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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Fee Required)
For the fiscal year ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(No Fee Required)
For the transition period from _____________ to ____________
Commission file number 1-11097
3CI COMPLETE COMPLIANCE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 76-0351992
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
910 Pierremont, #312
Shreveport, LA 71106
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (318)869-0440
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Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Voting Stock held by non-affiliates of the
registrant as reported on the NASDAQ Small-Cap Market System on January 9, 1997
was approximately $ 3.9 million computed on the basis of the closing sale price
that day. The number of shares of Common Stock outstanding as of the close of
business on January 9, 1997 was 9,900,311.
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3CI COMPLETE COMPLIANCE CORPORATION
TABLE OF CONTENTS *
ANNUAL REPORT ON FORM 10-K
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PAGE
PART I
Item 1. Business ............................................. 3
Item 2. Properties ............................................. 14
Item 3. Legal Proceedings....................................... 15
Item 4. Submission of Matters to a Vote of Security Holders.... 16
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters............ 17
Item 6. Selected Financial Data................................. 17
Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations......................... 18
Item 8. Financial Statements and Supplementary Data............. 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............... 27
PART III
Item 10. Directors and Executive Officers of
the Registrant.................................... 28
Item 11. Executive Compensation.................................. 29
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................. 32
Item 13. Certain Relationships and Related
Transactions...................................... 33
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K........................... 35
Signature Page .................................................... 36
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* This Table of Contents is inserted for convenience of reference only and is
not a part of this Report as filed.
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PART I
ITEM 1. BUSINESS
GENERAL
3CI Complete Compliance Corporation ("3CI" or the "Company") was
incorporated in Delaware in 1991. The Company is engaged in the business
of medical waste management services. The Company services customers in
a number of states in and contiguous to the southwestern and
southeastern United States, including Alabama, Arkansas, Georgia,
Florida, Missouri, Kansas, Louisiana, Mississippi, Oklahoma, Tennessee,
and Texas. The Company's customers include regional medical centers,
major hospitals, clinics, medical and dental offices, veterinarians,
pharmaceutical companies, retirement homes, medical testing laboratories
and other generators of medical waste. Services to customers include
collection, transportation, bar code identification and destruction by
controlled, high temperature incineration. The Company also provides
training to customers on compliance with regulations, use of containers,
documentation and tracking. All references herein to the "Company" or
"3CI" shall mean 3CI Complete Compliance Corporation and its
subsidiaries, unless the context otherwise requires.
"Medical waste" or "biomedical waste," as used herein, is broadly
defined to mean any liquid or solid waste generated in the diagnosis,
treatment or immunization of human beings or animals or in related
research, that may result in an infectious disease. State and federal
regulations tend to focus on regulated and infectious medical waste,
which includes pathological wastes, including tissues, organs and body
parts; blood and the products or components of blood; "sharps,"
including needles, scalpels, pipettes and other medical instruments;
wastes from surgery or autopsy; dialysis wastes, including contaminated
disposable equipment and supplies; cultures and stocks of infectious
agents, including cultures from medical and pathological laboratories;
and various other biological wastes and discarded materials contaminated
with or exposed to blood, excretion and secretions from human beings or
animals. "Medical waste" or "biomedical waste" as used herein, does not
include "hazardous waste," as such term is commonly defined under state
and federal regulations.
The Company has consistently incurred losses for the past several fiscal
years, and losses have continued in fiscal 1997. The Company has
historically relied on Waste Systems, Inc. ("WSI"), the Company's
majority stockholder, for funding, and such support was again necessary
in fiscal 1996. In the absence of the Company being able to secure third
party financing, WSI agreed to provide the Company with a revolving
credit facility of $8 million, including deferred interest with cash
advances not to exceed $7.4 million, of which $8.9 million including
deferred interest and $10.1 million including deferred interest has been
drawn as of September 30, 1996, and December 31, 1996. The note
agreement with the majority shareholder signed December 20, 1996
contains various covenants which the Company has been unable to meet and
waivers were obtained during fiscal year ended September 30, 1996. Since
September 30, 1996, WSI has made additional cash advances to the Company
totaling $960,000 including interest. Due to the additional cash
advances that have been made in excess of the principal in the original
promissory note, the Company entered into a second Revolving Credit
Facility of $2.7 million including deferred interest, dated December 20,
1996 with maturity date of February 28, 1997. It is the intent of WSI
and 3CI that this Revolving Promissory Note shall evidence all sums
owing by 3CI to WSI to the extent that such sums represent advances of
funds to 3CI in excess of the maximum limits fixed under that certain
$8,000,000 Revolving Promissory Note dated September 30, 1995. The
Promissory Note dated September 30, 1995 has a due date of December 31,
1996 of which the Company has requested from and received a 30 day
extension until January 31, 1997 to discuss with WSI on the possibility
of restructuring the terms of the Revolving Promissory Note. WSI's
shareholders have indicated that they are not willing to continue this
funding into 1997. Furthermore, the Company has attempted and has been
unsuccessful to date in obtaining third party financing. In the event
the Company and WSI do not come to a resolution on the restructuring of
the note and the Company is unable to obtain alternative financing,
there can be no assurance that the Company will be able to meet its
obligations as they become due or realize the recorded value of its
assets and would likely be forced to seek bankruptcy protection.
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Pursuant to a Put Option Agreement with River Bay, as amended (the "Put
Option"), the Company, in October 1995, repurchased 300,000 of the
shares of Common Stock issued in connection with the acquisition in
consideration for its promissory note in the original principal amount
of $900,000 ($3.00 per share) and providing for monthly principal
payments ranging from $25,000 to $75,000, plus interest, through January
1997. Pursuant to the Put Option, the Company is obligated to repurchase
the remaining 565,500 shares of Common Stock issued in connection with
the acquisition, at the option of River Bay, from February 1, 1997 until
April 1, 1997 for $3.00 per share. The Company has begun discussions
with River Bay regarding a renegotiation of the terms of the remaining
shares of the Put Option. There is no definitive agreement in place
towards a renegotiation of the terms. If no resolution can be achieved
by February 1, 1997, the Company is not in a financial position to have
the ability to repurchase the shares and would likely be forced to seek
bankruptcy protection.
During fiscal 1995, a group of minority shareholders filed suit against
the Company alleging minority shareholder oppression, breach of
fiduciary duty and breach of contract, among other allegations, and has
demanded unspecified actual damages and punitive damages of $10 million.
The Company's insurer has denied coverage in the lawsuit. The Company
has denied all material allegations of the lawsuit and believes that the
resolution of this matter, including attorneys fees incurred in the
Company's defense, could have a material adverse effect on the Company's
financial condition. However, the outcome of this litigation cannot be
predicted, and an adverse decision in the lawsuit would likely have a
material adverse effect on the Company's financial condition and results
of operations.
DISPOSAL TECHNOLOGY
INCINERATION
The incineration process is a two-stage process which ensures the
complete destruction of all pathogens. Most medical waste consists of
disposable paper and plastic products which burn readily. In an
incinerator, medical waste is first burned and reduced to ash. The
resulting gases are then heated in the incinerator to a temperature of
approximately 1800(Degree)F to 2000(Degree)F, assuring the destruction
of all pathogens. This process produces exhaust gas, which is
subsequently passed through scrubbers and bag houses to incinerator
stacks to ensure compliance with applicable air quality standards. The
remaining ash, which at this stage is sterilized and free of pathogens,
is then transported by truck to licensed landfills. To date, ash is not
considered hazardous under EPA regulations, but is regulated at the
state level by various state agencies.
AUTOCLAVING
A conventional steam autoclave is a large cylindrical chamber with a
vacuum lock door. It uses high temperature steam in a multi-stage
process to sterilize or disinfect waste. Once waste is placed in the
chamber and the door locked, a vacuum pump evacuates air from the
chamber. The chamber is then filled with steam at a temperature of
approximately 275(Degree)F for approximately 30 minutes to ensure
sterilization. Steam condensate is collected on the chamber floor where
the liquid is subjected to high temperature for the full cycle, ensuring
sterility. At the end of the exposure time, this steam condensate is
drained through a valve in the chamber floor and a pump again evacuates
air from the chamber. Once this has been accomplished, the chamber is
returned to atmospheric pressure, the chamber doors are opened and the
processed, sterilized waste is mechanically removed for cooling to room
temperature. In some processing facilities the treated waste is then
transported to a landfill without any shredding, while in others the
treated waste is fed into a shredder/grinder.
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The treated, disinfected and shredded waste is then conveyed into
containers or large transfer trailers and transported for disposal at
a licensed landfill or municipal solid waste incinerator.
The Company does not currently utilize autoclaving as a method of
medical waste disposal. Although there are a range of other methods
utilized for disposal of medical waste, such as the use of microwave
technology, incineration and autoclaving are the most widely used.
ALTERNATIVE TECHNOLOGIES; TECHNOLOGICAL OBSOLESCENCE
The regulated medical waste management industry presents continuing
opportunities for the development of alternative treatment and disposal
technologies. These alternative technologies may emphasize operating
cost efficiencies, reductions in the volume of regulated medical waste
generated or other environmental factors. The development and
commercialization of alternative treatment or disposal technologies that
are more cost-efficient than the Company's technologies or that reduce
the volume of regulated medical waste generated or afford other
environmental benefits could place the Company at a competitive
disadvantage.
BUSINESS
GENERAL
The Company believes the key to success in the medical waste management
business is to provide customers a total solution to their medical
compliance and disposal needs at competitive prices. To achieve and
sustain a competitive advantage in the medical waste disposal industry,
the Company provides the products and services described below to its
customers.
DISPOSAL AGREEMENTS
The Company enters into medical waste disposal agreements with customers
for the collection of their medical waste according to a schedule agreed
upon between the parties. The Company accepts medical waste that has
been packaged by customers in containers provided by the Company and
transports it in vehicles either owned or leased by the Company to
incineration facilities owned by the Company or for which the Company
has long-term contractual rights. The Company uses a sophisticated bar
code technology to track and record the movement of medical waste
through all phases of its handling and incineration, in compliance with
applicable governmental regulations.
Disposal agreements generally call for a one to three year term at a
negotiated rate based on the pounds of waste or number of containers
incinerated. Some disposal agreements are automatically renewable with
provisions for rate increases upon written notice after the first year,
and some provide for termination upon notice by the Company or the
customer.
The Company also enters into disposal agreements with other medical
waste transporters and manufacturers and distributors of pharmaceuticals
for the incineration and related documentation of medical waste and
expired pharmaceuticals. The Company intends to continue to enter into
such agreements to the extent possible in order to maximize utilization
of its incineration capacity without affecting its service to its
regular customers.
MEDICAL WASTE CONTAINERS
The Company furnishes its customers with rigid, cardboard containers for
disposal of medical waste products. These containers are clearly marked
with the "biohazard" symbol to draw attention to their contents and are
lined with specialized plastic bags and sealed to minimize potential
contact with the medical waste products by health care workers and
medical waste handlers. The Company also
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furnishes its customers with rigid plastic containers clearly marked as
biohazardous and designed to contain certain types of medical waste,
such as hypodermic needles, scalpels and other so-called "sharps,"
before being packed in the Company-supplied cardboard containers. Each
container is specifically designed for the type of waste it will hold
and meets or exceeds governmental specifications as to construction
and strength. The Company's policy is to accept medical waste from
customers only if it is packaged in containers provided or approved by
the Company. The Company believes that its emphasis on proper
containerization results in safer medical waste disposal and minimizes
potential hazard or liability to the Company and its customers.
During the fiscal year 1996, the Company initiated the use of reusable
plastic containers for certain of its customers. The Company believes
the use of reusable containers will ultimately result in lower costs of
disposal to the Company. The rigid, plastic containers are generally
larger than the disposable boxes, provide greater strength, and can hold
greater volumes of waste.
TRANSPORTATION
The Company operates a specially equipped fleet of trucks, tractors and
trailers (dry and refrigerated) to provide strict control of
transportation services for the acceptance and transportation of
containerized medical waste. Drivers are trained in Department of
Transportation ("DOT") procedures for the transportation of medical
waste. The Company has in place contingency plans to respond immediately
to any type of spill, leakage or other emergency that may occur during
transportation and provides emergency services to customers upon
request.
DISPOSAL
The Company owns an incinerator in Springhill, Louisiana, with a
capacity of 36 tons per day, and utilizes incinerator facilities at a
local medical center in Birmingham, Alabama. The Company also has
incineration rights under long-term contracts at two incinerators, each
with a capacity of 30 tons per day, operated by the cities of Carthage,
Texas and Center, Texas. The Company completed the construction of an
incinerator with a capacity of 12 tons per day in Birmingham, Alabama,
during the second quarter of fiscal 1996. In the fourth quarter of
fiscal 1996 the Company received a permit from the Alabama Department of
Environmental Management to install and operate a microwave treatment
unit with the capacity of up to 10.8 tons per day.
Medical waste is removed from the Company vehicles by trained employees
working on location at the Company's incineration facilities and is
loaded onto conveyors that deliver it to the incinerators. The medical
waste is incinerated soon after delivery.
INCINERATION CONTRACTS
The Company has incineration rights at an incinerator operated by the
City of Carthage, Texas under an agreement expiring in 1997, subject to
various renewal options. In order to maintain its rights under the
agreement, the Company is required to pay minimum annual fees of
approximately $550,000 to $1 million during the term. During fiscal
1996, the Company paid fees in the aggregate amount of approximately
$910,000 under the agreement.
The Company has incineration rights at an incinerator operated by the
City of Center, Texas under an agreement expiring in June 1998, subject
to various renewal options. In order to maintain its rights under the
agreement, the Company is required to pay minimum annual fees of
approximately $300,000 to $900,000 during the term. During fiscal 1995,
the Company paid fees in the aggregate amount of approximately $633,000
under the agreement. Certain contractual disputes have arisen with
respect to this arrangement and the City of Center contends that the
Company has been in default of its obligations thereunder. The Company
is presently not utilizing the incinerator at the City of Center for the
treatment of medical waste.
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The Company has rights to burn its medical waste when excess capacity
exists at an incinerator operated by The Children's Hospital of Alabama
in Birmingham, Alabama under an agreement expiring in December 1996,
which is currently in the process of being renewed with an expiration
date of December 1998. During fiscal 1996, the company paid fees in the
aggregate amount of approximately $102,000 under the agreement.
DOCUMENTATION AND REPORTING
The bar coded label affixed to each of the Company's medical waste
containers is used in conjunction with computers, laser scanners and
digital scales to document the handling, treatment, disposal and
weighing of the customer's medical waste stream. Bar coded containers
allow proper documentation and tracking of waste materials and meet all
applicable local, state and federal regulations concerning packaging and
labeling of medical waste materials. The Company provides its customers
on a regular basis with medical waste incineration reports that document
the acceptance, transportation, incineration and third party
verification of their medical waste disposal. The Company's detailed
documentation provides information on all waste it accepts and
incinerates, including individual container bar code number, point of
origin, date and time of pick up, date and time of incineration, weight
at time of incineration and certificate of destruction.
SAFETY TRAINING AND CONSULTATION
The Company designs specialized on-site training systems for the
identification, segregation, handling and containerizing of waste
products. These systems are designed to assist customers in reducing
their waste disposal costs while maintaining regulatory compliance and
to reduce potential exposure to the Company's employees. The Company
also instructs health care workers in the most efficient methods of
handling, recording and documenting their waste streams in compliance
with local, state or federal regulations. The Company will, on request,
review a customer's internal waste collection and control system or
assist the customer in developing an internal system to provide for the
efficient management of medical waste within the customer's facility
from its creation to the point of its acceptance by the Company.
CUSTOMERS
The Company's health care customer base is diverse, with over 15,000
accounts in Arkansas, Florida, Georgia, Kansas, Louisiana, Oklahoma,
Texas, Alabama, Mississippi, Missouri and Tennessee, including regional
medical centers, major hospitals, specialty clinics, individual medical
and dental practitioners, dialysis centers, veterinary clinics, nursing
homes and assisted care residences, among others. The Company is not
dependent upon a single customer or a few customers, and no customer
generates ten percent or more of the Company's consolidated revenues.
MARKETS
The Company divides its market into three categories: the hospital
market, the professional market and the third party market. The hospital
market consists principally of medical centers, major hospitals, major
teaching institutions involved in medicine and research and major
medical complexes. The professional market consists principally of
physician and dental offices, laboratories, nursing and convalescent
homes, medical and veterinarians offices, and clinics and mortuaries.
The third party market consists principally of pharmaceutical
manufacturers and distributors and other medical waste transportation
companies.
The Company utilizes a four-fold strategy to increase its presence and
customer base in a particular geographical market. First, Company
representatives meet personally with a prospective customer to describe
the Company's services and to negotiate a disposal agreement that
reflects the prospective
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customer's service needs. Second, the Company utilizes direct
mail to establish potential customer leads, particularly
in the professional market. Third, the Company seeks endorsements or
referral relationships with hospitals and professional associations in
the market areas. Fourth, the Company conducts periodic seminars with
local government officials and hospital and professional office
employees to inform them of trends and regulations regarding the
handling and disposal of medical waste. These seminars are designed to
inform interested parties of the need for medical waste disposal and of
the Company's ability to effectively satisfy that need.
PRICING
The Company has experienced intense competition in pricing. Margins of
profitability have declined and could deteriorate further if price
cutting within the industry persists. During fiscal 1996 there continued
to be a downward pressure in pricing by competitors to increase and
maintain market share. Due to continued deep discounting targeted toward
hospital accounts, the Company directed more of its marketing efforts
toward the professional market accounts, such as physicians and dental
offices, laboratories, nursing and convalescent homes, medical and
veterinarians offices, clinics and mortuaries. The average pricing was
at a level of approximately $0.37 per pound during fiscal 1996, compared
to $0.40 per pound in fiscal 1995, $0.37 per pound in fiscal 1994, $0.45
in fiscal 1993, $0.55 in fiscal 1992 and $0.65 in fiscal 1991.
COMPETITION
The market for medical waste collection and processing services is
highly competitive. The Company experiences intense competition from
national, local and regional waste disposal (i.e., collection) companies
as well as national, regional and local companies providing integrated
medical waste services (i.e., collection and processing). These
companies compete directly with the Company for business from medical
waste generators located in the Company's regional markets. Many of
these competitors have substantially greater financial and other
resources than the Company. Management believes that there are at least
two major competitors that operate in the Company's current markets.
INSURANCE COVERAGE
The medical waste disposal industry involves potentially significant
risks of statutory, contractual, tort and common law liability. The
Company carries a range of insurance coverage, including a comprehensive
general liability policy in the amount of $1,000,000 with a combined
single limit for bodily injury and property damage, and a $2,000,000
excess umbrella liability policy, which the Company considers sufficient
to meet regulatory and customer requirements and to protect the
Company's employees, assets and operations. The Company carries
$3,000,000 per occurrence of such coverage for the incineration
facilities used by the Company. The Company also carries $1,000,000 per
occurrence of transportation liability insurance coverage, which
includes coverage for environmental damage caused by waste spillage or
other forms of pollution occurring during transportation.
FINANCIAL STATEMENT PRESENTATION
In February 1994, two wholly-owned subsidiaries of the Company acquired
the assets and assumed certain liabilities of A/MED, Inc. ("A/MED") and
American Medical Transport Corporation ("AMTC"), majority-owned
subsidiaries of Waste Systems, Inc., a Delaware corporation ("WSI"), in
consideration for 2,640,350 shares of Common Stock, $.01 par value
("Common Stock"), of the Company. In addition, in February 1994, WSI
acquired 1,255,182 shares of Common Stock from American Medical
Technologies, Inc., a Delaware corporation and the former majority
stockholder of the Company ("AMOT"). As a result of the transactions
described above, WSI became the majority shareholder of 3CI immediately
following the acquisition of AMTC and A/MED. For accounting purposes,
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AMTC and A/MED were considered the acquirer in a reverse acquisition.
The combined financial statements of AMTC and A/MED are the historical
financial statements of the Company prior to the date of the business
acquisition. Historical combined shareholders' equity of AMTC and A/MED
has been retroactively restated for the equivalent number of 3CI shares
received for the assets and business operations of AMTC and A/MED, and
the combined accumulated deficit of AMTC and A/MED has been carried
forward.
EMPLOYEES
At September 30, 1996, the Company had approximately 195 full time and 5
part-time employees, four of whom were employed in executive capacities
and the remainder of whom were in transportation operations, incinerator
facility operations, sales positions, and administrative and clerical
capacities. None of the Company's employees are subject to collective
bargaining agreements, and the Company has not experienced any strikes
or work stoppages and considers its relationship with its employees to
be satisfactory.
RECENT ACQUISITIONS
ACQUISITION OF A/MED AND AMERICAN MEDICAL TRANSPORTS
In February 1994, two wholly-owned subsidiaries of the Company acquired
the assets and assumed certain liabilities of A/MED, Inc. ("A/MED") and
American Medical Transports Corporation ("AMTC"), majority-owned
subsidiaries of Waste Systems, Inc., a Delaware corporation ("WSI"), in
consideration for 2,640,350 shares of Common Stock, $.01 par value
("Common Stock"), of the Company. Of such shares, WSI received 1,840,350
shares initially, with the remaining 800,000 shares placed in escrow to
secure certain indemnity obligations. Upon termination of the escrow on
April 10, 1995, WSI received 565,160 shares.
In addition, in February 1994, WSI acquired 1,255,182 shares of Common
Stock from American Medical Technologies, Inc., a Delaware corporation
and the former majority stockholder of the Company ("AMOT"), in
consideration for $1,765,658 cash and the cancellation of the $3,317,828
unpaid balance of AMOT's previously issued promissory note payable to
WSI.
After giving effect to these transactions, WSI beneficially owned a
majority of the outstanding shares of Common Stock. Accordingly, the
merger was treated as a reverse acquisition for accounting purposes. The
acquired companies had been engaged in the business of medical waste
management services in Oklahoma, Texas, Louisiana and New Mexico.
ACQUISITION OF MED-WASTE
In August 1994, the Company acquired substantially all the assets and
assumed certain liabilities of Med-Waste Disposal Service, Inc., an
Arkansas corporation ("Med-Waste") in consideration for 525,000 shares
of Common Stock and an additional 145,470 shares which were earned
pursuant to an earnout arrangement.
Med-Waste had been engaged in the business of medical waste management
services in Arkansas and Missouri.
The acquisition of Med-Waste has been the subject of litigation between
the Company and the former stockholders of Med-Waste, which has been
settled, subject to court approval. See Item 3. - Legal Proceedings.
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ACQUISITION OF RIVER BAY CORPORATION
In October 1994, the Company acquired substantially all of the assets
and assumed certain liabilities of River Bay Corporation, a Mississippi
corporation ("River Bay"), in consideration for 865,500 shares of Common
Stock and shares of Common Stock contingent upon various matters,
including future profits of the operations attributable to the assets
purchased from River Bay. In addition, the Company issued to River Bay a
promissory note in the original principal amount of $1,000,000, which,
as amended, provides for monthly principal payments ranging from $50,000
to $100,000 through February 1996.
Pursuant to a Put Option Agreement with River Bay, as amended (the "Put
Option"), the Company, in October 1995, repurchased 300,000 of the
shares of Common Stock issued in connection with the acquisition in
consideration for its promissory note in the original principal amount
of $900,000 ($3.00 per share) and providing for monthly principal
payments ranging from $25,000 to $75,000, plus interest, through January
1997. Pursuant to the Put Option, the Company is obligated to repurchase
the remaining 565,500 shares of Common Stock issued in connection with
the acquisition, at the option of River Bay, from February 1, 1997 until
April 1, 1997 for $3.00 per share. The Company has begun discussions
with River Bay regarding the exercising of the remaining shares of the
Put Option. There is no definitive agreement in place towards a
renegotiation of the terms. If no resolution can be achieved by February
1, 1997, the Company is not in a financial position to have the ability
to repurchase the shares and would likely be forced to seek bankruptcy
protection.
The obligations of the Company under the Put Option and its promissory
notes payable to River Bay are secured by a security interest in certain
of the assets purchased from River Bay and future accounts receivable
attributable to the assets acquired from River Bay.
River Bay had been engaged in the business of medical waste management
services in Mississippi, Florida, Georgia, Tennessee and Alabama.
GOVERNMENTAL REGULATIONS
All aspects of the Company's business are heavily regulated. The
Company's collection, hauling, processing and disposal activities are
governed by numerous federal, state and local agencies and authorities
under laws, rules and ordinances relating to the definition, generation,
segregation, handling and packaging of medical waste. In addition,
facility citing, construction, operations, occupational training,
safety, air, water and incineration ash characteristics and disposal are
regulated under different but related laws, rules and ordinances.
The activities of the Company are regulated by federal laws relating to
public health and the environment. In addition to those federal
environmental and public health related laws which apply generally to
the Company's activities, there are a number of federal laws and
regulations which directly pertain to the handling, transport and
processing of medical waste. The most pertinent of these federal
environmental and public health laws are discussed below.
INCINERATION FACILITIES
The Company is required to obtain permits at local, state and federal
levels for the construction and operation of incineration facilities
which has to date and may continue to involve the expenditure of
substantial resources without any assurance of success. Such permits may
include: (a) air quality permits, relating to the emissions from
incineration facilities, (b) solid waste permits, relating to storage,
receipt and treatment of medical waste and the storage and disposal of
residues from the incineration facilities and ancillary air pollution
control equipment relative to incinerators, (c) waste-water discharge
permits, (d) storm water discharge permits, (e) site permits, such as
zoning or special use permits, relating to the appropriateness of the
site for a waste processing facility under applicable zoning regulations,
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(f) building permits and (g) occupancy permits. Air quality permits and
site permits, and in some cases, solid waste permits, can be difficult to
obtain, and may take a year or longer to be issued.
Companies in the medical waste disposal industry often face resistance to
its various permit applications from local and regional organizations,
citizens groups and residents because of the nature of waste and the
perceived threat to air quality and public health caused by waste
processing. It is often necessary for the Company to conduct a public
relations campaign, with an emphasis on education, in order to overcome
local opposition, which is often highly political and emotional.
Furthermore, once granted, permits are often subject to continuing review
and may be challenged either in court or otherwise even after
construction or operations have commenced. Accordingly, the Company's
operations could be subject to suspension or termination even after
substantial funds have been expended in reliance upon state or local
regulatory approvals.
Operating permits generally incorporate performance standards. The
failure to comply with such standards could subject the Company to the
suspension or revocation of its permits or financial penalties for
failure to comply with permit requirements.
TRANSFER STATIONS
Transfer of medical waste, generally from a small local pick-up vehicle
to a large transport trailer, called truck-to-truck transfer, is
necessary to consolidate and transport waste in an economical fashion to
regional processing centers. Most states permit such transfer operations
under their solid waste regulatory authority or department of health.
After receiving local approvals, such as necessary zoning or special use
permits, application may be made to the appropriate state solid waste
authority. Generally, this is a four to six month process. However, there
are some cases where the process is much longer. The continued right to
operating the Company's transfer stattion in Fresno, Texas is contingent
upon the commencement of the clean-up of a waste circulating pond from an
abandoned medical waste incinerator acquired from previous owners.
STATE TRANSPORT PERMITS
Transportation permits are currently required in a number of states. Some
states require permits only if waste is picked up in that state, while
others require permits to transport waste through the state. These
permits generally include driver safety and training, waste packaging,
labeling and tracking requirements. The Company currently holds necessary
hauling permits in Arkansas, Louisiana, Texas, Mississippi, Alabama,
Georgia, Florida, Oklahoma, Kansas, Missouri and Tennessee.
There can be no assurances that any of the Company's current permits will
be renewed or that, if the Company is able to identify and secure
additional locations for incineration or other waste processing
facilities or transfer stations, all necessary permits will be obtained,
or that if such permits are granted that they will be granted in a timely
manner or under conditions that will be acceptable to the Company.
THE OCCUPATIONAL SAFETY AND HEALTH ACT ("OSHA")
OSHA gives the federal government the authority to regulate the
management of infectious medical waste. Liability may be imposed under
the general duty clause found in Section 654 of OSHA. This section
requires employers to provide a place of employment that is free from
recognized and preventable hazards that are likely to cause serious
physical harm to employees. The regulations promulgated under OSHA
require employers to give notice to employees regarding the presence of
hazardous chemicals and to train employees in the use of such substances.
This may be found to apply in the case of chemicals that may be present
in infectious medical waste.
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In May 1989, OSHA promulgated new rules regarding exposure to blood borne
pathogens which could increase the cost of providing medical waste
management services. These rules impose, among other things, engineering
and work practice controls, use of personal protective clothing and
equipment, training, medical surveillance, labeling and record keeping
requirements with respect to occupational exposure to blood and other
potentially infectious materials.
THE RESOURCE CONSERVATION AND RECOVERY ACT OF 1976 ("RCRA")
RCRA establishes a regulatory program administered by the Environmental
Protection Agency ("EPA") covering the generation, storage,
transportation, treatment and disposal of hazardous waste. RCRA defines
"hazardous waste" as any solid waste, or combination of solid waste,
which because of quantity, concentration, physical, chemical, or
infectious characteristics may:
(a) cause, or significantly contribute to, an increase in
mortality or an increase in serious irreversible or
incapacitating reversible illness; or
(b) pose a substantial present or potential hazard to human
health or the environment when improperly treated, stored,
transported or disposed of, or otherwise managed.
Although this general statutory definition of hazardous waste may provide
the EPA with the authority to regulate at least certain infectious
medical wastes as hazardous wastes, the EPA has not chosen to do so. To
date, infectious medical wastes have not been listed by the EPA as
hazardous waste, nor has infectiousness been designated by the EPA as one
of the characteristics of a hazardous waste. Thus, infectious medical
wastes which do not otherwise qualify as hazardous wastes currently are
not subject to regulation under RCRA as hazardous wastes. Although the
EPA has not chosen to regulate infectious wastes as hazardous wastes, it
has developed and issued informal guidance outlining practical approaches
to infectious waste management. Moreover, although RCRA does not
comprehensively address the area of medical waste, certain wastes common
to the medical field are currently listed as hazardous wastes and,
therefore, certain medical wastes may be subject to the requirements of
RCRA. With respect to those solid wastes which are deemed hazardous, RCRA
contains extensive regulatory requirements pertaining to reporting to the
EPA, record keeping, labeling, the use of containers, the furnishing of
information to persons handling the hazardous wastes and the tracking of
hazardous wastes from the point of generation to the point of disposal
involving, among other things, the use of transportation manifests.
Finally, depending upon the composition and characteristics of the waste
ash generated by the incineration technology employed, the facility ash
may constitute hazardous waste. If so, the ash would be subject to the
hazardous waste transportation, disposal and other hazardous waste
management requirements of RCRA discussed above.
THE MEDICAL WASTE TRACKING ACT OF 1988 ("TRACKING ACT")
On November 1, 1988, Congress enacted the Tracking Act. The Tracking Act
amended RCRA by adding a new Subtitle X, entitled the "Demonstration
Medical Waste Tracking Program." The Tracking Act established a two-year
demonstration program for tracking and managing medical wastes. Pursuant
to the Tracking Act, any person who generated, transported, treated or
disposed of medical wastes which had been generated in certain specified
states (the "Covered States"), were required to comply with the
requirements of a "cradle to grave" tracking and management program for
those wastes. Connecticut, New York, New Jersey, Rhode Island and Puerto
Rico participated in the program.
The EPA promulgated extensive regulation implementing the Tracking Act
and management programs, including the imposition of civil and criminal
penalties against any person violating the Act. The Tracking Act expired
in 1991, and, although it has been the subject of previous attempts at
reauthorization, there is no bill seeking such reauthorization currently
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pending in Congress. Nevertheless, no assurances can be given as to
whether such legislation might be proposed in the future.
U.S. DEPARTMENT OF TRANSPORTATION ("DOT")
The Company's medical waste transportation activities are subject to
federal regulation by the DOT pursuant to the Hazardous Waste Materials
Transportation Act (the "HWTA") and the Hazardous Materials Regulations
promulgated thereunder (as amended by the Hazardous Materials Uniform
Transportation Act of 1990).
The DOT regulations contain packaging and labeling requirements which are
imposed on different waste categories, depending on the perceived hazards
of each category. The regulations impose the most stringent requirements
on packages containing over four liters gross volume of "etiologic
agents", which are defined as "viable microorganism(s) or (their)
toxin(s), which cause or may cause human disease," and are limited to
certain agents listed in the Hazardous Materials Regulations. These
standards are intended to prevent the release of such agents into the
environment. The DOT requirements are intended to supplement etiologic
waste regulations by the Public Health Service of the U.S. Department of
Health and Human Services.
Significant portions of the waste handled by the Company will fall under
the category of "Regulated Medical Waste" which, as defined in the DOT
Regulations, includes cultures and stocks, pathological waste, human
blood and any blood products, sharps, animal waste, isolation waste, and
unused sharps. These wastes are considered to be of medium danger. To
meet the packaging standards packages containing these wastes must be
rigid, leak resistant and impervious to moisture, of sufficient strength
to prevent tearing or bursting while under normal conditions of use and
handling, sealed to prevent leakage during transport, puncture resistant
for sharps and sharps with residual fluids, and break resistant and
tightly sealed for fluids in quantities greater than 20 cubic
centimeters.
The DOT Regulations also prescribe labeling standards for all infectious
and regulated waste and testing protocols for manufacturers and suppliers
of packaging. These regulations have not become final and have been
postponed a number of times.
In addition, the Company is generally subject to regulation by the DOT
and may be subject to regulation by the Interstate Commerce Commission
pursuant to a number of other statutes and bodies of regulation, some of
which specifically pertain to the transport of medical waste and which
address, among other things, vehicle operating procedures and the
training of persons to operate commercial vehicles carrying hazardous
materials.
CERCLA
Federal regulations are included in the Comprehensive Environmental
Response, Compensation and Liability Act, as amended by the Superfund
Amendments and Reauthorization Act of 1986 ("CERCLA"), which in general
imposes strict liability in the event of a release or threatened release
of hazardous substances from a facility. Certain medical wastes may be
categorized as hazardous substances under CERCLA.
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FEDERAL CLEAN AIR ACT
The Company's medical waste processing facilities may be regulated under
certain other environmental statutes. The Federal Clean Air Act, as
amended, and related implementing regulations may apply to the air
emissions from the Company's incineration facilities. The Clean Air Act
establishes, among other things, comprehensive air permitting and
enforcement programs. These regulatory programs are based on several
types of air quality standards: national air quality standards, national
emissions standards for hazardous air pollutants, new source performance
standards, technology based standards and acid deposition requirements.
FEDERAL CLEAN WATER ACT
Water discharges from the disposal processes, if any, and storm water
discharges may be regulated under the Federal Clean Water Act and
implementing regulations. Pursuant to the Federal Clean Water Act, EPA
has promulgated extensive effluent and water quality standards as well as
permitting requirements for industrial discharges of water. The Company
will be required to design, construct and operate its facilities in
accordance with the Federal Clean Air Act and the Federal Clean Water Act
and obtain all permits and approvals required therein.
THE FOOD AND DRUG ADMINISTRATION ("FDA")
The FDA considers sharps containers to be "medical devices", as defined
under the Federal Food, Drug, and Cosmetic Act ("FD&C Act"). Most sharps
containers, according to the FDA, are class II accessories to sharps
devices. The FDA began actively regulating sharps containers in 1993. The
Company and its products are subject to regulations by the FDA and the
corresponding agencies of the states and foreign countries in which the
Company sells its products. Such regulation, among other things, relates
to the testing, marketing, export and manufacture of medical devices. The
FDA inspects medical device companies on a regular basis to determine
compliance with federal requirements.
STATE REGULATIONS
The states in which the Company operates generally have complex
regulatory frameworks governing, among other issues, the storage,
treatment, labeling, transport and disposal of medical waste. These
regulations are typically administered by a variety of state regulatory
authorities. The Company's vehicles, packaging, facilities and operating
procedures are, accordingly, subject to detailed and comprehensive
regulation on the state level. The Company's incineration facilities will
be required to include controlled air combustion units, air quality
control equipment, pollution control equipment and ancillary control and
monitoring equipment. All facilities will be required to provide
monitoring equipment. State regulatory authorities may inspect Company
operations on a regular basis and assess fines and penalties or may halt
operations for failures by the Company to follow specific regulations. In
addition, the failure of state regulatory agencies to issue required
permits or renewals, or any delays by such agencies, could have a
material adverse impact on the Company's operations.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in approximately
6,100 square feet of office space in Shreveport, Louisiana, which is
leased under a lease expiring in December 1997, under which the Company
paid approximately $60,000 during fiscal 1996.
The Company owns or leases approximately 150 specially equipped trailers
and 81 trucks and tractors used for the transportation of containerized
waste. A summary description of the Company's operating properties is
set forth below:
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Location Type of Facility Capacity Owned/Lease
Shreveport, LA Corporate Office Leased
Austin, TX Sales Office Leased
Austin, TX Transportation Leased
Tulsa OK Transportation Leased
Carthage, TX Transportation Leased
Grand Prairie, TX Transportation Leased
Metaire, LA Transportation Leased
Fresno, TX Transfer & Transportation Station Owned
Lafayette, LA Transfer & Transportation Station Leased
Birmingham, AL Transportation Leased
Jackson, MS Transfer Station Owned Land
Olive Branch, MS Transportation Leased
Springhill, LA Transportation Owned
Bismark, AR Transfer Station Leased
Carthage, TX Incinerator 30 tons/day Operated
Center, TX Incinerator 30 tons/day Operated
Springhill, LA Incinerator 36 tons/day Owned
Birmingham, AL Incinerator 12 tons/day Incinerator Owned,
Birmingham, AL Microwave Unit 10.8 tons/day Treatment Unit Owned, Land
Birmingham, AL Incinerator located at 9 tons/day leased
Children's Hospital Operated
ITEM 3. LEGAL PROCEEDINGS
In May 1995, a group of minority stockholders of the Company, including
Patrick Grafton, former Chief Executive Officer of the Company, acting
individually and purportedly on behalf of all minority stockholders, and
on behalf of the Company, filed suit in James T. Rash, et al v. Waste
Systems, Inc., et al, No. 95-024912 in the District Court of Harris
County, Texas, 129th Judicial District, against the Company, WSI and
various directors of the Company. The plaintiffs have alleged minority
stockholder oppression, breach of fiduciary duty and breach of contract
and "thwarting of reasonable expectations" and have demanded an
accounting, appointment of a receiver for the sale of the Company,
unspecified actual damages and punitive damages of $10 million, plus
attorney's fees. In addition, Mr. Grafton has alleged unspecified
damages as a result of his removal as an officer and director of the
Company and the Company's failure to renew his employment agreement in
March 1995 and has alleged that such removal was wrongful and
ineffective. The Company's insurer has denied coverage in the lawsuit.
The Company has denied all material allegations of the lawsuit and
believes that the resolution of this matter, including attorneys fees
incurred in the Company's defense could have a material adverse effect
on the Company's financial condition. However, the outcome of this
cannot be predicted, and an adverse decision in the lawsuit would likely
have a material adverse effect on the Company's financial condition and
results of operations.
In June 1995, the former stockholders of Med-Waste filed suit in James
H. Shepherd, et al v. 3CI Complete Compliance Corporation, et al, No.
C.V.-95-1441-1 in the Circuit Court of Hot Spring County, Arkansas,
against the Company and various current and former officers and
directors of the Company. Plaintiffs have alleged violations of federal
and state securities laws, breach of contract, common law fraud and
negligence in connection with the acquisition of Med-Waste by the
Company and have demanded rescission, restitution, unspecified actual
damages and punitive damages of $10 million, plus attorney's fees. The
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case was transferred to the United States District Court of the Western
District of Arkansas, Hot Springs Division and in November 1996 was
subsequently transferred to the United States District Court for the
Western District of Louisiana. The parties, other than Patrick Grafton,
former Chief Executive Officer of the Company, have agreed to settle the
suit in consideration for the issuance by the Company to the plaintiffs
of 250,000 shares of Common Stock and the payment by the Company to the
plaintiffs of 20% to 55% of the pre-tax profits, as defined,
attributable to the assets previously acquired from Med-Waste until such
time as the shares of Common Stock held by the plaintiffs become freely
tradable and the market price of the Common Stock averages at least
$2.50 over a period of 42 consecutive days. In addition, the Company and
WSI have agreed to repurchase the shares of Common Stock held by the
plaintiffs for $2.50 per share in certain events, including the
bankruptcy of the Company or in the event WSI ceases to be the largest
beneficial holder of the Common Stock. The obligations of the Company to
the plaintiffs are secured by a security interest in most of the assets
of the Company, and WSI has agreed to subordinate its loans to the
Company, and all related security interests, to the obligations, and the
related security interests, of the Company to the plaintiffs.
In connection with an auto accident in July 1996, two suits have been
filed against the Company. Ryan O'Neil Youmans & Anita Youmans v.
American 3CI, et al, No. CV9604899, was filed in the Circuit Court of
Jefferson County, Alabama, in August 1996. Jimmy R. Whitfield & Rhonda
Whitfield v. Paul Bronger, American 3CI, et al. No. CV-96-847, was filed
in the Circuit Court of Shelby County, Alabama in November of 1996.
These proceedings have just been initiated and little or no discovery
has been conducted. Although the Company's insurer has acknowledged that
it provides coverage for this accident, the outcome of this cannot be
predicted. An adverse decision in the lawsuit is not likely to have a
material effect on the Company's financial condition and results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(None)
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PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company has a single class of equity securities outstanding, its
Common Stock, $.01 par value. The Common Stock has traded
over-the-counter on the NASDAQ SMALL-CAP MARKET under the NASDAQ symbol
TCCC since its initial public offering and qualification for listing on
NASDAQ in April 1992. The following table sets forth the high and low
bid quotations for the Common Stock in the over-the-counter market, as
reported by the NASDAQ SMALL CAP quotation system, for each of the
quarterly periods indicated. These quotations reflect the inter-dealer
prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
QUARTER ENDED HIGH LOW
FISCAL 1995:
First Quarter 2 5/8 1 1/8
Second Quarter 2 1/16 1 1/16
Third Quarter 2 1/4 1 1/8
Fourth Quarter 2 3/8
FISCAL 1996:
First Quarter 1 1/8 7/16
Second Quarter 2 1 13/32
Third Quarter 2 1 39/64
Fourth Quarter 1 39/64 1 7/16
As of January 9, 1997, the approximate number of holders of record of
the Company's Common Stock, as reported by the Company's transfer agent,
was 400, and the closing sale price of the Common Stock on January 9,
1997 was $0.81.
The Company has paid no cash dividends on its Common Stock since its
inception. The payment by the Company of cash dividends, if any, in the
future rests within the discretion of the Board of Directors of the
Company and will depend, among other things upon the Company's earnings,
its capital requirements and its financial condition, as well as other
relevant factors. By reason of the Company's current financial condition
and contemplated financial requirements, the Company has no plans to pay
any cash dividends on the Common Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following information is derived from the Company's audited
financial statements and includes the historical financial information
of AMTC and A/MED as well as the historical financial information since
the date of acquisition for each acquired company. The acquisitions
include (1) purchase of assets and liabilities of River Bay Corporation
in October 1994; (2) Med-Waste in August of 1994; (3) reverse merger of
3CI in February 1994; (4) Incendere in May 1992. This data should be
read in conjunction with the financial statements and the notes thereto
and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Report.
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Nine Month
Period Ended
Year Ended Year Ended Year Ended Year Ended Year Ended
September 30, September 30, September 30, September 30, December 31,
1996 1995 1994(1) 1993 (2) 1992
--------------- -------------- -------------- --------------- ---------------
Selected Statement of Operations Data:
Revenues.................................. $17,748,300 $16,522,025 $12,422,717 $ 6,069,217 $ 7,263,835
Costs and expenses:
Cost ofsales............................ 13,815,480 11,756,968 9,273,011 5,009,581 5,804,972
Write off of intangibles.................. 11,385,328 - - - -
Write off of assets....................... 1,183,446 - - - -
Selling, general and administrative....... 4,343,246 6,996,575 2,452,840 750,149 1,136,029
Depreciation and amortization............ 2,224,161 1,976,212 1,236,592 639,996 568,266
------------- ------------- ------------ ------------ -----------
Total operating expenses.................. 32,951,543 20,729,755 12,962,443 6,399,726 7,509,267
------------- ------------- ------------ ------------- -----------
Loss from operations...................... (15,203,243) (4,207,730) (539,726) (330,509) (245,432)
Other Expense, net........................ (1,053,424) (655,080) (423,890) (484,883) (389,779)
Accretion of put option................... ( 26,052) (217,075) - - -
------------- ------------- ------------ ------------ -----------
Net Loss.................................. $(16,282,837) $(5,079,885) $ (963,616) $ (815,392) $ (635,211)
============= ============= ============ ============ ===========
Loss per common share .................... $ (1.84) $ (.60) $ (0.17) $ (0.41) $ (0.39)
============== ============= ============ ============ ===========
Weighted Common Shares Outstanding........ 8,872,348 8,530,611 5,636,030 1,973,680 1,610,485
Selected Balance Sheet Data:
Working Capital(deficit).................. $(10,774,499) $(2,546,818) $ (191,840) $ (3,222,134) $ (996,859)
Property, Plant and Equipment, net........ 8,462,619 9,388,722 7,641,402 6,380,926 5,590,069
Total Assets.............................. 13,374,817 25,518,596 21,567,824 12,108,410 11,418,617
Long-term Debt, net of current
maturities............................. 742,400 5,575,622 1,403,316 5,450,069 2,243,354
Shareholders' Equity...................... (4,014,035) 11,821,339 15,892,569 1,427,962 6,288,783
Cash dividends per share - - - - -
(1) The fiscal 1994 balances include the reverse merger of 3CI and
acquisition of Med-Waste for periods subsequent to the
acquisition dates.
(2) Operating results are not comparable because the September 30, 1993
income statement amounts are for nine months.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company was incorporated in Delaware in 1991. The Company is
engaged in the business of medical waste management services. The
Company services customers in a number of states in and contiguous to
the southwestern and southeastern United States, including Alabama,
Arkansas, Florida, Georgia, Kansas, Louisiana, Mississippi, Missouri,
Oklahoma, Tennessee and Texas. The Company's customers include regional
medical centers, major hospitals, clinics, medical and dental offices,
veterinarians, pharmaceutical companies, retirement homes, medical
testing laboratories and other generators of medical waste. Services to
customers include collection, transportation, bar code identification
and destruction by controlled, high temperature incineration and
alternative treatment through the use of microwave technology. The
Company also provides training to customers on compliance with
regulations, use of containers, documentation and tracking.
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The Company has consistently incurred losses for the past several fiscal
years, and losses have continued in fiscal 1997. The Company has
historically relied on Waste Systems, Inc. ("WSI"), the Company's
majority stockholder, for funding, and such support was again necessary
in fiscal 1996. In the absence of the Company being able to secure third
party financing, WSI agreed to provide the Company with a revolving
credit facility of $8 million, including deferred interest with cash
advances not to exceed $7.4 million, of which $8.9 million including
deferred interest and $10.1 million including deferred interest has been
drawn as of September 30, 1996, and December 31, 1996. The note
agreement with the majority shareholder signed December 20, 1996
contains various covenants which the Company has been unable to meet and
waivers were obtained during fiscal year ended September 30, 1996. Since
September 30, 1996, WSI has made additional cash advances to the Company
totaling $960,000 including interest. Due to the additional cash
advances that have been made in excess of the principal in the original
promissory note, the Company entered into a second Revolving Credit
Facility of $2.7 million including deferred interest, dated December 20,
1996 with maturity date of February 28, 1997. It is the intent of WSI
and 3CI that this Revolving Promissory Note shall evidence all sums
owing by 3CI to WSI to the extent that such sums represent advances of
funds to 3CI in excess of the maximum limits fixed under that certain
$8,000,000 Revolving Promissory Note dated September 30, 1995. The
Promissory Note dated September 30, 1995 has a due date of December 31,
1996 of which the Company has requested from and received a 30 day
extension until January 31, 1997 to discuss with WSI on the possibility
of restructuring the terms of the Revolving Promissory Note. WSI's
shareholders have indicated that they are not willing to continue this
funding into 1997. Furthermore, the Company has attempted and has been
unsuccessful to date in obtaining third party financing. In the event
the Company and WSI do not come to a resolution on the restructuring of
the note and the Company is unable to obtain alternative financing,
there can be no assurance that the Company will be able to meet its
obligations as they become due or realize the recorded value of its
assets and would likely be forced to seek bankruptcy protection.
Pursuant to a Put Option Agreement with River Bay, as amended (the "Put
Option"), the Company, in October 1995, repurchased 300,000 of the
shares of Common Stock issued in connection with the acquisition in
consideration for its promissory note in the original principal amount
of $900,000 ($3.00 per share) and providing for monthly principal
payments ranging from $25,000 to $75,000, plus interest, through January
1997. Pursuant to the Put Option, the Company is obligated to repurchase
the remaining 565,500 shares of Common Stock issued in connection with
the acquisition, at the option of River Bay, from February 1, 1997 until
April 1, 1997 for $3.00 per share. The Company has begun discussions
with River Bay regarding the exercising of the remaining shares of the
Put Option. There is no definitive agreement in place towards a
renegotiation of the terms. If no resolution can be achieved by February
1, 1997, the Company is not in a financial position to have the ability
to repurchase the shares and would likely be forced to seek bankruptcy
protection.
The Company has undertaken a broad range of preliminary discussions with
third parties about the possibility of consumating an extraordinary
corporate transaction so as to permit the Company (or its successor, if
any) to meet its obligations. There can be no assurance that such any
agreement can be reached before these obligation come due. These
discussions are the subject of various confidentiality agreements.
The Company has been defending shareholder litigation in Houston, Texas,
and Little Rock, Arkansas (now transferred to Shreveport, Louisiana).
Although the Company does not believe these claims have merit, the
aggregate costs of defending these suits have had, and appear reasonably
likely to continue to have, a material adverse effect on the Company's
financial condition.
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RECENT ACQUISITIONS
ACQUISITION OF A/MED AND AMERICAN MEDICAL TRANSPORTS CORPORATION
In February 1994, two wholly-owned subsidiaries of the Company acquired
the assets and assumed certain liabilities of A/MED, Inc. ("A/MED") and
American Medical Transports Corporation ("AMTC"), majority-owned
subsidiaries of Waste Systems, Inc., a Delaware corporation, in
consideration for 2,640,350 shares of Common Stock, $.01 par value
("Common Stock"), of the Company. Of such shares, WSI received 1,840,350
shares initially, with the remaining 800,000 shares placed in escrow to
secure certain indemnity obligations. Upon termination of the escrow on
April 10, 1995 WSI received 565,160 shares.
In addition, in February 1994, WSI acquired 1,255,182 shares of Common
Stock from American Medical Technologies, Inc., a Delaware corporation
and the former majority stockholder of the Company ("AMOT"), in
consideration for $1,765,658 cash and the cancellation of the $3,317,828
unpaid balance of AMOT's previously issued promissory note payable to
WSI.
After giving effect to these transactions, WSI beneficially owned a
majority of the outstanding shares of Common Stock. Accordingly, the
merger was treated as a reverse acquisition for accounting purposes. The
acquired companies had been engaged in the business of medical waste
management services in Oklahoma, Texas, Louisiana and New Mexico.
ACQUISITION OF MED-WASTE
In August 1994, the Company acquired substantially all the assets and
assumed certain liabilities of Med-Waste Disposal Service, Inc., an
Arkansas corporation ("Med-Waste") in consideration for 525,000 shares
of Common Stock and an additional 145,470 shares which earned and issued
pursuant to an earnout arrangement.
Med-Waste had been engaged in the business of medical waste management
services in Arkansas and Missouri.
The acquisition of Med-Waste has been the subject of litigation between
the Company and the former stockholders of Med-Waste, which has been
settled, subject to court approval. See Item 3 - Legal Proceedings.
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ACQUISITION OF RIVER BAY CORPORATION
In October 1994, the Company acquired substantially all of the assets
and assumed certain liabilities of River Bay Corporation, a Mississippi
corporation ("River Bay"), in consideration for 865,500 shares of Common
Stock and shares of Common Stock contingent upon various matters,
including future profits of the operations attributable to the assets
purchased from River Bay--there has been no additional shares earned
pursuant to the earnout arrangement. In addition, the Company issued to
River Bay a promissory note in the original principal amount of
$1,000,000, which, as amended, provided for monthly principal payments
ranging from $50,000 to $100,000 through February 1996.
Pursuant to a Put Option Agreement with River Bay, as amended (the "Put
Option"), the Company, in October 1995, repurchased 300,000 of the
shares of Common Stock issued in connection with the acquisition in
consideration for its promissory note in the original principal amount
of $900,000 ($3.00 per share) and providing for monthly principal
payments ranging from $25,000 to $75,000, plus interest, through January
1997. Pursuant to the Put Option, the Company is obligated to repurchase
the remaining 565,500 shares of Common Stock issued in connection with
the acquisition, at the option of River Bay, from February 1, 1997 until
April 1, 1997 for $3.00 per share. The Company has begun discussions
with River Bay regarding the exercising of the remaining shares of the
Put Option. There is no definitive agreement in place towards a
renegotiation of the terms. If no resolution can be achieved by February
1, 1997, the Company is not in a financial position to have the ability
to repurchase the shares and would likely be forced to seek bankruptcy
protection.
The obligations of the Company under the Put Option and its promissory
notes payable to River Bay are secured by a security interest in certain
of the assets purchased from River Bay and future accounts receivable
attributable to the assets acquired from River Bay.
River Bay had been engaged in the business of medical waste management
services in Florida, Mississippi, Georgia, Tennessee and Alabama.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES
The Company has historically funded its operations, acquisitions and
debt service through cash advances from WSI. During fiscal 1994,
advances of $3,100,000 and $4,671,973 were converted to 666,670 and
1,557,324 shares of common stock. As a result of its prior expansion and
program of acquisitions, the Company has experienced liquidity
deficiencies.
In October 1994, WSI made a non-interest bearing cash advance of
$1,000,000 to the Company, which was converted into 416,667 shares of
Common Stock in April 1995. In the first half of 1995, WSI made
non-interest bearing cash advances totaling $4,100,000 to the Company.
In June 1995, the Company executed a $6,000,000 revolving promissory
note, which was utilized in part to repay the advances. This note was
renegotiated in September 1995, increasing the total available to
$8,000,000 including interest, with principal not to exceed $7,400,000.
The note bears interest at the prime rate and is payable on December 31,
1996. Interest is payable in quarterly installments which are
automatically added to the outstanding principal balance, if not paid.
As of September 30, 1996 and 1995 the Company has borrowed $8,843,000
and $4,100,000 respectively under the note. See note 5 to Notes to
Consolidated Financial Statements. As a significant amount of the
advances from WSI have historically been non interest bearing, some of
which was ultimately converted to equity, interest expense in 1996 has
increased significantly as a result of the advances made pursuant to the
interest bearing note.
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22
Since September 30, 1996, WSI has made additional cash advances to the
Company totaling $960,000 including interest. Due to the additional cash
advances that have been made in excess of the principal in the original
promissory note, the Company entered into a second Revolving Credit
Facility of $2.7 million including deferred interest, dated December 20,
1996 with maturity date of February 28, 1997. It is the intent of WSI
and 3CI that this Revolving Promissory Note shall evidence all sums
owing by 3CI to WSI to the extent that such sums represent advances of
funds by 3CI in excess of the maximum limits fixed under that certain
$8,000,000 Revolving Promissory Note dated September 30, 1995. The
Promissory Note dated September 30, 1995 has a due date of December 31,
1996 of which the Company has requested from and received a 30 day
extension until January 31, 1997 to discuss with WSI on the possibility
of restructuring the terms of the Revolving Promissory Note. In the
event the Company and WSI do not come to a resolution on the
restructuring of the note and the Company is unable to obtain
alternative financing, there can be no assurance that the Company will
be able to meet its obligations as they become due or realize the
recorded value of its assets and would likely be forced to seek
bankruptcy protection.
No assurance can be given that, following December 31, 1996, WSI will
continue to advance funds to the Company or that WSI will forego demand
for payment of the current indebtedness of the Company to WSI after
February 28, 1997. In the event that WSI fails to advance required funds
to the Company or demands payment of current indebtedness, the Company
would have limited financing sources and would likely be forced to seek
bankruptcy protection. At this time WSI's shareholders have indicated
that they are not willing to continue this funding into 1997.
Furthermore, the Company has attempted and has been unsuccessful in
obtaining third party financing.
During fiscal 1996, the Company repaid approximately $536,000 of its
notes payable and approximately $2,603,000 of its long-term debt that
became due during the year with the funds advanced from WSI, including
payments totaling approximately $863,000 to River Bay Corporation on
debt incurred related to the 1995 acquisition of net assets. The Company
issued a note for approximately $520,000 related to the purchase of its
insurance policies.
OPERATING ACTIVITIES
The Company has continued to experience a cash loss from operations
during fiscal 1996. The Company anticipates a working cash deficit from
operations for fiscal 1997 and will be dependent upon WSI to fund its
continued operations. However, no assurance can be given that,
following December 31, 1996, WSI will continue to advance funds to the
Company or that WSI will forego demand for payment of the current
indebtedness of the Company to WSI following February 28, 1997. In the
event that WSI fails to advance required funds to the Company or
demands payment of current indebtedness, the Company would have limited
financing sources and would likely be forced to seek bankruptcy
protection.
In fiscal 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived assets and for the Long-Lived Assets to be
Disposed of" SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by
those assets are less than the carrying amount. An evaluation of the
long-lived assets associated with the Company operations resulted in the
determination that certain intangible assets were impaired. The impaired
assets were written down by $11,385,328.
The Company also conducted a thorough analysis of fixed assets on hand
to the assets recorded in the accounting records resulting in an write
off of fixed assets resulting in a charge of $1,183,446.
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23
Depreciation and amortization expense increased by approximately
$250,000 from fiscal 1995 to 1996 primarily as a result of the
completion of certain incineration facilities in Birmingham, Alabama,
which were placed in service. Depreciation and amortization increased
by approximately $740,000 from fiscal 1994 to 1995 primarily as a
result of substantially a full year's depreciation on property, plant
and equipment from the acquistions of River Bay and Med-Waste assets
and increased amortization of intangibles, including goodwill, due to
the acquisitions. Similarly, the increase from fiscal 1993 to 1994 of
approximately $600,000 results from additional depreciation and
amortization relating to the 3CI merger.
The increase in accounts receivable from 1995 to 1996 results primarily
from an increase sales and from a delay in the billing cycle due to the
relocation of the Company's production accounting office during the
fourth quarter of the fiscal year end 1996. The decrease in accounts
receivable from 1994 to 1995 results primarily from providing a
significant allowance for doubtful accounts and aggressive cash
collections partially offset by increased billings during the year. The
increase in accounts receivable from 1993 to 1994 results primarily
from the acquisition of Med-Waste and merger of 3CI and a delay in
billings related to the move from San Marcus to Houston and integration
of the acquisitions.
The increase in accounts payable from 1995 to 1996 is primarily a
result of the decreased operating capital available to make payments on
a timely basis. The decrease in accounts payable from 1994 to 1995
results primarily from the payment of outstanding obligations due to
the availability of funds advanced or invested by WSI.
The increase in accrued liabilities from 1995 to 1996 is largely
attributable to accruals made by the Company for estimated costs
associated with several legal and contractual disputes. The increase in
accrued liabilities from 1994 to 1995 is largely attributable to
accruals made by the Company for estimated costs associated with
several legal and contractual disputes. The increase in accrued
liabilities from 1993 to 1994 results primarily from the accrual of
certain estimated cleanup costs and anticipated tax expenses.
INVESTING ACTIVITIES
During fiscal 1996, the Company completed the construction of
incineration facilities in Birmingham, Alabama. Expenditures related to
the project during fiscal 1996 totaled $791,851 in additions to the
$260,000 incurred during fiscal 1995 and the $550,000 incurred prior to
the acquistion of River Bay. During fiscal 1996, the Company invested
an additional $1,180,000 for transportation, machinery and equipment,
computer equipment and software, and other fixed assets.
During the fiscal 1995, the Company acquired substantially all of the
assets and certain liabilities from River Bay Corporation in exchange
for 865,500 shares of common stock and a $1 million promissory note to
River Bay Corporation. The Company has committed to repurchase the
shares at $3.00 per share at River Bay Corporation's option. See Note 1
to Consolidated Financial Statements.
During fiscal 1994 the Company incurred $550,000 in costs related to
the acquisitions of A/MED, AMTC and Med-Waste. Additionally, the
Company incurred $350,000 in costs for equipment purchases to support
ongoing operations.
For information with respect to acquisitions during 1995, see "RECENT
ACQUISITIONS" above.
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SELECTED RESULTS OF OPERATIONS
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1994
------------- ------------- -------------
REVENUES $17,748,300 $16,522,025 $ 12,422,717
Percentage increase
from prior period 7.4% 33.0% 104.7%
POUNDS OF MEDICAL WASTE
INCINERATED 48,174,155 41,204,766 33,759,859
Percentage increase
over prior period 16.9% 22.1% 150.6%
YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO THE YEAR ENDED
SEPTEMBER 30, 1995
REVENUES increased to $17,748,300 for the fiscal year ended September
30, 1996 compared to $16,522,025 for the fiscal year ended September 30,
1995. The Company has been able to achieve this increase in revenues by
a change in the mix of waste being burned and an increase in the volume
of the waste streams being collected and processed at its facilities.
The Company has been able to achieve the increase notwithstanding
continued downward pressure on pricing from the high level of
competition in the industry.
COST OF SERVICES increased to $13,815,480 for fiscal 1996 compared to
$11,756,968 for fiscal 1995. The increased cost of service resulted from
higher transportation costs, incineration costs paid to third parties
and a substantial increase in costs of supplies. These higher costs can
be partially associated with the River Bay division due to the delay of
the start of an incinerator in Birmingham, Alabama. The incinerator was
in full operation by the start of the third quarter of fiscal 1996 and
some of the projected reductions in outside incinerator costs paid to
third parties and the elimination of additional transportation and
repackaging costs associated with the dependency for outside
incineration costs are being achieved. In addition, the installation and
the startup costs associated with the microwave unit at our Birmingham ,
Alabama, created an increase in operating costs.
WRITE OFF OF INTANGIBLE ASSETS in fiscal 1996 totaled $11,385,328. The
company prepared an evaluation of the fair value of the assets
associated with the Company's operations resulting in the determination
that certain intangible assets were impaired. The fair value was based
on estimated future cash flows to be generated by the Company's
operations, discounted at a market rate of interest. This write off of
intangibles was a result of the Company consistently experiencing and
further projecting negative cash flows.
WRITE OFF OF FIXED ASSETS in fiscal 1996 totaled $1,183,000. A thorough
analysis was conducted of the Company's operating assets and systems of
American 3CI. In conjunction with the analysis, the Company reconsidered
the use of certain operating assets as well as a result of recent
experiences and current market conditions. As a result of the analysis,
the Company wrote off certain operating equipment which would not
benefit future operations, expensed certain leasehold improvements costs
for certain closed facilities and expensed $420,000 of computer
software and hardware which will not be utilitzed in future operations.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") expenses decreased to
$4,343,246 in fiscal 1996 from $6,996,575 in fiscal 1995. The decrease
results from one time severance costs and duplicative administration
functions that were being incurred by the Company from previous
acquisitions being eliminated. Due to the continued lawsuit proceedings
the Company felt it necessary to accrue an additional $1 million for
legal costs for the fourth quarter of fiscal year 1996.
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25
DEPRECIATION AND AMORTIZATION expense increased to $2,224,161 for fiscal
1996 from $1,976,212 for fiscal 1995, due principally to the commencing
of the new incinerator located in Birmingham, Alabama.
INTEREST EXPENSE increased to $839,089 in fiscal 1996 from $655,080 in
fiscal 1995 due primarily to attributed to the increase in the note
payable from advances by the majority shareholders.
YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO THE YEAR ENDED
SEPTEMBER 30, 1994
REVENUES increased to $16,522,025 for the fiscal year ended September
30, 1995 compared to $12,422,717 for the fiscal year ended September 30,
1994. The increase in revenues and pounds incinerated was due
principally to the inclusion of substantially a full year of revenues in
1995 for the acquisitions of River Bay, Med-Waste and 3CI while 1994
included only eight months for 3CI and two months for Med-Waste. In
fiscal 1995 there was an emphasis on obtaining smaller generators of
biomedical waste, such as physicians offices and laboratories, to offset
the loss of a major metropolitan hospital council contract.
COST OF SERVICES increased to $11,756,968 for fiscal 1995 compared to
$9,273,011 for fiscal 1994. The increased cost of service resulted from
higher transportation costs, incineration costs paid to third parties
and a substantial increase in costs of supplies. The acquisition of
River Bay in fiscal 1995 was a strategic entry into a new major market
region and costs per pound have been higher. Management believes that
the construction of a strategically located incineration facility,
scheduled for completion in the second quarter of fiscal 1996, should
reduce the cost of services for that region. Additionally, the cost of
supplies, (primarily boxes and liners) increased substantially as a
result of increased prices of paperboard and resin, resulting in higher
cost per revenue dollar. The Company was not able to pass all these cost
increases on to its customers due to ongoing competitive pricing
pressures.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") expenses increased to
$6,996,575 in fiscal 1995 from $2,452,840 in fiscal 1994. The increase
results partially from the acquisitions discussed above being included
for a full year in 1995 but only a partial year during fiscal 1994.
Specifically,
o The River Bay and Med-Waste acquisitions resulted in additional S,G&A
expenses of approximately $900,000 and $360,000, respectively, in
1995.
o The Company recorded bad debt expenses of approximately $840,000
during 1995, while 1994 included bad debt expense of approximately
$520,000.
o The Company has been involved in several legal or contract disputes
which resulted in settlement costs and accruals of estimated
related expenses totaling approximately $1,350,000.
o The Company reimbursed WSI for services rendered in the amount of
$310,000.
o As a result of the acquisitions concluded during the year, the
Company incurred duplicative expenses and management continues to
focus on integrating the administrative functions of its operations
with those of recent acquisitions. Additionally, the Company
relocated its headquarters from Houston, Texas, to Shreveport,
Louisiana, resulting in higher costs from employee turnover and other
non-recurring moving costs.
DEPRECIATION AND AMORTIZATION expense increased to $1,976,212 for fiscal
1995 from $1,236,592 for fiscal 1994, due principally to increased
depreciation on property, plant and equipment from acquisitions
previously discussed and increased amortization of intangibles due to
acquisitions.
INTEREST EXPENSE increased to $655,080 in fiscal 1995 from $423,890 in
fiscal 1994 due primarily to interest expense incurred related to the
River Bay acquisition.
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YEAR ENDED SEPTEMBER 30, 1994 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1993
REVENUES increased to $12,422,717 for the fiscal year ended September
30, 1994 compared to $6,069,217 for the nine month period ended
September 30, 1993. The increase in revenues was due principally to
certain acquisitions, a full year period compared to nine months plus a
reorganization of the sales personnel and an aggressive emphasis on
major generators of biomedical waste, such as medical centers and
hospitals. Notwithstanding the increase in revenues in fiscal 1994
compared to the nine months ended September 30, 1993, competitive
pricing pressures increased in the Company's marketing area causing the
price per pound of biomedical waste collected, transported and processed
to decline to approximately $0.36 per pound in fiscal 1994 compared to
approximately $0.45 per pound in 1993.
COST OF SALES increased to $9,273,011 for fiscal 1994 compared to
$5,009,581 for the nine month period ended September 30, 1993, due in
part to the effect of certain acquisitions. Cost of sales consists
primarily of the expenses related to the collection, transportation, and
processing (destruction by controlled incineration) of biomedical waste
generated by the Company's customers. Cost of sales as a percentage of
revenues was 74.7% in fiscal 1994 compared to 82.5% in the nine month
period ended September 30, 1993. Cost of sales decreased 7.9% due
primarily to economies of scale gained from the February 1994
acquisition of AMTC and AMED, reduction of employee redundancies,
improved routing efficiency, and reduction of third party waste
processing.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") expense increased to
$2,452,840 for fiscal 1994 compared to $750,149 for the nine month
period ended September 30, 1993, due in part to costs related to certain
acquisitions. SG&A expense includes commissions, advertising and
promotions, sales costs, salaries and benefits, contract labor, legal,
accounting and other professional fees, communications, postage and
freight, interest, and reserve for bad debt, among other items. SG&A
expense in 1994 included significant costs related to the Company's
reorganization following the acquisition of AMTC and A/MED including the
transfer of corporate headquarters from San Marcos, Texas to Houston,
Texas and employee severance payments related thereto, an increased
expense for an expanded billing and accounts receivable department and
increased professional fees. Bad debt expense was unusually high due to
a number of factors including the relocation of the Company's
headquarters, employee turnover and the operational, accounting, and
systems integrations of the acquisitions completed in 1994. SG&A as a
percentage of revenues was 20% in fiscal 1994 compared to 12% in the
nine month period ended September 30, 1993. Included in the 1994
amounts, the Company has increased its reserve for bad debt by $520,567,
representing approximately 54% of reported net loss.
DEPRECIATION AND AMORTIZATION expense increased to $1,236,592 for fiscal
1994 compared to $639,996 for the nine month period ended September 30,
1993, due principally to increased depreciation on property, plant and
equipment acquisitions previously discussed and increased amortization
of intangibles due to acquisitions.
INTEREST EXPENSE decreased due primarily to the conversion of WSI
debt to equity of $4,580,599 in April 1994 and $3,000,000 in
December 1993.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedule listed in Item
14(a)(1) and 14(a)(2) are annexed to this report as a separate section.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 26, 1994, KPMG Peat Marwick L.L.P. resigned from its role as
the Company's principal accountants. The Company subsequently appointed
Arthur Andersen LLP as principal accountants on January 16, 1995.
In connection with the audits of the fiscal periods ended September 30,
1993 and 1992, and the subsequent interim period through October 26,
1994, there were no disagreements with KPMG Peat Marwick L.L.P. on any
matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which disagreements if not
resolved to their satisfaction would have caused them to make reference
in connection with their opinion to the subject matter of the
disagreement.
The audit reports of KPMG Peat Marwick L.L.P. on the consolidated
financial statements of the Company as of and for the years ended
September 30, 1993 and December 31, 1992, did not contain any adverse
opinion or disclaimer of opinion nor were they qualified, modified as to
uncertainty, audit scope, or accounting principles.
On September 13, 1996, Arthur Andersen, LLP resigned from its role as
the Company's principal accountants. The Company subsequently appointed
Heard, McElroy & Vestal, LLP as principal accountants on November 13,
1996.
In connection with the audits of the fiscal periods ended September 30,
1994 and 1995 and the sebsequent period through September 13, 1996,
there were no disagreements with Arthur Andersen LLP on any matter of
accounting principles, financial disclosure, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction
would have caused them to make reference in connection with their
opinion to the subject matter of the disagreement.
The audit reports of Arthur Andersen LLP on the consolidated financial
statements of 3CI Complete Compliance Corporation as of and for the
years ended September 30, 1995 and 1994, did not contain any adverse
opinion or disclaimer of opinion; however, the 1995 opinion was modified
with respect to: 1. an emphasis of a matter paragraph discussing certain
operating and liquidity issues confronting the Company and 2. an
explanatory paragraph describing an uncertainty with respect to the
outcome of certain litigation filed against the Company. The 1994
opinion was modified and included an emphasis of a matter paragraph
discussing certain operating and liquidity issues confronting the
Company.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of January 9,
1997, with respect to the directors and executive officers of the
Company. All directors hold office until the next annual meeting of
stockholders of the Company, and until their successors are duly elected
and qualified.
SERVED IN SUCH
NAME AGE POSITION POSITION SINCE
---- --- -------- --------------
Dr. Werner Kook 48 Chairman of the Board 1995
Charles D. Crochet 38 President and Director 1994
Curtis W. Crane 37 Chief Financial Officer, 1995
Secretary and Treasurer
Dr. Clemens Pues 32 Vice President and Director 1995
Juergen Thomas 50 Director 1994
There are no arrangements or understandings with respect to the
selection of officers and directors and there are no family
relationships between any of such persons. Dr. Pues is a senior officer
of WSI, which beneficially owns 51.6% of the outstanding shares of the
Company, and Dr. Kook and Dr. Pues are employed by certain waste
management companies controlled by the Rethmann families and Edelhoff
families, respectively, collectively who own 100% of Waste Systems, Inc.
The following is a summary of the business background and experience of
each of the persons named above:
DR. WERNER KOOK has served as Chairman of the Board of the Company
since October 1995. Dr. Kook has served as a senior officer of
various waste management companies controlled by the Rethmann
family in Europe for the past six years and is a member of the board
of Rethmann AG & Co..
CHARLES D. CROCHET has served as President and a Director of the Company
since February 1994. Mr. Crochet founded and served as president of a
3CI predecessor company and has worked in the medical waste business
since 1988. Prior to 1988, Mr. Crochet was employed for over ten years
in senior positions with two public, national companies engaged in the
business of hazardous waste management.
CURTIS W. CRANE has served as Chief Financial Officer of the Company
since September 1995. Prior to his affiliation with the Company, Mr.
Crane held senior financial positions including Chief Financial Officer
for NDE Environmental Corporation and Director of Finance and Tax for
Lone Star Steel Company.
JUERGEN THOMAS has served as a Director of the Company since February
1994. Mr. Thomas has served for over fifteen years as Chief Financial
Officer of certain companies associated with the Edelhoff families,
which are leading waste management companies in Europe, and is a
Director of Waste Systems, Inc. since 1996.
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DR. CLEMENS PUES has served as a Director and Vice President of the
Company since October 1995. Dr. Pues is also currently President of
Waste Systems, Inc. Dr. Pues has been working with the AIR Lippewerk
Recycling GmbH, a wholly-owned subsidiary of the Rethmann
Kreislaufwirtschaft GmbH & Co.KG, since September 1994, where he has
been responsible for gypsum recycling. Prior to 1994, Dr. Pues was
employed at the University of Muenster as assistant professor in
international management for four years.
DIRECTOR COMPENSATION
Directors who are officers or employees of the Company receive no
additional compensation for their services as members of the Board of
Directors. Directors who are not such officers or employees do not
currently receive any compensation for such services but may, in the
future, receive such compensation for their services as the Board of
Directors may from time to time determine.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers, and persons who own more than
10% of a registered class of its equity securities, to file reports of
ownership and reports of changes in ownership of such equity securities
with the Securities and Exchange Commission ("SEC"). Directors,
executive officers and greater than 10% stockholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a)
forms they file.
To the Company's knowledge, based solely on a review of the copies of
such forms furnished to the Company and written representations that no
other reports were required, the Company believes that its directors,
executive officers and greater than 10% stockholders complied with all
Section 16(a) filing requirements.
During 1995, Dr. Clemens Pues and Dr. Werner Kook have not filed
timely Form 3's following their election as directors of the
Company, Curtis Crane has not filed a Form 3 following his
election as an officer of the Company. Larry Stephens,
Juergen Thomas, Dr. Hermann Niehues, Georg Rethmann, Dr. Werner Kook
and Waste Systems, Inc. all have filed Form 3's late, Waste Systems,
Inc. has filed two Form 4's late, Dr. Hermann Niehues filed four
Form 4's late and Charles Crochet filed two Form 4's late.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the cash
compensation awarded to, earned by or paid to the Company's Chief
Executive Officer or persons acting in a similar capacity, and the
remaining most highly compensated executive officers of the Company
whose total annual salary and bonus for the fiscal years ended
September 30, 1994, September 30, 1995 and September 30, 1996 was at
least $100,000.
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Long-term Compensation
Awards
Fiscal Annual Compensation Other Annual Stock All Other
Name and Principal Position Year Salary Bonus Compensation Options(#) Compensation(#)
- --------------------------- ------ ------ ----- ------------ ---------- ---------------
Patrick Grafton(1) 1994 $56,000 -- -- 135,000 --
Chief Executive Officer 1995 $115,000(2) -- -- -- --
Charles D. Crochet 1994 $ 90,000 90,000(3)
President 1995 $115,000 90,000
1996 $130,000 -- -- --
(1) Mr. Grafton was removed without cause as Chief Executive Officer and
Secretary of the Company in March 1995.
(2) Information provided as to Mr. Grafton's compensation is reported on an
annualized basis.
(3) In 1994, Mr. Crochet received an option to purchase 90,000 shares of
the Company's Common Stock at $3.00 per share vesting over a three year
period at 1/36 per month on a cumulative basis. Of these shares, 32,500
have vested and the remaining shares have been terminated pursuant to
the terms of the new employment agreement executed between Mr. Crochet
and the Company in August 1995.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of the Company performs, among other functions, the
functions normally performed by a compensation committee. During the fiscal year
1996, the following persons served on the Board of Directors and participated in
the deliberations concerning executive officer compensation: Dr. Werner Kook,
Charles D. Crochet, Dr. Clemens Pues, and Juergen Thomas. Charles D. Crochet
also served as the President of the Company during 1996. Dr. Clemens Pues is
currently the President of Waste Systems, Inc. which beneficially owns 51.6% of
the Common Stock of the Company. Erik v. Forell and Georg Rethmann formerly
served as directors of WSI during fiscal year 1995. Erik v. Forell served as
President and Secretary of WSI during the third and fourth quarters of fiscal
year 1995. Georg Rethmann served as the President of WSI during the first and
second quarters of fiscal year 1995. Dr. Clemens Pues is currently the President
of WSI.
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION
In accordance with the executive compensation rules established by the SEC, the
following report regarding executive compensation is provided by the Board of
Directors.
During fiscal 1996, the Company had no formal compensation policies with respect
to executive officers. Because there are no formal compensation policies in
place, the compensation of newly-hired executive officers was determined based
generally on the qualifications and prior experience of the executive officers.
The following paragraphs set forth the basis of the compensation paid in fiscal
1996 and fiscal 1995 to Patrick Grafton and Charles Crochet.
In February 1994, the Board of Directors elected Patrick Grafton as Chief
Executive Officer and Secretary of the Company. At that time, the Board of
Directors established Mr. Grafton's salary at $5,550 per month for February and
March of 1994, $7,500 per month for April through September 1994, and $9,583 per
month for October 1994 through September 1995, as part of an employment
agreement commencing February 1994 and ending September 1995. In February 1994,
Mr. Grafton also received an option to purchase 135,000 shares of the Company's
Common Stock at $3.00 per share which vests over a three-year period at 1/36 per
month on a cumulative basis. The Board of Directors set Mr. Grafton's
compensation package based on the key role he was to hold within the Company and
in view of competitive compensation packages offered to his peer group in the
industry. The stock option was granted to provide a long-term incentive to Mr.
Grafton. In March 1995, Mr. Grafton was removed without cause as Chief Executive
Officer and Secretary of the Company.
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In February 1994, the Board of Directors elected Charles Crochet as President of
the Company. At that time, the Board of Directors established Mr. Crochet's
salary at $6,250 per month for February and March of 1994, $7,500 per month for
April through September 1994, and $9,583 per month for October 1994 through
September 1995, as part of an employment agreement commencing February 1994 and
ending September 1995. This employment agreement was renewed on August 31, 1995,
increasing Mr. Crochet's salary to $10,833 per month commencing October 1, 1995
through September 1996. In February 1994, Mr. Crochet also received an option to
purchase 90,000 shares of the Company's Common Stock at $3.00 per share which
vested over a three year period at 1/36 per month on a cumulative basis.
According to the terms of the renewal of Mr. Crochet's employment agreement, the
remaining unvested options under the former employment agreement were terminated
and Mr. Crochet was granted an option to purchase 90,000 shares of the Company's
Common Stock at $2.00 per share, which also vests over a three year period at
1/36 per month on a cumulative bases. The Board of Directors set Mr. Crochet's
compensation package based on the key role he was to hold within the Company and
in view of competitive compensation packages offered to his peer group in the
industry. The stock option was granted to provide a long-term incentive to Mr.
Crochet.
BOARD OF DIRECTORS
Dr. Werner Kook
Mr. Juergen Thomas
Dr. Clemens Pues
Mr. Charles Crochet
EMPLOYMENT AGREEMENTS
Mr. Patrick Grafton served as Chief Executive Officer of the Company pursuant to
an employment agreement commencing February 1994 and ending September 1995. Mr.
Grafton was entitled to a salary of $5,500 per month in February and March 1994,
and then $7,500 per month from April through September 1994, increasing to
$9,583 per month commencing October 1994 through September 1995. This employment
agreement was terminated on March 31, 1995.
Mr. Charles D. Crochet serves as President of the Company pursuant to an
employment agreement commencing February 1994 and ending September 1995. Mr.
Crochet was entitled to a salary of $6,250 per month in February and March 1994,
and then $7,500 per month from April through September 1994, increasing to
$9,583 per month commencing October 1994 through September 1995. This employment
agreement was renegotiated and modified on August 31, 1995, increasing Mr.
Crochet's salary to $10,833 per month commencing October 1, 1995 and thereafter
increased to $13,333 on October 1, 1997, and continues through May 1998.
Persuant to this agreement in the event the Company discharges Mr. Crochet
without cause, Mr. Crochet is entitled to receive all monthly installments of
salary for the remaining term of the agreement. As an additional incentive to
Mr. Crochet under the new employment agreement, Mr. Crochet is eligible for an
annual bonus based on Fiscal Year Pre-Tax Profits as a percentage of Revenues.
The amount of such annual bonus is based on a percentage between 6% and 10% of
an amount determined by the Board of Directors from an approved bonus plan, such
actual percentage depending upon the Company's Pre-Tax Profits as a percentage
of Revenue.
Other than as set forth above, there are no compensatory plans or arrangement
with respect to any individual named in the Summary Compensation Table above or
otherwise which would result from the resignation, retirement or other
termination of such individual's employment with the Company or a change in
control.
31
32
33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, to the best of the Company's'
knowledge, as of January 7, 1997, regarding the beneficial ownership (as defined
by Rule 13d-3 of the Securities Exchange Act of 1934) of the Company's Common
Stock by (i) each person who is known by the Company to own beneficially more
than 5% of the outstanding shares of Common Stock, (ii) each director of the
Company, (iii) by each executive officer named in the Summary Compensation
Table, and (iv) by all directors and executive officers of the Company as a
group. Unless otherwise noted, each person has sole voting power and sole
investment power with respect to shares owned.
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- ------------------- -------------------- ----------
Waste Systems, Inc.(1) 5,104,448 51.6%
910 Pierremont, Suite 312
Shreveport, Louisiana 71106
River Bay Corporation(2) 865,500 8.4%
P.O. Box 13313
Jackson, Mississippi 39236
American Medical Technologies, Inc. 680,818 6.9%
5847 San Felipe, Suite 900
Houston, Texas 77057
Jim Shepherd(3) 477,889 4.8%
Route 3, Box 264
Bismarck, AR 71929
Patrick Grafton(4) 235,916 2.4%
120 Tradd Street
Charleston, South Carolina 29401
Charles D. Crochet(5) 123,209 1.2%
910 Pierremont, Suite 312
Shreveport, Louisiana 71106
Dr. Werner Kook -0- -0-
910 Pierremont, Suite 312
Shreveport, Louisiana 71106
Dr. Clemens Pues -0- -0-
910 Pierremont, Suite 312
Shreveport, Louisiana 71106
Juergen Thomas -0- -0-
910 Pierremont, Suite 312
Shreveport, Louisiana 71106
Curtis W. Crane -0- -0-
910 Pierremont, Suite 312
Shreveport, Louisiana 71106
All directors and executive officers as 123,209 1.2%
a group (5 persons)
- ---------------------------------------
Footnotes on Next Page
32
34
(1) A Schedule 13D dated April 17, 1995 reflects that Waste Systems, Inc.
("WSI") is the beneficial owner of 5,104,448 shares. Such Schedule 13D
reflects that WSI is owned 50% by Rethmann V & B GmbH & Co., a German
corporation controlled by members of the Rethmann Family in Germany,
and 50% by Gustav Dieter Edelhoff, Gustav Edelhoff, Heike
Edelhoff-Kirchhoff and Heidemarie Edelhoff, members of the Edelhoff
Family in Germany. The Rethmann Family and the Edelhoff Family share
voting and dispositive power with respect to the shares beneficially
owned by WSI. The Company has been advised that the interests in WSI
owned by the members of the Edelhoff family have been transferred to
Lobbe Holding GmbH & Co., a German corporation controlled by members of
the Edelhoff family.
(2) A Schedule 13D dated October 20, 1994, reflects that River Bay
Corporation, a Mississippi corporation, is the beneficial owner of
865,500 shares and has sole voting and dispositive power with respect
to such shares.
(3) See "Recent Acquisitions" and "Item 3. Legal Proceedings".
(4) Mr. Grafton was terminated without cause on March 31, 1995. The
information sets forth, to the best of the Company's' knowledge,
Mr. Grafton's beneficial ownership based on filings with the SEC.
(5) Includes 6,500 shares held in the name of Mr. Crochet's son, Chase
Crochet. Also included are 77,500 shares which Mr. Crochet has the
right to acquire pursuant to the Option Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February, March, April, May and July 1995, WSI made non-interest
bearing cash advances totaling $4,100,000 to the Company. In June 1995,
the Company executed a $6,000,000 revolving promissory note, to be
funded at the discretion of WSI, which was utilized to repay the
advances not converted to common stock. This Revolving Promissory Note
was renegotiated in September 1995 increasing the total available to
$8,000,000 including interest with the principal portion not to exceed
$7,400,000.
Since September 30, 1996, WSI has made additional cash advances to the
Company totaling $960,000 including interest. Due to the additional
cash advances that have been made in excess of the principal in the
original promissory note, the Company entered into a second Revolving
Credit Facility of $2.7 million including deferred interest, dated
December 20, 1996 with maturity date of February 28, 1997. The
Promissory Note dated September 30, 1995 has a due date of December 31,
1996 of which the Company has requested from and received a 30 day
extension until January 31, 1997 to discuss with WSI on the possibility
of restructuring the terms of the Revolving Promissory Note.
In April 1994, WSI which beneficially owns 51.6% of the outstanding
shares of Common Stock, purchased 1,557,324 shares of Common Stock of
the Company in consideration for the conversion by WSI of long-term
debt totaling $4,580,599, plus accrued interest of $91,374 ($3.00 per
share).
In April 1995, WSI purchased an additional 416,667 shares of Common
Stock in consideration for the conversion by WSI of a $1,000,000
non-interest-bearing cash advance made by WSI to the Company in
November 1994 ($2.40 per share).
In February, March, April, May and July 1995, WSI made additional cash
advances of $4,100,000 to the Company.
In February 1995, the Company expensed approximately $310,000 for
certain services provided to the Company and for reimbursement of
expenses incurred on behalf of the Company.
Charles Crochet, President of the Company, had previously entered into
an agreement with A/MED for an award of stock valued at $150,000 or of
that amount of cash to be used to purchase stock in the event of an
initial public offering. The parties have agreed that the reverse
acquisition of A/MED and AMTC is equivalent to an initial public
offering for purposes of the agreement. Mr. Crochet has agreed to
forego the award under the agreement in return for additional stock
options.
33
35
Through 1996, the Company shared certain facilities, personnel and
administrative services with WSI. The related costs allocated to the
Company were based on management's estimates of time expended by
personnel on, or benefit received by, periods.
The Company had loans from WSI, its majority shareholder, outstanding
during 1994, 1995 and 1996. Related interest expense in the amount of
$630,616, $112,500, and $221,246 was recorded for the years ended
Setpember 30, 1996, September 30, 1995, and September 30, 1994,
respectively.
The Company currently does business with an equipment company owned by
the father of Charles Crochet, the President of the Company. No
payments were made during the year ended September 30, 1995. There was
an outstanding invoice of $20,000 due to Crochet Equipment Company at
September 30, 1995 and 1996.
The Company leased a vehicle from a partnership controlled by certain
shareholders of the Company. The Company paid the partnership $20,935
for the year ended September 30, 1995 and $13,500 for the year ended
September 30, 1994, pertaining to the lease agreement. No payments were
made during fiscal year 1996.
During 1996, the Company has made purchases of business forms with a
company owned by the father of Curtis W. Crane, the Chief Financial
Officer of the Company. Payments to the business forms company during
fiscal year ended September 30, 1996 totaled $22,000.
34
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
1. Financial Statements
The audited financial statements and reports as detailed in the Index
to Financial Statements and Schedules for the year ended September 30,
1996, the year ended September 30, 1995 and the year ended September
30, 1994, required in response to Item 8 of Form 10-K are annexed to
this report as a separate section.
2. Financial Statement Schedule
The financial statement schedule for the year ended September 30, 1996,
the year ended September 30, 1995, and the year ended September 30,
1994, required by Item 8 of Part II of Form 10-K, is annexed to this
report as a separate section.
(b) REPORTS ON FORM 8-K FILED IN THE FOURTH QUARTER OF 1996:
The Company filed a Form 8-K in September 1996 to report the
resignation of the Company's independent public accountants Arthur
Andersen LLP.
The Company filed a Form 8-K in November 1996 to report the appointment
of Heard, McElroy & Vestal LLP as the Company's independent public
accountants.
(c) EXHIBITS - THE RESPONSE TO THIS PORTION OF ITEM 14 IS SUBMITTED
AS A SEPARATE SECTION OF THIS REPORT.
35
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
3CI COMPLETE COMPLIANCE CORPORATION
(Company)
January 13, 1997 /s/ Charles D. Crochet
----------------------
Charles D. Crochet
President (Principal Executive Officer)
January 13, 1997 /s/ Curtis W. Crane
--------------------
Curtis W. Crane
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Charles D. Crochet President and Director January 13, 1997
- ------------------------
Charles D. Crochet
/s/ Dr. Clemens Pues Vice President and Director January 13, 1997
- ------------------------
Dr. Clemens Pues
/s/ Dr. Werner Kook Chairman and Director January 13, 1997
- ------------------------
Dr. Werner Kook
/s/ Curtis W. Crane Chief Financial Officer, January 13, 1997
- ------------------------ Secretary and Treasurer
Curtis W. Crane
/s/ Juergen Thomas Director January 13, 1997
- ------------------------
Juergen Thomas
36
38
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
CONSOLIDATED FINANCIAL STATEMENTS OF 3CI COMPLETE
COMPLIANCE CORPORATION
Report of Independent Public Accountants
Heard, McElroy & Vestal, LLP 38
Report of Independent Public Accountants
Arthur Andersen, LLP 39
Consolidated Balance Sheets -- September 30, 1996 and 1995 40
Consolidated Statements of Operations for the years ended
September 30, 1996, 1995 and 1994. 41
Consolidated Statements of Shareholders' Equity (Deficit) for
the years ended September 30, 1996, 1995 and 1994 42
Consolidated Statements of Cash Flows for the years ended
September 30, 1996, 1995 and 1994 43
Notes to Consolidated Financial Statements 45
FINANCIAL STATEMENT SCHEDULE
The following schedule is filed as part of this Annual Report on Form
10-K.
Schedule II Valuation and Qualifying Accounts 63
All other Schedules are omitted because they are not required, are not
applicable or the required information is presented elsewhere herein.
37
39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 3CI Complete Compliance Corporation:
We have audited the accompanying consolidated balance sheets of 3CI Complete
Compliance Corporation as of September 30, 1996, and the related statements of
operations, shareholders' equity (deficit) and cash flows for the year ended
September 30, 1996. These financial statements and schedule referred to below
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 3CI Complete Compliance
Corporation as of September 30, 1996, and the results of its operation and cash
flows for the year ended September 30, 1996 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 discussed in notes 1 and 13 to the
financial statements, the Company (i) has suffered recurring losses from
operations, (ii) has a negative working capital, (iii) has a net capital
deficiency and (iv) is involved in legal proceedings, all of which collectively
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regards to these matters are also described in Notes 1 and
13. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commissions rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
HEARD, McELROY & VESTAL, LLP
Shreveport, Louisiana
January 13, 1997
38
40
To 3CI Complete Compliance Corporation:
We have audited the accompanying consolidated balance sheets of 3CI Complete
Compliance Corporation as of September 30, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended September 30, 1995 and 1994. These consolidated financial
statements and schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our accounts.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The Company has consistently incurred losses for the past several fiscal years
and losses have continued into fiscal 1996. The Company has historically relied
on WSI funding, and such support was again necessary in fiscal 1995 and will
continue to be necessary in the future. Management and the Company's board of
directors implemented a business plan and long term strategy which success is
dependent upon the Company's ability to substantially reduce operating expenses
and increase the average revenue per pound to levels sufficient to generate
income and cash flow necessary to satisfy its obligations as they become due and
realize the recorded value of its assets. In the absence of the Company being
able to secure third party financing, WSI has provided the Company with a line
of credit of $8 million (Note 5), with a maturity date of December 31, 1996, of
which $4.1 million has been drawn down as of September 30, 1995. The note
agreement contains various covenants, which among other things, require that the
Company's net after tax loss before stock accretion for the 3 months ended
December 31, 1995 shall not exceed $600,000, net after-tax income for the 3
months ended March 31, 1996, June 30, 1996 and September 30, 1996 shall exceed
$100,000, $200,000 and $300,000 respectively (excluding any expenses connected
with litigation commenced prior to September 30, 1995). Management believes this
note will be adequate to provide the necessary financial support to meet working
capital and other requirements through December 1996. The ability of the Company
to achieve its long-term business strategy is dependent upon the Company's
ability to meet its business plan and obtain continued financing from WSI or
third party lenders. In the event the Company does not meet its business plan or
WSI does not continue to support the Company prior to and beyond December 1996
or the Company is unable to obtain alternative financing, there can be no
assurance that the Company will be able to meet its obligations as they become
due or realize the recorded value of its assets and would likely be forced to
seek bankruptcy protection.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of 3CI
Complete Compliance Corporation as of September 30, 1995 and 1994, and the
results of its consolidated operations and cash flows for the years ended
September 30, 1995 and 1994 in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index of financial statements is presented for purposes of complying with the
Securities and Exchange Commission's, rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
As further discussed in Note 11, a group of minority shareholders filed suit
against the Company alleging minority shareholder suppression, breach of
fiduciary duty and breach of contract, among other allegations, and has demanded
unspecified actual damages and punitive damages of $10 million. The Company's
insurer has denied coverage in the lawsuit. The Company has denied all material
allegations of the lawsuit and believes that the resolution of this matter will
not have a material adverse effect on the Company's financial condition and
results of operations. However, the outcome of this matter cannot be predicted,
and an adverse decision in the lawsuit would likely have a material adverse
effect on the Company's financial condition and results of operations.
Accordingly, no provisions for any liability that may result upon adjudication
have been made in the accompanying financial statements.
ARTHUR ANDERSEN LLP
Houston, Texas
January 10, 1996
39
41
3CI COMPLETE COMPLIANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, September 30,
1996 1995
============ ============
ASSETS
Current Assets:
Cash and cash equivalents $ -- $ 78,556
Restricted cash 130,000 100,000
Accounts receivable, less allowances of $990,994 and $1,283,269
at September 30, 1996 and 1995, respectively 3,753,421 2,970,505
Inventory 59,045 90,384
Other current assets 232,989 254,378
------------ ------------
Total current assets 4,175,455 3,493,823
------------ ------------
Property, plant and equipment, at cost 11,396,144 12,044,891
Accumulated depreciation (2,933,525) (2,656,169)
------------ ------------
Net property, plant and equipment 8,462,619 9,388,722
------------ ------------
Incineration rights and permits, at cost, net of accumulated
amortization of $0 and $646,455 at
September 30, 1996 and 1995, respectively -- 1,845,289
Excess of cost over net assets acquired, net of accumulated amortization
of $49,988 and $517,237 at September 30, 1996 and 1995, respectively 387,243 10,297,387
Other intangible assets, net of accumulated amortization of $74,552 and
$677,120 at September 30, 1996 and 1995, respectively 349,502 493,375
------------ ------------
Total assets $ 13,374,819 $ 25,518,596
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Bank overdrafts $ 34,382 $ --
Notes payable 211,928 226,501
Current portion of long-term debt, unaffiliated lenders 1,314,290 1,962,992
Accounts payable 1,866,223 1,292,514
Accounts payable, affiliated companies 319,156 307,046
Accrued liabilities 2,361,006 2,558,634
Note payable majority shareholder 8,842,969 --
------------ ------------
Total current liabilities 14,949,954 6,040,641
------------ ------------
Accounts Payable, affiliated companies -- 307,046
Long-term debt unaffliated lenders, net of current portion 742,400 1,475,622
Long-term debt majority shareholder, net of current portion -- 4,100,000
------------ ------------
Total liabilities 15,692,354 11,923,309
------------ ------------
Accrued stock put option 1,696,500 1,773,948
Shareholders' Equity (deficit):
Preferred stock, no par value, authorized 1,000,000 shares; none issued
Common stock, $.01 par value, authorized 15,000,000 shares;
issued and outstanding 9,900,311 and 9,504,841 shares at
September 30, 1996 and 1995, respectively 99,004 95,049
Additional Paid-in capital 20,108,743 19,665,235
Accumulated deficit (24,221,782) (7,938,945)
------------ ------------
Total Shareholders' equity (deficit) (4,014,035) 11,821,339
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 13,374,819 $ 25,518,596
============ ============
The accompanying notes are an integral part of these financial statements.
40
42
3CI COMPLETE COMPLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the For the For the
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1996 1995 1994
============ ============ ============
Revenues $ 17,748,300 $ 16,522,025 $ 12,422,717
Expenses:
Cost of services 13,815,480 11,756,968 9,273,011
Depreciation and amortization 2,224,161 1,976,212 1,236,592
Write off of intangibles (Note 11) 11,385,328 -- --
Write off of fixed assets (Note 3) 1,183,446 -- --
Selling, general and administrative 4,343,246 6,996,575 2,452,840
------------ ------------ ------------
Loss from operations (15,203,361) (4,207,730) (539,726)
Other income (expense):
Interest and other expense, net (Notes 4 & 5) (1,053,424) (655,080) (423,890)
------------ ------------ ------------
Loss before income taxes and accretion
of stock put (16,256,785) (4,862,810) (963,616)
------------ ------------ ------------
Income taxes -- -- --
Accretion of stock put (26,052) (217,075) --
------------ ------------ ------------
Net loss $(16,282,837) $ (5,079,885) $ (963,616)
============ ============ ============
Weighted average shares outstanding 8,872,348 8,530,611 5,636,030
============ ============ ============
Net loss per common share $ (1.84) $ (0.60) $ (0.17)
============ ============ ============
The accompanying notes are an integral part of these financial statements.
41
43
3CI COMPLETE COMPLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
ADDITIONAL TOTAL
SHARES COMMON PAID-IN ACCUMULATED SHAREHOLDERS'
ISSUED STOCK CAPITAL DEFICIT EQUITY (DEFICIT)
------------ ------------ ------------ ------------ ----------------
Balance at September 30, 1993 1,973,680 $ 19,737 $ 3,303,669 $ (1,895,444) $ 1,427,962
Conversion of AMTC and A/MED
debt and accrued interest
to equity 666,670 6,667 3,093,333 -- 3,100,000
Deemed issuance of common stock
in connection with the merger of
AMTC and A/MED 3,500,000 35,000 6,965,000 -- 7,000,000
Conversion of 3CI debt and
accrued interest to equity 1,557,324 15,573 4,656,400 -- 4,671,973
Purchase of Med-Waste Arkansas 525,000 5,250 651,000 -- 656,250
Net Loss -- -- -- (963,616) (963,616)
------------ ------------ ------------ ------------ ------------
Balance at September 30, 1994 8,222,674 82,227 18,669,402 (2,859,060) 15,892,569
Conversion of 3CI debt to equity 416,667 4,167 995,833 -- 1,000,000
Purchase of River Bay 865,500 8,655 -- -- 8,655
Net Loss -- -- -- (5,079,885) (5,079,885)
------------ ------------ ------------ ------------ ------------
Balance at September 30, 1995 9,504,841 95,049 19,665,235 (7,938,945) 11,821,339
Issuance of Med-Waste earnout shares 145,470 1,455 196,008 197,463
Issuance of Med-Waste settlement shares 250,000 2,500 247,500 250,000
Net Loss -- -- -- (16,282,837) (16,282,837)
------------ ------------ ------------ ------------ ------------
Balance at September 30, 1996 9,900,311 $ 99,004 $ 20,108,743 $(24,221,782) $ (4,014,035)
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
42
44
3CI COMPLETE COMPLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1994
============ ============ ============
Cash flow from operating activities:
Net loss $(16,282,837) $ (5,079,885) $ (963,616)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
(Gain) loss on disposal of fixed and intangible assets -- (2,860)
Depreciation and amortization 2,224,161 1,976,212 1,236,592
Accretion of stock put 26,052 217,075 --
Discount on bank note -- (50,000) --
Write off of impaired intangible assets 11,385,328 -- --
Write off of fixed assets 1,183,446 -- --
Change in assets and liabilities, net of effect of purchase
of River Bay
(Increase) decrease in restricted cash (30,000) 5,364 (105,364)
(Increase) decrease in accounts receivable, net (782,916) 785,155 (853,256)
(Increase) decrease in inventory 31,339 (8,521) 110,216
(Increase) decrease in prepaid expenses (5,005) 9,000 (50,932)
(Increase) decrease in other current assets (45,098) 5,376 614,178
Increase (decrease) in accounts payable 573,709 (1,330,009) 262,179
Increase (decrease) in accounts payable, affiliated companies 12,110 304,230 (88,039)
Increase (decrease) in accrued liabilities (197,628) 722,349 503,300
------------ ------------ ------------
Total adjustments to net loss 14,375,498 2,636,231 1,626,014
------------ ------------ ------------
Net cash provided by (used in) operating activities (1,907,339) (2,443,654) 662,398
------------ ------------ ------------
Cash flow from investing activities:
Costs of business acquisitions, net of cash -- -- (546,824)
Proceeds from sale of property, plant and equipment 61,986 212,995 58,965
Purchase of property, plant and equipment (1,679,675) (1,246,893) (353,055)
Increase in Intangible assets -- (90,000) (84,120)
------------ ------------ ------------
Net cash used in investing activities (1,617,689) (1,123,898) (925,034)
------------ ------------ ------------
Cash flow from financing activities:
Increase (decrease) in bank overdrafts 34,382 -- --
Proceeds from issuance of notes payable 521,542 584,549 455,796
Principal reduction of notes payable (536,115) (863,844) (156,625)
Reduction of capital lease obligations -- (60,089) (35,778)
Proceeds from issuance of long-term debt, unaffiliated lenders 1,221,411 363,320 240,575
Unpaid interest included in long-term debt 842,969 -- 109,760
Reduction of long-term debt, unaffiliated lenders (2,603,335) (1,658,470) (358,050)
Proceeds from issuance of note payable to majority shareholder 4,000,000 5,100,000 --
------------ ------------ ------------
Net cash provided by financing activities 3,446,472 3,465,466 255,678
------------ ------------ ------------
Net decrease in cash and cash equivalents (78,556) (102,086) (6,958)
------------ ------------ ------------
Cash and cash equivalents, beginning of period 78,556 180,642 187,600
------------ ------------ ------------
Cash and cash equivalents, end of period $ -- $ 78,556 $ 180,642
============ ============ ============
The accompanying notes are an integral part of these financial statements.
43
45
3CI COMPLETE COMPLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1994
============ ============ ============
Supplemental Disclosures:
Cash paid for interest $ 241,294 $ 304,870 $ 206,839
============ ============ ============
Cash paid for taxes -- -- --
============ ============ ============
Investing and financing activities not affecting cash-
Purchase of net assets (1) 1,679,675 3,691,345 (99,443)
Increase in long-term debt and other liabilities (1) (1,679,675) (3,691,345) 99,443
------------ ------------ ------------
Cash effect -- -- --
============ ============ ============
Increase in shareholders' equity 443,508 1,000,000 7,771,973
Conversion of debt and accrued interest (443,508) (1,000,000) (7,771,973)
------------ ------------ ------------
Cash effect -- -- --
============ ============ ============
Increase in shareholders' equity (1) 3,955 8,655 7,656,250
Fair value of common stock issued for acquisition (1) (3,955) (8,655) (7,656,250)
------------ ------------ ------------
Cash effect -- -- --
============ ============ ============
(1) In 1995, the Company purchased substantially all of the net assets of
River Bay Coporation by issuing 865,500 shares of Common Stock, and a Note
Payable for $1,000,000.
Seller has the option to require the Company to repurchase the shares at
$3.00 per share, a liability, notes payable and accrued stock put option,
has been reflected in the company's balance sheet for the amount the
Company would be required to pay. (See note 2)
The accompanying notes are an integral part of these financial statements.
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3CI COMPLETE COMPLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies:
ORGANIZATION AND BASIS OF PRESENTATION
3CI Complete Compliance Corporation (the Company or 3CI), a Delaware
Corporation, is engaged in the collection, transportation and incineration of
biomedical waste in the southeastern and southwestern United States. In February
1994, subsidiaries of 3CI acquired all the assets and business operations of
American Medical Transports Corporation (AMTC), an Oklahoma corporation, and
A/MED, Inc. (A/MED), a Delaware corporation. Both AMTC and A/MED were engaged in
businesses similar to that of 3CI. Waste Systems, Inc. (WSI), a Delaware
corporation, was the majority shareholder of both AMTC and A/MED (the
Companies). Additionaly, in February 1994, WSI purchased 1,255,182 shares of 3CI
common stock from American Medical Technologies (AMOT).
As a result of the transactions described above, WSI became the majority
shareholder of 3CI immediately following the acquisition of AMTC and A/MED. For
accounting purposes, AMTC and A/MED were considered the acquirer in a reverse
acquisition. The combined financial statements of AMTC and A/MED are the
historical financial statements of the Company for periods prior to the date of
the business acquisition. Historical combined shareholders' equity of AMTC and
A/MED has been retroactively restated for the equivalent number of 3CI shares
received for the assets and business operations of AMTC and A/MED, and the
combined accumulated deficit of AMTC and A/MED has been carried forward.
In October 1992, Medical Environmental Disposal, Inc. (MEDI), a wholly owned
subsidiary of WSI was merged with and into AMTC, with AMTC being the surviving
corporation.
PREDECESSOR TO 3CI
Prior to the merger with AMTC and A/MED, 3CI was a majority owned subsidiary of
AMOT. In September 1991, AMOT purchased the business and assets and assumed
certain liabilities of 3CI and 3CI Transportation Systems Corporation (the
Predecessor Companies), both existing Texas corporations that had been in the
medical waste disposal business since 1989 and 1990, respectively. 3CI began
operations when AMOT contributed substantially all the net assets and business
operations of the Predecessor Companies to 3CI. In April 1992, the Company
completed an initial public offering of common stock whereby 800,000 shares were
sold by the Company and 580,000 shares were sold by AMOT.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of 3CI and its
divisions and/or subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
For years ended prior to September 30, 1996 the consolidated financial
statements included the Company and its wholly owned subsidiaries 3CI
Acquisition Corp./AMTC and 3CI Acquisition Corp./A/MED. During the year ended
September 30, 1996 the subsidiaries were merged into 3CI Complete Compliance
Corporation. Accordingly, for the year ended September 30, 1996, the financial
statements include the accounts of 3CI and its operating divisions and do not
include any subsidiary entities.
SUBSTANTIAL DOUBT REGARDING ABILITY TO CONTINUE AS A GOING CONCERN
The Company has consistently suffered losses for the past several fiscal years,
and losses have continued in fiscal 1997. As of September 30, 1996, the Company
has a negative working capital of $10,455,343 and a net capital deficiency of
$4,014,035. The Company has historically relied on Waste Systems, Inc. ("WSI"),
the Company's majority stockholder, for funding, and such support was again
necessary in fiscal 1996. In the absence of the Company being able to secure
third party financing, WSI agreed to provide the Company with a revolving
credit facility of $8 million, including deferred interest with cash advances
not to exceed $7.4 million, of which $8.9 million including deferred interest
and $10.1 million including deferred interest has been drawn as of September
30, 1996, and December 31, 1996, respectively. The note agreement with the
majority shareholder signed December 20, 1996 contains various covenants which
the Company has been unable to meet and waivers were obtained during fiscal
year ended September 30, 1996. Since September 30, 1996, WSI has made
additional cash advances to the Company totaling $960,000 including interest.
Due to the additional cash advances that have been made in excess of the
principal in the original promissory note, the Company entered into a second
Revolving Credit Facility of $2.7 million including deferred interest, dated
45
47
December 20, 1996 with maturity date of February 28, 1997. It is the intent of
WSI and 3CI that this Revolving Promissory Note shall evidence all sums owing
by 3CI to WSI to the extent that such sums represent advances of funds to 3CI
in excess of the maximum limits fixed under that certain $8,000,000 Revolving
Promissory Note dated September 30, 1995. The Promissory Note dated September
30, 1995 has a due date of December 31, 1996 of which the Company has requested
from and received a 30 day extension until January 31, 1997 to discuss with WSI
on the possibility of restructuring the terms of the Revolving Promissory Note.
WSI's shareholders have indicated that they are not willing to continue this
funding into 1997. Furthermore, the Company has attempted and has been
unsuccessful in obtaining third party financing. In the event the Company and
WSI do not come to a resolution on the restructuring of the note and the
Company is unable to obtain alternative financing, there can be no assurance
that the Company will be able to meet its obligations as they become due or
realize the recorded value of its assets and would likely be forced to seek
bankruptcy protection.
Pursuant to a Put Option Agreement with River Bay, as amended (the "Put
Option"), the Company, in October 1995, repurchased 300,000 of the shares of
Common Stock issued in connection with the acquisition in consideration for its
promissory note in the original principal amount of $900,000 ($3.00 per share)
and providing for monthly principal payments ranging from $25,000 to $75,000,
plus interest, through January 1997. Pursuant to the Put Option, the Company is
obligated to repurchase the remaining 565,500 shares of Common Stock issued in
connection with the acquisition, at the option of River Bay, from February 1,
1997 until April 1, 1997 for $3.00 per share. The Company has begun discussions
with River Bay regarding the exercising of the remaining shares of the Put
Option. There is no definitive agreement in place towards a
renegotiation of the terms. If no resolution can be achieved by February 1,
1997, the Company is not in a financial position to have the ability to
repurchase the shares and would likely be forced to seek bankruptcy protection.
The nature and level of competition in this industry have remained at a high
level for several years. This condition has produced aggressive price
competition and results in pressure on profit margins. The Company competes
against companies which may have access to greater capital resources. In order
to compete in this industry on a long-term basis and fully realize its business
strategy, the Company will require additional and continued financing and other
assistance from its current shareholders and if available, from outside sources.
There is no assurance that adequate funds for these purposes will be available
when needed or, if available, on terms acceptable to the Company.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of 3CI and its
divisions. All significant intercompany accounts and transactions are eliminated
in consolidation.
INVENTORY
Inventory, consisting of containers and supplies, are stated at the lower of
cost (first-in, first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation of property,
plant and equipment is calculated on the straight-line method over the estimated
useful lives of the assets. Expenditures for major renewals and betterments are
capitalized; expenditures for repairs and maintenance are charged to expense as
incurred.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued Statement No. 121, Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
46
48
to be generated by those assets are less than the assets carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company adopted Statement 121 in 1996 and, has
completed an analysis to determine the impact. See Note 12 for write off of
intangibles pursuant to early implementation of SFAS No. 121 during the fiscal
year 1996.
INCINERATION RIGHTS AND PERMITS
The incineration rights represent amounts capitalized pursuant to the reverse
merger of 3CI for incineration contracts with the cities of Carthage and Center,
Texas (the Cities) which own the incineration facilities. The amortization of
the incineration rights commences at the start of the contract and is amortized
on the straight-line method over nine years. Costs associated with the permits
are being amortized over the life of the contracts. See Note 12 for write off of
intangibles pursuant to early implementation of SFAS No. 121 during the fiscal
year 1996.
INTANGIBLE ASSETS
Intangible assets are amortized on a straight-line method as follows:
Excess of cost over net assets acquired 40 years
Permits 7-20 years
Customer lists 5-10 years
Amortization expense charged to operations for the years ended September 30,
1996, September 30, 1995 and for the year ended September 30, 1994 was $839,089,
$756,893 and $490,204, respectively.
Management evaluates the realization of the intangible assets recorded for each
acquisition based on the prospects for the ongoing operations of each acquired
company.
See Note 12 for write off of intangibles pursuant to early implementation of
SFAS No. 121 during the fiscal year 1996.
REVENUE RECOGNITION
The Company recognizes revenue from the treatment of medical waste in the period
in which the wastes are treated.
NET LOSS PER SHARE
Net loss per common share was computed by dividing the net loss by the weighted
average number of common shares outstanding. For the years ended September 30,
1996, 1995 and 1994 the weighted average common shares outstanding was
8,872,348, 8,530,611, and 5,636,030, respectively. The 865,500 shares issued in
connection with the acquisition of River Bay have been excluded from weighted
average shares outstanding. The accretion of the Stock Put Option (Note 2) is
reflected as a reduction of net income in determining net income to common
shareholders. In conjunction with the business acquistion described in Note 2,
the weighted average shares outstanding have been retroactively restated for
reverse aquistion accounting to reflect the equivalent shares based on the
conversion ratio established in the merger transaction. The effect of stock
options and warrants is antidilutive and is therefore not considered in the
calculations of net loss per common share.
47
49
SHAREHOLDERS' EQUITY (DEFICIT)
During the fiscal year 1995, the Company increased the number of common and
preferred shares authorized to 15 million and 1 million, respectively.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents.
RESTRICTED CASH
At September 30, 1996, and September 30, 1995 cash of $130,000 and $100,000,
respectively, was restricted pursuant to an irrevocable standby letter of credit
related to Workers Compensation insurance.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes in
accordance with the provisions of Statement of Financial Accounting Standards
No. 109 (SFAS No. 109). SFAS No. 109 requires that deferred income taxes reflect
the tax consequences of differences between the tax bases of assets and
liabilities and their financial reporting amounts.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior financial statements to
conform to the classifications used in the current financial statements.
MANAGEMENT ESTIMATES
Management has used estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could vary from the estimates that were used.
2. BUSINESS ACQUISITIONS
AMTC AND A/MED
The business acquisition, as discussed in Note 1, has been recorded using the
purchase method of accounting. All purchase accounting adjustments are
applicable to 3CI, the acquired company for accounting purposes. The operations
of 3CI are included in the accompanying financial statements from the February
1994 purchase date forward. The purchase price, consisting of 3,500,000 shares
of common stock (3CI's outstanding shares immediately preceding the acquisition
and deemed to have been issued in accordance with reverse acquisition
accounting) valued at $7,000,000 and transaction costs of $710,239, have been
allocated to 3CI's assets and liabilities based upon their estimated fair values
at the date of acquisition. The fair values allocated are as follows:
Current assets $ 1,818,478
Property, plant and equipment 1,639,887
Excess of cost over net assets acquired 4,285,019
Incineration rights and permits 1,810,109
Other assets 1,548
Current liabilities (1,787,494)
Long-term debt, net of current portion (57,308)
---------------
$ 7,710,239
===============
During fiscal year 1995, additional adjustments were made to the excess of cost
over net assets acquired related to this acquisition.
48
50
At the time of the reverse merger, two former officers held warrants to purchase
an aggregate of 100,000 shares of common stock at $3.00 per share. These
warrants expire December 31, 1996.
In anticipation of the acquisition of 3CI, WSI and an officer of A/MED
converted a total of $3,100,000 of debt to equity, as described in Note 5.
MED-WASTE DISPOSAL SERVICE, INC. OF ARKANSAS
In August 1994, the Company acquired all of the assets and business operations
and assumed substantially all of the liabilities of Med-Waste Disposal Service,
Inc. of Arkansas ("Med-Waste Arkansas") in exchange for 525,000 shares of 3CI
common stock. The transaction also contains a provision for the issuance of up
to 300,000 additional shares based on performance objectives. At September 30,
1995, 145,470 additional shares had qualified and were issued in January 1996
under this provision and are reflected in the excess of cost over net assets
acquired as shown below. Med-Waste Arkansas is engaged in the disposal of
biomedical waste services in Arkansas and Missouri. The operations of Med-Waste
Arkansas are included from the August 1994 purchase date forward. The purchase
price has been allocated to the underlying assets and liabilities based upon
their respective estimated fair values at the date of aquistion.
The fair values allocated are as follows:
Current assets $ 149,047
Property, plant and equipment 70,018
Excess of cost over net assets acquired 639,299
Current liabilities (4,649)
------------
$ 853,715
============
The above allocation has been adjusted to reflect the earned and issuable shares
during fiscal 1995 pursuant to the purchase agreement.
RIVER BAY CORPORATION
In October 1994 the Company aquired substantially all of the assets and assumed
certain liabilities of River Bay Corporation, a Mississippi Corporation ("River
Bay"), in consideration for 865,500 shares of common stock and additional shares
of common stock contingent upon the profits of the operations attributable to
the assets purchased from River Bay through December 31, 1996. In addition, the
Company issued to River Bay a promissory note in the original principal amount
of $1,000,000 bearing an interest rate of 8.75%, which as amended, provides for
monthly principal payments ranging from $50,000 to $100,000 through February
1996.
Pursuant to a Put Option Agreeent with River Bay, as amended ("Put Option"),
the Company, in October 1995, repurchased 300,000 of the shares of common stock
issued in connection with acquisistion in consideration for its promissory note
in the original principal amount of $900,000 ($3.00 per share) and providing
for monthly principal payments ranging from $25,000 to $75,000, plus interest,
through January 1997. This note payable has been recorded as of September 30,
1995 and is reflected in Long-Term Debt and Current Portion of Long Term Debt
on the accompanying balance sheet. Pursuant to the Put Option, the Company is
obligated to repurchase the remaining shares of 3CI common stock issued in
connection with the acquisition at the option of River Bay, from February 1,
1997 until April 1, 1997 for $3.00 per share. The liability associated with the
Put Option covering the remaining shares is included in Accrued Stock Put
Option on the accompanying balance sheet. The Company has begun discussions
with River Bay regarding the exercising of the Put Option. There is no
definitive agreement in place towards a renegotiation of the terms. If no
resolution can be achieved by February 1, 1997, the Company is not in a
financial position to have the ability to repurchase the shares and would
likely be forced to seek bankruptcy protection.
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The obligations of the Company under the Put Option and its promissory notes
payable to WSI are secured by a security interest in certain of the assets
purchased from River Bay and future accounts receivable attributable to the
assets acquired from River Bay.
River Bay has been engaged in the business of medical waste management services
in Mississippi, Tennessee, Florida, Georgia and Alabama.
The operations of River Bay are included from the October 1994 purchase date
forward. The purchase price has been allocated to the underlying assets and
liabilites based upon their respective estimated fair values at the date of
acquisition.
The fair values allocated are as follows:
Current ssets $ 325,379
Property, plant & equipment 2,054,193
Excess of cost over fair value of net assets acquired 3,379,565
Incineration Rights and permits 75,307
Other assets 7,186
Notes payable (822,416)
Other current liabilities (1,301,694)
================
$ 3,717,520
================
During fiscal year 1995, adjustments were made to the preliminary purchase price
allocation based on updated information.
The following unaudited pro forma information gives effect to the acquisistions
of AMTC, A/MED, and Med-Waste Arkansas by the Company as if the acquistions had
occurred on October 1, 1994. The operations of each acquisition, including River
Bay, are included in the historical consolidated statement of operations for the
full years ended September 30, 1995 and 1996, therfore the pro forma and
historical balances are the same. The pro forma amounts presented may not be
indicative of results that would have actually resulted if the transactions had
occurred on October 1, 1994, or which may be achieved in the future. The
acquistion of River Bay is not included in the pro-forma information as
financial information for that period is not available.
(unaudited)
Year ended Year ended
September 30,1994 September 30, 1993
----------------- ------------------
Pro Forma
Revenues $ 16,099,000 $ 13,798,000
Net Income (Loss) $ (1,073,000) $ (1,512,000
Net Income (Loss) per share $ (0.14) (0.23)
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3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
September 30, September 30,
1996 1995 Useful Life
------------------------------- -----------
Land $ 590,600 $ 584,940
Buildings and improvements 1,537,836 1,573,843 3-40 years
Transportation equipment 3,917,390 3,953,299 5-10 years
Machinery and equipment 4,859,445 4,773,135 5-20 years
Furniture and fixtures 490,873 349,146 3-10 years
Construction in progress - 810,528
----------- ------------
$11,396,144 $ 12,044,891
=========== ============
Depreciation expense charged to operations was $1,385,072, $1,219,319, and
$746,388 for years ending September 30, 1996,1995 and 1994, respectively. A
thorough analysis was done of the fixed asset of American 3CI. In conjunction
with the analysis, the Company reconsidered the appropriate asset lives as well
as revising various accounting policies as a result of recent operating
experiences and current market conditions. This write down of $1,183,446 appears
as "Write off of fixed assets" on the Consolidated Statement of Operations.
A substantial portion of the Company's property, plant and equipment has been
pledged as collateral against certain of the Company's liabilities.
4. NOTES PAYABLE:
September 30, September 30,
1996 1995
------------- -------------
Notes payable to an insurance company,
due in monthly installments including
interest of 7 to 9% through April 1996,
unsecured. 211,928 226,501
======= =======
5. LONG-TERM DEBT:
Long-term debt - unaffiliated lenders consists of the following:
September 30, September 30,
1996 1995
------------- -------------
Note payable to prior owner of Incendere,
with 34% of interest being paid quarterly
and 66% of interest deferred and added to
principal until May 21, 1995. Thereafter,
principal and interest are due in equal
monthly installments until maturity on
May 21, 1998, convertible into common
stock at $3.00 per share, secured by
substantially all of the assets of A/MED $ 615,166 $ 970,927
Notes payable for purchased vehicles and
equipment held as collateral, due in
monthly installments, including interest,
at rates ranging from 7% to 16.75%,
maturing through 1999. 991,008 988,957
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Note Payable to Stone Container Corp.
due in monthly payments with interest
at 10% through 1997. 74,539 149,829
Notes Payable to River Bay Corporation
due in monthly payments with interest of
8.75% through January 1997, secured by
accounts receivables and equipment 375,977 1,238,901
Note payable to bank with interest at
the prime rate plus one, past due,
secured by real estate. - 90,000
------------ -----------
2,056,690 3,438,614
Less-Current portion ( 1,314,290) (1,962,992)
------------ -----------
$ 742,400 $1,475,622
============ ===========
Long-term debt - majority shareholder consists of the following:
September 30, September 30,
1996 1995
------------- -------------
Revolving note payable to WSI,
bearing interest at the prime
rate, due December 31, 1996 with
interest payable quarterly. $ 8,842,969 $4,100,000
Less-current portion (8,842,969) ( - )
------------- -------------
$ - $4,100,000
============= =============
Effective December 30, 1993, WSI converted debt totaling $3,000,000 to the
equivalent of 627,496 shares of 3CI common stock and restructured the remaining
debt, including accrued interest into new notes with revised terms. At the same
time, an officer who held a 10 percent participating interest in the note
payable to the prior owner of Incendere converted $100,000 principal balance of
the note into equity as partial consideration for the officer in exercising his
option to purchase the equivalent of 39,174 shares at $2.55 per share.
Effective April 1, 1994, WSI converted long-term debt totaling $4,580,599 plus
accrued interest payable of $91,374 to the equivalent of 1,557,324 shares of
common stock. This conversion of debt to equity was accomplished at the average
cost to WSI of $3.00 per share for 3CI common stock.
Effective April 1995, WSI purchased an additional 416,667 shares of common stock
of 3CI at $2.40 per share in consideration for the conversion of a $1,000,000
non-interest bearing cash advance made by WSI to the Company in November 1994.
In February, March, April, May and July 1995, WSI made non-interest bearing cash
advances totaling $4,100,000 to the Company. In June 1995, the Company executed
a $6,000,000 revolving promissory note, to be funded at the discretion of WSI,
which was utilized to repay the advances not converted to common stock. This
Revolving Promissory Note was renegotiated in September 1995 increasing the
total available to $8,000,000 including interest with the principal portion not
to exceed $7,400,000. The note bears interest at the prime rate and is payable
on December 31, 1996. Interest is payable in quarterly installments which are
automatically added to the outstanding balance, if not paid. The note agreement
contains various covenants that among other things require the Company's net
after tax loss before stock accretion for the 3 months ended December 31, 1995
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shall not exceed $600,000; the net after-tax income for the 3 months ended March
31, 1996, June 30, 1996 and September 30, 1996 shall be at least $100,000,
$200,000 and $300,000, respectively (excluding any expenses connected with
litigation commenced prior to September 30, 1995). Due to continuing losses the
Company was not in compliance with the loan covenants described above. In each
of the quarters for the fiscal year ending 1996 the Company requested and
received financial waivers from WSI related to each of the quarters. Since
September 30, 1996, WSI has made additional cash advances to the Company
totaling $960,000 including interest. Due to the additional cash advances that
have been made in excess of the principal in the original promissory note, the
Company entered into a second Revolving Credit Facility of $2.7 million
including deferred interest, dated December 20, 1996 with maturity date of
February 28, 1997. The Promissory Note dated September 30, 1995 has a due date
of December 31, 1996 of which the Company has requested from and received a 30
day extension until January 31, 1997 to discuss with WSI on the possibility of
restructuring the terms of the Revolving Promissory Note.
Payments due on long-term debt, during each of the five years subsequent to
September 30, 1996 are as follows:
1997.......................................... $10,157,259
1998.......................................... 452,307
1999.......................................... 163,031
2000.......................................... 127,063
2001.......................................... -
The Company interest expense of $871,910, $666,157 and $206,839 for the
years ended September 30, 1996, 1995 and 1994, respectively.
6. INCINERATION CONTRACTS:
The Company is a party to exclusive incineration contracts with the Cities
whereby the Company is guaranteed minimum weekly burn capacity and is required
to pay fees to the Cities based on the total pounds incinerated. These contract
rights were obtained in exchange for the Predecessor Companies purchasing
certain equipment for the Cities' incinerators which enabled the Cities to meet
all current federal and state emissions control standards. Due to problems
arising from contractual agreements with the City of Center the Company is
presently not utilizing the incinerator at the City of Center for the treatment
of medical waste.
The Cities require minimum annual payments under the combined contracts as
follows:
Minimum Required
For The Year Ended September 30, Payments
-------------------------------- ----------------
1997............................. 1,762,000
1998............................. 1,597,000
1999............................. 1,000,000
2000............................. 666,667
-------------
$ 5,025,667
In the event the Company fails to meet the minimum amounts of annual guarantees
to the respective Cities, after giving effect to amounts paid above prior years'
annual required minimums (on a cumulative basis), the Cities have the option to
terminate the Company's exclusive incineration rights.
The incineration contract with Center, Texas is renewable at the Company's
option beginning in fiscal 1998 with a minimum payment requirement of $1 million
for each of the subsequent five years. Renewal periods and amounts not yet
accepted are not included in the above schedule of minimum annual payments.
Included in cost of sales for the years ended September 30, 1996, 1995 and 1994,
is $1,542,842, $1,348,355 and $1,065,288 respectively, related to incineration
costs at the Cities since the reverse merger.
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7. INCOME TAXES:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax rate used was 37
percent for the years ended September 30, 1996, 1995 and 1994 representing the
federal rate and an average of state income tax rates. The components of
deferred income tax liabilities and assets are as follows:
September 30, September 30, September 30,
1996 1995 1994
------------- ------------- -------------
Deferred income tax Liabilities -
Property and equipment $ 1,115,998 $ 771,017 $ 550,867
Other 67,200 92,513 83,160
----------- --------- ---------
Total deferred income tax liabilities 1,183,198 863,530 634,027
Deferred income tax assets
Net operating loss carryforward 7,910,438 3,712,934 2,353,184
Bad debt reserves 344,468 452,610 190,020
Other 940,358 523,553 68,330
----------- --------- ---------
Total deferred income tax assets 9,195,264 4,689,097 2,611,534
Valuation allowance (8,012,066) (3,825,567) (1,977,507)
----------- --------- -----------
Net deferred income tax asset (1,183,198) (863,530) 634,027
----------- --------- ----------
Total deferred income tax assets and
Liabilities $ - $ - $ -
At September 30, 1996, the Company had approximately $20,000,377 of net
operating loss carryforwards for federal tax purposes which will expire
beginning in 2004. The Company also had state net operating losses at September
30, 1996. The Company has established a valuation allowance for the federal and
state net operating losses of $8,012,066 and $3,825,567 as of September 30,
1996, 1995 and 1994, respectively. Because of separate return limitations,
change in ownership limitations, and the weight of available evidence, it is
more likely than not that some portion or possibly all of the net operating
losses will not be available for use by the consolidated entities.
8. STOCK OPTION PLAN:
In conjunction with the business acquisition described in Note 1, a stock option
plan (the Plan) approved by 3CI's previous shareholders in 1992 totaling 500,000
shares remained in effect. The purpose of the Plan is to provide additional
incentives to officers and employees of the Company who are primarily
responsible for the management and growth of the Company. Each option granted
pursuant to the Plan shall be designated at the time of grant as either an
"incentive stock option" or as a "non-qualified stock option". The exercise
price equals or exceeds the market price as of the grant date. At September 30,
1995, the Company had 230,000 shares outstanding under option for two officers
and one former officer of the Company, of which all were exercisable, at option
prices of $3.00 to $4.00 per share. During 1995, the Company reduced the total
shares available under the plan to 375,000 shares , resulting in 145,000
available for future issuance as of September 30, 1995 and 1996.
54
56
9. CONCENTRATION OF CREDIT RISK:
The Company's customers are concentrated in the medical industry and, therefore,
changes in economic, regulatory and other factors which affect the medical
industry may impact the Company's overall credit risk. The Company monitors the
status of its receivables including follow-up directly with customers on past
due balances.
10. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 (Disclosure of Financial Instruments) requires companies to
disclose the fair value of each class of financial instruments for which it is
practical to estimate that value and for which the recorded value significantly
differs from the fair market value. The Company's primary financial instruments
are accounts receivable, notes payable, accounts payable and accrued
liabilities. The fair value of accounts receivable approximates its carrying
amount. Because of the absence of availability of alternative financing and the
substantial doubt about the Company's ability to continue as a going concern, it
is not practical to estimate the fair values of notes payable, accounts payable
and accrued liabilities.
11. RELATED PARTY TRANSACTIONS:
In April 1994, WSI, which beneficially owns 53.7% of the outstanding shares of
3CI common stock, purchased 1,557,324 shares of Common Stock of the Company in
consideration for the conversion by WSI of long-term debt totaling $4,580,599,
plus accrued interest of $91,374 ($3.00 per share).
In April 1995, WSI purchased an additional 416,667 shares of 3CI common stock in
consideration for the conversion by WSI of a $1,000,000 non-interest-bearing
cash advance made by WSI to the Company in November 1994 ($2.40 per share).
In February, March, May, and July 1995, WSI made additional cash advances of
$4,100,000 to the Company.
Charles Crochet, President of the Company, had previously entered into an
agreement with A/MED for an award of stock valued at $150,000 or of that amount
of cash to be used to purchase stock in the event of an initial public offering.
The parties have agreed that the reverse acquisition of A/MED and AMTC is
equivalent to an initial public offering for purposes of the agreement. Mr.
Crochet has agreed to forego the award under the agreement in return for
additional stock options.
In Fiscal 1995, the Company expensed approximately $310,000 for certain services
provided to the Company by WSI and for reimbursement of expenses incurred on
behalf of the Company.
The Company has attempted to arrange financing with third party lenders,
however, they have been unable to do so at commercially acceptable terms. In the
absence of availability of third party financing, the Company is unable to
determine the fair value of its $8 million and $2.7 million revolving
promissory notes from WSI.
The Company had loans from WSI, its majority shareholder, outstanding during
1994, 1995, and 1996. Related interest expense in the amount of $630,616,
$112,500, and $221,246 was recorded for the years ended September 30, 1996 and
1995, and 1994.
The Company currently does business with an equipment company owned by the
father of Charles Crochet, the President of the Company. No payments were made
during the years ended September 30, 1994, 1995 and 1996. There remains an
outstanding invoice of $20,000 payable to Crochet Construction Company as of
September 30, 1995 and September 30, 1996.
The Company leased a vehicle from a partnership controlled by certain
shareholders of the Company. The Company paid the partnership $20,935 for the
year ended September 30, 1995, $13,500 for the year ended September 30, 1994.
Additionally, the Company paid approximately $20,000 in consulting fees to this
partnership during 1995.
55
57
In connection with the acquisition of A/MED and AMTC in February 1994 which
resulted in the resignation of certain executive officers, the company paid (i)
Jerry A. Argovitz, former President and Chief Executive Officer, $227,000, (ii)
James T. Rash, former Chairman of the Board, $208,333, and (iii) Leonard Bedell,
former Senior Vice President, Chief Financial Officer and Treasurer, $144,000.
Such Payments were made in cash and promissory notes in consideration for the
cancellation of certain employment contracts and outstanding options to purchase
3CI common stock held by the former executive officers.
During 1996, the Company has made purchases of business forms with a company
owned by the father of Curtis W. Crane, the Chief Financial Officer of the
Company. Payments to the business forms company during fiscal year ended
September 30, 1996 totaled $22,000.
12. INTANGIBLE ASSET WRITE-OFF
In fiscal 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. An evaluation of the fair value of the assets associated with
the Company's operations resulted in the determination that certain intangible
assets were impaired. The impaired assets were written down by $11,385,328. Fair
value was based on the estimated future cash flows to be generated by these
intangible assets. This writedown is included in the "Write off of Intangibles"
amount for fiscal 1996 on the Consolidated Statements of Operations.
13. COMMITMENTS AND CONTINGENCIES:
In May 1995, a group of minority stockholders of the Company, including Patrick
Grafton, former Chief Executive Officer of the Company, acting individually and
purportedly on behalf of all minority stockholders, and on behalf of the
Company, filed suit in James T. Rash, et al v. Waste Systems, Inc., et al, No.
95-024912 in the District Court of Harris County, Texas, 129th Judicial
District, against the Company, WSI and various directors of the Company. The
plaintiffs have alleged minority stockholder oppression, breach of fiduciary
duty and breach of contract and "thwarting of reasonable expectations" and have
demanded an accounting, appointment of a receiver for the sale of the Company,
unspecified actual damages and punitive damages of $10 million, plus attorney's
fees. In addition, Mr. Grafton has alleged unspecified damages as a result of
his removal as an officer and director of the Company and the Company's failure
to renew his employment agreement in March 1995 and has alleged that such
removal was wrongful and ineffective. The Company's insurer has denied coverage
in the lawsuit. The Company has denied all material allegations of the lawsuit
and believes that the resolution of this matter, including attorneys fees
incurred in the Company's defense could have a material adverse effect on the
Company's financial condition. However, the outcome of this cannot be
predicted, and an adverse decision in the lawsuit would likely have a material
adverse effect on the Company's financial condition and results of operations.
In June 1995, the former stockholders of Med-Waste filed suit in James H.
Shepherd, et al v. 3CI Complete Compliance Corporation, et al, No.
C.V.-95-1441-1 in the Circuit Court of Hot Spring County, Arkansas, against the
Company and various current and former officers and directors of the Company.
Plaintiffs have alleged violations of federal and state securities laws, breach
of contract, common law fraud and negligence in connection with the acquisition
of Med-Waste by the Company and have demanded rescission, restitution,
unspecified actual damages and punitive damages of $10 million, plus attorney's
fees. The case was transferred to the United States District Court of the
Western District of Arkansas, Hot Spring Division and in November 1996 was
subsequently transferred to the United States District Court for the Western
District of Louisiana. The parties, other than Patrick Grafton, former Chief
Executive Officer of the Company, have agreed to settle the suit in
consideration for the issuance by the Company to the plaintiffs of 250,000
shares of Common Stock and the payment by the Company to the plaintiffs of 20%
to 55% of the pre-tax profits, as defined, attributable to the assets
56
58
previously acquired from Med-Waste until such time as the shares of Common
Stock held by the plaintiffs become freely tradable and the market price of the
Common Stock averages at least $2.50 over a period of 42 consecutive days. In
addition, the Company and WSI have agreed to repurchase the shares of Common
Stock held by the plaintiffs for $2.50 per share in certain events, including
the bankruptcy of the Company or in the event WSI ceases to be the largest
beneficial holder of the Common Stock. The obligations of the Company to the
plaintiffs are secured by a security interest in most of the assets of the
Company, and WSI has agreed to subordinate its loans to the Company, and all
related security interests, to the obligations, and the related security
interests, of the Company to the plaintiffs.
The Company is subject to certain other litigation and claims arising in the
ordinary course of business. In the opinion of management of the Company, the
amounts ultimately payable, if any, as a result of such litigation and claims
will not have a materially adverse effect on the Company's financial position or
results of operations.
The Company has received a request from the Texas Natural Resource Conservation
Commission that the Company submit an environmental remediation plan for the
site of an inactive medical waste incineration facility acquired in the reverse
merger. An accrued liability of $50,000 is included in the accompanying balance
sheet as of September 30, 1996.
The Company operates within the regulated medical waste disposal industry which
is subject to intense governmental regulation at the federal, state and local
levels. The Company believes it is currently in compliance in all material
respects with all applicable laws and regulations governing the medical waste
disposal business. However, continuing expenditures may be required in order for
the Company to remain in compliance with existing and changing regulations.
Furthermore, because the medical waste disposal industry is predicated upon the
existence of strict governmental regulation, any material relaxation of
regulatory requirements governing medical waste disposal or of their enforcement
could result in a reduced demand for the Company's services and have a material
adverse effect on the Company's revenues and financial condition. The scope and
duration of existing and future regulations affecting the medical waste disposal
industry cannot be anticipated and are subject to changing political and
economic pressures.
At September 30, 1995, the Company had employment agreements with certain key
employees providing for compensation of $130,000 for the year ended September
30, 1996. These agreements further provide for a bonus based on the achievement
of certain performance objectives. For the year ended September 30, 1996, these
performance objectives were not achieved.
At September 30, 1996, the Company had certain noncancelable leases, principally
for office space and equipment, with various expiration dates. Future minimum
rentals under such leases for the following fiscal years aggregate $605,000 for
1997, $353,000 for 1998, $106,000 for 1999 $60,000 for 2000 and $135,000
thereafter.
The Company granted River Bay Corporaton security interests in certain of the
assets purchased from River Bay and certain accounts receivable attributable to
these purchased assets to secure future debt and the put option.
57
59
The Company has agreed to pay the President of River Bay Corporation
approximately $65,000 over a period of 15 months related to the settlement of
certain issues. This liability is included in accrued liabilites in the
September 30, 1995 and September 30, 1996 balance sheet.
The Company has committed to reimburse WSI approximately $6,000 per month for
services provided and costs incurred by the Company's vice president.
Mr. Charles D. Crochet serves as President of the Company pursuant to an
employment agreement commencing February 1994 and ending September 1995. Mr.
Crochet was entitled to a salary of $6,250 per month in February and March 1994,
and then $7,500 per month from April through September 1994, increasing to
$9,583 per month commencing October 1994 through September 1995. This employment
agreement was renegiotiated and modified in August 1995, increasing Mr.
Crochet's salary to $10,833 per month commencing October 1, 1995 and thereafter
increases to $13,333 on October 1, 1997, and continues through May 1998. As an
additional incentive to Mr. Crochet under the new employment agreement, Mr.
Crochet is eligible for an annual bonus based on Fiscal Year Pre-Tax Profits as
a percentage of Revenues. The amount of such annual bonus is based on a
percentage between 6% and 10% of an amount determined by the Board of Directors
from an approved bonus plan, such actual percentage depending upon the Company's
Pre-Tax Profits as a percentage of Revenue.
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60
3CI COMPLETE COMPLIANCE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II
===================================================================================================================================
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
CLASSIFICATION OF PERIOD EXPENSES ACCOUNTS OF PERIOD
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1996
ALLOWANCE FOR DOUBTFUL ACCOUNTS $ 1,283,269 $ 380,256 ($ 672,531) $ 990,994
------------ ------------ ------------ ------------
1,283,269 380,256 (672,531) 990,994
============ ============ ============ ============
FOR THE YEAR ENDED SEPTEMBER 30, 1995:
ALLOWANCE FOR DOUBTFUL ACCOUNTS 573,567 838,209 (128,507) 1,283,269
------------ ------------ ------------ ------------
573,567 838,209 (128,507) 1,283,269
============ ============ ============ ============
FOR THE YEAR ENDED SEPTEMBER 30, 1994:
ALLOWANCE FOR DOUBTFUL ACCOUNTS 53,000 460,567 60,000 573,567
------------ ------------ ------------ ------------
53,000 460,567 60,000 573,567
============ ============ ============ ============
59
61
INDEX TO EXHIBITS
EXHIBITS
Except as otherwise indicated, the following documents are incorporated
by reference as Exhibits to this Report (as used in the following
listing, "3CI" refers to the Company):
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1. Copy of Agreement of Purchase and Sale dated as of June
27, 1991 by, between and among American Medical
Technologies, Inc., Harry Argovitz, et ux, Complete
Compliance Corporation and 3CI Transportation Systems
Corporation, as amended by the First Amendment thereto
dated as of September 3, 1991 and the Second Amendment
thereto dated as of October 7, 1991 (incorporated by
reference to Exhibit 10(a) of 3CI's registration
statement on Form S-1 (No. 33-45632) effective April 14,
1992).
2.2. Copy of Blanket Conveyance, Bill of Sale and Assignment
dated as of September 6, 1991 executed and delivered by
American Medical Technologies, Inc., in favor of 3CI
(incorporated by reference to Exhibit 10(o) of 3CI's
registration statement on Form S-1 (No. 33-45632)
effective April 14, 1992).
2.3. Copy of Asset Purchase Agreement dated as of December
10, 1991 between 3CI, MedCon, Inc., and Harry S. Allen,
individually and as sole shareholder of MedCon, Inc.
(incorporated by reference to Exhibit 10(d) of 3CI's
registration statement on Form S-1 (No. 33-45632)
effective April 14, 1992).
2.4. Copy of First Amendment dated March 26, 1992 to Asset
Purchase Agreement by, and between and among, MedCon,
Inc., Harry S. Allen, as sole shareholder of MedCon,
Inc., and 3CI (incorporated by reference to Exhibit
10(n) of 3CI's registration statement on Form S-1 (No.
33-45632) effective April 14, 1992).
2.5. Copy of Second Amendment dated May 22, 1992 to Asset
Purchase Agreement by, between and among MedCon, Inc.,
Harry S. Allen, as the sole shareholder of MedCon, Inc.
and 3CI (incorporated by reference to Exhibit 2.6 of
3CI's Annual Report on Form 10-K for the fiscal year
ended September 30, 1992).
2.6. Copy of Third Amendment dated October, 1992 to Asset
Purchase Agreement by, between and among MedCon, Inc.,
Harry S. Allen, as sole shareholder of MedCon, Inc. and
3CI (incorporated by reference to Exhibit 2.7 of 3CI's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1992).
2.7. Purchase Agreement and Plan of Reorganization dated
February 4, 1994, among A/MED, Inc, 3CI Complete
Compliance Corporation and 3CI Acquisition Corp./A/MED
(incorporated by reference to Exhibit 1.1 of 3CI's
report on Form 8-K filed February 7, 1994).
2.8. Purchase Agreement and Plan of Reorganization dated
February 4, 1994, among A/Med, Inc., 3CI Complete
Compliance Corporation and 3CI Acquisition Corp./A/MED
(incorporated by reference to Exhibit 1.2 of 3CI's
report on Form 8-K filed February 7, 1994).
2.9. Stock Purchase Agreement dated February 4, 1995,
between Waste Systems, Inc. and 3CI
Complete Compliance Corporation (incorporated by
reference to Exhibit 1.3 of 3CI's report on Form 8-K
filed February 7, 1994).
62
2.10. Purchase Agreement dated October 10, 1994, among 3CI
Complete Compliance Corporation, River Bay Corporation
and Marlan Baucum (incorporated by reference to Exhibit
1.1 of 3CI's report on Form 8-K filed October 27, 1994).
2.11. Addendum to Purchase Agreement dated October 12, 1994,
among 3CI Complete Compliance Corporation, River Bay
Corporation and Marlan Baucum. (incorporated by
reference to Exhibit 1.2 of 3CI's report on Form 8-K
filed October 27, 1994).
2.12. Assumption of Liabilities dated October 10, 1994,
among 3CI Complete Compliance Corporation, 3CI
Acquisition Corp./A/MED, Marlan Baucum and River Bay
Corporation. (incorporated by reference to Exhibit
1.11 of 3CI's report on Form 8-k filed October
27, 1994).
2.13. Plan of Reorganization and Acquisition Agreement dated
August 9, 1994, among the 3CI, Med-Waste Disposal
Service, Inc., Jim Shepherd, Mike Shepherd and Richard
McElhannon (incorporated by reference to Exhibit 2.14 of
3CI's Annual Report on Form 10-K for the fiscal year
ended September 30, 1992).
3.1. Copy of 3CI's Certificate of Incorporation as amended
(incorporated by reference to Exhibit 3(a) of 3CI's
registration statement on Form S-1 (No. 33-45632)
effective April 14, 1992).
3.2. Copy of 3CI's Certificate of Incorporation, as amended
effective June 13, 1995 (incorporated by reference to
Exhibit 3.1 of 3CI's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1995).
3.3. Copy of 3CI's Bylaws, as amended (incorporated by
reference to Exhibit 3(b) of 3CI's registration
statement on Form S-1 (No. 33-45632) effective
April 14, 1992).
3.4. Copy of 3CI's Bylaws, as amended effective May 14, 1995
(incorporated by reference to Exhibit 3.2 of 3CI's
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1995).
4.1. Copy of Representative Warrant Agreement dated as of
April 14, 1992 (incorporated by reference to
Exhibit 4(b) of 3CI's registration statement on
Form S-1 (No. 33-45632) effective April 14, 1992).
4.2. Copy of Promissory Note of the Company dated January 13,
1993, in the principal amount of $200,000, bearing
interest payable quarterly at payee's prime rate plus 1%
payable on or before January 15, 1995, to the order of
Midlantic National Bank with payment of principal
subject to the conditions specified in Paragraph 14 of
said promissory note (incorporated by reference to
Exhibit 4.2. of 3CI's Annual Report on Form 10-K for the
fiscal year ended September 30, 1992).
4.3. Copy of Deed of Trust, Assignment, Security Agreement
and Financing Statement dated January 13, 1993, granted
and delivered by the Company in favor of Midlantic
National Bank to secure the Company's promissory note of
even date referred to in Exhibit 4.2. immediately above
(incorporated by reference to Exhibit 4.3. of 3CI's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1992).
4.4. Copy of Warrant No. 3CI-01 issued to James T. Rash
providing for the purchase on or before December
31, 1996 of 50,000 warrants of the common stock of
3CI at a purchase price of $3.00 per share, subject
to adjustment as therein provided (incorporated by
reference to Exhibit 4.4 of 3CI's Annual Report on
Form 10-K for the fiscal year ended
September 30, 1993).
63
4.5. Copy of Warrant No. 3CI-02 issued to Leonard A. Bedell
providing for the purchase on or before December
31, 1996 of 50,000 warrants of the common stock of
3CI at a purchase price of $3.00 per share, subject
to adjustment as therein provided. (incorporated by
reference to Exhibit 4.5 of 3CI's Annual Report on
Form 10-K for the fiscal year ended September 30, 1993).
4.6. Put Option Agreement dated October 10, 1994, among 3CI
Complete Compliance Corporation, River Bay Corporation
and Marlan Baucum (incorporated by reference to
Exhibit 1.3 of 3CI's report on Form 8-K filed
October 27, 1994).
4.7. Stock Pledge Agreement dated October 10, 1994, between
3CI Complete Compliance Corporation and River Bay
Corporation (incorporated by reference to Exhibit 1.4 of
3CI's report on Form 8-K filed October 27, 1994).
4.8. Stock Escrow and Pledge Agreement dated July 1994, among
3CI, Med-Waste Disposal Service, Inc., Jim Shepherd,
Mike Shepherd and Richard McElhannon (incorporated by
reference to Exhibit 4.11 of 3CI's Annual Report on Form
10-K for the fiscal year ended September 30, 1992).
4.9. Copy of Revolving Promissory Note dated June 1, 1995, in
the principal amount of $6,000,000 between 3CI and WSI,
its majority shareholder (incorporated by reference to
Exhibit 4.1 of 3CI's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1995).
4.10. Copy of Revolving Promissory Note dated September 1,
1995 in the principal amount of $6,000,000 between 3CI
and WSI, its majority shareholder (incorporated by
reference to Exhibit 4.2 of 3CI's quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1995).
4.11. Copy of Revolving Promissory Note dated September 30,
1995 in the principal amount of $8,000,000 between 3CI
and WSI, its majority shareholder. (incorporated by
reference to Exhibit 4.2 of 3CI's quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1995).
4.12. Copy of Revolving Promissory Note dated December 20,
1996 in the principal amount of $2,700,000 between 3CI
and WSI, its majority shareholder. (incorporated by
reference to Exhibit 4.2 of 3CI's quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1995).
4.13. Copy of extension of Revolving Promissory Note dated
December 30, 1996 in the principal amount of $8,000,000
between 3CI and WSI, its majority shareholder.
(incorporated by reference to Exhibit 4.2 of 3CI's
quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1995).
10.1. Copy of Contract dated August 22, 1989 between 3CI and
the City of Carthage, Texas, related to the incineration
of medical waste (incorporated by reference to Exhibit
10 of 3CI's registration statement on Form S-1 (No.
33-45632) effective April 14, 1992).
10.2. Copy of Addendum dated March 30, 1992 to Contract
between 3CI and the City of Carthage, Texas
(incorporated by reference to Exhibit 10 (p) of 3CI's
registration statement on Form S-1 (No. 33-45632)
effective April 14, 1992).
10.3. Copy of First Amendment dated July, 1993 to Contract
between 3CI and City of Carthage, Texas (incorporated by
reference to Exhibit 10.3 of 3CI's Annual Report on Form
10-K for the fiscal year ended September 30, 1993).
10.4. Copy of Contract dated August, 1989, between 3CI and the
City of Center, Texas, related to the incineration of
medical waste (incorporated by reference to Exhibit 10
(b) of 3CI's registration statement on Form S-1 (No.
33-45632) effective April 14, 1992).
10.5. Copy of form of Amendment No. 1 dated October 12, 1992
to the contract dated August, 1989, between 3CI and the
City of Center, Texas, related to the incineration of
medical waste (incorporated by reference to Exhibit
10.5. of 3CI's Annual Report on Form 10-K for the fiscal
year ended September 30, 1993).
10.6. Copy of form of Amendment No. 2 dated December 29, 1992
to the contract dated August, 1989, between 3CI and the
City of Center, Texas, related to the incineration of
medical waste (incorporated by reference to Exhibit
10.6. of 3CI's Annual Report on Form 10-K for the fiscal
year ended September 30, 1993).
64
10.7. Copy of form of Amendment No. 3 dated December, 1993 to
the contract dated August, 1989, between 3CI and the
City of Center, Texas, related to the incineration of
medical waste (incorporated by reference to Exhibit
10.7. of 3CI's Annual Report on Form 10-K for the fiscal
year ended September 30, 1993).
10.8. Copy of Termination Agreement, dated as of May 20, 1993,
between 3CI, Micro-Waste Corporation and the
shareholders of Micro-Waste Corporation (incorporated by
reference to Exhibit 10.17. of 3CI's Annual Report on
Form 10-K for the fiscal year ended September 30, 1993).
10.9. Copy of 1992 Stock Option Plan of 3CI (incorporated by
reference to Exhibit 10(m) of 3CI's registration
statement on Form S-1 (No. 33-45632) effective
April 14, 1992).
10.10. Promissory Note dated October 10, 1994, among 3CI
Complete Compliance Corporation, 3CI Acquisition
Corp./A/MED and River Bay Corporation (incorporated by
reference to Exhibit 1.5 of 3CI's report on Form 8-k
filed October 27, 1994).
10.11. Promissory Note dated October 10, 1994, between 3CI
Complete Compliance Corporation and River Bay
(incorporated by reference to Exhibit 1.6 of 3CI's
report on Form 8-K filed October 27, 1994).
10.12. Security Agreement dated October 10, 1994, among 3CI
Complete Compliance Corporation, 3CI Acquisition
Corp./A/MED and River Bay (incorporated by reference to
Exhibit 1.7 of 3CI's report on Form 8-K filed October
27, 1994).
10.13. Security Agreement dated October 10, 1994, between 3CI
Complete Compliance Corporation and River Bay
Corporation (incorporated by reference to Exhibit 1.8 of
3CI's report on Form 8-K filed October 27, 1994).
10.14. Mortgage, Security Agreement, Assignment of Leases and
Financing Statement dated October 10, 1994, among 3CI
Complete Compliance Corporation, 3CI Acquisition Corp.,
A/A/MED and River Bay Corporation (incorporated by
reference to Exhibit 1.9 of 3CI's report on Form 8-K
filed October 27, 1994).
10.15. Debt Subordination Agreement dated October 10, 1994,
among 3CI Complete Compliance Corporation, 3CI
Acquisition Corp./A/MED, River Bay Corporation, Marlan
Baucum, Zeb Baucum, III, Diedra Baucum, The Smith County
Bank and the Bank of Raleigh (incorporated by reference
to Exhibit 1.10 of 3CI's report on Form 8-K filed
October 27, 1994).
10.16. Non-Competition Agreement dated October 10, 1994,
between 3CI Complete Compliance Corporation and Marlan
Baucum (incorporated by reference to Exhibit 1.12 of
3CI's report on Form 8-K filed October 27, 1994).
10.17. Employment Agreement dated October 10, 1994, between 3CI
Complete Compliance Corporation and Zeb Baucum
(incorporated by reference to Exhibit 1.13 of 3CI's
report on Form 8-K filed October 27, 1994).
10.18. Consultant Agreement dated October 10, 1994, between 3CI
Complete Compliance Corporation and Marlan Baucum
(incorporated by reference to Exhibit 1.14 of 3CI's
report on Form 8-K filed October 27, 1994).
10.19. Employment Agreement dated May 20, 1994, between 3CI and
Patrick Grafton (incorporated by reference to Exhibit
10.19 of 3CI's Annual Report on Form 10-K for the fiscal
year ended September 30, 1992).
10.20. Employment Agreement dated May 20, 1994, between 3CI and
Charles Crochet (incorporated by reference to Exhibit
10.20 of 3CI's Annual Report on Form 10-K for the fiscal
year ended September 30, 1992).
10.21 Employment Agreement dated August 31, 1995, between
3CI and Charles D. Crochet. (incorporated by reference
to Exhibit 10.20 of 3CI's Annual Report on Form 10-K
for the fiscal year ended September 30, 1992).
65
10.22. Modification of Purchase Transaction dated January
25, 1995, among 3CI, 3CI Acquisition Corp./A/MED,
River Bay Corporation and Marlan Baucum (incorporated
by reference to Exhibit 10.21 of 3CI's Annual Report
on Form 10-K for the fiscal year ended
September 30, 1995).
10.23 Settlement Agreement dated January 1996 between James
Shepherd, Michael Shepherd and Richard T. McElhannon as
Releassors, and the Company, Georg Rethmann, Dr.
Herrmann Niehues, Jurgen Thomas, Charles Crochet and
Waste Systems, Inc., as Releasees.
Letter Re: Change in Certifying Accountant
(incorporated by reference to Exhibit 16.2 of 3CI's
report on Form 8-K/A filed December 28, 1994).
27 Financial Data Schedule