<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
COMMISSION FILE NUMBER: 0-22294
MED/WASTE, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 65-0297759
-------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6175 NW 153 Street, Suite 324, Miami Lakes, FL 33014
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(Address of principal executive offices)
(305) 819-8877
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(Issuer's telephone number)
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 [ ]
The number of shares outstanding of the registrant's common stock $.001 par
value as of September 30, 2000 was 6,731,956.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MED/WASTE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 58,545 $ 69,225
Accounts Receivable, Net of Allowances of $748,600
and $668,000 in 2000 and 1999 respectively 5,172,345 5,457,676
Inventories 400,018 210,544
Prepaid Expenses and Other Current Assets 312,835 153,780
------------ ------------
Total Current Assets $ 5,943,743 5,891,225
Property, Plant and Equipment, Net 11,399,400 12,908,410
Goodwill 18,343,350 18,774,945
Other Intangibles, net 7,135,687 7,469,018
Other Assets 498,880 294,827
Investment in unconsolidated subsidiary 737,284
------------ ------------
Total Assets $ 43,321,060 $ 46,075,709
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 7,293,698 $ 7,332,110
Current Portion of Notes Payables 23,490,292 23,731,306
Current Portion of Capital Lease Obligations 310,887 710,249
------------ ------------
Total Current Liabilities 31,094,877 31,773,665
Capital Lease Obligations, Less Current Portion 204,618 318,074
Notes Payable Less Current Portion 87,393 162,091
Subordinated Secured Convertible Notes Payable 3,738,185
------------ ------------
35,125,073 32,253,830
Shareholders' Equity:
Series A Preferred Stock, .01 par value; 60,000 shares
Authorized; 31,345 Shares Outstanding 313 311
Common Stock, $.001 par value; 10,000,000 Shares Authorized;
6,731,956 Issued and Outstanding in 2000 and 1999 6,732 6,732
Additional Paid-in Capital 31,251,647 30,475,847
Warrant Subscriptions Receivable (80,000) (382,113)
Deficit (22,952,048) (16,248,241)
------------ ------------
8,226,644 13,852,536
Less Cost of Treasury Stock: 11,824 Shares (30,657) (30,657)
------------ ------------
Total Shareholders' Equity 8,195,987 13,821,879
------------ ------------
Total Liabilities and Shareholders' Equity $ 43,321,060 $ 46,075,709
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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MED/WASTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 5,905,017 $ 6,921,107 $ 18,798,029 $ 20,877,420
Costs and expenses:
Operating costs 5,441,228 5,382,482 15,581,392 16,789,318
Administrative and selling expenses 2,056,479 1,590,403 5,227,222 5,689,120
Amortization of Intangibles 332,408 356,250 998,668 1,042,754
------------ ------------ ------------ ------------
Total 7,830,115 7,329,135 21,807,282 23,521,192
------------ ------------ ------------ ------------
Operating loss (1,925,098) (408,028) (3,009,253) (2,643,772)
Interest expense, net 795,810 508,726 2,392,790 1,817,091
Other, net 220,767 17,985 586,326 (78,086)
------------ ------------ ------------ ------------
Net loss before extraordinary item (2,941,675) (934,739) (5,988,369) (4,382,777)
Extraordinary item 503,858 503,858
Net loss (3,445,533) (934,739) (6,492,227) (4,382,777)
Preferred stock dividend (70,527) (66,000) (211,580) s(197,034)
------------ ------------ ------------ ------------
Net loss available to common
shareholders $ (3,516,060) $ (1,000,739) $ (6,703,807) $ (4,579,811)
============ ============ ============ ============
Loss per share - basic and diluted $ (.52) $ (0.15) $ (1.00) $ (0.68)
Weighted average shares outstanding 6,731,956 6,658,202 6,731,956 6,727,874
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Med/Waste, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) $(6,703,807) $(4,382,777)
Adjustments to reconcile net loss to net cash (used) in
operating activities
Extraordinary item 503,858
Depreciation and amortization 2,682,338 2,493,559
Provision for doubtful accounts receivable (80,484) 99,422
Equity in net loss (income) of unconsolidated subsidiary 233,426 (65,955)
Issuance of stock, options, and warrants for services 15,800 38,997
Changes in operating assets and liabilities
Decrease (increase) in accounts receivable 204,847 (133,742)
(Increase) decrease in inventories (189,474) 149,155
(Increase) decrease in prepaid expenses and other assets (159,055) 527,669
(Decrease) increase in accounts payable and accrued expenses (38,383) 547,902
Other decrease (increase) 62,085 55,457
----------- -----------
Net cash used in operating activities (3,307,881) (670,313)
INVESTING ACTIVITIES:
Purchase of operating equipment (55,402) (544,418)
----------- -----------
Net cash used by investing activities (55,402) (544,418)
FINANCING ACTIVITIES:
(Decrease) increase in line of credit and notes payable-net (315,712) 1,415,164
(Decrease) in capital leases, net (512,818) (232,052)
Net proceeds from subordinated notes 4,090,600
Payment of stock subscription receivable 302,113 43,913
Preferred stock dividend (211,580) (67,595)
----------- -----------
Net cash provided by financing activities 3,352,603 1,159,430
----------- -----------
Decrease in cash and cash equivalents (10,680) (55,301)
Cash and cash equivalents at beginning of period 69,225 113,146
----------- -----------
Cash and cash equivalents at end of period $ 58,545 $ 57,545
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Preferred stock issued as payment of dividend $ 129,514
Cash paid during the period for interest $ 450,000 $ 1,529,000
Cash paid during the period for dividends on preferred stock $ 135,000
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
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MED/WASTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. OPERATIONS AND BASIS OF PRESENTATION
ORGANIZATION
Med/Waste, Inc. (the "Company") is a holding company incorporated in November
1991 under the laws of the State of Delaware. The Company, through its
subsidiaries, is engaged in the businesses of medical waste management.
The medical waste management operations are conducted 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)
Incendere, Inc. ("Incendere")
Target Medical Waste Services, LLC ("Target")
Med-Waste, Inc. ("Decatur")
Sanford Motors, Inc. ("SMI")
BMW Medtec of West Virginia ("BMW")
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB and do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. These
statements should be read in conjunction with the consolidated financial
statements and related notes contained in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1999. These interim results of operations
are not necessarily indicative of results for the entire year. The December 31,
1999 balance sheet was derived from the audited financial statements as of that
date.
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2. ACQUISITIONS.
The Company made no acquisitions during the nine months ended September 30,
2000.
3. NOTES PAYABLE
Notes payable consist of the following at September 30, 2000:
Term Loan $16,200,000
Line of Credit 3,500,000
Notes payable 3,877,686
-----------
Total notes payable 23,577,686
Less: current portion 23,490,292
-----------
Long Term Portion 87,393
===========
In January 1999, the Company refinanced the line of credit and term loan 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 have converted to a term loan on July 31, 2000
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. However, due to the continuing defaults
of the financial covenants discussed below, the Company was not permitted to
convert such loan and the loan is now due and payable.
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 revolving credit loan was
originally due on July 31, 1999 but was extended by the Bank to May 30, 2000.
The Company received waivers from the bank for such violations which extended
through May 30, 2000 and as such, has classified the line of credit and term
loans outstanding at September 30, 2000 and December 31, 1999 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 notwithstanding expiration of the waivers. 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 September 30, 2000 was approximately 12%. The revolving credit
loan and the convertible credit loan are collateralized by substantially all of
the Company's assets.
4. SUBORDINATED SECURED CONVERTIBLE NOTES PAYABLE
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").
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The Notes are due on December 1, 2001 and 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 security interest in all of
its tangible personal property. The Notes are convertible at each holder's
option into shares of common stock at any time prior to redemption or maturity,
at a conversion price of $.543 per share. Each note holder was also granted one
warrant for every $2.00 of principal amount of Notes purchased for a total of
2,200,000 warrants. Each warrant entitles the holder to purchase one share of
Common Stock at an exercise price of $.68 per share through December 31, 2005.
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 through December 31, 2005. The value of the warrants ($700,000 using the
Black-Sholes method), issued to the note holders, are treated as a discount, and
amortized over the two-year term of the Notes. The value of the warrants
($60,000) and cash ($149,400) paid to the placement agents are treated as
deferred financing costs and amortized over the two-year term of the notes. This
treatment is consistent with that prescribed by APB 14. For purposes of balance
sheet presentation, the un-amortized discount on the notes ($507,200) and loans
granted to participating key employees ($194,600), are netted against the
outstanding balance due to the note holders.
The net 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 $4,091,000. These funds were used by the Company to reduce
outstanding accounts payable, amounts due to former owners of acquired
businesses, 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.
EXTRAORDINARY ITEM
In September 2000 a serious accident occurred at the incinerating facility
operated by an unconsolidated subsidiary of which the Company owns a 49%
interest. The 51% owner manages and operates the facility. The accident resulted
in investigations by various regulatory agencies and since then, the plant has
been shutdown and operations ceased. At the present time the subsidiary's
management team had advised the Company that the plant cannot return to
operations without an investment estimated to be in excess of $1,000,000.
Company's management estimates that the carrying value of $503,858 representing
its 49% investment in this subsidiary has been impaired and therefore was
written off during the three-months ended September 30, 2000.
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5. NET INCOME PER COMMON SHARE
A reconciliation of the numerator and denominator of earnings per share for the
quarters ended September 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
2000 1999
-------------------------------------- ----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net loss (6,492,227) $(4,382,777)
Less: Preferred stock dividends (211,580) (197,034)
Basic and diluted EPS and loss
available to common shareholders (6,703,807) 6,731,956 $ (1.00) $(4,579,811) 6,727,874 $ (0.68)
---------- --------- ----------- ----------- --------- -----------
</TABLE>
Options to purchase 1,388,750 shares of common stock with exercise prices
ranging from $.72 to $8.50 per share were outstanding as of September 30, 2000.
The options expire at various dates through 2010. Stock warrants, to purchase
3,426,726 shares of common stock with exercise prices ranging from $.68 to
$8.00, were outstanding as of September 30, 2000. The warrants expire at various
dates through 2005. In both 2000 and 1999, no options or warrants were included
in the computation of earnings per share because their inclusion would have an
anti-dilutive effect.
6. GOODWILL AND INTANGIBLES IMPAIRMENT REVIEW
In October 2000, the Company began a detailed review of the carrying value of
its goodwill and intangible assets. The Company anticipates completing such
review during the fourth quarter of 2000 and accordingly it is not possible at
this time to determine the results of such review and its effect, if any, on the
consolidated financial statements.
7. SEC INQUIRY
In July 19, 1999, the Securities and Exchange Commission ("SEC") advised the
Company that it was 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 is
complying fully with such request and will continue to cooperate with the SEC in
its inquiry. The Company cannot predict how long the investigation will last or
its outcome. In addition, the Company cannot determine what actions, if any, the
SEC might take against the Company, or what effect any such action might have on
the Company's operations.
8. LITIGATION
In January 1999, the former stockholders of Med-Waste, Inc., an Alabama
corporation, acquired by the Company in June 1998 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
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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
corporation. Two different attorneys representing certain of the plaintiff have
withdrawn from the case. One plaintiff is now representing himself, and two
others have engaged separate 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, Mr. Bonham seeks compensatory damages,
pre-judgment interest, costs, and reasonable attorney's fees. Specifically, Mr.
Bonham seeks his base salary ($175,000) due for the remaining term of his
employment agreement, as well as various stock options. In March 2000,
Plaintiff's counsel withdrew from the case. Substitute counsel was identified by
the Plaintiff, but the new counsel has also withdrawn. Mr. Bonham is now
representing himself. The litigation is in the discovery stage. Mr. Bonham has
failed to respond to the Company's discovery requests and the Company is now
moving to have the court strike Bonham's case. 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.
The court dismissed the case without prejudice, and the parties have stipulated
to a dismissal with prejudice. Counsel and Company believe this case is now
concluded.
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 the lawsuit 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
During the first week of November, 2000, the Company received a Summons in the
Civil Action from Craig and Mary Jo Sanford the former owners of SMI and current
employees and shareholders of the Company. No complaint has been filed and the
Company is unable to determine the cause of action alleged by the Sanfords, or
to predict the outcome of the case at this time.
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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.
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 estimate able. 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.
9. NEW ACCOUNTING STANDARDS
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION, AN INTERPRETATION OF APB OPINION NO. 25. The Company is required
to adopt the Interpretation on July 1, 2000. The Interpretation requires, among
other things, that stock options that have been modified be accounted for as
variable. Management anticipates the implementation of FASB Interpretation No.
44 will not have a material effect on the Company's financial position or
results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH SEPTEMBER 30, 1999
REVENUES. For the nine months ended September 30, 2000, the Company had revenues
of $18,798,029, a decrease from $20,877,420 for the same period in 1999. During
1999, the Company discontinued providing autoclave services at it's Marcus Hook
facility to certain low margin customers resulting in approximately $500,000 of
the decrease in revenues in the nine-months ended September 30, 2000 compared to
September 30, 1999. Also, 1999 included approximately $350,000 in sterilization
equipment revenues. As part of the Company's new marketing strategy, the sale of
such equipment was discontinued during the second half of 1999. During July and
August 2000 the processing facilities at Hampton, South Carolina and Marcus
Hook, Pennsylvania were temporarily shut down for various regulatory compliance
issues and in the case of the Hampton facility to repair damages caused by a
lightning strike. These issues have since been resolved and the plants are back
in full operation. These temporary plant shutdowns resulted in lost revenues of
approximately $250,000 in the third quarter of 2000. The remaining loss of
revenues is attributed to customers lost during 1999 and 2000 when the Company's
new management identified unprofitable accounts and discontinued services to
such customers. Also, internal growth was limited due to significant working
capital constraints.
OPERATING COSTS. Operating costs amounted to $15,581,392 or 83% of revenues, in
the nine months ended September 30, 2000, as compared to $16,789,318, or 81% of
revenues for the same period in 1999. The Company continued with its efforts to
reduce operating costs. These efforts have been successful but were slowed
during the three-month ended September 30, 2000 due to the unforeseen temporary
shutdowns of the processing facilities in Hampton, SC and Marcus Hook, PA
discussed above, and a 49% increase in fuel costs representing approximately
$273,000. Due to the lower revenues during the three-months ended September 30,
2000 the operating costs as a percent of revenues did not continue the trend of
the prior two quarters of 2000. A claim of approximately $210,000 has been filed
with an insurance company regarding the portion of the shutdown attributed to a
lightning strike. The insurance carrier is processing the claim and its effect
has not been accounted for in the financial statements for the nine months ended
September 30, 2000.
ADMINISTRATIVE AND SELLING EXPENSES. Administrative and selling expenses
decreased to $5,227,222 in the nine months ended September 30, 2000 from
$5,689,120 for the same period in 1999. These costs represent 27% of revenues in
2000 and in 1999. The many changes implemented by new management during
1999-2000 have helped reduce these costs for the nine-months ended September 30,
2000 as compared to 1999. These cost reduction initiatives continue and a large
support operations not yet centralized will be moved to the Company's Miami
Lakes, Florida, Service Center during the coming months. The progress of the
centralization of support operations was slowed during the quarter ended
September 30, 2000 due to management's involvement in the temporary and
unexpected shutdowns of the processing facilities mentioned above. Included in
the expenses for the nine month period ended September 30, 2000 are
approximately $121,000 in penalties and fees accrued to cover anticipated
potential fines that could be incurred by the regulatory authorities involved
with the shutdown in South Carolina. Management anticipates
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continued improvements in selling and general and administrative costs as a
percent of revenues in coming months.
OPERATING LOSS. The Company reported an operating loss of $3,009,253 for the
nine-month period ended September 30, 2000 compared to an operating loss of
$2,643,772 in 1999. The changes in operations implemented by new management has
resulted in significant costs reductions which will contribute to improved
results in the future. These improvements have been tempered by the reduction in
revenues but this trend is expected to be reversed as solutions to inadequate
debt structures and cash positions are found and implemented. Cost reduction
initiatives are expected to continue to improve the results of operations in
future periods.
INTEREST EXPENSE, NET. Interest costs increased to $2,392,790 for the nine month
period ended September 30, 2000 from $1,817,091 for the same period in 1999
because of higher interest rates charged by the banks in 2000 due to the
increase in the prime rate and the non-compliance condition of the loans.
Included in interest in 1999 is approximately $280,000 in loan fees, which were
amortized to expense because of the default conditions of the loan. In addition,
during 2000 all other notes payable of the Company are accruing interest at
default rates. The Company also had significantly more debt accruing interest
during the nine month period September 30, 2000 than it did during the same
period in 1999, including the $4.4 million of 10% Subordinated Convertible
Secured Notes issued in a private placement on February 1, 2000.
OTHER, NET. Other, net represents an expense of $586,326 for the nine months
ended September 30, 2000 as compared to income of $78,006 for the same period in
1999. The expense for the nine-month period ended September 30, 2000 includes
approximately $353,000 in amortization of discounts and fees related to the
private placement of the subordinated notes completed in February 2000 and
$233,000 in losses from an unconsolidated 49% owned subsidiary (see
Extraordinary Item below). This subsidiary had contributed profits of
approximately $75,000 in 1999.
EXTRAORDINARY ITEM. In September 2000, a serious accident occurred at the
incinerating facility operated by an unconsolidated subsidiary of which the
Company owns a 49% interest. This accident resulted in investigations by various
regulatory agencies and since then, the plant has been shutdown and operations
ceased. The subsidiary is managed by the 51% owner who has advised the Company
that the plant cannot return to operations without an investment estimated to be
in excess of $1,000,000. Company's management estimates that the carrying value
of $503,858 representing its 49% investment in this subsidiary has been impaired
and therefore was written off during the three-months ended September 30, 2000.
The Company is not contractually obligated to fund any additional losses or
expenses related to any recovery program initiated by the subsidiary's
management.
NET LOSS. The net loss of $6,492,227 for the nine-month period ended September
30, 2000 compares to a net loss of $4,382,777 during the same period in 1999.
The decrease in revenues, the temporary shutdowns of the processing facilities
and the write-off of the Company's investment in a 49% owned subsidiary both of
which were discussed above are the primary causes for the increase in the net
loss from 1999 to 2000.
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THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH SEPTEMBER 30, 1999
REVENUES. For the three months ended September 30, 2000, the Company had
revenues of $5,905,017, a decrease from the $6,921,107 for the same period in
1999. Included in 1999 were approximately $117,000 in sales of sterilization
equipment. As part of the Company's new marketing strategy, the sale of such
equipment was discontinued. The remaining loss of revenues is attributed to
customers lost during the second half of 1999 and during 2000 when the Company
reorganized under new management. During this time, unprofitable accounts were
identified and discontinued and internal growth was limited due to significant
working capital constraints. Revenues for the three-months ended September 30,
2000 were also negatively affected by approximately $350,000 due to the
temporary shutdowns of the Hampton, SC and Marcus Hook, PA facilities.
OPERATING COSTS. Consolidated operating costs amounted to $5,441,228 or 92% of
revenues, in the three months ended September 30, 2000, as compared to
$5,382,482, or 78% of revenues for the same period in 1999. The lost revenues
from the temporary plant shutdowns in Hampton, SC and Marcus Hook, Pennsylvania
and related inefficiencies resulted in the operating costs increase as a percent
of revenues. A claim of approximately $210,000 has been filed with an insurance
company regarding the portion of the shutdown attributed to a lightning strike.
The insurance carrier is processing the claim and its effect has not been
accounted for in the financial statements for the nine months ended September
30, 2000. Also contributing to the increase in costs is approximately $90,000 in
additional fuel costs for the three-months period ended September 30, 2000
compared to the three months period ended September 30, 1999.
ADMINISTRATIVE AND SELLING EXPENSES. Administrative and selling expenses
amounted to $2,056,479 during the three months ended September 30, 2000 compared
to $1,590,403 for the same period in 1999. These costs represent 33% of revenues
in 2000 compared to 23% in 1999. Although the many changes implemented by new
management during 1999-2000 have helped reduce these costs on a year to date
basis the expenses for the three months ended September 30, 2000 were higher
than in 1999 due to the difficulties encountered with the temporary shutdowns of
the Hampton, South Carolina and Marcus Hook, PA facilities. During the quarter
expenses of approximately $121,000 were accrued to cover anticipated penalties
and fines that may be issued by the regulatory authorities in South Carolina.
Medical expenses resulting from the Company's self-insured employee benefit plan
amounted to $123,000 more than in the previous quarter. Also, bank fees
resulting from overdraft conditions of the Company's operating accounts amounted
to approximately $100,000 more than the customary charges for a quarter. The
cost reduction initiatives continue and one large support operation not yet
centralized is expected to be moved to the Company's Miami Lakes, Florida,
Service Center in the near future.
OPERATING LOSS. The Company reported an operating loss of $1,925,098 the
three-month period ended September 30, 2000 compared to an operating loss of
$408,028 in 1999. The temporary
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shutdowns of the plants in Hampton, SC and Marcus Hook, PA previously discussed
affected negatively the operating results for the three months ended September
30, 2000.
OTHER, NET. Other, net represents an expense of $220,767 for the three months
ended September 30, 2000, compared to $17,985 for the same period in 1999. The
expense for the three-month period ended September 30, 2000 includes
approximately $118,500 in amortization of discounts and fees related to the
private placement of the subordinated notes completed in February 2000. Also
included in the results for 2000 is approximately $103,000 of losses from a 49%
owned unconsolidated subsidiary managed by the 51% owner. During the same period
in 1999, this subsidiary loses amounted to approximately $17,000.
EXTRAORDINARY ITEM. In September 2000 a serious accident occurred at the
incinerating facility operated by an unconsolidated subsidiary of which the
Company owns a 49% interest. The 51% owner manages and operates the facility.
The accident resulted in investigations by various regulatory agencies and since
then, the plant has been shutdown and operations ceased. The subsidiary is
managed by the 51% owner who has advised the Company that the plant cannot
return to operations without an investment estimated to be in excess of
$1,000,000. Company's management estimates that the carrying value of $503,858
representing its 49% investment in this subsidiary has been impaired and
therefore was written off during the three-months ended September 30, 2000. The
Company is not contractually obligated to fund any additional losses or expenses
related to any recovery program initiated by the subsidiary's management.
NET LOSS. The net loss of $3,445,533 for the three-month period ended September
30, 2000 compares to a net loss of $934,739 during the same period in 1999. The
lost revenues, the temporary shutdowns of the processing facilities and the
write-off of the Company's investment in a 49% owned subsidiary, all of which
were discussed above, are the primary causes for the increase in the net loss
from 1999 to 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
1999, 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 of
May 30, 2000 has not been extended further.
During the nine-months ended September 30, 2000 the Company successfully
completed a private placement of $4,400,000 of convertible secured notes which
netted the Company approximately $4,050,000 in additional capital. These funds
were used primarily to reduce the amount of accounts payable to vendors and
suppliers and bring past due lease payments up to date. 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
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State of South Carolina Tests were successfully completed, management still
expects to incur significant expenses to this facility in order to maximize its
waste throughput and obtain significant economies of scale and meet the 2002
Federal air emission standards. Previously these expenses were estimated at
$6,000,000. It now appears likely that the required work could be achieve for
substantially less than the previous estimates but management is unable to
predict with a significant degree of certainty how much less than the previously
estimated amount will be incurred. 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 significant legal costs to defend its on going
litigation.
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 demanded full 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 expired on May 30, 2000. The Company is currently
in negotiations with its lenders to extend the terms of the credit facility.
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. These cost reduction efforts are continuing,
however, due to the reluctance of the banks to extend any new credit to the
Company, many vendors are not paid on time, resulting in additional expense from
late fees, penalties, exposure due to temporary lapses of insurance coverage,
poor employee relations and others.
The operations of SMI have not yet been centralized into the Miami Lakes,
Florida, Service Center. Net customers accounts receivable of this subsidiary,
which was acquired in October 1998, represents approximately 43% of the total
receivables of the Company. Due to an acquisition related guarantee of the value
of shares of stock issued to the former owners and the uncertainty surrounding
how this guarantee will be paid the former owners have not cooperated fully with
current management in their efforts to centralize the billing and accounts
receivable functions, which would improve the cash flow of this subsidiary. This
situation has severely affected the cash flow of the Company at a critical time
when the lines of credit were suspended by the banks.
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. Unfortunately in
1997 and 1998, 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
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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'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 in its Annual Report on Form 10-KSB for the year ended December
31, 1999 which contains an explanatory paragraph regarding the Company's ability
to continue as a going concern.)
PLANT SHUTDOWNS DURING THE THREE MONTHS PERIOD ENDED SEPTEMBER 30, 2000
During July-August 2000, the Company's main incinerating facility in Hampton,
South Carolina was shut down for approximately 15 days due to the failure of
certain key equipment which was apparently struck by lightning. Due to
environmental concerns, the Company and the regulatory agency of the State of
South Carolina shut down the facility until the equipment was replaced. The
Company was also required to pass certain tests by the regulatory agency before
it was allowed to resume normal operations. The Company and its insurance
carrier are in the process of determining how much of the damages caused by this
event, including loss of business, is covered by insurance. Losses during this
period could amounted to approximately $350,000 in damages and lost revenue. The
benefit of the insurance claim of approximately $210,000 has not been recorded
in the financial statements for the nine months period ended September 30, 2000,
because it has not yet been approved by the insurance company.
On August 4, 2000, the Company was forced to close down its autoclave facility
in Marcus Hook, Pennsylvania because its processing permit from the State
expired and the renewal process was not completed. On August 10, 2000 a 10 year
permit was granted and the plant resumed normal operations. The Company suffered
losses from this shutdown amounting to approximately $50,000.
IMPORTANT FACTORS RELATING TO FORWARD LOOKING STATEMENTS
This Form 10-QSB 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 Med/Waste, Inc., 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
differ materially from those contemplated by such forward looking statements
include, among others, 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.
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INFLATION
The Company has not been materially affected by the impact of inflation.
YEAR 2000 COMPLIANCE
The potential for software failure due to the 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 has
been advised by its' major vendors that they are Year 2000 compliant. The
Company does not anticipate any significant future costs relating to Year 2000,
but continues to monitor the situation for any disruptions, due to Year 2000
related issues. The Company has not had its operations, products or services
disrupted with any Year 2000 issues and does not expect any material disruptions
related to Year 2000 issues, for the year 2000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SEE NOTE 7 TO THE FINANCIAL STATEMENTS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
Med/Waste, Inc.
Date: November 22, 2000 /s/ Carlos Campos
------------------ -------------------------------
President and Chief Executive Officer
Date: November 22, 2000 /s/ George Mas
----------------- --------------------------------
George Mas,
Vice President and Chief
Financial Officer
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