SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
Amendment No. 2
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 0-25998
WASTE SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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Delaware 95-4203626
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
420 Bedford Street, Suite 300
Lexington, Massachusetts 02173
(Address of principal executive offices) (Zip Code)
(781) 862-3000
(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
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. ___
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>
17
This report on Form 10-K/A, Amendment No. 2, amends the Report on Form
10-K of Waste Systems International, Inc. ("Waste Systems") filed with the
Securities and Exchange Commission on March 31, 1999, as amended by the report
on Form 10-K/A of Waste Systems filed with the Securities and Exchange
Commission on April 9, 1999 (such Report on Form 10-K, as so amended, the
"Amended Form 10-K").
The Amended Form 10-K is hereby amended by deleting Part I, Item 7
thereof in its entirety and replacing it as follows:
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:
<PAGE>
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 s 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.
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 BankNorth Group, N.A. 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 31, 1999, the Company
closed a private exchange offer in which it exchanged 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 $4.656 was equal to the closing
price of the Common Stock on the Nasdaq SmallCap Market on that date as reported
by NASDAQ. Accrued but unpaid interest on the Notes was paid in cash. As a
result of the private exchange offer, the Company retired $10,449,000 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.
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:
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
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Total cost of operations 90.3 113.0 531.0
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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
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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)%
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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 998 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.
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.
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 $10,449,000 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.
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
BankNorth Group, 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 or replacement of the facility
with The BankNorth Group, N.A.
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."
Certain Factors Affecting Future Operating Results
Our history of losses makes investment in Waste Systems highly
speculative.
During the fiscal years ending December 31, 1998, 1997 and 1996, we
suffered net losses (including non-recurring charges) of approximately
($6,496,000), ($5,589,000) and ($13,890,000), respectively on revenues of
approximately $21,045,000, $3,458,000 and $1,496,000, respectively. Following
Waste Systems' restructuring in 1996, we directed our focus on becoming an
integrated solid waste management company by implementing a business strategy
based on aggressive growth through acquisitions. Our ability to become
profitable and to maintain profitability as we pursue our business strategy will
depend upon several factors, including our ability to:
o execute our acquisition strategy and expand our revenue generating
operations while maintaining or reducing our proportionate administrative
expenses;
o locate sufficient financing to fund acquisitions; and
o adapt to changing conditions in the competitive market in which we operate.
External factors, such as the economic and regulatory environments in which we
operate will also have an effect on our business and its profitability. However,
continued losses and negative cash flow may not only prevent us from achieving
our strategic objectives, it may also limit our ability to meet financial
obligations, including our obligations under the Senior Notes.
Substantial Increased Leverage.
We currently have a high level of indebtedness relative to
stockholders' equity. The following table illustrates our level of indebtedness:
As of December 31, 1998 (*)
(dollars in thousands)
Long-term Indebtedness............................ $172,672
Stockholders' Equity.............................. $12,188
Debt to Equity ratio.............................. 14.2
(*) pro forma to include the issuance of $100 million principal amount of Senior
Notes and the exchange of $10,449,000 principal amount of the 7% Convertible
Notes into 2,244,109 shares of our common stock.
Our high level of indebtedness could:
o limit our flexibility in planning for, or reacting to, changes
in business, industry and economic conditions;
o require us to dedicate a substantial portion of our cash flow
from operations to repaying indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures and other general corporate purposes;
o place us at a competitive disadvantage compared to our competitors
with lower levels of indebtedness; and
o limit our ability to borrow additional funds, either because
of restrictive covenants in the Senior Notes Indenture or
because of a potential lender's limits on borrower
indebtedness.
Our high level of indebtedness may have a direct negative impact on our
operations. It may also result in an event of default under our debt instruments
which, if not cured or waived, could have a material adverse effect on our
finances.
For the Years Ended
December 31,
1998 1997
---- ----
Ratio of earnings to Fixed Charges...... N/A N/A
For the year ended December 31, 1998, we incurred net losses that did
not cover fixed charges by approximately $6.6 million; and for the year ended
December 31, 1997, we incurred net losses that did not cover fixed charges by
approximately $5.5 million. For purposes of computing this financial
relationship of earnings to fixed charges, earnings consist of pretax income
(loss) from continuing operations plus fixed charges. Fixed charges consist of
interest expense and financing costs, including capitalized interest and
amortization of deferred financing costs, and an estimated portion of rentals
representing interest costs.
Incurring more debt could further exacerbate the risks of our high
level of indebtedness.
Despite our current high level of indebtedness, the indenture does not
fully prohibit us or our subsidiaries from incurring substantial additional
indebtedness in the future. We may increase the amount of available borrowing
under our bank credit facility or obtain additional bank financing. Borrowings
and other indebtedness which Waste Systems or our subsidiaries may incur may be
secured and therefore would rank senior to the Senior Notes and the subsidiary
guarantees thereof. If new debt is added to our current level of debt, the
related risks of indebtedness could intensify both for us and for the holders of
the Senior Notes.
We may not generate enough cash to service our indebtedness or our
other liquidity needs.
Our ability to make payments on and to refinance our indebtedness, and
to fund planned capital expenditures will depend on our ability to generate cash
in the future. This ability depends in part on our operating performance and the
execution of our business strategy. It is also subject to influence by general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control.
We cannot assure you that our business will generate sufficient cash
flow from operations, that we will realize anticipated cost savings from
operating efficiency improvements, or that we will be able to obtain future
financing in amounts sufficient to enable us to pay our indebtedness or to fund
our other liquidity needs.
The following table outlines the schedule of our required debt
amortization payments proforma to include the Senior Notes and the exchange of
$10,449,000 of the 7% Convertible Notes into 2,244,109 shares of our common
stock.:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1998 1999 2000 2001 2002 2003 2004 2005 2006 Remainder Total
---- ---- ---- ---- ---- ---- ---- ---- ---- --------- -----
Principal Payments Due During
(Dollars in thousands)
Long-Term Debt
Bank Credit Facility $ 10,000 10,000 - - - - - - - - 10,000
13% Short-tern notes 7,500 7,500 - - - - - - - - 7,500
Capital Leases,
Equipment and
Other Notes
Payable........ 3,771 676 687 531 427 440 462 153 169 226 3,771
Senior Notes.... 100,000 - - - - - - - 100,000 - 100,000
10% Convertible
Subordinated
Debentures..... 1,850 - 1,850 - - - - - - - 1,850
7% Convertible
Subordinated
Notes.......... 49,551 - - - - - - 49,551 - - -
------------ ------ ----- ------ ----- ----- ------ ------ ------- ------ -------
Total....... $172,672 18,176 2,537 531 427 440 462 49,704 100,169 226 172,672
============ ====== ===== ====== ===== ===== ====== ====== ======= ====== =======
</TABLE>
We may need to refinance all or a portion of our indebtedness,
including our Senior Notes, on or before maturity. We cannot assure you that we
will be able to refinance any of our indebtedness, including our bank credit
facilities, if any, and the Senior Notes, on commercially reasonable terms or at
all.
Uncertain Ability to Finance the Company's Growth.
We require substantial funds to complete and bring to commercial
viability all of our currently planned projects. We also anticipate that future
business acquisitions will be financed not only through cash from operations and
the proceeds from the Senior Notes offering, but also by future borrowings under
bank credit facilities not currently established, offerings of Waste Systems
stock as consideration for acquisitions, or from the proceeds of additional
equity or debt financings. Therefore, our ability to satisfy our future capital
and operating requirements for planned growth is dependent on a number of
pending or future financing activities, and we cannot assure you that any of
these financing activities will be successfully completed.
Ability to manage growth.
Our objective is to continue to grow by expanding our services in
selected markets where we can be one of the largest and most profitable
fully-integrated solid waste management companies. Accordingly, we may
experience periods of substantial rapid growth. This growth could place a
significant strain on our operational, financial and other resources. Any
failure to expand our operational and financial systems and controls in an
efficient manner at a pace consistent with our growth could have a material
adverse effect on our business, financial condition and results of operations.
Our future success is also highly dependent upon our continuing ability
to identify, hire, train and motivate a sufficient number of highly qualified
personnel for our planned growth. We face competition for recruiting qualified
personnel from our competitors, other companies not in the waste management
industry, government entities and other organizations. We cannot assure you that
we will be successful in attracting and retaining qualified personnel as
required for our present and future planned operations. Our inability to attract
and retain a sufficient number of qualified personnel could have a material
negative impact on our business, financial condition and results of operations.
Our future success depends upon our ability to identify, acquire and
integrate acquisition targets.
Our future success is highly dependent upon our continued ability to
successfully identify, acquire and integrate additional solid waste collection,
recycling, transfer and disposal businesses. As the solid waste management
industry continues to consolidate, competition for acquisition candidates within
the industry increases and the availability of suitable candidates on terms
favorable to us may decrease. We compete for acquisition candidates with larger,
more established companies that may have significantly greater capital resources
than we do, which can further decrease the availability of suitable acquisition
candidates at prices affordable to us. We cannot assure you that we will be able
to identify suitable acquisition candidates, to successfully negotiate
acquisitions on terms reasonable to us given our resources, to obtain financing
for those targets on favorable terms, or to successfully integrate any acquired
targets with our current operations.
We believe that a significant factor in our ability to consummate
acquisitions will be the attractiveness of our common stock as consideration for
potential acquisition targets. This attractiveness may be, in large part,
dependent upon the relative market price and capital prospects of our equity
securities as compared to the equity securities of our competitors. Our stock is
traded on the Nasdaq Stock Market, Inc.'s SmallCap Market, while some of our
competitors' stock is traded on larger, more recognized markets. In addition,
some of our competitors have a significantly larger capitalization than we do,
which generally results in a more liquid market for their publicly traded
securities. If the market price of our common stock were to decline, we might be
unable to use our common stock as consideration for future acquisitions.
Dependence on Management.
We depend to a high degree on the services of Philip Strauss, Chairman,
Chief Executive Officer and President, and Robert Rivkin, Executive Vice
President_Acquisitions, Chief Financial Officer, Secretary and Treasurer, in
planning to achieve our business objectives. We have obtained $1 million key
executive insurance policies for each of Messrs. Strauss and Rivkin. However, if
we lost the services of either of these executives, our business, financial
condition and results of operations could suffer material adverse effects.
Failed acquisitions or projects may adversely affect our results of
operations and financial condition.
In accordance with generally accepted accounting principles, we record
some expenditures and advances relating to acquisitions, pending acquisitions
and landfill projects as assets on our balance sheet, then amortize or
depreciate these capitalized expenditures and advances over time, usually
matching an asset's depreciation against the revenues it generates. We also have
an accounting policy to record as an expense in the current accounting period
all unamortized capital expenditures and advances relating to any operation that
is permanently shut down, any acquisition that will not be consummated, and any
landfill project that is terminated. As a result of these accounting practices,
we may have to record the entire capitalized expenditure of any failed
acquisition or terminated project as a charge against earnings in the accounting
period in which the failure or termination occurs. A large, unexpected expense
against typical earnings could have a material adverse effect on our results of
operations, financial condition and our business.
Our business may not succeed due to the highly competitive nature of
the solid waste management industry.
The solid waste management industry is highly competitive and very
fragmented, and requires substantial labor and capital resources. Competition
exists for collection, recycling, transfer and disposal service customers, as
well as for acquisition targets. The markets we compete in or are likely to
compete in usually are served by one or more national, regional or local solid
waste companies who may have a respected market presence, and who may have
greater financial, marketing or technical resources than those available to us.
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.
We also compete 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
public sector competitors in solid waste management. Additionally, alternative
disposal facilities such as recycling and incineration may reduce the demand for
the landfill-based solid waste disposal services that we provide and on which
our strategy is based. We cannot assure you that we will be able to remain
competitive with our larger and better capitalized private competitors or with
tax-advantaged public sector operators.
Seasonal revenue fluctuations may negatively impact our operations.
Our revenues and results of operations tend to vary seasonally. We tend
to have lower revenues in the winter months of the fourth and first quarters of
the calendar year than in the warmer months of the second and third quarters.
The primary reasons for lower revenues in the winter months include:
o harsh winter weather conditions may interfere with collection and
transportation activities;
o the volume of winter month waste in our operating regions is generally
lower than that which occurs in warmer months; and
o the construction and demolition activities which generate landfill waste
are primarily performed in the warmer seasons.
We believe that the seasonality of the revenue stream will not have a material
adverse effect on our business, financial condition and results of operations on
an annualized basis. Still, higher warm weather revenues may not offset lower
cold season revenues, and seasonal revenue fluctuations may make it more
difficult to manage and finance our business successfully.
The geographic concentration of our operations magnifies the risks to
our success.
Waste Systems has established solid waste management operations in
central Pennsylvania, Vermont, upstate New York and central Massachusetts. Since
our current primary source of revenues will be concentrated in these geographic
locations, our business, financial condition and results of operations could be
materially affected by downturns in these local economies, severe weather
conditions in these regions, and Pennsylvania, Vermont, New York and
Massachusetts state and local regulations. Factors that have a greater impact on
our selected markets than on other regions of the country are more likely to
have a negative effect on our business than on our larger regional and national
competitors in the waste management industry.
Industry consolidation in our operating regions has also increased the
competition for customers who generate waste streams. This may make it
increasingly difficult to expand operations within our selected markets. We
cannot assure you that we will be able to continue to increase the local waste
streams to our operating landfills or be able to expand our geographic markets
to mitigate the effects of adverse economic events that may occur in these
regions. As a result of our geographic concentration, we are exposed to a higher
degree of risks than our geographically more diverse competitors.
Potential difficulties in acquiring landfill capacity could increase
our costs.
Our operations depend on our ability to expand the landfills we own or
operate and to develop or acquire new landfill sites. We cannot assure you that
we will be successful in obtaining new landfill sites or expanding the permitted
capacity of our existing landfills. The process of obtaining required permits
and approvals to open new landfills, and to operate and expand existing
landfills has become increasingly difficult and expensive. The process can take
several years and involves hearings and compliance with zoning, environmental
and other requirements. We cannot assure you that we will be successful in
obtaining and maintaining required permits to open new landfills or expand the
existing landfills we own or operate.
Even when granted, final permits to expand landfills are often not
approved until the remaining capacity of a landfill is very low. In the event we
exhaust our permitted capacity at one of our landfills, our ability to expand
internally will be limited and we will be required to cap and close that
landfill. Furthermore, as the solid waste management industry continues to
consolidate, there will be greater competition for potential landfill
acquisitions. As a result of insufficient landfill capacity, we could be forced
to transport waste greater distances to our own landfills that have capacity, or
to dispose of waste locally at landfills operated by our competitors. In either
case, the additional costs we would incur could have a material adverse effect
on our business.
Failure to obtain landfill closure performance bonds and letters of
credit may adversely affect our business.
We 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
some of our landfills and transfer stations. Our 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 our business, financial condition
and results of operations.
Adequacy of Accruals for Closure and Post-Closure Costs.
The closure and post-closure costs of our existing landfills and any
landfill we may own or operate in the future represent material financial
obligations. To meet these future obligations, we estimate and accrue closure
and post-closure costs based on engineering estimates of landfill usage and
remaining landfill capacity. We cannot assure you that the amount of funds
estimated and accrued for landfill closure and post-closure costs will be enough
to meet these future financial obligations. Any failure to meet these
obligations when they become due, or any use of significant funds to cover a gap
between such accruals and actual landfill closure and post-closure costs
incurred, may have a material adverse effect on our business, financial
condition and results of operations.
Potential Environmental Liability and Adverse Effect of Environmental
Regulation.
We are engaged in the collection, transfer and disposal of waste
described as non-hazardous, and we believe that we are currently in material
compliance with all applicable environmental laws. Despite these circumstances,
if harmful substances escape into the environment and cause damages or injuries
as a result of our operating activities, we are exposed to the risk that we will
be held liable for any damages and injuries, as well as for significant fines
for regulatory noncompliance.
We and our customers operate in a highly regulated environment, and our
landfill projects in particular usually will require federal, state and local
government permits and environmental approvals. Maintaining awareness of and
attempting to comply with applicable environmental legislation and regulations
require substantial expenditures of our personnel and financial resources. These
efforts, however, do not guarantee that we will meet all of the applicable
regulatory criteria necessary to obtain required permits and approvals.
Government regulators generally have broad discretion to deny, revoke,
or modify regulatory permits or approvals under a wide variety of circumstances.
In addition, government regulators may adopt new environmental legislation or
regulations or amend existing legislation, and may interpret or enforce existing
legislation in new ways. All of these circumstances may require us or our
customers to obtain additional permits or approvals.
Any delay in obtaining required regulatory permits or approvals may
delay our ability to obtain project financing, thereby increasing our need to
invest working capital in projects before obtaining more permanent financing.
These delays may also reduce our project returns by deferring the receipt of
project revenues to a later project completion date. If we are required to
cancel any planned project because we were unable to obtain required permits or
as a result of any other regulatory impediments, we may lose any investment we
have made in the project up to that point. The cancellation, or any substantial
delay in completion, of any project may have a significant negative effect on
our financial condition and results of operations.
Our environmental liability insurance may not cover all risks of loss.
We maintain environmental impairment liability insurance covering
particular claims for the sudden or gradual onset of environmental damage to the
extent of $5 million per landfill. If we were to incur liability for
environmental damage in excess of our insurance limits, our financial condition
could be adversely affected. We also carry a comprehensive general liability
insurance policy, which management considers adequate at this time to protect
our assets and operations from other risks.
Addressing local community concerns about our operations may adversely
affect our business.
Members of the public in the communities where we do business could
raise concerns with government regulators and others about the effects on their
communities of our existing or planned operations and, in some areas, the
proposed development of solid waste facilities. These concerns cannot always be
anticipated, and our attempts to address these concerns may result in unforseen
delays, costs and litigation that could adversely affect our ability to achieve
our business objectives.
Year 2000 problems could have an adverse impact on our business.
We utilize and are dependent upon general accounting and
industry-specific customer information and billing software to conduct our
business that are likely to be affected by the date change in the year 2000.
This purchased software is run on in-house computer networks. In addition,
embedded technology that is contained in a substantial number of our items of
hauling, disposal and communications equipment may be affected by the date
change in the year 2000. We have initiated a review and assessment of all
hardware, software and related technologies to determine whether it will
function properly in the year 2000. We currently believe that costs associated
with the compliance efforts will not have a significant impact on our ongoing
results of operations, although we cannot assure you in this regard. Computer
software and related technologies used by our customers, service providers,
vendors and suppliers are also likely to be affected by the year 2000 date
change. To date, those vendors which have been contacted have indicated that
their hardware or software is or will be year 2000 compliant in time frames that
meet our requirements. We have also initiated communications with our
significant suppliers regarding the year 2000 issue. However, we cannot assure
you that the systems of such suppliers, or of customers, will be year 2000
compliant. Failure by us or any of the parties mentioned above, to properly
process dates for the year 2000 and thereafter could result in unanticipated
expenses and delays to us, including delays in the payment by our customers for
services provided and our ability to make payments on the Senior Notes.
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 time frames. 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 time frames.
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.
[END OF AMENDMENT]
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: August 5, 1999 By: /s/ Robert Rivkin
-------------------------------------------
Robert Rivkin
Executive Vice President- Acquisitions,
Chief Financial Officer, Treasurer and
Secretary
(Principal Financial and Accounting Officer)
