-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S6C/d5FJ/lgGauNHk8Lw819HTSULEe3A2TEUlvMmty5VhRsQ8sECrHI0jcFnBERO casBskRl5U+h9aD2BVyQdg== 0000889812-99-000277.txt : 19990201 0000889812-99-000277.hdr.sgml : 19990201 ACCESSION NUMBER: 0000889812-99-000277 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19990129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WASTE TECHNOLOGY CORP CENTRAL INDEX KEY: 0000781902 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT, NEC [3569] IRS NUMBER: 132842053 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-14443 FILM NUMBER: 99516699 BUSINESS ADDRESS: STREET 1: 5400 RIO GRANDE AVE CITY: JACKSONVILLE STATE: FL ZIP: 32206 BUSINESS PHONE: 9043587013 MAIL ADDRESS: STREET 1: 5400 RIO GRANDE AVENUE CITY: JACKSONVILLE STATE: FL ZIP: 32254 10KSB40 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 REPORT ON FORM 10-KSB (Mark one) /X/ Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended October 31, 1998 or / / Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _______ to _______ . Commission File No. 0-14443 WASTE TECHNOLOGY CORP. (Name of small business issuer in its charter) Delaware 13-2842053 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5400 Rio Grande Avenue, Jacksonville, Florida 32254 (Address of Principal Executive Offices) (Zip Code) Issuer's telephone number, including area code: (904) 355-5558. 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. Check whether the registrant (1) 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 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 / / Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ x ] State issuer's revenues for its most recent fiscal year: $11,999,311. State the aggregate market value of the voting stock held by nonaffiliates (based on the closing price on January 22, 1999 of $0.1875): $1,034,315. State the number of shares outstanding of the registrant's $.01 par value common stock as of the close of business on the latest practicable date (January 22, 1999): 5,516,349. Documents Incorporated By Reference: None. Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ] PART I ITEM 1. BUSINESS. Waste Technology Corp. ("Waste Tech") was incorporated on September 10, 1975 in the State of Delaware under the name B.W. Energy Systems, Inc. Its name was changed to Waste Technology Corp. in August 1983. Waste Tech is a holding company and maintains its executive offices at 5400 Rio Grande Avenue, Jacksonville, Florida 32254 and its telephone number is (904) 355-5558. Unless the context otherwise requires, the term "Company" as used herein, refers to Waste Tech and its subsidiaries on a consolidated basis. The Company's fiscal year end is October 31. Subsidiaries International Baler Corp. International Baler Corp. ("IBC"), has been engaged in business for over 40 years manufacturing balers under the name "International Baler". In September, 1986 Waste Tech acquired approximately 85% of the outstanding shares of IBC. On June 24, 1997, IBC entered into an Agreement of Merger (the "Merger Agreement") with IBC Merger Corporation, a wholly owned subsidiary of the Corporation (formed for the purpose of the merger) which provides for the merger of IBC with and into IBC Merger Corporation. Subsequent to the merger, IBC Merger Corporation changed its name to International Baler Corporation ("IBC"). In accordance with the provisions of section 228 of the Delaware General Corporation Law, the Merger Agreement was approved by the Board of Directors of IBC, IBC Merger Corporation, and the Company and consented to by the Company as the sole shareholder of IBC Merger Corporation and the owner of 85.3% of the outstanding and issued stock of IBC. The Merger became effective on June 27, 1997. The last minority shareholders' shares of IBC stock were acquired in January 1998. As a result, the Company is now the sole shareholder of IBC. IBC's office and manufacturing facility is located at 5400 Rio Grande Avenue, Jacksonville, Florida 32254 and its telephone number is (904) 358-3812. Consolidated Baling Machine Co., Inc. In February 1987 Waste Tech, through Consolidated Baling Machine Co., Inc., ("Consolidated") a wholly-owned subsidiary, acquired all of the assets of N&J Cavagnaro Machinery Corp., ("N&J) which, for more than 50 years, manufactured balers in Brooklyn, New York under the name of "Consolidated Baler". The acquisition also included the right to use and market products under the name "Consolidated Baler". N&J had specialized in manufacturing and selling, under the "Consolidated" name, rubber and medical waste balers which were produced by only a few other companies. Consolidated is a marketing company, which sells balers manufactured by, and purchased from, IBC. International Press and Shear Corp. In June 1995 the Company formed a new wholly-owned subsidiary, International Press and Shear Corp. ("IPS"), and expanded its manufacturing capacity by constructing and opening a 65,000 square foot manufacturing facility in Baxley, Georgia, where IPS will manufacture, in addition to products currently manufactured by the Company, high speed balers, two-ram presses, and scrap metal shears, products that the Company did not previously manufacture. Solid Waste & Recovery Systems, Inc. In August 1990 Waste Tech entered into an agreement with Ted C. Flood, the President of Waste Tech, who, at the time, was a director and executive vice-president of Waste Tech and president of IBC and Consolidated, whereby Waste Tech acquired all of the outstanding and issued stock of Solid Waste & Recovery Systems, Inc. ("SWRS"), a Florida Corporation which is engaged in Florida and Southern Georgia in the distribution of brand name waste management and recycling equipment such as garbage trucks, containers, shredders, etc. Mr. Flood is presently the President of Waste Tech. In January 1998 SWRS entered into an exclusive distributorship agreement with DryVac Environmental, Inc. of Rio Vista, California to sell a patented system which features a revolutionary drying technique for sludge in southern Georgia, Alabama and Florida. This system allows substantial operating savings to a wide variety of industries such as paper and paint manufacturers and municipalities. General Since 1986, the Company's principal business has been the manufacture and sale of balers, which are machines used to compress and compact various waste materials. The Company manufactures approximately fifty (50) different types of balers for use with municipal waste, cloth, metal drums, glass and other products. It is one of the leading makers of balers designed to compact rubber, plastic, cotton mote and textile waste products. Since charges for transportation of waste material are generally based upon the volume of waste, balers, by reducing 2 volume substantially, also reduce transportation costs substantially. Increases in the quantity of waste produced, government restrictions on waste disposal and mandated recycling of waste products, have greatly increased the need for transportation of waste and hence, the need for balers. Products Balers utilize mechanical, hydraulic, and electrical mechanisms to compress a variety of materials into bales for easier and low cost handling, shipping, disposal, storage and/or bulk sales for recycling. Materials commonly baled include scrap metal, corrugated boxes, newsprint, cans, plastic bottles and other solid waste. More sophisticated applications include baling of textile waste and rubber. The Company offers a wide variety of balers, certain of which are standardized and others of which are designed to specific customer requirements. The Company's products include (i) general purpose horizontal and vertical balers, (ii) specialty balers, such as those used for low level radioactive waste, fifty-five gallon drums, aluminum cans, and rubber and textile waste, and (iii) accessory equipment such as conveyors, rufflers, bale tying machines and plastic bottle piercers (machines which puncture plastic bottles before compaction for greater density). General Purpose Balers These balers are designed for general purpose compaction of waste materials. They are manufactured in either vertical or horizontal loading models, depending on available floor space and desired capacity. Typical materials that are handled by this equipment include paper, corrugated boxes and miscellaneous solid waste materials. These balers range in bale weight capacity from approximately 300 to 1,500 pounds and range in price from approximately $5,000 to $250,000. General purpose baler sales constituted approximately 65% of revenues on a consolidated basis for each of the fiscal years ended October 31, 1997 and 1998. Specialty Balers These balers are designed for specific applications which require modifications of the general baler configuration. The Company is attempting to shift the emphasis in its product composition from general purpose to specialty balers due to product profitability and broader geographic markets. The scrap metal baler is designed to form a bale, referred to as a scrap metal "briquet" of specified size and weight. The rubber baler is designed to apply pressure in such a way as to compress 3 the synthetic rubber into a self-contained bale that does not require tying. The drum crusher baler is capable of collapsing a standard fifty-five gallon drum into a "pancake" approximately four (4) to eight (8) inches high, which also serves to contain any remaining contents. The radioactive waste baler has a self-contained ventilation system designed to filter and contain toxic dust and particles released during compaction and baling. The textile baler is capable of compressing and baling loose fibers, which do not ordinarily adhere to each other under pressure. In addition, a double chamber baler has been designed for use by the clothing and textile industries. Specialty balers range in price from approximately $6,000 to $200,000, and are less exposed to competitive pressures than are general purpose balers. Specialty baler sales constituted approximately 35% of revenues on a consolidated basis for each of the fiscal years ended October 31, 1997 and 1998. Accessory Equipment The Company has commenced manufacturing and marketing a number of accessory equipment items in order to market a complete waste handling system. These include conveyors, which carry waste from floor level to the top of large horizontal balers; extended hoppers on such balers; rufflers, which break up material to improve bale compaction; electronic start/stop controls and hydraulic oil coolers and cleaners. At the present time accessory equipment does not represent a significant percentage of consolidated revenues. Manufacturing IBC manufactures its products, as well as products sold by Consolidated, in its facility in Jacksonville, Florida, where it maintains a fully equipped and staffed manufacturing plant. IBC purchases raw materials, such as steel sheets and beams and components such as hydraulic pumps, valves and cylinders, and certain controls and other electric equipment which are used in the fabrication of the balers. The Company has no long term supply agreements, and has not experienced unusual delay in obtaining raw materials or components. The raw materials required by IBC to manufacture the balers, principally steel, motors and hydraulic systems, are readily available from a number of sources and IBC is not dependent on any particular source. IBC is not dependent on any significant patents, trademarks, licenses or franchises in connection with its manufacture of balers. In December 1995 the Company expanded its manufacturing capacity by opening a 65,000 square foot manufacturing facility in 4 Baxley, Georgia, where IPS will manufacture extensions to the Company's product line not previously possible due to space constraints. IPS will manufacture, in addition to products currently manufactured by the Company, high speed balers, two-ram presses, and scrap metal shears. IPS uses substantially the same raw materials as IBC to manufacture its products, and like IBC, such materials are readily available from a number of sources and IPS is not dependent on any particular source. Also like IBC, IPS is not dependent on any significant patents, trademarks, licenses or franchises in connection with its manufacture of products. While IBC maintains a large inventory of raw materials, most of it is earmarked for specific orders and inventory turnover is relatively rapid. Approximately 60% of its inventory turns over in 45 to 90 days and the balance, consisting of customized equipment, turns over in 3 to 6 months. It is anticipated that IPS will manage its inventory in substantially the same manner as IBC. This rate of turn-over is believed to be somewhat better than most manufacturers. Neither IBC's, IPS', nor Consolidated's business is seasonal. Sales and Marketing IBC, Consolidated and IPS sell their products throughout the United States and to some extent in Europe, the Far East and South America to manufacturers of rubber and polymers, plastic recycling facilities, power generating facilities, textile mills, paper mills, cotton gins, supermarkets and other retail outlets, paper recycling facilities and municipalities. Most of the sales of IBC, Consolidated and IPS are made by its sales force of eight (8) employees who rely upon responses to advertising, personal visits, attendance at trade shows, referrals from existing customers and telephone calls to dealers and/or end users. Approximately fifteen (15%) percent of sales are made through manufacturer's representatives and dealers. The Company's general purpose balers are sold primarily in the eastern United States to such end users as waste producing retailers (supermarkets and liquor stores, for example), restaurants, manufacturing and fabricating plants, bulk material producers, nuclear plants and solid waste recycling facilities. Specialty balers are sold throughout the United States and to some extent in Europe, the Far East and South America, to manufacturers of rubber and polymers, plastic recycling facilities, paper recycling facilities, textile mills and power generating facilities. Both types of balers are sold abroad. During fiscal 1998 foreign sales amounted to $1,900,000 or approximately 16% of consolidated sales. In fiscal 1997 foreign sales amounted to $2,000,0000, also 16% of consolidated sales. 5 During fiscal 1998, IBC, Consolidated and IPS had baler sales to more than 250 customers, none of which accounted for more than ten percent (10%) of their combined revenues for the year. The Company anticipates that no one customer will account for more than 10% of revenues in fiscal year ending October 31, 1999. The Company builds only a small quantity of balers for its inventory. Generally, it builds based on booked orders. The Company's backlog of firm booked orders at December 31, 1998 was $1,805,210 as compared with $3,309,600 at December 31, 1997. The Company generally delivers its orders within four (4) months of the date booked. IBC, on a contract basis, supplies SWRS with parts and service which are provided by trained employees of IBC. Warranties and Service IBC, Consolidated and IPS typically warrant their products for one (1) year from the date of sale as to materials and six (6) months as to labor, and offer a service plan for other required repairs and maintenance. Service is rendered by repairing or replacing parts at IBC's Jacksonville, Florida facility, and by on-site service provided by Company personnel who are based in Jacksonville, Florida or by local service agents who are engaged as needed. Repair services and spare parts sales represented approximately 15% of fiscal 1998 consolidated revenues. Competition The potential market for the Company's balers is nationwide and overseas, but the majority of general purpose baler sales are in the eastern United States, primarily because of freight and service costs. The Company competes in these markets with approximately eight (8) companies, none of which are believed to be dominant, but some of which may have significantly greater sales and financial resources. The Company is able to compete with these companies due to its reputation in the market place, its ability to service the balers it manufactures and sells, as well as its ability to custom design balers to a customer's particular needs. The Company experiences intense competition with respect to its lower priced or general purpose balers, based upon price, including freight, and based on performance. The Company experiences less competition with respect to its specialized baler equipment such as rubber, radioactive waste, scrap metal and plastic balers. Regulation Machinery such as the Company's balers is subject to both Federal and state regulation relating to safe design and operation. 6 The Company complies with design requirements and its balers include interlocks to prevent operation while the loading door is open, and also include required printed safety warnings. Employees As of December 31, 1998, the Company employed 84 persons as follows: 11 in management and supervision; 12 in sales and service; 53 in manufacturing; and 8 in administration. ITEM 2. DESCRIPTION OF PROPERTIES IBC is the owner of the building located at 5400 Rio Grande Avenue, Jacksonville, Florida which it acquired from the Company in partial satisfaction of an obligation owing by the Company to IBC. The building contains approximately 62,000 square feet and is situated on eight (8) acres. Prior to the opening of the Company's newest manufacturing facility in Baxley, Georgia (see below), IBC manufactured substantially all of the Company's products at this location. In 1995 and 1996 the Company expanded its manufacturing capacity by the opening a 65,000 square foot manufacturing facility in Baxley, Georgia, where IPS manufactures its products, and, in addition, will be able to manufacture extensions to the Company's product line not previously possible due to space constraints. The Company acquired the land for the facility for a nominal amount, and constructed the manufacturing facility for approximately $1,500,000. 3. LEGAL PROCEEDINGS Waste Tech Litigation (i) Hilde Basch Fremont The Company is a defendant in the matter entitled Hilde Basch Fremont, et al., Plaintiffs v. Urban Waste Disposal Leasing Co., et al., 88 Civ. 7579 (DNE) commenced in the United States District Court for the Southern District of New York. The eleven plaintiffs in this action are all investors in, and limited partners of, Urban Waste Disposal Leasing Co. (the "Partnership"). The former president of the Company is also a defendant in this action. The Partnership purchased certain waste disposal equipment from GGC, Inc. which did business under the name the Enterprise Company and for which the Company acted as its marketing agent. This is the only connection between the Partnership and the Company. Management is of the opinion that the claim asserted against the Company is without merit and there is no reasonable likelihood of recovery. A motion to dismiss the complaint has been 7 denied, and although discovery proceedings were commenced by the plaintiff, no action has been taken in this case for several years. (ii) Gould and GGC, Inc. The Company and one of its directors, Morton S. Robson, are named as defendants in an action entitled Orval E. Gould and GGC, Inc. d/b/a Enterprise Company, Plaintiffs v. Leslie N. Erber, et al., Defendants, 98 Civ. 0381 commenced in the United States District Court of the Southern District of New York. The complaint consists of three causes of action for malicious prosecution, intentional infliction of emotional distress and fraud arising out of the Company's unsuccessful prosection of claims against Gould and GGC, Inc. in an action entitled Spier v. Erber, et al., 89 Civ. 1657 (HB), United States District Court, Southern District of New York, to recover approximately $1,900,000, representing the amount which it was obligated to pay pursuant to its guarantee of a non-recourse loan made to GGC, Inc. by M & T Bank in February 1986. A non-jury trial was held on March 4-7, 1996. On January 20, 1997, the Court issued an opinion dismissing the Company's claims and granting judgment in favor of Gould and GGC, Inc. Gould and GGC, Inc. now claim that the Company's claims against them were made with malice, in bad faith and with an improper purpose. Gould and GGC, Inc. are each seeking damages against the Company and the other defendants in the amount of $10,000,000. The Company believes that these claims are completely without merit and has made a motion for summary judgment dismissing the complaint which has been fully submitted. As of this date, the Court has not yet heard argument of the Company's motion. (iii) L & A Contracting Company On June 5, 1998, a judgment (the "Judgment") was rendered against the Company's former wholly owned subsidiary, Ram Coating Technology Corporation ("Ram"), and Transamerica Premier Insurance Corporation ("Transamerica") in the amount of $360,194 in favor of L & A Contracting Company in the 19th Judicial District Court of the State of Louisiana in the case of L & A Contracting Company v. Ram Industrial Coatings, Inc., et al., Case No. 382,924, Division F. Transamerica had issued a performance and payment bond (the "Bond") for Ram in connection with the contract which was the subject of the action and which was the basis of the Judgment against Ram. The Company had agreed to indemnify Transamerica for any payments it was required to make pursuant to the Bond. As a result of this indemnification agreement, the Company is liable to Transamerica for the amount of the Judgment. The Company believes that the Court was in error in rendering the Judgment and intends to appeal. The Company's management believes that its appeal is meritorious and will be successful. IBC Litigation 8 (i) Wilson Plaintiff, Ritchie Wilson, filed a complaint against IBC and others for damages resulting from injuries he sustained while operating a baling machine in 1991 that was originally manufactured in 1974 in an action pending in Texas State District Court, Kaufman County, 86th Judicial District, entitled, Ritchie Wilson, Plaintiff v. Acco Trading Company, et al.,Defendants, Case No. 45636. All defendants except IBC settled with plaintiff or were dismissed in 1994. The trial court granted summary judgment in favor of IBC in 1995. The Court of Appeals for the Fifth District of Texas, in Dallas, Texas, reversed the judgment and remanded the case for further proceedings in the trial court in 1996. The Company recently settled this case for the sum of $80,000. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The annual meeting of stockholders of Waste Tech was held on May 28, 1998. (b) Robert Roth and William Nielsen were elected as Class II Directors to hold office for three (3) years and until their successors were elected and qualified. The results of voting were as follows: 4,387,826 votes for Robert Roth and 76,975 withheld; and, 4,395,180 for William Nielsen and 69,624 withheld. (c) The next item of business was a proposal to authorize the Board of Directors of the Company to approve a 2:1 reverse stock split of the Company's Common Stock, if in its discretion such action was appropriate. The results of the voting were as follows: 4,154,325 votes for the resolution; 289,573 votes against; and, 20,907 votes abstained. The Board of Directors did not enact the reverse stock split in 1998. (d) The next item of business was the proposal to ratify the appointment of KPMG LLP, the independent certified public accountants of the Company, for fiscal 1998. The results of the voting were as follows: 4,437,091 votes for the resolution, 11,224 votes against and 16,489 votes abstained. A majority of the votes cast at the meeting have voted for the resolution, the resolution was duly passed. No other matters were voted on at the meeting. 9 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Waste Tech's common stock was traded on The Nasdaq Stock Market, Small Cap, under the symbol WTEK until January 7,1999 when the Company's stock was delisted because the Company failed to meet the net tangible assets, market capitalization, net income and bid price and market float requirements of NASDAQ. The Company's stock is presently traded on the OTC Bulletin Board of the NASD under the symbol WTEK. As of December 31, 1998, the number of shareholders of record of the Company's Common Stock was approximately 800, and management believes that there are approximately 1,800 beneficial owners of Waste Tech's common stock. The range of high and low bid quotations for the Company's common stock during the fiscal years ended October 31, 1997 and 1998 are set forth below. The bid price for the Common Stock shown below, as adjusted for the 2:1 stock spilt of the Company's stock effective as of June 16, 1997, is reported by the National Association of Securities Dealers Automated Quotations System ("NASDAQ") represents prices between dealers without retail mark-up, mark-down or commissions, and do not necessarily reflect actual transactions. Fiscal Year Ended October 31, 1998 First Quarter 11/16 1/2 Second Quarter 15/16 1/2 Third Quarter 1 3/32 1/2 Fourth Quarter 3/4 7/16 Fiscal Year Ended October 31, 1997 First Quarter 1 1/16 5/8 Second Quarter 13/16 9/16 Third Quarter 1 1/16 11/16 Fourth Quarter 15/16 1/2 The Company has paid no dividends since its inception. Other than the requirement of the Delaware Corporation law that dividends 10 be paid out of capital surplus only, and that the declaration and payment of a dividend not render the Company insolvent, there are no restrictions on the Company's present or future ability to pay dividends. The payment by the Company of dividends, if any, in the future, rests within the discretion of its Board of Directors and will depend, among other things, upon the Company's earnings, its capital requirements, its financial condition and other relevant factors. By reason of the Company's present financial status and its contemplated financial requirements, the Company does not anticipate paying any dividends on its common stock during the foreseeable future, but intends to retain any earnings for future expansion of its business. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. Results of Operations For fiscal 1998 consolidated sales were $11,999,311 compared to consolidated sales of $12,530,973 for fiscal 1997, a decrease of 4.2%. The decrease in sales was the result of lower shipments of certain specialty balers offset by increased shipments of balers to the recycled products markets. Sales in fiscal 1997 decreased $1,431,930, 10.4% due to lower shipments to the recycled products markets which was attributable to lower prices in that market for most of the year. The Company had a net loss of $1,385,328 for fiscal 1998 as compared to a loss of $281,654 in fiscal 1997. The 1998 loss included the recording of a reserve for a judgement of $495,000 including interest thereon related to the Company's former subsidiary, Ram Coating Technology, Inc. This judgment is being appealed. Excluding the judgment, the Company lost $608,674 more than it lost in fiscal 1997 due to lower shipments of specialty balers in fiscal 1998. Gross profit as a percentage of sales also declined due to the lower sales of specialty balers, primarily rubber balers. Operating expenses for fiscal 1998 were up by $73,631, 2.5% over fiscal 1997. However, in the fourth quarter of 1998 the Company effectuated significant cost reductions which will exceed $500,000 on an annual basis. These cost cutting measures include personnel eliminations, salary reductions and advertising reductions. Operating expenses were down by $608,754 in fiscal 1997 versus 1996 due to reductions in selling expenses of $429,712 and administration expenses of $179,042. For fiscal 1998 and 1997, the Company, and particularly its new plant in Baxley, Georgia, did not achieve its expected sales 11 levels due to continuing depressed sales of corrugated cardboard balers because of the low market prices of used corrugated board and paper. The Company is unable to predict how soon prices will recover, but, based on previous cyclical dips in corrugated and paper prices, the Company believes that prices will rise in the relatively near future with a resulting increase in sales and profits. The Company has introduced new textile balers, new corrugated balers and has been marketing a new patented hinge side baler. The Company anticipates that these products will have a significant impact on sales in fiscal 1999. Financial Condition Working capital decreased from $1,559,730 at October 31, 1997 to $32,866 at October 31, 1998. This decrease is due to the overall operating results of 1998 and the accrued legal judgement of $495,000. The entire balance of the line of credit is included as a current liability even though it is not due to be renewed or replaced until July 31, 2000 because of the nature of this type of loan. The revolving note payable to SouthTrust in the amount of $1,000,000 was replaced with a Foothill Capital Corporation line of credit of $2,000,000. This line of credit is for a period of two years, accrues interest at 1 1/2% above the prime rate and is secured primarily by accounts receivable and inventories. The term note with SouthTrust Bank had a balance of $415,278 at October 31, 1998 and is due in equal monthly installments of $9,028, plus interest at the prime rate to August 2002. The Company also entered into an agreement in fiscal 1996 relating to the financing of the IPS subsidiary which is not affected by the previously mentioned loan arrangements. First, a term note for $250,000 with Appling County, Georgia was entered into in July 1996 at a rate of 4%. Monthly payments of $3,417 including interest are payable for a period extending to July 2003. Second, the Company entered into a capital lease agreement with Development Authority of Appling County, Georgia. Payments on this lease are $6,134.87 per month through April 2011. Our auditors, KPMG LLP, have stated in the "Report of Independent Accountants" for October 31, 1998 to the shareholders of Waste Technology Corporation that there is "substantial doubt" about the Company's ability to continue as a going concern. The Company's Management and Board of Directors has substantial concern over recent operating performances, however, it believes that it has several viable options to continue as a going concern for the following reasons: 12 1. The Company has replaced the $1,000,000 revolving promissory note with SouthTrust Bank with a $2,000,000 (maximum) revolving promissory note with a term of two years. Therefore, the Company is no longer in violation of the SouthTrust revolving promissory note loan covenants. 2. The Company has taken certain actions to reduce operating costs including the elimination of personnel, implementing salary reductions for management, and cutting expenditures wherever possible. These cost cutting actions should result in annual savings in excess of $500,000 and were implemented in the fourth quarter of fiscal 1998. The Company is also developing additional contingency plans to further reduce costs in order that the Company can operate profitably in the future and have positive cash flow from operations at a minimum. The Company has no commitments for any material capital expenditures. Other than as set forth above, there are no unusual or infrequent events or transactions or significant economic charges which materially affect the amount of reported income from continuing operations. The above contains forward looking statements and is subject to many variables over which the Company has no control such as inflation, competition, and the general market conditions for its products. Therefore the Company may have to consider additional financing and/or operating alternatives to insure the Company will continue as a going concern. Year 2000 Compliance: The Company believes it has fully achieved Year 2000 compliance for all internal systems. Costs associated with compliance were immaterial and have been fully incurred. The Company is in the process of examining key vendor and customer relationships to determine, to the extent practical, the degree of such parties' Year 2000 compliance. Should a key vendor or customer have a systems failure due to the century change, the Company believes that the most significant impact would likely be the inability to receive inventory on a timely basis. While the Company does not expect any such impact to be material, it is developing contingency plans to address this possibility. Inflation The costs of the Company and its subsidiaries are subject to the general inflationary trends existing in the general economy. 13 The Company believes that expected pricing by its subsidiaries for balers will be able to include sufficient increases to offset any increase in costs due to inflation. ITEM 7. FINANCIAL STATEMENTS The financial statements and supplementary data commence on page F-1. ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE (a) (1) Termination of Certifying Accountants (i) On October 13, 1997, Coopers & Lybrand, the Company's Certifying Accountants ("Former Accountants") resigned as the Registrant's Certifying Accountants. (ii) At the time of their resignation, the Former Accountants were not conducting an audit of the Company's financial statements for the year ending October 31, 1997. They did issue a report on the Company's financial statement for the year ended October 31, 1996. The Former Accountants did not state that a report, if issued, for 1997, would contain an adverse opinion or disclaimer of opinion or would be qualified as to uncertainty, audit, scope or accounting principles. The report of the Former Accountants for the years ended 1995 and 1996 did not contain an adverse opinion or disclaimer of opinion, nor was it qualified as to audit scope or accounting principles. However, the report for the year ended 1996 was modified as to uncertainty with respect to the Company's ability to continue as a going concern in the event, as a result of its violation of certain financial covenants in a bank loan agreement, the due date of the loan was accelerated. In that event, the Former Accountants were concerned about the Company's ability to obtain the funds necessary to satisfy the bank obligation. (iii) The decision to retain the New Accountants was approved by the Board of Directors of the Company (iv) During the Company's two most recent fiscal years and during the subsequent interim periods preceding their resignation, there were no disagreements with the Former Accountants with respect to auditing principles or practices, financial statement disclosures, or auditing scope or procedure, which, if not resolved to the Former Accountants' satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with its report 14 (v) During the two most recent fiscal years and any subsequent interim periods preceding their resignation, the Former Accountants have not advised the Registrant that: A. internal controls necessary for the Company to develop reliable financial statements did not exist; B. information has come to their attention that has led them to no longer be able to rely on management's representations or that they were unwilling to be associated with the financial statements prepared by management; C. the scope of the audit should be expanded significantly, or that information has come to their attention, that, if further investigated, might materially impact the fairness or reliability of either a previously issued audit report or the underlying financial statements, or the financial statements issued or to be issued covering the fiscal periods subsequent to the date of the most recent financial statements covered by an audit report (including information that might prevent them from rendering an unqualified audit report) on those financial statements. D. the Former Accountants have not advised the Company that information has come to their attention that caused them to conclude materially impacts the fairness or reliability of either (i) a previously issued audit report or the underlying financial statements, or (ii) the financial statements issued or to be issued covering the fiscal periods subsequent to the date of the most recent financial statements covered by an audit report (including information that unless resolved to the accountants satisfaction, would prevent them from rendering an unqualified audit report on those financial statements. (a) (2) Engagement of New Certifying Accountants On October 23, 1997, the Company engaged the firm of KPMG Peat Marwick LLP now known as KPMG LLP (the "New Accountants") as its new certifying accountants. The New Accountants were not consulted regarding: (i) the application of accounting principles to a specific transaction either completed or proposed; or (ii) the type of audit opinion to be rendered with regard to the Registrant's financial statements; or any disagreements or reportable events as such terms are defined in Regulation S-K, Item 304. (a) (3) The Former Accountant's were provided with a copy of the disclosures being set forth herein and thereafter they furnished the Company with a letter addressed to the Securities and 15 Exchange Commission stating they agreed with the statements made by the Company. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The current executive officers and directors of the Company are as follows: Name Position Ted C. Flood President, Chief Executive Officer and Director Morton S. Robson Executive Vice President, Secretary and Director William E. Nielsen Chief Financial Officer and Director Charles S. Wildes President of IPS and Director Robert Roth Director Alan Morrison Director The Board of Directors is divided into three (3) classes of directors ("Class I", "Class II", and "Class III"), with each class having as nearly the same number of directors as practicable. Stockholders elect such class of directors, Class I, Class II, or Class III, as the case may be, to succeed such class directors whose terms are expiring, for a three (3) year term, and such class of directors shall serve until the successors are elected and qualify. The following is the apportionment of existing directors into classes: No. of Class Term Expires Members Class I 1998 Annual Alan Morrison Stockholder's Meeting Charles S. Wildes (to be held in 1999) Class II 1999 Annual Morton S. Robson 16 Stockholder's Meeting Ted C. Flood Class III 2000 Annual Robert Roth Stockholder's Meeting William E. Nielsen Except for Mr. Flood who has an employment agreement with the Company, officers serve at the pleasure of the Board of Directors. Messrs. Robson and Morrison are members of the Company's audit and compensation committees. There are no family relationships between executive officers or directors of the Company. However, Robert Roth is the husband of Patricia B. Roth, and father of Steven F. Roth, major shareholders of the Company. See Item 12, "Certain Relationships and Related Transactions". For so long as Patricia Roth and Steven Roth are the owners of more than one percent (1%) of the number of outstanding shares of Common Stock, the Company has agreed to use its best efforts to cause the election of Robert Roth as a member of the Board of Directors. Except as noted above, there is no understanding or arrangement between any director or any other persons pursuant to which such individual was or is to be selected as a director or nominee of the Company. Background of Executive Officers and Directors The following is a brief account of the experience, during the past five years, of each director and executive officer of the Company: Ted C. Flood, age 68, was elected as the President and Chief Executive Officer of the Company on February 23, 1993. He is also the President and Chief Executive Officer of Consolidated, a wholly-owned subsidiary, and IBC, a majority-owned subsidiary of the Company. He was elected as a Director of the Company in May, 1989. From 1960 to 1972 he was president of Peabody Solid Waste Management Company (EZ Pack). From 1972 to 1975 Mr. Flood was a corporate vice-president of marketing for Browning Ferris Industries. During the period from 1977 to 1988 he was the principal shareholder and president of Solid Waste Recovery Systems. Morton S. Robson, age 75, was elected a Director and the Secretary of the Company in 1989. On February 23, 1993, he was elected Executive Vice President of the Company. Since 1977 Mr. Robson has been the senior partner of the law firm of Robson & Miller, LLP (and its predecessor firms), which acts as general 17 counsel to the Company. Mr. Robson obtained an LLB degree from St. John's University School of Law. Alan Morrison, age 72, has served as a Director of the Company since January, 1986. Mr. Morrison has been a management consultant and private investor since 1971. In 1970, he was the founder of SCA Services, Inc., a waste disposal company. For more than 25 years, he has been a director of the Dauphin Deposit Bank of Hanover, Pennsylvania. Mr. Morrison failed to file on a timely basis a Form 5 disclosing one transaction, the grant of a stock option. Charles C. Wildes, age 41, is President of the Company's subsidiary, International Press and Shear Corporation, and was appointed by the Board Of Directors as a Director of the Company in 1997. Prior to joining IPS he was the General Manger of Selco Products, Inc. and Director of purchasing for the Harris Group. Mr. Wildes was employed in various positions with Selco from 1978 to 1995, including Purchasing Director (5 years), Vice President of Manufacturing (5 years) and Assistant General Manager (4 years). Mr. Wildes received a Bachelor of Science Degree in Business Administration in 1978 from The Citadel. Robert Roth, age 73, is the Chairman of the Board and Treasurer of Georgetowne Electric, Ltd., and a director of Keystone Insurance Co., both publicly held companies. For more than the past five (5) years, in addition to being the Chairman of the Board and Treasurer of Georgetowne Electric, Ltd., he has also been the President and Chief Executive Officer of Browning Weldon Corp., a privately held financial company. William E. Nielsen, age 51, joined the Company in June 1994 as its Chief Financial Officer. Prior to joining the Company, Mr. Nielsen acted as a financial consultant to Fletcher Barnum Inc., a privately held manufacturing concern, from October 1993 through June 1994. From 1980 through July 1993 he was the Vice President, Administration and Finance at Unison Industries, Inc. Mr. Nielsen received a B.B.A in Finance and an M.B.A. at Western Illinois University in 1969 and 1970, respectively. ITEM 10. EXECUTIVE COMPENSATION The following table sets forth a summary of all compensation awarded to, earned by or paid to, the Company's Chief Executive Officer and each of the Company's executive officers whose compensation exceeded $100,000 per annum for services rendered in all capacities to the Company and its subsidiaries during fiscal 18 years ended October 31, 1998, October 31, 1997 and October 31, 1996(1): SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Awards ============================================================================================================= Name and Year Salary Bonus Other Annual Number All Other Principal Position ($) ($) Compensation of Compensation ($) Options - ------------------------------------------------------------------------------------------------------------- Ted C. Flood, 1998 186,854(2) -0- -0- -0- -0- Chief Executive Officer and 1997 180,750(3) -0- -0- -0- -0- President of Company and IBC 1996 190,422(4) -0- -0- -0- -0- =============================================================================================================
No director of the Company received remuneration for services as a director during Fiscal 1998. The following table sets forth certain information relating to stock option grants during Fiscal 1998 to the Company's Chief Executive Officer and each of the Company's most highly compensated executive officers whose compensation exceeded $100,000 for Fiscal 1998: - -------- (1) The law firm of Robson & Miller, LLP and its predecessor firms have provided legal services for the Company. Morton S. Robson, the Executive Vice President and Secretary and a Director of the Company, is the senior partner of Robson & Miller, LLP. During Fiscal 1998, Robson & Miller, LLP received $65,758 from Waste Tech for legal services rendered. As of the end of Fiscal 1998 accrued but unpaid legal fees and accrued interest due to Robson & Miller, LLP from Waste Tech amounted to $394,375. Further, Robson & Miller exercised an option in June, 1995 to purchase 250,000 shares of Common Stock at $1.00 per share. See "Certain Relationships and Related Party Transactions". (2) Ted C. Flood, President of the Company and President of the Company's subsidiaries received $160,730 in compensation from IBC during the fiscal year ended October 31, 1998 and $26,124 from Consolidated during that period. (3) Ted C. Flood, President of the Company and President of the Company's subsidiaries received $156,500 in compensation from IBC during the fiscal year ended October 31, 1997 and $24,250 from Consolidated during that period. (4) Ted C. Flood, President of the Company and President of the Company's subsidiaries received $164,340 in compensation from IBC and IPS during the fiscal year ended October 31, 1996 and $26,082 from Consolidated during that period. 19 OPTION GRANTS IN LAST FISCAL YEAR
Individualized Grants - ------------------------------------------------------------------------------------------------------ ====================================================================================================== Name Number of Securities Percent of Total Exercise or Expiration Underlying Options/SARs Base Price Date Options/SARs Granted to ($/Sh) Granted (#) Employees in Fiscal 1997 - ------------------------------------------------------------------------------------------------------ Ted C. Flood -0- NA NA NA ======================================================================================================
No options were exercised during Fiscal 1998 by the Company's Chief Executive Officer or any of the Company's most highly compensated executive officers whose compensation exceeded $100,000 for Fiscal 1998. Employment and Severance Agreements On September 15, 1996, Ted C. Flood, the President and Chief Executive officer of the Company entered into an employment agreement with the Company. The agreement is for a term of five years commencing on October 1, 1996 and terminating on September 30, 2001. Pursuant to the agreement, Mr. Flood shall receive compensation of $150,034 for the first year with increases of 5% per annum during the term of the agreement. However, in the event the Company is not profitable in any year, the Company's Board of Directors has the right to defer the 5% increase earned during that year. Such increase in income that is deferred shall be carried forward and paid in the next profitable fiscal year at the end of such fiscal year in a lump sum payment. The agreement further provides that in the event of a merger, consolidation, sale of substantially all of the Company's assets, or a sale of either a majority or plurality of the Company's stock, Mr. Flood shall have the option to allow the agreement to remain a binding obligation of the Company or the surviving or successor corporation or at such time of such event receive the balance due him under the agreement. On June 3, 1989, IBC entered into a Severance Agreement (the "Agreement") with Ted C. Flood, its President. The Agreement provides, among other things, that, in the event of a change in control of IBC as that term is defined in the Agreement, and the subsequent termination of Mr. Flood's employment by IBC other than for cause or by Mr. Flood for good reason, (as such terms are defined in the Agreement), IBC shall pay to Mr. Flood, in addition to his salary at the date of termination, a lump-sum severance payment equal to 2.99 times the greater of his annual salary rate in effect as of the date of termination or such rate in effect 20 immediately prior to the change in control, together with compensation for other benefits to which he would have been entitled. The initial term of the Agreement was from May 3, 1989 through April 30, 1991. It was, and thereafter it shall be, automatically extended for one year periods, unless IBC shall give written notice of termination, at least one year prior to the termination date, of its desire not to extend the Agreement. In the event of a change in control of the Company, however, the Agreement shall continue in effect for not less than 24 months after such change in control. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information with respect to the ownership of the Company's Common Stock as of December 31, 1998 by (i) those persons known by the Company to be the beneficial owners of more than 5% of the total number of outstanding shares of Common Stock, (ii) each director and executive officer, and (iii) all officers and directors as a group: 21 Amount of Name and Address of Beneficial Approximate Beneficial Owner Ownership(5) Percent of Class Ted C. Flood 1,166,939(6) 21.2% 5400 Rio Grande Avenue Jacksonville, Fla. 32254 Morton S. Robson 586,854(7) 10.6% 666 Third Avenue--18th Fl. New York, N.Y. 10017--4011 Alan Morrison 240,000(8) 4.4% 875 E. Camino Real, Apt. 10-C Boca Raton, Fla. 33432 Robert Roth 3,300(9) Less than 1% Georgetown Electric, Ltd. Unit 17, 2501 W. Third Street Wilmington De., 19805 William E. Nielsen 232,006(10) 4.2% - --------------------- (5) Unless otherwise stated, all shares of Common Stock are directly held with sole voting and dispositive power. The shares set forth in the table reflect the 2:1 stock split of the Company's common stock effective as of May 15, 1997. (6) Consists of 640,572 shares held directly and, 526,367 shares owned by the Waste Technology Corp. Employees Profit Sharing Trust of which Messrs. Flood, Robson and Morrison are Trustees. (7) Consists of 78,454 shares held directly; 2,400 shares held as custodian for his minor son; 505,000 shares held by Robson & Miller, of which Mr. Robson is the senior partner; and 1,000 shares held by the Robson & Miller pension plan. Excludes 89,728 shares held by Kenneth N. Miller, a partner of Mr. Robson who is the beneficial and record owner of such shares. Does not include the 526,460 shares owned by the Waste Technology Corp Employees Profit Sharing Trust of which Messrs. Flood, Robson and Morrison are trustees since these shares are included in Mr. Flood's holdings and their inclusion here would be duplicative. (8) Consists of options to purchase 240,000 shares. Does not include the 526,460 shares owned by the Waste Technology Corp Employees Profit Sharing Trust of which Messrs. Flood, Robson and Morrison are trustees since these shares are included in Mr. Flood's holdings and their inclusion here would be duplicative. (9) Excludes an aggregate of 315,358 shares held by family members. 22 5400 Rio Grande Avenue Jacksonville, Fla. 32254 Charles S. Wildes 392,000(11) 7.1% 396 Frost Industrial Blvd. Baxley, Ga. 31513 All Officers and Directors as a Group (6 persons) 2,936,437(12) 53.2% ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Related Party Transactions Loans to Officers and Directors The Company and IBC entered into an agreement with Mr. Flood dated as of December 29, 1995 pursuant to which IBC assigned all of its interest in a life insurance policy it owned on Mr. Flood's life to Mr. Flood. In consideration for this assignment Mr. Flood agreed to pay IBC the sum of $145,727 which amount represented the cash surrender value of the policy as of the date of the agreement. This amount is to be paid out of the proceeds Mr. Flood or his Estate receives upon surrender of the policy or from the living proceeds or death benefit proceeds from the policy, whichever occurs first. Interest on Mr. Flood's obligation accrues at the rate of 6% per annum from the date of the agreement to the date of payment. The agreement further provides that no payment of principal or interest of this obligation shall be required to be made until such time that Mr. Flood or his Estate shall receive the proceeds from the policy. This obligation of Mr. Flood to IBC is - ------------------- (10) Consists of 182,006 shares held directly and options to purchase 50,000 shares. (11) Consists of 40,000 shares held directly; 42,000 shares held by the Wildes Family Trust of which Mr. Wildes has a 20% ownership interest; 30,000 shares held indirectly as the executor of an estate, as a result of which Mr. Wildes has voting power and control over the disposition of these shares, but does not have any pecuniary interest in the shares; and, an option to purchase 280,000 shares. (12) Includes shares owned by family members of Robert Roth as follows: his wife, Patricia B. Roth (114,182), his son, Steven F. Roth (83,968), his daughter, Kathie Cecile Roth (10,000) and his son Charles B. Roth and his wife, Marta Roth (107,188). 23 evidenced by a promissory note executed by Mr. Flood to the order of IBC. The agreement further provides that all premiums due on the policy after ownership has been transferred from IBC to Mr. Flood shall be advanced by the Company. Each time that such advance is made for a premium by the Company, Mr. Flood shall execute a promissory note to the order of the Company in the amount of such premium advanced. Such note shall accrue interest at the rate of six per cent per annum and no payment of principal or interest of such notes shall be required to be made until such time that Mr. Flood or his Estate shall receive the proceeds from the policy, either upon the surrender of the policy or from the living proceeds or death benefit proceeds, whichever occurs first. As of the date of this report, the Company has advanced funds to pay six premiums on the policy each in the amount of $20,000. Mr. Flood has executed six promissory notes, each in the amount of $20,000, to the order of the Company evidencing his obligation to repay these loans to the Company. As of the date of this report, Morton S. Robson, the Company's Executive Vice President and Secretary and a Director and corporate counsel, was indebted to the Company. The transaction giving rise to the obligations owed to the Company by Mr. Robson is described below. On April 12, 1990, four individuals, including Leslie N. Erber, then Chairman of the Board and President of the Company, and Morton S. Robson entered into an agreement with a group of dissident shareholders to purchase an aggregate of 294,182 shares at a purchase price of $4.00 per share. Mr. Erber and Mr. Robson each purchased 134,951 shares of stock. Such number of shares and purchase price have been adjusted to reflect the one for four (1:4) reverse stock split effected on November 13, 1991. The dissidents had previously filed Forms 14B with the Commission indicating their intention of seeking control of the Company through the solicitation of consents from shareholders to a reduction in the number of directors and the replacement of the present directors with directors nominated by the dissident group. As part of the agreement to purchase the shares, the dissident shareholders who were selling their shares agreed that, for a period of ten years, they would not seek to obtain control of the Company or solicit proxies in opposition to the Board of Directors on any matter. Messrs. Erber and Robson and the two other persons borrowed the aggregate amount of $1,244,328 from the Company in 1990 and 1991 to purchase these shares. Most of the loan (91.5%) was made in equal amounts to the President and the Secretary. Those advances were secured by a lien on the 294,182 shares of Common Stock. In addition, Mr. Erber agreed to transfer to the Company as additional collateral, 156,000 shares of stock of the Company. Approximately 24 one-half of this sum was advanced on April 12, 1990 and the balance during 1991. In April 1990, promissory notes evidencing the first half of the funds were executed by these persons bearing interest at the rate of 9% per annum and payable in three annual installments commencing on April 12, 1991. Thereafter, independent members of Waste Tech's Board of Directors unanimously extended the payment due date of each payment for one (1) year. New promissory notes to Waste Tech were thereafter executed for the full amount of the advance, payable in three annual installments commencing April 12, 1992. The notes were secured by a lien on all of these shares which were acquired. In June 1992, $200,000 of the principal amount of these loans was repaid to the Company through a sale of 100,000 of the acquired shares at $2.00 per share. Payment of the remainder of the principal due in 1993 and 1994, together with the accrued interest, was subsequently deferred for two years by the Company's Board of Directors, and deferred again until 1998. It is anticipated that the obligation will again be deferred. Thereafter, Mr. Erber, in connection with his termination as President of the Company, turned in all of his stock in to the Company and IBC in full satisfaction of his obligation of $698,527. In June 1995 Robson & Miller exercised a stock option to purchase 250,000 shares of Common Stock at $1.00 per share, by offsetting $250,000 of the fees that were due and owing from the Company. As of the end of fiscal 1998, the Company owed Mr. Robson's law firm the sum of $394,375 for legal fees and accrued interest. The Company has acquired a security interest in the shares acquired by Robson & Miller by the exercise of the aforesaid option as collateral security for repayment of the outstanding loan of Mr. Robson. As of October 31, 1998 Mr. Robson still owed the Company $427,364 together with accrued interest. The largest aggregate outstanding loan balance of Mr. Robson during the past two (2) fiscal years was $758,184. Related Party Transactions Legal Services The law firm of Robson & Miller, LLP and its predecessors have provided legal services for the Company and its subsidiaries. Morton S. Robson, the Secretary and a Director of the Company is a partner of Robson & Miller, LLP, general counsel to the Company. During fiscal 1998, Robson & Miller, LLP received $65,758 from Waste Tech as payment for legal services rendered. As of the end of fiscal 1998 accrued but unpaid legal fees and accrued interest due to Robson & Miller, LLP, from the Company amounted to $394,375. In fiscal 1994 Robson & Miller was granted an option to purchase 250,000 shares at $1.00 per share for a five year period, in consideration of forbearing collection of past due legal fees. As noted above, on June 13, 1995, Robson & Miller exercised a stock 25 option to purchase the 250,000 Shares at $1.00 per share, by offsetting $250,000 of the fees that were due and owing to it from the Company at that time. Conflicts of Interest Each of Messrs. Flood and Robson are directors of both Waste Tech and its majority owned subsidiary, IBC. Conflicts of interest may arise for Messrs. Flood and Robson in transactions between Waste Tech and IBC. Additionally, counsel to the company is Robson & Miller, LLP, of which Mr. Robson is the senior partner. Conflicts of interests may arise as the result of such relationship. Robert Roth Members of the immediate family of Robert Roth, one of the Directors of the Company own an aggregate of 6.2% of the Company's outstanding and issued stock. The shares of stock are owned by his wife, Patricia B. Roth (114,182), his son, Steven F. Roth (83,968), his daughter, Kathie Cecile Roth (10,000) and his son Charles B. Roth and his wife, Marta Roth (107,188). Pursuant to the terms of an agreement dated May 11, 1993 between Patricia Roth, Steven Roth and Robert Roth so long as Patricia Roth and Steven Roth are the owners of more than one percent (1%) of the number of outstanding shares of Common Stock, the Company has agreed to use its best efforts to cause the election of Robert Roth as a member of the Board of Directors. 26 PART IV ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K. 1. Financial Statements: Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows 2. Financial Statement Schedules: Schedule II - Accounts Receivable from Related Parties, Underwriters, Promoters and Employees other than Related Parties Schedule X - Supplementary Income Statement Information 3. Exhibits. (a) - The following documents heretofore filed by the Company with the commission are hereby incorporated by reference herein: (i) from the Registration Statement on Form S-18 filed with the Commission in April, 1985 (Registration No. 2-97045) Exhibit Number and Description 3.0 Articles of Incorporation and by-laws and all amendments thereto. 4.0 All instruments defining the rights of security holders submitted as exhibits therewith: 10.1 Agreement between the Company and International Baler Corp. dated September 8, 1986 relating to acquisition of assets and stock. (ii) Annual Report on Form 10-K for fiscal year ended October 31, 1987: Exhibit Number and Description 10.2 Agreement dated February 3, 1987 between the Company and N. J. Cavagnaro & Sons and Machine Corp., Nicholas J. Cavagnaro Jr., George L. Cavagnaro, and Pauline L. Cavagnaro together with the exhibits annexed thereto for the acquisition of N. J. Cavagnaro & Sons Machine Corp. 27 10.3 Non-Competition Agreement dated February 3, 1987 between the Company and N. J. Cavagnaro & Sons Machine Corp., George L. Cavagnaro, Nicholas J. Cavagnaro, Jr. and Pauline L. Cavagnaro. (iii) Current Report on Form 8-K, Date of Report, June 1, 1989: Exhibit Number and Description 10.6 Severance Agreement between International Baler Corporation and Ted C. Flood dated May 17, 1989 and agreed to June 3, 1989. 10.7 Waste Technology Corp. Profit Sharing Plan including Agreement of Trust. (iv) Current Report on Form 8-K, Date of Report, March 22, 1990: Exhibit Number and Description 10.10 Agreement between Waste Technology Corp. and U. S. Environmental, Inc. dated March 26, 1990. (v) Current Report on Form 8-K, Date of Report, April 12, 1990: Exhibit Number and Description 10.11 Stock Purchase Agreement dated April 12, 1990. 10.12 Standstill Agreement dated April 12, 1990. (vi) Form 8 Amendment No. 1 to the Annual Report on Form 10-K for fiscal year ended October 31, 1989: Exhibit Number and Description 3.3 Certificate of Incorporation of International Baler Corporation f/k/a National Compactor & Technology Systems, Inc. and all amendments thereto. 3.4 By-Laws of International Baler Corporation. 3.5 Certificate of Incorporation of Consolidated Baling Machine Company, Inc. f/k/a Solid Waste Recovery Test Center, Inc. and all amendments thereto. 3.6 By-Laws of Consolidated Baling Machine Company, Inc. 28 10.14 Plan and Agreement of Merger of American Baler Machine Company, Inc. into National Compactor & Technology Systems, Inc. (vii) Annual Report on Form 10-K for fiscal year ended October 31, 1990: Exhibit Number and Description 3.7 Certificate of Incorporation of Waste Tech Real Estate Corp. 3.8 Certificate of Incorporation of Consolidated Baler Sales & Service, Inc. 10.19 Joint Venture Agreement between Waste Tech Real Estate and Rock-Tech Corp. (viii) Current Report on Form 8-K, Date of Report April 2, 1991: Exhibit Number and Description 10.20 Agreement among Waste Technology Corp., Ram Industrial Coating, Inc., Charles B. Roth and David Price dated April 2, 1991. 10.21 Agreement among Waste Technology Corp., Ram Coating Technology Corp., Eagle Tank Technology Corp., Ram Industrial Coating, Inc., Eagle Tank Services, Inc. Charles B. Roth and David C. Price dated April 2, 1991. (ix) Annual Report on Form 10K for the Fiscal Year ended October 31, 1991: Exhibit Number and Description 3.1.1 Certificate of Amendment to Certificate of Incorporation of Waste Technology Corp. as filed on November 4, 1991. 3.1.2 Certificate of Amendment to Certificate of Incorporation of Waste Technology Corp. as filed November 21, 1991. 3.2 Revised and Restated By-Laws of Waste Technology Corp. 3.2.1 Amendment to Revised and Restated By-Laws of Waste Technology Corp. 3.11 Certificate of Incorporation of Solid Waste & Recovery Systems, Inc. 10.22 Lease for 156 6th Street and 153 7th Street, Brooklyn, New York. 29 10.24 Lease for 115 N. 5th Street, Brooklyn, New York. 10.25 Form of Deferred Compensation Agreement for Ted C. Flood. 10.26 Working Agreement dated June 17, 1990 for Local Union No. 164. 10.27 Industrial and Heavy Construction and Maintenance Contract dated September 1, 1990. 10.28 Amended and Restated Revolving Credit Loan and Security Agreement dated July 12, 1991. (x) Current Report on Form 8K, Date of Report September 2, 1992: Exhibit Number and Description 10.30 Agreement between Waste Technology Corp. and Charles B. Roth, dated June 25, 1992. (xi) Current Report on Form 8K, Date of Report May 7, 1993: Exhibit Number and Description 10.31 Agreement between Waste Technology Corp., International Baler Corp. and Leslie N. Erber dated February 23, 1993. 10.32 Agreement between Waste Technology Corp. and Charles Roth dated May 7, 1993. 10.33 Agreement between Waste Technology Corp., Patricia Roth, Steven Roth and Robert Roth dated May 10, 1993. (xii) Annual Report on Form 10K for the Fiscal Year ended October 31, 1994: Exhibit Number and Description 10.34 Employment Agreement between International Baler Corporation and Ted C. Flood dated as of September 1, 1993. 10.35.1 Term Loan and Security Agreement among International Baler Corporation, Consolidated Baling Machine Company, Inc., Waste Technology Corp. and SouthTrust Bank of Northeast Florida dated as of September 8, 1994 30 10.35.2 Mortgage and Security Agreement between International Baler Corporation and SouthTrust Bank of Northeast Florida dated as of September 8, 1994 10.35.3 Promissory Note among International Baler Corporation, Consolidated Baling Machine Company, Inc. and SouthTrust Bank of Northeast Florida dated as of September 8, 1994 10.35.4 Note Modification Agreement among International Baler Corporation, Consolidated Baling Machine Company, Inc. and SouthTrust Bank of Northeast Florida dated November 30, 1994 10.35.5 Unconditional Guaranty of Payment and Performance by Waste Technology Corp. dated as of September 8, 1994 10.36.1 Business Loan Agreement between Ram Coating Technology Corp. and Barnett Bank of Jacksonville, N.A., dated September 15, 1994 10.36.2 Amended and Restated Mortgage between Ram Coating Technology Corp. and Barnett Bank of Jacksonville, N.A., dated September 15, 1994 10.36.3 Promissory Note between Ram Coating Technology Corp. and Barnett Bank of Jacksonville, N.A., dated September 15, 1994 10.36.4 Continuing Unlimited Commercial Guaranty by International Baler Corporation to Barnett Bank of Jacksonville, N.A. dated September 15, 1994 10.36.5 Continuing Unlimited Commercial Guaranty by Waste Technology Corp. to Barnett Bank of Jacksonville, N.A. dated September 15, 1994 (xiii) Annual Report on Form 10K for the Fiscal Year ended October 31, 1995: Exhibit Number and Description 4.1 1995 Stock Option Plan (xiv) Annual Report on Form 10K for the Fiscal Year ended October 31, 1996: Exhibit Number and Description 10.37 Employment Agreement between Waste Technology Corp. and Ted C. Flood dated as of September 15, 1996 31 10.38 Agreement between International Baler Corporation and Ted C. Flood dated as December 29, 1995 10.38.1 Promissory Note made by Ted C. Flood to the order of International Baler Corporation dated December 29, 1995. 10.38.2 Promissory Note made by Ted C. Flood to the order of Waste Technology Corp. dated April 5, 1996. 10.38.3 Promissory Note made by Ted C. Flood to the order of Waste Technology Corp. dated October 5, 1996. (xv) Current Report on Form 8-K, Date of Report, June 27, 1997: Exhibit Number and Description 10.39 Agreement of Merger between International Baler Corporation and IBC Merger Corporation dated June 24, 1997. 10.39.1 Certificate of Merger of International Baler Corporation into IBC Merger Corporation. (xvi) Current Report on Form 8-KA, Date of Report, October 13, 1997: Exhibit Number and Description 16.1 Letter dated October 30, 1997 from Morton S. Robson, Esq. of Robson & Miller, LLP to James E. Newman of Coopers & Lybrand. 16.2 Letter Dated November 5, 1997 from Coopers & Lybrand L.L.P. to the Securities and Exchange Commission. The following exhibits are filed herewith: 21 List of Subsidiaries 32 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Consolidated Financial Statements October 31, 1998 and 1997 (With Independent Auditors' Report Thereon) WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Index to Consolidated Financial Statements Page Independent Auditors' Report 1 Consolidated Balance Sheets as of October 31, 1998 and 1997 2-3 Consolidated Statements of Operations for the years ended October 31, 1998, and 1997 4 Consolidated Statements of Stockholders' Equity for the years ended October 31, 1998, and 1997 5 Consolidated Statements of Cash Flows for the years ended October 31, 1998, and 1997 6-8 Notes to Consolidated Financial Statements 9 Independent Auditors' Report To the Board of Directors Waste Technology Corp.: We have audited the accompanying consolidated balance sheets of Waste Technology Corp. and Subsidiaries as of October 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended October 31, 1998 and 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Waste Technology Corp. and Subsidiaries as of October 31, 1998 and 1997 and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 1 to the financial statements, the Company has suffered recurring losses from operations and has limited availability of capital, which raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. December 18, 1998 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Consolidated Balance Sheets October 31, 1998 and 1997 1998 1997 ------------ ------------ Assets Current assets: Cash and cash equivalents $ 69,349 80,783 Accounts receivable, net of allowance for doubtful accounts of $138,000 and $86,000 for 1998 and 1997, respectively 1,576,722 2,019,435 Inventories (note 4) 2,681,288 2,379,278 Prepaid expenses and other current assets 822 77,825 ------------ ------------ Total current assets 4,328,181 4,557,321 ------------ ------------ Property, plant and equipment, net (note 5) 2,057,089 2,221,768 Other assets: Due from officer (note 3) 300,082 245,759 Other assets 98,611 76,020 ------------ ------------ Total other assets 398,693 321,779 ------------ ------------ Total assets $ 6,783,963 7,100,868 ============ ============ See accompanying notes to consolidated financial statements. 2 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Consolidated Balance Sheets (continued) October 31, 1998 and 1997
1998 1997 ----------------- ----------------- Liabilities and Stockholders' Equity Current liabilities: Revolving promissory note (note 6) $ 1,220,555 626,652 Current portion of long-term debt and capital lease obligation (notes 7 and 8) 159,757 157,054 Accounts payable 1,276,045 1,343,922 Accrued liabilities 588,053 442,912 Accrued legal judgment (note 9) 495,000 -- Customer deposits 555,905 427,022 ----------------- ----------------- Total current liabilities 4,295,315 2,997,562 ----------------- ----------------- Long-term debt (note 7) 449,519 592,403 Obligation under capital lease, less current maturities (note 8) 669,175 686,046 Minority interest in equity of subsidiary (note 14) -- 210,322 ----------------- ----------------- Total liabilities 5,414,009 4,486,333 ----------------- ----------------- Stockholders' equity (notes 3, 11 and 14): Common stock, $.01 par value; 25,000,000 shares authorized, 6,179,875 and 5,996,081 shares issued and outstanding in 1998 and 1997, respectively 61,799 59,961 Preferred stock, $.0001 par value; 10,000,000 shares authorized, none issued -- -- Additional paid-in capital 6,347,187 6,205,436 Accumulated deficit (4,255,917) (2,870,589) ----------------- ----------------- 2,153,069 3,394,808 Less Treasury stock, 663,526 shares in 1998 and 1997, at cost 419,306 419,306 Less notes receivable from stockholders, net (note 3) 363,809 360,967 ----------------- ----------------- Total stockholders' equity 1,369,954 2,614,535 ----------------- ----------------- Commitments and contingencies (note 9) Total liabilities and shareholders' equity $ 6,783,963 7,100,868 ================= =================
3 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Consolidated Statements of Operations Years ended October 31, 1998, and 1997
1998 1997 ------------- ------------- Net sales (note 13) $ 11,999,311 12,530,973 Cost of sales 9,826,994 9,802,477 ------------- ------------- Gross profit 2,172,317 2,728,496 ------------- ------------- Operating expenses: Selling 1,334,762 1,143,881 General and administrative 1,636,457 1,753,687 ------------- ------------- 2,971,219 2,897,568 ------------- ------------- Loss from operations (798,902) (169,072) ------------- ------------- Other income (expense): Interest 66,255 65,581 Provision for legal judgment (note 9) (495,000) -- Other 63,758 7,383 Interest expense (221,439) (202,234) ------------- ------------- (586,426) (129,270) ------------- ------------- (1,385,328) (298,342) Minority interest in loss of consolidated subsidiary -- 16,688 ------------- ------------- Loss before income taxes (1,385,328) (281,654) ------------- ------------- Income tax provision (note 10): Current -- -- Deferred -- -- ------------- ------------- -- -- ------------- ------------- Net loss $ (1,385,328) (281,654) ============= ============= Basic and diluted loss per share $ (0.25) (.06) ============= ============= Weighted average number of shares 5,475,171 4,939,832 ============= =============
See accompanying notes to consolidated financial statements. 4 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended October 31, 1998 and 1997
Common Stock Par Value $.01 Authorized 25,000,000 Shares Treasury Stock ---------------------- ---------------------- Notes Number Additional Number Receivable of Shares Par Paid-in Accumulated of from Issued Issued Capital Deficit Shares Cost Stockholder Totals ---------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- Balance, October 31, 1996 2,888,340 $ 28,884 6,065,106 (2,588,935) 331,763 $ (419,306) (681,261) 2,404,488 Two-for-one stock split 2,888,340 28,883 (28,883) -- 331,763 -- -- -- Net adjustment of note receivable from stockholders (note 3) -- -- -- -- -- -- 320,294 320,294 Shares issued (note 14) 219,401 2,194 169,213 -- -- -- -- 171,407 Net loss -- -- -- (281,654) -- -- -- (281,654) ---------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- Balance, October 31, 1997 5,996,081 59,961 6,205,436 (2,870,589) 663,526 (419,306) (360,967) 2,614,535 Net adjustment of note receivable from stockholders (note 3) -- -- -- -- -- -- (2,842) (2,842) Shares issued (note 14) 183,794 1,838 141,751 -- -- -- -- 143,589 Net loss -- -- -- (1,385,328) -- -- -- (1,385,328) ---------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- Balance, October 31, 1998 6,179,875 $ 61,799 6,347,187 (4,255,917) 663,526 $ (419,306) (363,809) 1,369,954 ========== ========== ========== ========== ========== ========== =========== ==========
See accompanying notes to consolidated financial statements. 5 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended October 31, 1998, and 1997
1998 1997 ----------- ----------- Cash flows from operating activities: Net loss $(1,385,328) (281,654) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 210,481 271,873 Provision for doubtful accounts (52,000) (5,000) Minority interest in loss of subsidiary -- (16,688) (Increase) decrease in assets and liabilities: Accounts receivable 442,713 (603,479) Inventories (302,010) 782,930 Prepaid expenses and other current assets 77,003 (34,617) Other assets (93,868) 2,914 Accounts payable (67,877) 312,698 Accrued liabilities and legal judgment 640,143 (12,314) Customer deposits 128,883 (256,302) ----------- ----------- Net cash provided by (used in) operating activities (401,860) 160,361 ----------- -----------
See accompanying notes to consolidated financial statements. 6 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) Years ended October 31, 1998, and 1997
1998 1997 ----------- ----------- Cash flow from investing activities: Net investment in notes receivable from shareholders $ (2,842) (90,383) Purchase of property and equipment (28,583) (69,683) Purchase of minority interest (15,000) -- ----------- ----------- Net cash used in investing activities (46,425) (160,066) ----------- ----------- Cash flow from financing activities: Proceeds/drawings from long-term debt and revolving promissory note 4,857,689 2,010,000 Payments on long-term debt, revolving promissory note and capital leases (4,420,838) (2,069,512) ----------- ----------- Net cash provided by (used in) financing activities 436,851 (59,512) ----------- ----------- Net decrease in cash and cash equivalents (11,434) (59,217) Cash and cash equivalents at beginning of year 80,783 140,000 ----------- ----------- Cash and cash equivalents at end of year $ 69,349 80,783 =========== =========== Supplemental cash flow information: Cash paid for interest $ 201,660 179,650 =========== =========== Cash paid for income taxes $ -- -- =========== ===========
Supplemental disclosure of noncash transactions: During 1998 and 1997, the Company exchanged 183,794 and 219,401 shares, respectively, of common stock for the remaining minority interest in equity of subsidiary (note 14). During 1997, the Company transferred a life insurance policy to its president, who is also a director, in exchange for a note receivable of $193,836 which represents the cash surrender value of the policy at date of transfer, plus premiums paid and interest. 7 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements October 31, 1998 and 1997 (1) Nature of Business Waste Technology Corp. (the Company) is a manufacturer of baling machines which utilize mechanical, hydraulic and electrical mechanisms to compress a variety of materials into bales. The Company's customers include plastic recycling facilities, paper mills, textile mills and paper recycling facilities throughout the United States, the Far east and South America. The Company has two manufacturing subsidiaries, International Baler Corp. (IBC), located in Jacksonville, Florida, and International Press and Shear, Corp. (IPS), located in Baxley, Georgia. The IPS subsidiary was formed in the second quarter of fiscal 1995 and greatly expanded the manufacturing capacity of the Company. Operating losses at IPS are a significant cause of the consolidated losses in both 1998 and 1997. These losses occurred primarily as a result of the continuing depressed recycled products markets, as well as higher than anticipated costs of sales and selling and administrative expenses. In the fourth quarter of 1998 the Company effectuated significant cost reductions which will exceed $500,000 on an annual basis. These cost cutting measures include personnel eliminations, salary reductions and advertising reductions. The Company is unable to predict how soon prices will recover, but, based on previous cyclical dips in corrugated and paper prices, the Company believes that prices could rise in the relatively near future with a resulting increase in sales and profits. The Company has introduced new textile balers, new corrugated balers and has been marketing the new patented hinge side baler. The Company anticipates that these products will have a significant impact on sales in fiscal 1999. The Company has replaced the $1,000,000 revolving promissory note with SouthTrust Bank with a $2,000,000 (maximum) revolving promissory note with a term of two years. Therefore, the Company is no longer in violation of the SouthTrust revolving promissory note loan covenants. The Company has no commitments for any material capital expenditures. Management will take actions, as considered necessary, to reduce the operating and carrying costs of IPS to a level which will not jeopardize the liquidity of the Company. (2) Summary of Significant Accounting Policies (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of Waste Technology Corp. and all of its wholly owned and majority owned subsidiaries. Intercompany balances and material intercompany transactions have been eliminated in consolidation. 8 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements October 31, 1998 and 1997 (b) Minority Interest Minority interest at October 31, 1997 represents the minority stockholders' proportionate share of the equity of International Baler Corp. (IBC). During 1998, the Company issued shares to acquire the remaining minority interest of IBC. The Company owns 100% and 94.2% of the outstanding shares of IBC, its primary operating subsidiary, at October 31, 1998 and 1997, respectively. (c) 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (d) Cash and cash equivalents For purposes of cash flows, cash and cash equivalents include cash on hand, bank demand accounts and money market accounts having original maturities of less than three months. (e) Inventories Inventories are stated at the lower of cost or market. Cost is determined by a method that approximates the first-in, first-out method. (f) Depreciation The cost of property, plant and equipment is depreciated over the estimated useful lives of the related assets. Depreciation is computed on the double-declining balance and straight line methods over the estimated lives of 5 years for machinery and equipment and 31 years for buildings. Gain or loss upon retirement or disposal of property, plant and equipment is recorded as income or expense. The Company evaluates its long-lived assets for impairment when indicators of impairment are present and undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying value. 9 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements October 31, 1998 and 1997 (g) Income Taxes The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes," which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. (h) Earnings (Loss) Per Share and Stock Split The Company adopted SFAS No. 128, "Earnings per Share," during the first quarter of fiscal year 1998. The adoption of this statement did not effect the Company's earnings per share. Basic earnings (loss) per share is calculated using the weighted average number of common shares outstanding during each year. Diluted earnings (loss) per share includes the net number of shares that would be issued upon the exercise of stock options using the treasury stock method. Options are not considered in loss years as they would be antidilutive. On May 15, 1997 the Board of Directors declared a two-for-one stock split of the Company's Common Stock for holders of record on June 2, 1997. All share information in note 11 and per share data are restated to retroactively reflect the split. (i) Stock-Based Compensation Prior to November 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On November 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1997 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion 25 and provide the disclosure provisions of SFAS No. 123. 10 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements October 31, 1998 and 1997 (j) Reclassifications Certain prior year amounts have been reclassified to conform with the current year's presentation. (3) Related Party Loan and Notes Receivable On April 12, 1990, four individuals, including the former Chairman of the Board and Executive Vice President, General Counsel, Secretary and Director of the Company, entered into an agreement with a group of dissident shareholders to purchase an aggregate of 294,182 shares of the Company at a purchase price of $4 per share. The former Chairman and the General Counsel each purchased 134,591 shares of common stock and the other two individuals purchased an aggregate of 25,000 shares. On July 15, 1991, the purchase of shares was finalized by the payment to the selling shareholders of the balance of the purchase price plus accrued interest. The Financing of the transactions was paid with funds borrowed from the Company with the unanimous approval of the Company's Board of Directors. The four individuals executed promissory notes in favor of the Company, originally payable in three annual installments due July 15, 1992-1994 plus accrued interest from July 15, 1991 at the rate of 9% per annum. The former Chairman's promissory note was satisfied in 1993. The Company extended the initial installment date for the General Counsel to begin on July 15, 1997. No payments were made during the years ended October 31, 1998 or 1997. The debt is collateralized by a lien on the 134,591 shares of the Company's common stock and a personal guarantee of each borrower to the extent of his loan and the guarantee of General Counsel's law firm to the extent of his loan. On June 13, 1995, the General Counsel and his law firm exercised their option to purchase 250,000 shares of Waste Technology Corp. common stock at $1.00 per share, whereby, the Company reduced the legal fees payable to the law firm in lieu of cash. These shares are also being held as collateral for the note receivable from the General Counsel. During 1997, the General Counsel and his law firm authorized the Company to set off accrued legal fees against the note receivable from the General Counsel at such time as the Board of Directors shall determine. Accordingly, notes receivable from the General Counsel, net of accrued legal fees, are presented as a reduction of stockholders' equity. On December 29, 1995, the Company transferred a life insurance policy, covering the life of its president, to the president in exchange for a note receivable. The amount of the note receivable from the president is equal to the amount of the cash surrender value of the policy at the time of the transfer. Interest accrues at the rate of 6% per annum. No principal or interest is due until proceeds from the policy are realized. The note receivable from the president was $300,082 and $245,759 at October 31, 1998 and 1997, respectively. 11 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements October 31, 1998 and 1997 Notes receivable and accrued interest due from the general counsel, net of accrued legal fees, of $363,809 is included as a reduction of stockholders equity at October 31, 1998. The statement of operations includes interest income on officer and director notes receivable of $52,785 and $50,383 for 1998 and 1997, respectively. Legal expenses to the General Counsel and his law firm were $65,758 and $96,288 for fiscal 1998 and 1997, respectively. (4) Inventories Inventories consisted of the following: 1998 1997 ------------- ----------- Finished products $ 522,929 291,409 Work in process 643,170 506,095 Raw materials 1,515,189 1,581,774 ------------- ----------- $ 2,681,288 2,379,278 ============= =========== (5) Property, Plant and Equipment The following is a summary of property, plant and equipment, at cost, less accumulated depreciation: 1998 1997 ----------- ---------- Land $ 75,000 75,000 Buildings and improvements 2,264,729 2,264,675 Machinery and equipment 1,106,416 1,070,989 Vehicles 170,697 181,330 ----------- ----------- 3,616,842 3,591,994 Less accumulated depreciation and amortization 1,559,753 1,370,226 ----------- ----------- $ 2,057,089 2,221,768 =========== =========== Depreciation expense was $193,262 and $265,606 in 1998 and 1997, respectively. Included in buildings and improvements at October 31, 1998 and 1997 are assets recorded under a capital lease in the amount of $1,359,190. Amortization of the assets under capital lease in the amount of $43,926 is included in depreciation expense. 12 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements October 31, 1998 and 1997 (6) Revolving Promissory Note The Company has a $2,000,000 line of credit with $1,220,555 outstanding at October 31, 1998. The line of credit is secured by substantially all assets. Advances under the revolving line are limited to the aggregate of up to 85% of eligible accounts receivable less than 90 days old and 30% of eligible raw materials and finished goods inventory. As of October 31, 1998, the balance of the revolving line approximated the maximum borrowing capacity available to the Company. The revolving line bears interest at the prime rate plus 1.5% (9.5% at October 31, 1998) with the principal amount payable on demand. The above line of credit replaced a $1,000,000 revolving promissory note payable with $626,652 outstanding as of October 31, 1997. The note payable was paid in full in July 1998. (7) Long-Term Debt Long-term debt consists of the following:
1998 1997 ----------- ---------- Term note payable to bank, at prime rate, due in equal monthly installments of $9,028, plus interest, through August 2002, secured by substantially all assets $ 415,278 523,611 Term note payable to Appling County, Georgia at 4.0%, due in monthly installments of $3,417, including interest through July 2003 177,127 210,324 ---------- ---------- 592,405 733,935 Amounts classified as current 142,886 141,532 ---------- ---------- $ 449,519 592,403 ========== ==========
Based on recent negotiations with financial institutions the Company's debt substantially approximates fair value, except for the term note payable to Appling County due to the nature of the instrument. The term note payable to bank contains certain covenants, whereby the Company must maintain, among other things, specified levels of minimum net worth and working capital, and maintain a specified ratio of maximum debt to worth, and current ratio. 13 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements October 31, 1998 and 1997 The Company violated the debt to net worth financial covenant of the above term note as of October 31, 1998. The lender has waived this covenant violation. There is no assurance that the lender will provide future waivers should the Company continue to experience covenant violations. If such events occurred and the lender called the debt, management would be required to obtain alternative financing sources. For the period ending October 31, contractual maturities are as follows: 1999 $ 142,886 2000 144,291 2001 145,757 2002 129,217 2003 30,254 Thereafter -- ------------- $ 592,405 ============= (8) Capital Lease During 1996, International Press and Shear (IPS) entered into a capital lease agreement for its manufacturing facility. The following schedule provides for the minimum future lease payments and the present value of the commitment for the capital lease as of October 31, 1998: 1999 $ 73,618 2000 73,618 2001 73,618 2002 73,618 2003-2011 530,749 ---------- Total net minimum lease payments 825,221 Less amounts representing interest 139,175 ---------- Present value of net minimum obligations 686,046 Less current portion 16,871 ---------- Long-term obligations $ 669,175 ========== 14 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements October 31, 1998 and 1997 The present value of minimum future obligations shown above are calculated based on an 8.25% interest rate determined to be applicable at the inception of the lease. Interest expense on the outstanding obligations under capital leases was $58,096 and $59,337 for the period ending October 31, 1998 and 1997, respectively. The cost, accumulated amortization and net book value of the manufacturing facility under capital lease at October 31, 1998 are shown below. Cost represents the Company's direct investment in the facility. Cost $ 1,359,190 Accumulated amortization (134,012) ---------- Net book value $ 1,225,178 ========== (9) Contingent Liabilities, Commitments and Year 2000 Compliance Litigation: The Company is subject to legal proceedings and claims which arise in the ordinary course of business, some of which are substantial. While any litigation contains an element of uncertainty, management, based upon the opinion of the Company's General Counsel and other attorneys acting on behalf of the Company, presently believes, except for the legal judgment discussed below, that the outcome or cost of defending such proceedings or claims individually and in the aggregate, which are pending or threatened, will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. The Company is a defendant in a suit against its former subsidiary, RAM Coating Technology Corporation (RAM), claiming breach of contract. In September 1998, a judgment against the Company and RAM's former insurance carrier, was given in the amount of $250,194 in damages, $110,000 in attorney's fees, all costs of proceedings, plus interest. The total amount of the legal judgment, including interest, of $495,000, is reflected on the balance sheet at October 31, 1998. The Company has filed a devolutive appeal, with a decision expected in late 1999 or early 2000. The Company will continue to vigorously defend the action. Other: The Company has an employment agreement with its president for a term of five years commencing on October 1, 1996. Annual compensation pursuant to the contract is $150,034, increased by 5% per year. In the event of a change in ownership of the Company and the president is not retained, he shall receive as a lump sum the compensation owed for the remaining term of the agreement. 15 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements October 31, 1998 and 1997 Additionally, the Company has a severance agreement with its president, whereby in the event of change of control of IBC and the subsequent termination of employment of him for any reason other than cause, IBC shall be required to pay to him an amount equal to 2.99 times his salary at IBC prior to any change in control. The Company has also committed to pay premiums on a life insurance policy owned by its president to keep the policy in force. Annual premiums approximate $40,000 (see note 3). The Company is a guarantor of a note payable in the amount of $35,123. The note is secured by equipment and matures June 1, 1999. Year 2000 Compliance: The Company believes it has fully achieved Year 2000 compliance for all internal systems. Costs associated with compliance were immaterial and have been fully incurred. The Company is in the process of examining key vendor and customer relationships to determine, to the extent practical, the degree of such parties' Year 2000 compliance. Should a key vendor or customer have a system failure due to the century change, the Company believes that the most significant impact would likely be the inability to receive inventory on a timely basis. While the Company does not expect any such impact to be material, it is developing contingency plans to address this possibility. (10) Income Taxes The differences between income taxes as provided at the federal statutory tax rate of 34% and the Company's effective rate are as follows:
Fiscal 1998 Fiscal 1997 ----------- ----------- Federal income tax benefit at statutory rate $ (471,000) (95,800) State income tax benefit, net of federal income tax effect (50,300) (10,100) Other 20,400 8,900 Change in valuation allowance, net of correction to prior years' deferred taxes 500,900 97,000 ------------ ----------- Provision (benefit) for income taxes $ -- -- ============ ===========
The Company files consolidated federal and state income tax returns with its subsidiaries. 16 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements October 31, 1998 and 1997 The net change in the total valuation allowance for the years ended October 31, 1998 and 1997 was an increase of $500,000 and $208,000, respectively. Realization of net deferred tax assets is dependent on generating sufficient taxable income in the future. Based on current and anticipated future economic conditions, management cannot ascertain when it will become more likely than not that any portion of the net deferred tax asset will be realized. The significant components of the net deferred tax asset at October 31, 1998 and 1997 are as follows: 1998 1997 ---------- ---------- Reserves and allowances $ 400,000 236,000 Property, plant and equipment 103,000 87,000 General business credit carryforward 20,000 37,000 Net operating loss carryforward 1,111,000 752,000 Other 89,000 111,000 ---------- ---------- 1,723,000 1,223,000 Valuation allowance 1,723,000 1,223,000 ---------- ---------- $ -- -- ========== ========== Net operating loss carryforwards for tax purposes are approximately $2,950,000, which expire in years 2007 through 2012. IBC has general business tax credit carryforwards of approximately $20,000, which expire in the years 1998 through 2000. The Company has an Alternative Minimum Tax Credit carryforward of approximately $30,000. (11) Stock Options Effective in fiscal 1995, the Board of Directors of the Company adopted the 1995 Stock Option Plan (1995 Plan). Under the 1995 Plan, incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, nonqualified stock options and stock appreciation rights (SARs) may be granted to key employees, officers, directors and consultants of the Company and its present and future subsidiaries to purchase an aggregate of 2,000,000 shares after adjustment for the stock split in 1997 of the Company's common stock (the Common Stock). The Purpose of the 1995 Plan is to aid the Company in attracting and retaining key employees, officers, directors and consultants and to secure for the Company the benefits of the incentive inherent in equity ownership by such persons who are responsible for causing the Company's growth and success. 17 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements October 31, 1998 and 1997 The maximum number of shares as to which options may be granted under the 1995 Plan (subject to adjustment as described below) is 2,000,000 shares of Common Stock. Upon expiration, cancellation or termination of unexercised options, the shares with respect to which such options shall have been granted will again be available for grant under the 1995 Plan. The 1995 Plan is administered by the Board of Directors, or if appointed, by a stock option committee consisting of at least two members of the Board of Directors, none of whom is eligible to participate under the 1995 Plan. (The group administering the 1995 Plan is referred to as the Committee). The Committee has the authority under the 1995 Plan to determine the terms of options and SARs granted under the 1995 Plan, including, among other things, whether an option shall be an incentive or a nonqualified stock option, the individuals who shall receive them, whether a SAR shall be granted separately, in tandem with or in addition to options, the number of shares to be subject to each option and/or SAR, the date or dates each option or SAR shall become exercisable and the exercise price or base price of each option and SAR; provided, however, that the exercise price of an incentive stock option may not be less than 100% of the fair market value of the Common Stock on the date of grant and not less than 110% of the fair market value in the case of an optionee who at the time of grant owns more than ten percent of the total combined voting power of the Company, or of any subsidiary or parent of the Company. During 1995, the Board of Directors issued 1,760,000 non-qualified stock options to purchase 1,760,000 shares of the Company's common stocks at prices ranging from $.75 to $1.00 per share, respectively. The options were issued to key employees. The options grant the right to purchase shares of the Company's common stock at the date of the grant. The options have antidilutive rights in the event of a split, reverse split, or recapitalization and are exercisable in whole or in part through 2002. The options or shares purchased thereunder may be registered pursuant to the Securities Act of 1933. Outstanding options as of October 31, 1998 are 1,614,000. In March 1994 and February 1993, the Board of Directors issued 550,000 and 700,000 non-qualified stock options, respectively, to purchase 550,000 and 700,000 shares, respectively, of the Company's common stock at $.50 per share. The options have antidilutive rights in the event of a split, reverse split or recapitalization and are exercisable in whole or in part through March 2003 and September 1, 2002, respectively. The options or shares purchased thereunder may be registered pursuant to the Securities Act of 1933. Options outstanding as of October 31, 1998 are 50,000 and 200,000, respectively. 18 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements October 31, 1998 and 1997 A summary of the status of the Company's stock options is presented below: Weighted average Shares exercise price ------ -------------- Outstanding, October 31, 1996 2,140,000 $ .8922 Granted 75,000 .8125 Options of subsidiary exchanged for options on company stock 59,612 .6165 Canceled or surrendered (76,000) .5000 ------------ Outstanding, October 31, 1997 2,198,612 .9123 Canceled or surrendered (259,612) .7929 ------------ Outstanding, October 31, 1998 1,939,000 .9048 ============ ======= Shares exercisable 1,407,212 $ .8885 ============ ======= The outstanding stock options at October 31, 1998, have an exercise price ranging from $.50 to $1.00 per share and a remaining contractual term ranging from two to five years. The fair value of the options granted during 1997 is not considered material to the Company's financial statements. The full impact of calculating compensation cost for stock options under SFAS No. 123 is also not provided because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to November 1, 1996 is not considered. (12) Employees' Benefit Plan The Company instituted a profit sharing plan for its employees in 1989 by contributing 375,000 shares of its stock to the trust, having a fair market value of $165,000 on the transfer date. The Company made no contributions to the plan in 1998 or 1997. 19 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements October 31, 1998 and 1997 (13) Export Sales Export sales were approximately 16% for the years ended October 31, 1998 and 1997. The principal international markets served by the Company, among others include Canada, China, England, India, Korea, Japan and Thailand. No sales in one geographic region exceed 10%. (14) Purchase of Minority Interest in IBC Effective June 27, 1997, the Company issued 219,401 shares to acquire an additional 8.4% interest in International Baler Corp. (IBC). In addition, effective January 22, 1998, the Company issued 183,794 shares to acquire the remaining interest in IBC. These transactions have been accounted for as a purchase. Accordingly, the excess minority interest liability recorded by the Company over the market value of the shares issued was recorded as a reduction of long-lived assets. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WASTE TECHNOLOGY CORP. (Registrant) By: /s/ Ted C. Flood ----------------- Ted C. Flood, President Dated: January 27, 1999 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in their capacities and on the dates indicated. Signature Title Date /s/ Ted C. Flood Chief Executive January 27, 1999 - ---------------- Officer, and Director Ted C. Flood /s/ Morton S. Robson Director January 27, 1999 - -------------------- Morton S. Robson - ----------------- Director January 1999 Alan Morrison /s/ Charles C. Wildes Director January 27, 1999 - --------------------- Charles C. Wildes - ------------------- Director January , 1999 Robert Roth /s/ William E. Nielsen Director, Principal January 29, 1999 - ---------------------- Financial and William E. Nielsen Accounting Officer EX-21 2 LIST OF SUBSIDIARIES Exhibit 21 List of Subsidiaries Name State Of Incorporation International Baler Corp. Delaware Waste Technology Leasing Corp. Delaware Waste Technology Acquisitions Corp. Delaware Consolidated Baling Machine Co., Inc. Florida Solid Waste & Recovery Systems, Inc. Florida Waste Tech Real Estate Corp. New York Consolidated Baler Sales & Service Inc. New York International Press and Shear Corp. Georgia EX-27 3 FDS
5 The schedule contains summary financial information extracted from the financial statements and is qualified in its entirety by reference to such financial statements. Year OCT-31-1998 OCT-31-1998 69,349 0 1,714,722 138,000 2,681,288 4,328,181 3,616,842 1,559,753 6,783,963 4,295,315 0 0 0 61,799 6,071,836 6,783,963 11,999,311 11,999,311 9,826,994 12,798,213 364,987 0 221,439 (1,385,328) 0 (1,385,328) 0 0 0 (1,385,328) (0.25) (0.25)
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