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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, 1998
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
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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 8, 1999
was approximately $4,663,377 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 8, 1999 was 9,767,825.
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3CI COMPLETE COMPLIANCE CORPORATION
TABLE OF CONTENTS *
ANNUAL REPORT ON FORM 10-K
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PAGE
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PART I
Item 1. Business .......................................................................... 3
Item 2. Properties .......................................................................... 12
Item 3. Legal Proceedings.................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders.................................. 13
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters......................................... 13
Item 6. Selected Financial Data.............................................................. 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... 14
Item 8. Financial Statements and Supplementary Data.......................................... 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................................ 20
PART III
Item 10. Directors and Executive Officers of the Registrant .................................. 20
Item 11. Executive Compensation............................................................... 22
Item 12. Security Ownership of Certain Beneficial
Owners and Management.......................................................... 24
Item 13. Certain Relationships and Related
Transactions................................................................... 25
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K........................................................ 26
Signature Page ............................................................................... 29
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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. It 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 medical waste generators. Services to customers include
collection, transportation, bar code identification and destruction by
controlled high temperature incineration, autoclav, microwave and chemical
grinding and heating technologies. The Company also provides training to
customers on compliance with regulations, use of containers, documentation and
tracking.
"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; waste 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. Also included are out of date or off specification
pharmaceutical wastes. "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 believes the key to success in the medical waste
management business is to provide customers a total solution to their medical
waste 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 TECHNOLOGY
INCINERATION. The Company operates two incinerators with a capacity to
treat 36 tons of medical waste per day at its Springhill, Louisiana facility
and one incinerator with a treatment capacity of 12 tons per day at its
Birmingham, Alabama location. The incineration process is a two-stage process
that 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 that 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. Ash
currently is not considered hazardous under regulations of the Environmental
Protection Agency ("EPA"), but is regulated at the state level by various state
agencies.
AUTOCLAVING. The Company has a contract with a facility in Austin,
Texas to treat waste that utilizes autoclaving as a method of medical waste
disposal. 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
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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.
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.
Although there are a range of other methods used for disposal of
medical waste, such as the use of microwave technology, incineration and
autoclaving are the most widely used technologies in the United States. The
other technologies below are accepted, but either is new or developing.
MICROWAVE. The Company operates one microwave unit with a capacity to
treat 10.8 tons of medical waste per day at its Birmingham, Alabama location.
The microwave process is an alternative technology that is compact and designed
to shred and treat medical waste in an enclosed environment. The process uses a
combination of steam and microwave heat to destroy any pathogens that are
present. The resultant waste is then classified as ordinary municipal solid
waste and is disposed of in an approved solid waste landfill.
CHEM-CLAV. The Company operates one Chem-Clav unit with a capacity to
treat 30 tons of medical waste per day at its Springhill, Louisiana facility.
The Chem-Clav is a chemically enhanced steam autoclave that uses sodium
hypocholrite, a sanitizing chemical, to pre-treat the medical waste before its
introduction into the steam autoclave. The pretreatment reduces the time,
temperature and pressure requirements of a traditional autoclave while allowing
for a safer, more efficient processing of the medical waste. The waste is
loaded into the feed hopper. The feed hopper and recirculation tanks are under
negative pressure created by a negative pressure blower. Air is drawn through a
High Efficiency Particulate Air Filter chamber before exhausting to the
atmosphere. An interlock prevents the introduction of untreated medical waste
unless the negative pressure system is functional. As the waste drops from the
hopper into the shredding unit, a mixture of sodium hypochlorite and water is
applied to the containers of waste before their being broken open by the
shredders. The shredded materials fall through a transition where additional
chemical and water solution are applied. The treated waste is then introduced
into a screw press for de-watering. The bulk of the liquid solution is
separated from the waste, leaving a chemically active film on the residual
material. The liquids are drained back into the re-circulation tank. The liquid
from the clean side of the tank is re-circulated and additional treatment
chemical is automatically added before reintroduction to the process flow. The
temperature of the re-circulated liquids is controlled at approximately
105(degree) F. to optimize chlorine release. The residual matter exits the
screw press and enters the steam conveyor where low-pressure steam is injected
at multiple ports. The residence time in the steam conveyor is thirty minutes.
The steam conveyor has integral thermocouples that are used to maintain
operational temperature in the range of 205-212(degree) F. The steam conveyor
incorporates mixing tabs enhancing the permeation of steam into the shredded
materials. A vent installed at the end of the conveyor routes excess steam to
atmosphere. The sterilized waste exits the distant end of the conveyor through
a discharge flapper valve into a compactor, and then is transported for
disposal at a licensed landfill.
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
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disposal technologies has placed the Company into a more competitive
environment as hospitals can install on site treatment technologies.
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 the Company provides and transports it
in Company vehicles to treatment facilities the Company owns or for which the
Company has long-term contractual rights. The Company uses a bar code
technology to track and record the movement of medical waste through all phases
of its handling and treatment, in compliance with applicable governmental
regulations.
The Company also enters into disposal agreements with other medical
waste transporters and manufacturers and distributors of pharmaceuticals for
the treatment and related documentation of medical waste and out dated
pharmaceuticals. The Company intends to continue to enter into such agreements
to the extent possible in order to maximize utilization of its treatment
capacity without affecting its service to its regular customers.
MEDICAL WASTE CONTAINERS
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
furnishes its customers with multiple containers, carts, plastic reusable and
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 furnishes its customers
with rigid reusable 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". 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 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 and throughout the fiscal year 1997, the
Company initiated the use of reusable plastic containers for certain customers.
The Company believes the use of reusable containers has the potential to lower
costs to the Company. The rigid, plastic containers generally are larger than
the disposable boxes and can, therefore, potentially hold greater volumes of
waste.
TRANSPORTATION
An important element of the Company's business strategy is to maximize
the efficiency with which it collects and transports regulated medical waste.
Therefore, 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.
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TREATMENT
The Company owns two incinerators in Springhill, Louisiana, with a
capacity to treat up to 36 tons of medical waste per day. During the fiscal
year ended September 30, 1998, the Company installed a Chem-Clav unit in
Springhill, Louisiana, with a capacity to treat up to 30 tons of medical waste
per day. The Company also owns an incinerator that has the capacity to treat up
to 12 tons per day and a microwave unit with the capacity to treat up to 10.8
tons per day, both of which are located in Birmingham, Alabama.
INCINERATION CONTRACTS
The Company has exclusive incineration rights, for a capacity of 30
tons per day, at an incinerator operated by the City of Carthage, Texas, which
expires in June 1999, 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 of the agreement.
During fiscal 1998, 1997 and 1996, the Company paid fees in the aggregate
amount of approximately $1,277,033, $1,401,692 and $843,958 under the
agreement.
The Company also had exclusive 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 exclusive rights
under the agreement, the Company was required to pay minimum annual fees of
approximately $300,000 to $900,000 during the term of the agreement. During
fiscal 1997 and fiscal 1996, the Company paid fees in the aggregate amount of
approximately $27,000 and $779,000 under the agreement.
During the fiscal year of 1996, the Company became aware that the City
of Center was not meeting certain contractual obligations. The most critical
obligation was the City of Center's breach of the exclusivity clause in the
contract. The Company stopped using the City of Center's incinerator and ceased
making payments of burn fees. In 1997, the City of Center filed a lawsuit to
recover $80,000 for the non-payment of burn fees and the Company filed counter
claims against the City of Center for the breach of the exclusivity in the
contract. The lawsuit was settled. The City of Center has foregone its claim of
burn fees as originally demanded and agreed to make installment payments over
24 months to the Company in the aggregate amount of $380,000 for breaking the
exclusivity of the contract.
DOCUMENTATION AND REPORTING
The bar code 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 destruction reports that document the acceptance, transportation,
treatment and third party verification of their medical waste disposal. The
Company's detailed documentation provides information on all waste it accepts
and treats, including individual container bar code number, point of origin,
date and time of pick up, date and time of treatment, weight at time of
treatment and certificate of destruction.
SAFETY TRAINING AND CONSULTATION
The Company can design 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 can instruct health care workers in the
most
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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 about 17,000
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 individual customer generates five percent
or more of the Company's consolidated revenues.
MARKETS
The Company divides its market into three categories within each
geographic region: 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 uses a three-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 customer's service needs. Second, the Company uses 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.
PRICING
The Company has experienced intense competition in pricing. Profit
margins have declined and could deteriorate further if price-cutting within the
industry persists. During fiscal 1998, there continued to be a downward
pressure in pricing by competitors to increase and maintain market share and
from the threat of on site treatment. Due to continued deep discounting
targeted toward larger hospital accounts, the Company has 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.
COMPETITION
The market for regulated medical waste collection and processing
services is highly competitive and requires substantial labor and capital
resources. The Company experiences intense competition from national, regional
and local 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. In addition, the Company faces competition from businesses and other
organizations that are attempting to commercialize alternate treatment
technologies collectively to member groups of regulated medical waste
generators. The Company majority shareholder, Waste
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Systems, Inc. ("WSI") is owned by Stericycle, Inc. ("Stericycle") which
competes in two of the Company's operating 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. 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. The Company believes that
the types of insurance it carries and amounts of coverage are customary in the
industry and are sufficient to protect the Company against the covered
liabilities. There can be no assurance, however, the Company's insurance will
be adequate under all circumstances or that the Company will be able to
maintain it's current insurance at existing levels.
EMPLOYEES
At September 30, 1998, the Company had approximately 213 full time and
12 part-time employees, three of whom were employed in executive capacities and
the remainder of whom were in transportation operations, treatment facility
operations, sales positions and administrative and clerical capacities. None of
the Company's employees are subject to collective bargaining agreements. The
Company has not experienced any strikes or work stoppages and considers its
relationship with its employees to be satisfactory.
GOVERNMENTAL REGULATIONS
GENERAL. 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 Company's activities are subject to federal laws and regulations
relating to public health and the environment. In addition to those federal
environmental and public health related laws that 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.
TREATMENT FACILITIES. The Company is required to obtain permits at
federal, local and state levels for the construction and operation of treatment
facilities, which have to date, and may continue to involve, the expenditure of
substantial resources without any assurance of success. Such permits may
include: (i) air quality permits relating to the emissions from treatment
facilities, (ii) solid waste permits relating to storage, receipt and treatment
of medical waste, the storage and disposal of residues from the treatment
facilities, and ancillary air pollution control equipment relative to
incinerators, (iii) waste-water discharge permits, (iv) storm water discharge
permits, (v) site permits, such as zoning or special use permits, relating to
the appropriateness of sites for a waste processing facility under applicable
zoning regulations, (vi) building permits and (vii) 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.
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Companies in the medical waste disposal industry often face resistance
to various permit applications from local and regional organizations, citizens
groups and residents because of the nature of the waste and the perceived
threat to air quality and public health caused by waste processing. The Company
often must conduct a public relations campaign, with an emphasis on education,
to overcome local opposition, which often is highly political and emotional.
Furthermore, once granted, permits often are 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, 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 their 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.
STATE TRANSPORT PERMITS. Transportation permits currently are 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
assurance 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 treatment
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 could be present in
infectious medical waste.
OSHA contains rules regarding exposure to blood borne pathogens, which
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:
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(a) cause, or significantly contribute to, an increase in
mortality or an increase in serious irreversible or
incapacitating reversible illness; or
(b) poses 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 being infectious 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 currently are 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, facility ash may constitute hazardous waste depending upon
the composition and characteristics of the waste ash generated by the
incineration technology employed. If so, the ash would be subject to the
hazardous waste transportation, disposal and other hazardous waste management
requirements of RCRA discussed above.
U.S. DEPARTMENT OF TRANSPORTATION. The Company's medical waste
transportation activities are subject to federal regulation by the DOT pursuant
to the Hazardous Waste Materials Transportation Act 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 promulgated by the Public Health Service
of the U.S. Department of Health and Human Services.
A significant portion of the waste the Company handles is "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.
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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 generally is 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
Super-fund 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.
FEDERAL CLEAN AIR ACT. The Company's medical waste processing
facilities may be regulated under certain other environmental statutes. The
Federal Clean Air Act, and related 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, the EPA has promulgated extensive effluent and water quality standards as
well as permitting requirements for industrial discharges of water. The Company
is 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 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 considers sharps containers to be
"medical devices", as defined under the Federal Food, Drug, and Cosmetic Act.
Most sharps containers, according to the FDA, are class II accessories to
sharps devices.
STATE REGULATION
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. The Company's vehicles,
packaging, facilities and operating procedures are subject to detailed and
comprehensive regulation on the state level. The Company's incineration
facilities are required to include controlled air combustion units, air quality
control equipment, pollution control equipment and ancillary control and
monitoring equipment. All facilities are 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.
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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 2001, under which the Company paid
approximately $71,339 during fiscal 1998. The Company owns or leases
approximately 166 specially equipped trailers and 71 trucks and tractors used
for the transportation of containerized waste. A summary description of the
Company's operating properties is set forth below:
LOCATION TYPE OF FACILITY CAPACITY OWNED/LEASE
-------- ---------------- -------- -----------
Shreveport, LA Corporate Office N/A Leased
San Marcos, TX Sales Office & Transport N/A Leased
Tulsa, OK Transportation & Transfer N/A Leased
Carthage, TX Sales & Transportation N/A Leased
Grand Prairie, TX Sales & Transportation N/A Leased
Kenner, LA Sales & Transportation N/A Leased
Fresno, TX Transfer & Transportation Station, & Sales N/A Owned
Office
Birmingham, AL Transportation & Sales N/A Leased
Jackson, MS Sales, Transfer Station, Transportation N/A Owned Land
Springhill, LA Transportation & Sales N/A Owned
Bismarck, AR Transfer Station, & Sales N/A Leased
Carthage, TX Incinerator 30 tons/day Leased
Springhill, LA Incinerator 36 tons/day Owned
Springhill, LA Chem-Clav 30 tons/day Owned
Birmingham, AL Incinerator 12 tons/day Owned
Birmingham, AL Microwave Unit 10.8 tons/day Owned
The Company believes that its facilities are adequate for its current
and foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
In September 1998, Insurance Company of the State of Pennsylvania
filed suit in Insurance Company of the State of Pennsylvania v. 3CI Complete
Compliance Corporation, No. CV98-1756S, in the United Sates District Court of
Louisiana, Shreveport, Louisiana. The plaintiff has alleged approximately
$390,000 in unpaid premiums for workers compensation insurance policies
allegedly issued between February 1994 and February 1997. The Company believes
the outcome of this lawsuit will not have a material adverse effect on the
Company's financial position, results of operations and net cash flows.
The Company is subject to certain other litigation and claims arising
in the ordinary course of business. Management believes the amounts ultimately
payable, if any, as a result of such claims and assessments will not have a
materially adverse effect on the Company's financial position, results of
operations or net cash flows.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during
the fourth quarter of the fiscal year ended September 30, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Companys Common Stock is traded over-the-counter on the NASDAQ
Small-Cap Market under the symbol TCCC. The following table sets forth the high
and low bid quotations for the Common Stock on the NASDAQ Small-Cap Market 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.
HIGH LOW
FISCAL 1997:
First Quarter $ 1 5/16 $ 13/16
Second Quarter 15/16 1/32
Third Quarter 1 3/8
Fourth Quarter 5/8 9/16
FISCAL 1998:
First Quarter $ 2 11/16 $ 3/4
Second Quarter 11/2 2 3/32
Third Quarter 2 1/8 1
Fourth Quarter 1 3/4 7/8
As of December 31, 1998, the approximate number of holders of record
of the Company's Common Stock was 425, and the closing sale price of the Common
Stock on December 31, 1998 was $1.03.
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 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 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
American Medical Transports Corporation ("AMTC") and A/MED, Inc. ("A/MED"), the
assets and liabilities of which were acquired by the Company, as well as the
historical financial information since the date of acquisition for each
acquired company. 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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YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996 1995 (2) 1994 (1)
-------------- ------------- ------------- ------------- --------------
Selected Statement of Operations Data:
Revenues ............................... $ 19,008,697 $ 18,789,749 $ 17,748,300 $ 16,522,025 $ 12,422,717
Costs and expenses:
Cost of Sales .......................... 14,058,523 14,285,834 13,815,480 11,756,968 9,273,011
Write off of intangibles ............... -- -- 11,385,328 -- --
Write off of assets .................... -- -- 1,183,446 -- --
Selling, general and administrative .... 3,110,671 3,080,398 4,343,246 6,996,575 2,452,840
Depreciation and amortization .......... 1,297,620 1,352,015 2,224,161 1,976,212 1,236,592
------------ ------------ ------------ ------------ ------------
Total operating expenses ............... 18,466,814 18,718,247 32,951,543 20,729,755 12,962,443
------------ ------------ ------------ ------------ ------------
Gain (Loss) from operations ............ 541,883 71,502 (15,203,243) (4,207,730) (539,726)
Other Expense, net ..................... (529,994) (1,159,690) (1,053,424) (655,080) (423,890)
Accretion of put option ............... -- -- (26,052) (217,075) --
------------ ------------ ------------ ------------ ------------
Net Income (Loss) ...................... $ 11,889 $ (1,088,188) $(16,282,837) $ (5,079,885) $ (963,616)
============ ============ ============ ============ ============
Basic net income (loss)
per common share .................... $ .01 $ (0.12) $ (1.84) $ (0.60) $ (0.17)
============ ============ ============ ============ ============
Diluted net income (loss) per share .... $ .01 $ (0.12) $ (1.84) $ (0.60) $ (0.17)
============ ============ ============ ============ ============
Selected Balance Sheet Data:
Working Capital (deficit) .............. (6,785,489) (6,135,666) $(10,774,499) $ (2,546,818) $ (191,840)
Property, plant and equipment, net ..... 9,897,085 8,449,748 8,462,619 9,388,722 7,641,402
Total Assets ........................ 14,618,340 13,157,605 13,374,817 25,518,596 21,567,824
Long-term Debt, current Maturities ..... 1,619,889 1,373,617 1,314,290 1,475,622 --
Long-term Debt, net of current
Maturities ............................. 986,524 986,467 742,400 5,575,622 1,403,316
Shareholders' Equity ................. 2,759,511 1,964,122 (4,014,035) 11,821,339 15,892,569
Cash dividends per share ............. -- -- -- -- --
(1) The fiscal 1994 balances include the acquisitions of AMTC and A/MED and
acquisition of the assets of Med-Waste Disposal Services, Inc. for
periods after the acquisition date.
(2) The fiscal 1995 balances include the acquisition of the assets of River
Bay Corporation after the acquisition date.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is engaged in the business of medical waste management
services in the southwestern and southeastern United States. 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 medical waste generators. Services
include
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collection, transportation, bar code identification and destruction by
controlled, high temperature incineration and alternative treatment
technologies.
The Company has experienced significant losses in recent years caused
by the debt incurred in connection with the Company's acquisitions and the
expenses related to certain litigation arising out of those acquistions, as
well as expenses of a minority shareholder suit that was settled in 1998.
Although the Company's cash flow from operations during 1998 was positive, the
Company continues to experience cash shortages because the Company uses its
current working capital to purchase capital assets. The Company anticipates
continued improvement in its cash flow from operations, but will continue to
experience limited liquidity due to the Company's debt service requirements.
Competition in the medical waste industry has been high for several
years. The Company competes against companies that have access to greater
capital resources. One of those competitors is Stericycle, which owns 100% of
the captial stock of WSI, the Company's majority shareholder. To compete in the
medical waste disposal industry on a long-term basis and fully realize its
business strategy, the Company will require additional and continued financing
and other assistance from WSI, 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. If WSI fails to
advance funds to the Company or demands payment of its current indebtedness
when due, the Company would have limited financing sources and would likely be
forced to seek bankruptcy.
The Company has substantial indebtedness owed to WSI. This
indebtedness currently consists of (i) an Amended and Restated 1995 Note (the
"Restated 1995 Note") in the principal amount of $5,488,000, and (ii) a Loan
Agreement and Note Amendment dated as of December 31, 1998 in the principal
amount of $750,000. Through a series of transactions described below, certain
additional debt that the Company owed to WSI previously was converted into
7,000,000 shares of the Company's Series B Convertible Preferred Stock, par
value $.01 per share (the "Series B Preferred Stock") and 750,000 shares of the
Company's Series C Convertible Preferred Stock, par value $.01 per share (the
"Series C Preferred Stock"). The Series B Preferred Stock and Series C
Preferred Stock have substantially identical terms. See "--Liquidity and
Capital Resources."
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1997
REVENUES increased by $218,947, or 1.2%, to $19,008,696 during the fiscal year
ended September 30, 1998, from $18,789,749 for the fiscal year ended September
30, 1997. This increase is primarily attributable to the Company focusing on
higher margin generators of medical waste, offset by lower service fees that
resulted from increasing price competition in the industry.
CASH FLOW FROM OPERATIONS increased by $1,405,126 to $818,057 for the fiscal
year ended September 30, 1998 compared to a negative of $587,069 for the fiscal
year ended September 30, 1997.
NET INCOME (LOSS) increased to $11,889 during the year ended September 30,
1998, compared to a loss of $1,088,188 during the year ended September 30,
1997. The increase was attributable to an increase in revenues, the proceeds
from the settlement of the City of Center litigation, along with decreases in
interest expense and in depreciation and amortization.
DEPRECIATION AND AMORTIZATION expense decreased to $1,297,620 for fiscal 1998
from $1,352,015 for fiscal 1997. The decrease was attributable to the completed
depreciation of of certain assets during 1997.
WORKING CAPTIAL DEFICIT increased to ($6,785,489), or 10.6%, during the fiscal
year ended September 30, 1998 compared to a deficit of ($6,135,666) at
September 30, 1997. The increased deficit was due to bank overdrafts.
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COST OF SERVICES decreased $227,312, or 1.6%, to $14,058,522 during the year
ended September 30, 1998, compared to $14,285,834 for fiscal 1997. The
principal reasons for the decrease were due to the reduction of outside
incineration fees and from lowered transportation costs. Cost of revenues as a
percentage of revenues decreased to 74.0% during 1998 from 76.0% during 1997.
SELLING, GENERAL AND ADMINISTRATIVE expenses increased to $3,110,671 during the
year ended September 30, 1998 from $3,080,398 during the year ended September
30, 1997. The increase was primarily attributable to legal fees. Selling,
general and administrative as a percentage of revenue was 16.4% in fiscal 1998
and in fiscal 1997.
INTEREST EXPENSE decreased by $240,514, or 26.7%, to $661,715 during the fiscal
year ended September 30, 1998, from $902,229 in fiscal 1997. This decrease
resulted from WSI converting $7,750,000 of outstanding indebtedness owed by the
Company to WSI into preferred stock.
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1996
REVENUES increased by $1,041,449, or 5.9%, to $18,789,749 during the fiscal
year ended September 30, 1997, from $17,748,300 for the fiscal year ended
September 30, 1996. This increase was primarily attributable to the Company
focusing on higher margin generators of medical waste, offset by lower service
fees caused by competition in the industry.
CASH FLOW FROM OPERATIONS increased by $1,320,270 to ($587,069) for the fiscal
year ended September 30, 1997 compared to a negative of ($1,907,339) for the
fiscal year ended September 30, 1996.
NET INCOME (LOSS) decreased to a loss of $1,088,188 in 1997 compared to a loss
of $16,282,837 in 1996. The decrease in the loss was attributable to one-time
charges incurred in 1996 consisting of $11,385,328 in write-offs relating to
intangible assets, $1,183,446 of write-offs of fixed assets, a $1,000,000
accrual of legal fees relating to a shareholder lawsuit, an increase in
revenues from 1996 of $1,041,449 and a decrease in depreciation and
amortization.
DEPRECIATION AND AMORTIZATION expense decreased by $872,146, or 39.2%, to
$1,352,015 during the fiscal year ended September 30, 1997 from $2,224,161 for
the fiscal year ended September 30, 1996, due principally to the impairment
loss for the intangible assets in fiscal 1996, and the related reduction in
amortization.
WORKING CAPTIAL DEFICIT dEcreased by $4,638,833 to ($6,135,666) for the fiscal
year ended September 30, 1997, from ($10,774,499) for the fiscal year ended
September 30, 1996. The decrease was due to WSI converting $7,000,000 of debt
into 1,000,000 shares of preferred stock.
COST OF SERVICES increased by $470,354, or 3.4%, to $14,285,834 during the year
ended September 30, 1997, compared to $13,815,480 for fiscal 1996. The
principal reasons for the increase was higher workers compensation insurance,
and higher fuel and labor costs. Cost of revenues as a percentage of revenues
decreased to 76.0% during 1997 from 77.8% during 1996.
SELLING, GENERAL AND ADMINISTRATIVE expenses decreased to $3,080,398 during the
year ended September 30, 1997 from $4,343,246 during the year ended September
30, 1996. The decrease was primarily attributable to the reduction of legal
fees that the Company had accrued during the fiscal year ended 1996 related to
its minority shareholders lawsuit. Selling, general and administrative as a
percentage of revenue decreased to 16.4% in fiscal 1997 from 24.5% in fiscal
1996.
INTEREST EXPENSE increased by $30,319, or 3.5%, to $902,229 in fiscal 1997 from
$871,910 in fiscal 1996 due primarily to the increase in the principal amount
of a note payable to WSI.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations, acquisitions, and
debt service through cash advances from WSI. The Company's indebtedness
currently consists of amounts owed to WSI described below, insurance premiums
that are financed over the course of each fiscal year, debt incurred in
connection with the construction of the Chem-Clav unit, and the indebtedness
incurred in connection with the purchase of rolling stock.
The Company historically has financed its capital expenditures with
internally generated funds. During fiscal 1998, 1997 and 1996, the Company
invested approximately $2,789,934, $1,417,000 and $1,180,000 respectively, for
transportation, machinery and equipment at its treatment and transportation
locations, computer equipment and software, and for certain extraordinary
expenditures. The 1998 amount includes approximately $810,000 for the
construction of the Chem-Clav technology at the Company's Springhill, Louisiana
treatment facility. The 1996 amount includes approximately $791,000 to complete
the construction of incineration facilities in Birmingham, Alabama. The Company
previously spent $550,000 during fiscal 1995 on the construction of that
facility.
The Company finances its capital expenditures along with its insurance
payments, lease payments on the Chem-clav unit and indebtedness financing its
rolling stock, with internally generated funds. Since the Company has no
external sources of financing currently available other than WSI, if the
Company is unable to fund its capital expenditure budget and other indebtedness
with internally generated funds, the Company will be required to curtail its
budget and could default on its other obligations. The Company does not
currently have any external sources of financing and does not believe any
currently available.
In June 1995, the Company executed a $6,000,000 revolving promissory
note with WSI ("the 1995 Note"). The 1995 Note was renegotiated in September
1995, to increase the total borrowings available thereunder to $8,000,000
including interest, with the principal not to exceed $7,400,000. The 1995 Note
was due and payable in full on September 30, 1998, at which time the Company
had outstanding borrowings of $5,004,403.
During fiscal year 1996, the Company received cash advances from WSI
in excess of amounts available under the 1995 Note. As a result, in December
1996, the Company and WSI entered into a $2.7 million Revolving Credit Facility
(the "1996 Credit Facility"), with a maturity date of February 28, 1997. The
maturity date was subsequently extended to June 30, 1997.
In June 1997, WSI converted $7,000,000 of debt into 1,000,000 shares
of the Company's Series A preferred stock and canceled the 1996 Credit Facility
and reduced the outstanding indebtedness of the 1995 Note by $4,300,000. During
February 1998, the Company and WSI converted an additional $750,000 of debt
under the 1995 into Series C preferred stock. In March 1998, the Company
exchanged 1,000,000 shares of Series A preferred stock for 7,000,000 shares of
Series B preferred stock.
On October 1, 1998, WSI and the Company executed the Restated 1995
Note. The principal amount of the Restated 1995 Note is approximately
$5,488,000, which includes the then outstanding balance under the 1995 Note and
certain accounts to WSI as of September 30, 1998. The Restated 1995 Note bears
interest at the prime plus 2.0%. Interest is payable in quarterly installments
on the last business day of each month, with the first installment being
payable on the last business day of January 1999. Accrued and unpaid interest
outstanding on December 31, 1998 was capitalized and added to the principal
amount of this Note effective as January 1, 1999. The outstanding principal of
this Note and accrued but unpaid interest is due and payable on September 30,
1999 (the "Initial Maturity Date"). The Company may, at any time on or before
the Initial Maturity Date, extend the maturity to a date not later than March
31, 2000 (the "Subsequent Maturity Date") upon payment to WSI a commitment fee
equal to 1.0% of the outstanding principal amount on the 1995 Restated Note.
The Company may at any time on or before the Subsequent Maturity Date extend
the maturity to a date not later than September 30, 2000 upon payment to WSI of
a commitment fee equal to 1.5% of the outstanding principal amount of the 1995
Restated Note.
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On December 18, 1998, WSI and the Company entered into a Loan
Agreement and Note Amendment (the "New Loan") under which WSI agreed to lend
$750,000 to the Company. Borrowings under the New Loan bear interest at the
lesser of (i) Prime Rate plus 3.0% or (ii) the Maximum Rate. In either case,
accrued and unpaid interest outstanding on June 30, 1999 shall be capitalized
and added to the principal amount of the New Loan effective as of July 1, 1999.
Interest accruing after June 30, 1999 shall be due and payable in monthly
installments on the last day of each month, with the first such installment
being due and payable on the last day of July 1999. The outstanding principal
balance of the New Loan is due and payable on September 30, 1999. The maturity
date of the New Loan may not be extended. Included in the New Loan is a Sale
Event fee, whereby a fee shall be due to WSI based on the occurrence of a Sale
Event, the aggregate fee payable shall not exceed $50,000.
The Company purchased a Chem-Clav unit for its Springhill, Louisiana,
facility during the fiscal year 1998. The financing was completed through a
lease purchase agreement. The Company has the option to buy out the lease at
the end of the first anniversary for $665,000 or renew the lease agreement, for
another year increasing the lease payment from $15,000 to $18,000. The Company
currently intends to renew the lease rather than exercise its buy out option.
IMPACT OF ACCOUNTING STANDARDS
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. In 1996, the Company conducted an evaluation of the long-lived assets
associated with the Company operations. The Company estimated its future cash
flows to generate by its assets less the future cash outflows expected to be
necessary to obtain those cash inflows. In preparing the analysis, the expected
future cash flows (undiscounted and without interest charges) was less than the
carrying amount of the Company's intangible assets, and the Company recognized
an impairment loss in accordance SFAS 121 of $11,385,328.
Set forth below is a summary of the write-offs relating to fixed
assets during fiscal 1996:
BUILDINGS/EQUIPMENT $12,700. During 1996, the Company replaced the
refractory in one of its incinerators due to the normal wear and tear. The net
book value of $12,700 of the previously capitalized refractory was written-off.
LEASEHOLD IMPROVEMENTS $80,000. During 1996, the Company updated and
refurbished several of its transportation and incinerator locations. Management
believed the updating and refurbishment was necessary to make the locations
more functional and efficiently operational. The Company also made an
operational decision to close its Austin, Texas, transportation location. This
closure was made in order to reduce operating costs and personnel costs.
Previous leasehold improvement costs, which were being amortized over the life
of the lease (lease was terminated due to this decision to close the location,
were written-off as they remained a part of the leased building.
TRANSPORTATION EQUIPMENT $500,746. In February 1994, the Company had a
lease agreement that was accounted for as a capitalized lease and was being
depreciated over the term of the lease agreement. During 1996, the Company
terminated the lease early due to the high cost of maintenance of
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the leased equipment. The Company had also capitalized other costs associated
with these leased assets that the Company wrote off when the lease was
terminated. As the transportation equipment was returned, the Company wrote off
the remaining capitalized net book value of $500,746.
REUSABLE CONTAINERS $12,000. In 1996, the Company moved a portion of
its customer base from disposable cardboard boxes to reusable plastic
containers. A significant investment was then made in reusable plastic
containers because the Company had estimated that the life of reusable
containers was five years. Based upon operating experience, however, the
Company estimated that a three-year life was more reflective of the actual life
of the reusable containers. Due to this change in estimate, the Company wrote
off previously capitalized reusable containers with a net book value of
$12,000.
MACHINERY & EQUIPMENT $88,000. During fiscal 1996, the Company changed
out the bags inside the scrubber at an incinerator because its bags became
excessively worn and their integrity was deteriorating. These bags had a
remaining net book value of $22,200 that was written-off. The Company also
wrote off a previously capitalized major improvement that was done to the upper
chamber of the incinerator. During 1996, the Company completed a major
improvement in the upper chamber and the previously capitalized improvement was
written-off at its net book value of $28,405. In the River Bay division,
machinery and equipment with a net book value of $37,395 was written-off.
COMPUTER & SOFTWARE $490,000. During 1994 and 1995, the Company began
capitalizing costs associated with a bar coding system and an accounting
system. The system was put into service in fiscal 1995 and was being amortized.
During fiscal 1996, due to continued problems in the ongoing training of
employees on the use of the software and the prohibitive expense of replacing
hardware due to harsh conditions, management determined the bar coding system
was no longer cost effective and abandoned the project, and wrote-off the
unamortized costs of $472,000. The Company also wrote off previously
capitalized accounting software with a remaining net book value of $18,000 that
was acquired in a previous acquisition but was abandoned when the acquired
company was integrated into the Company's accounting system in the fourth
quarter of 1996.
YEAR 2000 ISSUES
The Company has developed a plan to modify its information technology
for the year 2000 and has begun converting critical data processing systems.
The Company currently expects the project to be substantially completed by July
1999 at a cost in the range of $100,000 to $200,000. The Company has an
established plan to address all hardware and software issues related to its
business. The year 2000 plan comprises both a plan for existing hardware and
software, and a larger project to upgrade the Company's overall business
information systems. The Company is conducting an extensive search for other
potential year 2000 issues that could affect its business. Software used in
accounting is not at risk as the Company has upgraded to new software, which is
already year 2000 compliant. The Company's business is not materially impacted
by interfaces with either customers or vendors. The Company does not believe
that the year 2000 presents an exposure as it relates to the Company's key
products and services.
The Company has not yet completed all phases of its year 2000 program.
As of today, and if the Company does not complete any additional phases, the
Company would be unable to invoice a portion of its customers.
Disruption in the economy generally resulting from year 2000 issues
could adversely also affect the Company. The Company could be subject to
litigation or fines for equipment shutdown or failure to properly date business
records.
The Company intends to develop contingency plans for certain critical
applications. The contingency plans involve, among other actions, manual
workarounds, increasing parts and supplies inventories, conversion to the new
business information systems, and adjusting staffing strategies.
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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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of December 31,
1998, 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.
NAME AGE POSITION
---- --- --------
Jack W. Schuler 57 Chairman of the Board
Charles D. Crochet 40 President and Director
Curtis W. Crane 39 Chief Financial Officer, Secretary
and Treasurer
Mark C. Miller 43 Director
Frank J.M. ten Brink 42 Director
David J. Schoonmaker 54 Director
Anthony J. Tomasello 52 Director
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. Messrs. Jack Schuler, Mark Miller, Frank J.M. ten
Brink and Anthony Tomasello are senior officers of Stericycle, which
beneficially owns 52.2% of the outstanding shares of the Company.
The following is a summary of the business background and experience
of each of the persons named above:
JACK W. SCHULER has served as a Director of the Company since October
1998. Mr. Schuler has served as Chairman of the Board of Directors of
Stericycle since January 1990. From January 1987 to August 1989, Mr.
Schuler served as President and Chief Operating Officer of Abbott
Laboratories, a diversified care company, where he served as a
Director from April 1985 to August 1989. Mr Schuler serves as Chairman
of the Board of Directors of Ventana Medical Systems, Inc., and as a
Director of Chiron Corporation and Medtronic, Inc. He is a co-founder
of Crabtree Partners LLC, a private investment firm in Deerfield,
Illinois, which was formed in June 1995. Mr. Schuler received a B.S.
degree in mechanical engineering from Tufts University and a M.B.A.
degree from the Stanford University Graduate School of Business
Administration.
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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 predecessor of the 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. Mr. Crochet received a B.S./B.A. in business management
degree from University of Southwestern Louisiana.
CURTIS W. CRANE has served as Chief Financial Officer of the Company
since September 1995. From 1993 until 1995, he served as Chief
Financial Officer for NDE Environmental Corporation and from 1988
until 1993, he served as Director of Finance and Tax for Lone Star
Steel Company. Mr. Crane received a B.B.A. degree in accounting from
the University of Texas.
MARK C. MILLER has served as a Director of the Company since October
1998. Mr. Miller has served as Stericycle's President and Chief
Executive Officer and a Director since May 1992. From May 1989 until
he joined Stericycle, Mr. Miller served as Vice President for Pacific
Asia and Africa in the International Division of Abbott Laboratories,
which he joined in 1976 and where he held a number of management and
marketing positions. He is a Director of Affiliated Research Centers,
Inc., which provides clinical research for pharmaceutical companies,
and is a director of Lake Forest Hospital. Mr. Miller received a B.S.
degree in computer science from Purdue University.
FRANK J.M. tEN BRINK has served as a Director since October 1998. Mr.
Ten Brink has served as Stericycle's Vice President, Finance and Chief
Financial Officer since June 1997. From 1991 until 1996, he served as
Chief Financial Officer of Hexacomb Corporation, and from 1996 until
joining Stericycle, he served as Chief Financial Officer of Telular
Corporation. Prior to 1991, Mr. ten Brink held various financial
management positions with Interlake Corporation and Continental Bank
of Illinois. He received a B.B.A. degree in international business and
a M.B.A. degree in finance from the University of Oregon.
ANTHONY J. TOMASELLO has served as a Director since October 1998. Mr.
Tomasello has served as Stericycle's Vice President, Operations, since
August 1990. For eight years prior to joining Stericycle, Mr.
Tomasello was President and Chief Operating Officer of Pi Enterprises
and Orbital Systems, companies providing process and automation
services. Mr. Tomasello received a B.S. degree in mechanical
engineering from the University of Pittsburgh.
DAVID J. SCHOONMAKER has served as a Director since February 1998. Mr.
Schoonmaker has served as President and Chief Executive Officer of
RxThermal, Inc., a company that permits, designs, builds, and operates
medical waste treatment facilities, since 1989. Mr. Schoonmaker is
also President of BMWNC, Inc. a commercial incinerator of medical
waste, since 1995. Mr. Schoonmaker received a B.S. degree in chemistry
from the University of California and a M.B.A. from California State
College.
DIRECTOR COMPENSATION
During the fiscal year ended September 30, 1998, Directors who are
officers or employees of the Company or associated with WSI received no
additional compensation for their services as members of the Board of
Directors. Directors who are not such officers or employees currently received
$2,000 for each meeting of the Board of Directors and were awarded an option to
purchase 5,000 shares of Common Stock.
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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 (the "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.
ITEM 11. EXECUTIVE COMPENSATION
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 for the fiscal years ended September 30, 1996, September 30, 1997 and
September 30, 1998. No other named executive officer received bonus and salary
which exceeded $100,000 in 1996, 1997 and 1998.
ANNUAL LONG TERM
COMPENSATION COMPENSATION AWARDS
------------ SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS/SARS(#)
--------------------------- ---- ------ ---------------
Charles D. Crochet, President 1998 $160,000 180,000 (1)
84,000 (2)
1997 $145,000
1996 $130,000
- ----------------
(1) In July 1998, Mr. Crochet received an option to purchase 180,000 shares of
Common Stock at $1.50 per share that vests in annual increments of 60,000
shares on July 31 of each year for three years commencing July 31, 1999. All of
such options expire July 31, 2008.
(2) Under the terms of Mr. Crochet's current employment agreement, which became
effective June 1, 1998, certain options that Mr. Crochet held for a total of
122,500 shares of Common Stock were converted into new options for 84,000
shares of Common Stock and repriced. At the time of such repricing, 32,500
options had an exercise price of $3.00 per share and 90,000 options had an
exercise price of $2.00 per share. The 84,000 new options have an exercise
price of $1.50 per share and expire August 31, 2005.
1998 STOCK OPTION GRANTS
The following table provides certain information regarding stock
options granted to the Company's Chief Executive Officer during the fiscal year
ended September 30, 1998, including the potential realizable value over the
term of the options (i.e., the period from the date of grant to the date of
expiration) based upon assumed rates of stock appreciation of 5% and 10%,
compound annually. These amounts do not represent the Company's estimate of
future appreciation of the price of its Common Stock. The Company did not grant
stock options to any other named executive officer during the fiscal year ended
September 30, 1998.
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23
POTENTIAL REALIZABLE VALUE
% OF TOTAL AT ASSUMED ANNUAL RATES OF
OPTIONS MARKET STOCK PRICE APPRECIATION
NUMBER OF GRANTED TO PRICE OF FOR OPTION TERM (2)
SECURITIES EMPLOYEES IN EXERCISE STOCK AT -------------------
UNDERLYING FISCAL PRICE PER TIME OF EXPIRATION
NAME OPTIONS YEAR (1) SHARE REPRICING DATE 5% 10% 0%
---- ------- -------- ----- --------- ---- ---- --- ---
Charles D. Crochet 180,000 (3) 68.2% $1.50 $1.94 7/31/08 298,812 39,728 $1.94
84,000 (4) 31.8% $1.50 $1.94 8/31/05 139,445 296,669 $1.94
- ----------------
(1) The percentage shown in the table reflects options for a total of 264,000
shares of Common Stock granted to employees during the fiscal year ended
September 30, 1998. All of these options were granted under the Company's 1992
Option Plan.
(2) The potential realizable value was calculated on the basis of the term of
each option on its grant date, assuming that the fair market value of the
underlying stock on the grant date appreciates at the indicated annual rate
compounded annually for the entire term of the option and that the option is
exercised and sold on the last day of its term for the appreciated stock price.
(3) The options vest in three annual installments of 60,000 shares each on July
31, 1999, 2000 and 2001.
(4) Under the terms of Mr. Crochet's current employment agreement, which became
effective June 1, 1998, certain options that Mr. Crochet held for a total of
122,500 shares of Common Stock were converted into new options for 84,000
shares of Common Stock and repriced. At the time of such repricing, 32,500
options had an exercise price of $3.00 per share and 90,000 options had an
exercise price of $2.00 per share.
1998 OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table provides certain information regarding unexercised
options to purchase shares of Common Stock granted by the Company to the named
executives during the fiscal year ended September 30, 1998. No executives
exercised any Common Stock options during fiscal 1998.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS AT
NAME FISCAL YEAR-YEAR (#) FISCAL YEAR-YEAR (#)(1)
- ---- -------------------- -----------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Charles D. Crochet 84,000 180,000 - -
- ----------------
(1) The exercise price per share exceeded the closing price of a share of
Common Stock on September 30, 1998, and accordingly, none of Mr. Crochet's
stock options were in the money at fiscal year end.
EMPLOYMENT AGREEMENTS
Charles D. Crochet serves as the Company's President pursuant to an
employment agreement that commenced on June 1, 1998 and expires May 31, 2001.
The Board of Directors established Mr. Crochet's salary at $160,000 during the
term of the agreement. Adjustments are to be made annually to reflect any
increases in the Consumer Price Index for Urban Wage Earners and Clerical
Workers as published by the United States Department of Labor, Bureau of Labor
Statistics; provided however, that should there be a decline in the index in
any year of the term of the agreement, there shall be no
23
24
downward adjustment of the base salary. As an additional incentive to Mr.
Crochet under the new employment agreement, Mr. Crochet is eligible for an
annual bonus based on the Company's earnings before interest, taxes,
depreciation and net operating profit. The amount of such annual bonus is
between 5% and 15% of an amount determined by the Board of Directors from an
approved bonus plan.
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 1998, the following persons served on the Board of Directors and
participated in the deliberations concerning executive officer compensation:
Dr. Werner Kook, David J. Schoonmaker and Valerie Banner. No officer or
employee of the Company, or any former officer of the Company, participated in
deliberations of the Company's Board of Directors concerning executive officer
compensation in fiscal 1998.
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 December 31, 1998, 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
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
----------------- --------------------- ----------------
Waste Systems, Inc.(1)........................... 5,104,448 52.2%
910 Pierremont, Suite 312
Shreveport, Louisiana 71106
River Bay Corporation(2)......................... 565,500 5.8%
P.O. Box 13313
Jackson, Mississippi 39236
American Medical Technologies, Inc.(3)........... 1,061,755 9.8%
5847 San Felipe, Suite 900
Houston, Texas 77057
Jim Shepherd (4)................................ 477,889 4.9%
Route 3, Box 264
Bismarck, AR 71929
Jack W. Schuler.................................. _ _
910 Pierremont, Suite 312
Shreveport, Louisiana 71106
Charles D. Crochet(5)............................ 146,159 1.5%
910 Pierremont, Suite 312
Shreveport, Louisiana 71106
Mark C. Miller................................... _ _
910 Pierremont, Suite 312
Shreveport, Louisiana 71106
Frank J.M. ten Brink............................. _ _
910 Pierremont, Suite 312
Shreveport, Louisiana 71106
David Schoonmaker................................ 10,000 0.1%
910 Pierremont, Suite 312
Shreveport, Louisiana 71106
Anthony Tomasello................................ _ _
910 Pierremont, Suite 312
Shreveport, Louisiana 71106
Curtis W. Crane.................................. _ _
910 Pierremont, Suite 312
Shreveport, Louisiana 71106
All Directors and executive officers as a 156,159 1.6%
group (7 persons)
- -------------------
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25
(1) A Schedule 13D dated October 14, 1998 reflects that WSI is the
beneficial owner of 5,104,448 shares. Such Schedule 13D reflects that
WSI is owned 100% by Stericycle.
(2) A Schedule 13D dated October 20, 1994 reflects that River Bay
Corporation is the beneficial owner of 865,500 shares and has sole
voting and dispositive power with respect to such shares. The Company
has repurchased 300,000 shares pursuant to a put option.
(3) Includes the exercise of 260,272 warrants that expire April 2000.
(4) Includes shares issued in the acquisition of the Med-Waste assets and
settlement of a lawsuit.
(5) Includes 6,500 shares held in the name of Mr. Crochet's son. Also
included are 84,000 stock options and 15,237 warrants that expire in
April 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended September 30, 1998, WSI made a cash
advance to the Company of $500,000. The advance was used for the payment of
settlement costs and expenses incurred in the minority shareholder litigation.
During February 1998, the Company and WSI converted $750,000 of debt
under the 1995 Note into Series C preferred stock. Also, during March 1998, the
Company exchanged 1,000,000 shares of Series A preferred stock for 7,000,000
shares of Series B preferred stock.
On September 30, 1998, Stericycle acquired 100% of the common stock of
WSI for $10 million (the "Transaction"). As a result of the Transaction, WSI
became a wholly-owned subsidiary of Stericycle. WSI owns 52.5% or 5,104,448
shares of the Company's Common Stock and 100% of the Company's outstanding
preferred stock, consisting of 7,000,000 shares of Series B preferred stock and
750,000 shares of Series C preferred stock.
On October 1, 1998, WSI and the Company entered into the Restated 1995
Note. The 1995 Restated Note is in the principal amount of approximately
$5,488,000. See "Management's Discussion and Analysis of Financial Conditions
and Results of Operations--Overview."
During fiscal 1998, 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.
During 1998, the Company 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, 1998 totaled $72,000.
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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, 1998,
the year ended September 30, 1997 and the year ended September 30, 1996,
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,
1998, the year ended September 30, 1997, and the year ended September 30, 1996,
required by Item 8 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 1998:
The Company filed a Form 8-K in October 1998 to report the acquisition
of WSI by Stericycle.
(c) EXHIBITS - THE RESPONSE TO THIS PORTION OF ITEM 14 IS SUBMITTED AS A
SEPARATE SECTION OF THIS REPORT.
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
2.1. 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).
3.1. 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. Amendment to 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. Amendment to 3CI's Certificate of Incorporation, as amended
effective March 23, 1998 (incorporated by reference to Exhibit
3.3 of 3CI's registration statement on Form S-1 (No.
333-48499), filed March 24, 1998).
3.4 Bylaws, 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).
3.5* Amendment of Bylaws effective October 1, 1998.
3.6. Certificate of Designations of 3CI's Series A Preferred Stock
without par value (incorporated by reference to Exhibit 3.6 of
3CI's registration statement on Form S-1 (No. 333-48499), filed
March 24, 1998).
3.7. Certificate of Designations of 3CI's Series B Preferred Stock
without par value (incorporated by reference to Exhibit 3.7 of
3CI's registration statement on Form S-1 (No. 333-48499), filed
March 24, 1998).
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27
3.8. Certificate of Designations of 3CI's Series C Preferred Stock
without par value (incorporated by reference to Exhibit 3.8 of
3CI's registration statement on Form S-1 (No. 333-48499), filed
March 24, 1998).
4.1.* Warrant dated September 11, 1998, issued to Klein Bank as escrow
agent with respect to 11,061 shares of Common Stock.
4.2. Escrow Agreement dated March 6, 1998 between 3CI and Klein Bank
as escrow agent (incorporated by reference to Exhibit 4.7 of
3CI's registration statement on Form S-1 (No. 333-48499), filed
March 24, 1998).
4.3.* First Amendment to Escrow Agreement dated as of April 22, 1998,
between 3CI and Klein Bank.
4.4.* Amended and Restated Secured Promissory Note dated October 1,
1998, in the principal amount of $5,487,308.13 between 3CI and
Waste Systems, Inc.
4.5.* Loan Agreement and Note Amendment dated December 18, 1998, by
3CI and Waste Systems, Inc.
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(c) 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. 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).
10.5. Security Agreement Note dated October 10, 1994, among 3CI
Complete Compliance Corporation, 3CI Acquisition Corp./A/MED and
River Bay Corporation (incorporated by reference to Exhibit 1.7
of 3CI's report on Form 8-K filed October 27, 1994).
10.6. 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).
10.7. Mortgage, Security Agreement, Assignment of Leases and Financing
Statement dated October 10, 1994, among 3CI Complete Compliance
Corporation, 3CI Acquisition Corp. /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).
10.8. 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).
10.9. 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).
10.10. 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
(incorporated by reference to Exhibit 10.23 of 3CI's report on
Form 10-K filed January 14, 1997).
10.11. Exchange Agreement between 3CI and Waste Systems, Inc. dated as
of June 24, 1997 (incorporated by reference to Exhibit 10.12 of
3CI's registration statement on Form S-1 (No. 333-48499), filed
March 24, 1998).
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10.12. Stock Purchase and Note Modification Agreement between 3CI and
Waste Systems, Inc. dated as of February 19, 1998 (incorporated
by reference to Exhibit 10.13 of 3CI's registration statement on
Form S-1 (No. 333-48499), filed March 24, 1998).
10.13. Employment Agreement dated May 30, 1998, between 3CI and Charles
D. Crochet (incorporated by reference to Exhibit 10.9 of 3CI's
registration statement on Form S-1 (No. 333-48499), filed March
24, 1998).
10.14.* Agreement dated September 30, 1998 among 3CI, Waste Systems,
Inc. and Stericycle, Inc. regarding Section 203 of the Delaware
General Corporation Law.
10.15.* Form of Indemnification Agreement dated August 26, 1998 entered
into between 3CI and Valerie Banner, David Schoonmaker, Charles
Crochet, Juergen Thomas, Dr. Werner Kook and Dr. Clemens Pues.
27.* Financial Data Schedule
* Filed herewith
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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 12, 1999 /s/Charles D. Crochet
----------------------------
Charles D. Crochet
President (Principal Executive Officer)
January 12, 1999 /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 12, 1999
- ------------------------
Charles D. Crochet
/s/Mark C. Miller Director January 12, 1999
- ------------------------
Mark C. Miller
/s/Jack W. Schuler Chairman and Director January 12, 1999
- ------------------------
Jack W. Schuler
/s/Curtis W. Crane Chief Financial Officer, January 12, 1999
- ------------------------ Secretary and Treasurer
Curtis W. Crane
/s/Frank J.M. ten Brink
- ------------------------
Frank J.M. ten Brink Director January 12, 1999
/s/Anthony J. Tomasello
- ------------------------
Anthony J. Tomasello Director January 12, 1999
/s/David J. Schoonmaker
- ------------------------
David J. Schoonmaker Director January 12, 1999
29
30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
- ---------------------------------------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS OF 3CI COMPLETE COMPLIANCE CORPORATION
Report of Independent Public Accountants Heard, McElroy, & Vestal, L.L.P. 31
Consolidated Balance Sheets -- September 30, 1998 and 1997 32
Consolidated Statements of Operations for the years ended September 30, 1998, 33
1997 and 1996.
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
September 30, 1998, 1997 and 1996. 34
Consolidated Statements of Cash Flows for the years ended September 30, 1998 35
1997 and 1996
Notes to Consolidated Financial Statements 37
FINANCIAL STATEMENT SCHEDULE
The following schedule is filed as part of this Annual Report on Form
10-K.
Schedule II Valuation and Qualifying Accounts 52
All other Schedules are omitted because they are not required, are not
applicable or the required information is presented elsewhere herein.
30
31
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board Directors of
3CI Complete Compliance Corporation:
We have audited the accompanying consolidated balance sheets of 3CI Complete
Compliance Corporation as of September 30, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the years ended September 30, 1998, 1997 and 1996. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 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, 1998 and 1997, and the
results of its consolidated operations and cash flows for the years ended
September 30, 1998, 1997 and 1996 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company (i) has an accumulated
deficit from operations, (ii) has a negative working capital and (iii)
continues to rely on its majority stockholder for funding, all of which
collectively raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to consolidated 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 audits 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.
HEARD, McELROY & VESTAL, LLP
Shreveport, Louisiana
January 11, 1999
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32
3CI COMPLETE COMPLIANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ -- $ --
Restricted cash -- --
Accounts receivable, net allowances of $573,937 and $875,144
at September 30, 1998 and 1997, respectively 3,252,673 3,559,091
Inventory 96,771 71,886
Other current assets 737,372 440,373
------------ ------------
Total current assets 4,086,816 4,071,350
------------ ------------
Property, plant and equipment, at cost 13,780,158 10,927,159
Accumulated depreciation (3,883,073) (2,477,411)
------------ ------------
Net property, plant and equipment 9,897,085 8,449,748
------------ ------------
Excess of cost over net assets acquired, net of accumulated amortization of
$223,656 and $74,988 at September 30, 1998 and 1997 respectively 337,243 362,243
Other intangible assets, net of accumulated amortization of $223,656 and
$149,104 at September 30, 1998 and 1997, respectively 149,104 223,656
Other assets 148,092 50,608
------------ ------------
Total assets $ 14,618,340 $ 13,157,605
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank overdrafts $ 666,834 $ 156,880
Notes payable 352,388 217,525
Current portion of long-term debt, unaffiliated lenders 1,619,889 1,373,617
Accounts payable 1,646,751 1,034,924
Accounts payable, affiliated companies 483,406 391,156
Accrued liabilities 1,098,634 2,188,697
Note payable majority shareholder 5,004,403 4,844,217
------------ ------------
Total current liabilities 10,872,305 10,207,016
------------ ------------
Long-term debt unaffiliated lenders, net of current portion 986,524 986,467
------------ ------------
Total liabilities 11,858,829 11,193,483
------------ ------------
Shareholders' Equity:
Preferred stock,$0 .01 par value, authorized 16,050,000 shares;
Issued and outstanding 7,750,000 at June 30, 1998, 77,500 --
Preferred stock, no par value, authorized 1,000,000 shares;
Issued and outstanding 1,000,000 at September 31, 1997 7,000,000
Additional paid-in capital - preferred stock 7,672,500 --
Common stock, $0.01 par value, authorized 40,450,000 shares;
Issued and outstanding 9,232,825 and 9,154,811 at
September 30, 1998 and 1997, respectively 92,329 91,549
Less cost of treasury stock (28,500 shares) (44,516) --
Additional Paid-in capital - common stock 20,259,779 20,182,543
Accumulated deficit (25,298,081) (25,309,970)
------------ ------------
Total shareholders' equity 2,759,511 1,964,122
------------ ------------
Total liabilities and shareholders' equity (deficit) 14,618,340 $ 13,157,605
============ ============
The accompanying notes are an integral part of these financial statements.
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3CI COMPLETE COMPLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATION
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996
------------- ------------ ------------
Revenues $ 19,008,696 $ 18,789,749 $ 17,748,300
Expenses:
Cost of services 14,058,522 14,285,834 13,815,480
Depreciation and amortization 1,297,620 1,352,015 2,224,161
Write off of intangibles (note 12) -- -- 11,385,328
Write off of fixed assets (note 3) -- -- 1,183,446
Selling, general and administrative 3,110,671 3,080,398 4,343,246
------------ ------------ ------------
Net income (loss) from operations $ 541,883 $ 71,502 $(15,203,361)
Other income (expense):
Other income 380,000 -- --
Interest and other expense, (909,994) (1,159,690) (1,053,424)
------------ ------------ ------------
Income (loss) before income taxes and accretion of stock put 11,889 (1,088,188) (16,256,785)
------------ ------------ ------------
Income taxes -- -- --
Accretion of stock put (26,052)
------------ ------------ ------------
Net income (loss) $ 11,889 $ (1,088,188) $(16,282,837)
============ ============ ============
Weighted average shares outstanding 9,160,034 9,064,071 8,872,348
============ ============ ============
Net income (loss) per common share $ 0.01 $ (0.12) $ (1.84)
============ ============ ============
The accompanying notes are an integral part of these financial statements.
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34
3CI COMPLETE COMPLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
ADDITIONAL ADDITIONAL
SHARES PREFERRED PAID-IN SHARES COMMON PAID-IN
ISSUED STOCK CAPITAL ISSUED STOCK CAPITAL
--------- ----------- ---------- --------- ------- -----------
Balance at September 30, 1995 -- -- -- 9,504,841 95,049 19,665,235
Issuance of Med-Waste earnout shares -- 145,470 1,455 196,008
Issuance of Med-Waste settlement shares -- 250,000 2,500 247,500
Net loss
--------- ----------- ---------- --------- ------- -----------
Balance at September 30, 1996 -- -- -- 9,900,311 99,004 20,108,743
Conversion of WSI debt and accrued interest
to equity 1,000,000 7,000,000
Issuance of Grafton lawsuit settlement shares -- 120,000 1,200 73,800
Remove put option shares from equity -- (865,500) (8,655)
Net loss
--------- ----------- ---------- --------- ------- -----------
Balance at September 30, 1997 1,000,000 $ 7,000,000 (9,154,811) $91,549 $20,182,543
Conversion of Series A to series B
preferred stock (1,000,000) $(7,000,000)
Issuance of Series B for Series A
preferred stock 7,000,000 $ 70,000 $6,930,000
Conversion of WSI debt and accrued
interest to equity 750,000 $ 7,500 $ 742,500
Issuance of minority lawsuit settlement shares 78,014 780 77,236
Purchase of treasury stock (28,500)
Net income
--------- ----------- ---------- --------- ------- -----------
Balance at september 30, 1998 7,750,000 $ 77,500 $7,672,500 9,204,325 $92,329 $20,259,779
========= =========== ========== ========= ======= ===========
Total
Accumulated Treasury Shareholers'
Deficit stock Equity (Deficit)
--------------- --------------- ----------------
Balance at September 30, 1995 (7,938,945) -- 11,821,339
Issuance of Med-Waste earnout shares 197,463
Issuance of Med-Waste settlement shares 250,000
Net loss (16,282,837) (16,282,837)
--------------- --------------- ----------------
Balance at September 30, 1996 (24,221,782) -- (4,014,035)
Conversion of WSI debt and accrued interest
to equity 7,000,000
Issuance of Grafton lawsuit settlement shares 75,000
Remove put option shares from equity (8,655)
Net loss (1,088,188) (1,088,188)
--------------- --------------- ----------------
Balance at September 30, 1997 $ (25,309,970) 0 $ 1,964,122
Conversion of Series A to series B
preferred stock (7,000,000)
Issuance of Series B for Series A
preferred stock 7,000,000
Conversion of WSI debt and accrued
interest to equity 750,000
Issuance of minority lawsuit settlement
shares 78,016
Purchase of treasury stock (44,516) (44,516)
Net income 11,889 11,889
--------------- --------------- ----------------
Balance at september 30, 1998 $ (25,298,081) $ (44,516) $ 2,759,511
=============== =============== ================
The accompanying notes are an integral part of these financial statements.
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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,
1998 1997 1996
------------ ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 11,889 $ (1,088,188) $(16,282,837)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
(GAIN) LOSS ON DISPOSAL OF FIXED AND INTANGIBLE ASSETS (24,078) --
DEPRECIATION AND AMORTIZATION 1,297,620 1,352,015 2,224,161
ACCRETION OF STOCK PUT -- -- 26,052
DISCOUNT ON BANK NOTE -- -- --
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 -- 130,000 (30,000)
(INCREASE) DECREASE IN ACCOUNTS RECEIVABLE, NET 306,418 194,330 (782,916)
(INCREASE) DECREASE IN INVENTORY (24,885) (12,841) 31,339
(INCREASE) DECREASE IN PREPAID EXPENSES (296,999) (207,384) (5,005)
(INCREASE) DECREASE IN OTHER CURRENT ASSETS (90,000) 685 (45,098)
INCREASE (DECREASE) IN ACCOUNTS PAYABLE 611,827 (831,299) 573,709
INCREASE (DECREASE) IN ACCOUNTS PAYABLE,
AFFILIATED COMPANIES 92,250 72,000 12,110
INCREASE (DECREASE) IN ACCRUED LIABILITIES (1,090,063) (172,309) (197,628)
------------ ------------ ------------
TOTAL ADJUSTMENTS TO NET INCOME (LOSS) 806,168 501,119 14,375,498
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 818,057 (587,069) (1,907,339)
------------ ------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALE OF PROPERTY, PLANT AND EQUIPMENT 214,661 248,873 61,986
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT (2,789,934) (1,416,758) (1,679,675)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITES (2,575,273) (1,167,885) (1,617,689)
------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
INCREASE IN BANK OVERDRAFTS 509,954 122,498 34,382
PROCEEDS FROM ISSUANCE OF NOTES PAYABLE 1,094,266 1,018,404 521,542
PRINCIPAL REDUCTION OF NOTES PAYABLE (959,403) (1,012,807) (536,115)
PURCHASE OF TREASURY STOCK (44,516) -- --
REDUCTION OF PUT OPTION -- (861,421) --
PROCEEDS FROM ISSUANCE OF LONG-TERM DEBT, UNAFFILIATED LENDERS 1,723,331 931,006 1,221,411
REDUCTION OF LONG-TERM DEBT, UNAFFILIATED LENDERS (1,477,002) (1,443,975) (2,637,717)
PROCEEDS FROM ISSUANCE OF NOTE PAYABLE TO MAJORITY SHAREHOLDERS 500,000 2,303,000 4,000,000
UNPAID INTEREST ADDED TO NOTE PAYABLE TO MAJORITY SHAREHOLDERS 410,586 698,249 842,969
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,757,216 1,754,954 3,446,472
------------ ------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS -- -- (78,556)
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD -- -- 78,556
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ -- $ -- $ --
============ ============ ============
The accompanying notes are an integral part of these financial statements.
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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,
1998 1997 1996
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES:
CASH PAID FOR INTEREST $ 251,129 $ 203,980 $ 241,294
========== ========== ==========
CASH PAID FOR TAXES $ -- $ -- $ --
========== ========== ==========
INCREASE IN SHAREHOLDERS' EQUITY $ 750,000 $7,000,000 $ --
---------- ---------- ----------
CONVERSION OF DEBT AND ACCRUED INTEREST (750,000) (7,000,000) --
---------- ---------- ----------
CASH EFFECT $ -- $- -- $ --
========== ========== ==========
INCREASE IN SHAREHOLDERS' EQUITY $ 78,014 $ 75,000 $ 447,463
FAIR VALUE OF COMMON STOCK ISSUED FOR ACQUISITION (197,463)
FAIR VALUE OF COMMON STOCK ISSUED IN LAWSUIT SETTLEMENTS (78,014) (75,000) (250,000)
---------- ---------- ----------
CASH EFFECT $ -- $ -- $- --
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
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37
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 treatment 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). Additionally, 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.
Effective October 1, 1998, after approval by the then properly constituted 3CI
board of Directors, Stericycle Inc., a Delaware corporation ("Stericycle")
acquired 100% of the common stock of Waste Systems, Inc. ("WSI") for $10
million, in a transaction that was financed by LaSalle National Bank of
Chicago, IL (the "Transaction"). As a result of the Transaction, WSI became a
wholly-owned subsidiary of Stericycle. Waste Systems owns 52.5% or 5,104,448
shares of the outstanding common stock of 3CI, a Delaware corporation, and 100%
of the outstanding preferred stock of the Company, consisting of 7,000,000
shares of Series B preferred stock and 750,000 shares of Series C preferred
stock.
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.
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38
During the year ended September 30, 1996 the subsidiaries were merged into 3CI
Complete Compliance Corporation. Accordingly, for the years ended September 30,
1998 and 1997, 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,
but during the fiscal year ended September 30, 1998, the Company has reported
income and has positive cash flows from operations but continues to experience
cash shortages. As of September 30, 1998, the Company has a working capital
deficit of $6,785,489 and a positive shareholders equity of $2,759,511.
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 1998. 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, the Promissory Note dated September 30, 1995,
(the "1995 Note"), including deferred interest with cash advances not to exceed
$7.4 million, of which $5.0 million including deferred interest is owed and
outstanding as of September 30, 1998. During February 1998, the Company and WSI
converted an additional $750,000 of debt under the 1995 Note into Series C
preferred stock.
During the fiscal year ended September 30, 1996, WSI made additional cash
advances that have were in excess of the principal in 1995 Note. The Company
entered into a second Revolving Credit Facility of $2.7 million including
deferred interest (the "1996 Credit Facility"), dated December 20, 1996 with
maturity date of February 28, 1997. It was the intent of WSI and 3CI that the
1996 Credit Facility 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 the 1995 Note. The 1995 Note had a
due date of December 31, 1996 of which the Company requested and received an
extension from WSI. In February 1997, the Company received a letter from the
NASDAQ Stock Market, Inc. regarding the Company's failure to meet listing
requirements. These requirements include maintaining a minimum capital and
surplus of at least $1,000,000 and a minimum bid price of $1.00. While the
Company remained out of compliance with this requirement, the NASDAQ allowed
the Company to remain listed with an exception added to it's trading symbol.
The NASDAQ Stock Market gave the Company until June 25, 1997, to meet the
listing requirement. In June 1997, WSI converted $7,000,000 of debt into
1,000,000 shares of 3CI preferred stock. This conversion allowed the Company to
meet the listing requirement of the NASDAQ Stock Market, Inc. On June 26, 1997,
the NASDAQ Stock Market Inc. informed the Company that it had been found to be
in compliance with all requirements necessary to for continued listing on the
exchange, the exception to it's trading symbol has been removed. In connection
with the conversion of debt to preferred stock, WSI cancelled the 1996 Credit
Facility which had been previously extended to June 30, 1997. The conversion
has also resulted in the reduction of the outstanding indebtedness of the 1995
Note. During the fiscal years ended September 30, 1998, 1997, and 1996 WSI has
made cash advances to the Company of $500,000, $2,303,000 and $4,000,000,
respectively. As more fully described in Note 5, the 1995 Note was amended and
restated on October 1, 1998.
As more fully described in Note 5, on December 18, 1998, the Company completed
a Loan Agreement and Note Amendment whereby WSI loaned the Company $750,000.
Such note is due on September 30, 1999.
WSI is under no obligation to provide additional advances. During the year, the
Company had discussions with third party lenders to obtain alternative sources
of financing apart from WSI. In the event the Company and WSI do not come to a
resolution on the possible additional restructuring and/or extensions on the
above notes 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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The nature and level of competition in this industry has 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.
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 computed 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
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. Prior to the adoption of SFAS
121, in the course of preparing its financial statements, the Company routinely
reviewed assets for impairment by reviewing expected future undiscounted net
cash flows.
In February 1997, the FASB issued Statement No. 128, Earnings Per Share. This
pronouncement will be effective for period ending after December 15, 1997. This
statement requires that the basic earning per share be presented on the face of
the income statement. Further, entities with complex capital structures must
also present diluted earnings per shares on the face of the income statement.
Basic earnings per share excludes dilution and is to be computed by dividing
income available to common stockholders by the weighted average number of
common shares of stock outstanding for the period. Diluted earnings per share
will reflect the potential dilution that could occur if securities, options, or
other contracts to issue common stock were converted into common stock that
then shared in the earnings of the company. No potential common shares shall be
included in the computation of any diluted per-share amount when a loss from
continuing operations exist, even if the company reports net income.
In February 1997, the FASB issued Statement No. 129, Disclosure of Information
about Capital Structure. This pronouncement will be effective for period ending
after December 15, 1997. This statement establishes standards for disclosing
information for an entity's capital structure. Adoption of this standard should
not have a significant impact on the Company's financial statements.
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income. This pronouncement will be effective for years beginning after December
15, 1997. This statement establishes standards for reporting and display of
comprehensive income and it's components in a full set
39
40
of general purpose financial statements. Because the Company does not presently
have any "items of other comprehensive income", adoption of this standard should
not have a significant impact on the Company's financial statements.
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, which corresponds
to the contract periods. Costs associated with the permits are being amortized
over the life of the contracts. See Note 12 for write-off of incineration
rights and permits.
INTANGIBLE ASSETS
Intangible assets are amortized on a straight-line method as follows:
Excess of cost over net assets acquired 17.5 - 40 years
Permits 5 - 7 years
Customer lists 5 - 10 years
Amortization expense charged to operations for the years ended September 30,
1998, 1997 and 1996 was $99,552, $99,552 and $839,089, 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 during the fiscal year 1996.
REVENUE RECOGNITION
The Company recognizes revenue when the treatment of the regulated medical
waste is completed on-site or the waste is shipped off-site for processing and
disposal. For waste shipped off-site, all costs are recognized at time of
shipment.
SHAREHOLDERS' EQUITY (DEFICIT)
During the fiscal year 1998, the Company increased the number of common and
preferred shares authorized to 40,450,000 million and 16,050,000 million from
15,000,000 million and 1,000,000 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.
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.
40
41
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. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 USEFUL LIFE
------------ ------------- -----------
Land $ 590,600 $ 590,600
Buildings and improvements 1,835,973 1,622,026 3-40 years
Transportation equipment 4,701,763 3,286,537 5-10 years
Machinery and equipment 6,336,221 5,098,484 5-20 years
Furniture and fixtures 315,601 329,512 3-10 years
----------- ------------
$13,780,158 $ 10,927,159
=========== ============
Depreciation expense charged to operations was $1,198,068, $1,252,463, and
$1,385,072 for years ending September 30, 1998, 1997, and 1996, respectively.
Subsequent to the year ending September 30, 1998, management made the
determination that the useful lives of certain incinerators and bag houses
should be revised to reflect shorter estimated useful lives. As a result of
this change, the estimated annual depreciation in future years will increase by
approximately $285,000. During fiscal year ended September 30, 1996, an
analysis was done of all the fixed assets of the Company. In conjunction with
the analysis, the Company reconsidered the appropriate asset lives as well as
revising various accounting estimates 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.
Substantially all of the Company's property, plant and equipment has been
pledged as collateral against certain of the Company's liabilities.
Set forth below is a summary of the write-offs relating to fixed assets during
fiscal 1996:
BUILDINGS/EQUIPMENT $12,700. During 1996, the Company replaced the
refractory in one of its incinerators due to the normal wear and tear.
The net book value of $12,700 of the previously capitalized refractory
was written-off.
LEASEHOLD IMPROVEMENTS $80,000. During 1996, the Company updated and
refurbished several of its transportation and incinerator locations.
Management believed the updating and refurbishment was necessary to
make the locations more functional and efficiently operational. The
Company also made an operational decision to close its Austin, Texas,
transportation location. This closure was made in order to reduce
operating costs and personnel costs. Previous leasehold improvement
costs, which were being amortized over the life of the lease (lease
was terminated due to this decision to close the location, were
written-off as they remained a part of the leased building.
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TRANSPORTATION EQUIPMENT $500,746. In February 1994, the Company had a
lease agreement that was accounted for as a capitalized lease and was
being depreciated over the term of the lease agreement. During 1996,
the Company terminated the lease early due to the high cost of
maintenance of the leased equipment. The Company had also capitalized
other costs associated with these leased assets that the Company wrote
off when the lease was terminated. As the transportation equipment was
returned, the Company wrote off the remaining capitalized net book
value of $500,746.
REUSABLE CONTAINERS $12,000. In 1996, the Company moved a portion of
its customer base from disposable cardboard boxes to reusable plastic
containers. A significant investment was then made in reusable plastic
containers because the Company had estimated that the life of reusable
containers was five years. Based upon operating experience, however,
the Company estimated that a three-year life was more reflective of
the actual life of the reusable containers. Due to this change in
estimate, the Company wrote off previously capitalized reusable
containers with a net book value of $12,000.
MACHINERY & EQUIPMENT $88,000. During fiscal 1996, the Company changed
out the bags inside the scrubber at an incinerator because its bags
became excessively worn and their integrity was deteriorating. These
bags had a remaining net book value of $22,200 that was written-off.
The Company also wrote off a previously capitalized major improvement
that was done to the upper chamber of the incinerator. During 1996,
the Company completed a major improvement in the upper chamber and the
previously capitalized improvement was written-off at its net book
value of $28,405. In the River Bay division, machinery and equipment
with a net book value of $37,395 was written-off.
COMPUTER & SOFTWARE $490,000. During 1994 and 1995, the Company began
capitalizing costs associated with a bar coding system and an
accounting system. The system was put into service in fiscal 1995 and
was being amortized. During fiscal 1996, due to continued problems in
the ongoing training of employees on the use of the software and the
prohibitive expense of replacing hardware due to harsh conditions,
management determined the bar coding system was no longer cost
effective and abandoned the project, and wrote-off the unamortized
costs of $472,000. The Company also wrote off previously capitalized
accounting software with a remaining net book value of $18,000 that
was acquired in a previous acquisition but was abandoned when the
acquired company was integrated into the Company's accounting system
in the fourth quarter of 1996.
3. NET INCOME (LOSS) PER COMMON SHARE:
The following table sets forth the computation of net income (loss) per common
share:
1998 1997 1996
------------ ------------ ------------
Numerator:
Net income (loss) $ 11,889 $ (1,088,188) $(16,282,837)
Denominator:
Denominator for basic earnings per share-- weighted
Average shares 9,160,034 9,064,071 8,872,348
------------ ------------ ------------
Effect of dilutive securities:
Employee stock options -- -- --
Warrants -- -- --
Preferred shares 7,750,000 -- --
------------ ------------ ------------
Dilutive potential common shares 7,750,000 -- --
------------ ------------ ------------
Denominator for diluted earnings per share adjusted weighted
average shares and assumed conversions 16,910,034 9,064,071 8,872,348
============ ============ ============
Basics earnings per share $ 0.01 $ (0.12) $ (1.84)
------------ ------------ ------------
Diluted earnings per common share $ 0.01 $ (0.12) $ (1.84)
------------ ------------ ------------
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For additional information regarding outstanding employee stock options and
outstanding warrants, see note 8.
Preferred stock, stock options and warrants, to purchase shares of common stock
outstanding during 1997 and 1996, respectively, were not included in the
computation of diluted earnings per common share in these years because the
Company had net losses in 1997 and 1996 and the effect would be antidilutive.
For fiscal 1998, stock options and warrants were assumed not to be exercised,
because they were considered to be antidilutive, as the exercise price of $1.50
was greater than the average price of the common stock.
4. NOTES PAYABLE:
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------ -------------
Notes payable to an insurance company, due in monthly and quarterly
installments including Interest of 7% to 9% through February 1998,
unsecured. 352,388 217,525
======= =======
5. LONG-TERM DEBT:
Long-term debt - unaffiliated lenders consists of the following:
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------ -------------
Note payable to prior owner of Incendere, at an annual adjustable
interest rate ranging between 7.5% to 9.75, with 34% of interest
being paid quarterly of interest being paid quarterly and 66% of
interest deferred and 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
$ -- $ 240,919
Notes payable for purchased vehicles and equipment
held as collateral, due in monthly installments,
including interest, at rates ranging from 7% to 18.0%,
maturing through 2003. 2,387,080 1,302,802
Notes Payable to River Bay Corporation due in monthly payments with
interest of 8.75% through December 1998, secured by accounts receivables,
equipment, and common stock. 219,334 816,364
--------- ----------
Total long-term debt 2,606,414 2,360,085
Less-Current portion (1,619,889) (1,373,618)
---------- ----------
Long-term portion $ 986,525 $ 986,467
========== ==========
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Note Payable to majority shareholder consists of the following:
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
---- ----
Revolving note payable to WSI, bearing interest at the prime rate
plus 2.0%, due September 30, 1998 with interest payable
monthly beginning in January 1999. $5,004,403 $4,844,217
========== ==========
In June 1995, the Company executed a $6,000,000 revolving promissory note with
WSI (the "1995 Note"). The 1995 Note was renegotiated in September 1995, to
increase the total borrowings available thereunder to $8,000,000 including
interest, with the principal not to exceed $7,400,000. The 1995 Note was due and
payable in full on September 30, 1998, at which time the Company had outstanding
borrowings of $5,004,403.
During fiscal year 1996, the Company received cash advances from WSI in excess
of amounts available under the 1995 Note. As a result, in December 1996, the
Company and WSI entered into a $2.7 million Revolving Credit Facility (the "1996
Credit Facility"), with a maturity date of February 28, 1997. The maturity date
was subsequently extended to June 30, 1997.
In June 1997, WSI converted $7,000,000 of debt into 1,000,000 shares of the
Company's Series A preferred stock and canceled the 1996 Credit Facility and
reduced the outstanding indebtedness of the 1995 Note by $4,300,000. During
February 1998, the Company and WSI converted an additional $750,000 of debt
under the 1995 into 750,000 shares Series C preferred stock. In March 1998, the
Company exchanged 1,000,000 shares of Series A preferred stock for 7,000,000
shares of Series B preferred stock.
On October 1, 1998, WSI and the Company, Amended and Restated the 1995 Note
("1995 Restated Note"). The 1995 Restated Note of approximately $5,488,000,
includes the outstanding balance of $5,004,000 due under the 1995 Note and also
an accounts payable of $484,000 due to WSI as of September 30, 1998. The 1995
Restated Note bears interest at the prime rate plus 2.0%. Interest under the
Restated Note shall be due and payable in quarterly installments on the last
business day of each month with the first such installment being due and payable
on the last business day of January 1999. Accrued and unpaid interest
outstanding on December 31, 1998 shall be capitalized and added to the principal
amount of this Note effective as January 1, 1999. The outstanding principal of
this Note and an accrued but unpaid interest is due and payable on this Note's
maturity date. The maturity date of this Note is September 30, 1999 (the "
Initial Maturity Date"). The Company may, at any time on or before the Initial
Maturity Date, extend the maturity of this Note to a date not later than March
31, 2000 (the "Subsequent Maturity Date") upon written notice to Payee of Makers
election to extend the Initial Maturity Date, and (b) payment to Payee on or
before the Initial Maturity Date of a commitment fee in immediately available
funds in an amount equal to 1.0% of the outstanding principal amount on this
Note. 3CI may at any time on or before the Subsequent Maturity Date extend the
maturity of this Note to a date not later than September 30, 2000 (the "Final
Maturity") upon (i) written notice to WSI of 3CI's election to extend the
Subsequent Maturity Date to the Final Maturity Date, and (ii) payment to WSI on
or before the Subsequent Maturity Date of a commitment fee in immediately
available funds in an amount equal to 1.5% of the outstanding principal amount
of this Note.
On December 18, 1998, WSI and the Company, entered into a Loan Agreement and
Note Agreement (the "New Loan") whereby WSI shall lend $750,000 to 3CI upon
written request. The New Loan shall bear interest at the lesser of (i) the Prime
Rate plus 3.0% or (ii) the Maximum Rate, in either case. Accrued
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45
and unpaid interest outstanding on June 30, 1999 shall be capitalized and added
to the principal amount of the New Loan effective as of July 1, 1999. Interest
accruing after June 30, 1999 shall be due and payable in monthly installments on
the last day of each month, with the first such installment being due and
payable on the last day of July 1999. The outstanding principal balance of the
New Loan, is due and payable on September 30, 1999. The maturity date of the New
Loan may not be extended. Included in the New Loan is a Sale Event fee, whereby
a fee shall be due to WSI based on the occurrence of a Sale Event, the aggregate
fee payable shall not exceed $50,000.
Payments due on long-term debt, during each of the five years subsequent to
September 30, 1998 are as follows:
1999.............................. $1,619,889
2000.............................. 576,211
2001.............................. 232,994
2002.............................. 141,673
2003.............................. 35,646
The total interest expense was $661,715, $902,229 and $871,910 for the years
ended September 30, 1998, 1997 and 1996, respectively.
6. INCINERATION CONTRACTS:
The Company is (was) a party to exclusive incineration contracts with the cities
of Carthage and Center, Texas (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. As more fully explained below, 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.
The City of Carthage requires minimum annual payments under the combined
contracts as follows:
Minimum Required
For The Year Ended September 30, Payments
-------------------------------- --------
1999.............................. 1,000,000
2000.............................. 1,000,000
----------
$2,000,000
In the event the Company fails to meet the minimum amounts of annual guarantees
to the City of Carthage, after giving effect to amounts paid in excess of prior
years' annual required minimums (on a cumulative basis), the City of Carthage
has the option to terminate the Company's exclusive incineration rights.
The Company had a minimum guaranteed payment to the City of Carthage, Texas for
incineration fees for the years ended May 31, 1998, 1997, and 1996, of
$1,000,000, $1,000,000, and $716,000 respectively. In the years ended May 31,
1998, 1997, and 1996 the Company paid incineration fees of $1,199,384,
$1,401,692, and $843,000, respectively to the City of Carthage. The Company also
had minimum guaranteed payments to the City of Center, Texas of for incineration
fees for the years ended May 31, 1997, and 1996, of $762,000, and $695,000,
respectively. In the years ended May 31, 1997 and 1996 the Company paid
incineration fees of $27,000 and $779,000 respectively to the City of Center.
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In October 1996, the Company discontinued use of the City of Center facility,
due to the City of Center's breach of the exclusivity portion of the contract.
The original agreement between the Company and the City of Center, Texas which
was executed on August 22, 1990, gave the Company the exclusive and sole right
to dispose of medical waste at the City of Center's resource Recovery facility.
The Company discovered that the City of Center breached its exclusivity portions
of the 1990 agreement, as amended on or about October 27, 1994. Due to this
breach of contract, the Company does not believe that minimum guaranteed payment
was due to the City of Center. Despite not having the ability to treat waste at
the City of Center's Resource recovery facility, the Company has ample treatment
capacity to dispose of its medical waste.
In January 1997, the City of Center, Texas filed suit in City of Center vs. 3CI
Complete Compliance Corporation, Cause No. CV 9:97-CV-125, in United Sates
District Court Eastern District of Texas. The plaintiffs filed suit to recover
damages arising out of a delinquent account of 3CI, and 3CI filed counterclaims
seeking damages arising out of the alleged breach of exclusivity and tortuous
interference by the City of Center. The Company and the City of Center reached a
settlement of the disputed claims whereby the City of Center would give up their
claim for the outstanding burn fees of approximately $80,000 and pay to the
Company $380,000 in settlement for breaking the exclusivity agreement in the
contract. The Company received $200,000 of this settlement in October 1998, with
the remaining balance of $180,000 to be paid over 24 months.
Included in cost of sales for the years ended September 30, 1998, 1997 and 1996,
is $1,199,384, $1,429,097 and $1,542,842 respectively, related to incineration
costs at both of the Cities.
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, 1998, 1997 and 1996 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,
1998 1997 1996
---- ---- ----
Deferred income tax liabilites -
Property and equipment $ 1,757,197 $ 1,461,197 $ 1,115,998
Other 68,735 68,735 67,200
------------ ------------ ------------
Total deferred income tax liabilities 1,825,932 1,529,932 1,183,198
Deferred income tax assets
Net operating loss carryforward 9,246,947 8,768,841 7,910,438
Bad debt reserves 190,156 301,603 344,468
Other 1,318,700 1,402,858 940,358
------------ ------------ ------------
Total deferred income tax assets 10,755,803 10,473,302 9,195,264
Valuation allowance (8,929,871) (8,943,370) (8,012,066)
------------ ------------ ------------
Net deferred income tax asset (1,825,932) (1,529,932) (1,183,198)
------------ ------------ ------------
Total deferred income tax assets and
Liabilities $ -- $ -- $ --
At September 30, 1998, the Company had approximately $23,612,562 of net
operating loss carryforwards for federal tax purposes which will expire
beginning in 2004 and continue through the year 2018. The Company also had state
net operating losses at September 30, 1998. The Company has established a
valuation allowance for the federal and state net operating losses of
$8,929,871, $8,943,370
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and $8,012,066 as of September 30, 1998, 1997 and 1996, 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 AND WARRANTS:
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.
During the fiscal year ended September 30, 1998, the Company issued 84,000 stock
options issued at a exercise price of $1.50, in exchange for the cancellation of
32,500 and 90,000 previously issued stock options which were exercisable at a
price of $3.00 per share and $2.00 per share, respectively. The Company issued
180,000 stock options of the Company's Common Stock at an exercise price $1.50
per share.
As of the fiscal year ended September 30, 1998, the Company had issued 264,000
of the 500,000 options share described above. As of September 30, 1997, a total
of 122,500 option shares are outstanding and a total of 377,500 option shares
are available for issuance under the plan. The outstanding option shares vest
annually over a three year period.
The Company, in connection with the settlement of a lawsuit with a group of its
minority stockholders issued the minority shareholder class warrants to purchase
up to 1,002,964 shares of common stock at $1.50 per share. At September 30,
1998, all of these warrants were outstanding. They expire in April 2000.
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:
The Company had Notes payable to WSI, its majority shareholder, of $5,004,403
and $4,844,217, as September 30, 1998 and 1997, respectively. In addition, the
Company owed current payables to WSI of $483,406 and $391,156 as of September
30, 1998 and 1997, respectively. Related interest expense in the
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amount of $410,596, $698,248 and $585,468, was recorded for the years ended
September 30, 1998, 1997, and 1996, respectively. Transactions and other
information relating to the debt owed to WSI are more fully described in Note 5
above.
During the fiscal years ending September 30, 1998, 1997 and 1996, the Company
shared certain facilities, personnel and administrative services with WSI.
Certain costs were allocated between the Companies based on management's best
estimate.
The Company purchased business forms from a company owned by the father of
Curtis W. Crane, the Chief Financial Officer of the Company. The payments made
were $72,000, $62,000, and $22,000, during fiscal years ended September 30,
1998, 1997, and 1996, respectively.
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. During
fiscal year 1995, the Company's majority shareholder sent an advisor to the
company to review ongoing operations of the company and to make recommendations
to achieve profitability. From this review the Company developed specific detail
plans for its fiscal year end September 1996. In September 1995, management put
together a business plan for the fiscal year ended September 30, 1996. The Board
of Directors reviewed the plan in detail and after thorough consideration in
every aspect, the plan was approved by the Board of Directors. The Chairman of
the Board met with key operating personnel and officers of the Company to
discuss the actions to be taken. Additionally the board installed a new officer
to oversee the operations and implementation of its plan. The business plan for
the fiscal year ended September 30, 1996, included cost reductions and a small
amount of price increases. As the fiscal year began to develop key operating
objectives of the business plan were not being achieve. In one of the company's
key operating territories (Houston, Texas), a competitor opened a treatment
facility that significantly increased the capacity to treat waste and because of
the competitors desire to fill the capacity, the competitor began deep
discounting pricing to fill the capacity of the new treatment facility. Also the
Company, did not bring it's newly constructed incinerator into full operational
use until March 1996, the business plan had projected the incinerator to be
fully operational in January 1996. As the losses continued the Company prepared
a forecast based on the best available business information. This forecast was
prepared in the fourth quarter of 1996. Because of the forecasted continued
losses it became apparent that an impairment.
13. PREFERRED STOCK:
In June 1997, Waste Systems, Inc., converted $7,000,000 of their Promissory Note
with 3CI Complete Compliance Corporation to Preferred Stock. The Company issued
1,000,000 shares of Series A cumulative convertible preferred stock, with no par
value, at $7.00 per share or $7,000,000 million, to Waste Systems, Inc., the
Company's majority shareholder. The Series A preferred shares has cumulative
dividends from the second anniversary of the original issuance date, at the rate
of $0.5775 per share per annum, and no more, payable quarterly on the 15th day
of July, October, January and April of each year, commencing with a payment on
July 15, 1999. Such dividends shall be cumulative from the second anniversary of
the original issuance date of the Series A Preferred Stock. Accruals of
dividends shall not bear interest.
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The shares of Series A Preferred Stock may be redeemed at any time on or after
the second anniversary of the original issuance date of the Series A Preferred
Stock, at the option of the Company in whole or, from time to time in part, in
any such case at a per share redemption price equal to $7.00, plus accrued
dividends, if any. In case of redemption of only a part of the series A
Preferred stock at the time outstanding, the shares to be redeemed shall be
selected by lot.
Subject to certain adjustments, the series A Preferred stock may be converted at
any time on or after the second anniversary of the original issuance thereof
into full shares of Common Stock of the Company based on a conversion rate of
series A Preferred Stock to Common Stock equal to $7.00 divided by the Market
Price of the Common Stock on the date of the related Conversion Notice.
In February 1998, Waste Systems, Inc., exchanged the 1,000,000 shares of the
Series A Preferred Stock for 7,000,000 shares of Series B cumulative convertible
preferred stock, with a par value $.01. The Series B preferred shares has
cumulative dividends from the second anniversary of the original issuance date,
at the rate of $0.0825 per share per annum, and no more, payable quarterly on
the 15th day of July, October, January and April of each year, commencing with a
payment on July 15, 1999, of dividends accrued from the second anniversary of
the original issuance date of the Series B Preferred Stock. Such dividends shall
be cumulative from the second anniversary of the original issuance date of the
Series B Preferred Stock. Accruals of dividends shall not bear interest. For so
long as any shares of Series B Preferred Stock shall be outstanding, without the
written consent of the holders of a majority in interest of the series B
Preferred Stock, the Corporation shall not (i) purchase or redeem any shares of
its common stock, par value $.01 per share ("Common Stock"), or declare, pay or
set apart for any payment any dividend on its Common Stock.
The shares of Series B Preferred Stock may be redeemed at any time on or after
the second anniversary of the original issuance date of the Series B Preferred
Stock, at the option of the Company in whole or, from time to time in part, in
any such case at a per share redemption price equal to $1.00, plus accrued
dividends, if any. In case of redemption of only a part of the Series B
Preferred stock at the time outstanding, the shares to be redeemed shall be
selected by lot.
Subject to certain adjustments, the series B Preferred Stock shall be
convertible at the option of the record holder thereof, at any time after the
second anniversary of the original issuance thereof, in whole, or from time to
time in part, in the manner provided, into Common Stock. The Series B Preferred
Stock may be converted at any time on or after the second anniversary of the
original issuance thereof, in whole but not in part, in to full shares of Common
Stock of the Corporation with a Market Price of $7,000,000 based on a conversion
rate determined by (i) dividing $7,000,000 by the Market Price of the Common
Stock on the date of the conversion, (ii) plus an amount of cash determined by
subtracting the quotient calculated in (i) and subtracting from $7,000,000;
provided however, that at the option of the holder, the holder may convert the
Series B Preferred Stock into solely that number of shares of common Stock
determined as provided in (i), and forego obtaining the additional Common Stock
issuable as calculated in (ii), subject to such adjustments, if any, of the
conversion rate and the securities or other property issuable upon such
conversion.
During February 1998, the Company and WSI converted an additional $750,000 of
debt under the 1995 Note, into 750,000 shares of Series C Convertible Preferred
Stock which have cumulative dividends, with a par value $.01. The Series C
preferred shares has cumulative dividends from the second anniversary of the
original issuance date, at the rate of $0.0825 per share per annum, and no more,
payable quarterly on the 15th day of July, October, January and April of each
year, commencing with a payment on July 15, 1999, of dividends accrued from the
second anniversary of the original issuance date of the Series B Preferred
Stock. Such dividends shall be cumulative from the second anniversary of the
original issuance date of the Series C Preferred Stock. Accruals of dividends
shall not bear interest. For so long as any shares of Series C Preferred Stock
shall be outstanding, without the written consent of
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the holders of a majority in interest of the series C Preferred Stock, the
Corporation shall not (i) purchase or redeem any shares of its common stock, par
value $.01 per share ("Common Stock"), or declare, pay or set apart for any
payment any dividend on its Common Stock.
The shares of Series C Preferred Stock may be redeemed at any time on or after
the second anniversary of the original issuance date of the Series C Preferred
Stock, at the option of the Company in whole or, from time to time in part, in
any such case at a per share redemption price equal to $1.00, plus accrued
dividends, if any.
Subject to certain adjustments, the Series C Preferred Stock shall be
convertible at the option of the record holder thereof, at any time after the
second anniversary of the original issuance thereof, in whole, or from time to
time in part, in the manner provided, into Common Stock. The Series C Preferred
Stock may be converted at any time on or after the second anniversary of the
original issuance thereof, in whole but not in part, in to full shares of Common
Stock of the Corporation with a Market Price of $750,000 based on a conversion
rate determined by (i) dividing $750,000 by the Market Price of the Common Stock
on the date of the conversion, (ii) plus an amount of cash determined by
subtracting the quotient calculated in (i) and subtracting from $750,000;
provided however, that at the option of the holder, the holder may convert the
Series C Preferred Stock into solely that number of shares of common Stock
determined as provided in (i), and forego obtaining the additional Common Stock
issuable as calculated in (ii), subject to such adjustments, if any, of the
conversion rate and the securities or other property issuable upon such
conversion.
14. COMMITMENTS AND CONTINGENCIES:
In September 1998, Insurance Company of the State of Pennsylvania filed suit in
Insurance Company of the State of Pennsylvania v. 3CI Complete Compliance
Corporation, No. CV98-1756S, in the United Sates District Court of Louisiana,
Shreveport, Louisiana. The plaintiffs have alleged approximately $390,000 in
unpaid premiums for workers compensation insurance policies allegedly issued
between February 1994 and February 1997. The outcome of this lawsuit will not
have a material adverse effect on the Company's financial position, result of
operations and net cash flows.
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 claims and assessments
will not have materially adverse effect on the Company's financial position,
result of operations or net cash flows except where noted above.
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.
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At September 30, 1998, 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 are as follows:
1999 $605,000
2000 353,000
2001 106,000
2002 60,000
2003 and thereafter 135,000
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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 PERIOD
---------- ---------- ---------- ----------
FOR THE YEAR ENDED SEPTEMBER 30, 1998:
ALLOWANCE FOR DOUBTFUL ACCOUNTS 875,144 (278,783) (22,424) 573,937
---------- ---------- ---------- ----------
875,144 (278,783) (22,424) 573,937
========== ========== ========== ==========
FOR THE YEAR ENDED SEPTEMBER 30, 1997:
ALLOWANCE FOR DOUBTFUL ACCOUNTS 990,994 212,867 (328,717) 875,144
---------- ---------- ---------- ----------
990,994 212,867 (328,717) 875,144
========== ========== ========== ==========
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
========== ========== ========== ==========
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1. 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).
3.1. 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. Amendment to 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. Amendment to 3CI's Certificate of Incorporation, as amended
effective March 23, 1998 (incorporated by reference to Exhibit
3.3 of 3CI's registration statement on Form S-1 (No.
333-48499), filed March 24, 1998).
3.4 Bylaws, 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).
3.5* Amendment of Bylaws effective October 1, 1998.
3.6. Certificate of Designations of 3CI's Series A Preferred Stock
without par value (incorporated by reference to Exhibit 3.6 of
3CI's registration statement on Form S-1 (No. 333-48499), filed
March 24, 1998).
3.7. Certificate of Designations of 3CI's Series B Preferred Stock
without par value (incorporated by reference to Exhibit 3.7 of
3CI's registration statement on Form S-1 (No. 333-48499), filed
March 24, 1998).
54
3.8. Certificate of Designations of 3CI's Series C Preferred Stock
without par value (incorporated by reference to Exhibit 3.8 of
3CI's registration statement on Form S-1 (No. 333-48499), filed
March 24, 1998).
4.1.* Warrant dated September 11, 1998, issued to Klein Bank as escrow
agent with respect to 11,061 shares of Common Stock.
4.2. Escrow Agreement dated March 6, 1998 between 3CI and Klein Bank
as escrow agent (incorporated by reference to Exhibit 4.7 of
3CI's registration statement on Form S-1 (No. 333-48499), filed
March 24, 1998).
4.3.* First Amendment to Escrow Agreement dated as of April 22, 1998,
between 3CI and Klein Bank.
4.4.* Amended and Restated Secured Promissory Note dated October 1,
1998, in the principal amount of $5,487,308.13 between 3CI
and Waste Systems, Inc.
4.5.* Loan Agreement and Note Amendment dated December 18, 1998, by
3CI and Waste Systems, Inc.
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(c) 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. 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).
10.5. Security Agreement Note dated October 10, 1994, among 3CI
Complete Compliance Corporation, 3CI Acquisition Corp./A/MED and
River Bay Corporation (incorporated by reference to Exhibit 1.7
of 3CI's report on Form 8-K filed October 27, 1994).
10.6. 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).
10.7. Mortgage, Security Agreement, Assignment of Leases and Financing
Statement dated October 10, 1994, among 3CI Complete Compliance
Corporation, 3CI Acquisition Corp. /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).
10.8. 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).
10.9. 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).
10.10. 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
(incorporated by reference to Exhibit 10.23 of 3CI's report on
Form 10-K filed January 14, 1997).
10.11. Exchange Agreement between 3CI and Waste Systems, Inc. dated as
of June 24, 1997 (incorporated by reference to Exhibit 10.12 of
3CI's registration statement on Form S-1 (No. 333-48499), filed
March 24, 1998).
55
10.12. Stock Purchase and Note Modification Agreement between 3CI and
Waste Systems, Inc. dated as of February 19, 1998 (incorporated
by reference to Exhibit 10.13 of 3CI's registration statement on
Form S-1 (No. 333-48499), filed March 24, 1998).
10.13. Employment Agreement dated May 30, 1998, between 3CI and Charles
D. Crochet (incorporated by reference to Exhibit 10.9 of 3CI's
registration statement on Form S-1 (No. 333-48499), filed March
24, 1998).
10.14.* Agreement dated September 30, 1998 among 3CI, Waste Systems,
Inc. and Stericycle, Inc. regarding Section 203 of the Delaware
General Corporation Law.
10.15.* Form of Indemnification Agreement dated August 26, 1998 entered
into between 3CI and Valerie Banner, David Schoonmaker, Charles
Crochet, Juergen Thomas, Dr. Werner Kook and Dr. Clemens Pues.
27.* Financial Data Schedule
* Filed herewith