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EXHIBIT 99.1
MED-TECH ENVIRONMENTAL LIMITED
MARCH 31, 1998 AND 1997
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AUDITORS' REPORT
To the shareholders of Med-Tech Environmental Ltd:
We have audited the consolidated balance sheet of Med-Tech Environmental Ltd as
at March 31, 1998 and 1997, and the consolidated statements of income, deficit
and changes in financial position 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 consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance 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.
In our opinion, these consolidated financial statements represent fairly, in all
material respects, the financial position of the Company as at March 31, 1998
and 1997 and the results of its operations and the changes in its financial
position for the years then ended in accordance with generally accepted
accounting principles.
Without qualifying our opinion, we draw attention to note 1(a) in the financial
statements which indicates the existence of a material uncertainty which may
cast significant doubt about the Company's ability to continue as a going
concern.
COLLINS BARROW, CHARTERED ACCOUNTANTS
Toronto, Canada
May 20, 1998
Except as to Notes 11(c) and 11(d) which is as of November 16, 1998
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MED-TECH ENVIRONMENTAL LTD
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
============================================================================================
1998 1997
- --------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ - $ 31,375
Accounts receivable 1,965,398 194,595
Other receivables 46,599 -
Subscriptions receivable - 50,000
Inventory 169,649 5,500
Prepaid expenses 45,693 289,771
---------------------------------------------------------------------------------------
2,227,339 571,241
Capital assets (note 2) 1,400,184 510,070
Other assets (note 3) 8,751,671 955,875
- --------------------------------------------------------------------------------------------
$ 12,379,194 $ 2,037,186
============================================================================================
LIABILITIES
Current liabilities
Bank indebtedness (note 4) $ 1,799,618 $ -
Accounts payable and accrued liabilities 2,183,460 424,694
Convertib1e debenture (note 5) 210,000 200,000
Current portion of obligations under capital lease 81,315 -
Current portion of long-term debt 5,752,364 -
---------------------------------------------------------------------------------------
10,026,757 624,694
Obligations under capital leases (note 6) 290,802 -
Long-term debt (note 7) 2,000,000 -
- --------------------------------------------------------------------------------------------
12,317,559 624,694
- --------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock (note 8) 6,170,429 2,803,389
Deficit (6,108,794) (1,390,897)
- --------------------------------------------------------------------------------------------
61,635 1,412,492
- --------------------------------------------------------------------------------------------
$ 12,379,194 $ 2,037,186
============================================================================================
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MED-TECH ENVIRONMENTAL LTD
CONSOLIDATED STATEMENT OF DEFICIT
YEAR ENDED MARCH 31, 1998
============================================================================================
1998 1997
- --------------------------------------------------------------------------------------------
Deficit, beginning $ (l,390,897) $ (891,9l8)
Net loss (4,717,897) (498,979)
- --------------------------------------------------------------------------------------------
Deficit, ending $ (6,108,794) $ (1,390,897)
============================================================================================
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MED-TECH ENVIRONMENTAL LTD
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED MARCH 31, 1998
==============================================================================
1998 1997
- ------------------------------------------------------------------------------
Sales $ 10,983,298 $ 392,432
Direct costs 6,920,620 298,397
- ------------------------------------------------------------------------------
Gross margin 4,062,678 94,035
- ------------------------------------------------------------------------------
Operating expenses
Amortization 1,068,964 55,925
Bad debts 20,000 -
Interest 1,467,476 722
Financing costs - 106,822
Office and general 206,269 7,623
Premises costs 449,527 47,281
Professional fees 122,666 182,523
Telephone 126,806 6,479
Wages and benefits 1,525,864 99,727
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4,987,572 507,102
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Loss before the following (924,894) (413,067)
Laidlaw financing and related costs (1,148,634) -
SMS financing and related costs (1,448,294) -
Loss from discontinued operations (note 9) (1,218,373) -
Gain (loss) on disposal of capital assets 22,298 (85,912)
- ------------------------------------------------------------------------------
(3,793,003) (85,912)
- ------------------------------------------------------------------------------
Net loss $ (4,717,897) $ (498,979)
==============================================================================
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MED-TECH ENVIRONMENTAL LTD
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
YEAR ENDED MARCH 31, 1998
========================================================================================
1998 1997
- ----------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR)
Operating activities
Net loss $ (4,717,897) $ (498,979)
Items not affecting cash
Amortization 1,068,964 55,925
(Gain) loss on disposal of capital assets (22,298) 85,912
-------------------------------------------------------------------------------
(3,671,231) (357,142)
Changes in non-cash working capital items 71,293 (94,385)
- ----------------------------------------------------------------------------------------
(3,599,938) (451,527)
- ----------------------------------------------------------------------------------------
Financing activities
Issue of common shares 3,367,040 864,499
Obligations under capital leases 372,117 -
Increase in long-term debt 8,097,166 -
Repayment of long-term debt (500,000) -
Convertible debenture 10,000 200,000
-----------------------------------------------------------------------------------
11,346,323 1,064,499
-----------------------------------------------------------------------------------
Investing activity
Purchase of capital assets (1,553,690) (179,658)
Proceeds on disposal of capital assets 16,352 -
Increase in goodwill (8,040,040) (479,332)
-----------------------------------------------------------------------------------
(9,577,378) (658,990)
-----------------------------------------------------------------------------------
Decrease in cash (1,830,993) (46,018)
Cash, beginning 31,375 77,393
- ----------------------------------------------------------------------------------------
(Bank indebtedness) cash, ending $ (1,799,618) $ 31,375
========================================================================================
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MED-TECH ENVIRONMENTAL LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
================================================================================
1. Significant accounting policies
Basis of presentation
These financial statements are prepared in accordance with generally
accepted accounting principles in Canada.
(a) Going concern assumption
These financial statements have been prepared on the basis of
accounting principles applicable to a "going concern", which assumes
that the Company will continue in operation for the foreseeable future
and will be able to realize its assets and discharge its liabilities in
the normal course of operations.
Several adverse conditions and events cast substantial assumption upon
the validity of this assumption. The Company has incurred significant
operating losses in the current year and has a significant working
capital deficiency. In addition the Company is in breach of certain
financial covenants relating to its bank credit facilities and
subordinated debt.
The Company is dependent on the continued support of its banker and
subordinated debt holders and is currently renegotiating its financing
arrangements as well as seeking alternate equity funding and pursuing
the possibility of an outright sale.
These financial statements do not reflect adjustments that would be
necessary if the "going concern" assumption were not appropriate
because management believes that the actions already taken or planned,
as described above, will mitigate the adverse conditions and events
which raise doubts about the validity of the "going concern" assumption
used in preparing these financial statements.
If the "going concern" assumption were not appropriate for these
financial statements, then adjustments would be necessary in the
carrying values of assets and liabilities, the reported revenues and
expenses, and the balance sheet classifications used.
(b) Business combination
On April 4, 1997, Med-Tech Environmental Limited ("Med-Tech") acquired
all the issued and outstanding capital stock of Laidlaw Medical
Services Ltd. ("LMSL") and Med-Tech Environmental Inc., a wholly owned
subsidiary of Med-Tech, and acquired all the issued and outstanding
capital stock of Laidlaw Medical Services, Inc. (Delaware) ("LMSI"),
for $9,200,000. The purchase price was funded by the issue of the
Company's capital stock, term and subordinated convertible term debt.
The purchase price was allocated equally between LMSL and LMSI. The
acquisition was accounted for by the purchase method.
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MED-TECH ENVIRONMENTAL LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
================================================================================
BASIS OF PRESENTATION, CONTINUED
(c) Change of name
During the year, the following companies, by way of articles of
amendment, changed their names as follows:
From To
Laidlaw Medical Services Ltd. Med-Tech Environmental (CDA) Ltd.
Laidlaw Medical Services, Inc. Med-Tech Environmental (MA) Inc.
(d) Principles of consolidation
These consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Bio-Med Waste Disposal
Systems Ltd., Med-Tech Environmental (CDA) Ltd., Med-Tech Environmental
Inc., and Med-Tech Environmental (MA) Inc. All significant intercompany
accounts and transactions have been eliminated.
(e) Capital assets are recorded at cost. Amortization is calculated on the
following annual rates and methods:
Furniture and fixtures 20% declining balance basis
Computers 30% declining balance basis
Trucks 30% declining balance basis
Equipment Straight-line over 5 years
Assets under capital leases 30% declining balance basis
Leasehold improvements are amortized on a straight line basis over the
term of the lease.
(f) Licenses and goodwill are recorded at cost and amortized on a
straight-line basis over a period no greater than 25 years.
(g) Foreign currency translation
Assets and liabilities of integrated foreign subsidiary operations and
foreign currency denominated assets and liabilities of Canadian
operations are translated into Canadian dollars at exchange rates
prevailing at the transaction date for non-monetary items. Revenue and
expenses, except amortization, are converted at average exchange rates
for the year. Amortization is converted at the same rate as the related
assets. Gains or losses on translation are expensed in the year
realized or incurred except for the exchange gains or losses on
long-term monetary items which are deferred and amortized over the
remaining terms of the related items.
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MED-TECH ENVIRONMENTAL LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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2. CAPITAL ASSETS 1998 1997
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NET NET
ACCUMULATED BOOK BOOK
COST AMORTIZATION VALUE VALUE
-------------------------------------------------------------------------------
Furniture and fixtures $ 538,199 529,805 $ 8,394 $ 11,046
Computers 117,549 34,057 83,492 28,328
Trucks 1,958,503 1,605,938 352,565 29,687
Equipment 1,195,903 814,531 381,372 397,499
Leasehold improvements 189,338 50,407 138,931 13,395
Assets under capital leases 508,899 73,469 435,430 30,115
-------------------------------------------------------------------------------
$4,508,391 3,108,207 $1,400,184 $ 510,070
===============================================================================
3. OTHER ASSETS 1998 1997
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NET NET
ACCUMULATED BOOK BOOK
COST AMORTIZATION VALUE VALUE
-------------------------------------------------------------------------------
Licenses $ 214,610 23,350 $ 191,260 $ 201,906
Goodwill 9,011,290 450,879 8,560,411 753,969
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$9,225,900 474,229 $8,751,671 $ 955,875
===============================================================================
4. BANK INDEBTEDNESS
The bank indebtedness is secured by a registered general security agreement
covering all assets and bears interest at the bank's prime rate plus 100
basis points.
5. CONVERTIBLE DEBENTURE 1998 1997
-------------------------------------------------------------------------------
5% convertible debenture to Oriole Point
Investment Inc., a shareholder; interest
payable on the 31st day of March in each
year commencing March 31, 1998, repayable
upon the earlier of: (i) a distribution to
the public of securities of the Company
and (ii) March 31,1999. The Company will
make mandatory principal prepayments
commencing April 30, 1998 to the lesser of
50% of annual free cash flow or $100,000. $ 210,000 $ 200,000
===============================================================================
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MED-TECH ENVIRONMENTAL LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
===========================================================================
6. OBLIGATIONS UNDER CAPITAL LEASES 1998 1997
-----------------------------------------------------------------------------------------
Obligations related to leased trucks
repayable in monthly instalments of $5,444 at
interest rates ranging from 8%to 12% $ 372,117 $ -
Less current portion 81,315 -
-----------------------------------------------------------------------------------------
$ 290,802 $ -
Total payments due in the next 5 years are as follows:
1999 $ 81,315
2000 88,999
2001 90,355
2002 56,680
2003 and thereafter 54,768
----------------------------------------------------------------------
$ 372,117
======================================================================
7. LONG-TERM DEBT 1998 1997
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4.8% monthly (57.6% per annum) promissory note to
Oriole Point Investment Inc., a shareholder, due
October 6, 1997, interest accrued monthly
commencing October 6, 1997. $ 105,000 $ -
25% non-revolving convertible term facility,
interest shall be paid monthly at the rate of 12.5%
per annum, the balance of 12.5% increases the
amount of the debt, due March 31, 1999, secured by
a registered general security agreement. 4,647,364 -
Term loan, bearing interest at prime plus 200 basis
points, interest payable monthly, repayable in
quarterly principal payments of $250,000 plus 75%
of the free cash flow to a maximum of $1,000,000
prior to March 31, 1998 and $500,000 every year
thereafter, secured by a registered general
security agreement. 3,000,000 -
-----------------------------------------------------------------------------------------
7,752,364 -
Less current portion 5,752,364 -
-----------------------------------------------------------------------------------------
$ 2,000,000 $ -
=========================================================================================
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MED-TECH ENVIRONMENTAL LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
===========================================================================
7. LONG-TERM DEBT, CONTINUED 1998 1997
-----------------------------------------------------------------------
At year end the company was in default of certain bank covenants and
certain covenants pertaining to the non-revolving convertible term
facility and is currently renegotiating its financing arrangements.
Principal payments required in each of tile next three years are as
follows:
1999 $ 5,752,364
2000 1,000,000
2001 1,000,000
--------------------------------------------------------
$ 7,752,364
========================================================
8. CAPITAL STOCK 1998 1997
=======================================================================
Authorized
Unlimited number of Class "A" common shares
Issued
14,605,000 (1997 9,725,000)
Class "A" common shares $ 6,170,429 $2,803,389
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During the year the Company entered into the following transactions
involving the issuance of capital stock:
a) The company issued 2,250,000 Class "A"common shares at $1.00 per
share for proceeds of $2,250,000.
b) 500,000 First Series Warrants were exercised at $1.00 per share
for 500,000 Class "A" common shares for $500,000.
c) 2,000,000 Fourth Series Warrants were exercised at $0.40 per
share for 2,000,000 Class "A" common shares for $800,000.
d) 80,000 corporate share purchase options were exercised at $0.40
each for 80,000 Class "A" common shares for $32,000.
e) The Company issued 50,000 Class "A" Common shares at $0.40 per
share for proceeds of $20,000.
f) The equity portion of the pro rata share of fees paid to TEGS
Capital Corporation on the issue of Class "A" common shares in
the amount of $234,960 was charged as a reduction to capital
stock.
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MED-TECH ENVIRONMENTAL LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
===========================================================================
The Company has the following warrants and options outstanding:
a) 3,268,062 First Series Warrants each entitling the holder to
subscribe for one Class "A" common share at $100 per share,
expiring December 31, 1998.
b) 500,000 Fourth Series Warrants each entitling the holder to
subscribe for one Class "A" common share at $0.40 per share
expiring March 21, 1999.
c) 600,000 Fifth Series Warrants each entitling the holder to
subscribe for one Class "A" common share at $0.73 per share,
expiring March 31, 2000.
d) 600,000 Sixth Series Warrants each entitling the holder to
subscribe for one Class "A" common share at $1.00 per share,
expiring March 31, 2000.
e) 1,333,333 Retractable Warrants each entitling the holder to
subscribe for one Class "A" common share at $0.40 per share,
exercisable from the earlier of March 31, 1999 and the
prepayment date until the expiry date, which will be two years
from the date the Company becomes a reporting issuer in Ontario
and the retractable Warrants and Class "A" common shares
issuable on their exercise become freely tradeable for the
holder or its nominees.
f) 280,000 Corporate Share Purchase Options to purchase 280,000
Class "A" common shares at the exercise price of $0.40 per
share, expiring January 23, 2001.
g) 480,000 Corporate Share Purchase Options to purchase 480,000
Class "A" common shares at the exercise price of $1.00 per
share, expiring November 6, 2002.
h) 24,000 Corporate Share Purchase Options to purchase 24,000 Class
"A" common shares at the exercise price of $0.40 per share,
expiring January 23, 2001.
i) 260,000 Corporate Share Purchase Options to purchase 260,000
Class "A" common shares at the exercise price of $1.00 per
share, expiring December 31, 2000.
j) 300,000 Corporate Share Purchase Options to purchase 300,000
Class "A" common shares at the exercise price of $0.40 per
share, expiring March 31, 1999.
k) 300,000 Corporate Share Purchase Options to purchase 300,000
Class "A" common shares at the exercise price of $1.00 per
share, expiring May 31, 1999.
l) During the year the 138,277 second series warrants and 553,110
third series warrants expired March 31, 1998 without being
exercised.
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MED-TECH ENVIRONMENTAL LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
===========================================================================
9. LOSS FROM DISCONTINUED OPERATIONS
The Company discontinued its divisions in Etobicoke, Ontario and
Gatineau, Quebec. Management has estimated losses related to the
discontinued operations and accrued them in these financial statements.
Any significant changes to these estimates will be recorded in the
period in which they are realized.
10. ACQUISITION
Effective April 4 1997, Med-Tech acquired all the issued and
outstanding capital stock of Laidlaw Medical Services Ltd. (Canada) and
Med-Tech Environmental Inc., a wholly owned subsidiary of "Med-Tech",
acquired all the issued and outstanding capital stock of Laidlaw
Medical Services, Inc., (Delaware). Both companies operated a medical
waste transportation and disposal business. The acquisition has been
accounted for by the purchase method and the results of operations have
been consolidated from April 4, 1997.
Current assets $ 1,744,901
Capital assets 2,121,706
Goodwill 8,057,321
----------------------------------------------------
$ 11,923,928
====================================================
Current liabilities $ 1,390,415
Long term debt 7,500,000
Class "A" common shares 3,033,513
----------------------------------------------------
$ 11,923,928
====================================================
11. COMMITMENTS AND CONTINGENCY
(a) The Company leases operating premises in Brampton, Ontario, St.
Catharines, Quebec, Calgary, Alberta and Haverhill, Massachusetts.
The minimum annual rentals for the balance of these leases amounts
to $244,057.
(b) The Company has provided the Ministry of the Environment of Ontario
with bonds for approximately $136,000 as required by provincial
statute.
(c) The Ministry of the Environment of Ontario and the Massachusetts
Department of Environmental Protection have several non-compliance
and related charges outstanding. It is not possible at this time to
determine the amount, if any, of any fines or damages that may be
levied as a result of these non-compliance issues. Any fines or
damages incurred as a result of these concerns will be charged to
operations in the year they are incurred. Management does not
believe that fines levied will be in excess of $15,000 in total.
(d) As at May 20, 1998 several of the Company's legal counsels had not
yet responded to our audit legal enquiry. As at November 16, 1998
the last of the outstanding legal enquiries was received and note
11(c) was amended accordingly.
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MED-TECH ENVIRONMENTAL LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
===========================================================================
10. COMMITMENTS AND CONTINGENCY, CONTINUED
(e) Under the terms of the purchase and sale agreement as described in
note 1(b) between Allied Waste Industries Inc. ("Allied"),
Med-Tech, LMSL and LMSI, Med-Tech has an obligation to obtain a
release of Allied's guarantee on the lease at 139-141 Ferry Road,
Haverhill, Massachusetts. To date, this obligation to obtain a
release has not yet been fulfilled.
(f) The Company agreed to issue to 1176698 Ontario Limited or its
nominees Warrants (the "Unrestricted Warrants") entitling the
holder to purchase 2,000,000 Class "A" common shares at an
exercise price of $1.00 per share, subject to adjustments. The
expiry date of the Unrestricted Warrants will be two years from
the date the Company became a reporting issuer and the
Unrestricted Warrants and Class "A" common shares issuable on
their exercise become freely tradeable for 1176698 Ontario Limited
or its nominees.
12. TAX BENEFITS AVAILABLE
These financial statements do not reflect potential tax benefits
available through the application of losses carried forward against
future years' earnings otherwise subject to income taxes. These losses
expire approximately as follows:
1999 $ 1,347,000
2000 3,319,000
2001 2,198,000
2002 1,247,000
2003 410,000
2004 1,122,000
-----------------------------------------------------
$ 9,643,000
=====================================================
13. RELATED PARTY TRANSACTIONS
During the year the Company incurred the following related party
transactions with certain corporate directors, officers and
professional firms of these certain directors and officers.
Professional services expenses $ 454,035
Commissions 266,000
Management and consulting services expenses 36,598
Interest 39,264
At March 31, 1998, $319,150 remains outstanding and is included in
accounts payable.
Management is of the opinion that these transactions are in the normal
course of operations and are measured at the exchange amount which is
the amount of consideration established and agreed to by the related
parties.
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MED-TECH ENVIRONMENTAL LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
===========================================================================
14. RISK MANAGEMENT AND FAIR VALUES
Financial risk is the risk to Med-Tech's earnings that arise from
fluctuations in interest rates and foreign exchange rates and the
degree of volatility of these rates. Med-Tech does not use derivative
instruments to reduce its exposure to interest and foreign exchange
risk. The book value of Med-Tech's financial assets and liabilities
approximate amounts for which instruments could be exchanged in a
transaction between knowledgeable and willing parties based on public
market information.
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