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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
COMMISSION FILE NUMBER: 1-11097
3CI COMPLETE COMPLIANCE CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 76-0351992
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1517 W. North Carrier Pkwy, Ste 104, Grand Prairie, TX 75050
(Address of principal executive offices)
(Zip Code)
(972) 375-0006
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(Registrant's telephone number, including area code)
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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 requirements for the past 90 days. YES [X] NO [ ]
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Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date: 9,739,611 shares of
Common Stock, $0.01 par value per share, as of July 14, 2003.
================================================================================
FORWARD-LOOKING STATEMENTS
"THIS QUARTERLY REPORT CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING OUR
BUSINESS AND OPERATIONS. ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN
THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, THESE EXPECTATIONS AND THE
RELATED STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES, AND OTHER FACTORS THAT
COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THESE
RISKS, UNCERTAINTIES, AND OTHER FACTORS INCLUDE, BUT ARE NOT LIMITED TO, ADVERSE
WEATHER CONDITIONS, FLUCTUATIONS IN CUSTOMER DEMAND AND OTHER PATTERNS,
COMPETITIVE ACTIVITY AND PRICING PRESSURE AND GENERAL ECONOMIC CONDITIONS
AFFECTING THE BIO-MEDICAL WASTE DISPOSAL INDUSTRY, AS WELL AS OTHER RISKS
DETAILED IN OUR FILINGS WITH THE SEC. WE EXPRESSLY DISCLAIM ANY OBLIGATIONS TO
RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO
REFLECT ANY CHANGES IN OUR EXPECTATIONS."
================================================================================
3CI COMPLETE COMPLIANCE CORPORATION
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements....................................................................1
Balance Sheets as of
June 30, 2003 (unaudited) and September 30, 2002.....................................1
Statements of Operations for the three and nine months ended
June 30, 2003 and 2002 (unaudited)...................................................2
Statements of Cash Flows for the
nine months ended June 30, 2003 and 2002 (unaudited).................................3
Notes to Financial Statements...........................................................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................9
Item 3. Quantitative and Qualitative Disclosure about Market Risk..............................13
Item 4. Controls and Procedures................................................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................14
Item 2. Changes in Securities and Use of Proceeds..............................................15
Item 3. Defaults upon Senior Securities........................................................15
Item 4. Submission of Matters to a Vote of Security Holders....................................15
Item 5. Other Information......................................................................15
Item 6. Exhibits and Reports on Form 8-K.......................................................16
SIGNATURES...........................................................................................17
ITEM 1. FINANCIAL STATEMENTS
3CI COMPLETE COMPLIANCE CORPORATION
BALANCE SHEETS
June 30, September 30,
2003 2002
(unaudited)
------------ -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,099,876 898,720
Accounts receivable, net allowances of $664,851. and $622,668.
at June 30, 2003 and September 30, 2002, respectively 2,331,164 3,324,529
Inventory 88,905 80,310
Prepaid expenses 481,140 326,711
Other current assets 22,143 43,363
------------ ------------
Total current assets 4,023,228 4,673,633
------------ ------------
Property, plant and equipment, at cost 7,516,474 8,375,654
Accumulated depreciation (5,145,655) (5,428,261)
------------ ------------
Net property, plant and equipment 2,370,819 2,947,393
------------ ------------
Goodwill, net of accumulated amortization of $262,243. 262,243 262,243
Excess purchase price of acquired assets 504,300 --
Other Assets 92,922 117,581
------------ ------------
Total assets $ 7,253,512 8,000,850
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 326,461 51,394
Accounts payable 344,865 435,311
Accounts payable and accrued interest to affiliated companies 455,704 863,327
Accrued liabilities 464,397 470,372
Dividends payable 2,203,717 2,042,560
Current portion of debt to affiliated lenders 2,696,761 1,002,433
------------ ------------
Total current liabilities 6,491,905 4,865,397
------------ ------------
Long-term debt to affiliated lenders, net of current portion -- 2,888,202
------------ ------------
Total liabilities 6,491,905 7,753,599
------------ ------------
Shareholders' Equity:
Preferred stock, $0.01 par value, authorized 16,050,000 shares;
issued and outstanding 7,750,000 at June 30, 2003 and September 30, 2002,
respectively 77,500 77,500
Additional paid-in capital - preferred stock 7,672,500 7,672,500
Common stock, $0.01 par value, authorized 40,450,000 shares;
Issued and outstanding 9,739,611 at June 30, 2003 and September 30, 2002 97,742 92,329
Less cost of treasury stock 34,500 shares (51,595) (51,595)
Additional paid-in capital - common stock 20,519,861 20,471,145
Accumulated deficit (27,554,401) (28,014,628)
------------ ------------
Total shareholders' equity 761,607 247,251
------------ ------------
Total liabilities and shareholders' equity $ 7,253,512 8,000,850
============ ============
The accompanying notes are an integral part of these financial statements.
1
3CI COMPLETE COMPLIANCE CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended June 30, For the nine months ended June 30,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Revenues $ 3,439,572 $ 3,785,274 $ 10,446,375 $ 12,090,685
Expenses:
Cost of services 1,989,164 2,400,714 6,495,219 7,869,766
Depreciation and amortization 153,909 166,144 511,914 498,117
Selling, general and administrative expenses 1,045,648 739,212 2,549,576 2,170,413
Interest expense 30,417 94,930 138,121 411,154
Other expense-net (9,255) 67,222 130,160 205,537
--------------- --------------- --------------- ---------------
Income before income taxes 229,689 317,052 621,385 935,698
Income taxes -- -- -- --
--------------- --------------- --------------- ---------------
Net income $ 229,689 $ 317,052 $ 621,385 $ 935,698
=============== =============== =============== ===============
Dividends on preferred stock -- (159,405) (161,158) (478,218)
--------------- --------------- --------------- ---------------
Net income applicable to common shareholders $ 229,689 $ 157,647 $ 460,227 $ 457,480
=============== =============== =============== ===============
Basic earnings per share:
Basic net income per share $ 0.02 $ 0.02 $ 0.05 $ 0.05
=============== =============== =============== ===============
Diluted earnings per share:
Diluted net income per share $ 0.01 $ 0.02 $ 0.04 $ 0.05
=============== =============== =============== ===============
The accompanying notes are an integral part of these financial statements.
2
3CI COMPLETE COMPLIANCE CORPORATION
STATEMENT OF CASH FLOWS
(UNAUDITED)
For the nine months ended June 30,
2003 2002
--------------- ---------------
Cash flow from operating activities:
Net income $ 621,385 $ 935,698
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on disposal of fixed assets (64,139) (4,778)
Depreciation 493,914 470,117
Amortization 18,000 18,000
Changes in operating assets and liabilities:
Decrease in accounts receivable, net 993,365 492,720
Increase in inventory (8,595) (25,078)
Increase in prepaid expenses (154,429) (168,198)
Decrease (Increase) in other current assets and other assets 27,879 (44,676)
(Decrease) in accounts payable (90,447) (69,554)
(Decrease) Increase in accounts payable, affiliated companies (407,623) 216,430
(Decrease) Increase in accrued liabilities (5,975) 184,664
--------------- ---------------
Total adjustments to net income 801,950 1,069,647
--------------- ---------------
Net cash provided by operating activities 1,423,335 2,005,345
--------------- ---------------
Cash flow from investing activities:
PMT acquisition (504,300) --
Proceeds from sale of property, plant and equipment -- 15,259
Purchase of property, plant and equipment (181,903) (54,861)
--------------- ---------------
Net cash used in investing activities (686,203) (39,602)
--------------- ---------------
Cash flow from financing activities:
Proceeds from issuance of notes payable 525,293 227,456
Principal reduction of notes payable (250,226) (292,243)
Proceeds from issuance of common stock 54,129 --
Reduction of long-term debt, unaffiliated lenders -- (703,469)
Reduction of note payable to majority shareholders (865,172) (1,100,000)
--------------- ---------------
Net cash used in financing activities (535,976) (1,868,256)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 201,156 97,487
Cash and cash equivalents, beginning of period 898,720 709,563
--------------- ---------------
Cash and cash equivalents, end of period $ 1,099,876 $ 807,050
=============== ===============
Non-cash investing and financing activities:
Sale of equipment to Stericycle in exchange for reduction of debt
to affiliate lender $ 328,702 $ --
The accompanying notes are an integral part of these financial statements.
3
3CI COMPLETE COMPLIANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2003
(1) ORGANIZATION AND BASIS OF PRESENTATION
3CI Complete Compliance Corporation, a Delaware corporation (the
"Company" or "3CI"), is engaged in the collection, transportation, and disposal
of biomedical waste in the southern and southeastern United States.
Effective October 1, 1998, Stericycle Inc., a Delaware
corporation ("Stericycle"), acquired 100% of the common stock of Waste Systems,
Inc. ("WSI") for $10 million. As a result of the transaction, WSI became a
wholly owned subsidiary of Stericycle. WSI owns 58.0% or 5,645,734 shares of the
outstanding common stock, par value $.01 per share (the "Common Stock"), of the
Company and 100% of the outstanding preferred stock, par value $.01 per share
(the "Preferred Stock"), of the Company. In addition, Stericycle owns 932,770
shares of Common Stock directly. Through its ownership of WSI and shares owned
directly, Stericycle owns 67.5% of the outstanding Common Stock.
The accompanying unaudited condensed financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States, for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States, for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month and nine-month periods ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the year ended
September 30, 2003.
For further information, refer to the consolidated financial
statements and footnotes included in the Company's annual report on Form 10-K
for the year ended September 30, 2002.
Certain amounts in the financial statements for 2002 have been
reclassified to conform to the 2003 presentation.
(2) NET INCOME PER COMMON SHARE
Basic earnings per common share are computed by dividing net
income by the weighted average number of common shares outstanding. Diluted
earnings per common share consider the effect of common stock equivalents.
4
The following table sets forth the computation of net income per common share:
FOR THE THREE AND NINE MONTHS ENDED,
-----------------------------------------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Numerator:
Net income $ 229,689 $ 317,052 $ 621,385 $ 935,698
Less preferred dividends -- (159,405) (161,158) (478,218)
------------ ------------ ------------ ------------
Net income applicable to common stockholders $ 229,689 $ 157,647 $ 460,227 $ 457,480
Denominator:
Denominator for basic earnings per share
-- weighted average shares 9,739,611 9,198,325 9,582,399 9,198,325
------------ ------------ ------------ ------------
Effect of dilutive securities:
Preferred shares and warrants 7,750,000 8,200,724 7,845,026 8,200,724
------------ ------------ ------------ ------------
Denominator for diluted earnings per share-adjusted 17,489,611 17,399,049 17,427,425 17,399,049
Weighted average shares and assumed conversions
------------ ------------ ------------ ------------
Basics earnings per share $ 0.02 $ 0.02 $ 0.05 $ 0.05
------------ ------------ ------------ ------------
Diluted earnings per share $ 0.01 $ 0.01 $ 0.04 $ 0.03
------------ ------------ ------------ ------------
The dilutive effect of the preferred shares is based upon the
Company's interpretation that the appropriate conversion rate is the per share
market value of the Common Stock on the conversion notice date, less $1.00 per
share, but in no event is the conversion rate less than $1.00 per share.
Warrants to purchase common shares included in the calculation of
diluted earnings per share for 2002 had expired or were exercised prior to
December 31, 2002. Outstanding stock options were not included in the
computation as they were anti-dilutive since the exercise prices ranging from
$0.33 to $1.50 were greater than the average price of the Common Stock.
(3) PREFERRED STOCK
WSI owns (a) 100% or 7,000,000 shares of the Company's Series B
Preferred Stock, par value $.01 per share, and (b) 100% or 750,000 shares of the
Company's Series C Preferred Stock, par value $.01 per share (collectively, the
"Preferred Stock").
On December 31, 2002, the Company declared a $0.0208 per share
dividend on the Preferred Stock, which totaled $161,158 and represented the
undeclared dividends accrued through that date. The Board resolution declaring
this dividend called for payment in cash from funds legally available for the
payment of dividends, as and when the Board of Directors may direct by further
resolution.
At June 30, 2003, the Company had recorded an aggregate of
$2,203,717 in declared but unpaid dividends on the Preferred Stock (the
"Preferred Stock Dividends"). Of such total amount, $2,034,555 or $0.29 per
share has been recorded as payable on the Company's Series B Preferred Stock and
$169,163 or $0.23 per share has been recorded as payable on the Company's Series
C Preferred Stock.
Under Delaware law, the Company can pay dividends out of its
capital surplus, or if it has no capital surplus, out of its net profits for the
fiscal year in which the dividends are declared and paid and/or the preceding
fiscal year. Capital surplus is calculated on a going concern basis and equals
the net
5
worth of the Company less the aggregate amount obtained by multiplying $.01
times the number of outstanding shares of the Company's capital stock. At June
30, 2003, the Company does not believe that it had sufficient capital surplus or
net profits with which to pay the aggregate amount of the Preferred Stock
Dividends.
Although the Company has no current intention of paying the
Preferred Stock Dividends, it is uncertain whether if it desired to pay these
dividends, it could lawfully do so. Before any payment of the Preferred Stock
Dividends, the Company intends to obtain confirmation, which may take the form
of judicial approval or an opinion of counsel expert in Delaware corporate law
that the Preferred Stock Dividends have been lawfully declared and may lawfully
be paid.
If the payment of the Preferred Stock Dividends is judicially
approved or otherwise deemed lawful and appropriate and the Company's Board of
Directors directs the payment of the Preferred Stock Dividends, the Company
intends to pay such dividends from all funds legally available for such payment,
including cash generated from operations, borrowings and sales of assets. There
is no assurance that at the payment date, sufficient cash would be available
from such sources to pay all or any part of the Preferred Stock Dividends.
Pursuant to the terms and conditions of the respective
certificates of designations governing the Company's Preferred Stock, all issued
and outstanding shares of Preferred Stock automatically converted into shares of
the Company's Common Stock on April 6, 2003. Prior to April 6, 2003, WSI and
Stericycle asserted that the conversion rate of the Preferred Stock is such that
each share of Preferred Stock is convertible into that number of shares of
Common Stock determined by dividing $7,000,000 (with respect to the Series B
Preferred Stock) or $750,000 (with respect to the Series C Preferred Stock) by
the market value of the Common Stock on the date of conversion. On April 6,
2003, the per share closing price of the Common Stock was $0.21. Accordingly,
the Company would have issued 36,904,761 shares of Common Stock upon conversion
of the Preferred Stock under this interpretation, which would have increased
WSI's ownership percentage to 91.2% of the outstanding shares of Common Stock
and the combined WSI and Stericycle ownership percentage to 93.2%.
WSI and Stericycle's interpretation of the conversion rate is
contrary to the Company's interpretation of the conversion rate. Based on the
certificates of designations governing the Preferred Stock, certain documents
executed contemporaneously with the issuance of the Preferred Stock, and the
intent of the parties at the time of issuance of the Preferred Stock and the
execution of these documents, the Company believes that the appropriate
conversion rate is the per share market value of the Common Stock on the
conversion notice date, less $1.00 per share, but that the conversion rate shall
not be less than $1.00 per share (the "Agreed Maximum Conversion Rate"). Under
this interpretation, since the per share market value of the Common Stock was
less than $1.00 on April 6, 2003, the Company would have issued 7,750,000 shares
of Common Stock upon conversion of the Preferred Stock, which would have
increased WSI's ownership percentage to 76.6% of the outstanding shares of
Common Stock and the combined WSI and Stericycle ownership percentage to 81.9%.
The Company has not issued any shares of Common Stock and has not
recorded any increase in the outstanding Common Stock relative to the conversion
of the Preferred Stock. On April 2, 2003, the Company, WSI, and Stericycle
entered into an Agreement to Defer Conversion of Preferred Stocks (the
"Agreement to Defer"), pursuant to which all parties agreed that the Company
will not issue any Common Stock upon conversion of the Preferred Stock until a
judicial judgment as to the appropriate conversion rate has become final and
non-appealable.
6
(4) PMT ACQUISITION
In June 2003, the Company acquired selected assets of PMT USA,
Inc., dba Air & Sea Environmental, a medical waste management services company
located in Houston, Texas. The aggregate purchase price was $504,300. As of June
30, 2003, the total purchase price has been recorded as an increase to excess
purchase price of acquired business as the valuation of intangibles acquired,
and the resulting amount of goodwill has not yet been determined.
(5) PROMISSORY NOTE
On October 1, 1998, the Company amended and restated its secured
promissory note payable to WSI (the "Note"), which was originally due September
30, 2000. The Note is secured by substantially all of the Company's assets.
Since that time, the Note has been renegotiated and extended either quarterly or
semi-annually under interest rate terms ranging from prime plus 1.0% to prime
plus 3.5%, not to exceed 13%. On October 1, 2000, the Note was amended and
extended and the Company issued warrants to WSI for the purchase of up to
541,286 shares of Common Stock at an exercise price of $.10 per share. These
warrants were exercised on December 19, 2002. The Company accounted for the
values of the warrants in its statement of operations for the respective periods
as interest expense.
By agreement dated May 23, 2002, the Note was amended and its
maturity was extended to October 1, 2003. The Note was further amended to be
payable in quarterly payments of principal and interest, with interest
calculated at the prime rate (4.25% as of September 1, 2003) plus 1.0%. Other
terms of this extension included the Company making a $700,000 principal payment
to WSI on the extension date and paying additional monthly payments of $100,000
on the Note, commencing June 1, 2002, and continuing on the first day of each
month thereafter. These monthly payments have been applied to the outstanding
balance of accrued interest and principal of the Note. The terms of this
extension also require the Company to achieve each fiscal quarter a minimum
level of $900,000 in EBITDA for the then trailing six-month period.
The Company did not meet the required minimum level of EBITDA for
the trailing six-month periods ended March 31, 2003 and June 30, 2003. The
Company received a waiver from WSI for the periods ended March 31, 2003 and June
30, 2003. In addition, on September 19, 2003, the Note was amended to reflect
the exclusion of certain expenses from the EBITDA computation. The Note is
secured by substantially all of the Company's assets.
7
(6) COMMITMENTS AND CONTINGENCIES
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 their
enforcement could result in a reduced demand for the Company's services and
could 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.
(7) NEW ACCOUNTING STANDARDS
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 nullifies Emerging
Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). SFAS No. 146 is effective for exit
or disposal activities that are initiated after December 31, 2002 with early
application encouraged. The Company does not expect that the adoption of the
statement will have a significant impact on the Company's financial position and
results of operations.
During November 2002, the EITF reached a consensus on EITF Issue
No. 00-21, Multiple-Deliverable Revenue Arrangements, which addresses how to
account for arrangements that may involve the delivery or performance of
multiple products, services, and/or rights to use assets. The final consensus is
applicable to agreements entered into in fiscal periods beginning after June 15,
2003, with early adoption permitted. The Company does not expect that the
adoption of EITF Issue No. 00-21 will have a significant impact on the Company's
financial position and results of operations.
In January 2003, the FASB issued Interpretation No. 46,
(Consolidation of Variable Interest Entities, and Interpretation of Accounting
Research Bulletin (ARB) No. 51" (the "Interpretation"). The Interpretation
introduces a new consolidation model which determines control and consolidation
based on potential variability in gains and losses of the entity being evaluated
for consolidation. The Interpretation applies to variable interest entities
created after January 1, 2003, and to variable interest entities in which a
company obtains an interest after that date. The Interpretation applies in the
first fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which a company holds a variable interest that it acquired
before February 1, 2003. Management believes there will be no impact of this
Statement on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
standard is effective for financial instruments entered into or modified after
May 31, 2003 and to all other instruments as of the beginning of the first
interim financial reporting period beginning after June 15, 2003. Management
believes there will be no impact of this Statement on the Company's consolidated
financial statements assuming the Company prevails in the dispute regarding its
interpretation of the Preferred Stock conversion rate.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is engaged in the business of medical waste
management services in the southern 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 collection, transportation, and disposal of regulated medical
waste.
RESULTS OF OPERATIONS
The following summarizes (in thousands) the Company's operations:
THREE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Revenues $ 3,440 $ 3,785 $ 10,446 $ 12,091
Cost of Services 1,989 2,401 6,495 7,870
Depreciation and amortization 154 166 512 498
---------- ---------- ---------- ----------
Selling, general and administrative expenses 1,046 739 2,550 2,170
---------- ---------- ---------- ----------
Net Income from operations 251 479 889 1,553
Interest Expense 30 95 138 411
Other (Income) Expense net (9) 67 130 206
---------- ---------- ---------- ----------
Net Income 230 317 621 936
Depreciation 148 160 494 480
Amortization 6 6 18 18
Interest Expense net 30 95 138 411
---------- ---------- ---------- ----------
EBITDA(1) $ 414 $ 578 $ 1,271 $ 1,845
========== ========== ========== ==========
(1) EBITDA is calculated as the sum of net income, plus interest expense,
income tax expense, depreciation expense, and amortization expense to the extent
deducted in calculating net income. The Company considers EBITDA to be a widely
accepted financial indicator of a company's operating performance and ability to
service debt, fund capital expenditures and expand its business. EBITDA is not
calculated in the same way by all companies and therefore may not be comparable
to similarly titled measures reported by other companies. EBITDA is not a
measure on accordance with accounting principles generally accepted in the
United States. EBITDA should not be considered as an alternative to net income,
as an indicator of operating performance or as an alternative to cash flow as a
measure of liquidity. The funds depicted by the measure may not be available for
management's discretionary use due to legal or functional requirements, debt
service, other commitments and uncertainties.
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002:
REVENUES decreased by $345,702 or approximately 9.1%, to $3,439,572 during the
three-month period ended June 30, 2003, from $3,785,274 for the three-month
period ended June 30, 2002. The decrease in revenue is primarily related to a
reduction in the volume of waste handled. The reduction in volume was
attributable to the Company's efforts to focus on the professional market
segments, which provide higher pricing at lower volumes while reducing the focus
on the hospital segment, which provides higher volume at a typically lower
average unit price.
COST OF SERVICES decreased $411,550 or approximately 17.1%, to $1,989,164 during
the three months ended June 30, 2003, compared to $2,400,714 for the three month
period ended June 30, 2002. The reasons for the decrease were primarily
attributable to a decrease in processing fees and transportation
9
costs. Cost of services as a percentage of revenues decreased to 57.8% during
the three months ended June 30, 2003, as compared to 63.4% during the three
months ended June 30, 2002.
DEPRECIATION AND AMORTIZATION expense decreased to $153,909 for the three months
ended June 30, 2003, from $166,144 for the three months ended June 30, 2002. The
decrease was the result of the Company disposing of certain owned vehicles and
replacing them with newer, leased vehicles.
SELLING, GENERAL AND ADMINISTRATIVE expenses increased to $1,045,648 during the
three months ended June 30, 2003, from $739,212, during the three months ended
June 30, 2002. The increase was due to higher legal and SEC compliance costs and
increased group insurance and compensation for employees. Selling, general and
administrative expenses increased as a percentage of revenue to 30.4% for the
three months ended June 30, 2003, as compared to 19.5% for the three months
ended June 30, 2002 primarily due to the factors described above.
INTEREST EXPENSE decreased by $64,513, or 68.0%, to $30,417 during the three
months ended June 30, 2003, as compared to $94,930 for the three month period
ended June 30, 2002. This decrease was due to the decrease in the prime interest
rate and lower principal debt balances under the Note.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION ("EBITDA")
totaled $414,015 or 12.0% of revenue for the three months ended June 30, 2003
compared to $578,126 or 15.3% of revenue for the quarter ended June 30, 2002.
This decrease was primarily the result of the reduced income and increased costs
of selling, general and administrative expenses for the three months ended June
30, 2003.
NINE MONTHS ENDED JUNE 30, 2003 COMPARED TO NINE MONTHS ENDED JUNE 30, 2002:
REVENUES decreased by $1,644,310 or 13.6%, to $10,446,375 during the nine-month
period ended June 30, 2003, from $12,090,685 for the nine-month period ended
June 30, 2002. This decrease is primarily due to a decrease in the volume of
waste handled. This reduction in volume was attributable to the Company's
efforts to focus on the professional market segments, which provide higher
pricing at lower volumes while reducing the focus on the hospital segment, which
provides higher volume at a typically lower average unit price.
COST OF SERVICES decreased $1,374,547, or 17.5%, to $6,495,219, during the nine
months ended June 30, 2003, compared to $7,869,766 for the nine-month period
ended June 30, 2002. The decrease in cost of services is attributable to the
decreased waste processing and transportation costs. Cost of services as a
percentage of revenues decreased to 62.2% during the nine months ended June 30,
2003, as compared to 65.1% during the nine months ended June 30, 2002.
DEPRECIATION AND AMORTIZATION expense increased to $511,914 for the nine months
ended June 30, 2003, from $498,117 for the nine months ended June 30, 2002. The
increase was primarily the result of the Company acquiring new assets for the
new computer system and the move of the corporate offices to Grand Prairie,
Texas in June 2002.
SELLING, GENERAL AND ADMINISTRATIVE expenses increased to $2,549,576 during the
nine months ended June 30, 2003, from $2,170,413 during the nine months ended
June 30, 2002. This increase of $379,163, or 17.5%, is primarily attributable to
higher legal and SEC compliance costs and increased group insurance and
compensation for employees. Selling, general and administrative expenses
increased as a percentage of revenue to 24.4% for the nine months ended June 30,
2003, as compared to 18.0% for the nine months ended June 30, 2002.
10
INTEREST EXPENSE decreased by $273,033 or 66.4% to $138,121 during the nine
months ended June 30, 2003 as compared to $411,154 during the nine months ended
June 30, 2002. This decrease was due to reduced debt and a reduction in the
interest rate for the Note, which is variable and tied to the prime interest
rate.
EARNINGS BEFORE INTEREST TAXES DEPRECIATION AND AMORTIZATION ("EBITDA") totaled
$1,271,420 or 12.2% of revenue for the nine months ended June 30, 2003 compared
to $1,844,969 or 15.3% of revenue for the nine months ended June 30, 2002. This
decrease was primarily the result of the reduced income and increased costs of
selling, general and administrative expenses for the nine months ended June 30,
2003.
LIQUIDITY AND CAPITAL RESOURCES
Over the last several quarters the Company has continued to
experience improved cash flow. This improvement in cash flow has resulted from
operations and from better billing and collection practices, including
collection of past due accounts. The improved cash flow has enabled the Company
to reduce debt and to rely more on internally generated funds to finance its
working capital needs, capital expenditures, and acquisitions and to rely less
on its majority stockholder, WSI. The Company's indebtedness currently consists
of amounts owed to WSI (which are described below) and insurance premiums that
are financed over the course of each fiscal year.
On October 1, 1998, the Company amended and restated its Note
payable to WSI. The Note is secured by substantially all of the Company's
assets. Since that time, the Note has been renegotiated and extended to be
payable either quarterly or semi-annually under interest rate terms that have
ranged from prime plus 1.0% to prime plus 3.5%, not to exceed 13%. On October 1,
2000, the Note was amended and extended and the Company issued warrants to WSI
for the purchase of up to 541,286 shares of Common Stock at an exercise price of
$.10 per share. These warrants were exercised on December 19, 2002. The Company
accounted for the values of the warrants in its statements of operations for the
respective periods as interest expense.
By agreement dated May 23, 2002, the Note was again amended and
its maturity was extended to October 1, 2003. The Note was further amended to be
payable in quarterly payments of principal and interest, with interest
calculated at the prime rate (4.25% as of September 1, 2003) plus 1.0%. Other
terms of this extension included the Company making a $700,000 principal payment
to WSI on the extension date and paying additional monthly payments of $100,000
on the Note, commencing June 1, 2002, and continuing on the first day of each
month thereafter. These monthly payments have been applied to the outstanding
balance of accrued interest and principal of the Note. The terms of the
extension also require the Company to achieve at the end of each fiscal quarter
a minimum level of $900,000 in EBITDA for the then trailing six-month period.
By agreement with WSI effective July 1, 2003, the interest rate
on the Note was reduced to the Federal Reserve's prime rate, as such may change
from time to time, not to exceed 13%. On September 23, 2003, by agreement with
WSI, the EBITDA calculation covenant of the Note was amended (i) effective for
the Company's fiscal quarter ended March 31, 2003, and subsequent, to exclude a
portion of the Company's reserve for bad debts, and (ii) effective for the
Company's fiscal quarter ended June 30, 2003, and subsequent, to further exclude
certain legal costs associated with the dispute regarding the conversion rate of
the Preferred Stock. See "Part II - Legal Proceedings" herein for a description
of the dispute regarding the conversion rate of the Preferred Stock.
11
The Company's Note payable to WSI matures on October 1, 2003. As
of August 31, 2003, the aggregate principle amount of the Note outstanding was
$2,517,244. The Company and WSI have agreed in principle to extend the Note at
maturity on terms substantially similar to those currently set forth in the Note
agreement. However, if for any reason the Company and WSI cannot consummate an
agreement to extend the Note, the Company would attempt to finance the aggregate
outstanding balance with a bank or other third party financial institution.
There is no assurance that the Company would be able to obtain such bank or
other third party financing, or that if obtained, the Company could do so on
terms comparable to or better than those currently available under the Note.
Failure to obtain replacement financing on terms comparable to or better than
those in the Note could have a material adverse effect on the Company, its
operations, and financial condition.
At June 30, 2003, the Company had net working capital of
$(2,468,677), including the Note payable to WSI of $2,696,761, compared to a net
working capital of $(191,764), including the Note payable to WSI of $1,002,433
at September 30, 2002. This decrease in net working capital of $(2,276,913) was
due primarily to the reduction in accounts receivable and the Note payable to
its majority stockholder changing from long term to current.
Net cash provided by operating activities was $1,423,335 during
the nine-month period ended June 30, 2003, compared to $2,005,345 of net cash
provided by operating activities for the nine month period ended June 30, 2002.
This decrease of $582,010 is due primarily to the decrease in net income during
2003 and the increase in accounts payable, affiliated companies and accrued
liabilities partially offset by the decrease in accounts receivable.
Net cash used in investing activities for the nine months ended
June 30, 2003, was $686,203 compared to $39,602 for the same period in 2002. The
$646,601 increase reflects the acquisition of selected assets from PMT USA, Inc.
and increased investment in capital equipment.
Net cash used in financing activities was $535,976 during the nine
month period ended June 30, 2003, as compared to net cash used in financing
activities of $1,868,256 during the nine month period ended June 30, 2002. The
$1,332,280 fluctuation is due to decreased payments on long-term debt and notes
payable in the period ending June 30, 2002.
At June 30, 2003, the Company had recorded an aggregate of
$2,203,717 in Preferred Stock Dividends. Under Delaware law, the Company can pay
dividends out of its capital surplus, or if it has no capital surplus, out of
its net profits for the fiscal year in which the dividends are declared and paid
and/or the preceding fiscal year. Capital surplus is calculated on a going
concern basis and equals the net worth of the Company less the aggregate amount
obtained by multiplying $.01 times the number of outstanding shares of the
Company's capital stock. At June 30, 2003, the Company does not believe that it
had sufficient capital surplus or net profits with which to pay the aggregate
amount of the Preferred Stock Dividends.
Although the Company has no current intention of paying the
Preferred Stock Dividends, it is uncertain whether if it desired to pay these
dividends, it could lawfully do so. Before any payment of the Preferred Stock
Dividends, the Company intends to obtain confirmation, which may take the form
of judicial approval or an opinion of counsel expert in Delaware corporate law
that the Preferred Stock Dividends have been lawfully declared and may lawfully
be paid.
If the payment of the Preferred Stock Dividends is judicially
approved or otherwise deemed lawful and appropriate and the Company's Board of
Directors directs the payment of the Preferred Stock
12
Dividends, the Company intends to pay such dividends from all funds legally
available for such payment, including cash generated from operations, borrowings
and sales of assets. There is no assurance that at the payment date, sufficient
cash would be available from such sources to pay all or any part of the
Preferred Stock Dividends.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's exposure to market risk includes the possibility of
rising interest rates in connection with the Company's credit facility with WSI,
its majority stockholder, thereby increasing its debt service obligation, which
could adversely affect the Company's cash flows. The interest rate for the Note
is variable and tied to the Federal Reserve's prime lending rate, not to exceed
13%. An increase in the prime rate of 1% would have the effect of increasing
interest expense by approximately $32,744 over 12 months.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in its filings,
under the Securities Exchange act of 1934 is recorded, processed, summarized,
and reported within the periods specified in the rules and forms of the
Securities and Exchange Commission. This information is accumulated and
communicated to our management including our principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding
required disclosures. Our management, including our principal executive officer
and our principal financial officer, recognizes that any set of controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives.
Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of our disclosure controls and procedures as
of the end of the period covered by this report. Based on this evaluation, our
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures are effective in alerting them on a timely
basis to material information required to be disclosed in our periodic filings.
There were no significant changes in the Company's internal
controls over financial reporting that occurred during the quarter covered by
this report that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Louisiana Minority Stockholder Litigation
On June 20, 2002, Larry F. Robb, individually, on behalf of a
class comprised of 3CI's minority stockholders, and derivatively on behalf of
the Company (collectively, the "Plaintiffs"), filed cause no. 467704-A, Robb et
al. v. Stericycle, Inc. et al., in the First Judicial District Court, Caddo
Parish, Louisiana (the "Louisiana Suit"). In this suit, the Plaintiffs assert
numerous claims of minority stockholder oppression, breach of fiduciary duty and
unjust enrichment against Stericycle, the four Stericycle directors who are also
3CI directors, and the President/CEO of the Company (collectively, the
"Defendants").
The Plaintiffs contend that since Stericycle's acquisition of WSI
in September 1998, Stericycle has unfairly and improperly exercised control over
3CI to the detriment of the Company's minority stockholders in contravention of
various contractual, common law, and statutory duties. Among other things, the
Plaintiffs allege that the Defendants have (i) deprived the Company of revenues
by imposing unfavorable loan obligations on 3CI and imposing avoidable expenses
on 3CI; (ii) usurped 3CI's business and business opportunities and diverted its
assets for Stericycle's benefit; and (iii) depressed the value of the Company's
outstanding Common Stock. Plaintiffs further allege that Stericycle has breached
an agreement entered into for the protection of 3CI's minority stockholders in
connection with Stericycle's acquisition of WSI.
Based on these and other allegations, the Plaintiffs seek to
recover actual and punitive damages and a variety of equitable and other relief,
including forfeiture or rescission of various disputed transactions, a
constructive trust of all benefits Stericycle has derived on business usurped
from the Company or not offered to the Company, and an order requiring
Stericycle to buy the capital stock of the minority stockholders of the Company
at the relative value of 3CI's shares to Stericycle's shares at the time
Stericycle gained control over 3CI, i.e. one share of Stericycle common stock
for every five shares of Company Common Stock. The parties in the Louisiana Suit
currently are proceeding with discovery. The Company does not have sufficient
information to predict the outcome of the Louisiana Suit.
Dispute with WSI and Stericycle as to Conversion Rate for Preferred Stock
Pursuant to the terms and conditions of the respective
certificates of designations governing the Company's Preferred Stock, all issued
and outstanding shares of Preferred Stock automatically converted into shares of
the Company's Common Stock on April 6, 2003. Prior to April 6, 2003, WSI and
Stericycle asserted that the conversion rate of the Preferred Stock is such that
each share of Preferred Stock is convertible into that number of shares of
Common Stock determined by dividing $7,000,000 (with respect to the Series B
Preferred Stock) or $750,000 (with respect to the Series C Preferred Stock) by
the market value of the Common Stock on the date of conversion. On April 6,
2003, the per share closing price of the Common Stock was $0.21. Accordingly,
the Company would have issued 36,904,761 shares of Common Stock upon conversion
of the Preferred Stock under this interpretation, which would have increased
WSI's ownership percentage to 91.2% of the outstanding shares of Common Stock
and the combined WSI and Stericycle ownership percentage to 93.2%.
WSI and Stericycle's interpretation of the conversion rate is
contrary to the Company's interpretation of the conversion rate. Based on the
certificates of designations governing the Preferred
14
Stock, certain documents executed contemporaneously with the issuance of the
Preferred Stock, and the intent of the parties at the time of issuance of the
Preferred Stock and the execution of these documents, the Company believes that
the appropriate conversion rate is the per share market value of the Common
Stock on the conversion notice date, less $1.00 per share, but that the
conversion rate shall not be less than $1.00 per share (the "Agreed Maximum
Conversion Rate"). Under this interpretation, since the per share market value
of the Common Stock was less than $1.00 on April 6, 2003, the Company would have
issued 7,750,000 shares of Common Stock upon conversion of the Preferred Stock,
which would have increased WSI's ownership percentage to 76.6% of the
outstanding shares of Common Stock and the combined WSI and Stericycle ownership
percentage to 81.9%.
The Company has not issued any shares of Common Stock and has not
recorded any increase in the outstanding Common Stock relative to the conversion
of the Preferred Stock. On April 2, 2003, the Company, WSI, and Stericycle
entered into an Agreement to Defer Conversion of Preferred Stocks, pursuant to
which all parties agreed that the Company will not issue any Common Stock upon
conversion of the Preferred Stock until a judicial judgment as to the
appropriate conversion rate has become final and non-appealable.
Judicial Determination of the Conversion Rate of the Preferred Stock
On May 9, 2003, the Company filed a declaratory judgment action
in the 269th District Court in Harris County, Texas seeking a judicial
determination of the appropriate conversion rate of the Preferred Stock.
Following a hearing in that action and for jurisdictional reasons, the Company
elected to initiate a new action, and on August 22, 2003, filed an original
petition for declaratory judgment and to enforce settlement agreement (the
"Declaratory Judgment Action") in the 234th District Court in Harris County,
Texas (the "Court"). In its petition, the Company requests the Court establish
the conversion rate of the Preferred Stock to be the Agreed Maximum Conversion
Rate and confirm issuance of no more than 7,750,000 shares of Common Stock to
WSI as of April 6, 2003.
Other
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits. The following is a list of the exhibits filed with this Form 10-Q.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
31.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley act of 2002.
b) Reports on Form 8-K.
None.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
3CI COMPLETE COMPLIANCE
CORPORATION
(Registrant)
Dated: September 24, 2003 By: /s/ Donald P. Zima
------------------------------
Donald P. Zima
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial Officer
and Principal Accounting
Officer)
17