EXHIBIT 99.2
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 1995 and 1994 and for each
of the three years in the period ended December 31, 1995
5
Report of Independent Accountants
To the Board of Directors and Stockholders,
Organic Waste Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Organic Waste
Technologies, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in common stock and other
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
Organic Waste Technologies, Inc. and Subsidiaries' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Organic Waste
Technologies, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 15 of the Notes to Consolidated Financial Statements,
Organic Waste Technologies, Inc. and Subsidiaries was sold to EMCON, a public
registrant, effective February 29, 1996 in a stock transaction.
COOPERS & LYBRAND L.L.P.
Cleveland, Ohio
April 5, 1996
6
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
as of December 31, 1995 and 1994
1995 1994
ASSETS ---- ----
Current assets:
Cash and cash equivalents .............................................. $ 198,716 $ 168,336
Accounts receivable, trade, net ........................................ 4,306,979 3,775,405
Accounts receivable, other ............................................. 14,905 18,173
Costs and estimated earnings in excess of billings on
uncompleted contracts .............................................. 302,231 126,960
Inventories ............................................................ 851,617 694,482
Prepaid expenses ....................................................... 79,712 40,566
Deferred income taxes .................................................. 146,414 15,211
----------- -----------
Total current assets .......................................... 5,900,574 4,839,133
----------- -----------
Property, plant and equipment:
Buildings and equipment ................................................ 3,795,732
Field equipment and tools .............................................. 2,678,805 2,120,244
Office equipment ....................................................... 220,342 192,656
Vehicles ............................................................... 198,523 220,058
Uncompleted energy recovery systems and facilities ..................... 1,289,799 3,493,773
----------- -----------
8,183,201 6,026,731
Less accumulated depreciation .......................................... 2,127,214 1,527,678
----------- -----------
Total property, plant and equipment, net ............................... 6,055,987 4,499,053
----------- -----------
Other assets:
Debt issuance costs, net ............................................... 124,982 128,651
Organization and software costs, net ................................... 2,867 20,331
Deferred project procurement costs ..................................... 145,647 150,000
Deferred income taxes .................................................. 41,616
Other .................................................................. 14,953 16,029
----------- -----------
Total other assets ............................................ 288,449 356,627
----------- -----------
Total assets .................................................. $12,245,010 $ 9,694,813
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
7
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
as of December 31, 1995 and 1994
LIABILITIES AND COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY 1995 1994
Current liabilities:
Accounts payable, trade ................................................. $ 2,197,702 $ 1,851,971
Billings in excess of costs and estimated earnings
on uncompleted contracts ............................................ 376,208 391,395
Note payable to bank .................................................... 250,000 668,969
Current portion of subordinated and long-term debt ...................... 428,572 217,499
Due to minority stockholder of consolidated subsidiary .................. 10,000
Income taxes payable .................................................... 508,360 75,000
Accrued expenses ........................................................ 853,793 652,442
------------ ------------
Total current liabilities ...................................... 4,614,635 3,867,276
Long-term debt, less current portion ......................................... 3,335,029 1,956,988
Subordinated long-term debt, less current portion ............................ 300,000
Deferred income taxes ........................................................ 67,063 5,476
------------ ------------
Total liabilities .............................................. 8,016,727 6,129,740
------------ ------------
Commitments and contingencies
Minority interest in consolidated subsidiaries ............................... 125,467 86,440
------------ ------------
Series A convertible redeemable preferred stock, $.01 par
value; 1,360,000 shares authorized, issued and outstanding .............. 1,683,907 1,683,907
Series B convertible redeemable preferred stock, $.01 par
value; 740,740 shares authorized, issued and outstanding ................ 995,617 995,617
Series C convertible redeemable preferred stock, $.01 par
value; 740,741 shares authorized, issued and outstanding ................ 990,098 990,098
------------ ------------
Total convertible redeemable preferred stock ................... 3,669,622 3,669,622
------------ ------------
Common stock and other stockholders' equity:
Common stock, par value $.01/share, at stated value; 7,500,000
shares authorized in 1995 and 1994, 712,000 shares issued and
outstanding in 1995 and 1994 ........................................ 236,256 236,256
Retained earnings (accumulated deficit) ................................. 548,468 (211,835)
------------ ------------
784,724 24,421
Less treasury stock, 546,000 in 1995 and 364,507 in 1994,
of common shares, at cost ........................................... (351,530) (215,410)
------------ ------------
Total common stock and other stockholders' equity ................... 433,194 (190,989)
------------ ------------
Total liabilities and common stock and other stockholders' equity ... $ 12,245,010 $ 9,694,813
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
8
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
Revenues:
Contracts ................................................... $ 13,072,939 $ 10,292,805 $ 7,331,534
Other ....................................................... 4,445,744 2,820,715 1,893,858
------------ ------------ ------------
Total revenues ..................................... 17,518,683 13,113,520 9,225,392
Total direct cost of revenues .................................... 13,590,180 10,911,302 7,604,575
------------ ------------ ------------
Gross profit ..................................................... 3,928,503 2,202,218 1,620,817
Selling, general and administrative expenses ..................... 2,200,614 1,535,566 1,292,518
------------ ------------ ------------
Income from operations ........................................... 1,727,889 666,652 328,299
------------ ------------ ------------
Other income (expenses):
Interest income ............................................. 1,750 2,231 2,859
Interest expense ............................................ (350,860) (126,501) (74,768)
Gain (loss) on sale of equipment ............................ 2,032 19,441 (91,696)
------------ ------------ ------------
Total other (expenses), net ........................ (347,078) (104,829) (163,605)
------------ ------------ ------------
Income before minority interest in consolidated
subsidiaries and income taxes ............................... 1,380,811 561,823 164,694
Minority interest in consolidated subsidiaries ................... (39,027) (37,468) (24,680)
------------ ------------ ------------
Income before provision for income taxes ......................... 1,341,784 524,355 140,014
------------ ------------ ------------
Provision for income taxes ....................................... (566,800) (23,649)
------------ ------------ ------------
Net income .............................................. $ 774,984 $ 500,706 $ 140,014
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
9
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Common Stock and Other Stockholders' Equity for the
years ended December 31, 1995, 1994 and 1993
Paid-In
Capital, Retained
Common Earnings Treasury
Stock (Accumulated Stock,
Common Warrants Deficit) at Cost Total
Balances at December 31, 1992 ........................... $ 236,256 $ 9,000 $(852,555) $(113,706) $(721,005)
Net income ......................................... 140,014 140,014
--------- --------- --------- --------- ---------
Balances at December 31, 1993 ........................... 236,256 9,000 (712,541) (113,706) (580,991)
Purchase of 214,507 shares of treasury stock ....... (101,704) (101,704)
Expiration of common stock warrants ................ (9,000) (9,000)
Net income ......................................... 500,706 500,706
--------- --------- --------- ---------
Balances at December 31, 1994 ........................... 236,256 (211,835) (215,410) (190,989)
Purchase of 181,493 shares of treasury stock ....... (136,120) (136,120)
Net income ......................................... 774,984 774,984
Dividends .......................................... (14,681) (14,681)
--------- --------- --------- --------- ---------
Balances at December 31, 1995 ........................... $ 236,256 $ -- $ 548,468 $(351,530) $ 433,194
========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
10
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
Cash flows from operating activities:
Net income ........................................................... $ 774,984 $ 500,706 $ 140,014
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ........................................ 845,569 512,708 462,852
Deferred income taxes ................................................ (28,000) (51,351)
Minority interest in consolidated subsidiaries ....................... 39,027 37,468 24,680
(Gain) loss on sale of equipment ..................................... (2,032) (19,441) 91,696
Changes in other current assets and liabilities:
Accounts receivable, trade, net .................................. (531,574) (1,277,586) (1,042,227)
Accounts receivable, other ....................................... 3,268 18,897 (21,624)
Costs and estimated earnings in excess of billings
on uncompleted contracts .................................... (175,271) 401,251 (483,086)
Inventories ...................................................... (258,277) (433,523) (190,085)
Prepaid expenses ................................................. (39,146) 24,035 (4,302)
Accounts payable, trade .......................................... (141,691) 6,816 1,143,961
Billings in excess of costs and estimated earnings
on uncompleted contracts .................................... (15,187) 391,395 (9,740)
Income taxes payable ............................................. 433,360 75,000
Accrued expenses ................................................. 186,670 327,582 130,239
Other, net ....................................................... 1,078 (5,550) (1,019)
----------- ----------- -----------
Net cash provided by operating activities ................... 1,092,778 508,407 241,359
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment ............................ (502,785) (469,660) (163,328)
Proceeds from sale of equipment ...................................... 48,166 135,683 195,351
Costs incurred related to energy recovery systems and
facilities ....................................................... (1,289,799) (3,143,838) (87,253)
Proceeds from repayment of notes receivable, stockholders ............ 22,913
Payment of debt issuance costs ....................................... (29,972) (79,716) (26,316)
Payment of organization and software costs ........................... (6,386) (19,723) (8,866)
Payment of deferred project procurement costs ........................ (5,647)
----------- ----------- -----------
Net cash used in investing activities ............................ (1,786,423) (3,577,254) (67,499)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from debt ................................................... 4,868,687 4,306,440 830,083
Payment of debt ...................................................... (3,998,542) (1,938,271) (1,047,005)
Payment of amount due to minority stockholder in
consolidated subsidiary .......................................... (10,000) (60,000) (79,000)
Payment of fees related to the issuance of Series A and B
preferred stock .................................................. (3,000)
Payment of fees related to the issuance of Series C
preferred stock .................................................. (9,902)
Purchase of shares of treasury stock ................................. (136,120) (101,704)
Proceeds from issuance of preferred stock ............................ 1,000,000
----------- ----------- -----------
Net cash provided by (used in) financing activities .............. 724,025 3,196,563 (298,922)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ...................... 30,380 127,716 (125,062)
Cash and cash equivalents at beginning of year ............................ 168,336 40,620 165,682
----------- ----------- -----------
Cash and cash equivalents at end of year .................................. $ 198,716 $ 168,336 $ 40,620
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
11
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
Supplemental disclosures of cash flows information:
Cash paid during the year for:
Income taxes ........................................................................ $161,440
========
Interest ............................................................................ $337,469 $126,501 $ 74,768
======== ======== ========
Non-cash operating and investing activities:
Amounts not paid and recognized in accounts payable for costs
incurred related to energy recovery systems and
facilities ...................................................................... $487,422 $262,682
======== ========
Non-cash financing activities:
Incurrance of a liability to minority shareholder less $1,000 for
subsidiary's issuance of KRI Class B Common Stock related to
project procurement costs; see Note 5 .................................... $ 11,088 $149,000
======== ========
Dividends declared and accrued ...................................................... $ 14,681
========
The accompanying notes are an integral part of these consolidated financial
statements.
12
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies:
Company's Formation and Activities: Organic Waste Technologies, Inc. was
incorporated on August 31, 1987 for the purpose of engaging in the business
of constructing methane gas recovery systems primarily for the landfill
industry.
On July 5, 1989, Organic Waste Technologies, Inc. entered into an Agreement
and Plan of Merger (the "Merger Agreement") with Organic Waste
Technologies, Inc., a Delaware corporation ("OWT Delaware"). Under the
terms of the Merger Agreement, Organic Waste Technologies, Inc. merged into
OWT Delaware, with OWT Delaware being the surviving corporation to be known
as Organic Waste Technologies, Inc. (the "Company" and/or "OWT").
On October 22, 1990, the Company acquired the remaining 49% minority
interest in one of its subsidiaries valued at $13,174 in consideration for
27,000 shares of the Company's common stock. Concurrent with the
transaction, the Company issued 10% of the majority-owned subsidiary's
common stock to its President.
On May 21, 1993, the Company formed a new subsidiary, Omni Gen
Technologies, Inc. ("OGT"). OGT is 100% owned and operated by the Company
and was formed for the purpose of engaging in the business of recovering
landfill gas for conversion to alternate forms of energy and for the
operation and maintenance of other completed construction contracts.
On June 24, 1993, OGT purchased 95% of Keystone Recovery, Inc. ("KRI"). KRI
constructed a 5.25 megawatt capacity electric generating facility fueled by
landfill gas from a landfill site in eastern Pennsylvania (the "KRI
Project"). In 1994, KRI entered into a twenty year agreement with
Pennsylvania Power and Light for the sale of electricity produced by KRI.
The KRI Project began operations in January 1995.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its Subsidiaries. All significant
intercompany accounts and transactions are eliminated. Minority interests
are presented under the parent company method and are not considered part
of common stock and other stockholders' equity.
Income Recognition: Profits on contracts are recorded on the basis of the
Company's estimates of the percentages of completion of the individual
contracts, commencing when progress reaches a point where experience is
sufficient to estimate final results with reasonable accuracy. That portion
of the total contract price is accrued which is allocable to contract
expenditures incurred and work performed on the basis of the Company's
estimates of the percentage of completion.
Revisions in cost and profit estimates of contracts are reflected in the
accounting period in which the facts which require the revision become
known. At the time a loss on a contract becomes known, the entire amount of
the estimated ultimate loss is accrued (see Note 3).
The work is performed primarily under fixed price contracts. The length of
the contracts vary, but is typically less than one year.
13
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
1. Summary of Significant Accounting Policies, Continued:
Other revenues represent non-contract revenues resulting from the sale of
inventories and the short-term, month-to-month rentals of finished goods
inventories. Revenues are recognized when inventories are shipped or a
rental agreement is completed.
A material part of the Company's business is with two customers. Revenues
from each customer were $4,968,865 and $2,486,567 in 1995, $2,751,328 and
$2,912,130 in 1994, and $1,542,823 and $3,442,395 in 1993. Amounts due from
each customer and included in "Accounts receivable, trade, net" were
$419,309 and $1,336,979 at December 31, 1995 and $271,660 and $783,792 at
December 31, 1994.
Inventories: Inventories, consisting of material and supplies for
construction jobs, are stated at lower of cost or market, with cost being
determined on the first-in, first-out basis.
Property, Plant and Equipment and Depreciation: Property, plant and
equipment are carried at cost. Maintenance and repairs are charged to
expense as incurred. Interest is capitalized during periods of construction
with approximately $44,000 capitalized to property, plant and equipment
during 1994. Depreciation is charged over the estimated useful lives of all
depreciable assets using the straight-line method over periods ranging from
3 to 15 years. Any gains or losses on disposition are credited or charged
to income. Any gains on trade-ins are reflected as an adjustment to the
basis of the acquired asset, while losses on trade-ins are charged to
income.
Energy Recovery Systems and Facilities: Costs incurred to: (1) explore,
drill, and equip wells and pipelines that are not yet completed for
landfill gas to energy projects, including costs of topographical and
geophysical studies, rights of access to properties to conduct studies, and
other related expenses; and (2) acquire or construct equipment and
facilities that are not yet completed and installed are capitalized and
classified as "Uncompleted energy recovery systems and facilities". Upon
completion, these costs will be depreciated using the straight-line method
over the estimated useful life of 15 years.
Deferred Project Procurement Costs: Costs incurred in connection with the
procurement of a project, including finder's fees or other similar costs
are deferred and amortized over the estimated life of the project.
Income Taxes: In 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes". SFAS
No. 109 requires the use of the liability method of computing deferred
income taxes, whereby deferred income taxes are recorded to reflect the
income tax consequences on future years of temporary differences between
the income tax and financial reporting bases of assets and liabilities as
of the balance sheet date. Under the liability method, deferred income
taxes are adjusted for tax rate changes as they occur. This method also
provides for the current recognition of the expected income tax benefits
from net operating losses if it is expected such income tax benefits are
more likely than not to be realized. The effects of the adoption of SFAS
No. 109 in 1993 were not material.
14
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
1. Summary of Significant Accounting Policies, Continued:
Debt Issuance Costs: Debt issuance costs are associated with the issuance
of the Subordinated Notes and other borrowing arrangements. These costs are
being amortized on a straight-line basis over the number of years the debt
is expected to be outstanding.
Organization and Software Costs: Organization and software costs are being
amortized on a straight-line basis over five years.
Earnings Per Share: Earnings per share is not presented for the Company as
it is a nonpublic company and management believes such presentation would
not be meaningful.
Cash and Cash Equivalents: The Company considers all highly liquid debt
instruments with a maturity of three months or less to be cash equivalents
for purposes of the statements of cash flows.
Use of Estimates: The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Fair Value of Financial Instruments: Information about specific valuation
techniques and related fair value is provided for in Note 6, "Debt", Note
7, "Credit Facilities" and Note 8, "Capital Transactions and Convertible
Redeemable Preferred Stock". All financial instruments are carried at
amounts which approximate fair value.
New Accounting Standards: In October 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 introduces a fair value based method of
accounting for stock-based compensation and encourages, but does not
require, companies to recognize compensation expense for grants of stock,
stock options and other equity instruments based on the new fair value
accounting rules. If companies elect not to adopt the new fair value
accounting rules, SFAS No. 123 requires them to provide expanded
disclosures in the footnotes. As the Company has been sold, effective
February 29, 1996 (see Note 15), it presently believes the requirements of
this SFAS would not have a significant effect on the Company's consolidated
financial statements. However, management will continue to evaluate the
effects of this SFAS in 1996 and make a determination at that time as to
the potential financial statement disclosure effects, if any, of this SFAS.
In addition, in March 1995, the FASB issued SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of". SFAS No. 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and
goodwill related to these assets to be held and used and for long-lived
assets and certain identifiable intangibles to be disposed of. Although
management has not evaluated the effects, if any, of this SFAS, it intends
to do so in 1996 and will adopt any effects of this SFAS, if material, in
its 1996 consolidated financial statements.
15
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
1. Summary of Significant Accounting Policies, Continued:
Reclassifications: Certain amounts in the prior years' consolidated
financial statements have been reclassified to conform with the 1995
presentation. Additionally, certain amounts in the prior years'
consolidated financial statements, principally the Company's convertible
redeemable preferred stock, have been reclassified to conform with certain
Regulation S-X provision effects as presented within the 1995 presentation.
2. Accounts Receivable, Trade, Net:
Accounts receivable, trade, net at December 31, consists of:
1995 1994
Billed accounts receivable $4,453,653 $3,387,389
Unbilled accounts receivable 409,738
---------- ----------
4,453,653 3,797,127
Allowance for doubtful accounts (146,674) (21,722)
---------- ----------
Accounts receivable, trade, net $4,306,979 $3,775,405
========== ==========
Included in accounts receivable, trade,
net, are retainages of $595,273 in 1995
and $379,178 in 1994.
3. Contracts in Progress:
Information related to contracts in
progress as of December 31, is as follows:
1995 1994
Costs incurred on uncompleted contracts $3,086,691 $4,911,686
Estimated earnings on uncompleted contracts 323,880 770,412
---------- ----------
3,410,571 5,682,098
Less billings to date on uncompleted
contracts 3,484,548 5,946,533
---------- ----------
Total $ (73,977) $ (264,435)
========== ==========
Included in the accompanying balance sheets on an individual contract basis
are:
1995 1994
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 302,231 $ 126,960
Billings in excess of costs and estimated
earnings on uncompleted contracts (376,208) (391,395)
--------- --------
Total $ (73,977) $(264,435)
========= =========
16
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
3. Contracts in Progress, Continued:
During the first quarter of 1994, the Company experienced a significant
decline in the estimated gross profits on several contracts in progress at
December 31, 1993. The change in estimated gross profits resulted from
delays and other difficulties caused by severe, adverse weather conditions
during the period of January through March 1994. These conditions resulted
in project work stoppages for approximately 30% of the normal work
schedule.
The estimated pro forma effects on the Company's financial position,
revenues and net income at December 31, 1993 had these events been
recognized at this date are as follows:
Estimated
Recorded Effects Net
Costs and estimated earnings in excess of billings on
uncompleted contracts ............................................ $ 528,211 $ (120,000) $ 408,211
Revenues ............................................................ 9,225,392 (120,000) 9,105,392
Net income .......................................................... 140,014 (120,000) 20,014
4. Accrued Expenses:
Accrued expenses as of December 31, consist of:
1995 1994
Accrued commissions and bonus ....................................... $ 232,821 $ 159,465
Accrued job costs ................................................... 89,422 191,263
Accrued required maintenance ........................................ 106,671
Accrued wages ....................................................... 43,197 52,667
Accrued workers' compensation ....................................... 45,719 52,566
Accrued warranty .................................................... 50,456 23,015
Accrued other ....................................................... 285,507 173,466
---------- ----------
$ 853,793 $ 652,442
========== ==========
5. Related Party Transactions:
An officer of the Company was provided a loan of $36,500 at an interest
rate of 9% on February 24, 1989. During 1994, the $11,088 unpaid balance of
the loan was paid through an exchange of the Company's common stock owned
by the officer.
On June 24, 1993, the Earth Environmental Irrevocable Trust ("EEIT")
acquired $1,000 of KRI (an OWT consolidated subsidiary) common stock in
connection with the formation of KRI. EEIT is a 5% owner of KRI and does
not participate in the management or operation of the Company.
17
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
5. Related Party Transactions, Continued:
On August 24, 1993, OGT agreed to pay EEIT $150,000 related to project
procurement costs of the KRI project ($1,000 of the total amount due was
offset for the amount of KRI common stock acquired by EEIT). As of December
31, 1994, OGT had paid $49,000 in advances and $90,000 in monthly payments.
The remaining $10,000 was paid during 1995.
See Notes 11 and 15.
6. Debt:
Long-term debt consists of the following at December 31,:
1995 1994
Note payable to a financial institution bearing interest at
the one year treasury rate plus 3.5% (9.78% at
December 31, 1995), collateralized by certain equipment
of KRI and guaranteed by the Company. (See Notes
7 and 15.) ............................................................................... $2,830,063
Notes payable, banks, fixed interest rates ranging from 8.49% to 8.99%
interest and principal payable in various installments through December
2000, collateralized by certain field equipment .......................................... 860,380 $1,916,204
Notes payable, finance companies, interest ranging from 8.90% to 18.09%,
interest and principal payable in various installments through February
1999, collateralized by certain vehicles and field equipment ............................. 20,415 16,372
Capital lease obligations .................................................................... 52,743 91,911
---------- ----------
3,763,601 2,024,487
Subordinated notes, 12.00%, interest payable quarterly and principal was
due in forty-eight monthly equal installments from January 15, 1994 to
January 15, 1998. Amount was refinanced during 1995
with a note payable to a bank. (See Note 8.) ............................................ 450,000
---------- ----------
3,763,601 2,474,487
Less current maturities ...................................................................... 428,572 217,499
---------- ----------
$3,335,029 $2,256,988
========== ==========
All debt instruments are carried at amounts which approximate fair value.
The aggregate maturities for long-term debt are as follows:
1996 $ 428,572
1997 422,048
1998 431,006
1999 453,059
2000 446,271
Thereafter 1,582,645
----------
$3,763,601
==========
18
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
6. Debt, Continued:
The Company's Convertible Note, Subordinated Note and Common Stock Warrant
Purchase Agreement (the "Agreement") (see Note 8) contain certain
provisions which, among other things, limit: the payment of dividends as
defined in the Agreement; the purchase, redemption, or otherwise acquiring
or retiring any class of the Company's common stock now or hereafter
outstanding; the return of capital or distributions of assets to
stockholders except for the repurchase of capital stock pursuant to a
Stockholders Agreement and a Repurchase Agreement; and the maintenance of
certain financial covenants.
During 1995, the Company redeemed all of the outstanding Subordinated Notes
together with all accrued and unpaid interest due on the amounts with a
note payable to a bank.
See Note 15.
7. Credit Facilities:
At December 31, 1995, the Company has a $3,070,000 revolving credit
facility with a bank. The credit facility has a sublimit of $700,000 for
standby letters of credit to be used for bonding purposes.
Cash draws under the revolving credit facility bear interest at the prime
rate (8.5% at December 31, 1995) plus 1.5% (as of January 16, 1996, the
revolving credit facility bears interest at the prime rate plus 1%). Fees
for outstanding letters of credit are 1.5% per year. Principal is payable
upon demand and interest is payable monthly. The revolving credit facility
is collateralized by accounts receivable, inventory, furniture, fixtures,
and unencumbered machinery and equipment. The Company had $250,000 and
$668,969 outstanding under this credit facility at December 31, 1995 and
1994, respectively.
The revolving credit facility contains, among others, covenants relating to
maintenance of a positive consolidated cash flow, as defined, of at least
$275,000; a minimum ratio of cash flow, as defined, to debt service of 1.1
to 1; maintenance of a consolidated tangible net worth of $1,685,000 at
December 31, 1994 to increase in increments of $185,000 each year
thereafter ($1,870,000 at December 31, 1995); and a maximum ratio of
indebtedness to tangible net worth to be less than 2.25 to 1.
Letters of credit issued under the revolving credit facility at December
31, 1995 were as follows:
Expiration
Issue Date Amount
Amwest Surety Insurance Company 9/11/91 12/31/96 $250,000
Browning-Ferris Industries, Inc. 9/11/91 6/30/96 50,000
--------
Total letters of credit at December 31, 1995 $300,000
========
19
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
7. Credit Facilities, Continued:
On December 14, 1993, KRI entered into a line of credit arrangement (the
"KRI Credit Facility") for $1.85 million at a floating rate determined by a
publicly announced bank rate plus 1.75%. Non-refundable commitment fees of
$18,500 were paid related to this arrangement as of December 31, 1994. The
outstanding balance under the KRI Credit Facility as of December 31, 1994
was $1.85 million.
On January 11, 1995, KRI received proceeds from a financial institution in
the amount of $3 million related to a financing arrangement entered into on
December 3, 1993. A portion of the proceeds was used to pay off the
outstanding balance under the KRI Credit Facility. The remaining proceeds
were used to finance the acquisition of certain equipment and to pay down
other outstanding debt as of December 31, 1994. The arrangement was to be
paid in equal monthly installments over a ten year period, at an adjustable
rate at the one year Treasury Note rate plus 3.5%. KRI had a monthly option
to convert the adjustable rate to a fixed rate based on the weighted
average of one year, three year, five year, and ten year U.S. Treasury Note
rates, plus 3.5%. Non-refundable commitment fees of $10,000 were paid
during 1993. Additional commitment fees paid upon the close of the loan
were $20,000. The loan was collateralized by certain equipment of KRI and
guaranteed by the Company. Additionally, the Company was to maintain at
least $1 million of net worth during the term of the loan.
All credit facilities are carried at amounts which approximate fair value.
See Note 15.
8. Capital Transactions and Convertible Redeemable Preferred
Stock:
On June 12, 1990, a Series A Convertible Participating Preferred Stock,
Series B Convertible Participating Preferred Stock, and Common Stock
Warrant Purchase Agreement (the "June 12, 1990 Purchase Agreement") was
entered into by and among the Company and six investors (the "Investors").
Under the June 12, 1990 Purchase Agreement, the Company authorized and
issued 1,360,000 shares of Series A Convertible Redeemable Participating
Preferred Stock (the "Series A Preferred Stock"), $.01 par value per share,
to the Investors in exchange for $500,000 in cash and cancellation of
$1,200,000 of previously issued Convertible Notes.
On September 5, 1990, a Series B Convertible Participating Preferred Stock
Purchase Agreement (the "Series B Preferred Stock Purchase Agreement") was
entered into by and among the Company and the Investors. Under the
Preferred Stock Purchase Agreement, the Company authorized and issued
370,370 shares of Series B Convertible Redeemable Participating Preferred
Stock (the "Series B Preferred Stock"), $.01 par value, to the Investors at
$1.35 per share subject to certain adjustments as defined in the June 12,
1990 Agreement. On March 28, 1991, the Company issued an additional 370,370
shares of Series B stock under these same terms.
20
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
8. Capital Transactions and Convertible Redeemable Preferred
Stock, Continued:
On March 4, 1994, a Series C Convertible Participating Preferred Stock
Purchase Agreement (the "Series C Preferred Stock Purchase Agreement") was
entered into by and among the Company and five purchasers (the
"Purchasers"). Under the Series C Preferred Stock Purchase Agreement, the
Company authorized and issued 740,741 shares of Series C Convertible
Participating Preferred Stock, $.01 par value, to the Purchasers at $1.35
per share subject to certain adjustments as defined in the June 12, 1990
Agreement, as amended. Certain payment provisions contained in the
Agreement were modified with respect to principal payment installments and
timing (see Note 6).
In connection with the Series A Preferred Stock and Preferred Stock
Purchase Agreement, the Company increased the authorized shares of common
stock to 4,269,630 on September 5, 1990. In connection with the March 28,
1991 Purchase Agreement, the Company increased the number of authorized
shares to 4,399,260. Authorized shares were increased to 7,500,000 shares
concurrent with the March 4, 1994 Purchase Agreement. Increases are made
for prospective conversions of the various series of preferred stock.
The holder of any of the Series A, Series B, and Series C Preferred Stock
("Preferred Stock") has the right, at their option, on June 8, 1996, to
require the Company to redeem 100% of the Shares of Preferred Stock.
The redemption price of the Series A, Series B and Series C Preferred Stock
is $1.25, $1.35, and $1.35 per share, respectively.
The Shares of Preferred Stock not redeemed as of June 8, 1996 will remain
outstanding and will only be redeemed when additional funds of the Company
are legally available for redemption.
Each holder of Preferred Stock shall be entitled to vote on all matters of
the Company and shall be entitled to voting rights equal to each common
stock share assuming the Preferred Stock is converted. Dividends are
payable on the Preferred Stock only upon declaration by the Company's Board
of Directors, and only if dividends are declared payable on the outstanding
shares of common stock.
In the event of a qualified public offering, all outstanding shares of
Preferred Stock and, at the option of the holder, all dividends declared
but unpaid will be converted automatically into the number of shares of
common stock to which a holder of Preferred Stock shall be entitled upon
conversion as defined in the Agreement.
In the event of any liquidation, dissolution, or winding up of the Company,
the Preferred Stock Shareholders shall be entitled to be paid first out of
the assets of the Company available for distribution to stockholders of the
Company's capital stock of all classes in accordance with the Company's
Certificate of Incorporation.
The carrying amounts of the Series A, Series B and Series C Preferred Stock
represent the original net proceeds received by the Company for each
particular Preferred Stock issue These carrying amounts approximate fair
value.
21
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
8. Capital Transactions and Convertible Redeemable Preferred
Stock, Continued:
In connection with the various Agreements previously described, a
Stockholders' Agreement and a Repurchase Agreement were entered into by the
Stockholders of the outstanding common stock of the Company, the two
founders (the "Founders"), and the Investors.
Under the Stockholders Agreement, the Company has the right of first
refusal to purchase any or all shares of stock offered for sale by the
Stockholders and Founders. The shares not purchased by the Company can be
purchased by the Founders and Investors as defined in the Agreement.
Under the Repurchase Agreement, any person holding or having the right to
acquire an aggregate of at least 50% of the Subordinated Notes (the
"Notes") and any other equity or debt security of the Company (the
"Securities") may, after February 24, 1996, notify the Company that they
intend to offer to sell to the Company any or all of the Notes and
Securities. The Company is obligated to repurchase the Notes and Securities
at a fair market value price as defined in the Repurchase Agreement. The
Company is then obligated to offer to repurchase at the same price the
Notes and Securities from any other person holding or having the right to
acquire Notes and Securities.
See Note 15 with respect to the above mentioned "Capital Transactions and
Convertible Redeemable Preferred Stock" and the
related provisions.
9. Stock Options and Warrants:
The Company has set aside 932,030 shares of common stock for issuance under
a stock option plan. Common stock options can be granted to any officer,
key management employee, or director of the Company. The option price of
the stock is determined by the Stock Option Plan Committee. The options
vest to the option holder over a three-year period and are exercisable over
a period of ten years from the grant date. A summary of certain stock
option information for the years ended December 31, follows:
1995 1994 1993
Option Option Option
Shares Price Shares Price Shares Price
Shares granted and outstanding ............ 468,199 $.50 558,521 $.50 578,521 $.50
Shares granted and outstanding ............ 160,000 .75 161,500 .75
Exercisable ............................... 448,462 .50 506,388 .50 489,795 .50
Exercisable ............................... 78,750 .75 40,375 .75
Reserved for future options ............... 303,831 212,009 353,509
Under the Agreement (see Note 6), the Company issued 90,000 common stock
purchase warrants (the "Warrants") to the Investors, and 60,000 warrants to
officers of the Company. No warrants were exercised and all warrants
expired on February 27, 1994.
22
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
9. Stock Options and Warrants, Continued:
As part of issuing the Series A Preferred Stock, the Company also issued
50,000 Common Stock Warrants (the "1990 Warrants") to the Investors as
consideration in cancellation of the interest on the Subordinated Notes for
1990. Each warrant could be converted into one share of common stock at a
price of $1.25 per share if done before June 12, 1995, subject to certain
adjustments as defined in the June 12, 1990 Purchase Agreement. There were
no warrants converted in 1995. There was no value assigned to these
warrants in the consolidated financial statements as a market value was not
determinable.
See Note 15 with respect to the above mentioned "Stock Options and
Warrants" and the related provisions.
10. Income Taxes:
The Company files a consolidated income tax return which includes its
subsidiaries.
The components of the Company's deferred income tax assets and deferred
income tax (liabilities) consisted of the following:
1995 1994
Deferred income tax assets:
Allowance for doubtful accounts $ 58,582 $ 7,385
AMT tax credit 41,616
Warranty reserve 62,754 7,826
Other non-deductible accruals 25,078
-------- -------
Deferred income tax assets $146,414 $56,827
======== =======
Deferred income tax liabilities:
Tax over book depreciation $(67,063) $(5,476)
======== =======
As of December 31, 1995 and 1994, the Company was able to demonstrate that
the benefit of the deferred tax assets was fully realizable. Accordingly,
the Company has not recorded a deferred tax asset valuation allowance as of
these dates.
The components of the provision for income taxes are as follows:
1995 1994
Current income tax $594,800 $ 75,000
Deferred income tax, net (28,000) (51,351)
-------- --------
Provision for income taxes $566,800 $ 23,649
======== ========
There was no provision for income taxes for the year ended December 31,
1993.
23
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
10. Income Taxes, Continued:
A reconciliation of income taxes provided at the statutory rate to actual
income taxes provided is as follows:
1995 1994 1993
Tax at the statutory rate ............................................. $ 456,207 $ 178,281 $ 47,604
Taxes associated with minority interest ............................... 13,269 12,739 8,392
Utilization of tax operating loss carryforwards ....................... (190,246) (65,778)
State and local income taxes, net of federal income tax
benefit ........................................................... 77,286 28,294 9,782
Travel and entertainment .............................................. 8,741 8,536
Officer's life insurance .............................................. 11,297 873
Net other change in valuation allowance ............................... (14,828)
--------- --------- ---------
Provision for income taxes ................................................. $ 566,800 $ 23,649 $ --
========= ========= =========
11. Operating Leases:
In October 1993, the Company began leasing land and buildings from a former
officer of the Company under a cancellable lease agreement for
approximately $2,400 per month.
The Company leases its offices under an escalating lease agreement that
expires on February 28, 1998. The Company pays an average rent of
approximately $4,250 per month under this lease agreement. The Company also
has several operating leases for a warehouse, vehicles and field equipment.
Rental expense for these leases was $436,609, $320,194 and $290,643 for
1995, 1994 and 1993, respectively. Minimum future rental payments under
noncancellable operating leases as of December 31, 1995 are as follows:
1996 $395,881
1997 317,734
1998 109,382
1999 10,208
2000 8,284
Total rental expense amounted to $1,851,928, $1,366,861 and $977,581 for
the years ended December 31, 1995, 1994 and 1993, respectively.
12. Medical Insurance Coverage:
On February 1, 1992, the Company entered into a stop-loss insurance
agreement for medical claims arising under their health and welfare benefit
plan. Under this agreement placed with an insurance carrier, the Company's
maximum liability on individual medical claims was $25,000 as of December
31, 1994. Effective February 1, 1995, the maximum liability on individual
medical claims was changed to $20,000.
24
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
12. Medical Insurance Coverage, Continued:
The maximum liability for all medical claims was approximately $155,000 and
$168,000 at December 31, 1995 and 1994, respectively. Total claims paid by
the Company were approximately $110,000, $91,000 and $100,000 for the years
ended December 31, 1995, 1994 and 1993, respectively.
If the Company decides to cancel this plan, additional premiums would be
payable to the insurance carrier for a period beyond the date of
cancellation.
13. 401(k) Retirement Savings Plan:
The Company provides for a 401(k) Retirement Savings Plan (the "Plan") for
all full time employees who have completed three months of service
effective January 1, 1994. Effective April 1, 1995, the Plan was amended to
require twelve months of service. Employees can contribute 1% to 15% of
their compensation, subject to IRS limitations. The Company may make
discretionary contributions based on the profitability of the Company.
Employees vest in Company contributions as follows:
Years of Service % Vested
1 10%
2 25%
3 45%
4 70%
5 100%
Accrued contributions by the Company amounted to $20,000 at December 31,
1995 and 1994.
14. Industry Segments and Geographic Area Information:
The Company's major operations are in Landfill Services, Landfill Products,
and Landfill Energy Recovery. Landfill Services includes the installation
of landfill gas and leachate control systems and provides continuing
operations and maintenance services for control systems installed by the
Company and others. Landfill Products manufactures and, or sells various
components for landfill and industrial applications. Landfill Energy
Recovery develops, owns and operates an electric generating facility fueled
by landfill gas and is pursuing other commercial uses of landfill gas. All
operations are prevalent throughout the United States, with additional
revenues, to a lesser extent, generated in Canada and Asia.
The Company attempts to minimize its foreign currency risks associated with
foreign contracts by requiring such contracts to be paid principally in
U.S. dollars.
25
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
14. Industry Segments and Geographic Area Information,
Continued:
Revenues, income from operations after interest expense, identifiable
assets, capital expenditures and depreciation and amortization pertaining
to the major operations are presented below for the years ended December
31,:
1995 1994 1993
Total revenues:
Landfill Services ........................................................... $ 11,475,315 $ 10,513,100 $ 7,331,534
Landfill Products ........................................................... 5,701,571 4,141,701 2,485,168
Landfill Energy Recovery .................................................... 1,628,604
Intercompany eliminations ................................................... (1,286,807) (1,541,281) (591,310)
------------ ------------ ------------
$ 17,518,683 $ 13,113,520 $ 9,225,392
Income from operations after interest expense:
Landfill Services ........................................................... $ 1,360,135 $ 656,458 $ 370,344
Landfill Products ........................................................... 422,753 366,546 246,795
Landfill Energy Recovery .................................................... 245,524
------------ ------------ ------------
$ 2,028,412 $ 1,023,004 $ 617,139
============ ============ ============
Included in income from operations after interest expense is interest
expense as follows:
Landfill Services ...................................................... $ 24,440 $ 62,095 $ 2,151
Landfill Products ...................................................... 4,979 692 2,163
Landfill Energy Recovery ............................................... 276,413
------------ ------------ ------------
$ 305,832 $ 62,787 $ 4,314
============ ============ ============
Identifiable assets:
Landfill Services ........................................................... $ 5,750,648 $ 5,420,954 $ 4,067,304
Landfill Products ........................................................... 1,814,900 1,663,931 827,104
Landfill Energy Recovery .................................................... 4,415,327 2,252,052 90,000
Intercompany eliminations ................................................... (19,000) (19,000) (19,000)
------------ ------------ ------------
$ 11,961,875 $ 9,317,937 $ 4,965,408
============ ============ ============
Capital expenditures:
Landfill Services ........................................................... $ 602,433 $ 355,858 $ 143,083
Landfill Products ........................................................... 199,589 65,871 19,826
Landfill Energy Recovery .................................................... 1,472,644 3,162,619 87,253
------------ ------------ ------------
$ 2,274,666 $ 3,584,348 $ 250,162
============ ============ ============
Depreciation and amortization:
Landfill Services ........................................................... $ 358,550 $ 338,057 $ 292,325
Landfill Products ........................................................... 162,233 129,766 130,853
Landfill Energy Recovery .................................................... 294,294
------------ ------------ ------------
$ 815,077 $ 467,823 $ 423,178
============ ============ ============
26
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
14. Industry Segments and Geographic Area Information,
Continued:
The differences of income from operations after interest expense,
identifiable assets, capital expenditures and depreciation and amortization
from the consolidated financial statements are due to the exclusion of the
general office subsidiary of the Company. This subsidiary performs the
general and administrative services for the Company and is not a revenue
producing subsidiary.
Also, see Note 3 for discussion of various effects caused by severe,
adverse weather conditions on the Company's financial position, revenues
and net income for the years ended December 31, 1994 and 1993,
respectively.
15. Subsequent Events:
On April 5, 1996, KRI received proceeds from a bank in the amount of
$4,850,000. The proceeds were used to pay off the outstanding balance under
the January 11, 1995 KRI credit facility and to fund the construction of
the Phase II expansion of the KRI electric generating facility. The new
credit facility has a 10 year term, bearing interest at 7.99% for three
years, thereafter converting to an adjustable rate based on a constant
maturity of three year Treasury Securities, plus 3%.
(See Notes 6 and 7.)
Effective February 29, 1996, the Company and certain stockholders of the
Company (the "Sellers") entered into a Stock Purchase Agreement (the
"transaction") with EMCON (the "Buyer"), a public registrant and a
California Corporation and international consulting firm providing services
in environmental engineering, waste management, air and water quality
management and construction. The Company and certain stockholders sold all
shares and/or options held for an aggregate gross purchase price of
approximately $15,750,000 (net proceeds amounted to approximately
$14,906,000, including a financial advisor fee of $623,165 (including
expenses of approximately $23,000) paid to Raymond James & Associates,
Inc., which had a representative serving on the Company's Board of
Directors). Amounts were paid to the Company and the stockholders in the
form of cash and the issuance of convertible notes payable that can be
exchanged for EMCON stock or Company stock in the event of a public
offering of the Company. The convertible notes provide for annual interest
at 8% and mature March 1, 2001 and include provisions for early repayment.
Included in the purchase price was $180,000 in which EMCON agreed to pay
for the Company's buyout of the minority interests in certain of the
Company's subsidiaries. The acquisition will be accounted for under the
purchase method of accounting by EMCON, and the Company will continue to
account for its financial position, results of operations and cash flows on
a historical basis. All purchase adjustments related to this transaction
are to be reflected in the Buyer's consolidated financial statements.
27
ORGANIC WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
15. Subsequent Events, Continued:
The following provides the unaudited pro forma
capital accounts of the Company as of December 31,
1995, assuming that the transaction between the
Sellers and the Buyer had occurred on December 31,
1995:
Common stock, pro forma (unaudited), no par value,
at stated value; 7,500,000 shares authorized,
3,008,481 shares issued and outstanding $ 30,085
Paid-in capital, pro forma (unaudited) 3,524,263
Retained earnings, pro forma (unaudited) 548,468
----------
$4,102,816
==========
28