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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1999
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OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission File Number: 0-22294
MED/WASTE, INC.
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(Name of small business issuer in its charter)
DELAWARE 65-0297759
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
6175 N.W. 153RD STREET, SUITE 324, MIAMI LAKES, FL 33014
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(Address of Principal Executive Offices) (Zip code)
Issuer's telephone number: (305) 819-8877
Securities registered under Section 12(b) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK $.001 PAR VALUE
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(Title of Class)
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B, contained in this form 10-KSB and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X].
The issuer's revenue for its most recent fiscal year was $26,872,279
The aggregate market value of the shares of voting stock held by
non-affiliates, computed by reference to the average bid and asked price for
such stock of $1.062 as of March 3, 2000 was approximately $6,694,381.
The number of shares outstanding of the registrant's common stock $.001
par value as of March 3, 2000 was 6,731,956.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format (Check one) Yes [ ] No [X]
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ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Med/Waste, Inc. (the "Company") is a holding company, which, through its
subsidiaries, is engaged in the business of medical waste management services
throughout the eastern United States. The Company's operations are conducted
through its wholly owned subsidiary, Safety Disposal System, Inc. ("SDS"),
Safety Disposal System of South Carolina, Inc. ("SDSSC"), Safety Disposal System
of Pennsylvania, Inc. (SDSPA"), Safety Disposal System of Georgia, Inc.
("SDSGA"), Incendere, Inc. ("Incendere"), Safety Disposal System of Virginia,
Inc. ("SDSVA"), Target Medical Waste Services, LLC ("Target"), Med-Waste, Inc.
("Decatur"), Sanford Motors, Inc. ("SMI") and BMW Medtec of West Virginia, Inc.
("BMW").
SDS, SDSGA, Incendere, Target, Decatur and SMI provide collection,
transportation, treating, tracking and related services for the disposal of
medical waste throughout Alabama, Delaware, Florida, Georgia, Maryland, New
Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee and Virginia.
SDSSC operates an incineration facility in Hampton, South Carolina, which is
permitted to treat municipal, medical and special waste which the Company
receives from generators throughout the eastern United States. SDSPA owns and
operates a medical waste autoclave treatment facility located in Marcus Hook,
Pennsylvania. Target owns and operates a microwave treatment facility in Mobile,
Alabama and Decatur owns and operates an autoclave treatment facility in
Decatur, Alabama. SDS also owns and operates an autoclave medical waste
treatment facility in West Palm Beach, Florida.
Medical waste is generally any waste which may cause an infectious disease or
can reasonably be suspected of harboring pathogenic organisms. Medical waste
includes predominantly all material that comes in contact with human and animal
body fluids. The Company collects medical waste from medical waste generators,
including hospitals, clinics, medical and dental offices, veterinarians,
laboratories, funeral homes, home health agencies and others. In addition to
medical waste collection, the Company provides programs to assist customers to
promote safe handling of medical waste and comply with federal and state
requirements applicable to their operations. Special waste is generally all
non-residential waste which requires more stringent management than municipal
solid waste, but does not include medical or hazardous waste.
Nationally, most medical waste is disposed of by incineration. Management
believes that recent changes in Environmental Protection Agency (EPA)
regulations are expected to affect negatively between 50% to 80% of current
on-site incinerating facilities (hospitals, etc.). Most of these facilities are
expected to look to outside processors to handle their medical waste instead of
investing the significant capital that will be required to have their facilities
meet the new regulations. These changes, and other more stringent government
regulations, as well as a generally negative public attitude toward nearby
incineration facilities have resulted in a declining number of incineration
disposal facilities. Relatively few newly permitted incineration facilities have
opened due to the significant cost of compliance with new environmental
legislation.
The trend against incinerator facilities has encouraged the development and
commercial use of a variety of alternative disposal techniques. The Company owns
and operates a 48-ton autoclave medical waste treatment facility located in
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Marcus Hook, Pennsylvania. The Company also operates autoclave treatment
facilities in West Palm Beach, Florida and Decatur, Alabama, which are capable
of treating 24 tons and 10 tons of medical waste per day, respectively. In
Mobile, the Company operates a microwave treatment facility with a capacity of 6
tons per day. The autoclaves and microwave facilities treat the medical waste
through sterilization, allowing most of such waste to be handled and disposed of
as solid waste. However, none of these new alternative disposal techniques can
handle the processing of chemotherapeutic and pathological waste ("by-pass
waste"). All by-pass waste must still be processed by incineration facilities.
In addition, as part of its comprehensive medical waste services, the Company
oversees the operations of on-site autoclaves at large quantity generators,
typically hospitals. Prior to 1999, the Company sold and installed such
autoclaves. The Company is no longer pursuing sales of autoclaves. Due to new
environmental regulations, public relations concerns, cost reduction pressures
and high capital investment requirements, it is becoming increasingly difficult
for large quantity generators to operate their own autoclave, incinerator or
alternative technology equipment. As a result, waste generators are outsourcing
their waste management requirements to suppliers such as the Company.
MEDICAL WASTE INDUSTRY OVERVIEW
The industry estimates that, the United States generates over two million tons
of medical waste per year. It has been estimated by industry specialists that,
the market in the United States is approximately $1.4 billion per year and $3
billion worldwide. Including ancillary products and services, the world wide
market is estimated at $10 billion. The growth of the US market is expected to
continue at 7% to 10% annually.
BUSINESS STRATEGY
The Company's focus is to improve and enhance its position as a fully integrated
medical waste management services company. The Company believes that in order to
achieve superior competitive results in the medical waste industry, it is
important to centralize its support organizations and realize economies of scale
from these consolidations. During 1999, all of the Alabama and a portion of
Pennsylvania support operations were moved to the Company's Miami Lakes, Florida
national service center. The centralization of administration for all operating
units will continue in 2000. As part of such strategy, the Company will continue
to provide all aspects of medical waste management, including collection,
transportation and treatment. By providing all services, the Company will be
able to take advantage of economies of scale and become a formidable competitor
within the medical waste industry. With the centralization of support services
into a national service center, the Company should be able to achieve
substantial cost reductions and benefit from the acquisitions made in 1997 and
1998. The centralization has and will continue to place the Company in a
position that allows it to maximize internal growth and integrate future
acquisitions into the organizational structure quickly and efficiently. The
Company now manages its various entities as "business units', each business unit
being centered by one of the Company's processing facilities. The Company's
strategy is to pursue internal growth or acquisitions in areas where the
expansion can be immediately integrated into the existing business unit
providing a maximization of benefits from the fixed costs of the processing
centers by increasing the Company's waste processing internalization. All of the
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Company's processing facilities are operating at less than full capacity.
Another major change in the Company's business strategy is its new emphasis on
providing "Reusable Sharps" containers service. These services provide the
customers a replacement for costly disposable containers with zero inventory.
The Company has recently streamlined its line of disposable containers, which
are sold to customers. These changes gives the customers more cost effective
options while enhancing the Company's revenues. Additionally, the customer
benefits from a more durable container that reduces employee handling and
exposure risks because the Company's driver collects the container at the point
of service. These containers are also environmentally correct because they are
reusable and do not require incineration.
OPERATIONS
GENERAL. Generators of medical waste are generally liable under applicable
regulations for the collection, packaging, transportation, tracking,
documentation and disposal of such waste, as well as the training of employees
in the handling of such waste. As new regulations are written, the complexity of
administering a medical waste management system increases. As a result, the
Company expects more health care providers will engage specialists to ensure
their compliance. Further, many small medical waste generators cannot afford the
cost of individualized compliance. The Company believes its approach to
management of medical waste, including the use of on-site equipment, specialized
containers, on-site training, timely customer service, radio dispatched trucks
and low cost disposal methods provide customers with a cost effective solution
for compliance.
The Company collects medical waste from medical waste generators, including
hospitals, clinics, medical and dental offices, veterinarians, laboratories,
funeral homes, home health agencies and others. In addition to medical waste
collection, the Company provides programs to assist customers to promote safe
handling of medical waste and comply with federal and state requirements
applicable to their operations.
The Company owns an incineration facility in South Carolina, which is permitted
to treat medical and special waste, as well as autoclave medical waste treatment
facilities in Pennsylvania, Alabama and Florida. It also owns a 49% interest in
an incinerator facility in North Carolina. The Company receives waste from
generators throughout the eastern United States. The incineration facility
treats medical and special waste. Special waste is generally non-residential
waste such as pharmaceuticals and non hazardous chemicals, which requires more
stringent management than municipal solid waste.
The Company believes that to remain competitive in the medical waste industry it
is critical to provide customers with a total program for their medical waste
compliance problems. In addition to disposal, the Company also provides a
variety of waste management services, including training of customer employees
on the handling of medical waste, educating generators on the latest
regulations, providing containers for disposal and documentation and tracking
medical waste from pick-up to ultimate disposal.
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COLLECTION. The Company contracts with medical and special waste generators to
collect their waste on a regular schedule pursuant to a negotiated fee
structure. Schedules for pickup can vary from several times per week to once a
month, depending on the volume of waste produced by a customer. Each waste
generator is responsible for packing its waste in containers usually sold to the
generator by the Company, or using the "Reusable Sharps" containers it receives
from the Company as part of the service. The containers are placed at designated
collection areas on the generator's premises at the point of use. The Company
sends its truck to pick up the waste. If a waste generator has sufficient
volume, the Company places a bulk reusable storage container(s) at the premises,
which the Company picks up for ultimate disposal at a waste treatment facility.
The Company supplies and/or sells containers to its customers for use in the
disposal of infectious medical waste. These containers contain the universal
biohazard symbol to draw attention to their contents and comply with state and
federal regulations. The containers used are either cardboard or a reusable or
disposable rigid plastic depending on the customer's preference.
MERCHANT BUSINESS. The Company receives at its treatment facilities waste from
customers, such as other medical waste service companies and special waste
brokers, for incineration or sterilization. These customers are normally charged
on a per pound basis for the processing of such waste.
DOCUMENTATION. In accordance with law, the Company provides complete
documentation to its customers for all waste it collects and treats. Such
documentation includes information related to point of origin, date of pick-up
and date of delivery to a treatment facility. The documentation system developed
by the Company meets all applicable local, state and federal regulations
regarding packaging, labeling and proof of disposal of waste materials.
TRANSFER STATIONS. The Company currently operates 9 transfer stations and 7
truck yards as follows: 3 in Florida; 2 in Pennsylvania, 2 in Virginia; 2 in
Georgia, 1 in Alabama, 3 in South Carolina, 2 in North Carolina and 1 in West
Virginia . Each transfer station is licensed as appropriate, by state, county
and city governmental authorities. The transfer stations are used as temporary
storage facilities to maximize efficiency in the transport of medical waste. In
most instances, waste containers picked up from generators are stored at a
transfer station until a full truck or trailer load can be brought to the
Company's autoclave or incineration facilities or to a third-party treatment
facility, thus saving time and cost.
DISPOSAL OF WASTE. The two most common methods of treating infectious waste are
incineration and steam sterilization, i.e., autoclaving. Alternate methods
include chemical disinfection, microwave and numerous other specialized and
experimental techniques. Incineration burns the medical waste at high
temperatures and reduces the waste to ash and metal. Incineration has the
advantage of significantly reducing the volume of waste. However, incineration
has come under increasing scrutiny by environmentalists, state and local
regulators due to emissions generated by incineration. Emissions contain
pollutants such as carbon monoxide, mercury, cadmium, lead and other toxins. As
a result, the cost of developing incineration facilities or to upgrade existing
facilities to meet regulatory standards is significant.
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INCINERATION FACILITY. SDSSC disposes of most of the waste that it receives from
third parties at its incineration facility located in Hampton, South Carolina
(the "Incinerator"). The Incinerator is in full compliance with all federal and
state regulations dealing with air pollution controls. The Incinerator is a
waste to energy facility with a rated capacity for processing up to 270 tons per
day of special, medical and municipal waste. The facility is currently permitted
under South Carolina law to incinerate up to 200 tons per day of waste, both
liquid and solid, including 100 tons of medical waste per day. The Incinerator
is equipped with three (3) Consumat modular, multi-chamber, solid-hearth,
controlled-air incinerators. Each incinerator has a design capacity of 90 tons
per day for waste materials. The primary chamber of each incinerator operates at
1,400 to 1,600 degrees Fahrenheit, with the secondary and tertiary chambers
operating at 1,800 to 2,400 degrees Fahrenheit. The secondary and tertiary
chambers have auxiliary gas fired burners designed to maintain 1,800 degrees
Fahrenheit temperature and at least two seconds residence time for flue gas. Ash
residue from the incineration process is transported for disposal in a local
sanitary landfill.
The Company disposes of a majority of the medical waste and all of the special
waste received from customers at the Incinerator. The Company also has
non-exclusive contracts to utilize third-party disposal facilities for
contracted prices per pound of medical waste. The majority of SDSSC's waste
stream is transported to the Incinerator through arrangements made directly by
its customers with third-party hauling companies.
In addition to generating revenue from the processing of waste materials, the
Incinerator currently sells process steam to an adjacent industrial plant. The
Incinerator has been designated as a Qualified Facility ("QF") by the United
Stated Department of Energy for purposes of producing and selling electricity
under the Public Utility Regulatory Power Act ("PURPA"). PURPA requires public
utilities to purchase electricity at the avoided cost of generation from those
facilities that carry a QF designation. The Incinerator would need minor
retrofitting of its boiler and installation of a turbine generator to allow for
the production and sale of electricity.
AUTOCLAVE FACILITIES.
In 1997, the Company purchased the Marcus Hook, Pennsylvania autoclave facility.
This is a 2.9 acre industrial site which includes two (2) 25 ton per day
autoclaves, a 10,000 square foot processing center and a 2,400 square foot
administrative building. The facility receives medical waste from generators
throughout New York, New Jersey, Connecticut, Pennsylvania, Maryland, Delaware,
Washington, D.C., and, Virginia.
Since 1994, the Company has treated a large portion of the medical waste it
collects in Florida, at its autoclave facility located in West Palm Beach,
Florida. In June of 1998, it also acquired Target and Decatur in Alabama. At
such locations, the Company also operates autoclave and microwave sterilization
facilities. The autoclave or microwave process sterilizes medical waste, then
feeds the sterilized waste through a shredder. The shredder grates the product
and ultimately the waste is compacted. The resulting waste is decreased in
volume by 80% and hauled to a landfill. In February 1998, the Company installed
an additional autoclave unit in West Palm Beach. The West Palm Beach autoclave
facility presently has the capacity to dispose of over 24 tons per day of
infectious medical waste.
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The Company believes existing and pending federal, state and local regulations
regarding air quality and the effects on air quality of medical waste disposal
by incineration will enhance the Company's' market position because the
Incinerator is in full compliance with all federal and state regulations dealing
with air pollution controls and its autoclave facilities do not cause measurable
air pollutants and will be more acceptable to local residents.
ON-SITE TREATMENT OF MEDICAL WASTE. SDS oversees the operations of several
on-site autoclaves at large quantity generators in Florida, typically hospitals.
The autoclaves treat medical waste through sterilization, allowing treated waste
to be handled and disposed of as solid waste. Hospitals may either purchase or
lease the autoclave and related equipment from the Company. During the term of
the lease, or following the purchase of a unit, the Company provides maintenance
and support of the autoclave and collects any by-pass waste and transports it
for ultimate disposal to its and/or third party incinerating facility. The
Company no longer actively pursues this type of business as the economies of
such small operations do not warrant the investments in the part of the
hospitals.
SAFETY TRAINING. Health care personnel have become increasingly sensitive to the
risk of contracting diseases such as AIDS and hepatitis through accidental
contact with infected patient blood. In addition, patients are increasingly
demanding that practitioners demonstrate continual vigilance against such risks.
Occupational Safety and Health Act ("OSHA") regulations require annual training
of all personnel who potentially come in contact with blood borne pathogens.
OSHA regulations also require documentation of procedures, clean-up plans and
training of such personnel. As a result, there has been heightened attention by
medical providers of the need to implement safeguards against such risks. SDS
has developed programs to train employees of customers in the proper methods of
handling, segregating and containerizing medical waste to reduce potential
exposure to employees. SDS instructs health care workers in the proper methods
of handling, recording and documenting their medical waste streams to comply
with local, state and federal regulations. It also trains the customer's staff
in the handling of disposable and/or "Reuseable Sharps" containers. SDS also
offers to develop an internal system for such customers to provide for the
efficient management of medical waste within the customer's facility in an
effort to reduce the customer's overall disposal costs.
SDS offers consulting and review services to medical waste generators regarding
their internal medical waste collection and control systems and to assist
generators in developing a system to provide for the efficient management of
medical waste through the point of pickup by SDS. Safety training and related
services are not presently a significant portion of SDS's revenues.
MEDICAL WASTE MARKET. The Company is the second largest medical waste disposal
company in the state of Florida and the second largest publicly held medical
waste disposal company based in the United States. The Company services more
than 20,000 health care facilities consisting of small, medium and large
quantity generators. A small quantity generator typically produces approximately
10 to 50 pounds of medical waste in a month. Medium quantity generators, such as
clinics, out-patient surgical centers, dialysis centers and laboratories produce
substantially more poundage per month. Large quantity generators, such as
hospitals, can produce as much as 70,000 pounds per month, depending on the size
and types of services provided by such hospital.
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Delivery of health care services within the United States is shifting from
hospitals to home care and alternate site facilities. Home care and delivery of
care in other non-acute facilities are among the fastest growing segments of the
health care industry. Cost containment pressures and new treatment protocols
will continue to move patients, including patients being treated for infectious
diseases, into non-hospital settings. As patients move into these settings,
infectious medical waste that would otherwise be handled by hospitals must be
disposed of, through alternate methods. These generators include physicians,
dentists, out-patient clinics, dialysis clinics, laboratories, home health
agencies, and other organizations involved in the medical profession. Most of
these generators, find it would be unrealistic to treat and dispose of their
medical waste by themselves. By contracting with the Company, these generators
can pay a small monthly fee and let the Company handle and dispose of their
medical and special waste.
MARKETING. The Company's marketing strategies and activities focus principally
on metropolitan areas because they represent the greatest concentration of
medical waste generators. Furthermore, special attention is given to areas where
the Company has existing routes to maximize the benefits of route concentration
and improved revenues per truck. This emphasis results in higher revenue
potential and reduced transportation costs per pick-up.
The Company's Incinerator competes in the marketplace on the basis of quality
service and reasonable pricing which the Company is able to achieve due to
economies of scale. Emphasis is now being placed on the development of special
waste streams, as well as, increased medical waste customers. During 1999, the
Company expanded its sales force and is aggressively penetrating the
non-hazardous industrial/residual waste and pharmaceutical waste markets.
The Company's Marcus Hook autoclave facility is strategically located in eastern
Pennsylvania near most of the major metropolitan markets in the northeast United
States. As such, the transportation costs of most haulers is sufficiently lower
to attract them to bring their waste to the facility. The Company's Florida and
Alabama sterilization facilities are located close to the population centers of
these areas, which allows for lower operating costs to the Company.
The Company markets its collection services directly to the waste generator,
primarily hospitals, clinics, medical and dental offices, veterinarians,
laboratories, funeral homes, home health agencies and similar health care
providers. Disposal agreements are negotiated individually with each customer.
Sales terms vary depending on the number of containers, frequency of pick up and
volume of and type of waste. Each agreement also specifies the customers'
specific obligation for packaging in proper containers before the Company will
accept the waste. Most disposal agreements for small and medium quantity
generators are for a period of one to three years, with automatic annual
renewals, although customers may terminate on written notice upon payment of a
penalty.
Most hospital contracts are for one, three or five year terms.
SALE OF SUBSIDIARY. On January 30, 1998, the Company sold 100% of the capital
stock of Kover Group, Inc. ("Kover"), to MPK Holdings, Ltd., an Ohio limited
liability company ("MPK"). Kover's operating results in 1998 were not material
to the consolidated statements. MPK is wholly owned by Phillip W. Kubec and
Melissa Kubec, his wife (the "Kubecs"). Mr. Kubec was the president and chief
executive officer of Kover and a director of the Company at the time of the
sale. The Company received aggregate consideration for the sale of Kover of
$2,700,000, payable $1.2 million in cash at closing and the balance of $1.5
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million in promissory notes. The Company received two promissory notes, one for
$960,000 from MPK (the "MPK Note") and one for $540,000 from Kover (the "Kover
Note"). In July 1998, MPK and Kover prepaid both notes plus accrued interest.
The Company received $1,350,000 in cash and a new $150,000 promissory note from
MPK ("the New Note"). The New Note was cancelled in 1999 due to a provision in
the sales contract requiring such cancellation if Kover consolidated revenues
did not exceed a prescribed amount. Kover's revenues fell short of the
prescribed amount therefore, the New Note was written off in December 1999.
BUSINESS DEVELOPMENT ACTIVITIES
Since 1997, the Company has experienced significant growth in its medical waste
operations. Growth has been primarily achieved through acquisitions of existing
businesses during 1998.
On March 31, 1998, the Company purchased the capital stock of MedWaste, Inc. an
unrelated Pennsylvania corporation. The 41,000 shares of the common stock issued
as part of the purchase price, is guaranteed by the Company at the end of two
years for $7.50 per share. Payments under such guarantee can be made in cash or
in additional shares of stock at the option of the Company. This guarantee is
due on March 31, 2000, and will represent approximately $266,500 cash or
additional shares of stock at the then current market price.
In June 1998, the Company purchased from Biomade Plastics, Inc.("Biomade") molds
for the manufacture of reusable sharps containers, lids and accessories used in
the "Sharps Away" program, together with all proprietary knowledge, patents,
510K approval, trade secrets, referral lists, technical information, quality
control data, processes, methods and other similar intangible assets. Biomade
operated a "Sharps Away" reusable sharps container program through licensing
territories to third parties. The Company received an assignment of all license
agreements, as well as all inventories of containers.
In June 1998, the Company, acquired Target Medical Waste Services, LLC
("Target") based in Mobile, Alabama. Target provides medical waste management
services to customers in Alabama, Florida, Louisiana, and Mississippi. Target
also owns and operates a medical waste autoclave facility.
In June 1998, the Company acquired certain assets and assumed certain
liabilities of Biotech Disposal, Inc. Biotech provides medical waste management
services to generators of medical waste in Broward County, Florida. In
connection with the purchase, the Company issued 26,666 shares of common stock
with a guaranteed value after one year of $6.50 per share. In June of 1999, the
Company issued 62,794 shares of common stock to fulfill this guarantee.
In June 1998, the Company acquired Med-Waste, Inc., an unrelated Alabama
corporation ("Decatur") based in Decatur, Alabama. Decatur provides medical
waste management services to medical waste generators located in the states of
Alabama, Georgia and Tennessee. Decatur also owns and operates a medical waste
autoclave facility. As part of the purchase price, the Company guaranteed
120,000 shares of the 133,334 issued to have a fair market value of $7.50 per
share at the end of two years. Payments under such guarantee can be made in cash
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or in additional shares of stock at the option of the Company . The Company is
presently in litigation with the former owners. (See Item 3, "Legal Proceedings"
for more information.).
In September 1998, the Company purchased BMW Medtec of West Virginia, Inc.
("BMW"), a medical waste transportation company operating in West Virginia,
Eastern Ohio and Western Pennsylvania.
In October 1998, the Company acquired Sanford Motors, Inc. and its related
companies ("SMI"). SMI operates a medical waste hauling operation in the
Pennsylvania, New Jersey, Delaware, and Maryland region and owns a 49% interest
in an incineration facility in Matthews, North Carolina. In connection with the
purchase, the Company issued 500,000 shares of common stock with a guaranteed
fair value of $14 per share after three years. Payments under such guarantee can
be made in cash or in additional shares of stock at the option of the Company.
GOVERNMENT REGULATION
GENERAL. The Company operates within the medical waste disposal industry, which
is subject to extensive local, state and federal laws. This statutory and
regulatory framework imposes compliance burdens and risks on the Company,
including requirements to obtain and maintain government permits. The transport,
treatment and disposal of medical waste is subject to packaging, labeling,
handling, notice and reporting requirements, as well as requirements pertaining
to transporter registration, transportation handling procedures and the
preparation of shipping papers. The treatment and disposal of municipal and
special waste are also subject to extensive government regulation. State and
local regulations vary from location to location. The Company believes that it
is currently in compliance in all material respects with all applicable laws and
regulations governing its business and has all appropriate government permits to
operate its existing business, including those required for the operation of its
incineration and autoclave facilities and transfer stations. However, the
addition of new, or amendments to existing, statutes and regulations could
require the Company to continually modify its methods of operations at costs
that could be substantial.
FEDERAL REGULATION. The Occupational Safety and Health Act ("OSHA") gives the
federal government the authority to regulate the management of infectious
medical waste. OSHA regulations attempt to limit occupational exposure to blood
and other potentially infectious materials, but do not actually cover the
disposal of medical waste. These regulations target all industries in which
employees could reasonably be expected to come in contact with blood borne
pathogens. The regulations define infectious materials to include semen, vaginal
secretions, cerebrospinal fluids, synovial fluid, pleural fluid, pericardial
fluid, peritoneal fluid, amniotic fluid, saliva in dental procedures, any body
fluid visibly contaminated with blood and all body fluids in situations where it
is difficult to differentiate among body fluids. The definition also includes
any unfixed tissue or organ, other than intact skin from a human (dead or
alive), human immune-deficiency virus (HIV) and hepatitis B virus. The
regulations require employers to identify in writing tasks and procedures, as
well as job classifications, where occupational exposure to blood may occur.
Employers must set forth a schedule for implementing procedures for employees to
minimize risk of contamination. Employers are required to offer such employees
vaccinations for hepatitis B virus and must keep records concerning such
employees' medical histories.
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The Resource Conservation and Recovery Act of 1976 ("RCRA") established a
regulatory program administered by the Federal Environmental Protection Agency
(the "EPA") for the generation, storage, transportation, and disposal of
hazardous waste. The general statutory definition of hazardous waste would
provide the EPA with the authority to regulate medical waste as hazardous
wastes. However, to date, the EPA has not designated infectious medical waste as
a hazardous waste and it is not presently regulated as such. The EPA has
developed and issued informal guidelines outlining practical approaches to
infectious waste management.
The interstate transport of medical waste is subject to regulation by the United
States Department of Transportation ("DOT") pursuant to the Hazardous Material
Transportation Act ("HMTA") and pertinent regulations. Pursuant to the HMTA, the
transport of medical waste will, depending on its composition, be subject to
packaging, labeling, notice and reporting requirements, as well as requirements
pertaining to transporter registration, transportation procedures and the
preparation of shipping papers. Strict penalties may be assessed for violations
of the HMTA and its regulations. On February 26, 1999, Research and Special
Programs Administration of DOT issued revised exemptions to 37 cubic yard
roll-off container transporters for hauling regulated medical waste. The Company
received its exemption and has worked with DOT to gain two modifications on the
original exemption to better suit the Company's application. This insures that
the efficient roll-off container will continue to be an effective tool in the
Company's waste collection and disposal products.
The Company's Incinerator in South Carolina is required to comply with the air
emissions standards of the Federal Clean Air Act, as amended (the "Clean Air
Act"). The Clean Air Act establishes, among other things, comprehensive air
permitting and enforcement programs. The Clean Air Act also provides for
specific performance standards for medical and infectious waste incinerators.
The Incinerator has recently received its Part 70 Air Quality (Title V
Operating) Permit No. TV1280-0021 effective on July 29, 1999, from the State of
South Carolina under its State Implementation Program ("SIP") as delegated by
U.S. EPA. The Company passed its compliance test for the state of South Carolina
during the testing period from October 28-31, 1999. The next air emission hurdle
is the EPA New Source Performance Standard ("NSPS"). The Company will have to
make some improvements in the particulate pollution control system in order to
meet the standard. At present time, the Company is preparing a plan to be
presented to EPA demonstrating how the Company will meet the NSPS by September
of 2002. Pursuant to the Clean Water Act, the EPA has promulgated extensive
effluent and water quality standards as well as permitting requirements for
industrial discharges to the waters of the United States under the National
Pollution Discharge Elimination System ("NPDES"). The Company's Incinerator has
a storm-water discharge NPDES permit, and discharges all wastewater to the
sanitary sewer system. The Company has struggled to comply with discharge limits
of its permit with the city of Hampton, and is reviewing alternatives to augment
the existing pretreatment process. The Company's other facilities also discharge
all wastewater to sanitary sewers in compliance with applicable law.
ALABAMA REGULATION. The Alabama Department of Environmental Management ("ADEM")
has jurisdiction over the packaging, collection, storage, transportation, and
disposal of regulated medical waste. Generators are required to develop a plan
to, package and label untreated medical waste, and then ship the untreated
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medical waste with a permitted transporter. Permits are also required for
medical waste treatment facilities. Once the medical waste is treated, it may be
disposed of as solid waste.
The Company has a permitted autoclave facility in Decatur, Alabama and a
microwave treatment facility permitted in Mobile, Alabama. The treatment permits
with ADEM, regulate the waste handling; time, temperature and pressure of the
sterilization process; frequency of testing with the biological indicator;
additional processing to render the waste unrecognizable; and finally
maintenance of records sufficient to demonstrate to the final landfill site that
the waste it is receiving is "treated". The Company's treatment facilities
comply with ADEM's regulations on a routine basis.
FLORIDA REGULATION. The Florida Department of Health ("DOH") has authority over
the generation, storage, treatment and transfer of medical waste. The Florida
Department of Environmental Protection ("DEP") has authority over on, and
off-site incineration and final disposal facilities. The DOH has specific
authority over the operation of the Company's commercial autoclave facility.
Each generator of medical waste is required to prepare, maintain and implement a
written plan to identify and handle all such waste within its facility, as well
as provide employee training programs. Such plan must outline the procedures for
on-site segregation, handling, labeling, storage and treatment of waste
generated by the facility. All medical waste management records, including any
documentation provided by the transporter, must be maintained for three years
and made available for inspection by DOH upon request. All on-site storage of
medical waste must be in a designated area away from the general traffic flow
pattern and be accessible only to authorized personnel. No medical waste
generator may store such waste on-site for any period in excess of thirty days.
All containers used for storage must be labeled with the name, address and phone
number of the generator if it is to be transported to a disposal site.
Violations of the regulations may be prosecuted as criminal offenses.
The Company's autoclave in West Palm Beach, Florida is regulated by the DOH. The
DOH issues permits for facilities to treat medical waste. Medical waste must be
treated within thirty (30) days of collection from a generator. The DOH permits
treatment by the autoclave, subject to specific operating and log keeping
requirements. Medical waste treated through autoclaving methods in accordance
with the regulations may be disposed of at a landfill in the same manner as
solid waste.
GEORGIA REGULATION. The Georgia Department of Natural Resources ("DNR") enforces
the biomedical waste management rules. As in other states, generators of the
medical waste are required to segregate, package, and label medical waste before
shipping it to a treatment site with a permitted medical waste transporter.
Georgia's DNR oversees the permitting of transporters, treatment facilities and
transfer facilities. The Company has a permitted transfer facility near Atlanta.
PENNSYLVANIA REGULATION. The Company's operations in the Commonwealth of
Pennsylvania, including the operation of its autoclave facility in Marcus Hook,
is regulated by the Pennsylvania Department of Environmental Protection (the
"PADEP"). Among other things, the PADEP has promulgated regulations for the
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collection and transport of medical waste. Regulations cover the method of
transport, washing of containers and the types and sizes of containers used for
the collection, storage and transportation of medical waste.
The PADEP has also formulated regulations regarding the operation of treatment
and disposal facilities. The Company's Marcus Hook autoclave facility is subject
to operating procedures and permitting requirements. The facility is also
subject to periodic inspections by the PADEP that insures the facility is
operated in compliance with all regulations.
SOUTH CAROLINA REGULATION. The South Carolina Department of Health and
Environmental Control ("DHEC") has authority over the generation, storage,
treatment and transfer of medical waste pursuant to the state Infectious Waste
Management Act. DHEC requires the profiling of special waste and daily spot
inspections of manifests, incoming vehicles and plant operations. Both the
Company's Incinerator and its transportation operations are regulated by DHEC in
the State of South Carolina. Regulations specify packaging, labeling and storage
and transportation of medical waste prior to its disposal.
State legislation presently restricts the Incinerator's capacity for medical
waste to 100 tons per day. The Company is permitted to accept special and
municipal waste to the full extent of its overall permitted capacity of 200 tons
of waste per day
TENNESSEE REGULATION. The Tennessee Department of Health and Environment
enforces the standards for medical waste incinerators. Generators of medical
waste are restricted from disposing of certain categories of medical waste in
landfills. Human blood and blood products, cultures and stocks of medical agents
and recognizable human organs and body parts may not be landfilled. The Company
collects and transports medical waste to an unaffiliated treatment facility in
Nashville.
VIRGINIA REGULATION. The Virginia Department of Waste Management has
jurisdiction to enforce the regulations for medical waste management in
Virginia. The comprehensive regulations require generators to segregate,
package, label and seal medical waste prior to shipping it off-site for
disposal. Transporters must be permitted through the Department, and the medical
waste must be taken to a permitted treatment facility. Transporters must insure
that all waste is properly packaged and labeled, and must be capable of managing
spills in the unlikely event of a spillage. Permits are required for transfer
stations and the permit process includes public participation. The Company
operates a permitted transfer facility in Richmond, Virginia and has a long term
incineration agreement with an unaffiliated Norfolk, Virginia incineration
company.
WEST VIRGINIA REGULATION. The West Virginia Department of Health and Human
Resources enforces the rules regulating medical waste. Generators are required
to segregate, package, seal and label medical waste before shipping off-site.
Medical waste may not be stored for longer than 30 days. Transporters must be
permitted and must haul the waste to a permitted treatment or transfer facility.
Waste collected in West Virginia is now transported out-of-state for treatment
and disposal in compliance with all applicable regulations.
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COMPETITION
The Company is the second largest medical waste management provider in the State
of Florida and the second largest publicly owned medical waste management
company based in the United States. The Company faces intensive competition in
its market from national, regional and local competitors. Several other
competitors, while not national, have significant regional recognition and
market share. Other competitors are local in origin. The largest national
publicly owned competitor is Stericycle, Inc. The Company also competes against
alternative waste disposal technologies and against generators who have their
own incineration or other treatment facilities, such as some hospitals. The
Company will likely encounter intense competition from national, regional and
local companies in each market into which it may expand.
The Company believes that the principal competitive factors in the medical waste
industry are price, reliability, reputation, timely service, ability to offer
alternative technologies and to help customers work within an increasingly
regulated environment. The Company believes it is able to compete effectively
because of its ability to deliver timely, reliable, environmentally sound
services, at a reasonable price.
POTENTIAL LIABILITY AND INSURANCE
The medical waste disposal industry involves potentially significant risks of
statutory, contractual, tort and common law liability. Potential liability could
involve, for example, claims for clean-up costs, personal injury, or damage to
the environment, claims of employees, customers or third parties for personal
injury or property damage occurring in the course of the Company's operations,
or claims alleging negligence or professional errors or omissions in the
planning or performance of work. The Company could also be subject to fines in
connection with violations of regulatory requirements. The Company attempts to
operate safely and prudently and has not had any material violations to date of
which it is aware.
The Company carries liability and casualty insurance coverage, which it
considers sufficient to meet regulatory and customer requirements and to protect
the Company's employees, assets, and operations.
SUPPLIES
The Company purchases its medical waste equipment and supplies, including
containers, from many sources. The Company has not experienced any difficulty in
obtaining equipment or supplies and alternative sources are readily available.
EMPLOYEES
As of December 31, 1999, the Company had approximately 320 full time employees,
including corporate officers, sales and customer service personnel and office
and clerical employees. SDSPA's employees are covered by a collective bargaining
agreement with the United Steelworkers of America, AFL-CIO. In May of 1999 a new
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2 year agreement was entered into expiring in May, 2001. None of the Company's
other employees are represented by a labor organization. Management considers
its relationship with its employees to be satisfactory.
RECENT DEVELOPMENTS
During 1998, the Company continued its expansion activities and suffered
significant financial setbacks. As a result, the Company experienced
significant losses from operations, and accordingly, the Company's financial
statements contain an explanatory paragraph regarding its ability to continue
as a going concern. In early 1999, the Company's top management was replaced,
and a recovery plan was implemented. In March 1999, an Independent Counsel was
appointed by the Audit Committee of the Board of Directors to investigate the
Company's past accounting practices (see ITEM 6. Management's Discussion and
Analysis of Financial Conditions and Results of Operations). In June 1999, a
lawsuit was filed against the Company, its former officers and certain former
and/or current directors. (See ITEM 3. Legal Proceedings). On July 19, 1999,
the Company received an informal inquiry from the Securities and Exchange
Commission. (See ITEM 3. Legal Proceedings.)
ITEM 2. DESCRIPTION OF PROPERTY.
SDSSC owns its principal offices and plant located in Hampton, South Carolina.
The facility is situated on approximately ten acres of industrial property. The
facility includes a 30,000 square foot process building, a 3,000 square foot
administrative building and a 5,000 square foot truck maintenance building. The
process portion of the facility is in a fully enclosed fenced area, equipped
with a truck scale, video camera system and radiation monitors to provide for
monitoring of all waste received at the facility. The facility is subject to an
approximately $1.9 million mortgage which is held by the prior owner.
The Company owns a 2.9 acre industrial site in Marcus Hook, Pennsylvania which
consists of two (2) 25 ton per day autoclaves, a 10,000 square foot processing
center and a 2,400 square foot administrative building. The facility is subject
to a purchase money mortgage of approximately $400,000 in favor of the prior
owner.
SMI owns and operates a transfer facility located in Morrisville, Pennsylvania,
which consists of land and 8,500 square feet of building space housing
administrative offices, repair station and a transfer station.
The Company operates an autoclave facility in West Palm Beach, Florida in
approximately 8,000 square feet of leased property adjacent to the Company's
West Palm Beach transfer station.
The Company operates autoclave and microwave facilities in Mobile and Decatur
Alabama respectively. The buildings used for these operations are owned by the
Company.
The Company maintains its principal offices in Miami Lakes, Florida where the
Company rents approximately 6,000 square feet. This location is used for
executive offices, billing, sales, and customer service. During 1999, as part of
a significant cost reduction effort, the Company closed down transfer stations
in: Opa Locka, Florida; Savannah, Georgia; Westchester, Pennsylvania and
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Washington, D.C. The Company continues to operate leased transfer stations
located in various parts of the eastern United States.
ITEM 3. LEGAL PROCEEDINGS.
In January 1999, the former stockholders of Med-Waste, Inc. an Alabama
corporation including Malcolm Alexander and Louis Noto filed a lawsuit against
the Company and Med-Waste, Inc., an Alabama corporation in the Circuit Court of
Decatur, Alabama. The Company purchased the capital stock of the Alabama
corporation in June 1998. The lawsuit alleges fraud, misrepresentations, breach
of contract and failure to pay on a promissory note given as part of the
purchase price. In June 1999, the Company terminated the employment of Malcolm
Alexander, Louis Noto and Abby Alexander for "cause". Near the end of 1999, the
second set of plaintiff's attorneys representing the former stockholders,
withdrew from the case. The former stockholders have engaged new counsel and
more recently, Louis Noto engaged new counsel, but the Alexanders have not yet
engaged new counsel. The Company intends to vigorously defend the lawsuit and
believes it has meritorious defenses to the claims. In addition, the Company
filed a counterclaim for breach of contract, fraud, and misrepresentation in
connection with the purchase of the Alabama corporation. Accordingly, the
Company and its counsel are unable to predict the outcome of this case at this
time.
On April 9, 1999, W. Fred Bonham filed a complaint against the Company which is
pending in the Circuit Court of the Fifteenth Judicial Circuit in and for Palm
Beach County, Florida. Prior to January 7, 1999, Mr. Bonham served first as the
Company's Vice President of Operations and then as Vice President/Chief
Operating Officer pursuant to a four (4) year employment agreement dated June 1,
1997 (the "Employment Agreement"). On January 7 1999, the Company terminated Mr.
Bonham's employment for "cause", as the term is defined in the Employment
Agreement. Mr. Bonham alleges in his complaint that the Company violated the
Employment Agreement by failing to pay Bonham certain compensation after his
discharge from the Company. In his complaint, Bonham seeks compensatory damages,
pre-judgment interest, costs and reasonable attorneys' fees. Specifically,
Bonham seeks his base salary ($175,000 per year) due for the remaining term of
his Employment Agreement as well as various stock options. Recently, Mr.
Bonham's attorneys have indicated intent to withdraw from the case and
substitute counsel has not yet been identified. Accordingly, the Company and its
counsel are unable to predict the outcome of this case at this time.
On June 16, 1999, Steve Saarinen filed a complaint in the United States District
Court for the Southern District of Florida, Miami Division against Med/Waste,
Inc., Daniel A. Stauber, Michael D. Elkin, Milton J. Wallace and Richard Green
as Defendants. Mr. Stauber served as President/Chief Executive Officer and as a
director until his resignation of all such positions on June 10, 1999. Mr.
Wallace has been Chairman of the Board of the Company since June 1993. Mr. Green
is a former director and chairman of the Audit Committee and resigned as a
director on December 15, 1998. Mr. Elkin was Vice President/Chief Financial
Officer of the Company from December 1995 until December 31, 1998, when he
resigned his position. The Plaintiff has certified a class action against the
Defendants for purported securities violations relating to Med/Waste common
stock. Specifically, the complaint seeks relief for violations of Section 10(b)
of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10(b)-5,
promulgated thereunder, as well a purported violation of Section 20(a) of the
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Exchange Act. The complaint alleges that the Defendants purportedly issued false
and misleading statements as to the Company's results of operations and that,
specifically, earnings and earnings per share of the Company for each of the
quarterly reports issued for the first, second and third quarters of the 1998
fiscal year were fraudulently misstated. Plaintiff seeks to recover damages on
behalf of himself and the putative class he represents purportedly sustained as
a result of the violations of the securities law alleged in the Complaint.
Plaintiff also seeks to recover attorneys' fees and costs incurred in the
litigation. No discovery has commenced and the size of the plaintiff class, if
certified, is not yet determined. Accordingly, the Company and its counsel are
unable to predict the outcome of this case at this time.
On October 8, 1999, the Company was served with a lawsuit by Richard Anthony
Dean, alleging fraud, breach of contract and misrepresentation, among other
charges, associated with the acquisition of Target Medical Waste Services, LLC,
in Mobile, Alabama. Dean is claiming unspecified compensatory damages, punitive
damages and court costs. The Company is vigorously defending itself and a
counterclaim by the Company for breach of covenants and misrepresentation has
been filed. Accordingly, the Company is unable to predict the outcome of this
case at this time
By letter dated July 19, 1999, the Securities and Exchange Commission ("SEC")
advised the Company that it is conducting an informal inquiry into the
accounting procedures utilized by the Company. The SEC has requested that the
Company voluntarily provide certain records and other information. The Company
has complied fully with SEC requests and is cooperating with the SEC in its
inquiry.
Any of the above matters, if determined adverse to the Company, may have a
material adverse effect on the Company's operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders during the three
months ended December 31, 1999.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded in the over-the-counter market. Prior to
June 3, 1999, prices were quoted on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") Small Cap Market under the symbol
"MWDS." On June 3, 1999, NASDAQ halted trading the Common stock. Effective June
10, 1999, the Company withdrew its stock from quotations by NASDAQ due to the
Company's inability to comply with SEC reporting requirements. The Company is
now in compliance with all SEC reporting requirements and the Company's common
stock is currently quoted on the " OTC-Bulletin Board" maintained by the NASDAQ.
The following table sets forth the high and low sales prices information for the
Company's common stock for each quarter for the last two fiscal years. The
quotations provided below reflect inter-dealer prices, without retail markups,
mark down or commission and may not represent actual transactions.
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FISCAL 1998 HIGH LOW
- ----------- ---- ---
Quarter ending March 31, 1998 $ 5.69 $ 4.56
-------- ------
Quarter ending June 30, 1998 $ 7.38 $ 4.75
-------- ------
Quarter ending September 30, 1998 $ 7.63 $ 3.63
-------- ------
Quarter ending December 31, 1998 $ 4.88 $ 2.88
-------- ------
FISCAL 1999
- -----------
Quarter ending March 31, 1999 $ 5.37 $ 3.00
-------- ------
Quarter ending June 30, 1999 $ 3.12 $ .50
-------- ------
Quarter ending September 30, 1999 $ 1.50 $ .25
-------- ------
Quarter ending December 31, 1999 $ .75 $ .37
-------- ------
On March 1, 2000 the average high and low prices of the common stock as quoted
on the "Bulletin Board" was $1.03 and $1.00 respectively.
As of March 1, 2000, the Company had approximately 200 shareholders.
DIVIDENDS
The Company has never paid any cash dividend on its common stock and does not
anticipate paying cash dividends in the foreseeable future. The payment of
dividends by the Company will depend on its earnings, financial condition and
other business and economic factors affecting the Company at that time which the
Board of Directors may consider relevant. The Company presently intends to
retain any earnings to provide for the development and growth of the Company.
The Company has outstanding 31,095 shares of Series A Preferred Stock which
accrue dividends at a rate of 9% per annum. The Company paid cash dividends on
its Series A Preferred Stock from its issuance until December 31, 1998. The
dividends for the first and second quarters of 1999 were paid through the
issuance of additional Shares of Series A Preferred Stock as permitted by the
terms of the Series A stock. The dividends for the third and fourth quarter of
1999 were paid in cash in February of 2000.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
GENERAL
During 1999, the Company was engaged in a fast paced recovery program to correct
many of the problems that faced the new management team that came on board in
the first quarter of 1999. During the year, the Company restated all of its 1998
quarterly reports and was successful in becoming compliant with all SEC
reporting requirements by September of 1999.
COMPANY'S MANAGEMENT REORGANIZATION AND 1998 FINANCIAL RESULTS
During January 1999, the Company announced the appointment of Carlos Campos as
Chief Operating Officer, George Mas as Chief Financial Officer and Ross Johnston
as Vice President of Legal Affairs. Also in January 1999, the Company terminated
the employment of William F. Bonham as Vice President/Chief Operating Officer.
On March 8, 1999, the Company issued a press release announcing the possibility
that it may be required to restate earnings for the three fiscal quarters of
1998. At that time, the restatement was estimated at $1.75 million for the
three-quarters. After further investigation by the new management team and the
appointment of an independent counsel by the Audit Committee of the Board of
Directors, the Company estimated the 1998 loss in a press release dated April
15, 1999 at $8 million. On March 17, 1999, Daniel Stauber, took a leave of
absence as president and Chief Executive Officer of the Company. Effective June
10, 1999, Mr. Stauber resigned as President and CEO and also as a member of the
Board of Directors. Carlos Campos was appointed acting CEO.
On June 3, 1999 the Company announced that it expected to report a net loss of
$9.3 million for fiscal year 1998 and that it had expanded its investigation to
fiscal years 1997 and 1996. In July 1999 after a review of 1997 and 1996 by the
independent counsel, it was concluded that no material misstatements of fiscal
years 1997 and 1996 had come to their attention. The Company's management agreed
with their conclusion and announced that it would file amended quarterly reports
for the first three-quarters of fiscal year 1998.
On June 10, 1999, the Company issued a press release announcing that it had
voluntarily removed its stock from trading on the NASDAQ Stock Market ("NASDAQ")
in anticipation of not being in compliance with the net tangible assets
requirements of NASDAQ.
Effective June 10, 1999, Daniel Stauber, former President and CEO resigned from
these positions and also from the Board of Directors. All stock options owned by
Mr. Stauber terminated as of the date of his resignation. On July 15, 1999, the
Company announced that Carlos Campos was appointed President and CEO and also
elected to the Board of Directors.
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YEAR ENDED DECEMBER 31, 1999 COMPARED WITH 1998
REVENUES. Revenues for the year ended December 31, 1999 increased by
approximately $1.9 million (7.8%) over 1998. This growth can be attributed
primarily to the acquisitions made during 1998, which contributed a full year of
operations in 1999. During 1999, new management intentionally limited the
internal sales growth rate so that the many problems arising from the Company's
inability to obtain benefits from acquisitions made in 1997 and 1998 could be
properly addressed and resolved. New customers were only added if they required
no significant capital investments, such as containers or transportation
equipment. As the cash situation improved late in 1999 and it became evident
that additional capital was forthcoming from the private placement of $4.4
million completed in early 2000, marketing priorities were changed so that a
more aggressive internal growth rate could be achieved in the future.
OPERATING COSTS. Operating costs increase 1% ($122,756)from 1998 to 1999 despite
sales increasing 7.8%. As a percent of revenues these costs improved from 85% in
1998 to 79% in 1999. Most of the new management operating changes were not
implemented until the second half of the year therefore, this improvement is
expected to continue in 2000. Some of the operating changes included improving
the trucking and customer route logistics, negotiating lower burn rates with an
outside medical waste processor under an existing contract, inherited from a
previous acquisition in Virginia and internalizing waste flows to the Company's
treatment facilities rather than with third parties.
ADMINISTRATIVE AND SELLING EXPENSES. These expenses decreased $3,211,868 from
1998 to 1999 and represented 28% of revenues in 1999 compared to 43% in 1998.
Substantial decreases in costs from 1998 can be attributed to an improvement in
collection policies and procedures which resulted in a reduction of bad debts
expense of $500,000. Additionally, professional services were reduced by
$1,250,000 by eliminating the use of outside consultants and professionals by
internalizing legal, computer and accounting costs and because of the absence of
special audit and investigation costs expensed in 1998. The remaining cost
reduction can be attributed to costs savings from the centralization of overhead
functions at the national service center. During 1999 there was a reduction of
approximately 25 employees representing approximately $1,000,000 in payroll and
related expenses.
OPERATING LOSS. The loss of $8.7 million in 1998 was primarily attributable to
the Company's inability to obtain costs synergies from acquisitions made in late
1997 and in 1998. During 1999, new management took immediate action to implement
its concept of handling all support operations from a central service center.
This along with significant reductions in administrative expenses, discussed
above, and the absence of a charge for failed acquisitions in 1999, resulted in
the reduction of the operating loss by $5,433,615.
OTHER EXPENSES, net. The increase of $1,361,437 was principally due to an
increase in interest expense resulting from higher debt during 1999 and the
effect of interest incurred on loans on default using the prescribed default
rates on certain loans which, are generally 2%-3% above the regular interest
rates.
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PROVISION FOR INCOME TAXES. No provision for income taxes were necessary for
1999 due to the loss reported for the year. The 1998 losses also created a tax
credit from net operating loss carrybacks to prior years. (See note 10 to
Consolidated Financial Statements.)
NET LOSS. The net loss for 1999 was $3,496,448 less than in 1998. During 1999,
new management implemented many operating changes in an attempt to begin to
properly consolidate into the operational structure the acquisitions made in
1997 and 1998. Most of these changes were made in the later half of the year and
others will be made in 2000. Management believes its new operating philosophy
should continue to result in reduced costs into the year 2000.
YEAR 2000 COMPUTER ISSUES
The potential for software failure due to Year 2000 calculations is a known
risk. The Company recognizes the need to ensure that its operations, products
and services are not adversely impacted by the Year 2000 risks. The Company
expended approximately $35,000 for Year 2000 related expenses and continues to
monitor the situation for any disruptions due to Year 2000 related issues. The
Company has not had its operations disrupted with any Year 2000 issues and does
not expect any material disruptions or significant costs related to Year 2000
issues, for the year 2000.
LIQUIDITY AND CAPITAL RESOURCES. The Company's bank borrowings during 1999 were
restricted to $1,500,000 during the first quarter of 1999. At that time, due to
the reporting and operational deficiencies uncovered by new management, all
lines of credit were frozen and the Company's only principal source of cash was
from its own operations. During the year, approximately $297,000 was borrowed
from the Chairman of the Board and the Chief Executive officer to meet certain
financial obligations that could no longer be delayed. Payments to vendors were
routinely delayed and payments on long term debt were not made on time. All bank
loans and other significant debt are currently in default and the due date of
the line of credit from the bank was extended to May 31, 2000.
Subsequent to December 31, 1999 the Company successfully completed a private
placement of $4,400,000 of convertible preferred stock which netted the Company
approximately $4,100,00 in additional working capital. These funds are to be
used primarily to reduce the amount of accounts payable to vendors and
suppliers. In addition $720,000 was used to retire a past due debt to a former
owner of business acquired in 1998.
The Company must make improvements at the SDSSC incinerator during 2000-2002 to
meet new air emission standard requirements. Although expected expenditures were
deferred in 1999 and required State of South Carolina Tests were successfully
completed, management still expects to incur approximately $6,000,000 in
improvements to this facility in order to maximize its waste throughput and
obtain significant economies of scale and meet the 2002 Federal air emission
standards. The Company expects to obtain those funds from additional bank
borrowings and/or equity capital. There can be no assurances that the Company
will be able to obtain such funds. In such event, the Company may be required to
reduce the amount of waste processed or close the facility until the funds to
make the renovations become available. During 2000, the Company anticipates
incurring approximately $1 million in company wide improvements as well as it
may incur significant legal costs to defend its on going litigation (See item
3).
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The Company is presently not in compliance with minimum tangible net worth and
other financial covenants set forth in its bank credit facility and certain
other notes payable. The Lenders have not declared the Company in formal default
or accelerated payment of the Company's indebtedness thereunder. There can be no
assurance that they will not do so in the future. The Company is engaged in
discussions with prospective sources of additional working capital and with its
current lenders. There can be no assurance that the Company will successfully
negotiate a new credit facility or obtain additional working capital. The
Company's current credit facility, which would have provided a maximum of $35
million in financing, has been placed on hold by the lenders. The revolving
portion of the credit facility expires on May 30, 2000. During 1999, the
Company's new management team implemented a series of cost reduction and
performance enhancing measures which reduced considerably the operating expenses
of the Company. As expected, the Company was able to achieve a positive cash
flow from operations by the third quarter of 1999. These cost reduction efforts
are continuing and management expects continued improved results during 2000 and
beyond. The private placement of approximately $4.4 million successfully
completed in February 2000 provides the Company with sufficient cash flow to
reduce its debts to vendors and suppliers to a manageable level. These
additional funds, along with a positive cash flow, are expected to be sufficient
for the operational cash needs of the Company for the next twelve months.
The Company's consolidated financial statements are presented on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. During 1997 and 1998, the Company
purchased several companies in the medical waste business in contemplation of
integrating the acquisitions into the Company's core business. In 1997 and 1998
unfortunately, the Company was unable to successfully integrate and achieve
profitability from these acquisitions. In addition, internal growth was limited
due to the Company's inability to formulate an effective marketing plan,
integrate its acquisitions, and manage the Company's growth. In early 1999, with
new management the Company began its plan to aggressively control costs, control
expansion efforts, and focus on the Company's core business.
The Company is also in discussions with several lenders for additional funds, as
well as obtaining a waiver to cure its financial covenant violations. The
Company believes that it will be successful in the future in obtaining its
required capital needs.
The Company's continued existence is dependent upon its ability to resolve its
liquidity problems principally by implementing cost reduction strategies and
obtaining positive results from increased marketing efforts. The financial
statements do not include any adjustments to reflect the possible future effect
on the recoverability and classification of assets for the amount of
classification of liabilities that may result from the possible inability of the
Company to continue as a going concern. There is no assurance that the Company
will be able to achieve its recovery plan as described above. (See Independent
Auditor's report which contains an explanatory paragraph regarding the Company's
ability to continue as a going concern.)
This Form 10-KSB contains certain forward looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 with respect to the
financial condition, results of operations and business of the Company, and its
subsidiaries, including statements made under Management's Discussion and
Analysis of Financial Condition and Results of Operations. These forward-looking
statements involve certain risks and uncertainties. No assurance can be given
that any of such matters will be realized. Factors that may cause actual results
22
<PAGE> 23
to differ materially from those contemplated by such forward looking statements
include, amount other, the following: the competitive pressure in the industry;
general economic and business conditions; the ability to implement and the
effectiveness of business strategy and development plans; quality of management;
business abilities and judgment of personnel; and availability of qualified
personnel; labor and employee benefit costs.
IMPACT OF INFLATION. To the extent permitted by competition, the Company passes
increased costs attributed to inflation to its customers by increasing sales
prices over a reasonable period of time. Also, it is the Company's policy to
place all of its major supplier purchases out to bid. During 1998, these
policies were not carried out in an organized financial structure resulting in
significant costs increases for the year.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
Derivative Instruments and Hedging Activities", establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Statement applies to all entities and, as amended, is
effective for all fiscal quarters of the fiscal years beginning after June 15,
2000. The Company did not engage in derivative instruments or hedging activities
in any periods presented in the consolidated financial statements. Accordingly,
management anticipates implementation of SFAS No. 133 will not have a material
effect on the Company's financial position or results of operations.
23
<PAGE> 24
ITEM 7. FINANCIAL STATEMENTS.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.................................................................. 25
Consolidated Balance Sheets as of December 31, 1999 and 1998........................................................ 26
Consolidated Statements of Operations for the years ended December 31, 1999 and 1998................................ 27
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999 and 1998...................... 28
Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998................................ 29
Notes to Consolidated Financial Statements.......................................................................... 30
</TABLE>
24
<PAGE> 25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders of Med/Waste, Inc.
We have audited the accompanying consolidated balance sheets of Med/Waste, Inc.
as of December 31, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's 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 audits 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 Med/Waste, Inc.
at December 31, 1999 and 1998, and the consolidated results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in notes 6, 13, and 17 to
the consolidated financial statements, the Company is in default of its
agreements with certain lenders, is involved in several lawsuits whose outcome
is uncertain at this time and has incurred significant losses from operations,
negative cash flows and a working capital deficiency as of and for the years
ended December 31, 1999 and 1998. These factors raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regards to these matters are described in note 17. The consolidated financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
BDO Seidman, LLP
Miami, Florida
March 3, 2000
25
<PAGE> 26
MED/WASTE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
ASSETS (Note 6)
Current assets:
Cash and cash equivalents $ 69,225 $ 113,146
Accounts receivable, net of allowances of $668,000 and $740,000 in
1999 and 1998, respectively (note 6) 5,457,676 5,713,044
Inventories 210,544 352,941
Prepaid expenses and other 153,780 1,359,436
------------ ------------
Total current assets 5,891,225 7,538,567
Property, plant and equipment, net (notes 3 and 11) 12,908,410 14,172,260
Goodwill, net of accumulated amortization of $1,554,000 and $1,152,000 18,774,945 19,906,832
(note 2)
Other intangibles, net (notes 2 and 5) 7,469,018 7,373,617
Other assets 294,827 297,369
Notes receivable (Note 9) 150,000
Investment in unconsolidated subsidiary (note 4) 737,284 717,399
------------ ------------
$ 46,075,709 $ 50,156,044
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 7,332,110 $ 6,699,336
Current portion of notes payable (note 6) 23,731,306 20,120,645
Current portion of capital lease obligations (note 11) 710,249 679,935
------------ ------------
Total current liabilities 31,773,665 27,499,916
Capital lease obligations, less current portion (note 11) 318,074 901,634
Notes payable (note 6) 162,091 1,957,023
------------ ------------
Total liabilities 32,253,830 30,358,573
Commitments and contingencies (notes 11, 13 and 17)
Shareholders' equity (notes 2, 7,8,14, 16 and 17):
Series A Preferred stock, .01 par value; 60,000 shares authorized,
31,095 and 28,869 shares outstanding at 1999 and 1998 respectively
($100 per share liquidation preference) 311 289
Common stock, $.001 par value; 10,000,000 shares authorized;
6,731,956 and 6,650,647 shares issued and outstanding in 1999 and
1998, respectively 6,732 6,651
Additional paid-in capital 30,475,847 30,289,507
Warrant subscriptions and option notes receivable (Note 12) (382,113) (387,466)
Deficit (16,248,241) (10,080,853)
------------ ------------
13,852,536 19,828,128
Less cost of treasury stock: 11,824 shares (30,657) (30,657)
------------ ------------
Total shareholders' equity 13,821,879 19,797,471
------------ ------------
$ 46,075,709 $ 50,156,044
============ ============
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS.
26
<PAGE> 27
MED/WASTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues $ 26,872,279 $ 24,924,664
Costs and expenses:
Operating costs 21,317,960 21,195,204
Administrative and selling expenses 7,531,555 10,743,423
Amortization of intangibles 1,313,611 999,536
Failed acquisitions expense (Note 2) 710,963
------------ ------------
30,163,126 33,649,126
------------ ------------
Operating (loss) (3,290,847) (8,724,462)
Other (expense) income:
Interest expense, net (2,632,973) (1,598,628)
Other, net 25,709 352,801
------------ ------------
Other (expense) income, net (2,607,264) (1,245,827)
------------ ------------
(LOSS) BEFORE INCOME TAXES (5,898,111) (9,970,289)
Income tax (benefit) (note 10) (580,835)
------------ ------------
NET (LOSS) (5,898,111) (9,389,454)
Preferred stock dividend 269,277 274,382
------------ ------------
Net (loss) available to common shareholders $ (6,167,388) $ (9,663,836)
============ ============
(Loss) per share - basic and diluted $ (.92) $ (1.68)
============ ============
Weighted Average number of common shares outstanding 6,687,259 5,764,566
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
27
<PAGE> 28
MED/WASTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------- ------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 42,969 $430 4,629,699 $4,630
Conversion of preferred stock to common stock (14,000) (141) 388,935 389
Conversion of debentures to common stock 558,579 559
Issuance of common stock for the acquisition of Decatur 133,334 133
Issuance of common stock for the acquisition of
Med-Waste, Inc. 41,334 41
Issuance of common stock for BMW acquisition 16,000 16
Issuance of common stock for the acquisition of SMI 500,000 500
Issuance of common stock for Bio-Tech, Inc. 26,666 27
Issuance of common stock for certain assets acquired from
Biomade, Inc 75,992 76
Stock issued for services 1,989 2
Warrants Exercised 38,417 38
Options Exercised 239,702 240
------ --- --------- -----
Balance at December 31, 1998 28,869 289 6,650,647 6,651
Stock issued for services 13,433 13
Issuance of common stock for Bio-Tech, Inc, Final Payment 62,794 63
Stock issued in lieu of dividends 2,442 24
Conversion of preferred stock to common stock (216) (2) 5,082 5
------ --- --------- -----
Balance at December 31, 1999 31,095 $311 6,731,956 $ 6,732
====== === ========= =====
</TABLE>
<TABLE>
<CAPTION>
WARRANT
ADDITIONAL SUBSCRIPTIONS
PAID-IN AND OPTION NOTES TREASURY TOTAL SHARE-
CAPITAL RECEIVABLE DEFICIT STOCK HOLDERS
--------------- -------------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $18,625,685 $ (258,003) $(417,017) $(30,657) $17,925,068
Conversion of preferred stock to common stock 248
Conversion of debentures to common stock 1,335,343 1,335,902
Issuance of common stock for the acquisition of
Decatur 992,378 992,511
Issuance of common stock for the acquisition of
Med-Waste, Inc. 309,959 310,000
Issuance of common stock for BMW acquisition 79,984 80,000
Issuance of common stock for the acquisition of SMI 6,999,500 7,000,000
Issuance of warrants for the acquisition of SMI 25,000 25,000
Issuance of common stock for Bio-Tech, Inc. 196,635 196,662
Issuance of common stock for certain assets
acquired from Biomade, Inc 549,924 550,000
Common stock issued for services 9,998 10,000
Options issued for services 245,870 245,870
Warrants issued for services 253,000 253,000
Warrants Exercised 114,985 115,023
Options Exercised 551,246 (179,463) 372,023
Proceeds from stock subscription receivable 50,000 50,000
Net (loss) for the year (9,389,454) (9,389,454)
Dividends (274,382) (274,382)
----------- -------- ------------ -------- -----------
Balance at December 31, 1998 $30,289,507 (387,466) $(10,080,853) $(30,657) $19,797,471
Warrants issued for services 46,700 46,700
Stock issued for services 8,987 9,000
Issuance of stock for Bio-Tech, Inc, Final Payment (65) --
Stock issued in lieu of dividends 130,718 130,743
Collection of notes receivable 5,353 5,353
Net (loss) for the year (5,898,111) (5,898,111)
Dividends (269,277) (269,277)
----------- -------- ------------ -------- -----------
Balance at December 31, 1999 30,475,847 $(382,113) $(16,248,241) $(30,657) $13,821,879
=========== ======== ============ ======== ===========
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
28
<PAGE> 29
MED/WASTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) $ (5,898,111) $ (9,389,454)
Adjustments to reconcile net loss to net cash (used) in operating activities,
Depreciation and amortization 3,279,611 2,479,577
Provision for doubtful notes and accounts receivable (71,460) 631,600
Loss on disposal of operating equipment -- 195,170
Equity in net income of unconsolidated subsidiary (19,885) (36,550)
Issuance of stock, options, and warrants for services 55,724 508,870
Changes in operating assets and liabilities net of effects of acquisition:
Decrease (increase) in accounts receivable 326,828 1,493,072
Decrease in notes receivables 150,000 --
Decrease (increase) in inventories 142,397 (23,863)
Decrease (increase) in prepaid expenses 1,205,657 (544,698)
Increase (decrease) in other assets (45,545) 335,804
Increase in accounts payable and accrued liabilities 632,774 1,573,986
(Decrease) in deferred income tax liability -- (818,000)
-------------- -------------
Net cash (used in) operating activities (242,010) (3,594,486)
INVESTING ACTIVITIES:
Purchase of Intangibles (229,038) --
Proceeds on sale of Kover 1,200,000
Proceeds on note for sale of Kover 1,350,000
Acquisition of businesses, net of cash acquired (6,838,743)
Purchase of operating equipment (702,150) (1,641,432)
-------------- -------------
Net cash used in investing activities (931,188) (5,930,175)
FINANCING ACTIVITIES:
Increase in borrowings under bank credit agreement 1,545,553 3,159,764
Preferred stock dividends (138,559) (274,382)
Additions to other long-term debt 389,365 12,436,618
Payments on other long-term debt (119,189) (6,531,475)
Principal payments under capital leases (553,246) (674,718)
Proceeds from exercise of options and warrants 487,292
Payment of stock subscription receivable 5,353 50,000
-------------- -------------
Net cash provided by financing activities 1,129,277 8,653,099
-------------- -------------
Net (decrease) in cash and cash equivalents (43,921) (871,562)
Cash and cash equivalents at beginning of period 113,146 984,708
-------------- -------------
Cash and cash equivalents at end of period $ 69,225 $ 113,146
============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Notes received for sale of Kover $(1,500,000)
Notes issued for acquisition of Decatur 1,500,000
Fixed assets acquired through capital leases 1,336,677
Common stock issued for the acquisitions 9,170,000
Warrants issued for the acquisition SMI 25,000
Fair value of assets acquired from acquisitions 5,060,000
Liabilities assumed from acquisitions 3,400,000
Conversion debentures to common stock 1,335,902
Conversion of preferred stock to common stock $ 5,082 1,410,000
Issuance of common stock for note receivable 179,463
Cash paid during the year for interest 2,292,666
Preferred Stock issued as Payment of Dividend 130,718
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENT
29
<PAGE> 30
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Med/Waste, Inc. (the "Company") is a holding company incorporated in November
1991 under the laws of the State of Delaware. The Company is engaged in the
businesses of medical waste management, primarily through the following
subsidiaries, collectively referred to as the "Waste Companies":
Safety Disposal System, Inc. ("SDS")
Safety Disposal System of South Carolina, Inc. ("SDSSC")
Safety Disposal System of Pennsylvania, Inc. ("SDSPA")
Safety Disposal System of Georgia, Inc. ("SDSGA")
Safety Disposal System of Virginia, Inc. ("SDSVA)
Target Medical Waste Services, LLC ("Target")
Med-Waste, Inc. ("Decatur")
Sanford Motors, Inc. ("SMI")
BMW Medtec of West Virginia ("BMW")
Incendere, Inc. ("Incendere")
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant inter-company transactions have been
eliminated.
PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial maturity of
three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories consist primarily of supplies used to store waste during transport
and are accounted for under the First-in-First-out (FIFO) method of accounting
and are carried at the lower of cost or market.
30
<PAGE> 31
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the assets, which range
from 5 to 30 years.
GOODWILL AND OTHER INTANGIBLE ASSETS
The excess of the cost over the fair value of net assets of purchased businesses
is recorded as goodwill and is amortized on a straight-line basis over 25 years.
Other intangible assets primarily include covenants not to compete, customer
lists, patents and permits. The cost of other intangibles in amortized on a
straight-line basis over their estimated useful lives, ranging from five to
twenty-five years. The Company reviews the carrying value of goodwill and other
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through the estimated undiscounted future cash flows from the use of
the assets associated with the intangibles.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash and cash
equivalents, accounts receivable, accounts payable, and long-term debt. The fair
values of these financial instruments were not materially different from their
carrying values. Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable. Credit
risk on trade receivables is substantially minimized as a result of the large
customer base. No single customer represents greater than 5% of total accounts
receivable. The Company maintains allowance for potential credit losses and
performs on going credit evaluations.
STOCK BASED COMPENSATION
The Company recognizes compensation expense for its employee stock option
incentive plans using the intrinsic value method of accounting. Under the terms
of the intrinsic value method, compensation cost is the excess, if any of the
quoted market price of the stock at the grant date, or other measurement date,
over the amount an employee must pay to acquire the stock.
INCOME TAXES
Income taxes are accounted for using the liability approach under the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes".
EARNINGS (LOSS) PER SHARE
Basic earnings per share are computed on the basis of the weighted average
number of common shares outstanding during each year. Diluted earnings per share
are computed on the basis of the weighted average number of common shares and
dilutive securities outstanding. Dilutive securities having an anti-dilutive
effect on diluted earnings per share are excluded from the calculation.
31
<PAGE> 32
SEGMENT REPORTING
During fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which establishes standards for the way that public enterprises
report information about operating segments in financial statements. It also
establishes disclosure standards regarding products and services, geographic
areas and major customers. The Company's operations are conducted in a single
unified segment - management of medical waste.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
Derivative Instruments and Hedging Activities", establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Statement applies to all entities and, as amended, is
effective for all fiscal quarters of the fiscal years beginning after June 15,
2000. The Company did not engage in derivative instruments or hedging activities
in any periods presented in the consolidated financial statements. Accordingly,
management anticipates implementation of SFAS No. 133 will not have a material
effect on the Company's financial position or results of operations.
ACQUISITIONS
On March 31, 1998, the Company purchased the capital stock of Med Waste, Inc. an
unrelated Pennsylvania corporation. Med Waste, Inc. provides medical waste
management services to medical waste generators in Pennsylvania. In connection
with the purchase, the Company issued 41,000 shares of common stock with a
guaranteed fair value after two years of $7.50 per share.
In June 1998, the Company purchased from Biomade Plastics, Inc. a subsidiary of
ARK Industries, Inc. (formerly Bio-Medical Waste Systems, Inc.) molds for the
manufacture of reusable sharps containers, lids and accessories used in the
"Sharps Express" program, together with all proprietary knowledge, patents, 510K
approvals, trade secrets, referral lists, technical information, quality control
data, processes (whether secret or not), methods and other similar know how or
rights. Biomade Plastics, Inc. operated a reusable sharps container program
through licensing territories to third parties. The Company received an
assignment of all license agreements as well as all inventories of such
containers.
In June 1998, the Company acquired Target, based in Mobile, Alabama. Target
operates a medical waste microwave facility and provides medical waste
management services to customers in Alabama, Florida, Louisiana and Mississippi.
In June 1998, the Company acquired certain assets and assumed certain
liabilities of Biotech Disposal, Inc. ("Biotech"). Biotech provided medical
waste management services to generators of medical waste in Broward County,
Florida. In connection with the purchase, the Company issued 26,666 shares of
common stock with a guaranteed per share value after one year of $6.50.
32
<PAGE> 33
In June 1998, the Company acquired Decatur, an unrelated Alabama corporation
based in Decatur, Alabama. Decatur owns and operates a medical waste autoclave
facility and provides medical waste management services to medical waste
generators in the states of Alabama, Georgia and Tennessee. In connection with
the purchase, the Company issued 133,334 shares of common stock of which the
Company guaranteed fair value of 120,000 shares after two years of $7.50 per
share.
In September 1998, the Company purchased BMW, a medical waste transportation
company operating in West Virginia, Eastern Ohio and Western Pennsylvania. In
connection with the purchase, the Company issued 16,000 shares of common stock
valued at the then market value.
In October 1998, the Company acquired SMI and its related companies. SMI
provides medical waste disposal services to medical waste generators in the
Pennsylvania, New Jersey, Delaware, and Maryland region and owns a 49% interest
in an incineration facility in Matthews, North Carolina. In connection with the
purchase, the Company issued 500,000 shares of common stock with a guaranteed
fair value of $14 per share, after three years. Payments under such guarantee
can be made in cash or in additional shares of stock at, the option of the
Company.
The following summarized unaudited pro forma consolidated results of operations
have been prepared as if the aforementioned acquisitions had occurred at the
beginning of 1998 and includes pro forma adjustments for interest, depreciation
and amortization:
PROFORMA
1998
--------
Revenues 29,932,645
Net (loss) (9,389,463)
EPS - Basic and Diluted (1.50)
Weighted Average number of common shares outstanding 6,239,677
The pro forma consolidated results do not purport to be indicative of results
that would have occurred had the acquisitions been in effect for the periods
presented, nor do they purport to be indicative of the results that will be
obtained in the future.
All of the acquisitions were accounted for by the purchase method of accounting.
Accordingly, the respective purchase prices include the guaranteed fair value of
common stock issued in connection with the acquisition and the results of
operations of the acquired entities are included in the accompanying
consolidated Statements of Operations from the respective dates of acquisition.
During 1997 and 1998 the Company had capitalized certain costs relating to the
potential acquisition of a company. During the fourth quarter of 1998, the
Company expensed the capitalized costs of $710,963 due to the Company's failure
to complete the acquisition.
In each acquisition, the purchase price has been allocated to the fair value of
tangible and identified intangible assets acquired and liabilities assumed, as
follows:
33
<PAGE> 34
<TABLE>
<CAPTION>
IN MILLIONS OF DOLLARS
PA TARGET DECATUR SMI BMW BIO-MADE
<S> <C> <C> <C> <C> <C> <C>
Value of common stock issued $0.31 $ -- $1.00 $7.03 $0.08 $0.55
Cash paid including expenses net of
cash acquired -- 1.32 0.51 4.17 0.17 0.63
Fair value of liabilities assumed 0.02 1.80 1.34 0.19 --
------------------------------------------------------------
Total amount paid $0.33 $1.32 $3.31 $12.54 $0.44 $1.18
============================================================
Fair value of tangible assets
acquired $0.07 $0.46 $0.48 $3.42 $0.15 $0.44
Fair value of identifiable
intangible assets acquired -- 0.60 1.00 3.55 0.23 0.33
Goodwill 0.26 0.26 1.83 5.57 0.06 0.41
------------------------------------------------------------
Total net assets acquired $0.33 $1.32 $3.31 $12.54 $0.44 $1.18
============================================================
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $ 527,700 $ 527,700
Building 2,897,569 2,819,817
Incinerator and autoclaves 4,541,970 4,310,947
Operations equipment 6,521,779 5,978,103
Computer, office and other equipment 3,176,426 3,119,221
---------- ----------
17,665,444 16,755,788
Less accumulated depreciation (4,757,034) (2,583,528)
---------- ----------
$ 12,908,410 $ 14,172,260
========== ==========
</TABLE>
Depreciation expense amounted to $1,966,001 and $1,480,041 for 1999 and 1998,
respectively. Included in operations equipment and computer, office and other
equipment is approximately $1,500,000 of equipment under capital leases at
December 31, 1999 and 1998.
4. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
During 1998, (as part of the SMI acquisition) the Company acquired a 49%
interest in Matthews Acquisition Corporation ("MAC"), an incineration facility
located in North Carolina, that owns all of the capital stock of BMWNC, Inc.
("BMWNC") and Biomedical Services, Inc. ("BMS"). Both BMWNC and BMS were debtors
in possession pursuant to Chapter 11 of the Bankruptcy Code. This transaction
was approved by the bankruptcy court on April 3, 1998. In connection therewith,
MAC acquired BMWNC and BMS for approximately $1 million in cash and the issuance
of $2.1 million, 8% notes payable, due in 2004. The notes are collateralized by
the assets and stock of BMWNC and BMS. The Company recorded the transaction
according to the equity method and, as such, recorded its initial investment at
cost and has adjusted its investment for its respective percentage of
undistributed income or loss, which is not material to the Company's financial
statements. The Company does not have a controlling interest in MAC, nor does it
have a significant influence in the operations. The Company's purchase agreement
for the 49% interest stipulates that the Company's interest in MAC will increase
to 51% upon the occurrence of certain events. Upon acquiring 51% interest, the
Company would have a controlling interest, and would consolidate the accounts of
MAC.
34
<PAGE> 35
5. OTHER INTANGIBLE ASSETS
Other intangible assets consist of the following at December 31:
1999 1998
---- ----
Licenses and permits $ 4,150,000 $ 4,150,000
Customer lists, non-compete, and other 3,903,906 3,690,972
----------- -----------
8,053,906 7,840,972
Less accumulated amortization (584,888) (467,355)
----------- -----------
$ 7,469,018 $ 7,373,617
=========== ===========
6. NOTES PAYABLE
Notes payable consist of the following at December 31:
1999 1998
---- ----
Note payable (1) $ 1,957,800 $ 1,860,642
Term loans (2) 16,200,000 13,154,447
Line of credit (2) 3,500,000 5,000,000
Notes payable (3) 1,747,091 1,826,468
Other (4) 488,506 236,111
---------- ----------
23,893,397 22,077,668
Less current portion 23,731,306 20,120,645
---------- ----------
$ 162,091 $ 1,957,023
========== ==========
The minimum annual debt payments for the next five years required under the
terms of the notes payable are as follows:
2000 $23,731,306
2001 87,735
2002 74,356
2003 --
2004 --
Thereafter --
-----------
$23,893,397
===========
(1) The note to a former owner is non-interest bearing and is payable quarterly
through June 2000. It is reflected, net of unamortized discounts of
approximately $42,200 in 1999 and $139,358 in 1998. The discount is based
on an imputed interest rate of 6% (based on the then prevailing tax exempt
interest rate available to the Company). The note is collateralized by
certain property and equipment (net book value $3 million) and an
assignment of revenues and profits. The Company did not make scheduled
payments during 1999 amounting to $1,050,000 and is therefore in default of
the debt agreement. Accordingly, such debt has been classified as current.
35
<PAGE> 36
(2) At December 31, 1998 the Company had a line of credit with a bank for $5
million. The line was a demand note bearing interest at prime plus 1%
(8.75% at December 31, 1998). Interest was payable monthly. In addition,
the Company had term loans with the bank of $13,154,447 at December 31,
1998.
In January 1999, the Company refinanced these loans with a Credit Agreement
consisting of a $10 million revolving credit loan and a $25 million
Convertible Credit Loan. Borrowings under the line are restricted to 80% of
eligible accounts receivable, as defined. Provided that no default or event
of default, as defined, has occurred, the total principal balance of the
convertible credit loan would be converted to a term loan on July 31, 2000
and would be payable monthly in an amount equal to one eighty-fourth
(1/84th) of the aggregate principal balance of the converted loan. Final
payment plus accrued interest would be due on July 31, 2004.
The revolving credit loan was originally due on July 31, 1999 but was
extended by the Bank to May 30, 2000. Interest on the revolving credit loan
and convertible credit loan is payable monthly at a rate equal to the Prime
Rate or the LIBOR Rate plus or minus an applicable margin as defined in the
Credit Agreement. The Credit Agreement requires the Company to maintain
minimum levels of liquidity, profitability and net worth. The Company is
currently in violation of all of the financial covenants pertaining to the
Credit Agreement. The Company has not obtained waivers from the bank and as
such, has classified the line of credit and term loans outstanding at
December 31, 1999 and 1998 as current liabilities. The Company has been
negotiating with its lenders for the purposes of restructuring the
Company's debt and these lenders have not called the outstanding balances.
Because of the default condition, all borrowings under the Credit Agreement
currently bear interest at a default rate provided by the Agreement (2 1/2%
over the normal rate) which at December 31, 1999 was 11%. The revolving
credit loan and the convertible credit loan are collateralized by
substantially all of the Company's assets.
(3) On November 6, 1997, the Company issued a $500,000 to a former owner
non-interest purchase money note collateralized by real estate. The note is
payable monthly over five years and the balance at December 31, 1999
amounted to $291,670 and is reflected, net of a $44,580 discount. The
discount is based on an imputed interest rate of 10%. The Company made all
the required payments during 1999.
On June 29, 1998, the Company issued five promissory notes to the previous
shareholders of Decatur aggregating $1,500,000. The notes bear interest at
the Prime Rate (8.5% at December 31, 1999) and the principal balances on
the notes with accrued interest are due June 30, 2000. Due to the current
litigation with the previous owners and holders of these notes the Company
ceased making interest payments in August of 1999 but has accrued for such
interest according to the terms of the notes.
36
<PAGE> 37
(4) Other notes consist principally of $297,000 due to the Chairman of the
Board of the Company ($257,000) and to the president and Chief Executive
Officer ("CEO") ($40,000). These unsecured notes bear interest at 10% per
year and represent advances made to the Company by these individuals to
assist the Company in meeting its financial obligations when the line of
credit was no longer available for use.
7. STOCK WARRANTS
In February 1998, the Company issued 14,117 warrants to holders of Series A
Preferred Stock who exchanged their shares of Series A Preferred for common
stock. These warrants have an exercise price of $3.625, were issued below the
market value of underlying stock on date of grant and expire December 2002.
In April 1998, the Company issued 50,000 warrants to a financial advisor with an
exercise price of $5.88. These warrants were issued below the market value of
the underlying stock on the date of grant and expire April 2003.
In September 1998, the Company issued 75,000 warrants to an investment banking
firm. Of these warrants, 37,500 have an exercise price of $3.63, equal to the
then market value of the underlying stock at the date of grant. The remaining
37,500 warrants have an exercise price of $5.00. These warrants expire September
2001.
In October 1998, in connection with the acquisition of SMI, the Company issued
100,000 warrants to the shareholders of SMI. The exercise price is $8.00 per
share, expiring October 2003.
In January 1999, the Company issued 25,000 warrants to a financial advisory firm
in relation to a consulting agreement entered into in 1998. The warrants have an
exercise price of $4.875 and expire on January 8, 2001.
In April 1999, the Company issued 5,000 warrants to an individual who was
instrumental in the recruiting of the Company's current President and CEO.
In December 1999, the Company issued 100,000 warrants to an investment-banking
firm for consulting services performed in 1998 and 1999. The warrants have an
exercise price of $.63 and expire in December 31 2005.
All values of warrants, except those related to acquisitions and capital raising
activities are charged to operations and were valued using the Black-Scholes
method.
8. STOCK OPTIONS
The Company has three stock option plans (a) the 1993 Employee Stock Option Plan
(the "1993 Plan") (b) the Directors Stock Option Plan (the "Directors Plan"),
(c) and the 1996 Employee Stock Option Plan (the "1996 Plan").
37
<PAGE> 38
Under the Directors Plan, as amended, each non-employee director receives
automatic non-discretionary grants of options on June 2 of each year. On each
grant date, each non-employee receives options to purchase 3,000 shares of
common stock for service on the board, additional options to purchase 3,000
shares of common stock for service on each committee of the board, other than
the executive committee and additional options to purchase 3,000 shares for
service as chairman of a committee other than the executive committee.
Non-employee directors receive options to purchase 6,000 shares for service on
the executive committee and an additional 6,000 options as chairman of the
executive committee. In June 1999 and 1998, the Company granted its non-employee
directors, options to purchase 60,000 and 93,000 shares of common stock,
respectively. In December 1998, the Company granted options to purchase 36,000
shares to three Directors who joined the Board at that time. Each option has a
term of five years and is exercisable commencing six months following the date
of grant.
All officers and employees are eligible for grants of options under the 1993 and
1996 Plans, which are administered by a stock option committee which has the
discretion to determine to whom, the amount, exercise prices, exercise terms and
all other matters relating to the grant of options under such plans. Options to
purchase 60,000 shares were granted under the 1993 Plan in 1998, at the then
fair market value of the underlying shares. No options under this plan were
granted during 1999. At December 31, 1999, options to purchase 91,650 shares
were outstanding at exercise prices ranging from $2.13 to $5.88 per share.
Options to purchase an aggregate of 135,000 and 835,000 shares were granted
under the 1996 Plan in 1999 and 1998, respectively, at the then fair market
value of the underlying shares. As of December 31, 1998 options to purchase
430,000 shares were outstanding under the 1996 Plan. Except as otherwise set
forth below all options granted under the 1993 and 1996 Plan vest 25% at the
time of the grant and an additional 25% on each anniversary date thereafter.
Options to purchase 150,000 shares granted to certain members of management,
vested 66,500 as of the respective date of grant and the balance at the end of
the first anniversary of each grant date.
The exercise price of all options granted by the Company since inception was the
closing market price of the underlying common stock on the grant date.
At December 31, 1999, options granted under all plans were accounted for under
APB Opinion 25, "Accounting for Stock Issued to Employees", and related
interpretations in accounting for the plans. Under APB Opinion 25, because the
exercise price of the Company's stock option plans equal the market price of the
underlying stock on the date of grant, no compensation cost is recognized.
FASB Statement No. 123, "Accounting for Stock-Based Compensation", requires the
Company to provide pro forma information regarding net income and earnings per
share as if compensation cost for the Company's stock option plans had been
determined in accordance with the fair value based method prescribed in FASB
Statement 123. For purposes of this disclosure, the Company estimates the fair
value of each stock option at the grant date by using the Black-Scholes
option-pricing model with the following weighted-average assumptions in 1999 and
1998, respectively: no dividends; expected volatility of 46% and 46%, risk-free
interest rates of 5.0% and 5.5% and expected lives of 4.3 and 3.7 years.
38
<PAGE> 39
Under the accounting provisions of FASB Statement 123, the Company's net loss
and loss per share would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1999 1998
--------------------- --------------------
<S> <C> <C>
Net (Loss)
As Reported $(5,898,111) $(9,389,454)
Pro forma $(6,199,433) $(9,871,648)
Net loss per common share-basic and diluted
As Reported $(0.92) $(1.68)
Pro forma $(0.97) $(1.76)
</TABLE>
A summary of the status of the Company's three stock option plans as of December
31, 1999 and 1998, and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1998
1999 1999 WEIGHTED-AVG. WEIGHTED-AVG.
SHARES EXERCISE PRICE 1998 SHARES EXERCISE PRICE
------ -------------- ----------- --------------
<S> <C> <C> <C> <C>
Outstanding at Beginning of Year 2,467,550 $ 2.81 1,700,700 $ 2.81
Granted 195,000 $ 2.88 1,195,500 $ 5.99
Exercised -- $ -- (239,702) $ 2.38
Forfeited, expired and cancelled (1,408,400) $ 4.26 (188,948) $ 3.48
------------ ------------ -------------- --------------
Outstanding at year-end 1,254,150 $ 4.21 2,467,550 $ 4.34
============ ============ ============== ==============
Options exercisable at year-end 1,061,650 $ 4.75 1,565,175 $ 3.98
============ ============ ============== ==============
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED- WEIGHTED-AVERAGE
NUMBER AVERAGE AVERAGE NUMBER EXERCISE PRICE
RANGE OF OUTSTANDING AT REMAINING EXERCISE PRICE EXERCISABLE AT (EXERCISABLE
EXERCISE PRICES 12/31/99 CONTRACTUAL LIFE (ALL OPTIONS) 12/31/99 OPTIONS ONLY)
--------------- -------- ---------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
$1.90-$3.00 438,650 2.4 $2.28 412,400 $2.18
$3.01-$5.00 440,500 3.0 $3.89 307,000 $5.19
$5.01-$7.00 175,000 3.1 $5.54 142,250 $6.66
$7.01-$8.50 200,000 3.5 $8.00 200,000 $8.00
--------- --- ----- --------- -----
1,254,150 2.9 $4.21 1,061,650 $4.75
========= === ===== ========= =====
</TABLE>
9. SALE OF SUBSIDIARY
On January 30, 1998, the Company sold 100% of the capital stock of Kover Group,
Inc. ("Kover") to MPK Holdings, Ltd., an Ohio limited liability company ("MPK").
Kover's operating results in 1998 were not material. MPK is wholly owned by
Phillip W. Kubec and Melissa Kubec, his wife (the "Kubecs"). Mr. Kubec was the
president and chief executive officer of Kover and a director of the Company at
the time of the sale. The Company received aggregate consideration for the sale
of Kover of $2,700,000, payable $1.2 million in cash at closing and the balance
of $1.5 million in promissory notes. The Company received two promissory notes,
one for $960,000 from MPK (the "MPK Note") and one for $540,000 from Kover (the
39
<PAGE> 40
"Kover Note"). In July 1998, MPK and Kover prepaid both notes plus accrued
interest. The Company received $1,350,000 in cash and a new $150,000 promissory
note from MPK ("the New Note"). The New Note was cancelled in 1999 due to a
provision in the sales contract requiring such cancellation if Kover revenues
did not exceed a prescribed amount. Kover's revenues fell short of the
prescribed amount therefore, the New Note was written off in December 1999.
Kover's operations and the gain resulting from the sale of Kover were not
material for the year ended December 31, 1998.
10. INCOME TAXES
At December 31, 1999, the Company had Federal net operating loss carryforwards
of approximately $17,800,000 that expire from 2004 through 2019. The Company
continually reviews the adequacy of the valuation allowance and recognizes tax
benefits when it believes is more likely than not that the benefits will be
realized. For financial reporting purposes, a valuation allowance of $5,337,000
at December 31, 1999 has been recognized to offset the net deferred tax assets
related to these carryforwards and other temporary differences. Management has
assessed that it currently is not more likely than not that these net deferred
tax assets will be realized through future taxable income. The Company recorded
an income tax benefit of $581,000 in 1998, principally due to the reversing of a
net deferred tax liability from the prior year. Realization of the benefits
related to the net operating loss carryforwards may be limited in any one year
due to the Section 382 change of ownership rules.
40
<PAGE> 41
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------
1999 1998
---------- ----------
<S> <C> <C>
CURRENT DEFERRED TAX ASSETS
Allowance for bad debts $ 211,000 $ 260,000
Reserve for medical costs 69,000 77,000
Accrued bonus 59,000
Other 9,000 9,000
---------- ----------
Total 348,000 346,000
---------- ----------
NON-CURRENT DEFERRED TAX ASSETS & (LIABILITIES)
Difference in basis of property, plant and equipment (1,946,000) (1,560,000)
Difference in basis of intangible assets (161,000) (84,000)
Net operating loss carryforwards 6,882,000 4,299,000
Non-exercised stock options and warrants 214,000 193,000
---------- ----------
Total 4,989,000 2,848,000
---------- ----------
Net deferred tax asset
before valuation allowance 5,337,000 3,194,000
Valuation allowance for net
deferred tax assets (5,337,000) (3,194,000)
---------- ----------
Net deferred tax asset $ -- $ --
========== ==========
</TABLE>
The provision(benefit) for income taxes consists of the following components:
DECEMBER 31
---------------------------------------
1999 1998
---------------- -------------------
Current $ -- $ --
Federal -- --
---------------- -------------------
State -- --
---------------- -------------------
Federal -- (476,000)
State -- (105,000)
---------------- -------------------
Federal -- (581,000)
---------------- -------------------
$ -- $ 581,000
================ ===================
The reconciliation between the provision (benefit) for income taxes and the
amount which results from applying the federal statutory tax rate of 34% to
income (loss) before income taxes is as follows:
41
<PAGE> 42
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1999 1998
---- ----
<S> <C> <C>
Income tax (benefit) at statutory federal rate $(2,097,000) $(3,406,000)
State benefit, net of federal benefit (256,000) (69,000)
Amortization of goodwill 199,000 50,000
Non-deductible expenses 11,000 32,000
Reversal of valuation allowance net of state tax benefit -- 2,812,000
Valuation allowance increase 2,143,000
----------- -----------
$ -- $ (581,000)
=========== ===========
</TABLE>
11. LEASES
The Company leases office and warehouse space and transportation and equipment
under various operating leases that expire through 2004. These leases, some of
which may be renewed for periods ranging from one to four years, require the
Company to pay for certain operating expenses. The Company's rent expense for
the years ended December 31, 1999 and 1998, amounted to $1,426,487 and
$1,221,377, respectively.
Future minimum payments, by year and in the aggregates under capital and
non-cancelable operating leases with initial or remaining terms of one-year
years are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C> <C>
2000 $ 720,329 $ 660,809
2001 276,648 549,040
2002 105,735 435,771
2003 44,184 341,116
2004 and thereafter -- 126,965
---------- ----------
Total minimum lease payments remaining $ 1,146,896 $ 2,113,701
==========
Less amount representing interest (118,573)
Present value of net minimum lease payments 1,028,323
Capital lease obligations-current portion 710,249
----------
Capital lease obligations-long term portion $ 318,074
==========
</TABLE>
12. RELATED PARTY TRANSACTIONS
During 1999 and 1998, the Company paid a law firm, in which the Chairman of the
Board is a shareholder, $114,990 and $214,225, respectively, for services in
assisting with acquisitions and various other corporate legal matters. On August
31, 1996, warrants to purchase 120,004 shares of common stock were exercised by
three directors through the issuance of promissory notes aggregating $288,003.
The promissory notes are collateralized by the common stock issued, bear
42
<PAGE> 43
interest at 8% a year and are payable $10,000 in principal plus accrued interest
on March 31, of each year for a period of five years, with the remaining
principal balance together with accrued interest payable at the end of five
years and are recorded as a reduction to shareholders' equity in the
accompanying consolidated Balance Sheets. During 1999, approximately $5,353 in
payments for such notes was received from the two active directors. In
connection, with Mr. Stauber's resignation, his notes aggregating $153,950 are
collateralized by the Company's stock owned by him, and is payable through July
1, 2001.
On June 2, 1998, the Company loaned to Milton J. Wallace, Daniel Stauber, Karen
Bass Stauber, (Daniel Stauber's wife) and Arthur G. Shapiro $63,750, $63,750,
$10,200 and $38,250, respectively in connection with exercise of options to
purchase 31,250, 31,250, 5,000 and 18,750 shares of common stock. The five-year
loans represented 85% of the exercise price of the options. The loans accrue
interest at the prime rate (currently 8.25%). Principal and interest is payable
semi-annually on January 1 and July 1. Payment on the loans from the two active
directors were current as of December 31, 1999. The amount due from Mr. and Mrs.
Stauber, $73,950, is secured by the Company's stock owned by them, and is
payable on July 1, 2001. Based on the agreement reached on his resignation the
loan is due July 1, 2001.
13. COMMITMENTS AND CONTINGENCIES
The medical waste disposal industry involves potentially significant risks of
statutory, contractual, tort and common law liability. Potential liability could
involve, for example, claims for clean-up costs, personal injury, or damage to
the environment, claims of employees, customers or third parties for personal
injury or property damage occurring in the course of the Company's operations,
or claims alleging negligence or professional errors or omissions in the
planning or performance of work. The Company could also be subject to fines in
connection with violations of regulatory requirements. The Company attempts to
operate safely and prudently and has not had any material violations to date of
which it is aware.
The Company carries liability insurance coverage which it considers sufficient
to meet regulatory and customer requirements and to protect the Company's
employees, assets, and operations. The availability of liability insurance
within the waste industry has been adversely affected by the constrained market
for casualty and environmental insurance. In the future, insurance that might be
available may be at significantly increased premiums with less extensive
coverage. If the Company is unable to obtain adequate insurance coverage at a
reasonable cost, it may become exposed to potential liability claims. In such
event, a successful claim, if of sufficient magnitude, could have a material
adverse effect on the Company's financial condition.
The Company and its subsidiaries market their services principally to customers
on the east coast of the United States. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral for
outstanding accounts receivable. Allowances are estimated for potential credit
losses.
43
<PAGE> 44
The Company must make improvements at the SDSSC incinerator during 2000-2001 of
approximately $6 million to meet new emission standard requirements which will
take effect in the year 2002. All other competitors will have to meet the same
standards. Several alternatives are currently being considered to finance these
costs. There is no guarantee that this financing will be available to the
Company and if the improvements are not made it is unlikely that the facility
will be allowed to operate by State and/or Federal regulatory bodies. In
addition, the Company plans to incur another $1 million in company-wide
improvements.
At December 31, 1999, the Company was committed to purchase incineration
services under a take-or-pay contract, with fixed, minimum or escalating price
provisions. The contract was renegotiated in April of 1999 and such commitments
are estimated to be $882,000, $890,820, $898,900, $908,000 and $917,000 for
years ending December 31, 2000 through 2004, and $2,500,000 for the remaining
three years of the contract.
In January 1999 the former stockholders of Med-Waste, Inc., an Alabama
corporation, filed a lawsuit against the Company. The lawsuit alleges fraud,
misrepresentations, breach of contract and failure to pay on a promissory note
given as part of the purchase price. In June 1999, the Company terminated the
employment of the former stockholders for "cause". The Company intends to
vigorously defend the lawsuit and believes it has meritorious defenses to the
claims. In addition, the Company expects to file a counterclaim for breach of
contract, fraud and misrepresentation in connection with the purchase of the
corporation. The second set of attorneys have withdrawn from the case during the
4th quarter of 1999. The former owners have engaged new counsel. In view of
these circumstances and the early stage of discovery, the Company and counsel
are unable to predict the outcome of this case at this time.
On April 9, 1999, W. Fred Bonham filed a complaint against the Company. On
January 7, 1999, the Company terminated Mr. Bonham's employment for "cause". Mr.
Bonham alleges in his complaint that the Company violated his employment
agreement by failing to pay Bonham certain compensation after his discharge from
the Company. In his complaint, Bonham seeks compensatory damages, pre-judgment
interest, costs and reasonable attorney's fees. Specifically, Bonham seeks his
base salary ($175,000) due for the remaining term of his employment agreement,
as well as various stock options. On January 11, 2000 the parties met for
mediation, but the parties were unable to reach a settlement. In March 2000,
Plaintiff's counsel has indicated its intent to withdraw from the case. No
substitute counsel has been identified by the Plaintiffs. Accordingly, the
Company and its counsel are unable to predict the outcome of this case at this
time.
On June 16, 1999, a complaint was filed against the Company, and certain former
officers and directors. The Plaintiff seeks to certify a class action against
the Defendants for purported securities violations. Specifically, the complaint
seeks relief for violations of Section 10(b) of the Securities Exchange Act of
1934 (the "Exchange Act") and Rule 10(b)-5, promulgated thereunder, as well as
purported violation of Section 20(a) of the Exchange Act. The complaint alleges
that the Defendants purportedly issued false and misleading statements as to the
Company's results of operations and that, specifically, earnings and earnings
per share of the Company for each of the quarterly reports issued for the first,
second and third quarters of the 1998 fiscal year were fraudulently misstated.
44
<PAGE> 45
Plaintiff seeks to recover damages on behalf of himself and the putative class
he represents purportedly sustained as a result of the violations of the
securities law alleged in the Complaint. Plaintiff also seeks to recover
attorney's fees and costs incurred in the litigation. No discovery has commenced
and the size of the plaintiff class is not yet determined. Accordingly, the
Company and its counsel are unable to predict the outcome of this case.
On October 8, 1999, the Company was served with a lawsuit by Richard Anthony
Dean, alleging fraud, breach of contract and misrepresentation, among other
charges, associated with the acquisition of Target Medical Waste Services, LLC,
in Mobile, Alabama. Dean is claiming unspecified compensatory damages, punitive
damages and court costs. The Company is vigorously defending itself and
counterclaim for breach of covenants and misrepresentation has been filed.
Accordingly, the Company is unable to predict the outcome of this case at this
time
By letter dated July 19, 1999, the Securities and Exchange Commission ("SEC")
advised the Company that it is conducting an informal inquiry into the
accounting procedures utilized by the Company. The SEC has requested that the
Company voluntarily provide certain records and other information by August 19,
1999. The Company has complied fully with SEC requests and is cooperating with
the SEC in its inquiry.
Any of the above matters, if determined adverse to the Company, may have a
material adverse effect on the Company's operations or finanical condition.
The Company is or may become involved in various lawsuits, claims and
proceedings in the normal course of its business, including those pertaining to
product liability, environmental, safety and health, and employment matters. The
Company records liabilities when loss amounts are determined to be probable and
reasonably estimatable. Insurance recoveries are recorded only when claims for
recovery are settled. Although generally the outcome of litigation cannot be
predicted with certainty and some lawsuits, claims or proceedings may be
disposed of unfavorably to the Company, management believes, based on facts
presently known, that the outcome of such legal proceedings and claims, other
than those previously disclosed, will not have a material adverse effect on the
Company's financial position, liquidity, or future results of operations.
14. SHAREHOLDERS' EQUITY
In 1997, the Company completed a private placement of 42,929 shares of 9%
Redeemable Convertible Series A Preferred Stock (the "Series A Preferred Stock")
raising net proceeds of approximately $3.9 million. Each share of Series A
Preferred Stock is presently convertible at any time at the option of the
holders at the current conversion rate of $4.25 assuming the value of each share
of Series A Preferred Stock of $100. Each holder is entitled to receive $100 per
share in the event of liquidation and may be redeemed at the option of the
Company for a price of $100. The Company can force conversion of the Series A
under certain circumstances, as defined. The dividend provision is cumulative.
Options to purchase 1,254,150 shares of Common Stock from $2.13 to $8.50 and
stock warrants to purchase 788,494 shares from $.68 to $8.00 were not included
in diluted EPS, as their effect would be anti-dilutive. The options and
warrants, which expire from 2000 to 2003, were still outstanding at the end of
year 1999. Stock options to purchase 2,468,000 shares of common stock from $2.38
45
<PAGE> 46
to $6.00 per share and warrants to purchase 658,494 shares of common stock from
$2.38 to $8.00 per share were outstanding during 1998, but were not included in
the computation of diluted EPS because the options exercise prices were greater
than the average market price of the common shares in 1998.
15. SALES OF AUTOCLAVES
The Company leases equipment to customers under sales-type leases as defined in
Statement of Financial Accounting Standards No. 13, "Accounting for Leases."
During 1998, leases of approximately $407,000 were sold to third parties with
recourse; no such sales occurred in 1999. The Company has estimated that no
obligation under the recourse provision exists based on the excellent credit
rating of the autoclave customers.
16. SUBSEQUENT EVENTS
In February 2000, the Company through its placement agents and certain of the
Company's officers and directors, successfully completed a private placement of
$4.4 million subordinated secured convertible promissory notes "Notes". The
Notes are subordinated in payment and security to the Company's lenders under
its $35 million credit facility. The Notes are also subordinate to any senior
credit facility up to $35 million, which refinances such obligations. Interest
is payable quarterly at 10% per annum. In the event of default, the interest
rate is to be increased to 15%. The Company has granted the note holders a
second lien on the security interest in all of its tangible personal property.
The Notes are convertible at each holders option into shares of common stock at
any time prior to redemption or maturity, at a conversion price of $.543. Each
note holder was also granted one warrant for every $2.00 of principal amount of
Notes purchased. Each warrant entitles the holder to purchase one share of
Common Stock at an exercise price of $.68.
The placement agents received a commission equal to 9% of the gross proceeds of
any Notes directly placed by the agents. In addition, the placement agents
received warrants to purchase shares of Common Stock equal to 10% of the shares
of common stock underlying the Notes directly placed by the agents. Each warrant
entitles the holder to purchase one share of Common Stock at an exercise price
of $.68.
The proceeds of the private placement to the Company, net of placement agents
fees ($149,400) and loans ($200,000) granted to participating key employees was
approximately $4,100,000. These funds will be used by the Company to reduce
outstanding accounts payable, for working capital, and to repay certain
obligations to related parties, including amounts owed to members of management
and a law firm in which the Chairman of the Board is a shareholder.
17. GOING CONCERN
The Company's consolidated financials are presented on the going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. During 1997 and 1998, the Company purchased
several companies in the medical waste business in contemplation of integrating
the acquisitions into the Company's core business. Unfortunately, the Company
46
<PAGE> 47
was unable to successfully integrate and achieve profitability from these
acquisitions. In addition, internal growth was limited due to the Company's
inability to formulate an effective marketing plan, integrate its acquisitions
and manage the Company's growth. In early 1999, new management replaced prior
management, and the Company began its plan to aggressively control costs,
control expansion efforts and focus on the Company's core business. The Company
is currently seeking additional working capital for operations and capital of
approximately $6 million for required improvements components to the SDSSC
incinerator during 1999 to 2000 to meet new emission standards. In addition, the
Company is seeking another $1 million for other company-wide improvements.
During 1999, several lawsuits were instituted against the Company. In this
connection, the Company and its Counsel are unable to determine the effects of
said litigation. The Company is also in discussion with several lenders for
additional funds, as well as obtaining a waiver to cure its financial covenant
violations. Discussions are also being held with private investors to raise
equity capital. The Company believes the additional loan and equity proceeds, if
obtained, will be adequate to fund its on-going operations.
The Company's continued existence is dependent upon its ability to resolve its
liquidity problems principally by implementing cost reduction strategies and
obtaining positive results from increased marketing efforts as well as
refinancing and obtaining new debt.
The consolidated financial statements do not include any adjustments to reflect
the possible future effective on the recoverability and classification of assets
for the amount of classification of liabilities that may result from the
possible inability of the Company to continue as a going concern. There is no
assurance that the Company will be able to achieve its recovery plan as
described above.
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<PAGE> 48
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company as of March 15, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Milton J. Wallace(1) (4) 64 Chairman of the Board
Carlos Campos 47 Director/President/Chief Executive Officer
George Mas 49 Vice President/Chief Financial Officer
Ross Johnston 45 Vice President - Legal Affairs
William F. Bonham 56 Director
William Dolan 74 Director
Douglas Hailey(3)(4) 38 Director
Patrick J. McEnany(3) 52 Director
Kendrick Meek (2) 34 Director
Arthur G. Shapiro, M.D.(1) (2) (4) 61 Director
Charles J. Simons(1) (2) (3) 82 Director
</TABLE>
- -------------------------
(1) Member of Executive Committee.
(2) Member of the Compensation and Stock Option Committee.
(3) Member of the Audit Committee.
(4) Member of the Nominating Committee.
MILTON J. WALLACE. Mr. Wallace has been Chairman of the Board of the
Company since June 1993 and a Director since 1991. Mr. Wallace has been a
practicing attorney in Miami, Florida for over 30 years and is currently a
shareholder of the law firm of Wallace, Bauman, Legon, Fodiman, Ponce & Shannon,
48
<PAGE> 49
P.A. He was chairman of the board of directors of Renex Corp., a provider of
dialysis services from July 1993 until February 2000, when it was sold to
National Nephrology Associates, Inc. Mr. Wallace is a director of Imperial
Industries, Inc. a construction materials manufacturer. He is also a director of
several private companies
CARLOS CAMPOS. Mr. Campos has been president and Chief Executive
officer of the Company since June 1999. Prior thereto, he was Executive Vice
President and Chief Operating Officer of the Company from January 1999 until
March 1999 when he was named Acting Chief Executive Officer (CEO). He also was
appointed to the Board of Directors in July of 1999. Prior thereto, Mr. Campos
was the founder, President and CEO of MedX, Inc. the largest medical waste
company in Florida in the 1980's and early `90's, before it was acquired by BFI.
GEORGE MAS. Mr. Mas has been Vice President and Chief Financial Officer
of the Company since January 1999. Prior thereto, he was Director of Finance for
Althin Medical Inc. where he was employed from 1992 to 1998. From 1981 to 1990
he was Vice President of Burnham Products, Inc. in Wichita, Kansas. Prior to
that time he was Director of Internal Audit for Hesston Corporation and an Audit
Manager with the accounting firm of Deloitte, Haskins and Sells.
ROSS JOHNSTON. Mr. Johnston has been Vice President-Legal Affairs of
the Company since January 1999. Prior thereto, from 1994 to 1998 he was Director
of Public Affairs for Browning Feris Industries-Dade County Florida. From 1989
to 1994 he was Vice President of Legal Affairs for MedX, Inc.
WILLIAM F. BONHAM. Mr. Bonham has been a director of the Company since
November 1997. From June 1998 until January 1999, he served as the Company's
Vice President/Chief Operating Officer. From June 1997 until June 1998, he
served as the Company's Vice President of Operations. From October 1995 until
June 1997, Mr. Bonham was the president of Bonham Management Group, Inc. which
managed a medical waste autoclave facility. The Company acquired certain of the
assets of Bonham Management Group, Inc. in November 1997. Prior thereto, from
1990 to 1995 Mr. Bonham was a vice president of Bio-Medical Waste, Inc., a
medical waste hauling and treatment company.
WILLIAM DOLAN, D.D.S. Dr. Dolan has been a Director of the Company
since 1993. Dr. Dolan is a retired dentist and previously maintained a private
practice of dentistry for over 30 years until his retirement in 1995. He is a
director of the Dade County, Florida Housing Finance Authority.
DOUGLAS HAILEY. Mr. Hailey has been a director of the Company since
December 1998. Mr. Hailey has been vice President of the Investment Banking
division of Taglich Brothers, D'Amadeo, Wagner and Company, Inc., a New
York-based full service brokerage firm specializing in the microcap segment of
the public equities markets since 1994. Prior to joining Taglich Brothers, Mr.
Hailey spent five years with Weatherly Financial Group, a small private equity
firm that specialized in sponsoring leveraged buyouts. Mr.
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<PAGE> 50
Hailey holds an MBA in Finance from the University of Texas.
PATRICK J. MCENANY. Mr. McEnany has been a director of the Company
since March 2000. He is the Managing Partner of Catalyst Pharmaceutical
Partners, a privately owned partnership, which offers consulting and investment
banking services to specialty pharmaceutical companies. Previously Mr. McEnany
was President and Chief Executive Officer of Royce Laboratories, then a publicly
held company, which was purchased in 1999 by Watson Pharmaceuticals. He serves
on the Board of Directors for several other private and publicly held companies.
KENDRICK MEEK. Mr. Meek has been a development representative for the
Wackenhut Corporation, a provider of security services. Prior thereto, from
March 1994 through November 1994, he was President of F&L Security Services,
Inc., a security consulting firm. From March 1989 until March 1994, he was
employed by the Florida Highway Patrol, the last three years of which he served
as a captain. Mr. Meek is a State Senator in the Florida State Legislature.
ARTHUR G. SHAPIRO, M.D., F.A.C.O.G. Dr. Shapiro has held an appointment
to the University of Miami School of Medicine as a professor of clinical
obstetrics and gynecology in the division of reproductive endocrinology since
January 1995. From 1985 until 1995, he was engaged in the private practice of
medicine. From 1970 until 1983, he was employed by the University of Miami
School of Medicine most recently as a professor. He is a graduate of Harvard
Medical School and is board certified in obstetrics and gynecology,
endocrinology and laser surgery. He is a Fellow in the American College of
Obstetrics and Gynecology and has been elected to become a Fellow by the
American College of Endocrinology. Dr. Shapiro was the Corporate Medical
Director of Renex Corp. and served as Vice Chairman of the Board of Directors
from 1993 until February 2000.
CHARLES J. SIMONS. Mr. Simons has been a director of the Company since
December 1998. Mr. Simons is the Chairman of the Board of G.W. Plastics, Inc., a
plastics manufacturer, and is an independent management and financial
consultant. From 1940 to 1981, he was employed by Eastern Airlines, last serving
as Vice Chairman, and Executive Vice President. He also serves as a Director of
Viragen, Inc., a pharmaceutical manufacturer and a number of private companies.
BOARD OF DIRECTORS
The Company's Board of Directors is divided into three classes. The
members of each class serve for staggered three year terms, including three
Class I directors (William Dolan, D.D.S., Charles J. Simons and Douglas Hailey),
three Class II directors (Kendrick Meek, William F. Bonham, Patrick McEnany) and
three Class III Directors (Milton J. Wallace, Carlos Campos and Arthur G.
Shapiro). Class I, II and III director terms expire upon the election of
directors at the annual meeting of shareholders to be held in 2001, 2000 and
2000, respectively. Directors hold office until the expiration of their
respective terms and until their successors are elected, or until death,
resignation or removal. The Company did not hold an annual meeting of
shareholders for 1999, so Class II directors will be up for election at the next
annual meeting to be held in 2000. Each officer serves at the discretion of the
Board of Directors, subject to certain contractual rights described below.
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<PAGE> 51
COMMITTEES OF THE BOARD
The Board has established a number of standing committees to assist it
in the discharge of its responsibilities. The principal responsibilities of each
standing committee are described below. Actions taken by any committee of the
Board are reported to the Board of Directors, usually at the next Board meeting.
The Board has standing Executive, Audit, Compensation and Stock Option and
Nominating Committees.
EXECUTIVE COMMITTEE: The Executive Committee is composed of Messrs.
Wallace and Simons and Dr. Shapiro. When the Board of Directors is not in
session, the Executive Committee possesses all of the powers of the Board, other
than certain powers reserved by Delaware law to the Board. Although the
Executive Committee has broad powers, in practice it only takes formal action in
a specific matter when it would be impractical to call a meeting of the Board.
COMPENSATION AND STOCK OPTION COMMITTEE: The Compensation and Stock
Option Committee is presently composed of Messrs. Meek and Simons and Dr.
Shapiro. Dr. Shapiro is the chairman of such committee. The Compensation and
Stock Option Committee reviews the Company's general compensation policies and
procedures; establishes salaries and benefit programs for the Chief Executive
Officer and other executive officers of the Company and its subsidiaries;
reviews, approves and establishes performance targets and awards under incentive
compensation plans for its executive officers; and reviews and approves
employment agreements. The Compensation and Stock Option Committee also
administers the Company's 1993 and 1996 Employee Stock Option Plans. The
Compensation and Stock Option Committee has the authority to determine, among
other things, to whom to grant options, the amount of options, the terms of
options and the exercise prices thereof.
AUDIT COMMITTEE: The Audit Committee is presently composed of Mr.
Simons, as Chairman, Patrick McEnany and Douglas Hailey. The principal duties of
the Audit Committee are to recommend the appointment of independent auditors;
meet with the Company's independent auditors to review the arrangements for, and
scope of, the audit by the independent auditors and the fees related to such
work; review the independence of the independent auditors; consider the adequacy
of the system of internal accounting controls; review and monitor the Company's
policies regarding conflicts of interest; and discuss with management and the
independent accountants the Company's annual financial statements.
NOMINATING COMMITTEE: The Nominating Committee is presently composed of
Messrs. Hailey and Wallace and Dr. Shapiro. The Nominating Committee recommends
to the Board director nominees for election by stockholders. It also reviews the
qualification of, and recommends to the Board, candidates to fill Board
vacancies as they may occur during the year. The Committee considers suggestions
from stockholders and other sources regarding possible candidates for director.
Such suggestions, together with appropriate biographical information, should be
submitted to the Secretary of the Corporation.
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<PAGE> 52
DIRECTORS' COMPENSATION
Directors who are employees of the Company or its subsidiaries do not
receive any compensation for their service as members of the Board of Directors.
Directors who are not employees of the Company receive an annual retainer of
$2,500, payable quarterly and are reimbursed for expenses which may be incurred
by them in connection with the business and affairs of the Company. In addition,
non-employee directors receive options granted under the Directors' Stock Option
Plan ("Directors' Plan") based upon specific criteria set forth in the
Directors' Plan. See "Compensation - Directors Stock Option Plan".
ITEM 10. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE The following table summarizes the
compensation earned by, and paid to, the Company's President and Chief Executive
Officer ("CEO") and for each other executive officer who received compensation
in excess of $100,000 for any year in the three (3) year period ended December
31, 1999 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION
----------------------------- OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION UNDERLYING OPTIONS
- ----------------------------------- --------- -------------- ---------- --------------- --------------------
<S> <C> <C> <C> <C> <C>
Milton J. Wallace 1999 $ 92,610 $ $ 17,820 100,000
Chairman of the Board 1998 $ 88,220 $ -- $ 17,908 400,000(2)
1997 $ 84,000 $ 46,400 $
Carlos Campos (3) 1999 $ 175,750 $ 9,600 100,000
President/CEO
George Mas (4) 1999 $ 110,600 $ 6,000 25,000
Vice President/CFO
Ross Johnston(5) 1999 $ 80,000 25,000
Vice President/Legal Affairs
Daniel A. Stauber (6) 1999 $ 96,223 $ 123,000 $ 9,000
Former President/CEO 1998 $ 192,500 $ 72,890 $ 18,000 100,000
1997 $ 183,000
</TABLE>
(1) The Company provides its executive officers with certain non-cash group
life and health benefits, generally available to all salaried employees and
are not included in this table pursuant to applicable Securities and
Exchange Commission rules. No executive officers listed above received
52
<PAGE> 53
aggregate personal benefits or perquisites that exceeded the lesser of
$50,000 or 10% of such individual's total annual salary and bonus in any
year above.
(2) Of such options, 300,000 were cancelled of record by mutual agreement
between Mr. Wallace and the Company.
(3) Mr. Campos was employed by the Company in January 1999.
(4) Mr. Mas was employed by the Company in January 1999.
(5) Mr. Johnston was employed by the Company in January 1999.
(6) Mr. Stauber resigned as President/Chief Executive Officer and as a
Director, as of June 10, 1999 and the options were cancelled in connection
with the termination
OPTIONS GRANTED IN LAST FISCAL YEAR The following table sets forth information
concerning grants of stock options to the CEO and each other Named Executive
Officer named on the Summary Compensation Table above, for the year ended
December 31, 1999:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------------------------------
NUMBER OF SECURITIES % OF TOTAL EXERCISE
UNDERLYING OPTIONS OPTIONS GRANTED TO PRICE PER EXPIRATION
NAME GRANTED(1) EMPLOYEES IN FISCAL YEAR(3) SHARE(2)(3) DATE
- ------------------ ---------------------- --------------------------- ----------- -------------
<S> <C> <C> <C> <C>
Milton J. Wallace -- -- -- --
Daniel A. Stauber (4) -- -- -- --
Carlos Campos 100,000 74% 3.25 1/8/04
George Mas 25,000 19% 3.56 1/4/04
Ross Johnston 5,000 4% 3.25 1/11/04
</TABLE>
(1) All the above options were granted pursuant to the Company's 1996 Employee
Stock Option Plans ("1993 Plan" or "1996 Plan", respectively). Subject to
the terms and conditions of the 1996 Plans, the Stock Option Committee has
the authority and discretion, among other things as to whom to grant
options, the number of options, the terms of options, including vesting
requirements and the exercise prices of options may modify, extend or renew
outstanding options granted under the Employee Plan. Each option entitles
the holder to purchase one share of common stock.
(2) The option exercise price may be paid, subject to the requirements of
Rule16b-3 promulgated by the Securities and Exchange Commission, by
delivery of shares already owned by such Optionee.
(3) Total options granted in 1999 was for 135,000 shares of Common Stock.
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<PAGE> 54
(4) Such options were cancelled in connection with the termination of Mr.
Stauber's employment in June 1999.
AGGREGATED OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR END OPTION VALUES
The following table sets forth certain aggregated option information for
the CEO and each Named Executive Officer for the year ended December 31, 1999:
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY OPTIONS AT DECEMBER 31,
UNEXERCISED OPTIONS(2) 1999(2)
--------------------------------------------- ---------------------------------------
NAME(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ----------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Milton J. Wallace 375,000 -- -- --
Daniel A. Stauber (3) -- -- -- --
Carlos Campos 100,000 -- -- --
George Mas 25,000 -- -- --
Ross Johnston 5,000 -- -- --
</TABLE>
(1) No options were exercised by the above named executive officers during the
fiscal year ended December 31, 1999.
(2) The value of unexercised options represents the positive difference between
the exercise price of the options and the market price of the common stock
at December 31, 1999. The market price is based on the closing sale price
as reported on the OTC Bulletin Board by NASDAQ on that date, which was
$.53.
(3) Mr. Stauber's employment, and all options previously issued to Mr. Stauber,
were terminated as of June 10, 1999.
EMPLOYMENT AGREEMENTS
Milton J. Wallace serves as Chairman of the Board pursuant to an employment
agreement expiring December 31, 2001. Mr. Wallace currently receives a base
salary of $92,610. Base Salary is increased in each year by the greater of (a)
five percent (5%) or (b) the cost of living index for the prior year. Mr.
Wallace also receives a car allowance and certain other non-cash benefits, such
as health, life and disability insurance. Mr. Wallace is eligible to participate
in such incentive bonus plans adopted from time to time by the Company's Board
of Directors. The Agreement provides that in the event of a change of control of
the Company, Mr. Wallace is entitled to terminate his employment agreement and
receive as compensation three (3) times the sum of (a) his base salary and (b)
any bonus received in the twelve (12) months prior to such change of control.
The employment agreement contains a two year non-competition agreement.
Carlos Campos serves as the Company's President /Chief Executive Officer
pursuant to a five year employment agreement expiring December 31, 2003. Mr.
Campos currently receives a base salary of $175,000. Base Salary is increased in
each year by greater of (i) $10,000, or (ii) the percentage increase, if any, of
the consumer price index. Mr. Campos receives a car allowance and certain other
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<PAGE> 55
non-cash benefits such as health, life and disability benefits. Mr. Campos is
eligible to participate in such incentive bonus plans adopted from time to time
by the Company's Board of Directors. The Employment Agreement contains an
eighteen (18) month non-competition agreement.
George Mas serves as the Company's Vice President/Chief Financial Officer
pursuant to a one year employment agreement which automatically renews on
January 1 of each year if notice of termination is not given by either party at
least thirty (30) days prior to January 1 of each year. Mr. Mas currently
receives a Base Salary of $115,000. Base Salary is increased by the greater of
(a) 5%; or (b) the cost of living index for the prior year. Mr. Mas receives a
car allowance and certain other non-cash benefits such as health, life and
disability benefits. Mr. Mas is eligible t to participate in such incentive
bonus plans adopted from time to time by the Company's Board of Directors. The
Employment Agreement contains a one (1) year non-competition agreement.
Ross Johnston serves as the Company=s Vice president for Legal Affairs
pursuant to a one year employment agreement which automatically renews on
January 1 of each year if notice of termination is not given by either party at
least thirty (30) days prior to January 1 of each year. Mr. Johnston currently
receives a Base Salary of $80,000. Base Salary is increased by the greater of
(a) 5%; or (b) the cost of living index for the prior year. Mr. Johnston
receives a car allowance and certain other non-cash benefits such as health,
life and disability benefits. Mr. Johnston is eligible to participate in such
incentive bonus plans adopted from time to time by the Company's Board of
Directors. The Employment Agreement contains a one (1) year non-competition
agreement
STOCK OPTION PLANS
EMPLOYEE PLANS. The Company has a 1993 Employee Stock Option Plan ("1993 Plan")
and a 1996 Employee Stock Option Plan ("1996 Plan") which provide for the grant
of options to purchase up to 750,000 and 1,400,000 shares of Common Stock to
officers and other employees, respectively. The 1993 and 1996 Plans are designed
as an incentive program to cause employees to increase their interest in the
Company's performance and to aid in attracting and retaining qualified
personnel. The 1993 and 1996 Plans are administered by the Compensation and
Stock Option Committee. During fiscal 1999, options to purchase an aggregate of
135,000 shares of Common Stock were granted at exercise prices ranging from
$3.25 to $3.56 under the 1993 and 1996 Plans. As of December 31, 1999, options
to purchase an aggregate 521,650 shares of Common Stock were outstanding under
the 1993 and 1996 Plans at exercise prices ranging from $2.13 to $5.88. During
the year ended December 31, 1999, options to purchase an aggregate of 1,298,000
shares of common stock expired or were cancelled. Options granted under each
Plan have a term of five (5) years from the date of their respective grants.
Options are not exercisable under any circumstances for six (6) months after
grant. Generally, options are subject to three (3) year vesting schedules from
the date of grants. Options to purchase an aggregate of 130,000 granted to
certain executive officers in 1999 vested 59,500 shares as of the respective
dates of grant with the balance vested on the respective one year anniversaries
of such grants.
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<PAGE> 56
All options granted under the 1993 and 1996 Plans become fully vested and
immediately exercisable upon the occurrence of a "Change of Control." The
Employee Plans defines Change of Control to mean the occurrence of any of the
following: (i) the acquisition (other than from the Company directly) by any
"person" group or entity within the meaning of Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934) of beneficial ownership of twenty-five (25%)
percent or more of the outstanding common stock of the Company; (ii) if the
individuals who served on the Board as of June 1993, no longer constitute a
majority of the members of the Board of Directors; provided, however, any person
who becomes a director subsequent to June 1993, who was elected to fill a
vacancy by a majority of the directors then serving on the Board of directors
shall be considered a member prior to June 1993; (iii) the stockholders of the
Company approve a merger reorganization or consolidation of the Company whereby
the stockholders of the Company immediately prior to such approval do not,
immediately after consummation of such reorganization, merger or consolidation,
own more than 50% of the voting stock of the surviving entity; or (iv) a
liquidation or dissolution of the Company, or the sale of all or substantially
all of the Company's assets.
DIRECTORS PLAN. The Company's Directors Stock Option Plan (the "Directors'
Plan") presently provides for the grant of options of up to 500,000 shares of
Common Stock. All non-employee directors are eligible to receive grants of
option ("Eligible Directors"). Each Eligible Director receives automatic,
non-discretionary annual grants of options based upon specific criteria set
forth in the Directors' Plan.
Each year, each Eligible Director receives options to purchase 3,000 shares of
common stock for service on the Board, options to purchase 3,000 shares for
service on each permanent committee (other than the Executive Committee) and
options to purchase 3,000 shares for services as a Committee Chairman (other
than the Executive Committee). Eligible Directors who serve on the Executive
Committee receive options to purchase 6,000 shares, with additional options to
purchase 6,000 shares for the Chairman of the Executive Committee.
The exercise price of each option granted under the Directors' Plan is equal to
the fair market value of the Common Stock on the date of grant. All options
granted are for a period of five (5) years and are exercisable commencing six
(6) months after the grant date. During 1999, options to purchase 60,000 shares
of Common Stock were granted to Eligible Directors at an exercise price $1.9038
per share. As of December 31, 1999, options to purchase 441,500 shares of Common
Stock were outstanding under the Directors' Plan, at exercise prices ranging
from $1.90 to $6.06.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of March 15, 2000 with
respect to the beneficial ownership of the Company's Common Stock by (i) each
director of the Company, (iii) each Named Executive Officer; (ii) all directors
and executive officers as a group, and (iii) each person known by the Company to
be the beneficial owner of more than five percent (5%) of Common Stock of the
Company.
56
<PAGE> 57
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK PERCENTAGE BENEFICIALLY
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OWNED(2)
- ---------------------------------------------- ------------------------- ----------------------------
<S> <C> <C>
William F. Bonham 300,000(3) 4.39
Carlos Campos 685,405(4) 9.24
William W. Dolan 58,875(5) *
Douglas Hailey 200,345(6) 2.89
Ross Johnston 122,181(7) 1.78
George Mas 142,081(8) 2.07
Patrick J. McEnany 351,243(9) 4.96
Kendrick Meek 18,250(10) *
Arthur G. Shapiro, M.D. 1,268,771(12) 16.07
Charles J. Simons 275,162(11) 3.93
Daniel A. Stauber 149,420(13) 2.22
Milton J. Wallace 1,940,097(14) 22.78
Lancer Offshore, Inc. 566,666 8.42
Kaya Flamboyan 9
Wilmstad, Curacao
Netherland Antilles
Peter Salas 1,626,691(15) 21.16
129 East 17th Street
New York, NY 10003
Dolphin Offshore Partners, L.P 1,626,691(15) 21.16
129 East 17th Street
New York, NY 10003
Craig Sanford 1,068,324(16) 14.63
1307 S. Pennsylvania Ave
Morrisville, PA 19067
Mark E. Brady 885,214(17) 13.15
c/o Eubel, Brady & Suttman
Management, Inc.
7777 Washington Drive
Dayton, OH 45459
Ronald L. Eubel 885,214(17) 13.15
c/o Eubel, Brady & Suttman
Management, Inc.
7777 Washington Drive
Dayton, OH 45459
William Hazel 762,630(17) 11.33
c/o Eubel, Brady & Suttman
Management, Inc.
7777 Washington Drive
Dayton, OH 45459
</TABLE>
57
<PAGE> 58
<TABLE>
<CAPTION>
<S> <C> <C>
Bernie Holtgreive 762,630(17) 11.33
c/o Eubel, Brady & Suttman
Management, Inc.
7777 Washington Drive
Dayton, OH 45459
Robert J. Suttman, II 885,214(17) 13.15
c/o Eubel, Brady & Suttman
Management, Inc.
7777 Washington Drive
Dayton, OH 45459
Eubel, Brady & Suttman Management, Inc 762,630(17) 11.33
7777 Washington Drive
Dayton, OH 45459
All officers and directors as a group 4,625,736 (18) 42.54
(11 persons)
</TABLE>
* Less than one percent.
(1) Except as set forth herein, all Common Stock is directly owned and the sole
investment and voting power are held by the person named. Unless otherwise
stated the address of each individual named above is c/o the Company, 6175
N.W. 153rd Street, Suite 324, Miami Lakes, Florida 33014.
(2) Based upon 6,731,956 shares of Common Stock outstanding and such shares of
Common Stock such individual has the right to acquire within 60 days.
(3) Includes 100,000 shares of Common Stock issuable upon exercise of options;
(4) Includes (i) 100,000 shares of Common Stock issuable upon exercise of
options; (ii) 460,405 shares of Common Stock issuable upon conversion of
convertible notes; and (iii) 125,000 shares of Common Stock issuable upon
exercise of warrants.
(5) Includes 40,000 shares of Common Stock issuable upon exercise of options.
(6) Includes (i) 36,000 shares of Common Stock issuable upon exercise of
options; (ii) 27,624 shares of Common Stock issuable upon conversion of
convertible notes; and (iii) 136,721 shares of Common Stock issuable upon
exercise of warrants.
(7) Includes (i) 5,000 shares of Common Stock issuable upon exercise of
options; (ii) 92,081 shares of Common Stock issuable upon conversion of
convertible notes; and (iii) 25,000 shares of Common Stock issuable upon
exercise of warrants.
(8) Includes (i) 25,000 shares of Common Stock issuable upon exercise of
options; (ii) 92,081 shares of Common Stock issuable upon conversion of
convertible notes; and (iii) 25,000 shares of Common Stock issuable upon
exercise of warrants.
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<PAGE> 59
(9) Includes (i) 276,243 shares of Common Stock issuable upon conversion of
convertible notes; and (ii) 75,000 shares of Common Stock issuable upon
exercise of warrants.
(10) Includes 18,250 shares of Common Stock issuable upon exercise of options.
(11) Includes (i) 36,000 shares of Common Stock issuable upon exercise of
options; (ii) 184,162 shares of Common Stock issuable upon conversion of
convertible notes; and (iii) 50,000 shares of Common Stock issuable upon
exercise of warrants.
(12) Except as set forth herein, all shares of Common Stock are owned jointly by
Dr. Shapiro and his wife. Includes (i) 193,000 shares of Common Stock
issuable upon exercise of options; (ii) 184,162 shares of Common Stock
issuable upon conversion of convertible notes; (iii) 50,000 shares of
Common Stock issuable upon exercise of warrants and (iv) 13,375 shares of
Common Stock and 736,648 shares of Common Stock issuable upon conversion of
convertible notes owned by a corporation of which Dr. Shapiro is a director
and shareholder
(13) Includes 5,834 shares owned by his wife.
(14) Except as set forth herein, all shares of Common Stock are owned jointly by
Mr. Wallace and his wife. Includes (i) 375,000 shares of Common Stock
issuable upon exercise of options; (ii) 6,376 shares of Common Stock
issuable upon conversion of Series A Preferred Stock; (iii) 8,664 shares
owned by his Individual Retirement Account; (iv) 2,500 shares of Common
Stock owned by his spouse as custodian for his child; (v) 1,000 shares
owned by his spouse's Individual Retirement Account; (vi) 368,324 shares of
Common Stock issuable upon conversion of convertible notes; (vii) 300,000
shares of Common Stock issuable upon exercise of warrants and (viii) 13,375
shares of Common Stock and 736,648 shares of Common Stock issuable upon
conversion of convertible notes owned by a corporation of which Mr. Wallace
is president, director and a controlling shareholder.
(15) The shares indicated above are owned by Dolphin Offshore Partners, LP.
Peter Salas is the General Partner of Dolphin. Includes (i) 736,648 shares
of Common Stock issuable upon conversion of convertible notes; and (ii)
220,063 shares of Common Stock issuable upon exercise of warrants.
(16) Includes (i) 368,324 shares of Common Stock issuable upon conversion of
convertible notes; and (ii) 200,000 shares of Common Stock issuable upon
the exercise of warrants.
(17) Messrs. Brady, Eubel, Hazel, Holtgreive and Suttman are investment advisors
and have discretionary control over the shares listed above, although the
shares are owned by other individuals and entities. Includes shares of
common Stock issuable upon conversion of Series A Preferred Stock and
exercise of warrants in amounts not disclosed in their respective SEC
filings.
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(18) Includes (i) 713,750 shares of Common Stock issuable upon exercise of
options; (ii) 928,250 shares of Common Stock issuable upon conversion of
convertible notes; and (iii) 6,376 shares of Common Stock issuable upon
exercise of Series A Preferred Stock, and (iv) 786,721 shares of Common
Stock issuable upon the exercise of warrants.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Milton J. Wallace, the Company's Chairman of the Board, is a shareholder of
the law firm of Wallace, Bauman, Legon, Fodiman & Shannon, P.A. Such law firm
acts as general counsel to the Company and received legal fees of $114,990 and
$214,225 in 1999 and 1998 respectively.
In February 1997, the Company completed a private placement of 10%
Convertible Redeemable Debentures due July 1, 2000 ("the Debentures"), raising
net proceeds of approximately $2.7 million. Taglich Brothers, D'Amadeo, Wagner &
Company, Incorporated ("Taglich Bros.") served as the placement agent in
connection with the offering and received a commission of $270,000. In addition,
Taglich Bros. received warrants to purchase 102,558 shares of common stock which
it distributed to its affiliates. Each warrant entitles the holder to purchase
one share of common stock at $2.925 until February 2002. Douglas Hailey, a
director of the Company is a Vice President of Taglich Bros. and received
warrants to purchase 10,256 shares.
During September 1997 and October 1997, the Company completed a private
placement of the "Series A Preferred Stock" raising net proceeds of
approximately $3.9 million. Taglich Bros. served as the placement agent in
connection with the offering and received a commission of $386,721. In addition,
Taglich Bros. received warrants to purchase 101,104 shares of common stock which
it distributed to its affiliates. Each warrant entitles the holder to purchase
one share of common stock at $4.25 per share until October 31, 2002. Douglas
Hailey, a director of the Company is a Vice President of Taglich Bros. and
received warrants to purchase 23,300 shares.
In November 1997, the Company sold an aggregate of 1,600,002 shares in a
private placement exempt from the registration requirement or the Securities Act
of 1933 as amended, raising net proceeds of approximately $5.4 million. Taglich
Bros. served as the placement agent in connection with the offering and received
a commission of $379,000. In addition, Taglich Bros. nominees received warrants
to purchase 31,582 shares of common stock at $4.50 per share until December 8,
2002 and 70,180 shares of common stock at $5.00 per share until November 6,
2002, all of which it distributed to its affiliates. Douglas Hailey, a director
of the Company is a Vice President of Taglich Bros. and received warrants to
purchase 7,754 and 15,239 shares, respectively.
On June 2, 1998, the Company loaned to Milton J. Wallace, Daniel Stauber,
Karen Bass Stauber (Daniel Stauber's wife) and Arthur G. Shapiro $63,750,
$63,750, $10,200 and $38,250, respectively in connection with exercise of
options to purchase 31,250, 31,250, 5,000 and 18,750 shares of common stock
expiring on such date. The loans represented 85% of the exercise price of the
options. The principal balances of such loans accrue interest at the prime rate
(currently 8.25%), adjusted annually. Principal, plus accrued interest is
payable semi annually on January 1 and July 1 of each year amortized over a five
year period. Mr. Wallace and Mr. Stauber repaid the entire principal balances of
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<PAGE> 61
their respective loans, together with accrued interest in March 2000. In
connection with the termination of Mr. Stauber's employment with the Company in
June 1999, the Company agreed to defer interest payments on the notes until
January 2001.
On January 7, 1999, the Company terminated W. Fred Bonham's employment for
"cause". On April 9, 1999, Mr. Bonham filed a complaint against the Company. Mr.
Bonham alleges in his complaint that the Company violated his employment
agreement by failing to pay Mr. Bonham certain compensation after his discharge
from the Company. In his complaint, Bonham seeks compensatory damages,
pre-judgement interest, costs and reasonable attorney=s fees. Specifically,
Bonham seeks his base salary ($175,000) due for the remaining term of his
employment agreement (through May 2001), as well as various stock options which
were canceled upon his termination.
Milton J. Wallace, Chairman of the Board, loaned the Company an aggregate of
$110,000 in April 1999 and $149,000 in December 1999, pursuant to a demand note.
Interest accrues on the note at the rate of 10% per annum. Carlos Campos,
President and Chief Executive Officer, loaned the Company $50,000 in July 1999.
The Notes were subsequently repaid in February 2000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit Index
2.1 Safety Disposal Systems of South Carolina, Inc. Acquisition of
the assets of Chambers Medical Technologies of South Carolina, Inc.
[Incorporated by reference to the Company's Form 8-K dated October 15, 1996,
File No. 0-22294]
2.2 Asset Purchase Agreement dated as of September 9, 1997 by and
between Med/Waste, Inc. and Environmental Waste Reduction, Inc. [Incorporated by
reference to the Company's Form 8-K dated September 25, 1997, File No. 0-22294]
2.3 Agreement For Purchase of Real Property between Med/Waste,
Inc. and Kurt Scheuermann dated May 15, 1997. [Incorporated by reference to the
Company's Form 8-K dated November 10, 1997, File No. 0-22294]
2.4 Asset Purchase Agreement between Med/Waste, Inc. and K. S.
Processing, Inc. dated May 15, 1997 [Incorporated by reference to the Company's
Form 8-K dated November 10, 1997, File No. 0-22294]
2.5 Stock Purchase Agreement dated as of October 22, 1997 by and
between Med/Waste, Inc., Safety Disposal System of Virginia, Inc., Republic
Industries, Inc. and Incendere, Inc. [Incorporated by reference to the Company's
Form 8-K dated November 7, 1997, File No. 0-22294]
2.6 Agreement dated January 30, 1998 by and between Med/Waste,
Inc., The Kover Group, Inc., MPK Holdings, Ltd. and Phillip W. Kubec.
[Incorporated by reference to the Company's Form 8-K dated January 30, 1998,
File No. 0-22294]
2.7 Stock Purchase Agreement entered into as of the 11th day of
August, 1998 by and between Med/Waste, Inc., a Delaware corporation, Sanford
Motors, Inc., a Pennsylvania corporation, East Coast Medical Waste, Inc., a New
Jersey corporation, Bucks County Resource and Recovery, Inc., a Pennsylvania
corporation, Craig Sanford and Mary Jo Sanford. [Incorporated by reference to
the Company's Form 8-K dated October 2, 1998, File No. 0-22294]
2.8 First Amendment to Stock Purchase Agreement dated September 1,
1998 by and between Med/Waste, Inc., a Delaware corporation, Sanford Motors,
Inc., a Pennsylvania corporation, East Coast Medical Waste, Inc., a New Jersey
corporation, Bucks County Resource and Recovery, Inc., a Pennsylvania
corporation, Craig Sanford and Mary Jo Sanford. [Incorporated by reference to
the Company's Form 8-K dated October 2, 1998, File No. 0-22294]
3.1 Registrant's Certificate of Incorporation, as amended
[Incorporated by reference to the Company's Registration Statement on Form SB-2,
File No. 33-67684]
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3.2 Registrant's Certificate of Adoption of Resolutions of the
Board of Directors of Med/Waste, Inc. to Provide for the Designation,
Preferences, Rights, Qualifications, Limitations or Restrictions Thereof, of the
Series A Preferred Stock, 9% Redeemable Convertible Series. [Incorporated by
reference to the Company's 1997 Form 10-KSB, File No. 0-22294]
3.3 Registrant's Certificate of Adoption of Resolutions of the
Board of Directors of Med/Waste, Inc. Amending the Designation, Preferences,
Rights, Qualifications, Limitations or Restrictions Thereof, Of the Series A
Preferred Stock, 9% Redeemable Convertible Series. [Incorporated by reference to
the Company's 1997 Form 10-KSB, File No. 0-22294]
3.4 Registrant's Certificate of adoption of resolutions of the
Board of Directors of Med/Waste, Inc. providing for the designation,
Preferenance, Rights, Qualifications, Limitations or restrictions thereof of the
Series B Junior participants preferred stock. (Incorporated by reference to the
Company's current report on From 10-K, File No. -022294)
3.5 Registrant's By-Laws [Incorporated by reference to the
Company's Registration Statement on Form SB-2, File No. 33-67684]
4.1 Form of Common Stock Certificate [Incorporated by reference to
the Company's Registration Statement on Form SB-2, File No. 33-67684]
4.2 Med/Waste, Inc., Safety Disposal System, Inc., The Kover
Group, Inc., Safety Disposal System of South Carolina, Inc. 10% Convertible
Redeemable Debenture Due July 1, 2000, aggregate principal amount of $3,000,000.
[Incorporated by reference to the Company's 1997 Form 10-KSB, File No. 0-22294]
4.3 Form of Med/Waste, Inc. Junior Secured Convertible Promissory
Note Due December 31, 2001, aggregated principal amount of $4,400,000.
10.1 Employment Agreement by and between Med/Waste, Inc. and Milton
J. Wallace dated January 1, 1996 [Incorporated by reference to the Company's
1997 Form 10-KSB, File No. 0-22294].
10.2 Employment Agreement by and between Med/Waste, Inc. and George
Mas dated January 4, 1999 [Incorporated by reference to the Company's 1998 Form
10-KSB, File No. 0-22294].
10.3 Employment Agreement by and between Med/Waste, Inc. and Carlos
Campos dated January 11, 1999 [Incorporated by reference to the Company's 1998
Form 10-KSB, File No. 0-22294].
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10.4 Employment Agreement by and between Med/Waste, Inc. and Ross
Johnston dated January 6, 1999. [Incorporated by reference to the Company's 1998
Form 10-KSB, File No. 0-22294].
10.5 1993 Employee Stock Option Plan [Incorporated by reference to
the Company's Registration Statement on Form SB-2, File No. 33-67684]
10.6 Directors Stock Option Plan [Incorporated by reference to the
Company's Registration Statement on Form SB-2, File No. 33-67684]
10.7 1996 Employee Stock Option Plan [Incorporated by reference to
the Company's Proxy Statement for the 1996 Annual Stockholders' Meeting, File
No. 0-22294]
10.8 Consolidating, Amended and Restated Credit Agreement, dated as
of the 31st day of December, 1998, by and among Med/Waste, Inc., and Union
Planters Bank, N.A., successor by merger with Union Planters Bank of Florida, a
Florida banking corporation, f/k/a Capital Bank, a Florida banking corporation,
as Agent for the Lenders. [Incorporated by reference to the Company's 1998 Form
10-KSB, File No. 0-22294].
21 Subsidiaries
27 Financial Data Schedules
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SIGNATURES
In accordance with Section 13 or 15(a) of the Exchange Act, the
registrant caused this report to be signed on behalf by the undersigned,
thereunto duly authorized.
<TABLE>
<CAPTION>
<S> <C>
MED/WASTE, INC., a Delaware corporation
Dated: March 30, 1999 By: /S/ CARLOS CAMPOS
--------------------------------------------------
CARLOS CAMPOS President/Chief Executive Officer
</TABLE>
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------- ------ ------
<S> <C> <C>
/s/ MILTON WALLACE Chairman of the Board of Directors March ____, 2000
- ---------------------------------
MILTON J. WALLACE
/s/ CARLOS CAMPOS Director/President /Chief Executive Officer March ____, 2000
- ---------------------------------
CARLOS CAMPOS
WILLIAM F. BONHAM Director March ____, 2000
- ---------------------------------
WILLIAM F. BONHAM
/s/ WILLIAM DOLAN, D.D.S. Director March ____, 2000
- ---------------------------------
WILLIAM DOLAN, D.D.S.
/s/ DOUGLAS HAILEY Director March ____, 2000
- ---------------------------------
DOUGLAS HAILEY
/s/ GEORGE MAS Vice President/Chief Financial Officer March ____, 2000
- ---------------------------------
GEORGE MAS
/s/ KENDRICK MEEK Director March ____, 2000
- ---------------------------------
KENDRICK MEEK
/s/ PATRICK MCENANY Director March ____, 2000
- ---------------------------------
PATRICK McENANY
/s/ ARTHUR SHAPIRO Director March ____, 2000
- ---------------------------------
ARTHUR G. SHAPIRO, M.D.
/s/ CHARLES J. SIMONS Director March ____, 2000
- ---------------------------------
CHARLES J. SIMONS
</TABLE>
64
<PAGE> 1
MED/WASTE, INC.
JUNIOR SECURED CONVERTIBLE PROMISSORY NOTE
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE AACT@), OR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE PLEDGED, SOLD,
ASSIGNED OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
WITH RESPECT THERETO UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAW, OR
UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY,
THAT SUCH REGISTRATION IS NOT REQUIRED. THE COMPANY'S SUBSCRIPTION AGREEMENT NTH
THE HOLDER CONTAINS ADDITIONAL PROVISIONS RESTRICTING THE TRANSFER OF THIS NOTE.
A COPY OF SUCH AGREEMENT IS AVAILABLE FOR INSPECTION AT THE COMPANY'S OFFICE.
$______________ January 31, 2000
FOR VALUE RECEIVED, MED/WASTE, INC., a Delaware corporation
("Company"), with its principal office at 6175 N.W. 153rd Street, Suite 324,
Miami Lakes, Florida 33014, promises to pay to the order of
______________________________________________ ("Holder"), the principal amount
of ________________________________________ Dollars ($_________) on December 31,
2002 (the AMaturity Date@), in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public or private debts. Interest shall be payable on the unpaid balance of said
principal amount from time to time outstanding at the rate of ten percent (10%)
per annum; provided, however, that for the period from and including the date of
the occurrence of any Event of Default as set forth in Section 3, to but not
including the date such Event of Default is cured or waived, the interest rate
shall be increased to fifteen percent (15%) per annum. Interest shall be payable
in arrears from the date of issuance or from the most recent Interest Payment
Date (as hereinafter defined) to which interest has been paid, quarterly on
April 1, July 1, October 1 and January 2 in each year, commencing the date
hereof (each as AInterest Payment Date@). The interest so payable on any
Interest Payment Date will be paid to the Holder in whose name this Note is
requested at the close of business fifteen (15) days prior to the respective
Interest Payment Date (a ARecord Date@). Interest shall be computed on the basis
of the actual number of days elapsed and the actual number of days in the
relevant period.
If this Note is converted into shares of Common Stock $.001 par
value per share of the Company (ACommon Stock@) pursuant to Section 5 below. (a)
on or prior to a Record Date, interest shall be paid from the immediately prior
Interest Payment Date through the date of conversion
This Note is issued pursuant to a subscription agreement between
the Company and the Holder ("Subscription Agreement") and is secured by a second
lien on certain collateral more specifically described in that certain Security
Agreement entered into by the Company for the benefit of the Holder, among
others ("Security Agreement"), both of which are available for inspection at the
Company's principal office. Reference herein to the Subscription Agreement and
the Security Agreement shall in no way impair the absolute and unconditional
obligation of the Company to pay both principal and interest hereon as provided
herein, subject to the subordination provided below.
Certain rights and remedies of the Holder are described in the
Security Agreement which appoints an independent agent to be selected by the
Company in its reasonable discretion prior to the initial closing of the
Offering as agent ("Agent") for the Holder thereunder and hereunder to exercise
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<PAGE> 2
the powers delegated to it including, without limitation, powers with respect to
the enforceability and collectability of all amounts due hereunder. Reference to
the Security Agreement is made for a complete description of the rights, powers
and obligations of the Agent, including the Agent's duty to act in certain
circumstances at the direction of the "Required Lenders," as such term is
defined therein
1. SUBORDINATION. Notwithstanding anything herein to the
contrary, the obligations of the Company created by this Note are subordinate in
right of payment to any amounts owing by the Company pursuant to that certain
Consolidating, Amended and Restated Loan Agreement dated December 31, 1998 by
and between Med/Waste, Inc., its subsidiaries, Union Planters Bank, N.A.,
BankAtlantic, F.S.B., The Provident Bank and Republic National Bank of Miami
creating a $35 million credit facility (the ACredit Facility@). So long as the
Credit Facility is not in default and there is no condition, event or act which,
with the giving of notice, passage of time or both, would constitute a default,
the Company may make regular Interest Payments; provided however no principal
payments may be made without the prior consent of the lenders of the Credit
Facility. The Company reserves the right to refinance the obligations under the
Credit Facility with new lenders in amounts not to exceed the maximum amount
permitted under the existing Credit Facility. The Notes without further action
on the part of the holders or the Company will be subordinate to such new credit
facility.
2. PREPAYMENT. Notwithstanding anything herein to the contrary,
this Note may be prepaid or called by the Company at any time in whole, or in
part, without penalty or premium, subject to the subordination in favor of the
lenders of the Credit Facility, provided that on the day that the redemption
notice is given by the Company to the registered holders (ANotice of
Repayment@), the average of the closing bid price per share of the Common Stock
wherever the Common Stock then trades, during twenty (20) trading days out of
the thirty (30) consecutive trading days ending five (5) trading days prior to
the date the redemption notice is sent, is at least two hundred (200%) percent
per share of the Conversion Price. Any notice to redeem ("Redemption Notice")
must be given to all Registered Holders no less than thirty (30) days nor more
than forty-five (45) days prior to the date set forth for redemption
("Redemption Date"). This Note shall be paid (and prepaid, if applicable) only
pro rata with certain additional notes of like tenor being issued
contemporaneously herewith, subject to each Holder=s conversion rights. The date
designated for repayment in the Notice of Payment shall be the APrepayment
Date@.
3. EVENTS OF DEFAULT.
(a) Upon the occurrence of any of the following events
(herein called "Events of Default"):
(i) The Company shall fail to pay the principal
of or interest on this Note when due;
(ii) An Event of Default shall occur under the
Credit Facility giving effect to any applicable notice provisions or cure
periods set forth in the documents;
(iii) (A) The Company shall commence any
proceeding or other action relating to it in bankruptcy or seek reorganization,
arrangement, readjustment of its debts, receivership, dissolution, liquidation,
winding-up, composition or any other relief under any bankruptcy law, or under
any other insolvency, reorganization, liquidation, dissolution, arrangement,
composition, readjustment of debt or any other similar act or law, of any
jurisdiction, domestic or foreign, now or hereafter existing; or (B) the Company
shall admit the material allegations of any petition or pleading in connection
2
<PAGE> 3
with any such proceeding; or (C) the Company shall apply for, or consent or
acquiesce to, the appointment of a receiver, conservator, trustee or similar
officer for it or for all or a substantial part of its property; or (D) the
Company shall make a general assignment for the benefit of creditors;
(iv)(A) The commencement of any proceedings or
the taking of any other action against the Company in bankruptcy or seeking
reorganization, arrangement, readjustment of its debts, liquidation,
dissolution, arrangement, composition, or any other relief under any bankruptcy
law or any other similar act or law of any jurisdiction, domestic or foreign,
now or hereafter existing and the continuance of any of such events for sixty
(60) days undismissed, unbonded or undischarged; or (B) the appointment of a
receiver, conservator, trustee or similar officer for the Company for any of its
property and the continuance of any of such events for sixty (60) days
undismissed, unbonded or undischarged;
(v) An "Event of Default" (as defined in the
Security Agreement) shall have occurred under the Security Agreement, after
giving effect to any applicable notice provisions and cure periods set forth in
the Security Agreement;
(vi) The Company shall fail to perform any
obligation of the Company contained in the Subscription Agreement; provided,
however, that if such failure is capable of being cured, such failure is not
cured within fifteen (15) days after the Company's receipt of written notice of
same;
(vii) The Company shall fail to comply with any
of its obligations under this Note, other than payment; provided, such failure
is not remedied within thirty (30) days after the Company's receipt of written
notice of same;
(viii) The Company shall default with respect to
any indebtedness for borrowed money (other than under this Note) in a principal
amount in excess of $200,000 if either (a) the effect of such default is to
allow the creditor to accelerate the maturity of such indebtedness (giving
effect to any applicable grace periods) or (b) the holder of such indebtedness
declares the Company to be in default (giving effect to any applicable grace
periods); or
(ix) Any judgment or judgments against the
Company or any attachment, levy or execution against any of its properties for
any amount in excess of $50,000 in the aggregate shall remain unpaid, or shall
not be released, discharged, dismissed, stayed or fully bonded for a period of
forty-five (45) days or more after its entry, issue or levy, as the case may be;
then, and in any such event, the Holder, at its option and without any written
notice to the Company, may declare the entire principal amount of this Note then
outstanding together with accrued unpaid interest thereon immediately due and
payable, and the same shall forthwith become immediately due and payable without
presentment, demand, protest, or other notice of any kind, all of which are
expressly waived. The Events of Default listed herein are solely for the purpose
of protecting the interests of the Holder of this Note. If the Note is not paid
in full upon acceleration, as required above, interest shall accrue on the
outstanding principal of and interest on this Note from and including the date
of the Event of Default to but not including the date of payment at a rate equal
to the lesser of fifteen percent (15%) per annum or the maximum interest rate
permitted by applicable law.
(b) NON-WAIVER AND OTHER REMEDIES. No course of dealing
or delay on the part of the Holder of this Note in exercising any right
hereunder shall operate as a waiver or otherwise prejudice the right of the
3
<PAGE> 4
Holder of this Note. No remedy conferred hereby shall be exclusive of any other
remedy referred to herein or now or hereafter available at law, in equity, by
statute or otherwise.
(c) COLLECTION COSTS; ATTORNEY'S FEES. In the event this
Note is turned over to an attorney for collection or Holder otherwise seeks
advice of an attorney in connection with the exercise of its rights hereunder
upon the occurrence of an Event of Default, the Company agrees to pay all
reasonable costs of collection, including reasonable attorney's fees and
expenses and all out of pocket expenses incurred in connection with such
collection efforts, which amounts may, at the Holders option, be added to the
principal hereof.
4. OBLIGATION TO PAY PRINCIPAL AND INTEREST: COVENANTS. No
provision of this Note shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the principal of and interest on
this Note at the place, at the respective times, at the rates, and in the
currency herein prescribed.
4.1 AFFIRMATIVE COVENANTS. The Company covenants and
agrees that, while this Note is outstanding, it shall:
(a) Pay all senior obligations accruing under
the Credit Facility;
(b) Pay and discharge all taxes, assessments and
governmental charges or levies imposed upon it or upon its income and profits,
or upon any properties belonging to it before the same shall be in default;
provided, however, that the Company shall not be required to pay any such tax,
assessment, charge or levy that is being contested in good faith by proper
proceedings and adequate reserves for the accrual of same are maintained if
required by generally accepted accounting principles;
(c) Preserve its corporate existence and
continue to engage in business of the same general type as conducted as of the
date hereof; and
(d) Comply in all respects with all statutes,
laws, ordinances, orders, judgments, decrees, injunctions, rules, regulations,
permits, licenses, authorizations and requirements ("Requirement(s)") of all
governmental bodies, departments, commissions, boards, companies or associations
insuring the premises, courts, authorities, officials, or officers, that are
applicable to the Company; except where the failure to comply would not have a
material adverse effect on the Company; provided that nothing contained herein
shall prevent the Company from contesting the validity or the application of any
Requirements.
4.2 NEGATIVE COVENANTS. The Company covenants and agrees
that while this Note is outstanding it will not directly or indirectly:
(a) Make or forgive any loans to any Insiders or
guarantee or otherwise in any way become or be responsible for indebtedness for
borrowed money, or for obligations, in either case of any of the Insiders,
contingently or otherwise, other than such guaranties existing as of the date
hereof and advancement of expenses in the ordinary course of business. For
purposes of this Note, AInsiders shall mean any officer, director or 5% or
greater shareholder;
(b) Declare or pay any cash dividends or make
any interest payments in cash to the holders of any of its outstanding equity or
debt securities, other than such dividends accruing or payable on the Company=s
Series A Preferred Stock;
4
<PAGE> 5
(c) Sell, transfer or dispose of any of its
assets other than in the ordinary course of its business and for fair value; or
(d) Purchase, redeem, retire or otherwise
acquire for value any of its capital stock now or hereafter outstanding.
(e) Increase the salary or other compensation or
benefits paid or provided to any officer or director of the Company except to
the extent that such increase (a) is commercially reasonable and in accordance
with industry standards and (b) is approved by a majority of the non-employee
members of the Board of Directors of such Borrower.
5. CONVERSION.
5.1 RIGHT TO CONVERT. Each Holder may at any time and from time to
time, commencing thirty (30) days after the original issuance of the Note,
convert all or any amount of the principal amount of the Notes then owned by
such Holder into shares of Common Stock of the Company at a conversion price per
share of Common Stock equal to $.543 per share (the AConversion Price@).
Notwithstanding the giving by the Company of Notice of Repayment, the Holder may
exercise the Holder's conversion rights set forth in this Section 5 at any time
up to one (1) business day prior to the Repayment Date.
5.2 MECHANICS AND EFFECT OF CONVERSION INTEREST. In order
to convert the unpaid principal amount hereof into shares of Common Stock, the
Holder shall surrender this Note, with the form of Conversion Notice annexed to
this Note completed and executed, to the Company at its principal executive
office. The Company shall, as soon as practicable, but not later than five (5)
business days after the date of receipt of this Note, issue and deliver to a
location in the United States designated by the Holder (a) a certificate for the
number of shares of Common Stock to which the Holder shall be entitled as
aforesaid; and (b) a check payable to the order of the Holder in the amount of
interest accrued through the Conversion Date on the principal amount so
converted. Such conversion shall be deemed to have been made immediately prior
to the close of business on the date on which the written notice is received by
the Company in accordance herewith ("Conversion Date"), and the Holder shall be
treated for all purposes as the record holder of such shares of Common Stock as
of such Conversion Date.
5.3 ISSUANCE OF COMMON STOCK. All Common Stock which may
be issued upon conversion of the Note will, upon issuance, be duly issued, fully
paid and non-assessable and free from all taxes, liens, and charges with respect
to the issue thereof. At all times that any Notes are outstanding, the Company
shall have authorized and shall have reserved for the purpose of issuance upon
such conversion into Common Stock of all Notes, a sufficient number of shares of
Common Stock to provide for the conversion of all outstanding Notes at the then
effective Conversion Price. Without limiting the generality of the foregoing,
if, at any time, the Conversion Price is decreased or increased, the number of
shares of Common Stock authorized and reserved for issuance by the Company upon
the conversion of the Notes shall be proportionately increased or decreased, as
the case may be.
5.4 ADJUSTMENTS.
5
<PAGE> 6
(a) If the outstanding shares of the Company's
Common Stock shall be subdivided or split into a greater number of shares, or a
dividend in Common Stock shall be paid in respect of Common Stock, the
Conversion Price in effect immediately prior to such subdivision or at the
record date of such dividend shall, simultaneously with the effectiveness of
such subdivision or split or immediately after the record date of such dividend,
be proportionately reduced. If the outstanding shares of Common Stock shall be
combined or reverse-split into a smaller number of shares, the Conversion Price
in effect immediately prior to such combination or reverse-split shall,
simultaneously with the effectiveness of such combination or reverse-split, be
proportionately increased. When any adjustment is required to be made in the
Conversion Price, the number of shares of Common Stock purchasable upon the
conversion of this Note shall be changed to the number determined by dividing
(i) an amount equal to the number of shares issuable upon the conversion of this
Note immediately prior to such adjustment, multiplied by the Conversion Price in
effect immediately prior to such adjustment, by (ii) the Conversion Price in
effect immediately after such adjustment.
(b) If there shall occur any capital
reorganization or reclassification of the Company's Common Stock (other than a
change in par value or a subdivision or combination as provided for in
subsection (a) above), or the payment of a liquidating distribution, then, as
part of any such reorganization, reclassification or liquidating distribution,
lawful provision shall be made so that the Holder of this Note shall have the
right thereafter to receive upon the conversion hereof (to the extent, if any,
still convertible) the kind and amount of shares of stock or other securities or
property which such Holder would have been entitled to receive if, immediately
prior to any such reorganization, reclassification or liquidating distribution,
as the case may be, such Holder had held the number of shares of Common Stock
which were then purchasable upon the conversion of this Note. In any such case,
appropriate adjustment (as reasonably determined by the Board of Directors of
the Company) shall be made in the application of the provisions set forth herein
with respect to the fights and interests thereafter of the Holder of this Note
such that the provisions set forth in this Section 5.4 (including provisions
with respect to adjustment of the Conversion Price) shall thereafter be
applicable, as nearly as practicable, in relation to any shares of stock or
other securities or property thereafter deliverable upon the conversion of this
Note.
(c) No adjustment in the per share Conversion
Price shall be required unless such adjustment would require an increase or
decrease in the Conversion Price of at least $0.01; provided, however, that any
adjustments which by reason of this paragraph are not required to be made shall
be carried forward and taken into account in any subsequent adjustment. All
calculations under this Section 5.4 shall be made to the nearest cent or to the
nearest 1/100th of a share, as the case may be. Anything in this Section 5.4, to
the contrary notwithstanding, the Company shall be entitled to make such
reductions in the per share Conversion Price, in addition to those required by
this Section 5.4, as in its discretion it shall deem to be advisable in order
that any stock dividend, subdivision of shares or distribution rights to
purchase stock or securities convertible or exchangeable for stock hereafter
made by the Company to its stockholders shall not be taxable.
(d) Upon the happening of any event requiring an
adjustment of the Conversion Price hereunder, the Company shall forthwith give
written notice thereto to the Holder of this Note stating the adjusted
Conversion Price and the adjusted number of shares purchasable upon the
conversion hereof resulting from such event and setting forth in reasonable
detail the method of calculation and the facts upon which such calculation is
based.
6
<PAGE> 7
5.5 FRACTIONAL SHARES. The Company shall not be required
to issue fractions of shares of Common Stock upon conversion. If any fractions
of a share would, but for this Section 5.5, be issuable upon any conversion, in
lieu of such fractional share the Company shall round up or down to the nearest
whole number of shares, with a fraction of 2 being rounded up.
6. REGISTRATION RIGHTS. The Holder shall have certain
registration rights with respect to the Common Stock issuable upon conversion of
the Note (ARegistrable Securities@) as hereinafter provided:
6.1 The Company agrees, at its sole cost and expense, to
file a registration statement on the appropriate form under the Securities Act
of 1933 (the A1933 Act@) with the Securities and Exchange Commission ("SEC")
covering all of the shares Stock issuable upon conversion of the Note and such
additional shares of Common Stock that may be issued pursuant to the
anti-dilution rights contained in the Note within sixty (60) days following the
Company=s eligibility to utilize Form S-3 for the registration of its
securities. The Company will use its best efforts to have such registration
statement declared effective as soon as possible thereafter. Notwithstanding
anything to the contrary contained herein, if such registration statement shall
not filed within such period, then the Conversion Price shall be reduced (and
concomitantly the number of shares of Common Stock issuable upon the conversion
of the Note shall increase) by the percentage resulting from multiplying three
(3%) percent by the number of months, or any part thereof, beyond said period
until the initial registration statement is filed.
6.2 If, at any time after six (6) months following the
date of the Final Closing, the Company shall file with the SEC a registration
statement under the 1933 Act registering any shares of Common Stock owned by any
person or entity, the Company, shall give written notice to each Holder thereof
prior to such filing.
6.3 Within fifteen (15) days after such notice from the
Company each Holder shall give written notice to the Company whether or not the
Holder desires to have all of the Holder's Common Stock included in the
registration statement. If a Holder fails to give such notice within such
period, such Holder shall not have the right to have such Holder's Registrable
Securities registered pursuant to such registration statement. If a Holder gives
such notice, then the Company shall include such Holder's Registrable Securities
in the registration statement at the Company=s sole cost and expense, subject to
the remaining terms of this Paragraph 6.
6.4 If the registration statement relates to an
underwritten offering, and the underwriter shall determine in writing that the
total number of shares of, Common Stock to be included in the offering,
including the Registrable Securities, shall exceed the amount which the
underwriter deems to be appropriate for the offering, the number of shares of
the Registrable Securities shall be reduced in the same proportion as the
remainder of the shares in the offering and each Holder's Registrable Securities
included in such registration statement will be reduced proportionately. For
this purpose, if other securities in the registration statement are derivative
securities, their underlying shares shall be included in the computation. The
Holders shall enter into such agreements as may be reasonably required by the
underwriters and the Holders shall pay to the underwriters commissions relating
to the sale of their respective Registrable Securities.
6.5 The Holders shall have two (2) opportunities to have
the Registrable Securities registered under this Paragraph 6.
7
<PAGE> 8
6.6 The Holder shall furnish in writing to the Company
such information as the Company shall reasonably require in connection with a
registration statement.
6.7 If and whenever the Company is required by the
provisions of this Paragraph 6 to use its best efforts to register any
Registrable Securities under the 1933 Act, the Company shall, as expeditiously
as possible under the circumstances:
(a) Prepare and file with the SEC a registration
statement with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become effective as soon as possible and
remain effective.
(b) Prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement current and to comply with the provisions of the 1933 Act, and any
regulations promulgated thereunder, with respect to the sale or disposition of
all Registrable Securities covered by the registration statement required to
effect the distribution of the securities, but in no event shall Med/Waste, Inc.
be required to do so for a period of more than one (1) year following the
effective date of the registration statement.
(c) Furnish to the sellers participating in the
offering, copies (in reasonable quantities) of summary, preliminary, final,
amended or supplemented prospectuses, in conformity with the requirements of the
1933 Act and any regulations promulgated thereunder, and other documents as
reasonably may be required in order to facilitate the disposition of the
securities, but only while the Company is required under the provisions hereof
to keep the registration statement current.
(d) Use its best efforts to register or qualify
the Registrable Securities covered by such registration statement under such
other securities or blue sky laws of such jurisdictions of the United States as
the sellers participating in the offering shall reasonably request, and do any
and all other acts and things which may be reasonably necessary to enable each
participating Seller to consummate the disposition of the Registrable Securities
in such jurisdictions.
(e) Upon request, deliver promptly to counsel of
each seller participating in the offering copies of all correspondence between
the SEC and Med/Waste, Inc., its counsel or auditors and all memoranda relating
to discussions with the SEC or its staff with respect to the registration
statement and permit each such Seller to do such investigation at such Seller's
sole cost and expense, upon reasonable advance notice, with respect to
information contained in or omitted from the registration statement as it deems
reasonably necessary. Each Seller agrees that it will use its best efforts not
to interfere unreasonably with Med/Waste, Inc.'s business when conducting any
such investigation and each Seller shall keep any such information received
pursuant to this Paragraph G confidential.
(f) Pay all registration expenses incurred in
connection with a registration of Registrable Securities, whether or not such
registration statement shall become effective provided that each seller shall
pay all underwriting discounts, commissions and transfer taxes, and their own
counsel fees, if any, relating to the sale or disposition of such Seller's
Registrable Securities pursuant to a registration statement. As used herein,
"Registration Expenses" means any and all reasonable and customary expenses
incident to performance of or compliance with the registration rights set forth
herein, including, without limitation, (i) all SEC and stock exchange or
National Association of Securities Dealers, Inc. registration and filing fees,
8
<PAGE> 9
(ii) all fees and expenses of complying with state securities or blue sky laws
(including reasonable fees and disbursements of counsel for the underwriters in
connection with blue sky qualifications of the Registrable Securities but no
other expenses of the underwriters or their counsel), (iii) all printing,
messenger and delivery expenses, and (iv) the reasonable fees and disbursements
of counsel for the Company and the Company=s independent public accountants.
7. ISSUE OF NOTES. This Note is one of a duly authorized issue of
notes of the Company, designated the Junior Secured Convertible Notes is limited
in aggregate principal amount of $4,000,000. The Notes have been offered and
sold pursuant to the Company=s Confidential Private Placement Memorandum dated
December 15, 1999. The obligations under this Note shall rank equally with all
other Notes of the same designation.
8. REQUIRED CONSENT. The Company may not modify any of the terms
of this Note except in accordance with the provisions of Section 8.
8.1 A meeting of Holders of the Notes may be called at
any time and from time to time to make, give or take any request, demand,
authorization, direction, notice, consent, waiver or other action provided by
the Notes to be made, given or taken by Holders of Notes or to modify, amend or
supplement the terms of the Notes as hereinafter provided. Notice of every
meeting of Holders of Notes, setting forth the time and the place of such
meeting and in general terms the action proposed to be taken at such meeting,
shall be given as provided for in the terms of the Notes, not less than ten (10)
nor more than sixty (60) days prior to the date fixed for the meeting. Such
meetings may be called at any time for any such purpose by the Company or by the
Holders of at least twenty-five (25%) percent in the aggregate principal amount
of the outstanding Notes. Upon receipt of any such request from Holders, the
Company shall call such meeting for such purposes by giving notice thereof.
To be entitled to vote at any meeting of Holders of Notes, a
person shall be a registered Holder of outstanding Notes or a person duly
appointed by an instrument in writing as proxy for such a Holder. The persons
entitled to vote more than fifty (50%) percent in principal amount of the
outstanding Notes shall constitute a quorum. The Company may make such
reasonable and customary regulations as it shall deem advisable for any meeting
of Holders of Notes with respect to the appointment of proxies in respect of
Holders of Notes, the record date for determining the registered owners of Notes
who are entitled to vote at such meeting (which date shall be set forth in the
notice calling such meeting hereinabove referred to and which shall be not less
than fifteen (15) nor more than sixty (60) days prior to such meeting), the
adjournment and chairmanship of such meeting, the appointment and duties of
inspectors of votes, the submission and examination of proxies, certificates and
other evidence of the right to vote, and such other matters concerning the
conduct of the meeting as it shall deem appropriate.
At any meeting of Holders of Notes duly called and held as
specified above, upon the affirmative vote, in person or by proxy thereunto duly
authorized in writing, of the Holders of not less than sixty-six and two-thirds
(66b%) percent in aggregate principal amount of outstanding Notes, or with the
written consent of the Registered Holders of not less than sixty-six and
two-thirds (66b%) percent in aggregate principal amount of outstanding Notes,
the Company may modify, amend or supplement the terms of the Notes in any way,
and the Holders of Notes may make, take or give any request, demand,
authorization, direction, notice, consent, waiver or other action provided by
the terms of the Notes to be made, given or taken by Holders of Notes; provided,
however, that no such action may, without the consent of Holders of Notes owning
eighty (80%) percent or more in the aggregate principal amount of outstanding
9
<PAGE> 10
Notes affected thereby, (a) change the due date for the payment of the principal
of or any installment of interest on any Note, (b) reduce the principal amount
of any Note, the portion of such principal amount which is payable upon
acceleration of the maturity of such Note or the interest rate thereon, (c)
change the coin or currency in which or the required places at which payment
with respect to interest or principal in respect of Notes is payable, or (d)
reduce the proportion of the principal amount of Notes, the vote or consent of
the Holders of which is necessary to modify, amend or supplement the terms and
conditions of the Notes or to make, take or give any request, demand,
authorization, direction, notice, consent, waiver or other' action provided
hereby or thereby to be made, taken or given.
Any instrument given by or on behalf of any Holder of a Note in
connection with any consent to or vote for any such modification, amendment,
supplement, request, demand, authorization, direction, notice, consent, waiver
or other action will be irrevocable once given and will be conclusive and
binding on all subsequent Holders of such Note or any Note issued directly or
indirectly in exchange or substitution therefor or in lieu thereof Any such
modification, amendment, supplement, request, demand, authorization, direction,
notice, consent, waiver or other action will be conclusive and binding on all
Holders of Notes, whether or not they have given such consent or cast such vote,
and whether or not notation of such modification, amendment, supplement,
request, demand, authorization, direction, notice, consent, waiver or other
action is made upon the Notes. Notice of any modification or amendment of,
supplement to, or request, demand, authorization, direction, notice, consent,
waiver or other action with respect to the Notes shall be given to each
registered Holder of Notes affected thereby, in all cases as provided herein.
Notes executed and delivered after the effectiveness of any such
modification, amendment, supplement, request, demand, authorization, direction,
notice, consent, waiver or other action shall bear a notation in the form
reasonably approved by the Company as to any matter provided for in such
modification, amendment, supplement, request, demand, authorization, direction,
notice, consent, waiver or other action. New Notes modified to conform to any
such modification, amendment, supplement, request, demand, authorization,
direction, notice, consent, waiver or other action may be prepared by the
Company and executed and delivered in exchange for outstanding Notes.
8.2 LOST DOCUMENTS. Upon receipt by the Company of
evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Note or any Note exchanged for it, and (in the case of loss, theft or
destruction) of indemnity satisfactory to it, and upon reimbursement to the
Company of all reasonable expenses incidental thereto, and upon surrender and
cancellation of such Note, if mutilated, the Company will make and deliver in
lieu of such Note a new Note of like tenor and unpaid principal amount and dated
as of the original date of the Note.
8.3 BENEFIT. This Note shall be binding upon and inure to
the benefit of the parties hereto and their legal representatives, successors
and assigns.
8.4 NOTICES AND ADDRESSES. All notices, offers,
acceptances and any other acts under this Note (except payment) shall be in
writing, and shall be sufficiently given if delivered to the addressee in
person, by overnight courier service or similar receipted delivery, or, if
mailed, postage prepaid, by certified mail, return receipt requested, as
follows:
To Holder: To Holder's address listed on
the Subscription Agreement
10
<PAGE> 11
To the Company: Med/Waste, Inc.
6175 N.W. 153rd Street, Suite 324
Miami Lakes, Florida 33014
Attn: Carlos Campos, President
or to such other address as any of them, by notice to the others may designate
from time to time. Time shall be counted to, or from, as the case may be, the
date of delivery in person, one (1) business day if delivered by overnight
courier or three (3) business days after mailing.
8.5 GOVERNING LAW. This Note and any dispute,
disagreement, or issue of construction or interpretation arising hereunder
whether relating to its execution, its validity, the obligations provided
therein or performance shall be governed and interpreted according to the
internal law of the State of Florida.
8.6 JURISDICTION AND VENUE. The Company (a) agrees that
any suit, action or proceeding arising out of or relating to this Note shall be
instituted exclusively in the Eleventh Judicial Circuit Court in and for
Miami-Dade County, Florida or in the United States District Court for the
Southern District of Florida; (b) waives any objection to the venue of any such
suit, action or proceeding and the right to assert that such forum is not a
convenient forum, and (c) irrevocably consents to the jurisdiction of the
Eleventh Judicial Circuit Court in and for Miami-Dade County, Florida, and the
United States District Court for the Southern District of Florida in any such
suit, action or proceeding, and the Company further agrees to accept and
acknowledge service of any and all process that may be served in any such suit,
action or proceeding in the Eleventh Judicial Circuit Court in and for
Miami-Dade County, Florida, or in the United States District Court for the
Southern District of Florida.
8.7 SECTION HEADINGS. Section headings herein have been
inserted for reference only and shall not be deemed to limit or otherwise
affect, in any matter, or be deemed to interpret in whole or in part any of the
terms or provisions of this Note.
8.8 SURVIVAL OF AGREEMENTS. The agreements contained
herein shall survive the delivery of this Note.
IN WITNESS WHEREOF, this Note has been executed and delivered on
the date specified above by the duly authorized representative of the Company.
MED/WASTE, INC.
By:/s/ CARLOS CAMPOS
-------------------------------------------
Carlos Campos
President and Chief Executive Officer
11
<PAGE> 12
NOTICE OF CONVERSION
(To Be Completed and Signed Only Upon Conversion of Note)
TO: MED/WASTE, INC.
6175 N.W. 153rd Street
Suite 324
Miami Lakes, Florida 33014
Attn: Carlos Campos, President
The undersigned, the Holder of the attached Note, hereby
surrenders such Note for conversion of $_________ in principal amount thereof at
the Conversion Price in effect upon your receipt of the foregoing Note into
shares of the Common Stock of MED/WASTE, INC. and requests that a certificate
for such shares be issued to the undersigned Holder at the address indicated
below.
The undersigned hereby confirms to Med/Waste, Inc. the truth and
accuracy of the representations and warranties made by the undersigned in the
Subscription Agreement and accepted by the Company, as if such representations
and warranties were made on the date hereof.
Dated:
-------------------------- ------------------------------
Name of Entity, if any
------------------------------
Signature*
------------------------------
Title, if applicable
------------------------------
Print Name
------------------------------
Address
------------------------------
------------------------------
- ---------------------------
* Must conform in all respects to name of Holder as specified on the face
of the Note.
12
<PAGE> 13
ASSIGNMENT
(To be executed by the Holder to Effect a Transfer of the Attached Note)
FOR VALUE RECEIVED, the undersigned does hereby sell, assign and
transfer unto ________________________________________________, with an address
of ______________________________________________________________________, all
right, title and interest of the undersigned in the attached Note of Med/Waste,
Inc. ("Company") and does hereby authorize the Company to transfer such right on
the books of the Company.
Dated:
-------------------------- ------------------------------
Name of Entity, if any
------------------------------
Signature*
------------------------------
Title, if applicable
------------------------------
Print Name
------------------------------
13
<PAGE> 14
- ---------------------------
* Must conform in all respects to name of Holder as specified on the face
of the Note.
14
<PAGE> 15
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("1933 ACT") OR ANY STATE SECURITIES
LAWS AND SHALL NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED, OR OTHERWISE
TRANSFERRED, WHETHER OR NOT FOR CONSIDERATION, BY THE HOLDER EXCEPT UPON
THE ISSUANCE TO THE COMPANY OF A FAVORABLE OPINION OF ITS COUNSEL OR THE
SUBMISSION TO THE COMPANY OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY
TO COUNSEL FOR THE COMPANY, IN EITHER CASE, TO THE EFFECT THAT ANY SUCH
TRANSFER SHALL NOT BE IN VIOLATION OF THE 1933 ACT AND APPLICABLE STATE
SECURITIES LAWS.
15
<PAGE> 1
<TABLE>
<CAPTION>
EXHIBIT 21 - SUBSIDIARIES
NAME OF SUBSIDIARY STATE OF
INCORPORATION DATE OF INCORPORATION
- ------------------------------------------------------------ ---------------------- ------------------------
<S> <C> <C> <C>
1. Safety Disposal System, Inc. Florida 1990
2. Med/Waste of Florida, Inc. Florida 1993
3. Safety Disposal System of South Carolina, Inc. South Carolina 1996
4. Safety Disposal System of Pennsylvania, Inc. Pennsylvania 1997
5. Safety Disposal System of Georgia, Inc. Georgia 1997
6. Safety Disposal System of Tennessee, Inc. Tennessee 1997
7. Safety Disposal System of Virginia, Inc. Virginia 1997
8. Incendere, Inc. Virginia 1986
9. Med Waste, Inc. Pennsylvania 1995
10. Target Medical Waste Services, LLC. Alabama 1993
11. Med-Waste, Inc. Alabama 1993
12. Safety Disposal System of New York, Inc. New York 1997
13. BMW Med Tec of West Virginia, Inc. West Virginia 1992
14. Sanford Motors, Inc. Pennsylvania 1989
15. East Coast Medical Waste, inc. New Jersey 1989
16. Bucks County Resource and Recovery, Inc. Pennsylvania 1994
17. Safety Disposal System Consulting, Inc. New York 1998
18. RxMed, Inc. Florida 1999
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 69,225
<SECURITIES> 0
<RECEIVABLES> 6,125,676
<ALLOWANCES> 668,000
<INVENTORY> 210,544
<CURRENT-ASSETS> 5,891,225
<PP&E> 17,665,444
<DEPRECIATION> 4,757,034
<TOTAL-ASSETS> 46,075,709
<CURRENT-LIABILITIES> 31,773,665
<BONDS> 480,165
311
0
<COMMON> 6,732
<OTHER-SE> 13,845,493
<TOTAL-LIABILITY-AND-EQUITY> 46,075,709
<SALES> 0
<TOTAL-REVENUES> 26,872,279
<CGS> 21,317,960
<TOTAL-COSTS> 30,163,126
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 71,460
<INTEREST-EXPENSE> 2,632,973
<INCOME-PRETAX> (5,898,111)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,898,111)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,898,111)
<EPS-BASIC> (.92)
<EPS-DILUTED> (.92)
</TABLE>
