-----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, CmPrtUfHcgNryO3j79ryNj6YyizwPdkHgyZYxMsPfbPVlRMMtCc1HyiCug2nSbUF liY0BcSt7FYWbbmHCkmq7A== 0000847468-99-000007.txt : 19990402 0000847468-99-000007.hdr.sgml : 19990402 ACCESSION NUMBER: 0000847468-99-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WASTE SYSTEMS INTERNATIONAL INC CENTRAL INDEX KEY: 0000847468 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 954203626 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25998 FILM NUMBER: 99582247 BUSINESS ADDRESS: STREET 1: 420 BEDFORD STREET STREET 2: SUITE 300 CITY: LEXINGTON STATE: MA ZIP: 02173 BUSINESS PHONE: 7818623000 MAIL ADDRESS: STREET 1: 420 BEDFORD STREET STREET 2: SUITE 300 CITY: LEXINGTON STATE: MA ZIP: 02173 FORMER COMPANY: FORMER CONFORMED NAME: BIOSAFE INTERNATIONAL INC DATE OF NAME CHANGE: 19950504 FORMER COMPANY: FORMER CONFORMED NAME: ZOE CAPITAL CORP DATE OF NAME CHANGE: 19920703 10-K 1 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission file number 0-25998 WASTE SYSTEMS INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 95-4203626 (State or other (I.R.S. Employer jurisdiction of Identification incorporation or organization) No.) 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 (Address of principal executive offices) (zip code) (781) 862-3000 Phone (781) 862-2929 Fax (Registrant's telephone number, including area code) ------------------------ Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value per share ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K X As of March 24, 1999, the market value of the voting stock of the Registrant held by non-affiliates of the Registrant was $50,492,453 The number of shares of the Registrant's common stock, par value $.01 per share, outstanding as of March 24, 1999 was 11,220,545. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. Portions of the Registration Statement on Form S-1 of Waste Systems International, Inc. (No. 33-93966) are incorporated by reference into Part IV of this Form 10-K. TABLE OF CONTENTS Page PART I Item 1. Business 1 Item 2. Properties 11 Item 3. Legal Proceedings 11 Item 4. Submission of Matters to a Vote of Security Holders 11 PART II Item 5. Market For Registrant's Common Equity and Related Stockholder Matters 12 Item 6. Selected Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 8. Financial Statements and Supplementary Data 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 49 PART III Item 10. Directors and Executive Officers 49 Item 11. Executive Compensation 52 Item 12. Security Ownership of Certain Beneficial Owners and Management 55 Item 13. Certain Relationships and Related Transactions 57 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 58 Signatures 59 Note Regarding Forward Looking Statements: This Annual Report on Form 10-K contains forward-looking statements concerning among other things, the Company's expected future revenues, operations and expenditures and estimates of the potential markets for the Company's services. Such statements made by the Company fall within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All such forward-looking statements are necessarily only estimates of future results and the actual results achieved by the Company may differ materially from these projections due to a number of factors as discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations--Certain Factors Affecting Future Operating Results" of this Form 10-K. PART I Item 1. Business The Company Waste Systems International, Inc. (the "Company" or "WSI") is an integrated non-hazardous solid waste management company that provides solid waste collection, recycling, transfer and disposal services to commercial, industrial, residential and municipal customers within certain regional markets in the Northeast and Mid-Atlantic States where it operates. The Company is achieving significant growth by implementing an active acquisition strategy. During 1998, the Company completed 34 acquisitions of landfills, collection companies and transfer stations. At December 31, 1998, the Company owned three landfills in Vermont and Central Pennsylvania. Subsequent to December 31, 1998, the Company acquired a fourth landfill located in Central Pennsylvania which significantly increased the Company's disposal capacity in that region. The Company's Moretown Landfill in Vermont and Sandy Run Landfill in Central Pennsylvania are currently operating and permitted to accept 120,000 and 86,000 tons per year, respectively. The Company's Mostoller Landfill in Central Pennsylvania is permitted to accept 624,000 tons per year and is scheduled to commence operations in the second half of 1999, subject to receipt of certain incidental permits and final construction. As of December 31, 1998, the aggregate remaining estimated permitted capacity of the Company's three owned landfills was approximately 18.5 million cubic yards. In addition, the Company has contracted with the Town of South Hadley, Massachusetts to operate that Town's landfill which has estimated capacity of approximately 1.87 million cubic yards available for future disposal, subject to receipt of required permits. The Company also owns four operating transfer stations and has acquired another that is permitted and is ready to begin construction. As of December 31, 1998, the Company's collection operations serve a total of approximately 52,000 commercial, industrial, residential and municipal customers in the Vermont, Central Pennsylvania, Central Massachusetts and Central Upstate New York markets. The Company has completed 6 acquisitions since January 1, 1999 (See Management's Discussion And Analysis Of Financial Condition And Results Of Operations - Recent Business Developments- Acquisitions) which have significantly increased the Company's presence within the geographic regions in which it operates. Included in the 6 acquisitions are Community Refuse Services, Inc., which is a landfill located in Central Pennsylvania, and Cumberland Waste Service, Inc., a collection operation serving over 2,300 customers in the geographical area surrounding the landfill. The landfill acquisition will add approximately 6.0 million cubic yards of capacity for the region and is permitted to accept 306,000 tons of municipal solid waste per year. As a result, management believes that the Company is poised to continue its growth in these areas and to enhance its profitability through the implementation of operating efficiencies. The Company focuses on the operation of an integrated non-hazardous solid waste management business, including the ownership and operation of landfills, solid waste collection services and transfer stations. The Company's objective is to expand the current geographic scope of its operations primarily within the Northeast and Mid-Atlantic regions of the United States, and to become one of the leading providers of non-hazardous solid waste management services in each local market that it serves. The key elements of the Company's strategy for achieving its objective are: (i) to acquire and integrate solid waste disposal capacity, transfer stations and collection operations in its targeted new markets, (ii) to generate internal growth through increased sales penetration and the marketing of additional services to existing customers and (iii) to enhance profitability by increasing operating efficiency. 1 Industry Overview Based on published industry information, the solid waste management industry generated approximately $38 billion in revenue during 1997. Of this $38 billion aggregate revenue, approximately 44% was generated by public companies, approximately 33% was generated by municipal governments, and the remaining 23% was generated by numerous private solid waste operators. The solid waste management industry is generally experiencing significant consolidation and integration. The Company believes that the consolidation and integration is a result of the following factors, among others: (i) increasingly stringent environmental regulations which have resulted in an increased need for substantial capital to maintain regulatory compliance; (ii) the inability of many smaller operators to achieve the economies of scale necessary to compete with larger providers; (iii) the competitive and economic benefits of providing integrated collection, recycling, transfer and disposal services; and (iv) the privatization of solid waste assets and services by municipalities. Although significant consolidation has occurred within the solid waste management industry, the Company believes the industry remains highly fragmented and that a substantial number of potential acquisition opportunities remain, including within the Northeast and Mid-Atlantic regions where it operates. Stringent environmental regulations have resulted in rising costs for owners of landfills while permits required for landfill development, expansion or construction have also become increasingly difficult to obtain. These ongoing costs are coupled with increased financial reserve requirements for closure and post-closure monitoring. Certain of the smaller industry participants have found these costs and regulations burdensome and have decided either to close their operations or to sell them to larger operators. As a result, the number of operating landfills has decreased while the size of landfills has increased. Economies of scale, driven by the high fixed costs of landfill assets and the associated profitability of each incremental ton of waste, have led to the development of higher volume, regional landfills. Integrated operators achieve economies of scale in the solid waste collection and disposal industry through vertical integration of their operations that may generate a significant waste stream for these high-volume landfills. Integrated companies gain further competitive advantage over non-integrated operators by being able to control the waste stream. The ability of larger integrated companies to internalize the collected solid waste (i.e., collecting the waste at the source, transferring it through their own transfer stations and disposing of it at their own disposal facility), coupled with access to significant capital resources to make acquisitions, has created an environment in which large integrated companies can operate more cost effectively and competitively than non-integrated operators. The trend toward consolidation in the solid waste industry is further supported by the increasing tendency of a number of municipalities to privatize their waste disposal operations. Privatization is often an attractive alternative for municipalities due, among other reasons, to the ability of integrated operators to leverage their economies of scale to provide the community with a broader range of services while enabling the municipality to reduce its own capital asset requirements. The Company believes that the financial condition of municipal landfills was adversely affected by the 1994 United States Supreme Court decision which declared "flow control" laws unconstitutional, particularly in the Northeastern states. These laws had required waste generated in counties or districts to be disposed of at the respective county or district-owned landfills or incinerators. The reduction in the captive waste stream to these facilities, resulting from the invalidation of such laws, forced the counties that owned them to increase their per ton tipping fees to meet municipal bond payments. The Company believes that these market dynamics are factors causing municipalities throughout the northeastern states to consider the privatization of public facilities. Strategy The Company's objective is to expand the current geographic scope of its operations primarily within the Northeast and Mid-Atlantic regions of the United States, and to become one of the leading providers of non-hazardous solid waste management services in each local market that it serves. The key elements of the Company's strategy for achieving its objective are: (i) to acquire and integrate solid waste disposal capacity, transfer stations and collection operations in its targeted new markets, (ii) to generate internal growth through increased sales penetration and the marketing of additional services to existing customers and (iii) to enhance profitability by increasing operating efficiency. The Company intends to implement this strategy as follows: 2 Expansion Through Acquisitions. During 1998, the Company completed 34 acquisitions within 4 states in the Northeast and Mid-Atlantic regions. The Company intends to continue to expand by acquiring solid waste disposal capacity and collection companies in new and existing markets. In considering new markets, the Company evaluates opportunities to acquire or otherwise control sufficient landfills, transfer stations and collection operations which would enable it to generate an integrated waste stream and achieve the disposal economies of scale necessary to meet its market share and financial objectives. The Company has established criteria, which enable it to evaluate the prospective acquisition opportunity and the target market. Historically, the Company has entered new markets, which are adjacent to its existing markets; however, the Company is considering new markets in non-contiguous geographic areas, which meet its criteria. Internal Growth. In order to generate continued internal growth, the Company has focused on increasing sales penetration in its current and adjacent markets, soliciting new commercial, industrial and residential customers, marketing upgraded services to existing customers and, where appropriate, raising prices. As customers are added in existing markets, the Company's revenue per routed truck is improved, which generally increases the Company's collection efficiencies and profitability. The Company uses transfer stations, which serve to link disparate collection operations with Company landfills, as an important part of its internal growth strategy. Operating Enhancements for Acquired and Existing Businesses. The Company has implemented a system that establishes standards for each of its markets and tracks operating criteria for its collection, transfer, disposal and other services to facilitate improved profitability in existing and acquired operations. These measurement criteria include collection and disposal routing efficiency, equipment utilization, cost controls, commercial weight tracking and employee training and safety procedures. The Company believes that by establishing standards and closely monitoring compliance, it is able to improve existing and acquired operations. Moreover, where the Company is able to internalize the waste stream of acquired operations, it is further able to increase operating efficiencies and improve capacity utilization. Acquisition Program The Company is pursuing an active acquisition strategy to achieve its objective of expanding the current geographical scope of its operations and becoming a leading provider of integrated solid waste management services in each of the markets it serves. The Company seeks acquisitions that are consistent with its three-step acquisition program designed to (i) acquire long-term disposal capacity in targeted regional markets, (ii) acquire collection companies and transfer stations which will serve as platforms in the targeted regions to secure a stable long-term waste flow, and (iii) secure "tuck-in acquisitions" of small but complementary collection companies to increase a regional operation's profitability. The following table sets forth acquisitions completed by the Company through March 24, 1999: Acquisition Month Acquired Principal Business Location - ----------- --------------- ------------------ --------- Vermont Region Grady Majors Rubbish Removal September 1998 Collection St. Albans, VT Cota Sanitation June 1998 Collection Newport, VT Vincent Moss June 1998 Collection Newport, VT Austin Rubbish Removal June 1998 Collection Newport, VT Surprenant Rubbish, Inc. June 1998 Collection Newport, VT Fortin's Trucking of Williston May 1998 Collection Williston, VT John Leo & Sons, Ltd. March 1998 Collection Burlington, VT Rapid Rubbish Removal, Inc. February 1998 Collection/Transfer Station St. Johnsbury, VT Greenia Trucking February 1998 Collection St. Albans, VT Doyle Disposal January 1998 Collection Barre, VT Perkins Disposal January 1998 Collection St. Johnsbury, VT CSWD Transfer Station* October 1997 Transfer Station Williston, VT The Hartigan Company January 1997 Collection Stowe, VT Waitsfield Transfer Station November 1995 Transfer Station Waitsfield, VT Moretown Landfill July 1995 Landfill Moretown, VT 3 Acquisition Month Acquired Principal Business Location - ----------- -------------- ------------------ ---------- Central Pennsylvania Region Cumberland Waste Service, Inc March 1999 Collection Cumberland, PA Community Refuse Service, Inc March 1999 Landfill Cumberland, PA Koontz Disposal January 1999 Collection Boswell, PA Jim's Hauling, Inc. January 1999 Collection Duncansville, PA Mostoller Landfill, Inc. August 1998 Landfill Somerset, PA Worthy's Refuse Service August 1998 Collection McVey Town, PA Sandy Run Landfill July 1998 Landfill Hopewell, PA Patterson's Hauling May 1998 Collection Altoona, PA Pleasant Valley Hauling May 1998 Collection Altoona, PA Horvath Sanitation, Inc./ Eagle Recycling, Inc. May 1998 Collection Altoona, PA McCardle Refuse Company May 1998 Collection Burham, PA Central Massachusetts Region Troiano Trucking, Inc. March 1999 Collection Worcester, MA Steve Provost Rubbish Removal December 1998 Collection Rochdale, MA Sunrise Trucking December 1998 Collection Spencer, MA Trashworks November 1998 Collection Worcester, MA Mattei-Flynn Trucking, Inc. August 1998 Collection Auburn, MA Mass Wood Recycling, Inc. July 1998 Transfer Station Oxford, MA Central Upstate New York Region Santaro Trucking Co., Inc. January 1999 Collection Syracuse, NY Richard A. Bristol, Sr. November 1998 Collection Rome, NY Bristol Trash and Recycling II November 1998 Collection Rome, NY Shepard Disposal Service October 1998 Collection Oneida, NY Emmons Trash Removal October 1998 Collection Sherill, NY Wayne Wehrle September 1998 Collection Clinton, NY Phillip Trucking September 1998 Collection Wampsville, NY Mary Lou Mauzy September 1998 Collection Cazenovia, NY Costello's Trash Removal September 1998 Collection Cazenovia, NY Bliss Rubbish Removal, Inc.* September 1998 Collection/Transfer Station Camden, NY Besig & Sons September 1998 Collection Westmoreland, NY Larry Baker Disposal, Inc. September 1998 Collection Oneida, NY - -----------------------
* Acquisition pursuant to lease/purchase arrangement. 4 Integrated Solid Waste Management Operations The Company's operations include the ownership and/or operation of landfills, solid waste collection services and transfer stations. As the Company has executed its acquisition strategy and integrated the solid waste management assets acquired, the Company's rate of internalization of its operations has increased. Throughout 1998, the Company increased the amount waste collected by the Company that was subsequently disposed at Company landfills and increased the amount of the solid waste delivered for disposal at the Company's landfills that was collected by the Company. Solid Waste Collection. The Company's solid waste collection operations served approximately 52,000 commercial, industrial, residential and municipal customers at December 31, 1998. A majority of the Company's commercial and industrial collection services are performed under service agreements with terms ranging from one to three years, and fees are determined by such factors as collection frequency, type of equipment and containers furnished, the type, volume and weight of the solid waste collected, the distance to the disposal or processing facility and the cost of disposal or processing. The Company's residential collection and disposal services are performed either on a subscription basis (i.e., with no underlying contract) with individuals, or under contracts with municipalities, homeowners associations, apartment owners or mobile home park operators. Revenues from collection operations accounted for approximately 73.5% of the Company's revenues for the year ended December 31, 1998. Landfills. At December 31, 1998, the Company owned three landfills and has an agreement to operate a fourth landfill under a long-term operating agreement. The Moretown Landfill and Sandy Run Landfill, which are the Company's only operating landfills at December 31, 1998, include leachate collection systems, groundwater monitoring systems and, where required, active methane gas extraction and recovery systems. During 1998, over 95% of the solid waste from the Company's Vermont operations was delivered for disposal at the Moretown Landfill and approximately 63% of the solid waste delivered for disposal at the Moretown Landfill during this period was collected by the Company. During 1998, approximately 59% of the solid waste from the Company's Central Pennsylvania operations was delivered for disposal at the Sandy Run Landfill and approximately 58% of the solid waste delivered for disposal at the Sandy Run Landfill during this period was collected by the Company. Revenue from landfill operations accounted for approximately 20.1% of the Company's revenues for the year ended December 31, 1998. The following table provides certain information regarding the landfills that the Company owns or operates. All information is provided as of December 31, 1998, except for Community Refuse Service, Inc. which is as of March 12, 1999. Remaining Estimated Permitted Capacity Estimated Capacity in Total Remaining Permitting Permitted Capacity Process Landfill Location (Cubic Yards) (Cubic Yards)(1) - -------------------------------------------------------------------------------- Mostoller Somerset, PA 14,200,000 - Sandy Run Hopewell, PA 2,865,000 - Moretown Moretown, VT 1,478,000 - South Hadley(2) South Hadley, MA - 2,000,000 Community Refuse Service, Inc. Cumberland, PA 6,000,000 - - ------------ (1) Represents capacity for which the Company has begun the permitting process. Does not include additional available capacity at the site for which permits have not yet been sought. (2) The South Hadley Landfill will be operated pursuant to an operating agreement expiring in 2015. Once the permitted capacity of a particular landfill is reached, the landfill must be closed and capped if additional capacity is not authorized. The Company establishes reserves for the estimated costs associated with such closure and post-closure costs over the anticipated useful life of such landfill. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Certain Factors Affecting Future Operating Results - -Adequacy of Accruals for Closure and Post-Closure Costs." 5 Transfer Station Services. At December 31, 1998, the Company owned four operating transfer stations. In addition, the Company has acquired another transfer station that is permitted and in the process of construction. The transfer stations receive, compact and transfer solid waste collected from the Company's various collection operations and from third parties to long-haul vehicles for transport to landfills. The Company believes that transfer stations benefit the Company by (i) increasing the size of the waste shed, which has access to the Company's landfills and (ii) reducing costs by improving utilization of collection personnel and equipment. Revenues from transfer station services accounted for approximately 6.4% of the Company's revenues for the year ended December 31, 1998. Regional Operations The Company's current or planned solid waste management operations are as follows: Vermont Operations. The Company established its first integrated solid waste management operations in the geographical area surrounding its Moretown Landfill. In addition to the Moretown Landfill, the Company currently owns and/or operates three transfer stations and collection operations serving commercial, industrial, residential and municipal customers in the Burlington, St. Albans, St. Johnsbury, Newport and Barre-Montpelier, Vermont areas. The Vermont operations serve approximately 6,200 residential customers and approximately 2,600 other customers, including commercial, industrial and municipal customers. The first cell ("Cell 1") at the Moretown Landfill is permitted to receive approximately 120,000 tons per year and had remaining estimated permitted capacity at December 31, 1998 of approximately 78,000 cubic yards. The Company received all of the permits required for development and operation of the second cell ("Cell 2") and began construction on Cell 2 in July 1998. Cell 2 will increase the permitted landfill capacity by an estimated additional 1.4 million cubic yards. The Company expects that Cell 2 will be available to receive solid waste late in the second quarter of 1999. During 1998, over 95% of the solid waste from the Company's Vermont operations was delivered for disposal at the Moretown Landfill and approximately 63% of the solid waste delivered for disposal at the Moretown Landfill during this period was collected by the Company. Central Pennsylvania Operations. In May 1998, the Company commenced operations in Central Pennsylvania, through the acquisition of Horvath Sanitation, Inc. and Eagle Recycling, Inc. ("Eagle"), which are based in Altoona, Pennsylvania. Subsequently, the Company completed four tuck-in acquisitions which have been integrated with Eagle's operations. At December 31, 1998, the Central Pennsylvania operations serve approximately 24,000 residential customers and 2,500 other customers, including commercial, industrial and municipal customers. In July 1998, the Company acquired the Sandy Run Landfill, a 700-acre, 3.0 million cubic yard permitted solid waste landfill in Hopewell, Pennsylvania and began the process of integrating Eagle's operations with the Sandy Run Landfill. The Sandy Run Landfill is currently permitted to receive approximately 86,000 tons per year and had remaining estimated permitted capacity at December 31, 1998 of approximately 2.9 million cubic yards. During 1998, approximately 59% of the solid waste from the Company's Central Pennsylvania operations was delivered for disposal at the Sandy Run Landfill and approximately 58% of the solid waste delivered for disposal at the Sandy Run Landfill during this period was collected by the Company. In August 1998, the Company acquired the Mostoller Landfill in Somerset County, Pennsylvania. The Mostoller Landfill is permitted to receive approximately 624,000 tons of waste per year (subject to receiving certain pending incidental permits as disclosed below), including municipal solid waste, construction and demolition waste, sludge and residual wastes. This landfill consists of 7 cells having approximately 14.2 million cubic yards of permitted capacity with expected additional room for expansion on the 513 acre permitted "greenfields" site. The Company has obtained the principal permits for the construction and operation of the Mostoller Landfill, subject to commencing operations prior to December 31, 1999. Applications are pending for incidental air quality and state highway occupancy permits required in connection with the operation of the landfill, and the Company expects these permits will be received in a timely fashion. The Company expects to carry out construction of the Mostoller Landfill during the first half of 1999 with operations expected to commence during the third quarter of 1999. In January 1999, the Company completed the tuck-in collection company acquisitions of Jim's Hauling, Inc. and Koontz Disposal in Central, Pennsylvania. These have been integrated into the Eagle operation. On March 11, 1999, the Company acquired Community Refuse Services, Inc., which is a landfill located in Central Pennsylvania, and Cumberland Waste Service, Inc., a collection operation serving over 2,300 customers in the geographical area surrounding the landfill. The landfill acquisition will add approximately 6.0 million cubic yards of capacity for the region and is permitted to accept 306,000 tons of municipal solid waste per year. Central Massachusetts Operations. The Company and the Town of South Hadley, Massachusetts have entered into a contract whereby the Company will operate the Town's 30-acre municipal solid waste landfill. The Town of South Hadley will retain full ownership of the South Hadley Landfill while the Company operates the facility. The Company is currently in the permitting process for the South Hadley Landfill and expects to have received all of its operating and construction permits by the third quarter of 1999. The Company anticipates that the South Hadley Landfill will be available to begin accepting solid waste at the first 10-acre lined cell during the second half of 1999. The South Hadley Landfill is currently expected to have approximately 2.00 million cubic yards of new capacity for future disposal. In July 1998, the Company acquired Mass Wood Recycling, Inc. in Oxford, Massachusetts, a permitted transfer station, with construction expected to commence during the first half of 1999. In August 1998, the Company acquired Mattei-Flynn Trucking, Inc. in Auburn, Massachusetts. This waste collection operation currently has an established customer base of approximately 1,500 residential customers and 2,300 other customers, including commercial, industrial and municipal customers and serves as a platform for company growth in this targeted regional market. Subsequently, the Company completed four tuck-in acquisitions, and has integrated these acquisitions with Mattei-Flynn's operations. The Company intends to integrate these collection operations with the Oxford Transfer Station and to eventually internalize the waste at the South Hadley Landfill. In addition, the Company has a long-term disposal agreement with a third party landfill in Southbridge, Massachusetts at very favorable rates through the year 2019. As a part of the agreement, the Company has a "Right of First Refusal" to purchase the landfill. 6 Central Upstate New York Operations. During the four months ended December 31, 1998, the Company entered the Central Upstate New York market with the acquisition of eleven collection operations and a transfer station in the general area between Syracuse and Utica, New York. At December 31, 1998, these waste collection operations serve approximately 11,300 residential customers and 1,600 other customers, including commercial, industrial and municipal customers. The Company selected the Central Upstate New York market for acquisition of collection operations and transfer stations in anticipation of the privatization of nearby landfills. The Company is currently evaluating opportunities for expansion and integration of its Central Upstate New York operations. In January 1999, the Company completed the acquisition of Santaro Trucking Co., Inc., a collection company located in Syracuse, New York which serves over 400 commercial customers. Competition Though the solid waste management industry has been substantially consolidated in certain markets, it generally is highly competitive and very fragmented and requires substantial labor and capital resources. Competition exists for collection, recycling, transfer and disposal services. The markets in which the Company competes or is likely to compete in are usually served by one or more of the large national, regional or local solid waste companies who may have greater financial, marketing or technical resources than the Company and may be able to achieve greater economies of scale than the Company. The Company also competes with counties, municipalities and operators of alternative disposal facilities that operate their own waste collection and disposal facilities. The availability of user fees, charges or tax revenues and the availability of tax-exempt financing may provide a competitive advantage to the public sector. Additionally, alternative disposal facilities such as recycling and incineration may reduce the demand for the disposal of solid waste in landfills. The Company competes for waste collection and disposal business on the basis of price, quality of service and geographical location. From time to time, competitors may reduce the price of their services in an effort to expand or maintain market share or to win competitively bid contracts. Competition also exists within the industry for acquisition targets where the Company may compete with publicly-owned national or regional solid waste management companies. Marketing and Sales The Company has a coordinated marketing and sales strategy to obtain solid waste streams which is formulated at the corporate level and implemented through regional management. The Company markets its services locally through regional managers and direct sales representatives who focus on commercial, industrial, municipal and residential customers. The Company markets its commercial, industrial and municipal services through its sales representatives who visit customers on a regular basis and make sales calls to potential new customers. These sales representatives receive a significant portion of their compensation based upon meeting certain incentive targets. The Company also obtains new customers from referral sources, its general reputation and local market print advertising. Leads are also developed from new building permits, business licenses and other public records. Additionally, each regional operation generally advertises in the yellow pages and other local business print media that cover its service area. The Company emphasizes customer satisfaction and retention, and believes that its focus on quality service will help retain existing and attract additional customers. Maintenance of a local presence and identity is an important aspect of the Company's marketing plan, and many of the Company's managers are involved in local governmental, civic and business organizations. The Company's name and logo, or, where appropriate, that of the Company's regional operations, are displayed on all Company containers and trucks. Additionally, the Company attends and makes presentations at municipal and state conferences and advertises in governmental associations' membership publications. No single customer of the Company individually accounted for more than 10% of Company revenues in the year ended December 31, 1998. 7 Government Regulation The Company and its customers are subject to extensive and evolving environmental laws and regulations that have been enacted in response to increased concern over environmental issues and technological advances. These regulations are administered by the U.S. Environmental Protection Agency ("EPA") and various other federal, state and local environmental, transportation and health and safety agencies. The Company believes that such laws and regulations have the effect of enhancing the potential market in which the Company operates by allowing the Company to offer economical solutions for regulatory problems to its customers and acquisition candidates. On the other hand, such laws and regulations represent a potential constraint on, and added expense with respect to, the Company's operation of projects for its customers or for its own account. In order to develop and operate a landfill project, the Company must go through several governmental review processes and obtain one or more permits and often zoning or other land use approvals. These permits and zoning or land use approvals are difficult and time consuming to obtain and may be opposed by various local authorities, abutters, and ad hoc citizens' groups. In connection with the Company's preliminary development of landfill projects, the Company will expend considerable time, effort and resources in complying with the governmental review and permitting process necessary to develop or increase the capacity of these landfills. Once obtained, operating permits generally must be periodically renewed and are subject to modification and revocation by the issuing agency. Furthermore, landfill operations are subject to challenge under statutory and common law regulation of "nuisances," in addition to statutes and regulations with respect to permits and other approvals. Similar permits and approvals are required for the development and operation of transfer stations, although the regulatory reviews of applications pertaining to transfer stations are generally less costly and time-consuming than the procedures conducted with respect to the permitting of landfills. The Company's landfill operations and transfer stations subject it to certain laws and regulations governing operational, monitoring, site maintenance, closure and post-closure, and financial assurance obligations which change from time to time and which could give rise to increased capital expenditures and operating costs. In connection with the Company's operation of landfills and transfer stations, the Company will expend considerable time, effort and resources in complying with these laws and regulations. Governmental authorities have the power to enforce compliance with these laws and regulations and to obtain injunctions or impose civil or criminal penalties in the case of violations. Failure to correct the problems to the satisfaction of the authorities could lead to curtailed operations, additional costs or even closure of a landfill or transfer station. The principal federal, state, and local statutes and regulations applicable to the Company's operations are as follows: The Resource Conservation and Recovery Act of 1976 ("RCRA"). RCRA regulates the generation, treatment, storage, handling, transportation and disposal of solid waste and requires states to develop programs to ensure the safe disposal of solid waste. RCRA divides solid waste into two groups, hazardous and non-hazardous. Wastes are generally classified as hazardous wastes if they (i) either (a) are specifically included on a list of hazardous wastes or (b) exhibit certain hazardous characteristics and (ii) are not specifically designated as non-hazardous. Wastes classified as hazardous under RCRA are subject to much stricter regulation than wastes classified as non-hazardous, and businesses that deal with hazardous waste are subject to regulatory obligations in addition to those imposed on handlers of non-hazardous waste. Among the wastes that are specifically designated as non-hazardous waste are household waste and "special" waste, including items such as petroleum contaminated soils, asbestos, shredder fluff and most non-hazardous industrial waste products. The EPA regulations issued under Subtitle C of RCRA (the "Subtitle C Regulations") impose a comprehensive "cradle to grave" system for tracking the generation, transportation, treatment, storage and disposal of hazardous wastes. The Subtitle C Regulations impose obligations on generators, transporters and disposers of hazardous waste, and require permits that are costly to obtain and maintain for sites where such material is treated, stored or disposed. Subtitle C requirements include detailed operating, inspection, training and emergency preparedness and response standards, as well as requirements for manifesting, record keeping and reporting, corrective action, facility closure, post-closure and financial responsibility. Most states have promulgated regulations modeled on some or all of the Subtitle C provisions issued by the EPA. Some state regulations impose different, additional or more stringent obligations. The Company is not involved with transportation or disposal of hazardous wastes, except for the occasional collection, at certain transfer stations, of hazardous wastes generated by "conditionally exempt small quantity generators" (as defined by RCRA). These hazardous wastes are then transported by properly permitted hazardous waste transporters for disposal at properly permitted hazardous waste disposal facilities that are owned by third parties. 8 In October 1991, the EPA adopted new regulations pursuant to Subtitle D of RCRA (the "Subtitle D Regulations"). These new regulations became generally effective in October 1993 (except for certain municipal solid waste landfills accepting less than 100 TPD, as to which the effective date was April 9, 1994, and new financial assurance requirements, which became effective April 9, 1997) and include location restrictions, facility design standards, operating criteria, closure and post-closure requirements, financial assurance requirements, groundwater monitoring requirements, groundwater remediation standards and corrective action requirements. In addition, these regulations require that new landfills meet more stringent liner design criteria (typically, composite soil and synthetic liners or two or more synthetic liners) designed to keep leachate out of groundwater and have extensive collection systems to control leachate for treatment prior to disposal. Groundwater wells must also be installed at virtually all landfills to monitor groundwater quality. The regulations also require, where threshold test levels are present, that methane gas generated at landfills be controlled in a manner that protects human health and the environment. Each state is required to revise its landfill regulations to meet these requirements or such requirements will be automatically imposed upon it by the EPA. Each state is also required to adopt and implement a permit program or other appropriate system to ensure that landfills within the state comply with the Subtitle D criteria. Many states, including Massachusetts, have adopted regulations or programs more stringent than the Subtitle D Regulations. The Federal Water Pollution Control Act of 1972 (the "Clean Water Act"). The Clean Water Act establishes rules regulating the discharge of pollutants from a variety of sources, including solid waste disposal sites, into waters of the United States. If runoff or collected leachate from the Company's landfills and transfer stations are discharged into streams, rivers or other surface waters of the United States, the Clean Water Act would require the Company to apply for and obtain a discharge permit, conduct sampling and monitoring and, under certain circumstances, reduce the quantity of pollutants in such discharge. Also, virtually all landfills are required to comply with federal storm water regulations, which are designed to prevent possibly contaminated storm water from flowing into surface waters. The Company is working with the appropriate regulatory agencies to ensure that its facilities are in compliance with Clean Water Act requirements, particularly as they apply to treatment and discharge of leachate and storm water. The Company has secured or has applied for the required discharge permits under the Clean Water Act or comparable state-delegated programs. To ensure compliance with the Clean Water Act pretreatment and discharge requirements, the Company has either installed wastewater treatment systems at its facilities to treat its effluent to acceptable levels before discharge or has arranged to discharge its effluent to municipal wastewater treatment facilities. The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("Superfund" or "CERCLA"). CERCLA establishes a regulatory and remedial program intended to provide for the investigation and cleanup of facilities from which there has been, or is threatened, a release of any hazardous substance into the environment. CERCLA's primary mechanism for remedying such problems is to impose strict joint and several liability for cleanup of facilities on current owners and operators of the site, former owners and operators of the site at the time of the disposal of the hazardous substances, as well as the generators of the hazardous substances and the transporters who arranged for disposal or transportation of the hazardous substances. The costs of CERCLA investigation and cleanup can be very substantial. Liability under CERCLA does not depend upon the existence or disposal of "hazardous waste" but can also be based upon the existence of even very small amounts of the numerous "hazardous substances" listed by the EPA, many of which can be found in household waste. If, for example, the Company were to be found to be a responsible party for a CERCLA cleanup at one of the Company's owned or operated facilities, the enforcing agency could hold the Company completely responsible for all investigative and remedial costs even if others may also be liable. CERCLA also authorizes the imposition of a lien in favor of the United States upon all real property subject to or affected by a remedial action for all costs for which a party is liable. The Company's ability to obtain reimbursement from others for their allocable share of such costs would be limited by the Company's ability to find other responsible parties and prove the extent of their responsibility and by the financial resources of such other parties. In the past, legislation has been introduced in Congress to limit the liability of municipalities and others under CERCLA as generators and transporters of municipal solid waste. Although such legislation has not been enacted, if it were to pass it would limit the Company's ability to seek full contribution from municipalities for CERCLA cleanup costs even if the hazardous substances that were released and caused the need for cleanup at one of the Company's facilities were generated by or transported to the facility by a municipality. The Clean Air Act. The Clean Air Act provides for regulation, through state implementation of federal requirements, of the emission of air pollutants from certain landfills based upon the date of the landfill construction and volume per year of emissions of regulated pollutants. The EPA has recently promulgated new source performance standards regulating air emissions of certain regulated pollutants (methane and non-methane organic compounds) from solid waste landfills. The EPA may also issue regulations controlling the emissions of particular regulated air pollutants from solid waste landfills. Landfills located in areas with air pollution problems may be subject to even more extensive air pollution controls and emission limitations. In addition, the EPA has issued standards regulating the removal, handling and disposal of asbestos-containing materials. 9 Each of the federal statutes described above contains provisions authorizing, under certain circumstances, the bringing of lawsuits by private citizens to enforce the requirements of the statutes. The Hazardous Materials Transportation Act. The transportation of hazardous waste is regulated both by the EPA pursuant to RCRA and by the federal Department of Transportation ("DOT") pursuant to the Hazardous Materials Transportation Act ("HMTA"). Pursuant to the HMTA, DOT has enacted regulations governing the transport of hazardous waste. These regulations govern, among other things, packaging of the hazardous waste during transport, labeling and marking requirements, and reporting of and response to spills of hazardous waste during transport. In addition, under both the HMTA and RCRA, transporters of hazardous waste must comply with manifest and record keeping requirements, which are designed to ensure that a shipment of hazardous waste is properly identified and can be tracked from its point of generation to point of disposal at a permitted hazardous waste treatment, storage or disposal facility. The Occupational Safety and Health Act of 1970 ("OSHA"). OSHA authorizes the Occupational Safety and Health Administration to promulgate occupational safety and health standards. Various of those promulgated standards, including standards for notices of hazards, safety in all aspects of the workplace, and specific standards relating to excavation, and the handling of asbestos, may apply to certain of the Company's operations. OSHA regulations set forth requirements for the training of employees handling, or who may be exposed in the workplace to, concentrations of asbestos-containing materials that exceed specified action levels. The OSHA regulations also set standards for employee protection, including medical surveillance, the use of respirators, protective clothing and decontamination units, during asbestos demolition, removal or encapsulation as well as its storage, transportation and disposal. In addition, OSHA specifies a maximum permissible exposure level for airborne asbestos in the workplace. Apart from receiving asbestos waste at the Company's landfills and transfer stations, the Company has no direct involvement in asbestos removal or abatement projects. State and Local Regulation. Each state in which the Company now operates or may operate in the future has laws and regulations governing the generation, storage, treatment, handling, transportation and disposal of solid and hazardous waste, water and air pollution and, in most cases, the siting, design, operation, maintenance, closure and post-closure maintenance of landfills and transfer stations. Certain state laws also contain provisions authorizing, under certain circumstances, the bringing of lawsuits by private citizens to enforce the requirements of those laws. In addition, many states have adopted "Superfund" statutes comparable to, and in some cases more stringent than, CERCLA. These statutes impose requirements for investigation and cleanup of contaminated sites and liability for costs and damages associated with such sites, and some provide for the imposition of liens on property owned by responsible parties. Furthermore, many municipalities also have ordinances, local laws and regulations affecting Company operations. These include zoning and health measures that limit solid waste management activities to specified sites or activities, flow control provisions that direct the delivery of solid wastes to specific facilities, laws that grant the right to establish franchises for collection services and then put out for bid for the right to provide collection services, and bans or other restrictions on the movement of solid wastes into a municipality. Certain permits and approvals may limit the types of waste that may be accepted at a landfill or the quantity of waste that may be accepted at a landfill during a given time period. In addition, certain permits and approvals, as well as certain state and local regulations, may limit a landfill to accepting waste that originates from specified geographic areas or seek to restrict the importation of out-of-state waste or otherwise discriminate against out-of-state waste. Generally, restrictions on the importation of out-of-state waste have not withstood judicial challenge. However, proposed federal legislation would allow individual states to prohibit the disposal of out-of-state waste or to limit the amount of out-of-state waste that could be imported for disposal and would require states, under certain circumstances, to reduce the amounts of waste exported to other states. If this or similar legislation is enacted, states in which the Company operates landfills could act to limit or prohibit the importation of out-of-state waste. Such state actions could adversely affect landfills within those states that receive a significant portion of waste originating from out-of-state. In addition, certain states and localities may for economic or other reasons restrict the exportation of waste from their jurisdiction or require that a specified amount of waste be disposed of at facilities within their jurisdiction. In 1994, the United States Supreme Court held unconstitutional, and therefore invalid, a local ordinance that sought to impose flow controls on taking waste out of the locality. However, certain state and local jurisdictions continue to seek to enforce such restrictions and, in certain cases, the Company may elect not to challenge such restrictions based upon various considerations. In addition, the aforementioned proposed federal legislation would allow states and localities to impose certain flow control restrictions. These restrictions could result in the volume of waste going to landfills being reduced in certain areas, which may adversely affect the Company's ability to operate its landfills at their full capacity and/or affect the prices that can be charged for landfill disposal services. 10 There has been an increasing trend at the federal, state and local level to mandate and encourage waste reduction at the source and waste recycling and to prohibit the disposal of certain types of solid wastes, such as yard wastes, in landfills. The enactment of regulations reducing the volume and types of wastes available for transport to and disposal in landfills could affect the Company's ability to operate its facilities at their full capacity. The Company believes that it is in material compliance with federal, state and local regulations based on the Company's internal review process which has not identified any material non-compliance and the Company has not received any verbal or written notification from any governmental agency to the contrary. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Certain Factors Affecting Future Operating Results -Potential Environmental Liability and Adverse Effect of Environmental Regulation." Employees As of December 31, 1998, the Company had 303 full time employees. As a result of the acquisitions subsequent to December 31, 1998, at March 24, 1999, the Company had 357 full time employees. The Company believes its future success will depend in part on its continued ability to recruit and retain highly qualified technical and managerial personnel. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Certain Factors Affecting Future Operating Results -Dependence on Management" and "-Ability to Manage Growth." The Company's employees are not subject to any collective bargaining agreement. The Company considers its relations with its employees to be good. Item 2. Properties The Company owns or leases and operates landfills, transfer stations, offices and other facilities in connection with its integrated solid waste management operations as described under "Business-Integrated Solid Waste Management Operations." In addition, the Company leases its corporate headquarters, located at 420 Bedford Street, Suite 300, Lexington, Massachusetts. The Company currently occupies approximately 11,000 square feet at the Lexington location under the terms of a lease expiring in March 2003, with annual rent of approximately $200,000 subject to escalation in future years. Item 3. Legal Proceedings Richard Rosen. Richard Rosen ("Rosen"), former Chairman, Chief Executive Officer and President of the Company, commenced an action against the Company in Middlesex County (Massachusetts) Superior Court, seeking an award of damages resulting from the Company's alleged breach of a Memorandum of Understanding entered into between the Company and Rosen in connection with the termination of Rosen's employment with the Company, in which Rosen had been granted an option to purchase certain assets of the Company not related to its core business. The Company believes this claim to be frivolous and is vigorously defending this action. The Company has previously received an arbitration award against Rosen directing Rosen to pay $780,160 for breach by Rosen of his employment agreement with the Company. On February 25, 1997 the Middlesex Superior Court in Cambridge, Massachusetts confirmed the arbitration award and entered judgment against Rosen. In addition to the matter set forth above, from time to time, in the ordinary course of its business, the Company is subject to legal proceedings and claims arising from the conduct of its business operations. In the opinion of the Company, the ultimate disposition of such matters on an aggregate basis will not have a material adverse effect on the Company's financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders None 11 PART II Item 5. Market For Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock is currently quoted on the NASDAQ Small-Cap Market under the symbol "WSII". The following table sets forth the high and low closing price of the common stock for the periods indicated and restated to reflect a one-for five reverse stock split effective February 13, 1998. High Low Fourth quarter ended December 31, 1998 $ 6.25 $ 4.38 Third quarter ended September 30, 1998 9.69 5.00 Second quarter ended June 30, 1998 9.81 5.94 First quarter ended March 31, 1998 7.38 3.00 Fourth quarter ended December 31, 1997 $ 5.00 $ 2.80 Third quarter ended September 30, 1997 3.15 1.40 Second quarter ended June 30, 1997 2.35 1.25 First quarter ended March 31, 1997 2.80 1.55 On March 24, 1999, the reported last sale price of the common stock on the NASDAQ Small-Cap Market was $4.50 per share, and there were 257 holders of record of common stock. The Company has never paid dividends on its Common Stock and has no present intention to pay dividends. The Company's intention is to retain future anticipated earnings to finance the expansion of its business. At December 31, 1997, the Company had outstanding $9,257,807 of principal amount Series A Convertible Preferred Stock, par value $0.001 per share ("Series A Preferred Stock"), which was issued in a private placement on June 26, 1997, bearing an 8.0% annual cumulative dividend and was convertible into common stock at a conversion price of $1.40625 per share of common stock. On July 27, 1998, the Company met the mandatory conversion trading requirements and elected to convert all of the remaining shares of Series A Preferred Stock into 6,590,577 shares of the Company's Common Stock and the Board of Directors declared and paid cash dividends of approximately $787,000. At December 31, 1997, the Company also had outstanding $4,048,750 of principal amount Series B Convertible Preferred Stock, par value $0.001 per share ("Series B Preferred Stock"). The Series B Preferred Stock was issued on December 31, 1997 in a private placement in exchange for outstanding convertible notes of the Company, bearing a 6.0% annual cumulative dividend, and was convertible into common stock at a conversion price of $6.25 per share of common stock. On May 14, 1998, the Company met the mandatory conversion trading requirements and elected to convert all of the shares of the Series B Preferred Stock into 623,808 shares of the Company's Common Stock and the Board of Directors declared and paid cash dividends of approximately $101,000. 12 Item 6. Selected Consolidated Financial and Operating Data SELECTED CONSOLIDATED FINANCIAL DATA (In thousands, except share and per share data) The following selected consolidated financial data for the five years ended December 31, 1998 have been derived from the Company's Consolidated Financial Statements, which have been audited by KPMG Peat Marwick LLP. The selected consolidated financial data presented below should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," which is included elsewhere in this Form 10-K. During 1998, the Company acquired two landfills, 31 solid waste collection companies and three transfer stations. Due to the significance of the acquired business operations to the Company's financial performance, the Company does not believe that its historical financial statements are necessarily indicative of future performance and as a result will affect the comparability of the financial information included herein. Fiscal Year Ended December 31 1998 1997 1996 1995 1994 -------- ------- -------- -------- ------ Statement of Operations Data: Revenues........................ $ 21,045 $ 3,458 $ 1,496 $ 1,344 $ -- Cost of operations: Operating expenses............ 12,400 1,719 921 766 -- Depreciation and amortization. 4,501 692 370 72 -- Acquisition integration costs(1) 1,864 -- -- -- -- Write-off of project development costs 236 1,495 6,652 -- -- -------- --------- --------- -------- --------- Total cost of operations... 19,001 3,906 7,943 838 -- --------- --------- --------- --------- --------- Gross profit (loss) ....... 2,044 (448) (6,447) 506 -- Selling, general and administrative expenses 4,483 2,138 2,433 3,286 1,485 Amortization of prepaid consulting fees -- -- 834 501 -- Restructuring(2)................ -- 596 1,741 -- -- --------- --------- --------- --------- --------- Loss from operations.......... (2,439) (3,182) (11,465) (3,281) (1,485) Other income (expense): Royalty and other income (expense), net (134) (516) 817 761 2,064 Interest expense and financing costs (4,074) (1,355) (1,182) (471) (152) Interest income............... 441 172 178 289 -- Write-off of accounts and notes receivable -- (568) -- (2,975) -- -------- --------- --------- --------- -------- Total other income (expense).. (3,767) (2,267) (187) (2,396) 1,912 --------- --------- --------- --------- -------- Income (loss) before income taxes, discontinued operations and extraordinary item............ (6,206) (5,449) (11,652) (5,677) 427 Federal and state income tax expense (benefit)..................... 43 6 (23) (110) 185 Discontinued operations......... -- -- (2,261) (2,303) -- Extraordinary item - loss on extinguishment of debt....................... (247) (134) -- -- -- -------- -------- --------- --------- --------- Net income (loss)............... $ (6,496) $ (5,589) $(13,890) $ (7,870) $ 242 Preferred stock dividends (3)... 888 -- -- 10 108 --------- --------- -------- --------- --------- Net income (loss) available for common stockholders(3)............ $ (7,384) $ (5,589) $(13,890) $ (7,880) $ 134 ======== ======== ========= ======== ========= Basic net income (loss) per share from continuing operations ........ $ (0.97) $ (1.51) $ (4.10) $ (2.88) $ 0.15 Weighted average number of shares used in computation of basic net income (loss) per share.............. 7,389,547 3,612,623 2,834,841 1,932,809 899,727 EBITDA (4)......................... $ 2,130 $(2,469) $ (9,909) $ (2,592) $(1,476) Adjusted EBITDA (5)................ $ 4,230 $ (378) $ (1,516) $ (2,592) $(1,476) Capital expenditures (excluding acquisitions) $ 9,032 $ 998 $ 6,599 $ 9,749 $ 807 Cash flow from operating activities $ 592 $(4,586) $ (3,912) $ (3,083) $ (209) Cash flow from investing activities $(71,939) $ 706 $ (7,641) $(10,267) $(1,588) Cash flow from financing activities $ 68,576 $ 6,579 $ 6,581 $ 18,416 $ 1,965 December 31, 1998 1997 1996 1995 1994 -------- ------- ------- ------- ------ Balance Sheet Data: Cash and cash equivalents.......... $ 194 $ 2,964 $ 265 $ 5,237 $ 171 Working capital.................... (6,520) 1,532 (4,508) 2,393 659 Total assets....................... 96,117 18,560 16,858 23,508 4,369 Long-term debt, less current portion 74,861 7,201 9,450 12,266 1,263 Total stockholders' equity (deficit) 1,739 5,972 (1,849) 3,292 597
13 (1) Acquisition integration costs consist of one-time, non-recurring costs, which in the opinion of management have no future value and, therefore, are expensed. Such costs include termination and retention of employees, lease termination costs, costs related to the integration of information systems and costs related to the change of name of the acquired company or business. (2) Prior to March 27, 1996, the Company had been actively developing environmental technologies with potential application in a number of business areas. On March 27, 1996, the Company announced its intention to take meaningful actions to conserve cash and working capital, including restructuring the Company's operations to focus its resources and activities on developing an integrated solid waste management operation. (3) In May and July 1998 the Company met the mandatory conversion trading requirements and elected to convert all of the remaining shares of the Company's Preferred Stock into shares of the Company's Common Stock and the Board of Directors declared and paid cash dividends of approximately $888,000. (4) EBITDA is defined as operating income or loss from continuing operations excluding depreciation and amortization, which includes depreciation and amortization included in selling, general and administrative expenses. EBITDA does not represent, and should not be considered as an alternative to, net income or cash flows from operating activities, each as determined in accordance with GAAP. Moreover, EBITDA does not necessarily indicate whether cash flow will be sufficient for such items as working capital or capital expenditures, or to react to changes in the Company's industry or to the economy in general. The Company believes that EBITDA is a measure commonly used by lenders and certain investors to evaluate a company's performance in the solid waste industry. The Company also believes that EBITDA data may help investors to understand the Company's performance because such data may reflect the Company's ability to generate cash flows, which is an indicator of its ability to satisfy its debt service, capital expenditures and working capital requirements. Because EBITDA is not calculated by all companies and analysts in the same fashion, the EBITDA measures presented by the Company may not be comparable to the similarly titled measures reported by other companies. Therefore, in evaluating EBITDA data, investors should consider, among other factors: the non-GAAP nature of EBITDA; actual cash flows; the actual availability of funds for debt service, capital expenditures and working capital; and the comparability of the Company's EBITDA data to similarly-titled measures reported by other companies. (5) Adjusted EBITDA is EBITDA after adjusting for one-time charges for write-off of landfill development costs, acquisition integration costs and restructuring charges. 14 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Company's Consolidated Financial Statements and the notes thereto. This Annual Report on Form 10-K contains forward-looking statements concerning among other things, the Company's expected future revenues, operations and expenditures and estimates of the potential markets for the Company's services. Such statements made by the Company fall within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All such forward-looking statements are necessarily only estimates of future results and the actual results achieved by the Company may differ materially from these projections due to a number of factors as discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations--Certain Factors Affecting Future Operating Results" of this Form 10-K. Introduction The Company is an integrated non-hazardous solid waste management company that provides solid waste collection, recycling, transfer and disposal services to commercial, industrial, residential and municipal customers within certain regional markets in the Northeast and Mid-Atlantic states, where it operates. The Company focuses on the operation of an integrated non-hazardous solid waste management business, including the ownership and operation of solid waste disposal facilities (landfills), transfer stations and solid waste collection services. The Company derives revenue from collecting solid waste from its customers, which it delivers for disposal in its own landfills, and also from unaffiliated waste collection companies who pay to dispose of waste in the Company's landfills. The Company seeks through its acquisition strategy to acquire substantial collection operations and transfer stations in association with its landfills in order to enhance its overall profitability and to increase its control over its sources of revenue. See "Business - Strategy" During 1998, the Company acquired a total of 34 companies including two landfills, 31 collection companies (2 of which included a transfer station) and one transfer station. Due to the significance of the acquired business operations to the Company's financial performance, the Company does not believe that its historical financial statements are necessarily indicative of future performance and as a result will affect the comparability of the financial information included herein. Revenues: Revenues represent fees charged to customers for solid waste collection, transfer, recycling and disposal services provided. Arrangements with customers include both long-term contractual arrangements and as-received disposal at prices quoted by the Company. Revenues for the periods presented in the consolidated statements of operations were derived from the following sources: Year ended December 31, 1998 1997 1996 ------- ------- ------- Collection 73.5% 12.8% - % Landfill 20.1 78.1 100.0 Transfer 6.4 9.1 - ---------- ---------- ------- Total Revenue 100.0% 100.0% 100.0% ========= ======== ====== For the purpose of this table, revenue is attributed fully to the operation where the Company first receives the waste. For example, revenue received from waste collected by the Company and disposed in a Company landfill is entirely attributed to collection. The increase in the Company's collection revenues as a percentage of total revenues during 1998 compared to 1997 is due primarily to the impact of the 31 collection companies acquired during 1998. The decrease in landfill and transfer station revenue as a percentage of revenues in 1998 compared to 1997 is due primarily to the acquisition of collection companies that had been disposing of their waste at the Company's transfer stations and landfills. These acquired revenues are now being recorded as collection revenue. 15 Recent Business Developments Senior Notes Offering and Debt Repayment. On March 2, 1999, the Company completed a private placement of $100.0 million of 11.5% Senior Notes (the "Senior Notes") and warrants to purchase an aggregate of 1,500,000 shares of common stock at an exercise price of $6.25 per share (the "Warrants"). The Senior Notes mature on January 15, 2006 and bear interest at 11.5% per annum, payable semi-annually in arrears on each January 15 and July 15, commencing July 15, 1999, subject to prepayment in certain circumstances. The interest rate on the Senior Notes is subject to adjustment upon the occurrence of certain events as provided in the Senior Notes Indenture. The Senior Notes may be redeemed at the option of the Company after March 2, 2003 at redemption prices set forth in the Senior Notes Indenture, together with accrued and unpaid interest. The Warrants are exercisable from September 2, 1999, through March 2, 2004. The number of shares for which, and the price per share at which, a Warrant is exercisable, are subject to adjustment upon the occurrence of certain events as provided in the Warrant Agreement. The net proceeds to the Company, after deducting the discount to the initial purchaser and related issuance costs, was approximately $97.3 million. The Company used a portion of the proceeds from the Senior Notes to repay $20.0 million of the Company's 13% short term notes due June 30, 1999, (the outstanding balance of the 13% short-term notes was $7.5 million at December 31, 1998) $10.0 million of the Howard Bank credit facility and approximately $1.7 million of capital leases and other notes payable. In addition, the Company redeemed approximately $1.45 million principal amount of the Company's 10% Convertible Subordinated Debentures due October 6, 2000 and completed several acquisitions as described below. The Company intends to use the balance of the proceeds for general corporate purposes, including possible future acquisitions and working capital. Conversion of Debt into Equity On March 3, 1999, the Company offered to exchange up to 2,244,109 shares of the Company's Common Stock for a portion of the Company's 7% Subordinated Notes due May 13, 2005. The exchange price per share of $4.63 was equal to the closing price of the Common Stock on the Nasdaq SmallCap Market on the first interim closing as reported by NASDAQ. Any accrued but unpaid interest on the Notes will be paid in cash. As a result of the exchange offer, the Company retired $10,390,000 of its 7% Convertible Subordinated Notes. The remaining 7% Convertible Subordinated Notes are convertible by holders into Common Shares at $10.00 per share. Stock Repurchase With the proceeds of the Senior Notes, the Company repurchased 497,778 shares of the Company's common stock from the Federal Deposit Insurance Corporation (FDIC) for an aggregate purchase price of approximately $2.8 million. Acquisitions Since December 31, 1998 through March 24, 1999, the Company has completed six acquisitions, consisting of 5 collection operations and one landfill. The aggregate purchase price for these acquisitions was approximately $38 million which was paid in cash and the assumption of approximately $3 million of debt. These acquisitions have combined annual revenue of approximately $12 million. The acquisitions have all been recorded using the purchase method of accounting. 16 The following table sets forth, for the periods indicated, certain data derived from the Company's Consolidated Statements of Operations, expressed as a percentage of revenues: Year ended December 31, 1998 1997 1996 ------------- ----------- ------------ Revenues 100.0 % 100.0 % 100.0% Operating expenses 58.9 49.7 61.6 Depreciation and amortization 21.4 20.0 24.7 Acquisition integration costs 8.9 - - Write-off of project development costs 1.1 43.3 444.7 ---------- --------- -------- Total cost of operations 90.3 113.0 531.0 ----------- --------- -------- Gross profit (loss) 9.7 (13.0) (431.0) Selling, general and administrative expenses 21.3 61.8 163.3 Restructuring - 17.2 116.5 Amortization of prepaid consulting fees - - 55.8 ----------- ---------- -------- Loss from operations (11.6) (92.0) (766.6) Royalty and other income (expense), net (0.6) (14.9) 62.5 Interest income 2.1 5.0 11.9 Interest expense and financing costs (19.4) (39.2) (79.0) Equity in loss of affiliate - - (6.4) Write off of assets - - (1.5) Write off of accounts receivable - (16.4) - ---------- ---------- -------- Total other income (expense) (17.9) (65.5) (12.5) Income tax expense 0.2 0.2 (1.6) Loss from continuing operations (29.7) (157.7) (777.5) Discontinued operations - - (151.2) ----------- ------- --- -------- Loss before extraordinary item (29.7) (157.7) (928.7) Extraordinary item (1.2) (3.9) - ------------- ----------- ------- Net loss (30.9)% (161.6)% (928.7)% ============ ======== ========= EBITDA 10.1% (71.4)% (662.0)% ============ =========== ========== Adjusted EBITDA 21.9% (10.9%) (101.3)% ============ =========== ===========
17 Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Revenues. Revenues for 1998 increased by $17,587,000 or 509% to $21,045,000 from $3,458,000 in 1997. Thirty-four acquisitions completed by the Company in 1998 accounted for approximately $15.8 million or 90% of the increase. The balance of the increase is the result of the internal growth within the Vermont operations during 1998. The growth in the Vermont operations was due to the full year's operation of the CSWD Transfer Station, which was acquired in the fourth quarter of 1997, increased volume and prices at the Moretown Landfill and internal growth at the Company's collection operations. Cost of operations. Operating expenses for 1998 was approximately $12,400,000 compared to $1,719,000 for 1997. The increase of $10,681,000 was primarily due to the 34 acquisitions completed by the Company in 1998 and the related increase in revenue. As a percentage of sales, operating expenses increased to approximately 59% in 1998 from approximately 50% in 1997. This increase was primarily due to the change in revenue mix, with a much larger portion of the revenue coming from collection operations, which typically experience much higher operating expenses than landfill operations. The Company internalizes a significant portion of its waste collected in Vermont and Pennsylvania, which significantly reduces costs of operations as a percentage of revenue. The Company's New York and Massachusetts operations do not yet have landfills where waste can be internalized. Operating costs, disposal costs, and collection fees vary widely throughout the geographic areas in which the Company operates. The prices that the Company charges are determined locally, and typically vary by the volume or weight, type of waste collected, frequency of collections, distance to final disposal sites, labor costs and amount and type of equipment furnished to the customer. Depreciation and amortization. Depreciation and amortization expense was $4,501,000 and $692,000 for the years ended 1998 and 1997, respectively. The increase of $3,809,000 was primarily due to the additional depreciation and amortization related to the Company's 34 acquisitions completed during 1998. During 1998, the Company purchased property and equipment of approximately $24,298,000 related to the acquisitions. ($7,522,000 of this amount was for assets under development not placed into service in 1998.) Goodwill and other intangible assets totaling approximately $35,171,000 were also recorded in connection with the acquisitions. In addition, the Company purchased approximately $3,094,000 of property and equipment necessary for its ongoing operations, including costs to improve efficiencies at several of the acquired companies. Finally, landfill amortization costs in Vermont increased due to increased usage of the Moretown landfill in 1998. The Company had costs of approximately $5,456,000 for construction of Cell 2 at the Moretown landfill and other development costs related to the Mostoller and South Hadley landfill and the Transfer Station in Oxford Massachusetts totaling approximately $480,000. These costs did not impact operating results as they were not placed into service in 1998. Acquisition integration costs. Acquisition integration costs consist of one-time, non-recurring costs, which in the opinion of management have no future value and, therefore, are expensed. Such costs include termination and retention of employees, lease termination costs, costs related to the integration of information systems and costs related to the change of name of the acquired company or business.These charges are estimated and accrued at the time the acquisition is closed. The estimates are reviewed frequently by Company management and the related operation teams integrating the new acquisitions and adjusted as required. Acquisition integration costs totaled $1,864,000 for 1998. Write-off of landfill development costs. Write-off of landfill development costs were $236,000 and $1,495,000 for 1998 and 1997, respectively. The write-off of landfill development costs is related to the termination of the Company's contract for remodeling and operation of a landfill in Fairhaven, Massachusetts. See footnote 17 "Fairhaven Massachusetts Operation" in the financial statements included in Item 8. The 1998 expense of $236,000 represents the final charges related to the termination of the project. There are no remaining accruals at December 31, 1998. 18 Selling, general and administrative expenses. Selling, general and administrative expenses increased $2,344,000 in 1998 to $4,482,000 from $2,138,000 in 1997. As a percentage of revenue, selling, general and administrative expenses decreased to 21.3% in 1998 from 61.8% in 1997. The dollar increase was due to efforts by the Company to build infrastructure to sustain its significant growth through acquisition and to support the several corporate initiatives designed to implement its strategy. The Company expects spending growth to continue moderately into 1999 as the Company continues to implement its growth through acquisition strategy. The decrease as a percentage of revenue was primarily due to the expanded revenue base and related efficiencies, as the Company is able to purchase "tuck-in" acquisitions that increase revenues and improve margins without adding significant administrative costs. The Company anticipates that in future periods its selling, general and administrative expenses should continue to decrease as a percentage of revenue as it leverages its current corporate overhead to revenue growth primarily through acquisitions. Restructuring. During 1996, the Company announced its intention to restructure the Company's operations to focus its resources and activities on developing an integrated solid waste management operation. See footnote 16 "Restructuring and Discontinued Operations" in the financial statements included in Item 8. The restructuring was completed in 1997. Restructuring charges for 1997 totaled $596,000 which consisted of costs incurred for employee severance, non-cancelable lease commitments, professional fees and litigation costs. No charges were recorded in 1998. Royalty and other income (expense). Royalty and other income (expense) was approximately ($134,000) and ($516,000) in 1998 and 1997, respectively. Royalty and other income (expense) primarily relates to the Company's medical waste treatment proprietary technologies. Interest expense and financing costs, net. Interest expense for 1998 was approximately $3,633,000, net of interest income of $441,000 as compared to approximately $1,182,000 net of interest income of $172,000 for 1997. The increase resulted primarily from significant increases in debt necessary to finance the acquisitions and capital needs of the Company. During 1998 and 1997, the Company capitalized interest expense of $360,000 and $24,000, respectively related to construction costs for the Mostoller and South Hadley landfills and the Transfer Station in Oxford Massachusetts discussed above.. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Revenues. Revenues for 1997 increased by $1,962,000 to $3,458,000 from $1,496,000 in 1996. The increase of 131% was due primarily to the increased waste volume accepted at the Moretown Landfill, in its first full year of operation, the acquisition through a lease/purchase arrangement on October 6, 1997 of the Chittenden Solid Waste District ("CSWD") transfer station located in Williston, Vermont and the internal growth of the Company's collection operations. All 1997 revenues were generated from the Company's Vermont operations as compared to 1996, where approximately $1,157,000 or 77% was generated from the Company's operations at the Fairhaven Landfill. Cost of operations. Operating expenses for 1997 was approximately $1,718,000 compared to $921,000 in 1996. The increase of $797,000 was primarily due to the growth of the Company's Vermont operations. During 1997, the Company's Vermont operations expanded as a result of the Company's purchase of a collection company and its acquisition through a lease/purchase arrangement of the CSWD transfer station. Depreciation and amortization. Depreciation and amortization expense was $692,000 and $370,000 for the years ended 1997 and 1996, respectively. The increase of $322,000 or 87% was due primarily to the growth in the operation at the Moretown Landfill which resulted in increased amortization of capitalized landfill costs and to a substantial increase in capital equipment used in the Company's other Vermont operations. Write-off of landfill development costs. Write-off of landfill development costs were $1,495,000 and $6,652,000 for the years ended 1997 and 1996, respectively. The write-off of landfill development costs is related to the Fairhaven Landfill. Selling, general and administrative expenses. Selling, general and administrative expenses for 1997 were approximately $2,138,000, a decrease of 12.5% from 1996. The decrease was due to the restructuring undertaken in March of 1996 and to the cessation of operations at the Fairhaven Landfill. The decrease was partially offset by increases in selling, general and administrative expenses at the Company's Vermont operations and general corporate expenses due to the building of an infrastructure necessary to support increases in acquisition, operating and administrative activities. 19 Restructuring. Prior to March 27, 1996, the Company had been actively developing environmental technologies with potential application in a number of business areas. On March 27, 1996, the Company announced its intention to take meaningful actions to conserve cash and working capital, including restructuring the Company's operations to focus its resources and activities on developing an integrated solid waste management operation. As part of the restructuring, the Company ceased operations at its technology center in Woburn, Massachusetts, and discharged all employees and consultants previously engaged in developing technologies with potential application in certain environmental related activities, including the manufacture of useful materials from tires and other recycled materials, contaminated soil cleanup and recycling, industrial sludge disposal, size reduction equipment design and manufacture (the "Ancillary Technologies"), and Major Sports Fantasies, Inc. ("MSF"), a business unrelated to the environmental industry. No substantial revenues were received from the technology center operations or MSF activities. Restructuring charges for 1997 and 1996 were $596,000 and $1,742,000, respectively, which consisted of costs incurred for employee severance, non-cancelable lease commitments, professional fees and litigation costs. Royalty and other income (expense). Royalty and other income (expense) decreased approximately $1,451,000 in 1997 to ($516,000) from $935,000 in 1996. The decrease in 1997 was due to the termination of one of the Company's licensing agreements with ScotSafe Limited ("ScotSafe"). Interest expense and financing costs. Interest expense for 1997 was approximately $1,182,000 net of interest income of $172,000 as compared to approximately $1,004,000 net of interest income of $178,000 for 1996. The increase resulted primarily from additional indebtedness incurred in connection with acquisitions and capital expenditures for the Company's Vermont operations. During 1997 and 1996, the Company capitalized interest expense of $24,000 and $42,000, respectively related to construction costs. Write-off of accounts receivable. During the fourth quarter of 1997, the Company wrote-off an uncollectible receivable due from ScotSafe of approximately $568,000. Liquidity and Capital Resources The Company's business is capital intensive. The Company's capital requirements, which are substantial, include acquisitions, property and equipment purchases and capital expenditures for landfill cell construction, landfill development and landfill closure activities. Principally due to these factors, the Company may incur working capital deficits. The Company plans to meet its capital needs through various financing sources, including internally generated funds, equity securities and debt. On May 13, 1998, the Company closed on an offering of $60.0 million 7% Convertible Subordinated Notes which resulted in net proceeds to the Company of approximately $58.3 million. As discussed in "Recent Business Developments", on March 2, 1999, the Company completed a private offering of 11 1/2% Senior Notes in the aggregate principal amount of $100 million due January 15, 2006 which resulted in net proceeds to the Company of approximately $97.3 million. The Company has used the proceeds from these Debt offerings to complete various acquisitions during 1998 and 1999. In addition, the Company has repaid other outstanding debt obligations, repurchased 497,778 shares of the Company's common stock from the Federal Deposit Insurance Corporation (FDIC) for an aggregate purchase price of approximately $2.8 million, and fund the Company's growth, including infrastructure. The Company intends to use the balance of the proceeds for general corporate purposes, including possible future acquisitions and working capital. In addition, approximately $10,390,000 of the 7% Convertible Subordinated Notes were exchanged into common stock during March 1999 through an exchange offering. The Company intends to continue its strategy to aggressively pursue and develop an integrated solid waste management company, primarily through acquisitions. There can be no assurance that additional debt or equity financing will be available, or available on terms acceptable to the Company. Any failure of the Company to obtain required financing would have a material adverse effect on the Company's financial condition and results of operations. The Company maintains an acquisitions department that is responsible for the identification, due diligence, negotiation and closure of acquisitions. The Company believes that a combination of internally generated funds, additional debt and equity financing and the proceeds from the Notes will provide adequate funds to support the Company's cost structure, acquisition strategy and working capital requirements for the foreseeable future. 20 In connection with its growth strategy, the Company currently is and at any given time will be involved in potential acquisitions that are in various stages of exploration and negotiation (ranging from initial discussions to the execution of letters of intent and the preparation of definitive agreements), some of which may, if consummated, be material. No assurance can be given, however, that the Company will be successful in completing further acquisitions in accordance with its growth strategy, or that such acquisitions, if completed, will be successful. During 1998, the Company acquired a total of 34 companies, including eleven collection companies (one of which included a transfer station) in Vermont, five collection companies and two landfills in Central Pennsylvania, three collection companies and a transfer station in Central Massachusetts and twelve collection companies (one of which included a transfer station) in Central Upstate New York. The aggregate cost of these acquisitions was approximately $61.4 million consisting of approximately $58.3 million in cash, $3.4 million in common stock and approximately $1.5 million in assumed liabilities. Acquisition integration costs for the year ended December 31, 1998, related to the acquisitions in Vermont, Central Pennsylvania, Central Massachusetts and Central Upstate New York, were approximately $1,865,000. The Company generated net cash from operating activities for 1998 approximately $592,000. In 1997, the Company used approximately ($4,586,000) for operating activities. The improved cash flow from operations in 1998 was due primarily to the increased revenues which were offset by related increases in cost of operations, integration costs and selling, general and administrative expenses. The remainder of the cash flow increase was due to changes in the operating assets and liabilities including increases in accounts payable, accrued expenses and deferred revenue. These were offset by an increase in accounts receivable. EBITDA increased by approximately $4,599,000 during 1998 to approximately $2,130,000 from negative EBITDA of approximately ($2,469,000) in 1997. As a percentage of revenue, EBITDA increased to 10.1% during 1998 from (71.4%) in 1997. Adjusted EBITDA increased by approximately $4,608,000 during 1998 to approximately $4,230,000 from negative Adjusted EBITDA of approximately ($378,000) in 1997. As a percentage of revenue, Adjusted EBITDA increased to 21.9% in 1998 compared to (10.9%) in 1997. Net cash used by investing activities during 1998 was approximately $71,939,000 compared to cash generated of approximately $706,000 in 1997. Of the net cash used by investing activities in 1998, approximately $58,340,000 million was used for the acquisition of landfill, collection and transfer operations in Vermont, Central Pennsylvania, Central Massachusetts and Central Upstate New York. In addition, the Company placed deposits for future acquisitions totaling $2,211,000. Additional capital expenditures of approximately $9,032,000 were made to develop Cell 2 at the Company's Moretown landfill and to increase operating efficiencies at the Company's Vermont, Central Pennsylvania, Central Massachusetts and Central Upstate New York operations. Other investing activity included the acquisition of various long-term permits necessary to operate the landfills and for long-term prepaid disposal costs. The net cash generated by investing activities for 1997 was primarily due to the reduction in collateral requirements on the Vermont Landfill closure and post-closure performance bond of approximately $1,000,000 and the proceeds from the sale of the Fairhaven equipment for approximately $800,000. These were offset by capital expenditures at the Company's Vermont operation. The Company's capital expenditures and capital needs for acquisitions have increased significantly, reflecting the Company's rapid growth by acquisition and development of revenue producing assets, and will increase further as the Company continues to complete acquisitions. Total capital expenditures are expected to further increase during 1999 due to acquisitions, ongoing construction of Cell 2 at the Moretown Landfill, the development and construction of the Mostoller and South Hadley Landfills and construction of the transfer station in Central Massachusetts. Net cash provided by financing activities during 1998 was approximately $68,576,000 compared to $6,579,000 in 1997. The increase in 1998 was due primarily to the receipt of the net proceeds of $58.3 million related to the 7% Convertible Subordinated Notes, borrowings under the Company's bank credit facility of $10 million, $7.5 million in additional short-term financing from a related party stockholder and borrowings for equipment purchases of approximately $9.0 million. The proceeds were offset by principal repayments of debt of approximately $15.2 million and dividend payments on the Preferred Stock of approximately $888,000. The Company has a $10 million line of credit facility with The Howard Bank, N.A. which was fully drawn as of December 31. The entire balance was repaid on March 2, 1999 with the proceeds from the Senior Notes. The Company is currently negotiating an expansion of this facility with The Howard Bank. At December 31, 1998, the Company had approximately $83.1 million of short-term and long-term debt. Based upon its current operating plan, the Company believes that its cash and cash equivalents, available borrowings, future cash flow from operations and the proceeds of future debt and equity financings will satisfy the Company's working capital needs for the foreseeable future. However, there can be no assurances in this regard. See Certain Factors Affecting Future Operating Results-Substantial Increased Leverage," and "-Uncertain Ability to Finance the Company's Growth." 21 Certain Factors Affecting Future Operating Results History of Losses During the fiscal years ending December 31, 1998, 1997 and 1996, the Company suffered net losses (including non-recurring charges) of approximately ($6,496,000), ($5,589,000), and ($13,890,000), respectively, on revenues of $21,045,000, $3,458,000, and $1,496,000, respectively. Following its restructuring in 1996 in which the Company directed its focus on becoming an integrated solid waste management company, the Company implemented a business strategy based on aggressive growth through acquisitions. The Company's ability to become profitable, and to maintain such profitability, as it pursues its business strategy will depend upon several factors, including its ability to (i) execute its acquisition strategy and expand its revenue generating operations while not proportionately increasing its administrative overhead, (ii) locate sufficient additional financing to fund acquisitions, and (iii) continually adapt to changing conditions in the competitive market in which it operates. Outside factors, such as the economic and regulatory environments in which it operates will also have an effect on the Company's business. Substantial Increased Leverage In connection with its business strategy, the Company has incurred and expects to incur substantial indebtedness, resulting in a highly leveraged capital structure. The Company's substantial indebtedness could have important consequences, including limiting the Company's ability to fund future working capital, capital expenditures and other general corporate requirements. This may increase the Company's vulnerability to adverse economic and industry conditions; requiring the Company to dedicate a substantial portion of its cash flow from operations to payments on the Company's indebtedness, thereby reducing the availability of the Company's cash flow to fund working capital, capital expenditures and other general corporate purposes; limiting the Company's flexibility in planning for, or reacting to, changes in the Company's business and the industry in which the Company operates; placing the Company at a competitive disadvantage compared to the Company's competitors that have less indebtedness and limiting the Company's ability to borrow additional funds. Uncertain Ability to Finance the Company's Growth The Company will require substantial funds to complete and bring to commercial viability all of its currently planned projects. The Company also anticipates that future business acquisitions will be financed through cash from operations, the proceeds from the Senior Notes, borrowings under its bank credit facility, offering the Company's stock as consideration for acquisitions or additional equity or debt financings. Therefore, the Company's ability to satisfy its future capital and operating requirements is dependent on a number of pending or future financing activities, none of which is assured successful completion. Ability to Identify, Acquire and Integrate Acquisition Targets The future success of the Company is highly dependent upon the Company's continued ability to successfully identify, acquire and integrate additional solid waste collection, recycling, transfer and disposal businesses. As competition for acquisition candidates increases within the solid waste management industry, the availability of suitable candidates at terms favorable to the Company may decrease. The Company competes for acquisition candidates with larger, more established companies that may have significantly greater capital resources than the Company, which can further decrease the availability of suitable acquisition candidates. There can be no assurance that the Company will be able to identify suitable acquisition candidates, obtain necessary financings on favorable terms or successfully integrate any acquisitions with current operations. The Company believes that a significant factor in its ability to consummate acquisitions will be the attractiveness of the Company's Common Stock as consideration for potential acquisition targets. This attractiveness may, in large part, be dependent upon the relative market price and capital prospects of the Company's equity securities as compared to the equity securities of its competitors. If the market price of the Company's Common Stock were to decline, the Company's ability to implement its acquisition program through the issuance of its Common Stock could be materially adversely affected. Ability to Manage Growth The Company's objective is to continue to grow by expanding its services in markets where it can be one of the largest and most profitable fully-integrated solid waste management companies. Accordingly, the Company may experience periods of significant rapid growth. Such growth, if it were to occur, could place a significant strain on the Company's management and its operational, financial and other resources. Any failure to expand its operational and financial systems and controls or to recruit appropriate personnel in an efficient manner at a pace consistent with such growth could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's future success is also highly dependent upon its continuing ability to identify, hire, train and motivate highly qualified personnel. The Company faces competition for hiring such personnel from other companies, government entities and other organizations. There can be no assurance that the Company will be successful in attracting and retaining qualified personnel as required for its projected operations. The inability to attract and retain qualified personnel could have a material adverse effect upon the Company's business, financial condition and results of operations. 22 Limitations on Landfill Permitting and Expansion The Company's operations depend on its ability to expand the landfills it owns or operates and develop or acquire new landfill sites. There can be no assurance that the Company will be successful in obtaining new landfill sites or expanding the permitted capacity of its existing landfills. The process of obtaining required permits and approvals to operate and expand landfills and transfer stations has become increasingly difficult and expensive. The process can take several years and involves hearings and compliance with zoning, environmental and other requirements. There can be no assurance that the Company will be successful in obtaining and maintaining required permits. Even when granted, final permits to expand are often not approved until the remaining capacity of a landfill is very low. In the event the Company exhausts its permitted capacity at one of its landfills, the Company's ability to expand internally will be limited and the Company will be required to cap and close such landfill. In addition, the Company could be forced to dispose of its waste at landfills operated by its competitors. The additional costs could have a material adverse effect on the Company's business. Dependence on Management The Company's future success is highly dependent upon the services of its executive officers, particularly Philip Strauss, Chairman, Chief Executive Officer and President of the Company, and Robert Rivkin, Executive Vice President-Acquisitions, Chief Financial Officer, Treasurer and Secretary of the Company. The Company has obtained key executive insurance policies in the amount of $1.0 million with respect to each of Messrs. Strauss and Rivkin. The loss of the services of Mr. Strauss or Mr. Rivkin could have a material adverse effect on the Company's business, financial condition and results of operations. Competition The solid waste management industry is highly competitive, very fragmented and requires substantial labor and capital resources. Competition exists for collection, recycling, transfer and disposal services, and acquisition targets. The markets the Company competes or is likely to compete in are usually served by one or more of the large national, regional or local solid waste companies who may have accumulated substantial goodwill and/or have greater financial, marketing or technical resources than those available to the Company. The Company also competes with counties, municipalities and operators of alternative disposal facilities that operate their own waste collection and disposal facilities. The availability of user fees, charges or tax revenues and the availability of tax-exempt financing may provide a competitive advantage to the public sector. Additionally, alternative disposal facilities such as recycling and incineration may reduce the demand for the disposal of solid waste in landfills. Competition for waste collection and disposal business is based on price, the quality of service and geographical location. From time to time, competitors may reduce the price of their services in an effort to expand or maintain market share or to win competitively bid contracts. There can be no assurance that the Company will be able to successfully bid such contracts or compete with the larger and better-capitalized companies. Geographic Concentration of Operations The Company has established solid waste management operations in Vermont, Central Pennsylvania, Central Massachusetts and Central Upstate New York. Since the Company's current primary source of revenues will be concentrated in these geographic locations, the Company's business, financial condition and results of operations could be materially affected by, without limitation, the following: (i) downturns in these local economies, (ii) severely harsh weather conditions and (iii) state regulations. Additionally, the growing competition within the local economies for waste streams may make it increasingly difficult to expand within these regions. There can be no assurance that the Company will be able to continue to increase the waste stream to its landfills or be able to expand its geographic markets to mitigate the effects of adverse events that may occur in these regions. Seasonally The Company's revenues and results of operations tend to vary seasonally. The winter months of the fourth and first quarters of the calendar year tend to yield lower revenues than those experienced in the warmer months of the second and third quarters. The primary reasons for lower revenues in the winter months include, without limitation: (i) harsh winter weather conditions which can interfere with collection and transportation, (ii) the construction and demolition activities which generate landfill waste are primarily performed in the warmer seasons and (iii) the volume of waste in the region is generally lower than that which occurs in warmer months. The Company believes that the seasonally of the revenue stream will not have a material adverse effect on the Company's business, financial condition and results of operations on an annualized basis. 23 Environmental and Government Regulations The Company and its customers operate in a highly regulated environment, and in general the Company's landfill projects will be required to have federal, state and/or local government permits and approvals. Any of these permits or approvals may be subject to denial, revocation or modification under various circumstances. In addition, if new environmental legislation or regulations are adopted or existing legislation or regulations are amended or are interpreted or enforced differently, the Company or its customers may be required to obtain additional operating permits or approvals. There can be no assurance that the Company will meet all of the applicable regulatory requirements. Any delay in obtaining required permits or approvals will tend to cause delays in the Company's ability to obtain project financing, resulting in increases in the Company's need to invest working capital in projects prior to obtaining more permanent financing, and will also tend to reduce project returns by deferring the receipt of project revenues. In the event that the Company is required to cancel any planned project as a result of the inability to obtain required permits or other regulatory impediments, the Company may lose any investment it has made in the project up to that point, and the cancellation of any landfill projects may have a materially adverse effect on the Company's financial condition and results of operations. Potential Environmental Liability and Adverse Effect of Environmental Regulation The Company's business exposes it to the risk that it will be held liable if harmful substances escape into the environment and cause damages or injuries as a result of its operating activities. Moreover, federal, state and local environmental legislation and regulations require substantial expenditures and impose significant liabilities for non-compliance. The Company believes that it is currently in material compliance with all applicable environmental laws. Potential Adverse Community Relations The potential exists for unexpected delays, costs and litigation resulting from community resistance and concerns relating to existing and acquired operations and proposed future development of solid waste facilities. Performance or Surety Bonds and Letters of Credit The Company may be required to post a performance bond, surety bond or letter of credit to ensure proper closure and post-closure monitoring and maintenance at its landfills and transfer stations. Failure to obtain performance bonds, surety bonds or letters of credit in sufficient amounts or at acceptable rates may have a material adverse effect on the Company's business, financial condition and results of operations. Environmental Impairment Liability Insurance The Company has obtained environmental impairment liability insurance covering claims for the sudden or gradual onset of environmental damage to the extent of $5 million per landfill. If the Company were to incur liability for environmental damage in excess of its insurance limits, its financial condition could be adversely affected. The Company also carries a comprehensive general liability insurance policy, which management considers adequate at this time to protect its assets and operations from other risks. Adequacy of Accruals for Closure and Post-Closure Costs The Company has material financial obligations relating to closure and post-closure costs of its existing landfills and any landfill it may purchase or operate in the future. The Company estimates and accrues closure and post-closure costs based on engineering estimates of landfill usage and remaining landfill capacity. There can be no assurance that the Company's financial obligations for closure and post-closure costs will not exceed the amount accrued, which, if it occurs, may have a material adverse effect on the Company's business, financial condition and results of operations. 24 Capital Expenditures The Company capitalizes, in accordance with GAAP, certain expenditures and advances relating to acquisitions, pending acquisitions and landfill projects. The Company's policy is to expense in the current period all unamortized capital expenditures and advances relating to any operation that is permanently shut down or any acquisition that will not be consummated and any landfill project that is terminated. Thus, the Company may be required to incur a charge against earnings in future periods that could have a material adverse effect on the Company's business, financial condition and results of operations. Year 2000 Compliance The statements in the following section include the "Year 2000 readiness disclosure" within the meaning of the Year 2000 Information and Readiness Disclosure Act. Please refer to the information located at the beginning of this Item 7 regarding forward-looking statements contained in this section. The Company is assessing the readiness of its systems for handling the Year 2000. Although the assessment is still underway, management currently believes that all material systems will be compliant by Year 2000 and that the costs associated with this are not material. The Company has incurred only minimal costs to date associated with the Year 2000 issue. The Company is in the process of identifying key third-party vendors to understand their ability to continue providing services through Year 2000. The Company uses well-regarded nationally known software vendors for both its general accounting applications and industry-specific customer information and billing systems. The Company is implementing a new general accounting package which will be fully Year 2000 compatible, and the provider of the solid waste industry customer information and billing system is Year 2000 compatible. The Company's banking arrangements are with national banking institutions, which are taking all necessary steps to insure its customers' uninterrupted service throughout applicable Year 2000 timeframes. The Company's payroll is performed out-of-house by the largest provider of third party payroll services in the country, which has made a commitment of uninterrupted service to their customers throughout applicable Year 2000 timeframes. While the Company currently expects that the Year 2000 issue will not cause significant operational problems, delays in the implementation of new information systems, or failure to fully identify all Year 2000 dependencies in the Company's systems and in the systems of suppliers and financial institutions could have material adverse consequences. Therefore, the Company is developing contingency plans for continuous operations in the event such problems arise. Inflation The Company does not believe its operations have been materially affected by inflation. 25 Item 8. Financial Statements and Supplementary Data WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES Index to Consolidated Financial Statements Page Independent Auditors' Report 27 Consolidated Balance Sheets at December 31, 1998 and 1997 28 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 29 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 30-31 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1998, 1997 and 1996 32 Notes to Consolidated Financial Statements 33-48 26 Independent Auditors' Report The Board of Directors Waste Systems International, Inc.: We have audited the accompanying consolidated balance sheets of Waste Systems International, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Waste Systems International, Inc. and subsidiaries as of December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Boston, Massachusetts March 12, 1999 27 WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, December 31, Assets 1998 1997 ------ ---------------- ---------------- Current assets: Cash and cash equivalents $ 193,613 $ 2,964,274 Accounts receivable, less allowance for doubtful accounts of - - $222,028 and $45,833 in 1998 and 1997, respectively 5,235,534 944,793 Prepaid expenses and other current assets (Note 4) 4,769,285 1,366,092 ---------------- ---------------- Total current assets 10,198,432 5,275,159 Restricted cash and securities 39,842 254,000 Property and equipment, net (Notes 2, 3 and 5) 44,685,735 12,487,183 Intangible assets, net (Notes 2, 3 and 6) 38,059,374 96,832 Other assets 3,133,316 447,080 ---------------- ---------------- Total assets $ 96,116,699 $ 18,560,254 ================ ================ Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt and notes payable (Note 7) $ 8,259,922 $ 843,831 Accounts payable 3,849,632 353,937 Accrued expenses (Note 8) 2,742,409 2,544,995 Deferred revenue 1,866,128 - ---------------- ---------------- Total current liabilities 16,718,091 3,742,763 Long-term debt and notes payable (Note 7) 64,861,187 7,201,262 Landfill closure and post-closure costs (Notes 2 and 10) 2,798,597 1,644,000 ---------------- ---------------- Total liabilities 94,377,875 12,588,025 ---------------- ---------------- Commitments and Contingencies (Note 11) Stockholders' equity (Notes 12, 13, 14 and 20): Common stock, $.01 par value. Authorized 30,000,000 shares; 11,718,323 and 3,893,415 shares issued and outstanding at December 31, 1998 and 1997, respectively 117,184 38,934 Preferred stock, $.001 par value. Authorized 1,000,000 shares: Series A Convertible Preferred Stock; 200,000 shares designated, 0 and 92,580 shares issued and outstanding at December 31, 1998 and 1997, respectively - 9,257,807 Series B Convertible Preferred Stock; 100,000 shares designated, 0 and 40,488 shares issued and outstanding at December 31, 1998 and 1997, respectively - 4,048,750 Additional paid-in capital 37,810,712 21,432,437 Accumulated deficit (36,189,072) (28,805,699) ---------------- ---------------- Total stockholders' equity 1,738,824 5,972,229 ---------------- ---------------- Total liabilities and stockholders' equity $ 96,116,699 $ 18,560,254 ================ ================ See accompanying notes to consolidated financial statements.
28 WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, ----------------------------------------------------- 1998 1997 1996 --------------- --------------- --------------- Revenues $ 21,044,584 $ 3,457,692 $ 1,495,606 --------------- --------------- --------------- Cost of operations: Operating expenses 12,399,529 1,718,214 920,553 Depreciation and amortization 4,501,424 692,224 369,785 Acquisition integration costs (Note 3) 1,864,535 - - Write-off of project development costs (Note 17) 235,464 1,495,388 6,652,075 --------------- --------------- --------------- Total cost of operations 19,000,952 3,905,826 7,942,413 --------------- --------------- --------------- Gross profit (loss) 2,043,632 (448,134) (6,446,807) Selling, general and administrative expenses 4,482,478 2,138,180 2,442,816 Amortization of prepaid consulting fees - - 834,375 Restructuring (Note 16) - 596,426 1,741,729 --------------- --------------- --------------- Loss from operations (2,438,846) (3,182,740) (11,465,727) --------------- --------------- --------------- Other income (expense): Royalty and other income (expense), net (134,455) (515,875) 935,358 Interest income 441,069 172,363 178,224 Interest expense and financing costs (4,073,693) (1,354,614) (1,182,118) Write-off of accounts receivable (Note 15) - (568,217) - Equity in loss of affiliate - - (96,144) Write-off of assets - - (21,858) --------------- --------------- --------------- Total other income (expense) (3,767,079) (2,266,343) (186,538) --------------- --------------- --------------- Loss before income tax expense (benefit), discontinued operations and extraordinary item (6,205,925) (5,449,083) (11,652,265) Income tax expense (benefit) (Note 9) 43,174 5,622 (23,456) Loss from continuing operations (6,249,099) (5,454,705) (11,628,809) Discontinued operations (Note 16) - - (2,260,963) --------------- --------------- --------------- Loss before extraordinary item (6,249,099) (5,454,705) (13,889,772) Extraordinary item - loss on extinguishment of debt (Note 7) (246,535) (133,907) - --------------- --------------- --------------- Net loss (6,495,634) (5,588,612) (13,889,772) Preferred stock dividends (Note 13) 887,869 - - --------------- --------------- --------------- Net loss available for common shareholders $ (7,383,503) $ (5,588,612) $ (13,889,772) =============== =============== =============== Basic net loss per share: Loss from continuing operations $ (0.85) $ (1.51) $ (4.10) Discontinued operations - - (0.80) Extraordinary item (0.03) (0.04) - --------------- --------------- --------------- Basic net loss per share (0.88) (1.55) (4.90) Preferred stock dividends (0.12) - - --------------- --------------- --------------- Basic net loss available for common shareholders $ (1.00) $ (1.55)$ $ (4.90) Weighted average number of shares used in computation of basic net loss per share 7,389,547 3,612,623 2,834,841 =============== =============== =============== See accompanying notes to consolidated financial statements.
29 WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, ----------------------------------------------------- 1998 1997 1996 ------------------ ---------------- --------------- Cash flows from operating activities: Net loss $ (6,495,634) $ (5,588,612) $ (13,889,772) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization 5,248,354 900,549 1,556,380 Extraordinary loss on extinguishment of debt 246,535 133,907 - Accrued landfill closure and post-closure costs 1,154,597 124,000 20,000 Write-off of project development costs 235,284 1,495,388 6,652,075 Write-off of accounts receivable and other assets - 568,217 21,858 Discontinued operations - - 2,260,963 Minority interest - - (12,655) Equity in loss of affiliate - - 96,144 Issuance of common stock for services 12,500 44,854 17,157 Allowance for doubtful accounts 176,195 23,333 10,000 Changes in assets and liabilities: Accounts and notes receivable (2,004,616) 73,503 375,519 Prepaid expenses and other current assets (861,529) (242,092) 16,558 Accounts payable 1,372,730 (1,175,139) (1,253,507) Accrued expenses 640,869 62,463 777,516 Deferred revenue 1,645,124 - - ------------------ ---------------- --------------- Net cash used by continuing operations 1,370,409 (3,579,629) (3,351,764) Net cash used by discontinued operations and restructuring (778,609) (1,006,488) (560,377) ------------------ ---------------- --------------- Net cash provided (used) by operating activities 591,800 (4,586,117) (3,912,141) ------------------ ---------------- --------------- Cash flows from investing activities: Proceeds from sale of assets - 800,000 127,500 Net assets acquired through acquisitions (58,340,223) - Restricted cash and securities 214,158 956,017 (1,022,517) Investment in affiliate - - (86,115) Landfills (5,372,481) (307,552) (5,199,493) Landfill and other development projects (99,655) (263,868) (467,855) Land, buildings, facilities and improvements (664,264) - Machinery and equipment (189,215) (114,330) (914,600) Rolling stock (1,403,747) (122,905) - Containers (617,813) (189,109) (16,716) Office furniture and equipment (684,515) - Deposits for future acquisitions (2,210,667) - - Intangible assets (709,881) - (35,261) Other assets (1,860,527) (52,127) (26,162) ------------------ ---------------- --------------- Net cash provided (used) by investing activities (71,938,830) 706,126 (7,641,219) ------------------ ---------------- --------------- Cash flows from financing activities: Deferred financing and registration costs (1,808,962) (56,098) (86,074) Net borrowings and advances from stockholders and related parties - - (114,575) Repayments of notes payable and long-term debt (15,217,063) (2,445,476) (426,734) Borrowings from notes payable and long-term debt 86,449,857 1,143,861 1,117,982 Proceeds from issuance of common stock 40,406 686,724 6,090,473 Proceeds from issuance of Series A preferred stock - 7,250,478 - Dividends paid (887,869) - ------------------ ---------------- --------------- Net cash provided by financing activities 68,576,369 6,579,489 6,581,072 ------------------ ---------------- --------------- Increase (decrease) in cash and cash equivalents (2,770,661) 2,699,498 (4,972,288) Cash and cash equivalents, beginning of year 2,964,274 264,776 5,237,064 ------------------ ---------------- --------------- Cash and cash equivalents, end of year $ 193,613 $ 2,964,274 $ 264,776 ================== ================ =============== See accompanying notes to consolidated financial statements.
30 Supplemental disclosures of cash flow information: During the years ended December 31, 1998, 1997 and 1996, cash paid for interest was $3,715,304, $1,493,221, and $1,201,864, respectively. Supplemental disclosures of non-cash activities: During 1998, 1997 and 1996 the Company acquired assets of $2,113.591, $2,190,050 and $683,777 respectively, under capital lease obligations. In connection with the Company's acquisitions, during 1998, the Company acquired property and equipment of $24,297,759, intangible assets of $35,170,590 and other assets of $336,619. The Company paid $58,340,233 in cash and assumed liabilities from the acquired companies of $1,464,735. During 1998, the Company converted 92,580 shares or $9,257,807 of its Series A Preferred Stock into 6,590,577 shares of its Common Stock. On September 22, 1998, the Company issued 455,922 shares of its Common Stock in connection with the acquisition of Mattei-Flynn Trucking, Inc. On May 22, 1998, the Company issued 111,110 shares of its Common Stock in connection with the acquisition of Eagle Recycling, Inc. and Horvath S anitation, Inc. On May 14, 1998, the Company converted 40,488 shares or $4,048,750 of its Series B Preferred Stock into 623,808 shares of its Common Stock. In December 1997, the Company converted $3,950,000, plus accrued interest, of its 10% Convertible, Redeemable, Subordinated Notes due October 6, 2000 for 40,488 shares of its Series B Convertible Preferred Stock. In October 1997, the Company converted 4,800 shares valued at $480,000, of its Series A Preferred Stock into 341,334 shares of its Common Stock. In June 1997, the Company issued Series A Preferred Stock valued at $850,000 in exchange for the remaining 20% minority interest in the Moretown, Vermont landfill. In June 1997, the Company issued Series A Preferred Stock valued at $44,854 in exchange for consulting services. In June 1997, the Company wrote down assets to their net realizable value of $863,428 related to the Fairhaven landfill project. This was charged against the restructuring and current liabilities accrual. In June 1997, the Company issued Series A Preferred Stock at a value of $700,000 and retired the FDIC loan of $511,093 and accrued interest of $55,000. The pay off resulted in a realized loss on the early retirement of debt of $133,907. In 1996, the Company exchanged $2,850,000 of convertible subordinated debt and $27,425 of accrued interest for 313,992 shares of common stock. See accompanying notes to consolidated financial statements. 31 WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) Preferred Stock Preferred Stock Additional Stockholders' Series A Series B Common Stock paid-in Accumulated equity Shares Amount Shares Amount Shares Amount capital deficit (deficit) --------- ---------- ---------- ---------- ---------- ---------- ------------ ------------- ------------ Balance, December 31, 1995 - - - - 2,341,268 $ 23,413 $12,595,504 $ (9,327,315) $ 3,766,601 Exercise of Warrants to purchase 1,728 shares of common stock at $11.45 per share - - - - 1,728 17 19,769 - 19,786 Exercise of merger-related Placement Agent Warrants to purchase 1,755 shares of common stock at $11.50 per share - - - - 1,755 18 20,165 - 20,183 Exercise of merger-related Placement Agent Warrants to purchase 6,444 shares of common stock at $11.50 per share - - - - 6,444 64 74,042 - 74,106 Exercise of Options to purchase 656 shares of common stock at $10.00 per share - - - - 656 7 6,555 - 6,562 Issuance of common stock at $9.70 per share, through private placement in June, 1996 - - - - 660,949 6,609 6,404,591 - 6,411,200 Expenses incurred in connection with the private placement in June, 1996 - - - - - - (651,926) - (651,926) Exercise of Options to purchase 656 shares of common stock at $10.00 per share - - - - 656 7 6,555 - 6,562 Issuance of common stock at $11.25 per share, net of 50% discount due to restrictions on sale, for director's fee - - - - 2,000 20 11,230 - 11,250 Conversion of convertible debentures, plus accrued interest at a conversion price of $9.16 313,992 3,140 2,874,285 2,877,425 Reclassification of deferred financing costs related to convertible debentures converted to common stock (235,888) (235,888) Exercise of Series C Warrants to purchase 400 shares of common stock at $10.00 per share - - - - 400 4 3,996 - 4,000 Issuance of common stock at $7.50 per share, net of 50% discount due to restrictions on sale, for directors fee 1,575 $ 16 $ 5,890 5,906 Issuance of common stock at $6.85 per share, in exchange for debt in November 1996 - - - - 29,091 291 199,709 - 200,000 Net loss for the year ended December 31, 1996 - - - - - - - (13,889,772) (13,889,772) -------- ---------- ---------- ---------- ---------- ---------- ------------ ------------- ------------ Balance, December 31, 1996 - - - - 3,360,514 33,606 21,334,477 (23,217,087) (1,374,005) Issuance of common stock at $2.50 per share, in connection with a private placement, January 1997 - - - - 172,000 1,720 428,280 - 430,000 Issuance of Series A Convertible Preferred Stock, 8% cumulative annual dividend, convertible into common stock at a price of $1.406 per share, June 1997 97,380 9,737,807 - - - - (892,475) - 8,845,332 Issuance of common stock at $3.75 per share, in connection with the purchase of minority interest in the Company's collection operations in Vermont, September 1997 - - - - 18,667 187 69,813 - 70,000 Exercise of Series E Warrants to purchase 901 shares of common stock at $17.50 per share, November 1997 - - - - 901 9 15,755 - 15,764 Conversion of Series A Convertible Preferred Stock for common stock at $1.406 per share, September and October 1997 (4,800) (480,000) - - 341,334 3,413 476,587 - - Issuance of Series B Convertible Preferred Stock, 6% cumulative annual dividend, convertible into common stock at a price of $6.26 per share, December 30, 1997 - - 40,488 4,048,750 - - - - 4,048,750 Net loss for the year ended December 31, 1997 - - - - - - - (5,588,612) (5,588,612) -------- ---------- ---------- ---------- ---------- ---------- ------------ ------------- ------------ Balance, December 31, 1997 92,580 9,257,807 40,488 4,048,750 3,893,415 38,935 21,432,437 (28,805,699) 5,972,230 Conversion of Series B Preferred Stock to equity - - (40,488)(4,048,750) 623,808 6,238 4,042,512 - - Conversion of Series A Preferred Stock to equity (92,580)(9,257,807) - - 6,590,577 65,906 9,191,901 - - Expenses associated with equity transactions (256,101) (256,101) Common Stock issued for services 14,766 148 12,352 12,500 Common Stock issued in business combinations 567,032 5,670 3,347,494 3,353,164 Exercise of options to purchase common stock 28,725 287 40,117 40,404 Dividends paid on preferred stock (887,869) (887,869) Net loss for the year ended December 31, 1998 (6,495,634) (6,495,634) -------- ---------- ---------- ---------- ---------- ---------- ------------ ------------- ------------ Balance, December 31, 1998 - $ - - $ - 11,718,323 $ 117,184 $37,810,712 $(36,189,202) $ 1,738,694 -------- ---------- ---------- ---------- ---------- ---------- ------------ ------------- ------------ See accompanying notes to consolidated financial statements
32 WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Business and Nature of Operations The Company is an integrated solid waste management company providing non-hazardous waste collection, recycling, transfer and disposal services to approximately 52,000 commercial, industrial, residential and municipal customers located in 4 states in the Northeast and Mid-Atlantic regions of the country as of December 31, 1998. On March 2, 1999, the Company completed an offering of $100.0 million in 11.5% Senior Notes (the "Senior Notes") and warrants to purchase an aggregate of 1,500,000 shares of common stock at an exercise price of $6.25 per share (the "Warrants"). The Company used a portion of the proceeds from the Senior Notes to repay certain debt obligations and to repurchase 497,778 shares of the Company's common stock from the Federal Deposit Insurance Corporation (FDIC). The Company intends to use the balance of the proceeds for general corporate purposes, including possible future acquisitions and working capital. In addition, since December 31, 1998 the Company has completed six acquisitions, consisting of 5 collection operations and one landfill. See Footnote 20 "Subsequent Events". Note 2. Summary of Significant Accounting Policies Basis of Presentation: The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents: All short-term investments which have an original maturity of 90 days or less, and are valued at cost plus accrued interest which approximates market, are considered to be cash equivalents. Restricted Cash and Securities: Restricted cash and securities consist principally of funds or securities deposited in connection with the future financial obligation of landfill or transfer station closure and post-closure. Amounts are principally invested in fixed income securities of U.S. governmental and financial institutions. The Company considers its investments to be held to maturity. Substantially all of these investments mature within one year. The investments are valued at cost plus accrued interest, which approximates market. Fair Value of Financial Instruments: Statement of Financial Accounting Standards No. 102, "Disclosures About the Fair Value of Financial Instruments", requires disclosure of information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of the following disclosure the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced sale or liquidation. Management has determined that the carrying value of its financial assets and liabilities approximates fair value at December 31, 1998. Property and Equipment: Property and equipment are stated at cost. The cost of all maintenance and repairs are charged to operations as incurred. Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets as follows: Buildings, facilities and improvements 10-30 years Machinery and equipment 3-10 years Rolling stock 3-10 years Containers 5-10 years Office equipment 3-5 years 33 Capitalization of landfill development costs begins upon determination by the Company of the economic feasibility or extended useful life of each landfill acquired as a result of comprehensive engineering and profitability studies and with the signing of landfill management contracts for facilities operated by the Company that are not owned. Capital costs include acquisition, engineering, legal, and other direct costs associated with the permitting and development of new landfills, expansions at existing landfills, and cell development. These costs are capitalized and not amortized until all permits are obtained and operations have commenced. Interest is capitalized on landfill development costs related to permitting, site preparation, and facility construction during the period that these assets are undergoing activities necessary for their intended use. Interest costs of approximately $360,000, $24,000 and $42,000 were capitalized during 1998, 1997 and 1996, respectively. Landfill development costs are amortized using the unit-of-production method, which is calculated using the total units of airspace filled during the year in relation to total estimated permitted airspace capacity. The determination of airspace usage and remaining airspace capacity is an essential component in the amortization calculation. The determination is performed by conducting annual topography surveys of the Company's landfill facilities to determine remaining airspace capacity in each landfill. The surveys are reviewed by the Company's consulting engineers, the Company's internal operating and engineering staff, and its financial and accounting staff. Current year-end remaining airspace capacity is compared with prior year-end remaining airspace capacity to determine the amount of airspace used during the current year. The result is compared against the airspace consumption figures used during the current year for accounting purposes to ensure proper recording of the amortization provision. The reevaluation process did not materially impact results of operations for any years presented. The Company performs assessments for each landfill of the recoverability of capitalized costs which requires considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future revenues, estimated economic life and changes in environmental regulation. It is the Company's policy to periodically review and evaluate that the benefits associated with these costs are expected to be realized and therefore capitalization and amortization is justified. Capitalized costs related to landfill development for which no future economic benefit is determined by the Company are expensed in the period in which such determination is made. Intangible Assets: The Company records the excess of the purchase price over the fair market value of the net identifiable assets of an acquired company as goodwill. Goodwill is amortized on a straight-line basis over forty years. Other intangible assets include customer lists and covenants not to compete which are amortized on a straight-line basis over a period not to exceed ten years and over the term of the agreement, respectively. The Company evaluates the periods of amortization continually to determine whether subsequent events and circumstances warrant revised estimates of useful lives. If estimates are changed, the unamortized cost shall be allocated to the remaining period in the revised useful life. Landfill Closure and Post-Closure Costs: The Company has a material financial obligation relating to closure and post-closure activities for landfills it owns or operates. Accordingly, the Company estimates and accrues closure and post-closure costs on a unit-of-production basis over each landfill's estimated remaining permitted airspace capacity. The accrual is based on final capping of the site, site inspection, leachate management, methane gas control and recovery, groundwater monitoring, and operation and maintenance costs to be incurred during the period after the facility closes. The estimated costs are expressed in current dollars and are not discounted to reflect timing of future expenditures. The Company has accrued approximately $2.8 million and $1.6 million for closure and post-closure costs at December 31, 1998 and 1997, respectively. The engineering and accounting staffs of the Company periodically review its future obligation for closure and post-closure costs. If estimates of the permitted air space capacity or the estimated costs of closure and post-closure have changed, the Company revises the rates at which it accrues the future costs. The Company records reserves for landfill closure and post-closure costs, as necessary, as a component of the purchase price of facilities acquired, in acquisitions accounted for under the purchase method, when the acquisition is consummated. Deferred Financing Costs: Deferred financing costs are amortized on a straight-line basis over the life of the related notes payable or debt. There is not a material difference between using the straight-line method and the effective interest method. 34 Income Taxes: The Company uses the asset and liability method of accounting for deferred income taxes. Revenue Recognition: The Company's revenues are derived primarily from its collection, recycling, transfer and disposal services. The Company records revenues when the services are performed. The Company occasionally bills customers in advance of providing the services. Advanced billings are recorded as deferred revenue. Cost of operations: Cost of operations includes direct labor, fuel, equipment maintenance, insurance, depreciation and amortization of equipment and landfill development costs, accruals for ongoing closure and post-closure regulatory compliance (for landfills owned), and other routine maintenance and operating costs directly related to landfill operations. Also included in cost of operations are payments made to the towns in which each landfill is located in the form of "Host Town Fees", which are negotiated on a rate per ton basis as part of the contract with the Town. In Towns where landfills are operated under management contracts, the Town is responsible for the closure and post-closure costs related to the landfill. Earnings Per Share: In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS 128 requirements. Weighted average number of common and common equivalent shares outstanding and earnings per common and common equivalent shares have been restated to give effect to a one-for-five reverse stock split effective February 18, 1998. Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of: The Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of", on January 1, 1997, for the year ended December 31, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations, or liquidity in 1998 or 1997. Reclassifications: Certain amounts in prior year financial statements have been reclassified to conform to their 1998 presentation. 35 Note 3. Acquisitions During 1998, the Company acquired a total of 34 companies, including eleven collection companies (one of which included a transfer station) in Vermont, five collection companies and two landfills in Central Pennsylvania, three collection companies and a transfer station in Central Massachusetts and twelve collection companies (one of which included a transfer station) in Central Upstate New York. The aggregate cost of these acquisitions was approximately $63.2 million consisting of approximately $58.3 million in cash, $3.4 million in stock and approximately $1.5 million in assumed liabilities. The acquisitions have all been recorded using the purchase method of accounting and accordingly, the results of operations of the acquired companies are included in the consolidated statements of operations since the respective dates of acquisition. The purchases prices were allocated to the assets and liabilities of the acquired companies based on their respective fair values at the dates of acquisition as follows: the Company acquired property and equipment of $24,298,000, intangible assets of $35,171,000 and other assets of $337,000. Acquisition integration costs consist of one-time, non-recurring costs, which in the opinion of management have no future value and, therefore, are expensed. Such costs include termination and retention of employees, lease termination costs, costs related to the integration of information systems and costs related to the change of name of the acquired company or business. These charges are estimated and accrued at the time the acquisition is closed. The estimates are reviewed frequently by Company management and the related operation teams integrating the new acquisitions and adjusted as required. Acquisition integration costs totaled $1,865,000 for 1998. The following unaudited pro forma financial information presents the combined results of operations of the Company and the aggregate of the acquired entities for the years ended December 31, 1998 and 1997 as if the acquisitions had occurred as of January 1, 1998 and 1997, respectively, after giving effect to certain adjustments, including amortization of intangibles and additional depreciation of property and equipment. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and the aggregate of the acquired entities constituted a single entity during such period. December 31,1998 December 31, 1997 (unaudited) (unaudited) Net revenue $ 31,546,000 $31,018,000 ============ =========== Net loss $ (4,631,000) $(5,128,000) ============= ============ Basic loss per share $ (0.63) $ (1.42) ============ ============ Note 4. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following; December 31, 1998 1997 ----------------------------------- Deposits for future acquisitions $ 2,210,667 $ 132,893 Prepaid disposal costs 1,922,792 - Prepaid permit costs - 502,974 Due from former employee - 300,000 Other prepaid expenses 635,826 430,225 -------------- ----------- Total prepaid expenses and other current assets $ 4,769,285 $ 1,366,092 ============== ============ 36 Note 5. Property and Equipment Property and equipment are stated at cost and consist of the following; December 31, 1998 1997 -------------------------------- Landfills $ 18,631,409 $ 8,412,010 Landfill and other development projects 8,778,901 691,225 Buildings, facilities and improvements 4,701,245 1,490,964 Machinery and equipment 3,038,700 1,513,720 Rolling stock 8,980,626 662,595 Containers 4,104,397 401,941 Office furniture and equipment 713,235 333,017 ------------ ---------- 48,948,513 13,505,472 Less accumulated depreciation and amortization (4,262,778) (1,018,289) ----------- ------------- Property and equipment, net $44,685,735 $12,487,183 =========== =========== Note 6. Intangible Assets Intangible assets consist of the following; December 31, 1998 1997 ------------------------------- Goodwill $ 30,441,948 $ 94,873 Non-compete agreements 4,333,685 - Customer lists 3,841,599 - Other 713,235 3,354 ------------ ----------- 39,330,467 98,227 Less accumulated amortization (1,271,093) (1,395) ----------- ---------- Total intangible assets $ 38,059,374 $ 96,832 ============ =========== Note 7. Long-term Debt and Notes Payable Long-term debt and notes payable consists of: December 31, 1998 1997 --------------------------- 7% Convertible Subordinated Notes $ 60,000,000 $ - Howard Bank Credit Facility 10,000,000 748,000 13% Short-term Notes 7,500,000 - 10% Convertible Subordinated Debentures 1,850,000 4,425,000 Capital Leases 1,201,516 2,626,700 Equipment and Other Notes Payable 2,569,593 245,393 ------------- ----------- 83,121,109 8,045,093 Less current portion 8,259,922 843,831 ------------- ----------- Long-term portion $ 74,861,187 $ 7,201,262 ============ =========== Scheduled maturities of long-term debt and notes payable, excluding capital leases are as follows: Payments due in the year ending December 31, 1999 $ 8,176,268 2000 12,536,690 2001 530,953 2002 427,261 2003 248,421 Thereafter 60,000,000 ------------- $ 81,919,593 37 7% Convertible Subordinated Notes: On May 13, 1998, the Company closed an offering of $60.0 million in 7% Convertible Subordinated Notes (the "Notes" or "7% Subordinated Notes"), which resulted in net proceeds to the Company of approximately $58.3 million. The Notes mature in May 2005, and bear interest at 7.0% per annum, payable semi-annually in arrears on each June 30 and December 31. The Notes and any accrued but unpaid interest are convertible into Common Stock at a conversion price of $10.00 per share. The shares are convertible at the option of the holder at any time and can be mandatorily converted by the Company after 2 years if the Company's Common Stock closing price equals or exceeds the conversion price of $10.00 per share for a period of 20 consecutive trading days. The Company used the majority of the proceeds from the Notes to repay existing debt of approximately $11.7 million and complete several acquisitions. As a result of the debt payoffs, the Company recorded an extraordinary loss on extinguishment of debt of approximately $247,000 during 1998. In March 1999, the Company exchanged 2,244,109 shares of the Company's Common Stock for $10,390,000 of the Notes. (See Footnote 20 "Subsequent Events") Howard Bank Credit Facility: On March 31, 1997, the Company closed a $1.0 million term loan with The Howard Bank of Burlington, Vermont. During 1998, the loan was renegotiated as part of a line of credit for $10,000,000. The line of credit was repaid in full in March 1999, with the proceeds of the Senior Notes. See Footnote 20 "Subsequent Events". The Company is currently negotiating an expansion of this facility with The Howard Bank. 13% Short-term Notes. At December 31, 1998 the Company had outstanding debt in the principal amount of approximately $7.5 million to BIII Capital Partners, L.P., a significant shareholder of the Company. The debt consisted of 13% Short Term Notes due June 30, 1999. The Short Term Notes were repaid in full in March 1999, with the proceeds of the Senior Notes. See Footnote 20 "Subsequent Events". 10% Convertible Subordinated Notes. During 1995, the Company closed a "Regulation S" offering of $11,225,000 in Convertible Subordinated Notes and Warrants to overseas investors, which resulted in net proceeds to the Company of $10,085,587. The Notes mature on September 30, 2000, and bear interest at 10%, payable quarterly. The Notes are convertible into Common Stock at $9.20 per share and are callable at the Company's option at any time if the closing sale price of the Common Stock exceeds $50.00 per share for a period of 20 consecutive trading days prior to redemption notice. The Notes have not been registered under the Securities Act and may not be sold in the United States without such registration or an applicable exemption from the requirement of registration. On December 31, 1997, the Company converted $3,950,000 of Convertible Subordinated Debentures and $110,625 of accrued interest into 40,488 shares of Series B Convertible Preferred Stock. See Footnote 13 "Preferred Stock". Capital Leases. The Company leases certain facilities, equipment, and vehicles under agreements which are classified as capital leases. 38 Leased capital assets included in property and equipment are as follows: December 31, 1998 1997 Land and Buildings $ 1,327,161 $ 1,634,078 Machinery and equipment - 1,881,630 ------------ --------- 1,327,161 3,515,708 Accumulated depreciation (38,667) (207,053) ---------- --------- $ 1,288,494 $ 3,308,655 ============ =========== Future minimum lease payments, by year and in the aggregate, under non-cancelable capital leases and operating leases with initial or remaining terms of one year or more at December 31, 1998 are as follows: Capital Operating Leases Leases Payments due in the year ending December 31, 1999 $ 200,040 $ 313,883 2000 200,040 327,719 2001 200,040 351,215 2002 200,040 358,484 2003 200,040 94,366 Thereafter 766,820 - ---------- ---------- Minimum lease payments 1,767,020 $ 1,445,667 ========== Less: amount representing interest 565,504 Present value of net minimum lease payments 1,201,516 Less current portion 83,654 Long-term portion $ 1,117,862 =========== The Company's rental expense for operating leases was $388,630, $81,757 and $293,766 for the years ended December 31, 1998, 1997 and 1996, respectively. Equipment and Other Notes Payable, Equipment and other notes payable are secured by the respective equipment, and are payable monthly in varying amounts ranging from $1,686 To $18,524 With interest rates ranging from 8.0% to 8.5%. Most of the notes were repaid in March 1999 with the proceeds of the Senior Notes. See Footnote 20 "Subsequent Events". Note 8. Accrued Expenses Accrued expenses consisted of the following: December 31, 1998 1997 --------------------------------- Acquisition integration costs $ 676,703 $ - Interest 123,872 103,578 Professional and consulting fees 125,410 265,024 Compensation and benefits 432,089 64,451 Other taxes and fees 449,509 271,718 Due to sellers 260,000 - Accrued disposal costs 210,021 - Medical Waste litigation (See Note 15) 88,189 300,000 Other 376,616 5,615 Fairhaven landfill (See Note 17) - 756,000 Restructuring (See Note 16) - 778,609 ----------- ------- $ 2,742,409 $ 2,544,995 =========== ========== 39 Note 9. Income Taxes Income tax expense (benefit) consists of: Current Deferred Total Year ended December 31, 1998: ---------------------------------------- Federal $ - $ - $ - State 43,174 - 43,174 ---------------------------------------- $ 43,174 $ - $ 43,174 ======================================== Year ended December 31, 1997: Federal $ - $ - $ - State 5,622 - 5,622 ----------------------------------------- $ 5,622 $ - $ 5,622 ======================================== Year ended December 31, 1996: Federal $ - $ - $ - State (23,456) - (23,456) ---------------------------------------- $ (23,456) $ - $ (23,456) ========================================= A reconciliation between federal income tax expense (benefit) at the statutory rate and the Company's federal tax expense (benefit) is as follows for the years ended December 31: 1998 1997 1996 --------------------------------------- Statutory Federal income tax (benefit) $ (2,193,836) $ (1,898,217) $ (4,717,894) State taxes, net of Federal income tax benefit (3,460,328) (530,947) (1,210,466) Valuation allowance 5,533,239 2,432,087 5,898,245 Other 164,100 2,699 6,659 ------------- -------------- ------------- $ 43,174 $ 5,622 $ (23,456) =========== ============== ============ The tax effects of temporary differences between financial statement and tax accounting that gave rise to significant portions of the Company's net deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are presented below. 1998 1997 ------------- ---------- Deferred tax assets: Accounts receivable allowance $ 303,207 $ 11,528 Property and equipment depreciation - 194,942 Other accrued liabilities 334,102 4,371,736 Operating loss and credit carryforwards 14,864,820 4,543,738 ---------- --------- Gross deferred tax assets 15,502,129 9,121,944 Less: valuation allowance (14,655,182) (9,121,944) ------------ ----------- Net deferred t 846,947 - Deferred tax liabilities: Total deferred tax liabilities (846,947) - Net deferred tax liability $ - $ - =============== ============== 40 At December 31, 1998 the Company had net operating loss carryforwards for Federal income tax purposes of approximately $34 million which generally are available to offset future Federal taxable income, if any, and which expire during the years ending December 31, 2010 through 2018. The Company underwent an ownership change as defined in Internal Revenue Code Section 382 on June 30, 1997 and as a result will be restricted in its ability to use net operating loss carryforwards generated prior to the ownership change to offset future taxable income. The Company's future use of net operating loss carryforwards generated prior to the ownership change will be subject to an annual limitation generally equal to the product of the long-term tax exempt rate for June 1997 of 5.64% and the value of the Company as of June 30, 1997. As a result of this limitation a portion of the Company's Federal and state net operating loss carryforwards may expire unused. Note 10. Landfill Closure and Post-Closure Costs Landfills are typically developed in a series of cells, each of which is constructed, filled, and capped in sequence over the operating life of the landfill. When the cell is filled and the operating life of the landfill is over, the final cell must be capped, the entire site must be closed and post-closure care and monitoring activities begin. The Company will have material financial obligations relating to the final closure and post-closure costs of each landfill the Company owns. The Company has estimated at December 31, 1998, that the total costs for final closure and post-closure of Cells I and II at the Moretown, Vermont landfill, including capping costs, cap maintenance, groundwater monitoring, methane gas monitoring, and leachate treatment and disposal for up to 30 years, is approximately $4.2 million. Based upon the capacity of Cells I and II, approximately $1.8 million and $1.6 million were accrued at December 31, 1998 and 1997, respectively for final closure and post closure costs. In July 1998, the Company acquired the Sandy Run landfill located in Hopewell, Pennsylvania. The Company has estimated at December 31, 1998, that the total costs for final closure and post-closure of Cells I through IV at Sandy Run, including capping costs, cap maintenance, groundwater monitoring, methane gas monitoring, and leachate treatment and disposal for up to 30 years, is approximately $4.1 million. Based upon the capacity of Cells I and II, approximately $1.0 million was accrued at December 31, 1998 for final closure and post closure costs. The Company bases its estimates for these accruals on respective State regulatory requirements, including input from its internal and external consulting engineers and interpretations of current requirements and proposed regulatory changes. The closure and post-closure requirements are established under the standards of the U.S. Environmental Protection Agency's Subtitle D regulations as implemented and applied on a state-by-state basis. The determination of airspace usage and remaining airspace capacity is an essential component in the calculation of closure and post-closure accruals. See Note 2 - Summary of Significant Accounting Policies - Landfill Closure and Post-Closure Costs. Note 11. Commitments and Contingencies Landfill related activities. In the normal course of its business, and as a result of the extensive governmental regulation of the solid waste industry, the Company periodically may become subject to various judicial and administrative proceedings involving federal, state, or local agencies. In these proceedings, the agency may seek to impose fines on the Company or to revoke or deny renewal of an operating permit held by the Company. From time to time, the Company also may be subjected to actions brought by citizens' groups in connection with the permitting of its landfills or transfer stations, or alleging violations of the permits pursuant to which the Company operates. Certain federal and state environmental laws impose strict liability on the Company for such matters as contamination of water supplies or the improper disposal of waste. The Company's operation of landfills subjects it to certain operational, monitoring, site maintenance, closure and post-closure obligations which could give rise to increased costs for monitoring and corrective measures. See Note 10 - Landfill Closure and Post Closure Costs. The Company has a $5 million environmental impairment liability insurance covering claims for sudden or gradual onset of environmental damage at each of its landfills. If the Company were to incur liability for environmental damage in excess of its insurance limits, its financial condition could be adversely affected. The Company carries a comprehensive general liability insurance policy which management considers adequate at this time to protect its assets and operations from other risks. 41 None of the Company's landfills are currently connected with the Superfund National Priorities List or potentially responsible party issues. Employment Contracts. The Company has entered into employment agreements with its two senior executives, which expire on July 1, 2000 and subsequently provide for employment until terminated by either party at annual salaries of $200,000 through July 1, 1999 and $225,000 through July 1, 2000. Legal Matters. Richard Rosen ("Rosen"), former Chairman, Chief Executive Officer and President of the Company, commenced an action against the Company in Middlesex County (Massachusetts) Superior Court, seeking an award of damages resulting from the Company's alleged breach of a Memorandum of Understanding entered into between the Company and Rosen in connection with the termination of Rosen's employment with the Company, in which Rosen had been granted an option to purchase certain assets of the Company not related to its core business. The Company believes this claim to be frivolous and is vigorously defending this action. The Company has previously received an arbitration award against Rosen directing Rosen to pay $780,160 for breach by Rosen of his employment agreement with the Company. On February 25, 1997 the Middlesex Superior Court in Cambridge, Massachusetts confirmed the arbitration award and entered judgment against Rosen. In addition to the matter set forth above, from time to time, in the ordinary course of its business, the Company is subject to legal proceedings and claims arising from the conduct of its business operations. In the opinion of the Company, the ultimate disposition of such matters on an aggregate basis will not have a material adverse effect on the Company's financial position or results of operations. Note 12. Common Stock During 1998, the Company converted 92,580 shares or $9,257,807 of its Series A Preferred Stock into 6,590,577 shares of its Common Stock. On September 22, 1998, the Company issued 455,922 shares of its Common Stock in connection with the acquisition of Mattei-Flynn Trucking, Inc. On May 22, 1998, the Company issued 111,110 shares of its Common Stock in connection with the acquisition of Eagle Recycling, Inc. and Horvath Sanitation, Inc. On May 14, 1998, the Company converted 40,488 shares or $4,048,750 of its Series B Preferred Stock into 623,808 shares of its Common Stock. In December 1997, the Company's Board of Directors approved a one for five reverse stock split of the Company's Common Stock. On February 13, 1998, the stockholders of the Company approved the reverse stock split at a special stockholders' meeting. No fractional shares were issued in connection with the reverse stock split, and stockholders received cash in payment for any fractional shares otherwise issuable. The Company's financial statements have been restated to reflect the one-for-five reverse split. In September 1997, the Company issued 18,667 shares of common stock in connection with the purchase of the minority interest in the Company's Vermont hauling business for $70,000. On January 21, 1997, the Company closed a Regulation "D" private placement of 172,000 shares of common stock at $2.50 per share with gross proceeds of $430,000. 42 Note 13. Preferred Stock At December 31, 1997, the Company had outstanding $9,257,807 of principal amount Series A Convertible Preferred Stock, par value $0.001 per share ("Series A Preferred Stock"), which was issued in a private placement on June 26, 1997, bearing an 8.0% annual cumulative dividend. The Series A Preferred Stock was convertible into common stock at a conversion price of $1.40625 per share of common stock. On July 27, 1998, the Company met the mandatory conversion trading requirements and elected to convert all of the remaining shares of Series A Preferred Stock into 6,590,577 shares of the Company's Common Stock and the Board of Directors declared and paid cash dividends of approximately $787,000. At December 31, 1997, the Company also had outstanding $4,048,750 of principal amount Series B Convertible Preferred Stock, par value $0.001 per share ("Series B Preferred Stock"). The Series B Preferred Stock was issued on December 31, 1997 in a private placement in exchange for outstanding 10% Convertible Debentures of the Company, bearing a 6.0% annual cumulative dividend, and was convertible into common stock at a conversion price of $6.25 per share of common stock. On May 14, 1998, the Company met the mandatory conversion trading requirements and elected to convert all of the shares of the Series B Preferred Stock into 623,808 shares of Common Stock and the Board of Directors declared and paid cash dividends of approximately $101,000. Note 14. Stock Options Employee Stock Option Plan. Pursuant to the Company's 1995 Stock Option and Incentive Plan as amended (the "Plan"), options to purchase up to 3,000,000 shares of Common Stock were reserved for issuance to employees and consultants of the Company. Options granted under the Plan may be either Incentive Stock Options or Non-Qualified Stock Options for purposes of federal income tax law. Options are generally subject to vesting over a period of four years from the date of grant and are exercisable only to the extent vested from time to time, although certain options have provided for earlier vesting. The selection of individuals to receive awards of options under the Plan and the amount and terms of such awards may be determined by the Board of Directors of the Company or an Administering Committee appointed by the Board of Directors. At the Annual Meeting of the Stockholders of the Company, held August 19, 1998, the number of shares reserved for issuance under the Plan was increased from 1,700,000 to 3,000,000. As of December 31, 1998, options to purchase 2,341,793 shares of Common Stock had been granted and options to purchase up to an additional 658,207 shares remained available for grant. The per share weighted average fair value of stock options granted during 1998, 1997 and 1996 was approximately $3.28, $3.73, and $4.08, respectively, using the Black Scholes option-price model with the following weighted average assumptions: volatility, 50% in 1998 and 30% in both 1997 and 1996; expected dividend yield, 0% for all years; risk free interest rate, 4.75% in 1998 and 5.5% in both 1997 and 1996; and expected life, 5 years for all years. The Company applies APB Opinion No. 25 in accounting for stock options and, accordingly, no compensation cost has been recorded in the financial statements. If the Company had determined compensation costs based on the fair value of its stock options at their grant date under SFAS No. 123, the Company's net losses in 1998, 1997 and 1996 would have increased to the amounts shown below. 43 1998 1997 1996 ---- ---- ---- Net loss available for common shareholders - as reported $ (7,383,503) $ (5,588,612) $ (13,889,772) - pro forma (8,662,888) (6,006,315) (14,334,772) Basic net loss per share - as reported $ (1.00) $ (1.55) $ (4.90) - pro forma $ (1.17) $ (1.66) $ (5.06) Pro forma net loss reflects only the effects of options granted in 1998, 1997 and 1996. Therefore, it does not reflect the full effect of calculating the cost of stock options under SFAS No. 123 because the cost of options issued prior to January 1, 1996 are not considered. As a result, it may not be representative of the pro forma effects on operating results that will be disclosed in future years. Changes in options and option shares under the plan during the respective years were as follows: 1998 1997 1996 ------------------------------------------------------------------------------------------------ Weighted Avg. Weighted Avg. Weighted Avg. exercise price Number exercise price Number exercise price Number per share of shares per share of shares per share of shares Options outstanding, beginning of year $1.42 1,327,417 $1.41 161,200 $1.41 123,825 Options granted 6.68 1,121,351 1.43 1,179,217 1.41 148,250 Options exercised 1.41 (28,725) - 1.41 (1,312) Options canceled 6.82 (78,250) 1.64 (13,000) 1.41 (109,563) Options outstanding, end of year 3.75 2,341,793 1.42 1,327,417 1.41 161,200 Shares reserved for future grants 658,207 372,583 1.41 138,800 Total options in the plan 3,000,000 1,700,000 300,000 Options exercisable, end of year $1.42 340,573 $1.42 114,900 $1.41 102,225 ======= ======= =======
On June 30, 1997, the Board of Directors repriced to $1.406 per share any currently outstanding stock options with exercise prices in excess of $1.406 per share for all employee participants in the Stock Option Plan at that time. Each repriced option retained the vesting schedule associated with the original grant. 44 Options outstanding at December 31, 1998 and related proceeds to the Company were as follows: Remaining Weighted Avg. Number of Shares Price Exercise Contractual Exercise Options Under Option Per Share Proceeds Life Price Exercisable 1,264,043 $1.41 $1,830,768 8.38 $ 1.41 334,823 23,000 1.88 - 2.19 43,438 8.73 1.89 5,750 30,000 3.44 103,140 9.17 3.44 - 43,750 3.75 - 5.88 237,450 9.72 5.28 - 762,500 6.25 4,765,625 9.33 6.25 - 47,000 6.50-8.88 368,668 9.49 7.84 - 86,500 9.00 778,500 9.42 9.00 - 85,000 9.23 - 9.25 786,172 9.57 9.25 - ----------- ----------- ----------- -------------- ------------------- ------------ 2,341,793 $8,913,761 8.84 $ 3.78 340,573 ========= ========== =======
Non-Employee Directors Stock Option Plan. Pursuant to the Company's 1995 Stock Option Plan for Non-Employee Directors as amended, each Director is entitled to receive a grant of Non Qualified Stock Options to purchase 10,000 shares of the Company's Common Stock for each calendar year of service as a director of the Company commencing January 1, 1996. Each such option is subject to vesting at a rate of 2,500 shares for each year that the holder remains a Director of the Company. In addition, the plan provides for the issuance of 20,000 fully vested options upon the election of each new member of the Board of Directors initially elected after December 24, 1997, excluding employees of the Company. At the Annual Meeting of the Stockholders of the Company, held August 19, 1998, the number of shares granted to each Director under the Non-Qualified Stock Option Plan for Non-Employee Directors as amended was increased to 10,000 from 2,000 for each year that the holder remains a Director of the Company. In addition, the number of fully vested options upon the election of each new member of the Board of Directors initially elected after December 24, 1997, excluding employees of the Company was increased to 20,000 from 4,000. Changes in options and option shares under the plan during the respective years were as follows: 1998 1997 1996 Weighted Avg. Weighted Avg. Weighted Avg. exercise price Number exercise price Number exercise price Number per share of shares per share of shares per share of shares Options outstanding, beginning of year $1.79 27,480 $1.41 19,416 $1.41 8,750 Options granted 3.75 50,000 2.28 35,480 1.41 10,666 Options exercised - - - - - - Options canceled - - 2.15 (27,416) - - --------- -------- -------- Options outstanding, end of year 3.05 77,480 1.79 27,480 1.41 19,416 ====== ====== ====== Options exercisable, end of year $1.84 22,370 $1.84 21,500 1.41 7,041 ====== ====== =====
45 Options outstanding at December 31, 1998 and related proceeds to the Company were as follows: Remaining Weighted Avg. Number of Shares Price Exercise Contractual Exercise Options Under Option Per Share Proceeds Life Price Exercisable 14,000 $ 1.41 $ 19,684 8.67 $ 1.41 10,000 13,480 2.19 29,454 8.33 2.19 12,370 10,000 3.75 37,500 9.00 3.75 - 40,000 6.25 250,000 9.67 6.25 - ----------- -------- --------- -------------- ------------------- ------------ 77,480 $ 4.34 $ 336,638 9.09 $ 4.34 22,370 =========== ========= ======
Note 15. Accounts Receivable Write-off During 1996, the Company entered into a licensing and royalty agreement with ScotSafe Limited (ScotSafe), a Glasgow, Scotland based company, for the exclusive rights to use the Company's CFA medical waste processing technology throughout Europe. In accordance with the agreement, the Company would provide technical assistance including facility design, installation, testing and training. In addition to royalty payments for each plant, ScotSafe agreed to pay the Company for consulting and other services including out-of-pocket expenses. During the fourth quarter of 1997 the Company terminated its licensing agreements with ScotSafe and wrote off the receivable due from ScotSafe of approximately $570,000 because ScotSafe was in default for failure to pay the Company royalties due under the terms of the agreement. Subsequent to the termination, ScotSafe was placed into receivership and Eurocare Environmental Services, Ltd. (Eurocare) purchased its assets in December 1997. Eurocare continues to operate the three facilities the Company constructed for ScotSafe without a licensing agreement. The Company is continuing to pursue an action against Eurocare through the Court of Session in Scotland to restrict Eurocare's use of the Company's confidential information embodied within the plant equipment. The Company also has a patent pending with the European Patent Office and expects grant on April 21, 1999, at which time, the Company will act vigorously to protect its rights to the CFA technology against Eurocare and seek substantial damages. Note 16. Restructuring and Discontinued Operations Restructuring of Operations. In March 1996, the Company announced its intention to restructure the Company's operations to focus its resources and activities on developing a fully integrated solid waste management company. During the years ended December 31, 1997 and 1996, the Company recorded restructuring charges of $596,426 and $1,741,729, respectively, for costs associated with the plan to focus on the development of an integrated solid waste management company. The costs included accruals for employee severance, non-cancelable lease commitments, professional fees and litigation costs. The restructuring was completed in 1997; no restructuring charges were recorded in 1998. Discontinued Operations. In March 1996, as part of the restructuring, the Company ceased operations at its technology center and discharged all employees and consultants engaged in various research and development projects. The Company also ceased operations at Major Sports Fantasies, Inc. ("MSF"), a business unrelated to the environmental industry. No substantial revenues were received from the technology center operations or MSF activities. The expenses associated with operations at the technology center and MSF for all periods presented are reported in the accompanying consolidated statements of operations and cash flows under discontinued operations. The charge for discontinued operations relates primarily to losses from operations and the costs associated with the termination of these operations. At December 31, 1998 and 1997, the Company had reserves and liabilities associated with restructuring activities and discontinued operations of $0 and $778,609, respectively. Note 17. Fairhaven, Massachusetts Operation In 1994, WSI entered into a contract with the Town of Fairhaven, Massachusetts to operate and remodel the Town's existing 26-acre landfill. The Company began operations at the landfill in 1995. On November 8, 1995, an action was brought against various parties including the Company relating to the remodeling permits issued at the Fairhaven landfill, seeking among other things, to appeal the permits that had been issued. On June 2, 1997, the judge ruled in the Company's favor. However, based on the extensive delays associated with the litigation and the engineering impacts of the delays associated with the litigation, which resulted in the uncertainty of the long-term economic viability of the project, the Company terminated the project. On February 24, 1998, the Company entered into a termination agreement with the Town of Fairhaven that required the Company to perform a certain amount of construction and closure work at the landfill. Write-off of project development costs in 1998 and 1997 primarily represent the Company's cost to liquidate the equipment that was used at the Fairhaven landfill and the costs to close the landfill under the Company's Termination Agreement with the Town of Fairhaven. The Company wrote off its capital investment in the project at December 31, 1996. The termination of this project was completed in 1998. No other amounts are accrued at December 31, 1998. 46 Note 18. Segment Information The Company adopted the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information ", on January 1, 1999, for the year ended December 31, 1998. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing their performance. The Company's chief operating decision-maker is the Chief Executive Officer (CEO). The Company manages its business segments primarily on a regional basis. The Company's reportable segments are comprised of Central Massachusetts, Central Upstate New York, Central Pennsylvania and Vermont. Each operating segment provides services as further described in Note 1. The accounting policies of the various segments are the same as those described in the "Summary of Significant Accounting Policies" in Note 2. The Company evaluates the performance of its segments based on operating income (loss), EBITDA and Adjusted EBITDA. Operating income (loss) for each segment includes all expenses directly attributable to the segment, including acquisition related costs, and excludes certain expenses that are managed outside the reportable segments. Costs excluded from segment profit primarily consist of corporate expenses. Corporate expenses are comprised primarily of information systems and other general and administrative expenses separately managed. EBITDA is defined as operating income or loss from continuing operations excluding depreciation and amortization, which includes depreciation and amortization included in selling, general and administrative expenses. EBITDA does not represent, and should not be considered as an alternative to, net income or cash flows from operating activities, each as determined in accordance with GAAP. Adjusted EBITDA represents EBITDA plus one-time charges associated with the write-off of landfill development costs, acquisition integration costs and restructuring costs. Acquisition integration costs consist of one-time, non-recurring costs, which in the opinion of management have no future value and, therefore, are expensed. Such costs include termination and retention of employees, lease termination costs, costs related to the integration of information systems and costs related to the change of name of the acquired company or business. The Company does not include intercompany transfers between segments for management reporting purposes. Segment assets exclude corporate assets. Corporate assets include cash and cash equivalents, office equipment and other assets. Capital expenditures for long-lived assets are not reported to management by segment and are excluded, as presenting such information is not practical. Summary information by segment as of and for the years ended December 31, 1998, 1997 and 1996 is as follows: 1998 1997 1996 ---- ---- ---- Vermont Revenue $10,430,732 $3,457,692 $338,225 Income (loss) from continuing operations 1,603,205 761,433 (95,363) Depreciation and amortization 2,307,776 692,224 104,961 Acquisition integration costs 477,328 - - EBITDA 3,910,981 1,453,657 9,598 Adjusted EBITDA 4,388,309 1,453,657 9,598 Net interest expense 298,369 177,917 - Segment assets 26,105,235 14,986,994 11,124,803 Central Pennsylvania Revenue $6,644,099 $ - $ - Income (loss) from continuing operations (418,827) - - Depreciation and amortization 1,786,435 - - Acquisition integration costs 617,403 - - EBITDA 1,367,609 - - Adjusted EBITDA 1,985,012 - - Net interest expense 46,586 - - Segment assets 44,613,001 132,893 - Central Massachusetts Revenue $1,831,027 $ - $ 1,157,381 Income (loss) from continuing operations (188,864) (1,930,008) (8,886,925) Depreciation and amortization 167,663 - 264,824 Acquisition integration costs 84,276 - - EBITDA (21,202) (1,930,008) (8,622,101) Adjusted EBITDA 298,538 (434,620) (1,970,026) Net interest expense - - 183,499 Segment assets 11,699,773 1,090,170 3.288.827 Central Upstate New York Revenue $2,138,726 $ - $ - Income (loss) from continuing operations (573,510) - - Depreciation and amortization 239,551 - - Acquisition integration costs 685,528 - - EBITDA (333,959) - - Adjusted EBITDA 351,569 - - Net interest expense - - - Segment assets 9,118,715 - - Corporate Revenue $ - $ - $ - Income (loss) from continuing operations (2,860,851) (2,014,165) (2,483,439) Depreciation and amortization 67,396 21,516 1,186,595 Acquisition integration costs - - - EBITDA (2,793,455) (1,992,649) (1,296,844) Adjusted EBITDA (2,793,455) (1,396,223) (444,885) Net interest expense 2,949,574 1,004,334 820,395 Segment assets 4,579,975 2,483,090 2,444,460
47 Note 19. Year 2000 The Company is assessing the readiness of its systems for handling the Year 2000. Although the assessment is still underway, management currently believes that all material systems will be compliant by Year 2000 and that the costs associated with this are not material. The Company has incurred only minimal costs to date associated with the Year 2000 issue. The Company is in the process of identifying key third-party vendors to understand their ability to continue providing services through Year 2000. The Company uses well-regarded nationally known software vendors for both its general accounting applications and industry-specific customer information and billing systems. The Company is implementing a new general accounting package which will be fully Year 2000 compatible, and the provider of the solid waste industry customer information and billing system is Year 2000 compatible. The Company's banking arrangements are with national banking institutions, which are taking all necessary steps to insure its customers' uninterrupted service throughout applicable Year 2000 timeframes. The Company's payroll is performed out-of-house by the largest provider of third party payroll services in the country, which has made a commitment of uninterrupted service to their customers throughout applicable Year 2000 timeframes. While the Company currently expects that the Year 2000 issue will not cause significant operational problems, delays in the implementation of new information systems, or failure to fully identify all Year 2000 dependencies in the Company's systems and in the systems of suppliers and financial institutions could have material adverse consequences. Therefore, the Company is developing contingency plans for continuous operations in the event such problems arise. Note 20. Subsequent Events Senior Notes Offering and Debt Repayment. On March 2, 1999, the Company completed a private placement of $100.0 million of 11.5% Senior Notes (the "Senior Notes") and warrants to purchase an aggregate of 1,500,000 shares of common stock at an exercise price of $6.25 per share (the "Warrants"). The Senior Notes mature on January 15, 2006 and bear interest at 11.5% per annum, payable semi-annually in arrears on each January 15 and July 15, commencing July 15, 1999, subject to prepayment in certain circumstances. The interest rate on the Senior Notes is subject to adjustment upon the occurrence of certain events as provided in the Senior Notes Indenture. The Senior Notes may be redeemed at the option of the Company after March 2, 2003 at redemption prices set forth in the Senior Notes Indenture, together with accrued and unpaid interest. The Warrants are exercisable from September 2, 1999, through March 2, 2004. The number of shares for which, and the price per share at which, a Warrant is exercisable, are subject to adjustment upon the occurrence of certain events as provided in the Warrant Agreement. The net proceeds to the Company, after deducting the discount to the initial purchaser and related issuance costs, was approximately $97.3 million. The Company used a portion of the proceeds from the Senior Notes to repay $20.0 million of the Company's 13% short term notes due June 30, 1999, (the outstanding balance of the 13% short-term notes was $7.5 million at December 31, 1998) $10.0 million of the Howard Bank credit facility and approximately $1.7 million of capital leases and other notes payable. In addition, the Company redeemed approximately $1.45 million principal amount of the Company's 10% Convertible Subordinated Debentures due October 6, 2000 and completed several acquisitions as described below. The Company intends to use the balance of the proceeds for general corporate purposes, including possible future acquisitions and working capital. Conversion of Debt into Equity On March 3, 1999, the Company offered to exchange up to 2,244,109 shares of the Company's Common Stock for a portion of the Company's 7% Subordinated Notes due May 13, 2005. The exchange price per share of $4.63 was equal to the closing price of the Common Stock on the Nasdaq SmallCap Market on the first interim closing as reported by NASDAQ. Any accrued but unpaid interest on the Notes will be paid in cash. As a result of the exchange offer, the Company retired $10,390,000 of its 7% Convertible Subordinated Notes. The remaining 7% Convertible Subordinated Notes are convertible by holders into Common Shares at $10.00 per share. Stock Repurchase With the proceeds of the Senior Notes, the Company repurchased 497,778 shares of the Company's common stock from the Federal Deposit Insurance Corporation (FDIC) for an aggregate purchase price of approximately $2.8 million. Acquisitions Since December 31, 1998 through March 24, 1999, the Company has completed six acquisitions, consisting of 5 collection operations and one landfill. The aggregate purchase price for these acquisitions was approximately $38 million which was paid in cash and the assumption of approximately $3 million of debt. These acquisitions have combined annual revenue of approximately $12 million. The acquisitions have all been recorded using the purchase method of accounting. 48 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Information Regarding Directors The following table and biographical descriptions set forth certain information as of March 15, 1999, unless otherwise specified, with respect to the seven Directors of the Company, all of whom are nominees for reelection at the 1999 Annual Meeting of Stockholders, based on information furnished to the Company by each Director. Directors Director Age Since ----------------------------------- Philip W. Strauss 50 1996 Robert Rivkin 40 1997 Jay Matulich 44 1995 David J. Breazzano 42 1997 Charles Johnston 64 1997 Judy K. Mencher 42 1997 William B. Philipbar 73 1997 - -------------- Philip W. Strauss. Mr. Strauss has been the Chief Executive Officer and President since March 27, 1996 and Chairman of the Board since June 24, 1996. Previously Mr. Strauss had been Executive Vice President and Chief Operating Officer of the Company since September 19, 1995. He has 24 years of experience in project, business and corporate development. Mr. Strauss was co-founder of BioMedical Waste Systems, Inc., a publicly-held waste management firm, where he served as Executive Vice President from its inception in 1987 until May 1992 and as a Director from inception until May 1993. Robert Rivkin. Mr. Rivkin, a Certified Public Accountant, has been Executive Vice President Acquisitions of the Company since April 1998, Vice President and Chief Financial Officer since March 1995, Secretary since May 1995 and Treasurer since June 1996. Mr. Rivkin was first elected to the Board of Directors in June 1997. For the six years prior to joining the Company, Mr. Rivkin was a principal at The Envirovision Group Inc., a full service environmental engineering, consulting and contracting company, where he was responsible for finance, marketing and strategic planning. Previously, Mr. Rivkin practiced public accounting in New York, where he specialized in mergers and acquisitions, initial public offerings and SEC reporting. Jay J. Matulich. Mr. Matulich has been a member of the Board of Directors since March 1995. Mr. Matulich is a Managing Director of International Capital Growth Limited ("ICG"), formerly Capital Growth International L.L.C. and U.S. Sachem Financial Consultants, L.P. He has held this position since 1994. From May 1990 to October 1994, Mr. Matulich was a Vice President of Gruntal & Co., Incorporated, investment bankers. David J. Breazzano. Mr. Breazzano has been a member of the Board of Directors since June 1997. Mr. Breazzano is one of the two principals at DDJ Capital Management, LLC, which was established in 1996. He has over 18 years of investment experience and served as a Vice President and Portfolio Manager at Fidelity Investments ("Fidelity") from 1990 to 1996. Prior to joining Fidelity, Mr. Breazzano was President and Chief Investment Officer of the T. Rowe Price Recovery Fund. Mr. Breazzano also serves as a Director of Key Energy Group, Inc. and Samuel Jewelers, Inc. Charles Johnston. Mr. Johnston has been a member of the Board of Directors since June 1997. During the past 10 years he has served on various boards. Mr. Johnston is currently Chairman of Ventex Technology in Riviera Beach, Florida and has held that position since 1993. He is also currently Chairman of AFD Technologies in Jupiter, Florida. He was previously founder, Chairman, and CEO of ISI Systems, a public company on the American Stock Exchange prior to being sold to Teleglobe Corporation of Montreal, Canada. Mr. Johnston also serves as Trustee of Worcester Polytechnic Institute in Worcester, Massachusetts as well as Trustee for the Institute of Psychiatric Research, University of Pennsylvania in Philadelphia, Pennsylvania. In addition, he serves as director of the following companies - Kideo Productions and Infosafe Systems both of New York City, Hydron Technologies Inc. of Boca Raton, Florida and Spectrum Signal Processing of Vancouver, British Columbia. 49 Judy K. Mencher. Ms. Mencher has been a member of the Board of Directors since August 1997. Ms. Mencher is one of the two principals at DDJ Capital Management, LLC, which was established in 1996. From 1990 to 1996, Ms. Mencher was at Fidelity working in the Distressed Investing Group. Prior to joining Fidelity in 1990, Ms. Mencher was a Partner at the law firm of Goodwin, Procter & Hoar LLP specializing in bankruptcy and creditors' rights. William B. Philipbar. Mr. Philipbar was first elected a Director of the Company on May 8, 1996. He resigned as a Director of the Company on June 24, 1997 and was reelected to the Board on August 20, 1997. Since December 1997, Mr. Philipbar has been a part-time consultant for the Company in connection with the Company's consideration of proposed acquisitions and other strategic matters. Prior to becoming a Director of the Company, Mr. Philipbar served as Chairman of the Delaware Solid Waste Authority fro 1977 to 1987 and was President and Chief Executive Officer of Rollins Environmental Corp. from 1973 to 1984. He has been a Director of Matlack Systems, Inc. and Rollins Truck Leasing Corp. since 1993. Until 1995 he was also an advisor to Charles River Ventures. The Board of Directors and Its Committees Board of Directors The Company's Board of Directors consists of seven members, a majority of whom is independent of the Company's management. Each director holds office for a term from election until the next Annual Meeting of the Company's stockholders and until his or her successor is duly elected and qualified. The Board of Directors held 5 meetings during fiscal year 1998. Each of the Company's directors attended at least 80% of the total number of meetings of the Board of Directors and of the committees of the Company of which he or she was a member. The Board of Directors has appointed a Compensation Committee and an Audit Committee. Compensation Committee. The Compensation Committee currently consists of Messrs. Johnston and Strauss and Ms. Mencher. The Compensation Committee makes recommendations and exercises all powers of the Board of Directors in connection with certain compensation matters, including incentive compensation and benefit plans. The Compensation Committee (excluding Mr. Strauss) administers, and has authority to grant awards under, the Directors' Plan to the employee directors and management of the Company and its subsidiaries and other key employees. The Compensation Committee held 2 meetings during fiscal year 1998. Audit Committee. The Audit Committee currently consists of Messrs. Breazzano, Matulich and Philipbar. The Audit Committee is empowered to recommend to the Board the appointment of the Company's independent public accountants and to periodically meet with such accountants to discuss their fees, audit and non-audit services, and the internal controls and audit results for the Company. The Audit Committee also is empowered to meet with the Company's accounting personnel to review accounting policies and reports. The Audit Committee held 2 meetings during fiscal year 1998. 50 Information Regarding Executive Officers Set forth below is certain information regarding each of the executive officers of the Company, including their principal occupation and business experience for at least the last five years. Name Age Position Philip W. Strauss............ 50 Chief Executive Officer and President Robert Rivkin................ 40 Executive Vice President - Acquisitions,Chief Financial Officer, Secretary and Treasurer Michael J. Leannah........... 46 Senior Vice President and Chief Operating Officer Joseph E. Motzkin............ 56 Vice President - Acquisitions Arthur Streeter.............. 38 Vice President and General Counsel - ----------------- The principal occupation and business experience for at least the last five years of each executive officer of the Company, other than executive officers also serving as Directors, is set forth below. Michael J. Leannah. Mr. Leannah has been a Senior Vice President and the Chief Operating Officer of the Company since July 1998. Prior to joining the Company, he was an Operating Vice President at Superior Services, Inc. From 1986 to 1997, he held various management positions at Waste Management, Inc., most recently serving as Vice President, Operations and State President. Joseph E. Motzkin. Mr. Motzkin has been a Vice President of the Company since August 1996. From 1994 to 1996, Mr.Motzkin was a General Manager at Prins Recycling Corporation where he established recycling programs, and directed sales programs and customer service activities. From 1989 to 1994, he was a General Manager at Laidlaw Waste Systems where he was responsible for their New England operations. Mr. Motzkin has 26 years of experience in the solid waste management business. Arthur Streeter. Mr. Streeter has been Vice President and General Counsel since February 1998. Prior to joining the Company he was a Partner at Goldstein and Manello, a 60 lawyer firm based in Boston, Massachusetts where he gained 12 years of experience representing both private and public companies. Each of the executive officers holds his or her respective office until the regular annual meeting of the Board of Directors following the annual meeting of stockholders and until his or her successor is elected and qualified or until his or her earlier resignation or removal. Compliance with Section 16(a) of the Exchange Act Section 16(a) of the Exchange Act requires the Company's executive officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the SEC and the Nasdaq Small-Cap Market. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required during the fiscal year ended December 31, 1998, all Section 16(a) filing requirements applicable to its executive officers, directors and greater than 10% beneficial owners were satisfied. 51 Item 11. Executive Compensation Director Compensation The Company does not currently pay cash compensation to its directors. Non-employee directors are entitled to stock option grants under the Amended and Restated Waste Systems International, Inc. 1995 Stock Option Plan for Non-Employee Directors (the "Director Plan"). The Director Plan provides for the automatic granting to Independent Directors (as defined in the Director Plan) of options that do not qualify as incentive stock options (referred to as "Stock Options") under Section 422 of the Code. Under the terms of the Director Plan, each Independent Director who first becomes a Director of the Company on or after June 30, 1997 shall automatically be granted on the date he or she becomes a Director of the Company a Stock Option to purchase 20,000 shares of Common Stock. In addition, the Director Plan provides that each Independent Director shall automatically be granted, at the beginning of each calendar year in which he or she is serving as an Independent Director, a Stock Option to acquire 10,000 shares of Stock. Each Independent Director entering service after the start of any calendar year will automatically be granted on the effective date of his or her Board membership a Stock Option to acquire a portion of 10,000 shares of Stock prorated to reflect the remaining portion of such calendar year. The exercise price per share for the Common Stock covered by any Stock Option granted under the Director Plan shall be equal to the fair market value of the Common Stock on the date such option is granted. Other than Stock Options to acquire 20,000 shares of Stock granted automatically to each new director joining the Board on or after June 30, 1997, which Stock Options vest immediately upon grant, options granted under the Director Plan shall vest at a rate of 25% of the total number of shares of Common Stock purchasable under such option for each year that the holder remains a Director of the Company, such vesting to take place at the end of each of the first four calendar years following issuance of such options. An option issued under the Director Plan shall not be exercisable after the expiration of ten years from the date of grant. Executive Compensation Summary Compensation Table. The following table sets forth the aggregate cash compensation paid by the Company with respect to the fiscal years ended December 31, 1998, 1997 and 1996 to the Company's Chief Executive Officer and the three other senior executive officers in office on December 31, 1998 who earned at least $100,000 in cash compensation during 1998 (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE Long-Term Compensation Awards Annual Shares Compensation Underlying Salary Options (1) Name and Principal Position Year ($) (#) - --------------------------- ---- -------------------------------- Philip Strauss 1998 188,172 250,000 Chairman of the Board, 1997 162,504 522,859 President and Chief 1996 150,000 50,000(2) Executive Officer Robert Rivkin 1998 187,506 250,000 Executive Vice President - Acquisitions, 1997 162,504 522,859 Chief Financial Officer, Secretary and Treasurer 1996 150,000 41,250 Joseph Motzkin(3) 1998 118,060 40,000 Vice President - Acquisitions 1997 110,000 19,300 Arthur Streeter(4) 1998 118,428 40,000 Vice-President and General Counsel
(1) All information with respect to outstanding options, including shares issuable or issued and exercise prices payable or paid per share, has been adjusted to reflect the 1-for-5 reverse stock split effective February 13, 1998. (2) Includes the options to acquire 40,000 shares of Common Stock granted in 1995 and repriced in 1996. (3) Includes Mr. Motzkin's salary for 1998 and 1997 only as Mr. Motzkin did not join the Company until the third quarter of 1996. (4) Includes Mr. Streeter's salary for 1998 only as Mr. Streeter joined the Company in February 1998. 52 Option Grants in Fiscal Year 1998. The following table sets forth the options granted during fiscal year 1998 and the value of the options held on December 31, 1998 by the Company's Named Executive Officers. OPTION GRANTS IN FISCAL YEAR 1998 (1) Percent of Total Number of Options Granted Exercise or Shares Underlying to Employees in Base Price Expiration Grant Date Name Options Granted(#) Fiscal Year ($ /share) Date Present Value$(2) - ---- ------------------ ------------------- ---------- ------------- -------------- Philip Strauss 250,000 24% $6.25 4/17/08 $767,000 Robert Rivkin 250,000 24% $6.25 4/17/08 $767,000 Joseph Motzkin 40,000 4% $6.25 4/17/08 $122,720 Michael Leannah 75,000 7% $9.25 7/20/08 $126,525 Arthur Streeter 30,000 3% $3.44 2/2/08 $ 50,610 Arthur Streeter 10,000 1% $6.25 4/17/08 $ 30,680
(1) All information with respect to outstanding options, including shares issuable or issued and exercise prices payable or paid per share, has been adjusted to reflect the 1-for-5 reverse stock split effective February 13, 1998. (2) The grant date present value was determined using the Black Scholes option pricing model with the following weighted average assumptions; volatility, 50%; expected dividend yield, 0%; risk free interest rate, 4.75% and expected life, 5 years. Option Exercises and Year-End Holdings. The following table sets forth the options exercised during fiscal year 1998 and the value of the options held on December 31, 1998 by the Company's Named Executive Officers. AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998 AND FISCAL YEAR-END 1998 OPTION VALUES Number of Securities Underlying Value of Unexercised Shares Unexercised Options in-the-Money Options Acquired On Value at Fiscal Year-End (#) at Fiscal Year-End ($) Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable ----------------------------------- -------------- -------------------------------------------------- ----------------- Philip Strauss 0 0 180,715 642,144 $739,847 $2,628,937 Robert Rivkin 0 0 180,715 642,144 739,847 2,628,937 Joseph Motzkin 0 0 9,825 59,475 40,224 79,731
53 Employment Agreements. On June 30, 1998, the Company and Mr. Strauss entered into an employment agreement. The terms of the agreement provide (i) that Mr. Strauss shall serve as the Company's President and Chief Executive Officer, (ii)that he receive a salary of $200,000 per year through June 30, 1999 and $225,000 per year through June 30, 2000 and (iii) that he agree not to compete with the Company following termination of his employment for a period of one year following the termination. In the event that Mr. Strauss is terminated for cause, he shall not be bound to the non-competition provisions. The Company's agreement with Mr. Strauss is effective until June 30, 1999 and, absent ninety-day notice from either party to the contrary, shall be extended automatically for subsequent one-year terms upon the expiration of the agreement. The Company's agreement with Mr. Strauss may be terminated at any time by the mutual consent of the parties. On June 30, 1998, the Company and Mr. Rivkin entered into an employment agreement. The terms of the agreement provide (i) that he receive a salary of $200,000 per year through June 30, 1999 and $225,000 per year through June 30, 2000 per year and (iii) that he agree not to compete with the Company following termination of his employment for a period of one year following the termination. In the event that Mr. Rivkin is terminated for cause, he shall not be bound to the non-competition provisions. The Company's agreement with Mr.Rivkin is effective until June 30, 1999 and, absent ninety-day notice from either party to the contrary, shall be extended automatically for subsequent one-year terms upon the expiration of the agreement. The Company's agreement with Mr. Rivkin may be terminated at any time by the mutual consent of the parties. Compensation Committee Interlocks and Insider Participation Currently, Philip W. Strauss, Charles Johnston and Judy K. Mencher serve on the Compensation Committee. Philip W. Strauss, in addition to serving as a member of the Compensation Committee, is the Chief Executive Officer and President. No other member of the Compensation Committee in 1997 ever served as an officer of the Company. 54 Item 12. Security Ownership of Certain Beneficial Owners and Management The following table presents information as to all directors and senior executive officers of the Company as of March 15, 1999 and persons or entities known to the Company to be beneficial owners of more than 5% of the Company's Common Stock as of March 15, 1999, unless otherwise indicated, based on representations of officers and directors of the Company and filings received by the Company on Schedules 13D and 13G or Form 13F under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Beneficial Ownership Common Stock ------------------------------------------------- # of Shares % of Class Directors, Executive Officers and 5% Stockholders(1) Beneficially Beneficially Owned Owned(2) - ---------------------------------------------------------------------------------------------------------------------- B-III Capital Partners, L.P.(3) 45.4% c/o DDJ Capital Management, LLC 6,367,406 141 Linden Street Wellesley, MA 02181 The Prudential Insurance Company of America (4) 6.9% 100 Mulberry Street 791,611 Newark, NJ 07102 PaineWebber High Income Fund (5) 1285 Avenue of the Americas 1,717,194 14.1% New York, NY 10019 John Hancock Advisers(6) 1,150,000 9.3% 101 Huntington Avenue Boston, MA 02199 BEA Associates (Credit Suisse) (7) 700,000 5.9% 153 East 53 Street, 57th Floor New York, NY 10022 735,000 6.5% Dawson Samberg Capital Management, Inc,(8) 354 Pequot Avenue Southport, CT 06490 David J. Breazzano(9) 6,750 * Charles Johnston(10) 6,750 * Jay Matulich(11) 7,000 * Judy K. Mencher(9) 6,685 * Joseph Motzkin(12) 45,553 * William B. Philipbar(13) 31,685 * Robert Rivkin(14) 261,168 2.3% Philip W. Strauss(15) 260,993 2.3% All directors and officers as a 626,584 5.6% Group (8 persons)
55 less than 1% (1) The persons named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them subject to community property laws where applicable and the information contained in footnotes to this table. (2) Based on 11,220,546 shares of Common Stock issued and outstanding as of March 15, 1999. As of March 15, 1999 the Company had outstanding 7% Convertible Subordinated Notes due 2005 which are currently convertible at the option of the holder into an aggregate 6,000,000 shares of Common Stock at a conversion price of $10.00 as set forth in the Notes. The Company is currently conducting a private exchange offering with respect to the 7% Subordinated Notes, scheduled to expire March 31, 1999, pursuant to which it is offering to issue up to 2,244,109 shares in exchange for the tender of 7% Subordinated Notes at the face value of their principal amount (plus a cash payment for accrued interest). The exchange price for Common Stock issued in such exchange offer is $4.63 per share, or $5.37 per share less than the $10 per share conversion price under the terms of the 7% Subordinated Notes. Assuming the Company issues 2,244,109 shares of Common Stock in the exchange offer at an exchange price of $4.63 per share, the Company would be obligated to issue upon conversion of all remaining outstanding 7% Subordinated Notes an aggregate of 4,960,978 shares of Common Stock, which aggregate figure includes an additional 1,205,087 shares of Common Stock issuable as a result of the difference between the $4.63 per share exchange price and the $10 per share conversion price. In accordance with Exchange Act rules promulgated by the Commission, the foregoing shares issuable upon conversion of the 7% Convertible Subordinated Notes are included in this table only for those holders with the right to acquire such shares within 60 days from the date of this report, to the extent such holder could acquire additional shares. (3) Includes 3,567,406 shares of Common Stock currently owned and 2,800,000 shares issuable upon conversion of 7% Convertible Subordinated Notes at a conversion price of $10.00 as set forth in the Note. DDJ Capital Management, LLC ("DDJ") serves as the investment manager to B-III Capital Partners, L.P. ("B III"); an affiliate of DDJ acts as the general partner of B III. Assuming its pro rata participation in the private exchange offering described in footnote 2 above, B III might receive an additional 562,374 shares as a result of the private exchange offering price being lower than the conversion price in the Note which would result in B III owning approximately 47.5% of the Common Stock. (4) Includes 591,611 shares of Common Stock currently owned and 200,000 shares issuable upon conversion of 7% Convertible Subordinated Notes at a conversion price of $10.00 as set forth in the Note. Assuming its pro rata participation in the private exchange offering described in footnote 2 above, Prudential might receive an additional 40,170 shares as a result of the private exchange offering price being lower than the conversion price in the Note which would result in Prudential owning approximately 7.3% of the Common Stock. The Common Stock and Notes are held for the benefit of certain registered investment companies over which Prudential or The Prudential Investment Corporation ("PIC") may have direct or indirect voting and/or investment discretion, with respect to which Prudential has advised the Company that Prudential and PIC disclaim beneficial ownership. (5) Includes 717,194 shares of Common Stock currently owned and 1,000,000 shares issuable upon conversion of 7% Convertible Subordinated Notes at a conversion price of $10.00. Assuming its pro rata participation in the private exchange offering described in footnote 2 above, Paine Webber might receive an additional 208,848 shares as a result of the private exchange offering price being lower than the conversion price in the Note which would result in Paine Webber owning approximately 15.4% of the Common Stock. (6) Includes 1,150,000 shares issuable upon conversion of 7% Convertible Subordinated Notes at a conversion price of $10.00. Assuming its pro rata participation in the private exchange offering described in footnote 2 above, John Hancock might receive an additional 230,975 shares as a result of the private exchange offering price being lower than the conversion price in the Note which would result in John Hancock owning approximately 11.0% of the Common Stock. (7) Includes 700,000 shares issuable upon conversion of 7% Convertible Subordinated Notes at a conversion price of $10.00. Assuming its pro rata participation in the private exchange offering described in footnote 2 above, BEA Associates might receive an additional 140,593 shares as a result of the private exchange offering price being lower than the conversion prices in the Note which would result in BEA Associates owning approximately 7.0% of the Common Stock. (8) Includes 585,000 shares of Common Stock currently owned and 150,000 shares issuable upon conversion of 7% Convertible Subordinated Notes with a conversion price of $10.00. Assuming its pro rata participation in the private exchange offering described in footnote 2 above. Dawson Samberg might receive an additional 56,103 shares as a result of the private exchange offering price being lower than the conversion prices in the Note which would result in Dawson Samberg owning approximately 6.9% of the Common Stock. (9) Includes 6,750 shares subject to stock options which are fully vested and currently exercisable and excludes those shares owned by B III, which Mr. Breazzano and Ms. Mencher may be deemed to beneficially own as a result of Mr. Breazzano's and Ms. Mencher's interest in DDJ, however, such beneficial ownership is disclaimed. Both Mr. Breazzano and Ms. Mencher are managing members of DDJ. (10) Includes 6,750 shares subject to stock options which are fully vested and currently exercisable. (11) Includes 2,000 shares of Common Stock currently owned and 5,000 shares subject to stock options which are fully vested and currently exercisable. (12) Includes 18,403 shares of Common Stock currently owned and 27,150 shares subject to stock options which are fully vested and currently exercisable. (13) Includes 31,685 shares subject to stock options which are fully vested and currently exercisable. (14) Includes 17,953 shares of Common Stock currently owned and 243,215 shares subject to stock options which are fully vested and currently exercisable. (15) Includes 17,778 shares of Common Stock currently owned and 243,215 shares subject to stock options which are fully vested and currently exercisable. 56 Item 13. Certain Relationships and Related Transactions On December 15, 1997, the Board of Directors voted to retain Mr. William Philipbar, a Non-Employee Director of the Company, as a part-time consultant in connection with the Company's consideration of proposed acquisitions and other strategic matters. Mr. Philipbar's compensation for providing such consulting services for up to four days per month, as requested by the Company, consists of grants of options to acquire 25,000 shares of Common Stock to be granted on January 1 of each year (beginning January1, 1998) so long as Mr. Philipbar continues to be so retained by the Company. Under such consulting arrangement, Mr. Philipbar received options on January 1, 1998 and 1999 to acquire 25,000 shares of Common Stock, vesting according to the terms described below. Such grants are made under an amendment of the Company's Amended and Restated 1995 Stock Option and Incentive Plan (the "Plan") permitting the grant of options and other benefits under the Plan to Non-Employee Directors, consultants and other key persons, which was approved by the Company's stockholders at the August 18, 1998 Annual Meeting of Stockholders. Each such option granted to Mr. Philipbar under such consulting arrangement (a) shall remain outstanding for a term of ten years, subject to termination 90 days following the date of termination of Mr. Philipbar's consulting arrangement with the Company; (b) shall be exercisable at an exercise price per share equal to the closing price of the Common Stock on its principal trading market on the first trading day on or after the date of issuance; (c) shall initially be unvested, and shall vest in full on the date one year after the date of issuance, provided that Mr. Philipbar has been retained as a consultant by the Company and has been ready, willing and able to perform services as such consultant during such one year period; and (d) shall be a non-qualified stock option for income tax purposes. 57 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (A) 1. Financial Statements The financial statements are listed under Part II, Item 8 of this Report. 2. Financial Statement Schedules The financial statement schedules are listed under Part II, Item 8 of this Report. 3. Exhibits The exhibits are listed below under Part IV, Item 14(c) of this report. (B) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1998. (C) Exhibits Exhibit No. Description 1.1 Purchase Agreement, dated February 25, 1999, by and among First Albany Corporation and Waste Systems International, Inc. and its subsidiaries. (Incorporated by reference to Exhibit No. 1.1 of the Company's Current Report on Form 8-K, dated March 2, 1999.) 2.1 Articles of Merger of BioSafe International, Inc., a Nevada Corporation, with and into Waste Systems International, Inc., a Delaware Corporation, filed October 24, 1997 (Incorporated by reference to Exhibit 2.1 to Form 10-Q For the Quarterly Period Ended September 30, 1997 of Waste Systems International, Inc.) 2.2 Certificate of Merger of BioSafe International, Inc., a Nevada Corporation, with and into Waste Systems International, Inc., a Delaware Corporation, filed October 24, 1997 and effective October 27, 1997. (Incorporated by reference to Exhibit 2.2 to Form 10-Q For the Quarterly Period Ended September 30, 1997 of Waste Systems International, Inc.) 2.3 Agreement and Plan of Merger dated October 17, 1997 by and between BioSafe International, Inc. a Nevada Corporation and Waste Systems International, Inc. a Delaware Corporation. (Incorporated by reference to Exhibit 2.3 to Form 10-Q For the Quarterly Period Ended September 30, 1997 of Waste Systems International, Inc.) 3(i).1 Second Amended and Restated Certificate of Incorporation of Waste Systems International, Inc. filed February 13, 1998. 3(i).2 Certificate of Designations of Series B Convertible Preferred Stock of Waste Systems International, Inc. filed March 5, 1998. 3(i).3 Certificate of Corrections to the Second Amended and Restated Certificate of Incorporation of Waste Systems International, Inc. as filed February 13, 1998),filed March 17, 1998. 3(ii).1 Bylaws of the Company, adopted and effective as of October 27, 1997. 4.4 Certificate of Designation of Series A Convertible Preferred Stock of Waste Systems International, Inc. filed October 20, 1997 (Refer to Exhibit 3(i).3 above). 4.5 Certificate of Designation of Series B Convertible Preferred Stock of Waste Systems International, Inc. filed October 20, 1997 (Refer to Exhibit 3(i).2 above). 4.6 Amended and Restated Subscription Agreement dated as of June 30, 1997 (Incorporated by reference to Exhibit 4.2 to Form 10-Q for the Quarterly Period Ended September 30, 1997 of Waste Systems International, Inc.) 4.7 Indenture, dated as of March 2, 1999, between Waste Systems International, Inc. and IBJ Whitehall Bank & Trust Company, including a form of the 11 1/2% Senior Note due 2006. (Incorporated by reference to Exhibit No. 4.1 of the Company's Current Report on Form 8-K, dated March 2, 1999.) 4.8 Warrant Agreement, dated as of March 2, 1999, between Waste Systems International, Inc. and subsidiaries and IBJ Whitehall Bank & Trust Company, a New York banking corporation as warrant agent. (Incorporated by reference to Exhibit No. 4.2 of the Company's Current Report on Form 8-K, dated March 2, 1999.) 4.9 Note Registration Rights Agreement, dated as of March 2, 1999, by and among Waste Systems International, Inc. and its subsidiaries and First Albany Corporation. (Incorporated by reference to Exhibit No. 4.3 of the Company's Current Report on Form 8-K, dated March 2, 1999.) 4.10 Warrant Registration Rights Agreement, dated as of March 2, 1999, by and among Waste Systems International, Inc. and its subsidiaries and First Albany Corporation. (Incorporated by reference to Exhibit No. 4.4 of the Company's Current Report on Form 8-K, dated March 2, 1999.) 10.4 Agreement and Plan of Merger dated as of March 17, 1995, among the Company, Zoe Resources, Inc., certain stockholders of the Company and BioSafe, Inc. (Incorporated by Reference to Exhibit 2.1 of the Company's Current Report on Form 8-K, dated March 29, 1995.) 10.5 1995 Stock Option Plan (Incorporated by Reference to Exhibit 10.1 of the Company's Current Report on Form 8-K, dated March 29, 1995.) 10.6 Agreement between BioSafe, Inc. and the Town of South Hadley, Massachusetts, dated August 22, 1995. (Incorporated by reference to Exhibit No. 10.12 to the Registration Statement on Form S-1 of BioSafe International, Inc., No. 33-93966 as filed on June 26 1995.) 10.7 Form of 10% Convertible, Redeemable, Subordinated Note Due 2000. (Incorporated by reference to Exhibit No. 10.15 to the Registration Statement on Form S-1 of BioSafe International, Inc., No. 33-93966.) Schedule of Subsidiaries. 27.1 Financial Data Schedules 58 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WASTE SYSTEMS INTERNATIONAL, INC. Date: March 31, 1999 By: /s/ Philip Strauss ------------------ Philip Strauss Chairman, Chief Executive Officer and President (Principal Executive Officer) Date: March 31, 1999 By: /S/ Robert Rivkin ------------------ Robert Rivkin Executive Vice President -Acquisitions, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 31, 1999 By: /s/ Philip Strauss ------------------------- Philip Strauss Chairman, Chief Executive Officer and President (Principal Executive Officer) Date: March 31, 1999 By: /S/ Robert Rivkin ---------------------------- Robert Rivkin Executive Vice President -Acquisitions, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) Date: March 31, 1999 By: /S/ Jay J. Matulich ----------------------------- Jay J. Matulich - Director Date: March 31, 1999 By: /S/ David J. Breazzano ------------------------------ David J. Breazzano - Director Date: March 31, 1999 By: /S/ Charles Johnston ------------------------------ Charles Johnston - Director Date: March 31, 1999 By: /S/ Judy K. Mencher ------------------------------ Judy K. Mencher - Director Date: March 31, 1999 By: /S/ William B. Philipbar ------------------------------- William B. Philipbar - Director 59 Exhibit 21.1 Schedule of Subsidiaries As of December 31, 1998 Name and address: EIN WSI Medical-Waste Systems, Inc. 04-3377563 (Formerly Biosafe Medical Waste Technology, Inc.) 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 WSI Vermont 03-0347845 (Formerly Waste Professionals of Vermont, Inc.) 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 WSI Moretown 03-0355691 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 WSI Burlington Transfer Station,Inc. 04-3374689 (Formerly Burlington Area Transfer Station, Inc.) 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 WSI Waitsfield Transfer Station, Inc. 04-3292469 (Formerly Waitsville Transfer Station, Inc. 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 WSI of Vermont, Inc. 03-0354296 (Formerly WPV Disposal, Inc.) 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 WSI of Massachusetts Holdings, Inc. 04-3301441 (Formerly Biosafe Buckland, Inc.) 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 WSI of Fairhaven, Inc. 04-3301442 (Formerly Biosafe Fairhaven, Inc.) 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 WSI of South Hadley, Inc. 04-3086959 (Formerly Biosafe, Inc.) 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 WSI Pennsylvania Holdings, Inc. 04-3301448 (Formerly Biosafe Mid-Atlantic, Inc.) 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 WSI Hopewell Landfill, Inc. 04-3301445 (Formerly Biosafe Pennsylvania, Inc.) 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 WSI of Pennsylvania, Inc. 04-3301449 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 WSI of Pennsylvania Transportation, Inc. 04-3301450 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 WSI Altoona Transfer Station, Inc. 04-3301447 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 Biosafe Systems, Inc. 36-4027808 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 Eagle Recycling, Inc. 23-2640932 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 Horvath Sanitation, Inc. 25-1685001 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 Mostoller Landfill, Inc. 25-1622775 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 WSI St. Johnsbury Transfer Station, Inc. 03-0356503 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 WSI New York Holdings, Inc. 04-3428760 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 WSI of New York, Inc. 04-3434005 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 Mattei-Flynn Trucking, Inc. 04-2989917 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 Mass Wood Recycling, Inc. 04-3454163 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 WSI Maryland Holdings, Inc. 04-3428758 420 Bedford Street, Suite 300 Lexington, Massachusetts 02420 60 EX-27 2 FDS --
5 0000847468 WASTE SYSTEMS INTERNATIONAL, INC. 1 USD 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 193613 0 5457562 222028 0 10198432 48948513 4262778 96116699 16718221 60000000 0 0 117184 37810712 96116699 21044584 21044584 12399529 19000952 4482478 0 (4073693) (6205925) 43174 (6249099) 0 (246539) 0 (6495634) (1.00) (1.00)
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