meeting of stockholders and until his or her successor is elected and qualified
or until his or her earlier resignation or removal.
Compliance with Section 16(a) of the Exchange Act
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, 1998, all Section 16(a) filing requirements
applicable to its executive officers, directors and greater than 10% beneficial
owners were satisfied.
51
<PAGE>
Item 11. Executive Compensation
Director Compensation
The Company does not currently pay cash compensation to its directors.
Non-employee directors are entitled to stock option grants under the Amended and
Restated Waste Systems International, Inc. 1995 Stock Option Plan for
Non-Employee Directors (the "Director Plan"). The Director Plan provides for the
automatic granting to Independent Directors (as defined in the Director Plan) of
options that do not qualify as incentive stock options (referred to as "Stock
Options") under Section 422 of the Code. Under the terms of the Director Plan,
each Independent Director who first becomes a Director of the Company on or
after June 30, 1997 shall automatically be granted on the date he or she becomes
a Director of the Company a Stock Option to purchase 20,000 shares of Common
Stock. In addition, the Director Plan provides that each Independent Director
shall automatically be granted, at the beginning of each calendar year in which
he or she is serving as an Independent Director, a Stock Option to acquire
10,000 shares of Stock. Each Independent Director entering service after the
start of any calendar year will automatically be granted on the effective date
of his or her Board membership a Stock Option to acquire a portion of 10,000
shares of Stock prorated to reflect the remaining portion of such calendar year.
The exercise price per share for the Common Stock covered by any Stock Option
granted under the Director Plan shall be equal to the fair market value of the
Common Stock on the date such option is granted.
Other than Stock Options to acquire 20,000 shares of Stock granted
automatically to each new director joining the Board on or after June 30, 1997,
which Stock Options vest immediately upon grant, options granted under the
Director Plan shall vest at a rate of 25% of the total number of shares of
Common Stock purchasable under such option for each year that the holder remains
a Director of the Company, such vesting to take place at the end of each of the
first four calendar years following issuance of such options. An option issued
under the Director Plan shall not be exercisable after the expiration of ten
years from the date of grant.
Executive Compensation
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, 1998, 1997 and 1996 to the Company's Chief Executive Officer and
the three other senior executive officers in office on December 31, 1998 who
earned at least $100,000 in cash compensation during 1998 (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<S> <C> <C> <C>
Long-Term
Compensation
Awards
Annual Shares
Compensation Underlying
Salary Options (1)
Name and Principal Position Year ($) (#)
- --------------------------- ---- --------------------------------
Philip Strauss 1998 188,172 250,000
Chairman of the Board, 1997 162,504 522,859
President and Chief 1996 150,000 50,000(2)
Executive Officer
Robert Rivkin 1998 187,506 250,000
Executive Vice President - Acquisitions, 1997 162,504 522,859
Chief Financial Officer, Secretary and Treasurer 1996 150,000 41,250
Joseph Motzkin(3) 1998 118,060 40,000
Vice President - Acquisitions 1997 110,000 19,300
Arthur Streeter(4) 1998 118,428 40,000
Vice-President and General Counsel
</TABLE>
(1) All information with respect to outstanding options, including shares
issuable or issued and exercise prices payable or paid per share, has
been adjusted to reflect the 1-for-5 reverse stock split effective
February 13, 1998.
(2) Includes the options to acquire 40,000 shares of Common Stock granted
in 1995 and repriced in 1996.
(3) Includes Mr. Motzkin's salary for 1998 and 1997 only as Mr. Motzkin
did not join the Company until the third quarter of 1996.
(4) Includes Mr. Streeter's salary for 1998 only as Mr. Streeter joined the
Company in February 1998.
52
<PAGE>
Option Grants in Fiscal Year 1998. The following table sets forth the
options granted during fiscal year 1998 and the value of the options held on
December 31, 1998 by the Company's Named Executive Officers.
<TABLE>
OPTION GRANTS IN FISCAL YEAR 1998 (1)
<S> <C> <C> <C> <C> <C>
Percent of Total
Number of Options Granted Exercise or
Shares Underlying to Employees in Base Price Expiration Grant Date
Name Options Granted(#) Fiscal Year ($ /share) Date Present Value$(2)
- ---- ------------------ ------------------- ---------- ------------- --------------
Philip Strauss 250,000 24% $6.25 4/17/08 $767,000
Robert Rivkin 250,000 24% $6.25 4/17/08 $767,000
Joseph Motzkin 40,000 4% $6.25 4/17/08 $122,720
Michael Leannah 75,000 7% $9.25 7/20/08 $126,525
Arthur Streeter 30,000 3% $3.44 2/2/08 $ 50,610
Arthur Streeter 10,000 1% $6.25 4/17/08 $ 30,680
</TABLE>
(1) All information with respect to outstanding options, including shares
issuable or issued and exercise prices payable or paid per share, has
been adjusted to reflect the 1-for-5 reverse stock split effective
February 13, 1998.
(2) The grant date present value was determined using the Black Scholes
option pricing model with the following weighted average assumptions;
volatility, 50%; expected dividend yield, 0%; risk free interest rate,
4.75% and expected life, 5 years.
Option Exercises and Year-End Holdings. The following table sets forth
the options exercised during fiscal year 1998 and the value of the options held
on December 31, 1998 by the Company's Named Executive Officers.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998
AND FISCAL YEAR-END 1998 OPTION VALUES
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Number of
Securities Underlying Value of Unexercised
Shares Unexercised Options in-the-Money Options
Acquired On Value at Fiscal Year-End (#)
at Fiscal Year-End ($)
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
----------------------------------- -------------- -------------------------------------------------- -----------------
Philip Strauss 0 0 180,715 642,144 $739,847 $2,628,937
Robert Rivkin 0 0 180,715 642,144 739,847 2,628,937
Joseph Motzkin 0 0 9,825 59,475 40,224 79,731
</TABLE>
53
<PAGE>
Employment Agreements. On June 30, 1998, the Company and Mr. Strauss
entered into an employment agreement. The terms of the agreement provide (i)
that Mr. Strauss shall serve as the Company's President and Chief Executive
Officer, (ii)that he receive a salary of $200,000 per year through June 30, 1999
and $225,000 per year through June 30, 2000 and (iii) that he agree not to
compete with the Company following termination of his employment for a period of
one year following the termination. In the event that Mr. Strauss is terminated
for cause, he shall not be bound to the non-competition provisions.
The Company's agreement with Mr. Strauss is effective until June 30, 1999
and, absent ninety-day notice from either party to the contrary, shall
be extended automatically for subsequent one-year terms upon the expiration of
the agreement. The Company's agreement with Mr. Strauss may be terminated at any
time by the mutual consent of the parties.
On June 30, 1998, the Company and Mr. Rivkin entered into an employment
agreement. The terms of the agreement provide (i) that he receive a salary of
$200,000 per year through June 30, 1999 and $225,000 per year through June 30,
2000 per year and (iii) that he agree not to compete with the Company
following termination of his employment for a period of one year
following the termination. In the event that Mr. Rivkin is terminated for
cause, he shall not be bound to the non-competition provisions. The Company's
agreement with Mr.Rivkin is effective until June 30, 1999 and, absent
ninety-day notice from either party to the contrary, shall be extended
automatically for subsequent one-year terms upon the expiration of the
agreement. The Company's agreement with Mr. Rivkin may be terminated at any
time by the mutual consent of the parties.
Compensation Committee Interlocks and Insider Participation
Currently, Philip W. Strauss, Charles Johnston and Judy K. Mencher
serve on the Compensation Committee. Philip W. Strauss, in addition to serving
as a member of the Compensation Committee, is the Chief Executive Officer and
President. No other member of the Compensation Committee in 1997 ever served as
an officer of the Company.
54
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table presents information as to all directors and senior
executive officers of the Company as of March 15, 1999 and persons or entities
known to the Company to be beneficial owners of more than 5% of the Company's
Common Stock as of March 15, 1999, unless otherwise indicated, based on
representations of officers and directors of the Company and filings received by
the Company on Schedules 13D and 13G or Form 13F under the Securities Exchange
Act of 1934, as amended (the "Exchange Act").
<TABLE>
Beneficial Ownership
<S> <C> <C> <C>
Common Stock
-------------------------------------------------
# of Shares % of Class
Directors, Executive Officers and 5% Stockholders(1) Beneficially Beneficially
Owned Owned(2)
- ----------------------------------------------------------------------------------------------------------------------
B-III Capital Partners, L.P.(3) 45.4%
c/o DDJ Capital Management, LLC 6,367,406
141 Linden Street
Wellesley, MA 02181
The Prudential Insurance Company of America (4) 6.9%
100 Mulberry Street 791,611
Newark, NJ 07102
PaineWebber High Income Fund (5)
1285 Avenue of the Americas 1,717,194 14.1%
New York, NY 10019
John Hancock Advisers(6) 1,150,000 9.3%
101 Huntington Avenue
Boston, MA 02199
BEA Associates (Credit Suisse) (7) 700,000 5.9%
153 East 53 Street, 57th Floor
New York, NY 10022
735,000 6.5%
Dawson Samberg Capital Management, Inc,(8)
354 Pequot Avenue
Southport, CT 06490
David J. Breazzano(9) 6,750 *
Charles Johnston(10) 6,750 *
Jay Matulich(11) 7,000 *
Judy K. Mencher(9) 6,685 *
Joseph Motzkin(12) 45,553 *
William B. Philipbar(13) 31,685 *
Robert Rivkin(14) 261,168 2.3%
Philip W. Strauss(15) 260,993 2.3%
All directors and officers as a 626,584 5.6%
Group (8 persons)
</TABLE>
55
<PAGE>
less than 1%
(1) The persons named in the table have sole voting and investment power with
respect to all shares shown as beneficially owned by them subject to
community property laws where applicable and the information contained in
footnotes to this table.
(2) Based on 11,220,546 shares of Common Stock issued and outstanding as of
March 15, 1999. As of March 15, 1999 the Company had outstanding 7%
Convertible Subordinated Notes due 2005 which are currently convertible
at the option of the holder into an aggregate 6,000,000 shares of Common
Stock at a conversion price of $10.00 as set forth in the Notes. The
Company is currently conducting a private exchange offering with respect
to the 7% Subordinated Notes, scheduled to expire March 31, 1999,
pursuant to which it is offering to issue up to 2,244,109 shares in
exchange for the tender of 7% Subordinated Notes at the face value of
their principal amount (plus a cash payment for accrued interest). The
exchange price for Common Stock issued in such exchange offer is $4.63
per share, or $5.37 per share less than the $10 per share conversion
price under the terms of the 7% Subordinated Notes. Assuming the Company
issues 2,244,109 shares of Common Stock in the exchange offer at an
exchange price of $4.63 per share, the Company would be obligated to
issue upon conversion of all remaining outstanding 7% Subordinated Notes
an aggregate of 4,960,978 shares of Common Stock, which aggregate figure
includes an additional 1,205,087 shares of Common Stock issuable as a
result of the difference between the $4.63 per share exchange price and
the $10 per share conversion price. In accordance with Exchange Act rules
promulgated by the Commission, the foregoing shares issuable upon
conversion of the 7% Convertible Subordinated Notes are included in this
table only for those holders with the right to acquire such shares within
60 days from the date of this report, to the extent such holder could
acquire additional shares.
(3) Includes 3,567,406 shares of Common Stock currently owned and 2,800,000
shares issuable upon conversion of 7% Convertible Subordinated Notes at a
conversion price of $10.00 as set forth in the Note. DDJ Capital
Management, LLC ("DDJ") serves as the investment manager to B-III Capital
Partners, L.P. ("B III"); an affiliate of DDJ acts as the general partner
of B III. Assuming its pro rata participation in the private exchange
offering described in footnote 2 above, B III might receive an additional
562,374 shares as a result of the private exchange offering price being
lower than the conversion price in the Note which would result in B III
owning approximately 47.5% of the Common Stock.
(4) Includes 591,611 shares of Common Stock currently owned and 200,000
shares issuable upon conversion of 7% Convertible Subordinated Notes at a
conversion price of $10.00 as set forth in the Note. Assuming its pro
rata participation in the private exchange offering described in footnote
2 above, Prudential might receive an additional 40,170 shares as a result
of the private exchange offering price being lower than the conversion
price in the Note which would result in Prudential owning approximately
7.3% of the Common Stock. The Common Stock and Notes are held for the
benefit of certain registered investment companies over which Prudential
or The Prudential Investment Corporation ("PIC") may have direct or
indirect voting and/or investment discretion, with respect to which
Prudential has advised the Company that Prudential and PIC disclaim
beneficial ownership.
(5) Includes 717,194 shares of Common Stock currently owned and 1,000,000
shares issuable upon conversion of 7% Convertible Subordinated Notes at a
conversion price of $10.00. Assuming its pro rata participation in the
private exchange offering described in footnote 2 above, Paine Webber
might receive an additional 208,848 shares as a result of the private
exchange offering price being lower than the conversion price in the Note
which would result in Paine Webber owning approximately 15.4% of the
Common Stock.
(6) Includes 1,150,000 shares issuable upon conversion of 7% Convertible
Subordinated Notes at a conversion price of $10.00. Assuming its pro rata
participation in the private exchange offering described in footnote 2
above, John Hancock might receive an additional 230,975 shares as a
result of the private exchange offering price being lower than the
conversion price in the Note which would result in John Hancock owning
approximately 11.0% of the Common Stock.
(7) Includes 700,000 shares issuable upon conversion of 7% Convertible
Subordinated Notes at a conversion price of $10.00. Assuming its pro rata
participation in the private exchange offering described in footnote 2
above, BEA Associates might receive an additional 140,593 shares as a
result of the private exchange offering price being lower than the
conversion prices in the Note which would result in BEA Associates owning
approximately 7.0% of the Common Stock.
(8) Includes 585,000 shares of Common Stock currently owned and 150,000
shares issuable upon conversion of 7% Convertible Subordinated Notes with
a conversion price of $10.00. Assuming its pro rata participation in the
private exchange offering described in footnote 2 above. Dawson Samberg
might receive an additional 56,103 shares as a result of the private
exchange offering price being lower than the conversion prices in the
Note which would result in Dawson Samberg owning approximately 6.9% of
the Common Stock.
(9) Includes 6,750 shares subject to stock options which are fully
vested and currently exercisable and excludes those shares owned by
B III, which Mr. Breazzano and Ms. Mencher may be deemed to beneficially
own as a result of Mr. Breazzano's and Ms. Mencher's interest in DDJ,
however, such beneficial ownership is disclaimed. Both Mr. Breazzano
and Ms. Mencher are managing members of DDJ.
(10) Includes 6,750 shares subject to stock options which are fully vested
and currently exercisable.
(11) Includes 2,000 shares of Common Stock currently owned and 5,000
shares subject to stock options which are fully vested and currently
exercisable.
(12) Includes 18,403 shares of Common Stock currently owned and 27,150 shares
subject to stock options which are fully vested and currently
exercisable.
(13) Includes 31,685 shares subject to stock options which are fully vested
and currently exercisable.
(14) Includes 17,953 shares of Common Stock currently owned and 243,215
shares subject to stock options which are fully vested and currently
exercisable.
(15) Includes 17,778 shares of Common Stock currently owned and 243,215
shares subject to stock options which are fully vested and currently
exercisable.
56
<PAGE>
Item 13. Certain Relationships and Related Transactions
On December 15, 1997, the Board of Directors voted to retain Mr. William
Philipbar, a Non-Employee Director of the Company, as a part-time consultant in
connection with the Company's consideration of proposed acquisitions and other
strategic matters. Mr. Philipbar's compensation for providing such consulting
services for up to four days per month, as requested by the Company, consists of
grants of options to acquire 25,000 shares of Common Stock to be granted on
January 1 of each year (beginning January1, 1998) so long as Mr. Philipbar
continues to be so retained by the Company. Under such consulting arrangement,
Mr. Philipbar received options on January 1, 1998 and 1999 to acquire 25,000
shares of Common Stock, vesting according to the terms described below. Such
grants are made under an amendment of the Company's Amended and Restated 1995
Stock Option and Incentive Plan (the "Plan") permitting the grant of options and
other benefits under the Plan to Non-Employee Directors, consultants and other
key persons, which was approved by the Company's stockholders at the August 18,
1998 Annual Meeting of Stockholders. Each such option granted to Mr. Philipbar
under such consulting arrangement (a) shall remain outstanding for a term of ten
years, subject to termination 90 days following the date of termination of Mr.
Philipbar's consulting arrangement with the Company; (b) shall be exercisable at
an exercise price per share equal to the closing price of the Common Stock on
its principal trading market on the first trading day on or after the date of
issuance; (c) shall initially be unvested, and shall vest in full on the date
one year after the date of issuance, provided that Mr. Philipbar has been
retained as a consultant by the Company and has been ready, willing and able to
perform services as such consultant during such one year period; and (d) shall
be a non-qualified stock option for income tax purposes.
57
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(A) 1. Financial Statements
The financial statements are listed under Part II, Item 8 of this Report.
2. Financial Statement Schedules
The financial statement schedules are listed under Part II, Item 8 of this
Report.
3. Exhibits
The exhibits are listed below under Part IV, Item 14(c) of this report.
(B) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
(C) Exhibits
Exhibit No. Description
1.1 Purchase Agreement, dated February 25, 1999, by and among First
Albany Corporation and Waste Systems International, Inc. and its
subsidiaries. (Incorporated by reference to Exhibit No. 1.1 of the
Company's Current Report on Form 8-K, dated March 2, 1999.)
2.1 Articles of Merger of BioSafe International, Inc., a Nevada
Corporation, with and into Waste Systems International, Inc., a
Delaware Corporation, filed October 24, 1997 (Incorporated by reference
to Exhibit 2.1 to Form 10-Q For the Quarterly Period Ended September
30, 1997 of Waste Systems International, Inc.)
2.2 Certificate of Merger of BioSafe International, Inc., a Nevada
Corporation, with and into Waste Systems International, Inc., a
Delaware Corporation, filed October 24, 1997 and effective October 27,
1997. (Incorporated by reference to Exhibit 2.2 to Form 10-Q For the
Quarterly Period Ended September 30, 1997 of Waste Systems
International, Inc.)
2.3 Agreement and Plan of Merger dated October 17, 1997 by and between
BioSafe International, Inc. a Nevada Corporation and Waste Systems
International, Inc. a Delaware Corporation. (Incorporated by
reference to Exhibit 2.3 to Form 10-Q For the Quarterly Period
Ended September 30, 1997 of Waste Systems International, Inc.)
3(i).1 Second Amended and Restated Certificate of Incorporation of Waste
Systems International, Inc. filed February 13, 1998.
3(i).2 Certificate of Designations of Series B Convertible Preferred Stock of
Waste Systems International, Inc. filed March 5, 1998.
3(i).3 Certificate of Corrections to the Second Amended and Restated
Certificate of Incorporation of Waste Systems International, Inc.
as filed February 13, 1998),filed March 17, 1998.
3(ii).1 Bylaws of the Company, adopted and effective as of October 27, 1997.
4.4 Certificate of Designation of Series A Convertible Preferred Stock
of Waste Systems International, Inc.
filed October 20, 1997 (Refer to Exhibit 3(i).3 above).
4.5 Certificate of Designation of Series B Convertible Preferred Stock of
Waste Systems International, Inc. filed October 20, 1997 (Refer to
Exhibit 3(i).2 above).
4.6 Amended and Restated Subscription Agreement dated as of
June 30, 1997 (Incorporated by reference to Exhibit 4.2 to Form
10-Q for the Quarterly Period Ended September 30, 1997 of
Waste Systems International, Inc.)
4.7 Indenture, dated as of March 2, 1999, between Waste Systems
International, Inc. and IBJ Whitehall Bank & Trust Company, including a
form of the 11 1/2% Senior Note due 2006. (Incorporated by reference to
Exhibit No. 4.1 of the Company's Current Report on Form 8-K, dated
March 2, 1999.)
4.8 Warrant Agreement, dated as of March 2, 1999, between Waste Systems
International, Inc. and subsidiaries and IBJ Whitehall Bank & Trust
Company, a New York banking corporation as warrant agent. (Incorporated
by reference to Exhibit No. 4.2 of the Company's Current Report on Form
8-K, dated March 2, 1999.)
4.9 Note Registration Rights Agreement, dated as of March 2, 1999, by and
among Waste Systems International, Inc. and its subsidiaries and First
Albany Corporation. (Incorporated by reference to Exhibit No. 4.3 of
the Company's Current Report on Form 8-K, dated March 2, 1999.)
4.10 Warrant Registration Rights Agreement, dated as of March 2, 1999,
by and among Waste Systems International, Inc. and its
subsidiaries and First Albany Corporation. (Incorporated by
reference to Exhibit No. 4.4 of the Company's Current Report on
Form 8-K, dated March 2, 1999.)
10.4 Agreement and Plan of Merger dated as of March 17, 1995, among the
Company, Zoe Resources, Inc., certain stockholders of the Company and
BioSafe, Inc. (Incorporated by Reference to Exhibit 2.1 of the
Company's Current Report on Form 8-K, dated March 29, 1995.)
10.5 1995 Stock Option Plan (Incorporated by Reference to Exhibit 10.1 of
the Company's Current Report on Form 8-K, dated March 29, 1995.)
10.6 Agreement between BioSafe, Inc. and the Town of South Hadley,
Massachusetts, dated August 22, 1995. (Incorporated by reference
to Exhibit No. 10.12 to the Registration Statement on Form S-1 of
BioSafe International, Inc., No. 33-93966 as filed on June 26 1995.)
10.7 Form of 10% Convertible, Redeemable, Subordinated Note Due 2000.
(Incorporated by reference to Exhibit No. 10.15 to the Registration
Statement on Form S-1 of BioSafe International, Inc., No. 33-93966.)
Schedule of Subsidiaries.
27.1 Financial Data Schedules
58
<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.
Date: March 31, 1999 By: /s/ Philip Strauss
------------------
Philip Strauss
Chairman, Chief Executive
Officer and President
(Principal Executive Officer)
Date: March 31, 1999 By: /S/ Robert Rivkin
------------------
Robert Rivkin
Executive Vice President
-Acquisitions,
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.
Date: March 31, 1999 By: /s/ Philip Strauss
-------------------------
Philip Strauss
Chairman, Chief Executive
Officer and President
(Principal Executive Officer)
Date: March 31, 1999 By: /S/ Robert Rivkin
----------------------------
Robert Rivkin
Executive Vice President
-Acquisitions,
Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
Date: March 31, 1999 By: /S/ Jay J. Matulich
-----------------------------
Jay J. Matulich - Director
Date: March 31, 1999 By: /S/ David J. Breazzano
------------------------------
David J. Breazzano - Director
Date: March 31, 1999 By: /S/ Charles Johnston
------------------------------
Charles Johnston - Director
Date: March 31, 1999 By: /S/ Judy K. Mencher
------------------------------
Judy K. Mencher - Director
Date: March 31, 1999 By: /S/ William B. Philipbar
-------------------------------
William B. Philipbar - Director
59
<PAGE>
Exhibit 21.1
Schedule of Subsidiaries
As of December 31, 1998
Name and address: EIN
WSI Medical-Waste Systems, Inc. 04-3377563
(Formerly Biosafe Medical Waste Technology, Inc.)
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
WSI Vermont 03-0347845
(Formerly Waste Professionals of Vermont, Inc.)
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
WSI Moretown 03-0355691
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
WSI Burlington Transfer Station,Inc. 04-3374689
(Formerly Burlington Area Transfer Station, Inc.)
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
WSI Waitsfield Transfer Station, Inc. 04-3292469
(Formerly Waitsville Transfer Station, Inc.
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
WSI of Vermont, Inc. 03-0354296
(Formerly WPV Disposal, Inc.)
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
WSI of Massachusetts Holdings, Inc. 04-3301441
(Formerly Biosafe Buckland, Inc.)
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
WSI of Fairhaven, Inc. 04-3301442
(Formerly Biosafe Fairhaven, Inc.)
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
WSI of South Hadley, Inc. 04-3086959
(Formerly Biosafe, Inc.)
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
WSI Pennsylvania Holdings, Inc. 04-3301448
(Formerly Biosafe Mid-Atlantic, Inc.)
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
WSI Hopewell Landfill, Inc. 04-3301445
(Formerly Biosafe Pennsylvania, Inc.)
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
WSI of Pennsylvania, Inc. 04-3301449
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
WSI of Pennsylvania Transportation, Inc. 04-3301450
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
WSI Altoona Transfer Station, Inc. 04-3301447
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
Biosafe Systems, Inc. 36-4027808
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
Eagle Recycling, Inc. 23-2640932
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
Horvath Sanitation, Inc. 25-1685001
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
Mostoller Landfill, Inc. 25-1622775
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
WSI St. Johnsbury Transfer Station, Inc. 03-0356503
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
WSI New York Holdings, Inc. 04-3428760
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
WSI of New York, Inc. 04-3434005
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
Mattei-Flynn Trucking, Inc. 04-2989917
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
Mass Wood Recycling, Inc. 04-3454163
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
WSI Maryland Holdings, Inc. 04-3428758
420 Bedford Street, Suite 300
Lexington, Massachusetts 02420
60
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000847468
<NAME> WASTE SYSTEMS INTERNATIONAL, INC.
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<CASH> 193613
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<RECEIVABLES> 5457562
<ALLOWANCES> 222028
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<CURRENT-ASSETS> 10198432
<PP&E> 48948513
<DEPRECIATION> 4262778
<TOTAL-ASSETS> 96116699
<CURRENT-LIABILITIES> 16718221
<BONDS> 60000000
0
0
<COMMON> 117184
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<TOTAL-LIABILITY-AND-EQUITY> 96116699
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<INCOME-PRETAX> (6205925)
<INCOME-TAX> 43174
<INCOME-CONTINUING> (6249099)
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (6495634)
<EPS-PRIMARY> (1.00)
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</TABLE>
