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FORM 10-K/A
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, 1997
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
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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
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Voting Stock held by non-affiliates of the
registrant as reported on the NASDAQ Small-Cap Market System on January 6, 1998
was approximately $5,769,829 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 6, 1998 was 9,720,311.
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3CI COMPLETE COMPLIANCE CORPORATION
TABLE OF CONTENTS (*)
ANNUAL REPORT ON FORM 10-K/A
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PAGE
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PART I
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Item 1. Business.......................................................................... 3
Item 2. Properties........................................................................ 16
Item 3. Legal Proceedings................................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders.............................. 19
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters......................................... 20
Item 6. Selected Financial Data........................................................... 20
Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations...................................................... 21
Item 8. Financial Statements and Supplementary Data....................................... 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................................ 33
PART III
Item 10. Directors and Executive Officers of
the Registrant................................................................. 34
Item 11. Executive Compensation............................................................ 35
Item 12. Security Ownership of Certain Beneficial
Owners and Management.......................................................... 38
Item 13. Certain Relationships and Related
Transactions................................................................... 39
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K........................................................ 41
Signature Page............................................................................. 42
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(*) This Table of Contents is inserted for convenience of reference only and is
not a part of this Report as filed.
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PART I
ITEM 1. BUSINESS
GENERAL
3CI Complete Compliance Corporation ("3CI" or the "Company") was
incorporated in Delaware in 1991. The Company is engaged in the
business of medical waste management services. The Company services
customers in a number of states in and contiguous to the southwestern
and southeastern United States, including Alabama, Arkansas, Georgia,
Florida, Missouri, Kansas, Louisiana, Mississippi, Oklahoma, Tennessee,
and Texas. The Company's customers include regional medical centers,
major hospitals, clinics, medical and dental offices, veterinarians,
pharmaceutical companies, retirement homes, medical testing
laboratories and other generators of medical waste. Services to
customers include collection, transportation, bar code identification
and destruction by controlled, high temperature incineration, and
utilization of an ABBA Sanitec unit at the Birmingham, alabama
location. The Company also provides training to customers on compliance
with regulations, use of containers, documentation and tracking. All
references herein to the "Company" or "3CI" shall mean 3CI Complete
Compliance Corporation and its subsidiaries, unless the context
otherwise requires.
"Medical waste" or "biomedical waste," as used herein, is broadly
defined to mean any liquid or solid waste generated in the diagnosis,
treatment or immunization of human beings or animals or in related
research, that may result in an infectious disease. State and federal
regulations tend to focus on regulated and infectious medical waste,
which includes pathological wastes, including tissues, organs and body
parts; blood and the products or components of blood; "sharps,"
including needles, scalpels, pipettes and other medical instruments;
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. "Medical waste" or "biomedical waste" as used
herein, does not include "hazardous waste," as such term is commonly
defined under state and federal regulations.
The Company has consistently incurred losses for the past fiscal years
and losses have continued into fiscal 1998. 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 1997. 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, including deferred interest with cash advances not
to exceed $7.4 million, of which $4.8 million including deferred
interest and $4.9 million including deferred interest has been drawn as
of September 30, 1997, and December 31, 1997. During the fiscal year
ended September 30, 1996, WSI made additional cash advances that were
in excess of the principal in the original promissory note, the Company
entered into a second Revolving Credit Facility of $2.7 million
including deferred interest, dated December 20, 1996 with maturity date
of February 28, 1997. It is the intent of WSI and 3CI that this
Revolving Promissory Note shall evidence all sums owing by 3CI to WSI
to the extent that such sums represent advances of funds to 3CI in
excess of the maximum limits fixed under that certain $8,000,000
Revolving Promissory Note dated September 30, 1995. The Promissory Note
dated September 30, 1995 has a due date of December 31, 1996 of which
the Company has requested from and received an extension to discuss
with WSI on the possibility of restructuring the terms of the Revolving
Promissory Note. 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
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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 was in compliance with all requirements necessary 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 Revolving Credit Facility of $2.7
million dated December 20, 1996, with a maturity date of February 28,
1997, which had been previously extended to June 30, 1997. The
conversion has also resulted in the reduction of the outstanding
indebtness of the Promissory Note dated September 30, 1995. During the
fiscal years ended September 30, 1997, 1996 and 1995 WSI has made cash
advances to the Company of $2,303,000, $4,000,000 and $4,100,000. Since
the year ended September 30, 1997, the Company has not requested nor
received any cash advances from WSI. During the fiscal year of 1997,
the Company began to have discussion with third party lenders to obtain
an alternative source of financing apart from WSI. In the event the
Company and WSI do not come to a resolution on the restructuring of the
note and the Company is unable to obtain alternative financing, there
can be no assurance that the Company will be able to meet its
obligations as they become due or realize the recorded value of its
assets and would likely be forced to seek bankruptcy protection.
Pursuant to a Put Option Agreement with River Bay, as amended (the "Put
Option"), the Company, in October 1995, repurchased 300,000 of the
shares of Common Stock issued in connection with the acquisition in
consideration for its promissory note in the original principal amount
of $900,000 ($3.00 per share) and providing for monthly principal
payments ranging from $25,000 to $75,000, plus interest, through
January 1997. Pursuant to the Put Option, the Company was obligated to
repurchase the remaining 565,500 shares of Common Stock issued in
connection with the acquisition, at the option of River Bay, from
February 1, 1997 until April 1, 1997 for $3.00 per share. The River Bay
Corporation exercised the put option on or about February 14, 1997, for
the Company to repurchase the 565,500 shares of Common Stock. On or
about March 10, 1997 the Company commenced arbitration proceedings
before the American Arbitration Association in Houston, Texas against
River Bay Corporation and Marlan Baucum seeking to set aside a Purchase
Agreement entered into between those parties on or about October 10,
1994, together with ancillary agreements pertaining thereto. The
Company was seeking damages and/or to set aside the Purchase Agreement
and collateral agreements, including the Put Option Agreement which, if
otherwise enforceable, would have required the payment by the Company
of approximately $1,700,000.00 for 565,500 shares of 3CI common stock.
In response, on April 9, 1997 Bank of Raleigh and Smith County Bank,
assignees of certain rights under the Purchase Agreement, commenced a
complaint for declaratory and monetary relief in the U.S. District
Court for the Southern District of Mississippi, Jackson Division in
Civil Action No. 3:97cv249BN. The Smith County Bank and Bank of Raleigh
have prayed declaratory judgment declaring the arbitration provision in
the Purchase Agreement to be not binding upon said banks, declaratory
judgement declaring the claims of 3CI against River Bay to be
subordinate to the claims of the banks, for unspecified compensatory
damages and for punitive damages of at least $1,000,000.00. On or about
May 10, 1997 the Company filed a Petition of Arbitration in Suit No.
422,107 of the First Judicial District Court, Caddo Parish, Louisiana,
naming River Bay Corporation and Marlan Baucum as defendants therein.
This lawsuit seeked an injunction and stay of all judicial and
extra-judicial proceedings pursuant to the Put Agreement until such
time as the arbitration is completed. This action was removed by the
defendants to the U.S. District Court for the Western District of
Louisiana, Shreveport Division in Civil Action No. 97-0578. In April
1997, the Bank of Raleigh and Smith County Bank gave notice to certain
customers in the River Bay division that the Company was in default of
the put option obligation and that their payments should be directly
made to the Bank of Raleigh and Smith County Bank. From these efforts
the Bank of Raleigh and Smith County Bank collected $463,000 of the
Company's accounts receivables that were pledeged in the initial
purchase agreement. On or about October 14, 1997, the parties settled
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the lawsuits with the Bank of Raleigh and Smith County Bank . In the
settlement, the Company agreed to repurchase the remaining 565,500
shares of common stock related to the Put Option agreement with
payments ranging from $100,000 to $63,500.
During fiscal 1995, a group of minority shareholders filed suit against
the Company alleging minority shareholder oppression, breach of
fiduciary duty and breach of contract, among other allegations, and has
demanded unspecified actual damages and punitive damages of $10
million. The Company's insurer has denied coverage in the lawsuit. The
Company has denied all material allegations of the lawsuit and believes
that the resolution of this matter, including attorneys fees incurred
in the Company's defense, could have a material adverse effect on the
Company's financial condition. The Company has reached an agreement in
principle with some, but not all, of the plaintiffs for the settlement
of this action. The proposed settlement is subjected to court approval
in February 1998. However, the outcome of this litigation cannot be
predicted, and an adverse decision in the lawsuit would likely have a
material adverse effect on the Company's financial condition and
results of operations.
DISPOSAL TECHNOLOGY
INCINERATION
The incineration process is a two-stage process which ensures the
complete destruction of all pathogens. Most medical waste consists of
disposable paper and plastic products which burn readily. In an
incinerator, medical waste is first burned and reduced to ash. The
resulting gases are then heated in the incinerator to a temperature of
approximately 1800(degree)F to 2000(degree)F, assuring the destruction
of all pathogens. This process produces exhaust gas, which is
subsequently passed through scrubbers and bag houses to incinerator
stacks to ensure compliance with applicable air quality standards. The
remaining ash, which at this stage is sterilized and free of pathogens,
is then transported by truck to licensed landfills. To date, ash is not
considered hazardous under EPA regulations, but is regulated at the
state level by various state agencies.
AUTOCLAVING
A conventional steam autoclave is a large cylindrical chamber with a
vacuum lock door. It uses high temperature steam in a multi-stage
process to sterilize or disinfect waste. Once waste is placed in the
chamber and the door locked, a vacuum pump evacuates air from the
chamber. The chamber is then filled with steam at a temperature of
approximately 275(degree)F for approximately 30 minutes to ensure
sterilization. Steam condensate is collected on the chamber floor where
the liquid is subjected to high temperature for the full cycle,
ensuring sterility. At the end of the exposure time, this steam
condensate is drained through a valve in the chamber floor and a pump
again evacuates air from the chamber. Once this has been accomplished,
the chamber is returned to atmospheric pressure, the chamber doors are
opened and the processed, sterilized waste is mechanically removed for
cooling to room temperature. In some processing facilities the treated
waste is then transported to a landfill without any shredding, while in
others the treated waste is fed into a shredder/grinder. The treated,
disinfected and shredded waste is then conveyed into containers or
large transfer trailers and transported for disposal at a licensed
landfill or municipal solid waste incinerator.
The Company does not currently utilize autoclaving as a method of
medical waste disposal. Although there are a range of other methods
utilized for disposal of medical waste, such as the use of microwave
technology, incineration and autoclaving are the most widely used.
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ALTERNATIVE TECHNOLOGIES; TECHNOLOGICAL OBSOLESCENCE
The regulated medical waste management industry presents continuing
opportunities for the development of alternative treatment and disposal
technologies. These alternative technologies may emphasize operating
cost efficiencies, reductions in the volume of regulated medical waste
generated or other environmental factors. The development and
commercialization of alternative treatment or disposal technologies has
placed the Company into a more competitive environment.
BUSINESS
GENERAL
The Company believes the key to success in the medical waste management
business is to provide customers a total solution to their medical
compliance and disposal needs at competitive prices. To achieve and
sustain a competitive advantage in the medical waste disposal industry,
the Company provides the products and services described below to its
customers.
DISPOSAL AGREEMENTS
The Company enters into medical waste disposal agreements with
customers for the collection of their medical waste according to a
schedule agreed upon between the parties. The Company accepts medical
waste that has been packaged by customers in containers provided by the
Company and transports it in vehicles either owned or leased by the
Company to incineration facilities owned by the Company or for which
the Company has long-term contractual rights. The Company uses a
sophisticated bar code technology to track and record the movement of
medical waste through all phases of its handling and incineration, in
compliance with applicable governmental regulations.
The Company also enters into disposal agreements with other medical
waste transporters and manufacturers and distributors of
pharmaceuticals for the incineration and related documentation of
medical waste and expired pharmaceuticals. The Company intends to
continue to enter into such agreements to the extent possible in order
to maximize utilization of its incineration capacity without affecting
its service to its regular customers.
MEDICAL WASTE CONTAINERS
The Company furnishes its customers with rigid, cardboard containers
for disposal of medical waste products. These containers are clearly
marked with the "biohazard" symbol to draw attention to their contents
and are lined with specialized plastic bags and sealed to minimize
potential contact with the medical waste products by health care
workers and medical waste handlers. The Company also 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's policy is to accept medical waste from
customers only if it is packaged in containers provided or approved by
the Company. The Company believes that its emphasis on proper
containerization results in safer medical waste disposal and minimizes
potential hazard or liability to the Company and its customers.
During the fiscal year 1996 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 will
ultimately result in lower costs of disposal to the Company. The rigid,
plastic containers are generally larger than the disposable boxes, and
can hold greater volumes of waste.
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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.
DISPOSAL
The Company owns an incinerator in Springhill, Louisiana, with a
capacity to treat medical waste of 36 tons per day. Also, the Company
owns and operates a incinerator which has the capacity to treat 12 tons
per day and a microwave unit with the capacity to treat 10.8 tons per
day of medical waste located at it's facility in Birmingham, Alabama.
The Company also has exclusive incineration rights under a long-term
contract, with a capacity of 30 tons per day, operated by the City of
Carthage, Texas.
Medical waste is removed from the Company vehicles by trained employees
working on location at the Company's incineration facilities and is
loaded onto conveyors that deliver it to the incinerators and microwave
unit. The medical waste is incinerated soon after delivery.
INCINERATION CONTRACTS
The Company has incineration rights at an incinerator operated by the
City of Carthage, Texas under an agreement expiring in 1998, subject to
various renewal options. In order to maintain its rights under the
agreement, the Company is required to pay minimum annual fees of
approximately $550,000 to $1 million during the term. During fiscal
1997 and fiscal 1996, the Company paid fees in the aggregate amount of
approximately $1,401,692 and $843,958 under the agreement.
The Company has incineration rights at an incinerator operated by the
City of Center, Texas under an agreement expiring in June 1998, subject
to various renewal options. In order to maintain its rights under the
agreement, the Company is required to pay minimum annual fees of
approximately $300,000 to $900,000 during the term. During fiscal 1997
and fiscal 1996, the Company paid fees in the aggregate amount of
approximately $779,000 and $27,000 under the agreement. During the
fiscal year of 1996, the company became aware that certain contractual
obligation were allegedly not being met by the City of Center. The most
critical obligation is the City of Center's alleged breach of the
exclusivity clause in the contract. The Company is presently not
utilizing the incinerator at the City of Center for the treatment of
medical waste.
The Company has rights to burn its medical waste when excess capacity
exists at an incinerator operated by The Children's Hospital of Alabama
in Birmingham, Alabama under an agreement that expired in December
1996. This agreement was not renewed. During fiscal 1997, the company
paid fees in the aggregate amount of approximately $70,387 under the
agreement.
DOCUMENTATION AND REPORTING
The bar coded label affixed to each of the Company's medical waste
containers is used in conjunction with computers, laser scanners and
digital scales to document the handling, treatment, disposal and
weighing of the customer's medical waste stream. Bar coded containers
allow proper documentation and tracking of waste materials and meet all
applicable local, state and federal regulations concerning packaging
and labeling of medical waste materials. The Company provides its
customers on a regular basis with medical waste incineration reports
that document the
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acceptance, transportation, incineration and third party verification
of their medical waste disposal. The Company's detailed documentation
provides information on all waste it accepts and incinerates, including
individual container bar code number, point of origin, date and time of
pick up, date and time of incineration, weight at time of incineration
and certificate of destruction.
SAFETY TRAINING AND CONSULTATION
The Company designs specialized on-site training systems for the
identification, segregation, handling and containerizing of waste
products. These systems are designed to assist customers in reducing
their waste disposal costs while maintaining regulatory compliance and
to reduce potential exposure to the Company's employees. The Company
also instructs health care workers in the most efficient methods of
handling, recording and documenting their waste streams in compliance
with local, state or federal regulations. The Company will, on request,
review a customer's internal waste collection and control system or
assist the customer in developing an internal system to provide for the
efficient management of medical waste within the customer's facility
from its creation to the point of its acceptance by the Company.
CUSTOMERS
The Company's health care customer base is diverse, with about 15,000
accounts in Arkansas, Florida, Georgia, Kansas, Louisiana, Oklahoma,
Texas, Alabama, Mississippi, Missouri and Tennessee, including regional
medical centers, major hospitals, specialty clinics, individual medical
and dental practitioners, dialysis centers, veterinary clinics, nursing
homes and assisted care residences, among others. The Company is not
dependent upon a single customer or a few customers, and no customer
generates ten percent or more of the Company's consolidated revenues.
MARKETS
The Company divides its market into three categories: the hospital
market, the professional market and the third party market. The
hospital market consists principally of medical centers, major
hospitals, major teaching institutions involved in medicine and
research and major medical complexes. The professional market consists
principally of physician and dental offices, laboratories, nursing and
convalescent homes, medical and veterinarians offices, and clinics and
mortuaries. The third party market consists principally of
pharmaceutical manufacturers and distributors and other medical waste
transportation companies. The Company sales efforts are supplemented by
several strategic marketing agreements with state associations, under
which the Company has received endorsements or marketing assistance.
The Company utilizes 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
utilizes direct mail to establish potential customer leads,
particularly in the professional market. Third, the Company seeks
endorsements or referral relationships with hospitals and professional
associations in the market areas.
PRICING
The Company has experienced intense competition in pricing. Margins of
profitability have declined and could deteriorate further if price
cutting within the industry persists. During fiscal 1997, there
continued to be a downward pressure in pricing by competitors to
increase and maintain market share. Due to continued deep discounting
targeted toward hospital accounts, the Company directed more of its
marketing efforts toward the professional market accounts, such as
physicians and dental
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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. Management believes that Browning Ferris, Inc. is the
Company's main competitor in it's operating regions.
INSURANCE COVERAGE
The medical waste disposal industry involves potentially significant
risks of statutory, contractual, tort and common law liability. The
Company carries a range of insurance coverage, including a
comprehensive general liability policy in the amount of $1,000,000 with
a combined single limit for bodily injury and property damage, and a
$2,000,000 excess umbrella liability policy, which the Company
considers sufficient to meet regulatory and customer requirements and
to protect the Company's employees, assets and operations. The Company
carries $3,000,000 per occurrence of such coverage for the incineration
facilities used by the Company. The Company also carries $1,000,000 per
occurrence of transportation liability insurance coverage, which
includes coverage for environmental damage caused by waste spillage or
other forms of pollution occurring during transportation.
FINANCIAL STATEMENT PRESENTATION
In February 1994, two wholly-owned subsidiaries of the Company acquired
the assets and assumed certain liabilities of A/MED, Inc. ("A/MED") and
American Medical Transport Corporation ("AMTC"), majority-owned
subsidiaries of Waste Systems, Inc., a Delaware corporation ("WSI"), in
consideration for 2,640,350 shares of Common Stock, $.01 par value
("Common Stock"), of the Company. In addition, in February 1994, WSI
acquired 1,255,182 shares of Common Stock from American Medical
Technologies, Inc., a Delaware corporation and the former majority
stockholder of the Company ("AMOT"). As a result of the transactions
described above, WSI became the majority shareholder of 3CI immediately
following the acquisition of AMTC and A/MED. For accounting purposes,
AMTC and A/MED were considered the acquiror in a reverse acquisition.
The combined financial statements of AMTC and A/MED are the historical
financial statements of the Company prior to the date of the business
acquisition. Historical combined shareholders' equity of AMTC and A/MED
has been retroactively restated for the equivalent number of 3CI shares
received for the assets and business operations of AMTC and A/MED, and
the combined accumulated deficit of AMTC and A/MED has been carried
forward.
EMPLOYEES
At September 30, 1997, the Company had approximately 196 full time and
7 part-time employees, three of whom were employed in executive
capacities and the remainder of whom were in transportation operations,
incinerator facility operations, sales positions, and administrative
and clerical capacities. None of the Company's employees are subject to
collective bargaining agreements, and the Company has not experienced
any strikes or work stoppages and considers its relationship with its
employees to be satisfactory.
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ACQUISITIONS
ACQUISITION OF A/MED AND AMERICAN MEDICAL TRANSPORTS
In February 1994, two wholly-owned subsidiaries of the Company acquired
the assets and assumed certain liabilities of A/MED, Inc. ("A/MED") and
American Medical Transports Corporation ("AMTC"), majority-owned
subsidiaries of Waste Systems, Inc., a Delaware corporation ("WSI"), in
consideration for 2,640,350 shares of Common Stock, $.01 par value
("Common Stock"), of the Company. Of such shares, WSI received
1,300,115 shares initially, with the remaining 800,000 shares placed in
escrow to secure certain indemnity obligations. Upon termination of the
escrow on April 10, 1995, WSI received 565,160 shares.
In addition, in February 1994, WSI acquired 1,255,182 shares of Common
Stock from American Medical Technologies, Inc., a Delaware corporation
and the former majority stockholder of the Company ("AMOT"), in
consideration for $1,765,658 cash and the cancellation of the
$3,317,828 unpaid balance of AMOT's previously issued promissory note
payable to WSI.
After giving effect to these transactions, WSI beneficially owned a
majority of the outstanding shares of Common Stock. Accordingly, the
merger was treated as a reverse acquisition for accounting purposes.
The acquired companies had been engaged in the business of medical
waste management services in Oklahoma, Texas, Louisiana and New Mexico.
ACQUISITION OF MED-WASTE
In August 1994, the Company acquired substantially all the assets and
assumed certain liabilities of Med-Waste Disposal Service, Inc., an
Arkansas corporation ("Med-Waste") in consideration for 525,000 shares
of Common Stock and an additional 145,470 shares which were earned
pursuant to an earnout arrangement.
Med-Waste had been engaged in the business of medical waste management
services in Arkansas.
The acquisition of Med-Waste has been the subject of litigation between
the Company and the former stockholders of Med-Waste. This matter has
been settled by the parties and was dismissed in its entirety on July
31, 1997, by order of the court. See Item 3. - Legal Proceedings.
ACQUISITION OF RIVER BAY CORPORATION
In October 1994, the Company acquired substantially all of the assets
and assumed certain liabilities of River Bay Corporation, a Mississippi
corporation ("River Bay"), in consideration for 865,500 shares of
Common Stock and shares of Common Stock contingent upon various
matters, including future profits of the operations attributable to the
assets purchased from River Bay. In addition, the Company issued to
River Bay a promissory note in the original principal amount of
$1,000,000, which, as amended, provides for monthly principal payments
ranging from $50,000 to $100,000 through February 1996.
Pursuant to a Put Option Agreement with River Bay, as amended (the "Put
Option"), the Company, in October 1995, repurchased 300,000 of the
shares of Common Stock issued in connection with the acquisition in
consideration for its promissory note in the original principal amount
of $900,000 ($3.00 per share) and providing for monthly principal
payments ranging from $25,000 to $75,000, plus interest, through
January 1997. Pursuant to the Put Option, the Company was obligated to
repurchase the remaining 565,500 shares of Common Stock issued in
connection with the acquisition, at the option of River Bay, from
February 1, 1997 until April 1, 1997 for $3.00 per share.
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The River Bay Corporation exercised their put option on or about
February 14, 1997, for the Company to repurchase the 565,500 shares of
Common Stock. On or about March 10, 1997 the Company commenced
arbitration proceedings before the American Arbitration Association in
Houston, Texas against River Bay Corporation and Marlan Baucum seeking
to set aside a Purchase Agreement entered into between those parties on
or about October 10, 1994, together with ancillary agreements
pertaining thereto. The Company was seeking damages and/or to set aside
the Purchase Agreement and collateral agreements, including the Put
Option Agreement which, if otherwise enforceable, would have required
the payment by the Company of approximately $1,700,000.00 for 565,500
shares of 3CI common stock. In response, on April 9, 1997 Bank of
Raleigh and Smith County Bank, assignees of certain rights under the
Purchase Agreement, commenced a complaint for declaratory and monetary
relief in the U.S. District Court for the Southern District of
Mississippi, Jackson Division in Civil Action No. 3:97cv249BN. The
Smith County Bank and Bank of Raleigh have prayed declaratory judgment
declaring the arbitration provision in the Purchase Agreement to be not
binding upon said banks, declaratory judgement declaring the claims of
3CI against River Bay to be subordinate to the claims of the banks, for
unspecified compensatory damages and for punitive damages of at least
$1,000,000.00. On or about May 10, 1997 the Company filed a Petition of
Arbitration in Suit No. 422,107 of the First Judicial District Court,
Caddo Parish, Louisiana, naming River Bay Corporation and Marlan Baucum
as defendants therein. This lawsuit seeked an injunction and stay of
all judicial and extra-judicial proceedings pursuant to the Put
Agreement until such time as the arbitration is completed. This action
was removed by the defendants to the U.S. District Court for the
Western District of Louisiana, Shreveport Division in Civil Action No.
97-0578. In April 1997, the Bank of Raleigh and Smith County Bank gave
notice to certain customers in the River Bay division that the Company
was in default of the put option obligation and that their payments
should be directly made to the Bank of Raleigh and Smith County Bank.
From these efforts the Bank of Raleigh and Smith County Bank collected
$463,000 of the the Company's accounts receivables that were pledged in
the initial purchase agreement. On or about October 14, 1997, the
parties settled the lawsuits with the Bank of Raleigh and Smith County
Bank . In the settlement, the Company agreed to repurchase the
remaining 565,500 shares of common stock related to the Put Option
agreement with payments ranging from $100,000 to $63,500.
The obligations of the Company under the Put Option and its promissory
notes payable to River Bay are secured by a security interest in
certain of the assets purchased from River Bay and future accounts
receivable attributable to the assets acquired from River Bay.
River Bay had been engaged in the business of medical waste management
services in Mississippi, Florida, Georgia, Tennessee and Alabama.
GOVERNMENTAL REGULATIONS
All aspects of the Company's business are heavily regulated. The
Company's collection, hauling, processing and disposal activities are
governed by numerous federal, state and local agencies and authorities
under laws, rules and ordinances relating to the definition,
generation, segregation, handling and packaging of medical waste. In
addition, facility citing, construction, operations, occupational
training, safety, air, water and incineration ash characteristics and
disposal are regulated under different but related laws, rules and
ordinances.
The activities of the Company are regulated by federal laws relating to
public health and the environment. In addition to those federal
environmental and public health related laws which apply generally to
the Company's activities, there are a number of federal laws and
regulations which directly pertain to the handling, transport and
processing of medical waste. The most pertinent of these federal
environmental and public health laws are discussed below.
11
<PAGE> 12
INCINERATION FACILITIES
The Company is required to obtain permits at local, state and federal
levels for the construction and operation of incineration facilities
which have to date and may continue to involve the expenditure of
substantial resources without any assurance of success. Such permits
may include: (a) air quality permits, relating to the emissions from
incineration facilities, (b) solid waste permits, relating to storage,
receipt and treatment of medical waste and the storage and disposal of
residues from the incineration facilities and ancillary air pollution
control equipment relative to incinerators, (c) waste- water discharge
permits, (d) storm water discharge permits, (e) site permits, such as
zoning or special use permits, relating to the appropriateness of the
site for a waste processing facility under applicable zoning
regulations, (f) building permits and (g) occupancy permits. Air
quality permits and site permits, and in some cases, solid waste
permits, can be difficult to obtain, and may take a year or longer to
be issued.
Companies in the medical waste disposal industry often face resistance
to its various permit applications from local and regional
organizations, citizens groups and residents because of the nature of
waste and the perceived threat to air quality and public health caused
by waste processing. It is often necessary for the Company to conduct a
public relations campaign, with an emphasis on education, in order to
overcome local opposition, which is often highly political and
emotional. Furthermore, once granted, permits are often subject to
continuing review and may be challenged either in court or otherwise
even after construction or operations have commenced. Accordingly, the
Company's operations could be subject to suspension or termination even
after substantial funds have been expended in reliance upon state or
local regulatory approvals.
Operating permits generally incorporate performance standards. The
failure to comply with such standards could subject the Company to the
suspension or revocation of its permits or financial penalties for
failure to comply with permit requirements.
TRANSFER STATIONS
Transfer of medical waste, generally from a small local pick-up vehicle
to a large transport trailer, is necessary to consolidate and transport
waste in an economical fashion to regional processing centers. Most
states permit such transfer operations under their solid waste
regulatory authority or department of health. After receiving local
approvals, such as necessary zoning or special use permits, application
may be made to the appropriate state solid waste authority. Generally,
this is a four to six month process. However, there are some cases
where the process is much longer. The continued right to operating the
Company's transfer station in Fresno, Texas was contingent upon the
commencement of the clean-up of a waste circulating pond from an
abandoned medical waste incinerator acquired from previous owners. The
clean-up of the circulating pond was completed in fiscal 1997.
STATE TRANSPORT PERMITS
Transportation permits are currently required in a number of states.
Some states require permits only if waste is picked up in that state,
while others require permits to transport waste through the state.
These permits generally include driver safety and training, waste
packaging, labeling and tracking requirements. The Company currently
holds necessary hauling permits in Arkansas, Louisiana, Texas,
Mississippi, Alabama, Georgia, Florida, Oklahoma, Kansas, Missouri and
Tennessee.
There can be no assurances that any of the Company's current permits
will be renewed or that, if the Company is able to identify and secure
additional locations for incineration or other waste processing
facilities or transfer stations, all necessary permits will be
obtained, or that if such permits are granted
12
<PAGE> 13
that they will be granted in a timely manner or under conditions that
will be acceptable to the Company.
THE OCCUPATIONAL SAFETY AND HEALTH ACT ("OSHA")
OSHA gives the federal government the authority to regulate the
management of infectious medical waste. Liability may be imposed under
the general duty clause found in Section 654 of OSHA. This section
requires employers to provide a place of employment that is free from
recognized and preventable hazards that are likely to cause serious
physical harm to employees. The regulations promulgated under OSHA
require employers to give notice to employees regarding the presence of
hazardous chemicals and to train employees in the use of such
substances. This may be found to apply in the case of chemicals that
may be present in infectious medical waste.
In May 1989, OSHA promulgated new rules regarding exposure to blood
borne pathogens which could increase the cost of providing medical
waste management services. These rules impose, among other things,
engineering and work practice controls, use of personal protective
clothing and equipment, training, medical surveillance, labeling and
record keeping requirements with respect to occupational exposure to
blood and other potentially infectious materials.
THE RESOURCE CONSERVATION AND RECOVERY ACT OF 1976 ("RCRA")
RCRA establishes a regulatory program administered by the Environmental
Protection Agency ("EPA") covering the generation, storage,
transportation, treatment and disposal of hazardous waste. RCRA defines
"hazardous waste" as any solid waste, or combination of solid waste,
which because of quantity, concentration, physical, chemical, or
infectious characteristics may:
(a) cause, or significantly contribute to, an increase in
mortality or an increase in serious irreversible or incapacitating
reversible illness; or
(b) pose a substantial present or potential hazard to human health
or the environment when improperly treated, stored, transported or
disposed of, or otherwise managed.
Although this general statutory definition of hazardous waste may
provide the EPA with the authority to regulate at least certain
infectious medical wastes as hazardous wastes, the EPA has not chosen
to do so. To date, infectious medical wastes have not been listed by
the EPA as hazardous waste, nor has infectiousness been designated by
the EPA as one of the characteristics of a hazardous waste. Thus,
infectious medical wastes which do not otherwise qualify as hazardous
wastes currently are not subject to regulation under RCRA as hazardous
wastes. Although the EPA has not chosen to regulate infectious wastes
as hazardous wastes, it has developed and issued informal guidance
outlining practical approaches to infectious waste management.
Moreover, although RCRA does not comprehensively address the area of
medical waste, certain wastes common to the medical field are currently
listed as hazardous wastes and, therefore, certain medical wastes may
be subject to the requirements of RCRA. With respect to those solid
wastes which are deemed hazardous, RCRA contains extensive regulatory
requirements pertaining to reporting to the EPA, record keeping,
labeling, the use of containers, the furnishing of information to
persons handling the hazardous wastes and the tracking of hazardous
wastes from the point of generation to the point of disposal involving,
among other things, the use of transportation manifests.
Finally, depending upon the composition and characteristics of the
waste ash generated by the incineration technology employed, the
facility ash may constitute hazardous waste. If so, the ash would be
subject to the hazardous waste transportation, disposal and other
hazardous waste management requirements of RCRA discussed above.
13
<PAGE> 14
THE MEDICAL WASTE TRACKING ACT OF 1988 ("TRACKING ACT")
On November 1, 1988, Congress enacted the Tracking Act. The Tracking
Act amended RCRA by adding a new Subtitle X, entitled the
"Demonstration Medical Waste Tracking Program." The Tracking Act
established a two-year demonstration program for tracking and managing
medical wastes. Pursuant to the Tracking Act, any person who generated,
transported, treated or disposed of medical wastes which had been
generated in certain specified states (the "Covered States"), were
required to comply with the requirements of a "cradle to grave"
tracking and management program for those wastes. Connecticut, New
York, New Jersey, Rhode Island and Puerto Rico participated in the
program.
The EPA promulgated extensive regulation implementing the Tracking Act
and management programs, including the imposition of civil and criminal
penalties against any person violating the Act. The Tracking Act
expired in 1991, and, although it has been the subject of previous
attempts at reauthorization, there is no bill seeking such
reauthorization currently pending in Congress. Nevertheless, no
assurances can be given as to whether such legislation might be
proposed in the future.
U.S. DEPARTMENT OF TRANSPORTATION ("DOT")
The Company's medical waste transportation activities are subject to
federal regulation by the DOT pursuant to the Hazardous Waste Materials
Transportation Act (the "HWTA") and the Hazardous Materials Regulations
promulgated thereunder (as amended by the Hazardous Materials Uniform
Transportation Act of 1990).
The DOT regulations contain packaging and labeling requirements which
are imposed on different waste categories, depending on the perceived
hazards of each category. The regulations impose the most stringent
requirements on packages containing over four liters gross volume of
"etiologic agents", which are defined as "viable microorganism(s) or
(their) toxin(s), which cause or may cause human disease," and are
limited to certain agents listed in the Hazardous Materials
Regulations. These standards are intended to prevent the release of
such agents into the environment. The DOT requirements are intended to
supplement etiologic waste regulations by the Public Health Service of
the U.S. Department of Health and Human Services.
Significant portions of the waste handled by the Company will fall
under the category of "Regulated Medical Waste" which, as defined in
the DOT Regulations, includes cultures and stocks, pathological waste,
human blood and any blood products, sharps, animal waste, isolation
waste, and unused sharps. These wastes are considered to be of medium
danger. To meet the packaging standards packages containing these
wastes must be rigid, leak resistant and impervious to moisture, of
sufficient strength to prevent tearing or bursting while under normal
conditions of use and handling, sealed to prevent leakage during
transport, puncture resistant for sharps and sharps with residual
fluids, and break resistant and tightly sealed for fluids in quantities
greater than 20 cubic centimeters.
The DOT Regulations also prescribe labeling standards for all
infectious and regulated waste and testing protocols for manufacturers
and suppliers of packaging. These regulations have not become final and
have been postponed a number of times.
In addition, the Company is generally subject to regulation by the DOT
and may be subject to regulation by the Interstate Commerce Commission
pursuant to a number of other statutes and bodies of regulation, some
of which specifically pertain to the transport of medical waste and
which address, among other things, vehicle operating procedures and the
training of persons to operate commercial vehicles carrying hazardous
materials.
14
<PAGE> 15
CERCLA
Federal regulations are included in the Comprehensive Environmental
Response, Compensation and Liability Act, as amended by the Superfund
Amendments and Reauthorization Act of 1986 ("CERCLA"), which in general
imposes strict liability in the event of a release or threatened
release of hazardous substances from a facility. Certain medical wastes
may be categorized as hazardous substances under CERCLA.
15
<PAGE> 16
FEDERAL CLEAN AIR ACT
The Company's medical waste processing facilities may be regulated
under certain other environmental statutes. The Federal Clean Air Act,
as amended, and related implementing regulations may apply to the air
emissions from the Company's incineration facilities. The Clean Air Act
establishes, among other things, comprehensive air permitting and
enforcement programs. These regulatory programs are based on several
types of air quality standards: national air quality standards,
national emissions standards for hazardous air pollutants, new source
performance standards, technology based standards and acid deposition
requirements.
FEDERAL CLEAN WATER ACT
Water discharges from the disposal processes, if any, and storm water
discharges may be regulated under the Federal Clean Water Act and
implementing regulations. Pursuant to the Federal Clean Water Act, EPA
has promulgated extensive effluent and water quality standards as well
as permitting requirements for industrial discharges of water. The
Company will be required to design, construct and operate its
facilities in accordance with the Federal Clean Air Act and the Federal
Clean Water Act and obtain all permits and approvals required therein.
THE FOOD AND DRUG ADMINISTRATION ("FDA")
The FDA considers sharps containers to be "medical devices", as defined
under the Federal Food, Drug, and Cosmetic Act ("FD&C Act"). Most
sharps containers, according to the FDA, are class II accessories to
sharps devices. The FDA began actively regulating sharps containers in
1993. The Company and its products are subject to regulations by the
FDA and the corresponding agencies of the states and foreign countries
in which the Company sells its products. Such regulation, among other
things, relates to the testing, marketing, export and manufacture of
medical devices. The FDA inspects medical device companies on a regular
basis to determine compliance with federal requirements.
STATE REGULATIONS
The states in which the Company operates generally have complex
regulatory frameworks governing, among other issues, the storage,
treatment, labeling, transport and disposal of medical waste. These
regulations are typically administered by a variety of state regulatory
authorities. The Company's vehicles, packaging, facilities and
operating procedures are, accordingly, subject to detailed and
comprehensive regulation on the state level. The Company's incineration
facilities will be required to include controlled air combustion units,
air quality control equipment, pollution control equipment and
ancillary control and monitoring equipment. All facilities will be
required to provide monitoring equipment. State regulatory authorities
may inspect Company operations on a regular basis and assess fines and
penalties or may halt operations for failures by the Company to follow
specific regulations. In addition, the failure of state regulatory
agencies to issue required permits or renewals, or any delays by such
agencies, could have a material adverse impact on the Company's
operations.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in approximately
6,100 square feet of office space in Shreveport, Louisiana, which is
leased under a lease expiring in December 1997, under which the Company
paid approximately $68,815 during fiscal 1997. This lease was renewed
for another 3 years until December 2001.
16
<PAGE> 17
The Company owns or leases approximately 152 specially equipped
trailers and 74 trucks and tractors used for the transportation of
containerized waste. A summary description of the Company's operating
properties is set forth below:
<TABLE>
<CAPTION>
Capacity
Utilization
Levels at 1997
Fiscal year-end
Location Type of Facility Capacity 9/30/97 Owned/Lease
-------- ---------------- -------- ---------------- -----------
<S> <C> <C> <C>
Shreveport, LA Corporate Office Leased
San Marcos, TX Sales Office & Transport Leased
Tulsa, OK Sales, Transportation
& Transfer Leased
Carthage, TX Sales & Transportation Leased
Grand Prairie, TX Sales & Transportation Leased
Metaire, LA Sales & Transportation Leased
Fresno, TX Transfer, & Transportation Owned
Station, & Sales Office
Birmingham, AL Transportation & Sales Leased
Jackson, MS Sales, Transfer Station, Owned Land
Transportation
Springhill, LA Transportation & Sales Owned
Bismark, AR Transfer Station, & Sales Leased
Carthage, TX Incinerator 30 tons/day 72% Operated
Springhill, LA Incinerator 36 tons/day 75.2% Owned
Birmingham, AL Incinerator 12 tons/day 63.2% Incinerator Owned
Birmingham, AL Microwave Unit 10.8 tons/day 65.2% Treatment Unit Owned
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
In May 1995, a group of minority stockholders of the Company, including
Patrick Grafton, former Chief Executive Officer of the Company, acting
individually and purportedly on behalf of all minority stockholders,
and on behalf of the Company, filed suit in James T. Rash, et al v.
Waste Systems, Inc., et al, No. 95-024912 in the District Court of
Harris County, Texas, 129th Judicial District, against the Company, WSI
and various directors of the Company. The plaintiffs have alleged
minority stockholder oppression, breach of fiduciary duty and breach of
contract and "thwarting of reasonable expectations" and have demanded
an accounting, appointment of a receiver for the sale of the Company,
unspecified actual damages and punitive damages of $10 million, plus
attorney's fees. In addition, Mr. Grafton has alleged unspecified
damages as a result of his removal as an officer and director of the
Company and the Company's failure to renew his employment agreement in
March 1995 and has alleged that such removal was wrongful and
ineffective. The Company's insurer has denied coverage in the lawsuit.
The Company has denied all material allegations of the lawsuit and
believes it has adequately reserved for all potential losses related to
these matters. However, the outcome of this minority shareholder
litigation cannot be predicted, and an adverse decision in the lawsuit
would likely have a material adverse effect on the Company's financial
condition and results of operations and cash flows. The Company has
reached an agreement in principle with some, but not all, with the
plantiffs for the settlement of this action. The execution of the
appropriate documentation to evidence this settlement has been
completed and both parties are awaiting court approval. The Company and
Mr. Grafton reached a settlement of Mr. Grafton's individual claims
relating to his removal as an officer and director of the Company. The
17
<PAGE> 18
terms of the settlement reached between the Company and Mr. Grafton are
confidential to both parties. The Company accrued an amount in the
fiscal years ended 1996 and 1995 financial statements which closely
approximates the actual settlement agreement.
In June 1995, the former stockholders of Med-Waste filed suit in James
H. Shepherd, et al v. 3CI Complete Compliance Corporation, et al, No.
C.V.-95-1441-1 in the Circuit Court of Hot Spring County, Arkansas,
against the Company and various current and former officers and
directors of the Company. Plaintiffs have alleged violations of federal
and state securities laws, breach of contract, common law fraud and
negligence in connection with the acquisition of Med-Waste by the
Company and have demanded rescission, restitution, unspecified actual
damages and punitive damages of $10 million, plus attorney's fees. The
case was transferred to the United States District Court of the Western
District of Arkansas, Hot Springs Division and in November 1996 was
subsequently transferred to the United States District Court for the
Western District of Louisiana. The parties, other than Patrick Grafton,
former Chief Executive Officer of the Company, have agreed to settle
the suit in consideration for the issuance by the Company to the
plaintiffs of 250,000 shares of Common Stock and the payment by the
Company to the plaintiffs of 20% to 55% of the pre-tax profits, as
defined, attributable to the assets previously acquired from Med-Waste
until such time as the shares of Common Stock held by the plaintiffs
become freely tradable and the market price of the Common Stock
averages at least $2.50 over a period of 42 consecutive days. In
addition, the Company and WSI have agreed to repurchase the shares of
Common Stock held by the plaintiffs for $2.50 per share in certain
events, including the bankruptcy of the Company or in the event WSI
ceases to be the largest beneficial holder of the Common Stock. The
obligations of the Company to the plaintiffs are secured by a security
interest in most of the assets of the Company, and WSI has agreed to
subordinate its loans to the Company, and all related security
interests, to the obligations, and the related security interests, of
the Company to the plaintiffs. This matter has been settled and was
dismissed in its entirety on July 31, 1997, by order of the court.
During the fiscal years ended September 30, 1996 and 1997, the Company
has made payments totaling approximately $193,000 and $248,000,
respectively, to the plaintiffs, related to this agreement.
In connection with an auto accident in July 1996, two suits have been
filed against the Company. Ryan O'Neil Youmans & Anita Youmans v.
American 3CI, et al, No. CV9604899, was filed in the Circuit Court of
Jefferson County, Alabama, in August 1996. Jimmy R. Whitfield & Rhonda
Whitfield v. Paul Bronger, American 3CI, et al. No. CV-96-847, was
filed in the Circuit Court of Shelby County, Alabama in November of
1996. These proceedings have been settled by the Company's insurance
carrier and the related expenditure to the Company are reflected in the
current year financial statements. The resolution to these lawsuits did
not a material effect on the Company's financial condition, results of
operations and cash flows.
On or about March 10, 1997, the Company commenced arbitration
proceedings before the American Arbitration Association in Houston,
Texas, against River Bay Corporation and Marlan Baucum. The Company was
seeking damages and/or to set aside the Purchase Agreement (the
"Purchase Agreement") and ancillary agreements, including a Put Option
Agreement (the "Put Option Agreement") entered into in connection with
the acquisition of the River Bay Assets. If otherwise enforceable, the
Put Option Agreement would have required the payment by the Company of
approximately $1,700,000 for 565,000 shares of Common Stock. The
arbitration proceeding was subsequently amended to include the Bank of
Raleigh and Smith County Bank, assignees of certain rights under the
Purchase Agreement, because through an independent legal action such
banks were able to collect approximately $463,000 of the Company's
accounts receivable that were used as a collateral under the Purchase
Agreement. In settlement of the arbitration, the Company agreed to
repurchase the remaining 565,500 shares of Common Stock in
consideration of $861,000, of which, $100,000 was payable immediately
and $761,000 is payable in monthly installments of $63,450, with the
final payment due December 1, 1998.
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<PAGE> 19
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.
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, 1997.
19
<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company has a single class of equity securities outstanding, its
Common Stock, $.01 par value. The Common Stock has traded
over-the-counter on the NASDAQ SMALL-CAP MARKET under the NASDAQ symbol
TCCC since its initial public offering and qualification for listing on
NASDAQ in April 1992. The following table sets forth the high and low
bid quotations for the Common Stock in the over-the-counter market, as
reported by the NASDAQ SMALL CAP quotation system, for each of the
quarterly periods indicated. These quotations reflect the inter-dealer
prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
<S> <C> <C>
FISCAL 1996:
------------
First Quarter 1 1/8 7/16
Second Quarter 2 1 13/32
Third Quarter 2 1 39/64
Fourth Quarter 1 39/64 1 7/16
FISCAL 1997:
------------
First Quarter 1 5/16 13/16
Second Quarter 15/16 1/2
Third Quarter 1 3/8
Fourth Quarter 5/8 9/16
</TABLE>
As of December 31, 1997 the approximate number of holders of record of
the Company's Common Stock, as reported by the Company's transfer
agent, was 425, and the closing sale price of the Common Stock on
January 6, 1998 was $1.25.
The Company has paid no cash dividends on its Common Stock since its
inception. The payment by the Company of cash dividends, if any, in the
future rests within the discretion of the Board of Directors of the
Company and will depend, among other things upon the Company's
earnings, its capital requirements and its financial condition, as well
as other relevant factors. By reason of the Company's current financial
condition and contemplated financial requirements, the Company has no
plans to pay any cash dividends on the Common Stock in the foreseeable
future.
ITEM 6. SELECTED FINANCIAL DATA
The following information is derived from the Company's audited
financial statements and includes the historical financial information
of AMTC and A/MED as well as the historical financial information since
the date of acquisition for each acquired company. The acquisitions
include (1) purchase of assets and liabilities of River Bay Corporation
in October 1994; (2) Med-Waste in August of 1994; (3) reverse merger of
3CI in February 1994; (4) Incendere in May 1992. This data should be
read in conjunction with the financial statements and the notes thereto
and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Report.
20
<PAGE> 21
<TABLE>
<CAPTION>
Nine Month
Year Ended Year Ended Year Ended Year Ended Period Ended
September 30, September 30, September 30, September 30, September 30,
1997 1996 1995 1994 (1) 1993 (2)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Selected Statement of Operations Data:
Revenues .......................... $ 18,789,749 $ 17,748,300 $ 16,522,025 $ 12,422,717 $ 6,069,217
Costs and expenses:
Cost of sales ........................ 14,285,834 13,815,480 11,756,968 9,273,011 5,009,581
Write off of intangibles ............... -- 11,385,328 -- -- --
Write off of assets .................... -- 1,183,446 -- -- --
Selling, general and administrative ... 3,080,398 4,343,246 6,996,575 2,452,840 750,149
Depreciation and amortization ......... 1,352,015 2,224,161 1,976,212 1,236,592 639,996
------------ ------------ ------------ ------------ ------------
Total operating expenses .............. 18,718,247 32,951,543 20,729,755 12,962,443 6,399,726
------------ ------------ ------------ ------------ ------------
Gain (Loss) from operations ........... 71,502 (15,203,243) (4,207,730) (539,726) (330,509)
Other Expense, net .................... (1,159,690) (1,053,424) (655,080) (423,890) (484,883)
Accretion of put option ............... -- (26,052) (217,075) -- --
------------ ------------ ------------ ------------ ------------
Net Loss .............................. (1,088,188) $(16,282,837) $ (5,079,885) $ (963,616) $ (815,392)
============ ============ ============ ============ ============
Loss per common share ................. $ (0.12) $ (1.84) $ (0.60) $ (0.17) $ (0.41)
============ ============ ============ ============ ============
Weighted Common Shares Outstanding .... 9,064,071 8,872,348 8,530,611 5,636,030 1,973,680
Selected Balance Sheet Data:
Working Capital (deficit) ............ (6,130,010) $(10,774,499) $ (2,546,818) $ (191,840) $ (3,222,134)
Property, Plant and Equipment, net .. 8,449,748 8,462,619 9,388,722 7,641,402 6,380,926
Total Assets ........................ 13,163,260 13,374,817 25,518,596 21,567,824 12,108,410
Long-term Debt, net of current
maturities ......................... 986,467 742,400 5,575,622 1,403,316 5,450,069
Shareholders' Equity ................ 1,969,778 (4,014,035) 11,821,339 15,892,569 1,427,962
Cash dividends per share ............ -- -- -- -- --
</TABLE>
(1) The fiscal 1994 balances include the reverse merger of 3CI and
acquisition of Med-Waste for periods subsequent to the acquisition
dates.
(2) Operating results are not comparable because the September 30, 1993
income statement amounts are for nine months.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company was incorporated in Delaware in 1991. The Company is
engaged in the business of medical waste management services. The
Company services customers in a number of states in and contiguous to
the southwestern and southeastern United States, including Alabama,
Arkansas, Florida, Georgia, Kansas, Louisiana, Mississippi, Missouri,
Oklahoma, Tennessee and Texas. The Company's customers include regional
medical centers, major hospitals, clinics, medical and dental offices,
veterinarians, pharmaceutical companies, retirement homes, medical
testing laboratories and other generators of medical waste. Services to
customers include collection, transportation, bar code identification
and destruction by controlled, high temperature incineration and
alternative treatment
21
<PAGE> 22
through the use of microwave technology. The Company also provides
training to customers on compliance with regulations, use of
containers, documentation and tracking.
The Company has consistently incurred losses for the past several
fiscal years, and losses continued in fiscal 1997. The Company has
historically relied on Waste Systems, Inc. ("WSI"), the Company's
majority stockholder, for funding, and such support was again necessary
in fiscal 1997. In the absence of the Company being able to secure
third party financing, WSI agreed to provide the Company with a
revolving credit facility of $8 million, including deferred interest
with cash advances not to exceed $7.4 million, of which $4.8 million
including deferred interest and $4.9 million including deferred
interest has been drawn as of September 30, and December 31, 1997. The
note agreement with the majority shareholder signed December 20, 1996
contains various covenants which the Company has been unable to meet
and waivers were obtained during fiscal year ended September 30, 1996.
Due to the additional cash advances that have been made in excess of
the principal in the original promissory note, the Company entered into
a second Revolving Credit Facility of $2.7 million including deferred
interest, dated December 20, 1996 with maturity date of February 28,
1997. It is the intent of WSI and 3CI that this Revolving Promissory
Note shall evidence all sums owing by 3CI to WSI to the extent that
such sums represent advances of funds to 3CI in excess of the maximum
limits fixed under that certain $8,000,000 Revolving Promissory Note
dated September 30, 1995. The Promissory Note dated September 30, 1995
has a due date of December 31, 1996 of which the Company has requested
from and received an extension to discuss with WSI on the possibility
of restructuring the terms of the Revolving Promissory Note. WSI's
shareholders have indicated that they are not willing to continue this
funding. Furthermore, the Company has attempted and has been
unsuccessful in obtaining third party financing. In the event the
Company and WSI do not come to a resolution on the restructuring of the
note and the Company is unable to obtain alternative financing, there
can be no assurance that the Company will be able to meet its
obligations as they become due or realize the recorded value of its
assets and would likely be forced to seek bankruptcy protection.
Pursuant to a Put Option Agreement with River Bay, as amended (the "Put
Option"), the Company, in October 1995, repurchased 300,000 of the
shares of Common Stock issued in connection with the acquisition in
consideration for its promissory note in the original principal amount
of $900,000 ($3.00 per share) and providing for monthly principal
payments ranging from $25,000 to $75,000, plus interest, through
January 1997. Pursuant to the Put Option, the Company is obligated to
repurchase the remaining 565,500 shares of Common Stock issued in
connection with the acquisition, at the option of River Bay, from
February 1, 1997 until April 1, 1997 for $3.00 per share. The River Bay
Corporation exercised there put option on or about February 14, 1997,
for the Company to repurchase the 565,500 shares of Common Stock. On or
about March 10, 1997 the Company commenced arbitration proceedings
before the American Arbitration Association in Houston, Texas against
River Bay Corporation and Marlan Baucum seeking to set aside a Purchase
Agreement entered into between those parties on or about October 10,
1994, together with ancillary agreements pertaining thereto. The
Company was seeking damages and/or to set aside the Purchase Agreement
and collateral agreements, including the Put Option Agreement which, if
otherwise enforceable, would have required the payment by the Company
of approximately $1,700,000.00 for 565,500 shares of 3CI common stock.
In response, on April 9, 1997 Bank of Raleigh and Smith County Bank,
assignees of certain rights under the Purchase Agreement, commenced a
complaint for declaratory and monetary relief in the U.S. District
Court for the Southern District of Mississippi, Jackson Division in
Civil Action No. 3:97cv249BN. The Smith County Bank and Bank of Raleigh
have prayed declaratory judgment declaring the arbitration provision in
the Purchase Agreement to be not binding upon said banks, declaratory
judgement declaring the claims of 3CI against River Bay to be
subordinate to the claims of the banks, for unspecified compensatory
damages and for punitive damages of at least $1,000,000.00. On or about
May 10, 1997 the Company filed a Petition of
22
<PAGE> 23
Arbitration in Suit No. 422,107 of the First Judicial District Court,
Caddo Parish, Louisiana, naming River Bay Corporation and Marlan Baucum
as defendants therein. This lawsuit seeked an injunction and stay of
all judicial and extra-judicial proceedings pursuant to the Put
Agreement until such time as the arbitration is completed. This action
was removed by the defendants to the U.S. District Court for the
Western District of Louisiana, Shreveport Division in Civil Action No.
97-0578. In April 1997, the Bank of Raleigh and Smith County Bank gave
notice to certain customers in the River Bay division that the Company
was in default of the put option obligation and that their payments
should be directly made to the Bank of Raleigh and Smith County Bank.
From these efforts the Bank of Raleigh and Smith County Bank collected
$463,000 of the the Company's accounts receivables that were pledged
in the initial purchase agreement On or about October 14, 1997, the
parties settled the lawsuits with the Bank of Raleigh and Smith County
Bank . In the settlement, the Company agreed to repurchase the
remaining 565,500 shares of common stock related to the Put Option
agreement with payments ranging from $100,000 to $63,500.
The Company has undertaken a broad range of preliminary discussions
with third parties about the possibility of consumating an
extraordinary corporate transaction so as to permit the Company (or its
successor, if any) to meet its obligations. There can be no assurance
that such any agreement can be reached before these obligation come
due. These discussions are the subject of various confidentiality
agreements.
The Company has been defending shareholder litigation in Houston,
Texas, and Little Rock, Arkansas (now transferred to Shreveport,
Louisiana). Although the Company does not believe these claims have
merit, the aggregate costs of defending these suits have had, and
appear reasonably likely to continue to have, a material adverse effect
on the Company's financial condition. At fiscal year ended September
30, 1996, the Company took an accrual for $1,000,000 to defend these
suits. The Company believes that the accrual is sufficient to cover the
costs of the litigation.
ACQUISITIONS
ACQUISITION OF A/MED AND AMERICAN MEDICAL TRANSPORTS CORPORATION
In February 1994, two wholly-owned subsidiaries of the Company acquired
the assets and assumed certain liabilities of A/MED, Inc. ("A/MED") and
American Medical Transports Corporation ("AMTC"), majority-owned
subsidiaries of Waste Systems, Inc., a Delaware corporation, in
consideration for 2,640,350 shares of Common Stock, $.01 par value
("Common Stock"), of the Company. Of such shares, WSI received
1,840,350 shares initially, with the remaining 800,000 shares placed in
escrow to secure certain indemnity obligations. Upon termination of the
escrow on April 10, 1995 WSI received 565,160 shares.
In addition, in February 1994, WSI acquired 1,255,182 shares of Common
Stock from American Medical Technologies, Inc., a Delaware corporation
and the former majority stockholder of the Company ("AMOT"), in
consideration for $1,765,658 cash and the cancellation of the
$3,317,828 unpaid balance of AMOT's previously issued promissory note
payable to WSI.
After giving effect to these transactions, WSI beneficially owned a
majority of the outstanding shares of Common Stock. Accordingly, the
merger was treated as a reverse acquisition for accounting purposes.
The acquired companies had been engaged in the business of medical
waste management services in Oklahoma, Texas, Louisiana and New Mexico.
ACQUISITION OF MED-WASTE
In August 1994, the Company acquired substantially all the assets and
assumed certain liabilities of Med-Waste Disposal Service, Inc., an
Arkansas corporation ("Med-Waste") in consideration for
23
<PAGE> 24
525,000 shares of Common Stock and an additional 145,470 shares which
earned and issued pursuant to an earnout arrangement.
Med-Waste had been engaged in the business of medical waste management
services in Arkansas and Missouri.
The acquisition of Med-Waste has been the subject of litigation between
the Company and the former stockholders of Med-Waste. This matter has
been settled by the parties and was dismissed in its entirety on July
31, 1997, by order of the court. See Item 3 - Legal Proceedings.
ACQUISITION OF RIVER BAY CORPORATION
In October 1994, the Company acquired substantially all of the assets
and assumed certain liabilities of River Bay Corporation, a Mississippi
corporation ("River Bay"), in consideration for 865,500 shares of
Common Stock and shares of Common Stock contingent upon various
matters, including future profits of the operations attributable to the
assets purchased from River Bay--there has been no additional shares
earned pursuant to the earnout arrangement. In addition, the Company
issued to River Bay a promissory note in the original principal amount
of $1,000,000, which, as amended, provided for monthly principal
payments ranging from $50,000 to $100,000 through February 1996.
Pursuant to a Put Option Agreement with River Bay, as amended (the "Put
Option"), the Company, in October 1995, repurchased 300,000 of the
shares of Common Stock issued in connection with the acquisition in
consideration for its promissory note in the original principal amount
of $900,000 ($3.00 per share) and providing for monthly principal
payments ranging from $25,000 to $75,000, plus interest, through
January 1997. Pursuant to the Put Option, the Company is obligated to
repurchase the remaining 565,500 shares of Common Stock issued in
connection with the acquisition, at the option of River Bay, from
February 1, 1997 until April 1, 1997 for $3.00 per share. The Company
has begun discussions with River Bay regarding the exercising of the
remaining shares of the Put Option.
The obligations of the Company under the Put Option and its promissory
notes payable to River Bay are secured by a security interest in
certain of the assets purchased from River Bay and future accounts
receivable attributable to the assets acquired from River Bay.
Pursuant to the Put Option, the Company was obligated to repurchase the
remaining 565,500 shares of Common Stock issued in connection with the
acquisition, at the option of River Bay, from February 1, 1997 until
April 1, 1997 for $3.00 per share. River Bay Corporation exercised
there put option on or about February 14, 1997, for the Company to
repurchase the 565,500 shares of Common Stock. On or about March 10,
1997 the Company commenced arbitration proceedings before the American
Arbitration Association in Houston, Texas against River Bay Corporation
and Marlan Baucum seeking to set aside a Purchase Agreement entered
into between those parties on or about October 10, 1994, together with
ancillary agreements pertaining thereto. The Company was seeking
damages and/or to set aside the Purchase Agreement and collateral
agreements, including the Put Option Agreement which, if otherwise
enforceable, would have required the payment by the Company of
approximately $1,700,000.00 for 565,500 shares of 3CI common stock. In
response, on April 9, 1997 Bank of Raleigh and Smith County Bank,
assignees of certain rights under the Purchase Agreement, commenced a
complaint for declaratory and monetary relief in the U.S. District
Court for the Southern District of Mississippi, Jackson Division in
Civil Action No. 3:97cv249BN. The Smith County Bank and Bank of Raleigh
have prayed declaratory judgment declaring the arbitration provision in
the Purchase Agreement to be not binding upon said banks, declaratory
judgement declaring the claims of 3CI against River Bay to be
subordinate to the claims of the banks, for unspecified compensatory
damages and for punitive damages of at least $1,000,000.00. On or about
May 10, 1997 the Company filed a Petition of Arbitration in Suit No.
24
<PAGE> 25
422,107 of the First Judicial District Court, Caddo Parish, Louisiana,
naming River Bay Corporation and Marlan Baucum as defendants therein.
This lawsuit seeked an injunction and stay of all judicial and
extra-judicial proceedings pursuant to the Put Agreement until such
time as the arbitration is completed. This action was removed by the
defendants to the U.S. District Court for the Western District of
Louisiana, Shreveport Division in Civil Action No. 97-0578. In April
1997, the Bank of Raleigh and Smith County Bank gave notice to certain
customers in the River Bay division that the Company was in default of
the put option obligation and that their payments should be directly
made to the Bank of Raleigh and Smith County Bank. From these efforts
the Bank of Raleigh and Smith County Bank collected $463,000 of the the
Company's accounts receivables that were pledged in the initial
purchase agreement On or about October 14, 1997, the parties settled
the lawsuits with the Bank of Raleigh and Smith County Bank . In the
settlement, the Company agreed to repurchase the remaining 565,500
shares of common stock related to the Put Option agreement with
payments ranging from $100,000 to $63,500.
River Bay had been engaged in the business of medical waste management
services in Florida, Mississippi, Georgia, Tennessee and Alabama.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES
The Company has historically funded its operations, acquisitions and
debt service through cash advances from WSI. During fiscal 1994,
advances of $3,100,000 and $4,671,973 were converted to 666,670 and
1,557,324 shares of common stock. As a result of its prior expansion
and program of acquisitions, the Company has experienced liquidity
deficiencies.
In October 1994, WSI made a non-interest bearing cash advance of
$1,000,000 to the Company, which was converted into 416,667 shares of
Common Stock in April 1995. In the first half of 1995, WSI made
non-interest bearing cash advances totaling $4,100,000 to the Company.
In June 1995, the Company executed a $6,000,000 revolving promissory
note, which was utilized in part to repay the advances. This note was
renegotiated in September 1995, increasing the total available to
$8,000,000 including interest, with principal not to exceed $7,400,000.
The note bears interest at the prime rate and is payable on December
31, 1996. Interest is payable in quarterly installments which are
automatically added to the outstanding principal balance, if not paid.
As of September 30, 1997, 1996, and 1995, the Company has borrowed
$4,844,217, $8,843,000 and $4,100,000 respectively under the note. See
note 5 to Notes to Consolidated Financial Statements. As a significant
amount of the advances from WSI have historically been non interest
bearing, some of which was ultimately converted to equity, interest
expense in 1997 and 1996 has increased significantly as a result of the
advances made pursuant to the interest bearing note.
During the fiscal year of 1997, the Company received cash advances in
excess of the Promissory Note dated September 30, 1995. Due to the
additional cash advances that were made in excess of the principal in
the original promissory note, the Company entered into a second
Revolving Credit Facility of $2.7 million including deferred interest,
dated December 20, 1996 with maturity date of February 28, 1997. It is
the intent of WSI and 3CI that this Revolving Promissory Note shall
evidence all sums owing by 3CI to WSI to the extent that such sums
represent advances of funds by 3CI in excess of the maximum limits
fixed under that certain $8,000,000 Revolving Promissory Note dated
September 30, 1995. The Promissory Note dated September 30, 1995 has a
due date of December 31, 1996, of which the Company has requested from
and received an extension of this repayment to restructure the terms of
the Revolving Promissory Note. 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
25
<PAGE> 26
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 has 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 Revolving Credit Facility
of $2.7 million dated December 20, 1996, with a maturity date of
February 28, 1997, which had been previously extended to June 30, 1997.
The conversion has also resulted in the reduction of the outstanding
indebtness of the Promissory Note dated September 30, 1995. During the
fiscal years ended September 30, 1997, 1996 and 1995 WSI has made cash
advances to the Company of $2,303,000, $4,000,000 and $4,100,000. Since
the year ended September 30, 1997, the Company has not requested nor
received any cash advances from WSI. As the Company, has not been able
to repay its' indebtedness to WSI as per the original Promissory Note
dated September 30, 1995, it has requested and received extensions and
waivers on a month-to-month basis from WSI, so that the Company and WSI
could restructure the Promissory Note. WSI is under no obligation to
provide additional advances and could demand payment on the debt at any
time. During the fiscal year of 1997, the Company has begun to have
discussion with third party lenders to obtain an alternative source of
financing apart from WSI. In the event the Company and WSI do not come
to a resolution on the restructuring of the note and the Company is
unable to obtain alternative financing, there can be no assurance that
the Company will be able to meet its obligations as they become due or
realize the recorded value of its assets and would likely be forced to
seek bankruptcy protection.
The nature and level of competition in the medical waste industry has
remained high for several years. This condition has produced aggressive
price competition and results in pressures on profit margins. The
Company competes against companies which 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 majority shareholder 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.
During fiscal 1997, the Company repaid approximately $1,012,800 of its
notes payable and approximately $1,444,000 of its long-term debt that
became due during the year with the funds advanced from WSI, including
payments totaling approximately $376,000 to River Bay Corporation on
debt incurred related to the 1994 acquisition of net assets. The
Company also reduced the Put Option from the collections which were
received by the Bank of Raliegh and Smith County Banks by approximately
$463,000, prior to the settlement agreement of the River Bay lawsuit.
OPERATING ACTIVITIES
The Company has continued to experience a cash loss from operations
during fiscal 1997. The Company anticipates an improvement of its
working cash from operations for fiscal 1998 and will be dependent upon
WSI to fund its continued operations. However, no assurance can be
given that WSI will continue to advance funds to the Company. In the
event that WSI fails to advance required funds to the Company or
demands payment of current indebtedness, the Company would have limited
financing sources and would likely be forced to seek bankruptcy
protection.
In fiscal 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived assets and for the Long-Lived Assets to be
Disposed of" SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by
those assets are less than the carrying amount. An evaluation of the
long-lived assets associated with the Company operations resulted in
the determination that certain intangible assets were impaired. The
impaired assets were written down by $11,385,328.
26
<PAGE> 27
An analysis was conducted of the Company's operating assets and systems
of American 3CI. In conjunction with the analysis, the Company
reconsidered the use of certain operating assets as well as a result of
recent experiences and current market conditions. As a a result of the
analysis the Company wrote off certain operating equipment which would
not benefit future operations, expensed certain leasehold improvements
costs for certain closed facilities, and expensed $420,000 of computer
software and hardware which will not be utilitzed in future operations.
Depreciation and amortization expense increased by approximately
$250,000 from fiscal 1995 to 1996 primarily as a result of the
completion of certain incineration facilities in Birmingham, Alabama,
which were placed in service. Depreciation and amortization increased
by approximately $740,000 from fiscal 1994 to 1995 primarily as a
result of substantially a full year's depreciation on property, plant
and equipment from the acquisitions of River Bay and Med-Waste assets
and increased amortization of intangibles, including goodwill, due to
the acquisitions. Similarly, the increase from fiscal 1993 to 1994 of
approximately $600,000 results from additional depreciation and
amortization relating to the 3CI merger.
The increase in accounts receivable from 1995 to 1996 results primarily
from an increase sales and from a delay in the billing cycle due to the
relocation of the Company's production accounting office during the
fourth quarter of the fiscal year end 1996. The decrease in accounts
receivable from 1994 to 1995 results primarily from providing a
significant allowance for doubtful accounts and aggressive cash
collections partially offset by increased billings during the year. The
increase in accounts receivable from 1993 to 1994 results primarily
from the acquisition of Med-Waste and merger of 3CI and a delay in
billings related to the move from San Marcus to Houston and integration
of the acquisitions.
The increase in accounts payable from 1995 to 1996 is primarily a
result of the decreased operating capital available to make payments on
a timely basis. The decrease in accounts payable from 1994 to 1995
results primarily from the payment of outstanding obligations due to
the availability of funds advanced or invested by WSI.
The increase in accrued liabilities from 1995 to 1996 is largely
attributable to accruals made by the Company for estimated costs
associated with several legal and contractual disputes. The increase in
accrued liabilities from 1994 to 1995 is largely attributable to
accruals made by the Company for estimated costs associated with
several legal and contractual disputes. The increase in accrued
liabilities from 1993 to 1994 results primarily from the accrual of
certain estimated cleanup costs and anticipated tax expenses.
INVESTING ACTIVITIES
During fiscal 1997, the Company invested approximately $1,417,000 for
transportation, machinery and equipment at it's incinerators and
transportation locations, computer equipment and software.
During fiscal 1996, the Company completed the construction of
incineration facilities in Birmingham, Alabama. Expenditures related to
the project during fiscal 1996 totaled $791,851 in additions to the
$260,000 incurred during fiscal 1995 and the $550,000 incurred prior to
the acquisition of River Bay. During fiscal 1996, the Company invested
an additional $1,180,000 for transportation, machinery and equipment,
computer equipment and software, and other fixed assets.
During the fiscal 1995, the Company acquired substantially all of the
assets and certain liabilities from River Bay Corporation in exchange
for 865,500 shares of common stock and a $1 million promissory note to
River Bay Corporation. The Company has committed to repurchase the
shares at $3.00 per share at River Bay Corporation's option. See Note 1
to Consolidated Financial Statements.
27
<PAGE> 28
For information with respect to acquisitions during 1995, see "RECENT
ACQUISITIONS" above.
SELECTED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES $18,789,749 $17,748,300 $ 16,522,025
Percentage increase
from prior period 5.9% 7.4% 33.0%
POUNDS OF MEDICAL WASTE
INCINERATED 47,004,370 48,174,155 41,204,766
Percentage increase over prior period (2.4%) 16.9% 22.1%
</TABLE>
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO THE YEAR ENDED SEPTEMBER 30,
1996
REVENUES increased to $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
ended September 30, 1996. This increase is primarily attributable
to the Company focusing on higher margin generators. The Company has
been able to achieve the increase notwithstanding continued downward
pressure on pricing from the high level of competition in the industry.
COST OF SERVICES increased $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 increase was due to higher workers compensation insurance (an
increase of $250,236), fuel costs (an increase of $173,000) and labor
costs (an increase of $47,118). Cost of revenues as a percentage of
revenues decreased to 76.0% during 1997 from 77.8% during 1996.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") 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 results 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.
DEPRECIATION AND AMORTIZATION expense decreased to $1,352,015 for
fiscal 1997 from $2,224,161 for fiscal 1996, due principally to the
impairment loss for the intangible assets in fiscal 1996.
INTEREST EXPENSE increased to $902,229 in fiscal 1997 from $839,089 in
fiscal 1996 due primarily to attributed to the increase in the note
payable from advances by the majority shareholders.
The Company grants credit to local and national customers on a net 30
day basis. These accounts are then monitored as to their payment
pattern and if a consistent pattern develops of slow payment or no
payment, the Company then suspends service. The Company maintains an
allowance for doubtful accounts at a level that management believes is
sufficient to cover potential credit losses. The Company provided for
bad debt reserves in the fiscal years ending September 30, 1995, 1996
and 1997 of $838,000, $380,000 and $212,867, respectively. The reserve
taken in fiscal year ended 1995
28
<PAGE> 29
were substanially high due to several factors, including high employee
turnover, relocation of the company headquarters and difficulties in
integrating the Company's management information systems.
YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO THE YEAR ENDED SEPTEMBER 30,
1995
REVENUES increased $1,226,000 or 7%, to $17,748,000, during the year
ended September 30, 1996 from $16,522,000 for the year ended September
30, 1995, as the Company continued its strategy of focusing on
higher-margin professional account generators. This strategy has
resulted in an increase of $1,400,000 or 8% increase of revenue from
professional accounts, while during the same time the Company's revenue
from third party generators decreased approximately $174,000, or 1%
decrease in revenue from third party generators."
COST OF SERVICES increased to $13,815,480 for fiscal 1996 compared to
$11,756,968 for fiscal 1995. The increased cost of service resulted
from higher transportation costs, incineration costs paid to third
parties and a substantial increase in costs of supplies. These higher
costs can be partially associated with the River Bay division due to
the delay of the start of an incinerator in Birmingham, Alabama. The
incinerator was in full operation by the start of the third quarter of
fiscal 1996 and some of the projected reductions in outside incinerator
costs paid to third parties and the elimination of additional
transportation and repackaging costs associated with the dependency for
outside incineration costs are being achieved. In addition, the
installation and the startup costs associated with the microwave unit
at our Birmingham , Alabama, created an increase in operating costs.
WRITE OFF OF INTANGIBLE ASSETS in fiscal 1996 totaled $11,385,328. The
company prepared an evaluation of the fair value of the assets
associated with the Company's operations resulting in the determination
that certain intangible assets were impaired. The fair value was based
on estimated future cash flows to be generated by the Company's
operations, discounted at a market rate of interest. This write off of
intangibles was a result of the Company consistently experiencing and
further projecting negative cash flows.
Due to 3CI current operating and cash flow losses, combined with the
Company's history of operating and cash flow losses and the current
forecast of continued losses of both operating and cash flow for the
fiscal year ended September 30, 1997, it was necessary that the Company
perform tests for the potential impairment to long-lived assets as
outline in SFAS 121.
Recognition and Impairment. Because of the above circumstances, the
Company estimated its future cash flows to be generated by its assets
less the future cash outflows expected to be necessary to obtain those
cash inflows. In the 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 with SFAS 121 of its
intangible assets of $11,385,328.
In estimating the expected future cash flows for determining whether
the assets were impaired and if expected future cash flows sre used in
measuring assets that are impaired, the assets grouped at the lowest
level for which there are identifiable cash flows (as noted above the
Company broke down the assets into divisions). The estimates used for
expected future cash flows were based on the Company forecast for the
fiscal year ended September 30, 1997. Also, in the fourth quarter of
fiscal 1996, the Company's majority shareholder indicated that they
were no longer willing to commit to fund the Company on a long-term
basis. This event along with the fiscal 1997 budget of continued losses
indicated that an impairment should be recognized.
29
<PAGE> 30
The impaired assets are incineration rights, goodwill and customer
lists as recorded on 3CI and River Bay division accounting records at
September 30, 1996. This write-down is a result of the Company
suffering historical operating and cash flow losses with continued
forecast operating and cash flow losses for the current fiscal year.
WRITE OFF OF FIXED ASSETS in fiscal 1996 totaled $1,183,446. A complete
analysis was conducted of the Company's operating assets and systems of
American 3CI. In conjunction with the analysis, the Company
reconsidered the use of certain operating assets as well as a result of
recent experiences and current market conditions. Set forth below is a
summary of the write-offs relating to fixed assets during fiscal 1996:
BUILDINGS $12,700
During 1996, it was necessary to replace the refractory in one
of the Company's incinerators due to the normal wear and tear.
There was a net book value of $12,700 of the previously
capitalized refractory that is being written off.
LEASEHOLD IMPROVEMENTS $80,000
During 1996, the Company updated and refurbished several of it's
transportation and incinerator locations. Management believed
the updating and refurbishment was necessary to make the
locations more functional and efficiently operational. Also the
Company made an operational decision to close it's 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, at the time of the reverse merger of the
Company, 3CI had a lease agreement which were accounted for as a
Capitalized Lease and were being depreciated over the term of
the lease agreement. During 1996, the Company made a decision to
terminate the lease agreement early due to the high cost of
maintenance of the leased transportation equipment. The Company
had also, capitalized other costs associated with these leased
assets which when the lease was terminated the company wrote off
the remaining net book value. As the transportation equipment
was returned it was necessary to write the remaining capitalized
net book value off of $500,746.
REUSABLE CONTAINERS $12,000
In 1996, the Company made an operational decision to move a
portion of their customer base from disposable cardboard boxes
to reusable plastic containers. A significant investment was
then made in reusable plastic containers and based upon it's
prior operating experience with the reusable containers, the
Company estimated that a three (3) year life was more reflective
of the reusable containers than a five (5) year life. In
previous periods the Company had estimated that the life of
reusable containers was 5 years. 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, it was necessary to change out the bags
inside the scrubber
30
<PAGE> 31
at incinerator as these bags became excessively worn and the
integrity of the bags were beginning to deteriorate. These bags
had a remaining net book value of $22,200 that were written-off
as they were no longer able to remain in service. Also, there is
a write-off of a previously capitalized major improvement that
was done to the upper chamber of incinerator. During 1996, there
was a major improvement completed 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 written-off.
COMPUTER & SOFTWARE $490,000
During 1994 and 1995, the Company, began capitalizing cost
associated with a proven technology of a bar coding systems and
an accounting system that would streamline the paperwork from
the transportation locations to the incinerators to ultimately
the accounting department (production/billing/accounting
system). This 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
appropriately wrote-off the unamortized costs. The write-off of
these capitalized costs totaled $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 (River Bay asset acquisition) as this software was
abandoned when the River Bay division was integrated in the
fourth quarter of 1996 into the 3CI accounting system.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") expenses decreased to
$4,343,246 in fiscal 1996 from $6,996,575 in fiscal 1995. The decrease
results from one time severance costs and duplicative administration
functions that were being incurred by the Company from previous
acquisitions being eliminated. Due to the continued lawsuit proceedings
the Company felt it necessary to accrue an additional $1 million for
legal costs for the fourth quarter of fiscal year 1996.
DEPRECIATION AND AMORTIZATION expense increased to $2,224,161 for
fiscal 1996 from $1,976,212 for fiscal 1995, due principally to the
commencing of the new incinerator located in Birmingham, Alabama.
INTEREST EXPENSE increased to $839,089 in fiscal 1996 from $655,080 in
fiscal 1995 due primarily to attributed to the increase in the note
payable from advances by the majority shareholders.
The Company grants credit to local and national customers on a net 30
day basis. these accounts are then monitored as to their payment
pattern and if a consistent pattern develops of slow payment or no
payment, the Company then suspends service. The Company maintains an
allowance for doubtful accounts at a level that management believes is
sufficient to cover potential credit losses. The Company provided for
bad debt reserves in the fiscal years ending September 30, 1994, 1995
and 1995 of $461,000, $838,000 and $380,000, respectively. The reserves
taken in fiscal years ended 1994 an 1995 were substanially high due to
several factors, including high employee turnover and difficulties in
integrating the Company's systems.
31
<PAGE> 32
YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO THE YEAR ENDED SEPTEMBER 30,
1994
REVENUES increased to $16,522,025 for the fiscal year ended September
30, 1995 compared to $12,422,717 for the fiscal year ended September
30, 1994. The increase in revenues and pounds incinerated was due
principally to the inclusion of substantially a full year of revenues
in 1995 for the acquisitions of River Bay, Med-Waste and 3CI while 1994
included only eight months for 3CI and two months for Med-Waste. In
fiscal 1995 there was an emphasis on obtaining smaller generators of
biomedical waste, such as physicians offices and laboratories, to
offset the loss of a major metropolitan hospital council contract.
COST OF SERVICES increased to $11,756,968 for fiscal 1995 compared to
$9,273,011 for fiscal 1994. The increased cost of service resulted from
higher transportation costs, incineration costs paid to third parties
and a substantial increase in costs of supplies. The acquisition of
River Bay in fiscal 1995 was a strategic entry into a new major market
region and costs per pound have been higher. Management believes that
the construction of a strategically located incineration facility,
scheduled for completion in the second quarter of fiscal 1996, should
reduce the cost of services for that region. Additionally, the cost of
supplies, (primarily boxes and liners) increased substantially as a
result of increased prices of paperboard and resin, resulting in higher
cost per revenue dollar. The Company was not able to pass all these
cost increases on to its customers due to ongoing competitive pricing
pressures.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") expenses increased to
$6,996,575 in fiscal 1995 from $2,452,840 in fiscal 1994. The increase
results partially from the acquisitions discussed above being included
for a full year in 1995 but only a partial year during fiscal 1994.
Specifically,
o The River Bay and Med-Waste acquisitions resulted in additional
S,G&A expenses of approximately $900,000 and $360,000,
respectively, in 1995.
o The Company recorded bad debt expenses of approximately $840,000
during 1995, while 1994 included bad debt expense of approximately
$520,000.
o The Company has been involved in several legal or contract
disputes which resulted in settlement costs and accruals of
estimated related expenses totaling approximately $1,350,000.
o The Company reimbursed WSI for services rendered in the amount of
$310,000.
o As a result of the acquisitions concluded during the year, the
Company incurred duplicative expenses and management continues to
focus on integrating the administrative functions of its
operations with those of recent acquisitions. Additionally, the
Company relocated its headquarters from Houston, Texas, to
Shreveport, Louisiana, resulting in higher costs from employee
turnover and other non-recurring moving costs.
DEPRECIATION AND AMORTIZATION expense increased to $1,976,212 for
fiscal 1995 from $1,236,592 for fiscal 1994, due principally to
increased depreciation on property, plant and equipment from
acquisitions previously discussed and increased amortization of
intangibles due to acquisitions.
INTEREST EXPENSE increased to $655,080 in fiscal 1995 from $423,890 in
fiscal 1994 due primarily to interest expense incurred related to the
River Bay acquisition.
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.
32
<PAGE> 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On September 13, 1996, Arthur Andersen, LLP resigned from its role as
the Company's principal accountants. The Company subsequently appointed
Heard, McElroy & Vestal, LLP as principal accountants on November 13,
1996.
In connection with the audits of the fiscal periods ended September 30,
1994 and 1995 and the sebsequent period through September 13, 1996,
there were no disagreements with Arthur Andersen LLP on any matter of
accounting principles, financial disclosure, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction
would have caused them to make reference in connection with their
opinion to the subject matter of the disagreement.
The audit reports of Arthur Andersen LLP on the consolidated financial
statements of 3CI Complete Compliance Corporation as of and for the
years ended September 30, 1995 and 1994, did not contain any adverse
opinion or disclaimer of opinion; however, the 1995 opinion was
modified with respect to: 1. an emphasis of a matter paragraph
discussing certain operating and liquidity issues confronting the
Company and 2. an explanatory paragraph describing an uncertainty with
respect to the outcome of certain litigation filed against the Company.
The 1994 opinion was modified and included an emphasis of a matter
paragraph discussing certain operating and liquidity issues confronting
the Company.
33
<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of January 6,
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.
<TABLE>
<CAPTION>
NAME AGE POSITION SERVED IN SUCH POSITION SINCE
- ---- --- -------- -----------------------------
<S> <C> <C> <C>
Dr. Werner Kook 44 Chairman of the Board 1995
Charles D. Crochet 39 President and Director 1994
Curtis W. Crane 38 Chief Financial Officer, Secretary 1995
and Treasurer
Dr. Clemens Pues 33 Vice President and Director 1995
Juergen Thomas 51 Director 1994
</TABLE>
There are no arrangements or understandings with respect to the
selection of officers and directors and there are no family
relationships between any of such persons. Dr. Pues is a senior officer
of WSI, which beneficially owns 52.5% of the outstanding shares of the
Company, and Mr. Thomas, Dr. Kook and Dr. Pues are employed by certain
waste management companies controlled by the Rethmann families and
Edelhoff families, respectively, collectively who own 100% of Waste
Systems, Inc.
The following is a summary of the business background and experience of
each of the persons named above:
DR. WERNER KOOK has served as Chairman of the Board of the Company
since October 1995. Dr. Kook has served as a senior officer of various
waste management companies controlled by the Rethmann family in Europe
for the past six years and is a member of the board of Rethmann AG &
Co..
CHARLES D. CROCHET has served as President and a Director of the
Company since February 1994. Mr. Crochet founded and served as
president of a 3CI predecessor company and has worked in the medical
waste business since 1988. Prior to 1988, Mr. Crochet was employed for
over ten years in senior positions with two public, national companies
engaged in the business of hazardous waste management.
CURTIS W. CRANE has served as Chief Financial Officer of the Company
since September 1995. Prior to his affiliation with the Company, Mr.
Crane held senior financial positions including Chief Financial Officer
for NDE Environmental Corporation and Director of Finance and Tax for
Lone Star Steel Company.
JUERGEN THOMAS has served as a Director of the Company since February
1994. Mr. Thomas has served for over fifteen years as Chief Financial
Officer of certain companies associated with the Edelhoff families,
which are leading waste management companies in Europe, and is a
Director of Waste Systems, Inc. since 1996.
34
<PAGE> 35
DR. CLEMENS PUES has served as a Director and Vice President of the
Company since October 1995. Dr. Pues is also currently President of
Waste Systems, Inc. Dr. Pues has been working with the AIR Lippewerk
Recycling GmbH, a wholly-owned subsidiary of the Rethmann
Kreislaufwirtschaft GmbH & Co.KG, since September 1994, where he has
been responsible for gypsum recycling. Prior to 1994, Dr. Pues was
employed at the University of Muenster as assistant professor in
international management for four years.
DIRECTOR COMPENSATION
Directors who are officers or employees of the Company receive no
additional compensation for their services as members of the Board of
Directors. Directors who are not such officers or employees do not
currently receive any compensation for such services but may, in the
future, receive such compensation for their services as the Board of
Directors may from time to time determine.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers, and persons who own more than
10% of a registered class of its equity securities, to file reports of
ownership and reports of changes in ownership of such equity securities
with the Securities and Exchange Commission ("SEC"). Directors,
executive officers and greater than 10% stockholders are required by
SEC regulations to furnish the Company with copies of all Section 16(a)
forms they file.
To the Company's knowledge, based solely on a review of the copies of
such forms furnished to the Company and written representations that no
other reports were required, the Company believes that its directors,
executive officers and greater than 10% stockholders complied with all
Section 16(a) filing requirements.
During 1995, Dr. Clemens Pues and Dr. Werner Kook have not filed timely
Form 3's following their election as directors of the Company, Curtis
Crane has not filed a Form 3 following his election as an officer of
the Company. Larry Stephens, Juergen Thomas, Dr. Hermann Niehues, Georg
Rethmann, Dr. Werner Kook and Waste Systems, Inc. all have filed Form
3's late, Waste Systems, Inc. has filed two Form 4's late, Dr. Hermann
Niehues filed four Form 4's late and Charles Crochet filed two Form 4's
late.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the cash
compensation awarded to, earned by or paid to the Company's Chief
Executive Officer or persons acting in a similar capacity, and the
remaining most highly compensated executive officers of the Company
whose total annual salary and bonus for the fiscal years ended
September 30, 1995, September 30, 1996 and September 30, 1997 was at
least $100,000.
35
<PAGE> 36
<TABLE>
<CAPTION>
Long-term Compensation
Annual Compensation Awards
Fiscal ----------------------- Other Annual Stock All Other
Name and Principal Position Year Salary Bonus Compensation Options(#) Compensation($)
- --------------------------- ------ ------ ----- ---------------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Patrick Grafton(1) 1995 $115,000(2) -- -- -- --
Chief Executive Officer -- -- -- --
Charles D. Crochet 1995 $115,000 -- -- 90,000 --
President 1996 $130,000 -- -- 90,000 --
1997 $145,000 -- -- --
</TABLE>
(1) Mr. Grafton was removed without cause as Chief Executive Officer and
Secretary of the Company in March 1995.
(2) Information provided as to Mr. Grafton's compensation is reported on an
annualized basis.
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
1997, the following persons served on the Board of Directors and participated in
the deliberations concerning executive officer compensation: Dr. Werner Kook,
Charles D. Crochet, Dr. Clemens Pues, and Juergen Thomas. Charles D. Crochet
also served as the President of the Company during 1997. Dr. Clemens Pues is
currently the President of Waste Systems, Inc. which beneficially owns 52.5% of
the Common Stock of the Company. Erik v. Forell and Georg Rethmann formerly
served as directors of WSI during fiscal year 1995. Erik v. Forell served as
President and Secretary of WSI during the third and fourth quarters of fiscal
year 1995. Georg Rethmann served as the President of WSI during the first and
second quarters of fiscal year 1995. Dr. Clemens Pues is currently the President
of WSI.
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION
In accordance with the executive compensation rules established by the
SEC, the following report regarding executive compensation is provided
by the Board of Directors.
During fiscal 1997, the Company had no formal compensation policies
with respect to executive officers. Because there are no formal
compensation policies in place, the compensation of newly- hired
executive officers was determined based generally on the qualifications
and prior experience of the executive officers. The following
paragraphs set forth the basis of the compensation paid in fiscal 1996
and fiscal 1995 to Patrick Grafton and Charles Crochet.
In February 1994, the Board of Directors elected Patrick Grafton as
Chief Executive Officer and Secretary of the Company. At that time, the
Board of Directors established Mr. Grafton's salary at $5,550 per month
for February and March of 1994, $7,500 per month for April through
September 1994, and $9,583 per month for October 1994 through September
1995, as part of an employment agreement commencing February 1994 and
ending September 1995. In February 1994, Mr. Grafton also received an
option to purchase 135,000 shares of the Company's Common Stock at
$3.00 per share which vests over a three-year period at 1/36 per month
on a cumulative basis. The Board of Directors set Mr. Grafton's
compensation package based on the key role he was to hold within the
Company and in view of competitive compensation packages offered to his
peer group in the industry. The stock option was granted to provide a
long-term incentive to Mr. Grafton. In March 1995, Mr. Grafton was
removed without cause as Chief Executive Officer and Secretary of the
Company.
36
<PAGE> 37
In February 1994, the Board of Directors elected Charles Crochet as
President of the Company. At that time, the Board of Directors
established Mr. Crochet's salary at $6,250 per month for February and
March of 1994, $7,500 per month for April through September 1994, and
$9,583 per month for October 1994 through September 1995, as part of an
employment agreement commencing February 1994 and ending September
1995. This employment agreement was renewed on August 31, 1995,
increasing Mr. Crochet's salary to $10,833 per month commencing October
1, 1995 through September 1996, $12,083 per month commencing October 1,
1996 through September 30, 1997, and $13,333 per month commencing
October 1, 1996 through May 31, 1998. In February 1994, Mr. Crochet
also received an option to purchase 90,000 shares of the Company's
Common Stock at $3.00 per share which vested over a three year period
at 1/36 per month on a cumulative basis. According to the terms of the
renewal of Mr. Crochet's employment agreement, the remaining unvested
options under the former employment agreement were terminated and Mr.
Crochet was granted an option to purchase 90,000 shares of the
Company's Common Stock at $2.00 per share, which also vests over a
three year period at 1/36 per month on a cumulative bases. The Board of
Directors set Mr. Crochet's compensation package based on the key role
he was to hold within the Company and in view of competitive
compensation packages offered to his peer group in the industry. The
stock option was granted to provide a long-term incentive to Mr.
Crochet.
BOARD OF DIRECTORS
Dr. Werner Kook
Mr. Juergen Thomas
Dr. Clemens Pues
Mr. Charles Crochet
EMPLOYMENT AGREEMENTS
Mr. Patrick Grafton served as Chief Executive Officer of the Company
pursuant to an employment agreement commencing February 1994 and ending
September 1995. Mr. Grafton was entitled to a salary of $5,500 per
month in February and March 1994, and then $7,500 per month from April
through September 1994, increasing to $9,583 per month commencing
October 1994 through September 1995. This employment agreement was
terminated on March 31, 1995.
Mr. Charles D. Crochet serves as President of the Company pursuant to
an employment agreement commencing February 1994 and ending September
1995. Mr. Crochet was entitled to a salary of $6,250 per month in
February and March 1994, and then $7,500 per month from April through
September 1994, increasing to $9,583 per month commencing October 1994
through September 1995. This employment agreement was renegotiated and
modified on August 31, 1995, increasing Mr. Crochet's salary to $10,833
per month commencing October 1, 1995 and thereafter increased to
$13,333 on October 1, 1997, and continues through May 1998. Pursuant to
this agreement in the event the Company discharges Mr. Crochet without
cause, Mr. Crochet is entitled to receive all monthly installments of
salary for the remaining term of the agreement. As an additional
incentive to Mr. Crochet under the new employment agreement, Mr.
Crochet is eligible for an annual bonus based on Fiscal Year Pre-Tax
Profits as a percentage of Revenues. The amount of such annual bonus is
based on a percentage between 6% and 10% of an amount determined by the
Board of Directors from an approved bonus plan, such actual percentage
depending upon the Company's Pre-Tax Profits as a percentage of
Revenue.
Other than as set forth above, there are no compensatory plans or
arrangement with respect to any individual named in the Summary
Compensation Table above or otherwise which would result from the
resignation, retirement or other termination of such individual's
employment with the Company or a change in control.
37
<PAGE> 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, to the best of the Company's'
knowledge, as of January 7, 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.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------- -------------------- ----------------
<S> <C> <C>
Waste Systems, Inc.(1) 5,104,448 52.5%
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. 780,818 8.0%
5847 San Felipe, Suite 900
Houston, Texas 77057
Jim Shepherd (3) 477,889 4.9%
Route 3, Box 264
Bismarck, AR 71929
Patrick Grafton(4) 235,916 2.4%
120 Tradd Street
Charleston, South Carolina 29401
Charles D. Crochet(5) 148,209 1.5%
910 Pierremont, Suite 312
Shreveport, Louisiana 71106
Dr. Werner Kook -0- -0-
910 Pierremont, Suite 312
Shreveport, Louisiana 71106
Dr. Clemens Pues -0- -0-
910 Pierremont, Suite 312
Shreveport, Louisiana 71106
Juergen Thomas -0- -0-
910 Pierremont, Suite 312
Shreveport, Louisiana 71106
Curtis W. Crane -0- -0-
910 Pierremont, Suite 312
Shreveport, Louisiana 71106
All directors and executive officers as a 148,209 1.5%
group (5 persons)
</TABLE>
- ---------------------------------------
Footnotes on Next Page
38
<PAGE> 39
(1) A Schedule 13D dated April 17, 1995 reflects that Waste Systems, Inc.
("WSI") is the beneficial owner of 5,104,448 shares. Such Schedule 13D
reflects that WSI is owned 50% by Rethmann V & B GmbH & Co., a German
corporation controlled by members of the Rethmann Family in Germany,
and 50% by Gustav Dieter Edelhoff, Gustav Edelhoff, Heike
Edelhoff-Kirchhoff and Heidemarie Edelhoff, members of the Edelhoff
Family in Germany. The Rethmann Family and the Edelhoff Family share
voting and dispositive power with respect to the shares beneficially
owned by WSI. The Company has been advised that the interests in WSI
owned by the members of the Edelhoff family have been transferred to
Lobbe Holding GmbH & Co., a German corporation controlled by members of
the Edelhoff family.
(2) A Schedule 13D dated October 20, 1994, reflects that River Bay
Corporation, a Mississippi corporation, is the beneficial owner of
865,500 shares and has sole voting and dispositive power with respect
to such shares. The Company has repurchased 300,000 shares pursuant to
a put option.
(3) See "Recent Acquisitions" and "Item 3. Legal Proceedings".
(4) Mr. Grafton was terminated without cause on March 31, 1995. The
information sets forth, to the best of the Company's' knowledge, Mr.
Grafton's beneficial ownership based on filings with the SEC.
(5) Includes 6,500 shares held in the name of Mr. Crochet's son, Chase
Crochet. Also included are 102,500 shares which Mr. Crochet has the
right to acquire pursuant to the Option Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February, March, April, May and July 1995, WSI made non-interest
bearing cash advances totaling $4,100,000 to the Company. In June 1995,
the Company executed a $6,000,000 revolving promissory note, to be
funded at the discretion of WSI, which was utilized to repay the
advances not converted to common stock. This Revolving Promissory Note
was renegotiated in September 1995 increasing the total available to
$8,000,000 including interest with the principal portion not to exceed
$7,400,000.
Since September 30, 1996, WSI has made additional cash advances to the
Company totaling $960,000 including interest. Due to the additional
cash advances that have been made in excess of the principal in the
original promissory note, the Company entered into a second Revolving
Credit Facility of $2.7 million including deferred interest, dated
December 20, 1996 with maturity date of February 28, 1997. The
Promissory Note dated September 30, 1995 has a due date of December 31,
1996 of which the Company has requested from and received an extension
from WSI to discuss the possibility of restructuring the terms of the
Revolving Promissory Note.
In April 1995, WSI purchased an additional 416,667 shares of Common
Stock in consideration for the conversion by WSI of a $1,000,000
non-interest-bearing cash advance made by WSI to the Company in
November 1994 ($2.40 per share).
In February, March, April, May and July 1995, WSI made additional cash
advances of $4,100,000 to the Company.
In February 1995, the Company expensed approximately $310,000 for
certain services provided to the Company by WSI, and for reimbursement
of expenses incurred on behalf of the Company.
Through 1996 and 1997, 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.
39
<PAGE> 40
The Company had loans from WSI, its majority shareholder, outstanding
during 1995, 1996 and 1997. Related interest expense in the amount of
$698,248, $585,468, and $157,500 was recorded for the years ended
September 30, 1997, September 30, 1996, and September 30, 1995,
respectively.
The Company currently does business with an equipment company owned by
the father of Charles Crochet, the President of the Company. No
payments were made during the year ended September 30, 1995 and 1996.
997. There was an outstanding invoices totaling $20,000 and $7,000 due
to Crochet Equipment Company at September 30, 1995, 1996 and 1997.
During 1996, the Company has made purchases of business forms with a
company owned by the father of Curtis W. Crane, the Chief Financial
Officer of the Company. Payments to the business forms company during
fiscal year ended September 30, 1996 and 1997, totaled $22,000 and
$62,000, respectively.
40
<PAGE> 41
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,
1997, the year ended September 30, 1996 and the year ended September
30, 1995, 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, 1997,
the year ended September 30, 1996, and the year ended September 30,
1995, required by Item 8 of Part II of Form 10-K, is annexed to this
report as a separate section.
(b) REPORTS ON FORM 8-K FILED IN THE FOURTH QUARTER OF 1997:
None.
(c) EXHIBITS - THE RESPONSE TO THIS PORTION OF ITEM 14 IS SUBMITTED AS A
SEPARATE SECTION OF THIS REPORT.
41
<PAGE> 42
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)
July 30, 1998 /s/ Charles D. Crochet
----------------------------
Charles D. Crochet
President (Principal Executive Officer)
July 30, 1998 /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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Charles D. Crochet President and Director July 30, 1998
- ------------------
Charles D. Crochet
/s/ Dr. Clemens Pues Vice President and Director July 30, 1998
- --------------------
Dr. Clemens Pues
/s/ Dr. Werner Kook Chairman and Director July 30, 1998
- --------------------
Dr. Werner Kook
/s/ Curtis W. Crane Chief Financial Officer, July 30, 1998
- -------------------- Secretary and Treasurer
Curtis W. Crane (Principal Financial Officer and
Principal Accounting Officer)
Director July 30, 1998
- -----------------
Juergen Thomas
</TABLE>
42
<PAGE> 43
INDEX TO EXHIBITS
EXHIBITS
Except as otherwise indicated, the following documents are incorporated
by reference as Exhibits to this Report (as used in the following
listing, "3CI" refers to the Company):
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
2.1. Copy of Agreement of Purchase and Sale dated as of June 27, 1991
by, between and among American Medical Technologies, Inc., Harry
Argovitz, et ux, Complete Compliance Corporation and 3CI
Transportation Systems Corporation, as amended by the First
Amendment thereto dated as of September 3, 1991 and the Second
Amendment thereto dated as of October 7, 1991 (incorporated by
reference to Exhibit 10(a) of 3CI's registration statement on Form
S-1 (No. 33-45632) effective April 14, 1992).
2.2. Copy of Blanket Conveyance, Bill of Sale and Assignment dated as
of September 6, 1991 executed and delivered by American Medical
Technologies, Inc., in favor of 3CI (incorporated by reference to
Exhibit 10(o) of 3CI's registration statement on Form S-1 (No.
33-45632) effective April 14, 1992).
2.3. Copy of Asset Purchase Agreement dated as of December 10, 1991
between 3CI, MedCon, Inc., and Harry S. Allen, individually and as
sole shareholder of MedCon, Inc. (incorporated by reference to
Exhibit 10(d) of 3CI's registration statement on Form S-1 (No.
33-45632) effective April 14, 1992).
2.4. Copy of First Amendment dated March 26, 1992 to Asset Purchase
Agreement by, and between and among, MedCon, Inc., Harry S. Allen,
as sole shareholder of MedCon, Inc., and 3CI (incorporated by
reference to Exhibit 10(n) of 3CI's registration statement on Form
S-1 (No. 33-45632) effective April 14, 1992).
2.5. Copy of Second Amendment dated May 22, 1992 to Asset Purchase
Agreement by, between and among MedCon, Inc., Harry S. Allen, as
the sole shareholder of MedCon, Inc. and 3CI (incorporated by
reference to Exhibit 2.6 of 3CI's Annual Report on Form 10-K for
the fiscal year ended September 30, 1992).
2.6. Copy of Third Amendment dated October, 1992 to Asset Purchase
Agreement by, between and among MedCon, Inc., Harry S. Allen, as
sole shareholder of MedCon, Inc. and 3CI (incorporated by
reference to Exhibit 2.7 of 3CI's Annual Report on Form 10-K for
the fiscal year ended September 30, 1992).
2.7. Purchase Agreement and Plan of Reorganization dated February 4,
1994, among A/MED, Inc, 3CI Complete Compliance Corporation and
3CI Acquisition Corp./A/MED (incorporated by reference to Exhibit
1.1 of 3CI's report on Form 8-K filed February 7, 1994).
2.8. Purchase Agreement and Plan of Reorganization dated February 4,
1994, among A/Med, Inc., 3CI Complete Compliance Corporation and
3CI Acquisition Corp./A/MED (incorporated by reference to Exhibit
1.2 of 3CI's report on Form 8-K filed February 7, 1994).
2.9. Stock Purchase Agreement dated February 4, 1995, between Waste
Systems, Inc. and 3CI Complete Compliance Corporation
(incorporated by reference to Exhibit 1.3 of 3CI's report on Form
8-K filed February 7, 1994).
</TABLE>
43
<PAGE> 44
<TABLE>
<S> <C>
2.10. Purchase Agreement dated October 10, 1994, among 3CI Complete
Compliance Corporation, River Bay Corporation and Marlan Baucum
(incorporated by reference to Exhibit 1.1 of 3CI's report on Form
8-K filed October 27, 1994).
2.11. Addendum to Purchase Agreement dated October 12, 1994, among 3CI
Complete Compliance Corporation, River Bay Corporation and Marlan
Baucum. (incorporated by reference to Exhibit 1.2 of 3CI's report
on Form 8-K filed October 27, 1994).
2.12. Assumption of Liabilities dated October 10, 1994, among 3CI
Complete Compliance Corporation, 3CI Acquisition Corp./A/MED,
Marlan Baucum and River Bay Corporation. (incorporated by
reference to Exhibit 1.11 of 3CI's report on Form 8-k filed
October 27, 1994).
2.13. Plan of Reorganization and Acquisition Agreement dated August 9,
1994, among the 3CI, Med-Waste Disposal Service, Inc., Jim
Shepherd, Mike Shepherd and Richard McElhannon (incorporated by
reference to Exhibit 2.14 of 3CI's Annual Report on Form 10-K for
the fiscal year ended September 30, 1992).
3.1. Copy of 3CI's Certificate of Incorporation as amended
(incorporated by reference to Exhibit 3(a) of 3CI's registration
statement on Form S-1 (No. 33- 45632) effective April 14, 1992).
3.2. Copy of 3CI's Certificate of Incorporation, as amended effective
June 13, 1995 (incorporated by reference to Exhibit 3.1 of 3CI's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1995).
3.3. Copy of 3CI's Bylaws, as amended (incorporated by reference to
Exhibit 3(b) of 3CI's registration statement on Form S-1 (No.
33-45632) effective April 14, 1992).
3.4. Copy of 3CI's Bylaws, as amended effective May 14, 1995
(incorporated by reference to Exhibit 3.2 of 3CI's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1995).
4.1. Copy of Representative Warrant Agreement dated as of April 14,
1992 (incorporated by reference to Exhibit 4(b) of 3CI's
registration statement on Form S-1 (No. 33-45632) effective April
14, 1992).
4.2. Copy of Promissory Note of the Company dated January 13, 1993, in
the principal amount of $200,000, bearing interest payable
quarterly at payee's prime rate plus 1% payable on or before
January 15, 1995, to the order of Midlantic National Bank with
payment of principal subject to the conditions specified in
Paragraph 14 of said promissory note (incorporated by reference to
Exhibit 4.2. of 3CI's Annual Report on Form 10-K for the fiscal
year ended September 30, 1992).
4.3. Copy of Deed of Trust, Assignment, Security Agreement and
Financing Statement dated January 13, 1993, granted and delivered
by the Company in favor of Midlantic National Bank to secure the
Company's promissory note of even date referred to in Exhibit 4.2.
immediately above (incorporated by reference to Exhibit 4.3. of
3CI's Annual Report on Form 10-K for the fiscal year ended
September 30, 1992).
4.4. Copy of Warrant No. 3CI-01 issued to James T. Rash providing for
the purchase on or before December 31, 1996 of 50,000 warrants of
the common stock of 3CI at a purchase price of $3.00 per share,
subject to adjustment as therein provided (incorporated by
reference to Exhibit 4.4 of 3CI's Annual Report on Form 10-K for
the fiscal year ended September 30, 1993).
</TABLE>
44
<PAGE> 45
<TABLE>
<S> <C>
4.5. Copy of Warrant No. 3CI-02 issued to Leonard A. Bedell providing
for the purchase on or before December 31, 1996 of 50,000 warrants
of the common stock of 3CI at a purchase price of $3.00 per share,
subject to adjustment as therein provided. (incorporated by
reference to Exhibit 4.5 of 3CI's Annual Report on Form 10-K for
the fiscal year ended September 30, 1993).
4.6. Put Option Agreement dated October 10, 1994, among 3CI Complete
Compliance Corporation, River Bay Corporation and Marlan Baucum
(incorporated by reference to Exhibit 1.3 of 3CI's report on Form
8-K filed October 27, 1994).
4.7. Stock Pledge Agreement dated October 10, 1994, between 3CI
Complete Compliance Corporation and River Bay Corporation
(incorporated by reference to Exhibit 1.4 of 3CI's report on Form
8-K filed October 27, 1994).
4.8. Stock Escrow and Pledge Agreement dated July 1994, among 3CI,
Med-Waste Disposal Service, Inc., Jim Shepherd, Mike Shepherd and
Richard McElhannon (incorporated by reference to Exhibit 4.11 of
3CI's Annual Report on Form 10-K for the fiscal year ended
September 30, 1992).
4.9. Copy of Revolving Promissory Note dated June 1, 1995, in the
principal amount of $6,000,000 between 3CI and WSI, its majority
shareholder (incorporated by reference to Exhibit 4.1 of 3CI's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1995).
4.10. Copy of Revolving Promissory Note dated September 1, 1995 in the
principal amount of $6,000,000 between 3CI and WSI, its majority
shareholder (incorporated by reference to Exhibit 4.2 of 3CI's
quarterly Report on Form 10-Q for the quarterly period ended June
30, 1995).
4.11. Copy of Revolving Promissory Note dated September 30, 1995 in the
principal amount of $8,000,000 between 3CI and WSI, its majority
shareholder (incorporated by reference to 3CI's Annual Report on
Form 10-K for the fiscal year ended September 30, 1996).
4.12. Copy of Revolving Promissory Note dated December 20, 1996 in the
principal amount of $2,700,000 between 3CI and WSI, its majority
shareholder (incorporated by reference to 3CI's Annual Report on
Form 10-K for the fiscal year ended September 30, 1996).
4.13. Copy of extension of Revolving Promissory Note dated December 30,
1996 in the principal amount of $8,000,000 between 3CI and WSI,
its majority shareholder (incorporated by reference to 3CI's
Annual Report on Form 10-K for the fiscal year ended September
30, 1996).
10.1. Copy of Contract dated August 22, 1989 between 3CI and the City of
Carthage, Texas, related to the incineration of medical waste
(incorporated by reference to Exhibit 10 of 3CI's registration
statement on Form S-1 (No. 33-45632) effective April 14, 1992).
10.2. Copy of Addendum dated March 30, 1992 to Contract between 3CI and
the City of Carthage, Texas (incorporated by reference to Exhibit
10 (p) of 3CI's registration statement on Form S-1 (No. 33-45632)
effective April 14, 1992).
10.3. Copy of First Amendment dated July, 1993 to Contract between 3CI
and City of Carthage, Texas (incorporated by reference to Exhibit
10.3 of 3CI's Annual Report on Form 10-K for the fiscal year ended
September 30, 1993).
10.4. Copy of Contract dated August, 1989, between 3CI and the City of
Center, Texas, related to the incineration of medical waste
(incorporated by reference to Exhibit 10 (b) of 3CI's registration
statement on Form S-1 (No. 33-45632) effective April 14, 1992).
10.5. Copy of form of Amendment No. 1 dated October 12, 1992 to the
contract dated August, 1989, between 3CI and the City of Center,
Texas, related to the incineration of medical waste (incorporated
by reference to Exhibit 10.5. of 3CI's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993).
</TABLE>
45
<PAGE> 46
<TABLE>
<S> <C>
10.6. Copy of form of Amendment No. 2 dated December 29, 1992 to the
contract dated August, 1989, between 3CI and the City of Center,
Texas, related to the incineration of medical waste (incorporated
by reference to Exhibit 10.6. of 3CI's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993).
10.7. Copy of form of Amendment No. 3 dated December, 1993 to the
contract dated August, 1989, between 3CI and the City of Center,
Texas, related to the incineration of medical waste (incorporated
by reference to Exhibit 10.7. of 3CI's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993).
10.8. Copy of Termination Agreement, dated as of May 20, 1993, between
3CI, Micro-Waste Corporation and the shareholders of Micro-Waste
Corporation (incorporated by reference to Exhibit 10.17. of 3CI's
Annual Report on Form 10-K for the fiscal year ended September 30,
1993).
10.9. Copy of 1992 Stock Option Plan of 3CI (incorporated by reference
to Exhibit 10(m) of 3CI's registration statement on Form S-1 (No.
33-45632) effective April 14, 1992).
10.10. Promissory Note dated October 10, 1994, among 3CI Complete
Compliance Corporation, 3CI Acquisition Corp./A/MED and River Bay
Corporation (incorporated by reference to Exhibit 1.5 of 3CI's
report on Form 8-k filed October 27, 1994).
10.11. Promissory Note dated October 10, 1994, between 3CI Complete
Compliance Corporation and River Bay (incorporated by reference to
Exhibit 1.6 of 3CI's report on Form 8-K filed October 27, 1994).
10.12. Security Agreement dated October 10, 1994, among 3CI Complete
Compliance Corporation, 3CI Acquisition Corp./A/MED and River Bay
(incorporated by reference to Exhibit 1.7 of 3CI's report on Form
8-K filed October 27, 1994).
10.13. Security Agreement dated October 10, 1994, between 3CI Complete
Compliance Corporation and River Bay Corporation (incorporated by
reference to Exhibit 1.8 of 3CI's report on Form 8-K filed October
27, 1994).
10.14. Mortgage, Security Agreement, Assignment of Leases and Financing
Statement dated October 10, 1994, among 3CI Complete Compliance
Corporation, 3CI Acquisition Corp., A/A/MED and River Bay
Corporation (incorporated by reference to Exhibit 1.9 of 3CI's
report on Form 8-K filed October 27, 1994).
10.15. Debt Subordination Agreement dated October 10, 1994, among 3CI
Complete Compliance Corporation, 3CI Acquisition Corp./A/MED,
River Bay Corporation, Marlan Baucum, Zeb Baucum, III, Diedra
Baucum, The Smith County Bank and the Bank of Raleigh
(incorporated by reference to Exhibit 1.10 of 3CI's report on Form
8-K filed October 27, 1994).
10.16. Non-Competition Agreement dated October 10, 1994, between 3CI
Complete Compliance Corporation and Marlan Baucum (incorporated by
reference to Exhibit 1.12 of 3CI's report on Form 8-K filed
October 27, 1994).
10.17. Employment Agreement dated October 10, 1994, between 3CI Complete
Compliance Corporation and Zeb Baucum (incorporated by reference
to Exhibit 1.13 of 3CI's report on Form 8-K filed October 27,
1994).
10.18. Consultant Agreement dated October 10, 1994, between 3CI Complete
Compliance Corporation and Marlan Baucum (incorporated by
reference to Exhibit 1.14 of 3CI's report on Form 8-K filed
October 27, 1994).
10.19. Employment Agreement dated May 20, 1994, between 3CI and Patrick
Grafton (incorporated by reference to Exhibit 10.19 of 3CI's
Annual Report on Form 10-K for the fiscal year ended September 30,
1992).
</TABLE>
46
<PAGE> 47
<TABLE>
<S> <C>
10.20. Employment Agreement dated May 20, 1994, between 3CI and Charles
Crochet (incorporated by reference to Exhibit 10.20 of 3CI's
Annual Report on Form 10-K for the fiscal year ended September 30,
1992).
10.21 Employment Agreement dated August 31, 1995, between 3CI and
Charles D. Crochet (incorporated by reference to 3CI's Annual
Report on Form 10-K for the fiscal year ended September 30, 1995).
10.22. Modification of Purchase Transaction dated January 25, 1995, among
3CI, 3CI Acquisition Corp./A/MED, River Bay Corporation and Marlan
Baucum (incorporated by reference to Exhibit 10.21 of 3CI's Annual
Report on Form 10-K for the fiscal year ended September 30, 1995).
10.23 Settlement Agreement dated January 1996 between James Shepherd,
Michael Shepherd and Richard T. McElhannon as Releassors, and the
Company, Georg Rethmann, Dr. Herrmann Niehues, Jurgen Thomas,
Charles Crochet and Waste Systems, Inc., as Releasees. Letter Re:
Change in Certifying Accountant (incorporated by reference to
Exhibit 16.2 of 3CI's report on Form 8-K/A filed December 28,
1994).
27* Financial Data Schedule
</TABLE>
* Previously filed
47
<PAGE> 48
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF 3CI COMPLETE COMPLIANCE CORPORATION
Report of Independent Public Accountants Heard, McElroy & Vestal, LLP .............................. 49
Report of Independent Public Accountants Arthur Andersen LLP ....................................... 50
Audited Consolidated Balance Sheets -- September 30, 1997 and 1996 ................................. 52
Audited Consolidated Statements of Operations for the years ended September 30, 1997, 1996
and 1995 ........................................................................................... 53
Audited Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
September 30, 1997, 1996 and 1995 ................................................................. 54
Audited Consolidated Statements of Cash Flows for the years ended September 30, 1997, 1996
and 1995 ........................................................................................... 55
Notes to Audited Consolidated Financial Statements ................................................. 57
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts .................................................... 72
</TABLE>
All other Schedules are omitted because they are not required, are not
applicable or the required information is presented elsewhere herein.
48
<PAGE> 49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO 3CI COMPLETE COMPLIANCE CORPORATION:
We have audited the accompanying consolidated balance sheets of 3CI
Complete Compliance Corporation as of September 30, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for the years ended September 30, 1997 and 1996. These financial
statements and schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 1997 and 1996 and the
results of its consolidated operations and cash flows for the years ended
September 30, 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
Notes 1 and 13 to the consolidated financial statements, the Company (i) has
suffered recurring losses from operations, (ii) has a negative working capital,
(iii) has suffered recurring negative cash flow from operating activities and
(iv) is involved in legal proceedings, all of which collectively raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Notes 1 and 13. 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 13, 1998, except
for Note 14, as to which
the date is March 20, 1998
49
<PAGE> 50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO 3CI COMPLETE COMPLIANCE CORPORATION:
We have audited the accompanying consolidated statement of operations,
shareholders' equity and cash flows of 3CI Complete Compliance Corporation for
the year ended September 30, 1995. 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The Company has consistently incurred losses for the past several
fiscal years and losses have continued into fiscal 1996. The Company has
historically relied on WSI funding, and such support was again necessary in
fiscal 1995 and will continue to be necessary in the future. Management and the
Company's board of directors implemented a business plan and long term strategy,
the success of which is dependent upon the Company's ability to substantially
reduce operating expenses and increase the average revenue per pound to levels
sufficient to generate income and cash flow necessary to satisfy its obligations
as they become due and realize the recorded value of its assets. In the absence
of the Company being able to secure third party financing, WSI has provided the
Company with a line of credit of $8 million (Note 5), with a maturity date of
December 31, 1996, of which $4.1 million has been drawn down as of September 30,
1995. The note agreement contains various covenants, which among other things,
require that the Company's net after tax loss before stock accretion for the 3
months ended December 31, 1995 shall not exceed $600,000, net after-tax income
for the 3 months ended March 31, 1996, June 30, 1996 and September 30, 1996
shall exceed $100,000, $200,000 and $300,000 respectively (excluding any
expenses connected with litigation commenced prior to September 30, 1995).
Management believes this note will be adequate to provide the necessary
financial support to meet working capital and other requirements through
December 1996. The ability of the Company to achieve its long-term business
strategy is dependent upon the Company's ability to meet its business plan and
obtain continued financing from WSI or third party lenders. In the event the
Company does not meet its business plan or WSI does not continue to support the
Company prior to and beyond December 1996 or the Company is unable to obtain
alternative financing, there can be no assurance that the Company will be able
to meet its obligations as they become due or realize the recorded value of its
assets and would likely be forced to seek bankruptcy protection.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of its
operations and its cash flows for the year ended September 30, 1995 in
conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index of financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
As further discussed in Note 13, a group of minority shareholders filed
suit against the Company alleging minority shareholder suppression, breach of
fiduciary duty and breach of contract, among other allegations, and has demanded
unspecified actual damages and punitive damages of $10 million. The Company's
insurer has denied coverage in the lawsuit. The Company has denied all material
allegations of the lawsuit and believes that the resolution of this matter will
not have a material adverse effect on the Company's financial condition and
results of operations. However,
50
<PAGE> 51
the outcome of this matter cannot be predicted, and an adverse decision in the
lawsuit would likely have a material adverse effect on the Company's financial
condition and results of operations. Accordingly, no provisions for any
liability that may result upon adjudication have been made in the accompanying
financial statements.
ARTHUR ANDERSEN LLP
Houston, Texas
January 10, 1996
51
<PAGE> 52
3CI COMPLETE COMPLIANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
ASSETS 1997 1996
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ -- $ --
Restricted cash -- 130,000
Accounts receivable, net allowances of $875,144 and $990,994 at September 30,
1997 and 1996, respectively 3,559,091 3,753,421
Inventory 71,886 59,045
Other current assets 440,373 232,989
------------ ------------
Total current assets 4,071,350 4,175,455
------------ ------------
Property, plant and equipment, at cost 10,927,159 11,396,144
Accumulated depreciation (2,477,411) (2,933,525)
------------ ------------
Net property, plant and equipment 8,449,748 8,462,619
------------ ------------
Excess of cost over net assets acquired, net of accumulated amortization of
$74,988 and $49,988 at September 30, 1997 and 1996, respectively 362,243 387,243
Other Intangible assets, net of accumulated amortization of $149,104 and
$74,552 at September 30, 1997 and 1996, respectively 274,264 349,502
------------ ------------
Total assets $ 13,157,605 $ 13,374,819
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Bank Overdrafts $ 156,880 $ 34,382
Notes payable 217,525 211,928
Current portion of long-term debt, unaffiliated lenders 1,373,617 1,314,290
Accounts payable 1,034,924 1,866,223
Accounts payable, affiliated companies 391,156 319,156
Accrued liabilities 2,188,697 2,361,006
Note payable majority shareholder 4,844,217 8,842,969
------------ ------------
Total current liabilities 10,207,016 14,949,954
------------ ------------
Long-term debt unaffiliated lenders, net of current portion 986,467 742,400
------------ ------------
Total liabilities 11,193,483 15,692,354
------------ ------------
Accrued stock put option (565,500 common stock at $3.00 per share) -- 1,696,500
Shareholders' Equity (deficit):
Preferred stock, no par value, authorized 1,000,000 shares;
Issued and outstanding 1,000,000 shares and none at September 30, 1997
and 1996, respectively 7,000,000 --
Common stock, $0.01 par value, authorized 15,000,000 shares; Issued and
outstanding 9,154,811 and 9,900,311 shares at September 30, 1997 and
1996, respectively 91,549 99,004
Additional Paid-In capital 20,182,543 20,108,743
Accumulated deficit (25,309,970) (24,221,782)
------------ ------------
Total Shareholders' equity (deficit) 1,964,122 (4,014,035)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 13,157,605 $ 13,374,819
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
52
<PAGE> 53
3CI COMPLETE COMPLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Revenues $ 18,789,749 $ 17,748,300 $ 16,522,025
Expenses:
Cost of Services 14,285,834 13,815,480 11,756,968
Depreciation and Amortization 1,352,015 2,224,161 1,976,212
Write off of intangibles (Note 12) -- 11,385,328 --
Write off of fixed assets (Note 3) -- 1,183,446 --
Selling, general and administrative 3,080,398 4,343,246 6,996,575
------------ ------------ ------------
Net income (loss) from Operations $ 71,502 $(15,203,361) $ (4,207,730)
Other Income (expense):
Interest and other expense (1,159,690) (1,053,424) (655,080)
------------ ------------ ------------
Loss before income taxes and accretion of stock put (1,088,188) (16,256,785) (4,862,810)
------------ ------------ ------------
Income taxes -- -- --
Accretion of stock put -- (26,052) (217,075)
------------ ------------ ------------
Net loss $ (1,088,188) $(16,282,837) $ (5,079,885)
============ ============ ============
Weighted average shares outstanding 9,064,071 8,872,348 8,530,611
============ ============ ============
Net loss per common share $ (0.12) $ (1.84) $ (0.60)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
53
<PAGE> 54
3CI COMPLETE COMPLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL SHAREHOLDERS'
SHARES PREFERRED SHARES COMMON PAID-IN ACCUMULATED EQUITY
ISSUED STOCK ISSUED STOCK CAPITAL DEFICIT (DEFICIT)
---------- ---------- ------------- ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 - - 8,222,674 $ 82,227 $ 18,669,402 $ (2,859,060) $ 15,892,569
Conversion of WSI debt and - - 416,667 4,167 995,833 - 1,000,000
accrued interest to equity
Purchase of River Bay - - 865,500 8,655 - - 8,655
Net loss - - (5,079,885) (5,079,885)
---------- ---------- ------------- ------------- -------------- -------------- ------------
Balance at September 30, 1995 - - 9,504,841 95,049 19,665,235 (7,938,945) 11,821,339
Issuance of Med-Waste earnout
shares 145,470 1,455 196,008 197,463
Issuance of Med-Waste
settlement shares 250,000 2,500 247,500 250,000
Net loss (16,282,837) (16,282,837)
---------- ---------- ------------- ------------- -------------- -------------- ------------
Balance at September 30, 1996 - - 9,900,311 99,004 20,108,743 (24,221,782) (4,014,035)
Conversion of WSI debt and
accrued interest to equity 1,000,000 7,000,000 7,000,000
Issuance of Grafton lawsuit
settlement shares 120,000 1,200 73,800 75,000
Remove put option shares
from equity (865,500) (8,655) (8,655)
Net loss (1,088,188) (1,088,188)
---------- ---------- ------------- ------------- -------------- -------------- ------------
Balance at September 30, 1997 1,000,000 $7,000,000 9,154,811 $ 91,549 $ 20,182,543 $ (25,309,970) $ 1,964,122
</TABLE>
The accompanying notes are an integral part of these financial statements.
54
<PAGE> 55
3CI COMPLETE COMPLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1995
-------------- --------------- ---------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net loss $(1,088,188) $(16,282,837) $(5,079,885)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
(Gain) loss on disposal of fixed and intangible assets (24,078) -- --
Depreciation and amortization 1,352,015 2,224,161 1,976,212
Accretion of stock put -- 26,052 217,075
Discount on bank note -- -- (50,000)
Write off of impaired intangible assets -- 11,385,328 --
Write off of fixed assets -- 1,183,446 --
Change in assets and liabilities, net of effect of purchase of River Bay
(Increase) decrease in restricted cash 130,000 (30,000) 5,364
(Increase) decrease in accounts receivable net 194,330 (782,916) 785,155
(Increase) decrease in inventory (12,841) 31,339 (8,521)
(Increase) decrease in prepaid expenses (207,384) (5,005) 9,000
(Increase) decrease in other current assets 685 (45,098) 5,376
Increase (decrease) in accounts payable (831,299) 573,709 (1,330,009)
Increase (decrease) in accounts payable, affiliated companies 72,000 12,110 304,230
Increase (decrease) in accrued liabilities (172,309) (197,628) 722,349
----------- ------------ -----------
Total adjustments to net loss 501,119 14,375,498 2,636,231
----------- ------------ -----------
Net cash provided by (used in) operating activities (587,069) (1,907,339) (2,443,654)
----------- ------------ -----------
Cash flow from investing activities:
Proceeds from sale of property, plant and equipment 248,873 61,986 212,995
Purchase of property, plant and equipment (1,416,758) (1,679,675) (1,246,893)
Increase in intangible assets -- -- (90,000)
----------- ------------ -----------
Net cash used in investing activities (1,167,885) (1,617,689) (1,123,898)
----------- ------------ -----------
Cash flow from financing activities:
Increase in bank overdrafts 122,498 34,382 --
Proceeds from issuance of notes payable 1,018,404 521,542 584,549
Principal reduction of notes payable (1,012,807) (536,115) (863,844)
Reduction of capital lease obligations -- -- (60,089)
Reduction of put option (861,421) -- --
Proceeds from issuance of long-term debt, unaffiliated lenders 931,006 1,221,411 363,320
Reduction of long-term debt, unaffiliated lenders (1,443,975) (2,637,717) (1,658,470)
Proceeds from issuance of note payable to majority shareholders 2,303,000 4,000,000 5,100,000
Unpaid interest added to note payable to majority shareholders 698,249 842,969
----------- ------------ -----------
1,754,954 3,446,472 3,465,466
----------- ------------ -----------
Net decrease in cash and cash equivalents -- (78,556) (102,086)
----------- ------------ -----------
Cash and cash equivalents, beginning of period -- 78,556 180,642
----------- ------------ -----------
Cash and cash equivalents, end of period $ -- $ -- $ 78,556
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
55
<PAGE> 56
3CI COMPLETE COMPLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1995
-------------- ---------------- ----------------
<S> <C> <C> <C>
Supplemental disclosures:
Cash paid for interest $ 203,980 $ 241,294 $ 304,870
=========== =========== ===========
Cash paid for taxes $ -- $ -- $ --
=========== =========== ===========
Investing and financing activities not affecting cash:
Purchase of net assets (1) $ -- $ 1,679,675 $ 3,691,345
----------- ----------- -----------
Increase in long-term debt and other liabilities (1) -- (1,679,675) (3,691,345)
----------- ----------- -----------
Cash affect $ -- $ -- $ --
=========== =========== ===========
Increase in shareholders' equity $ 7,000,000 $ 443,508 $ 1,000,000
----------- ----------- -----------
Conversion of debt and accrued interest (7,000,000) (443,508) (1,000,000)
----------- ----------- -----------
Cash effect $ -- $ -- $ --
=========== =========== ===========
Increase in shareholders' equity $ 75,000 $ 3,955 $ 8,655
----------- ----------- -----------
Fair value of common stock issued for acquisition (1) (75,000) (3,955) (8,655)
----------- ----------- -----------
Cash effect $ -- $ -- $ --
=========== =========== ===========
</TABLE>
(1) In 1995, the Company purchased substantially all of the net assets of
River Bay Corporation by issuing 865,500 shares of common stock, and a
note payable for $1,000,000. Seller has the option to require the company
to repurchase the shares at $3.00 per share, a liability, and accrued
stock put option, has been reflected in the company's balance for the
amount the company would be required to pay.
The accompanying notes are an integral part of these financial statements.
56
<PAGE> 57
3CI COMPLETE COMPLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
3CI Complete Compliance Corporation (the "Company" or "3CI"), a Delaware
corporation, is engaged in the collection, transportation and incineration of
biomedical waste in the southeastern and southwestern United States. In February
1994, subsidiaries of 3CI acquired all the assets and business operations of
American Medical Transports Corporation ("AMTC"), an Oklahoma corporation, and
A/MED, Inc. ("A/MED"), a Delaware corporation. Both AMTC and A/MED were engaged
in businesses similar to that of 3CI. Waste Systems, Inc. ("WSI"), a Delaware
corporation, was the majority shareholder of both AMTC and A/MED (the
"Companies"). Additionally, in February 1994, WSI purchased 1,255,182 shares of
3CI common stock ("Common Stock") from American Medical Technologies ("AMOT").
As a result of the transactions described above, WSI became the majority
shareholder of 3CI immediately following the acquisition of AMTC and A/MED. For
accounting purposes, AMTC and A/MED were considered the acquirer in a reverse
acquisition. The combined financial statements of AMTC and A/MED are the
historical financial statements of the Company for periods prior to the date of
the business acquisition. Historical combined shareholders' equity of AMTC and
A/MED has been retroactively restated for the equivalent number of 3CI shares
received for the assets and business operations of AMTC and A/MED, and the
combined accumulated deficit of AMTC and A/MED has been carried forward.
In October 1992, Medical Environmental Disposal, Inc., a wholly-owned
subsidiary of WSI was merged with and into AMTC, with AMTC being the surviving
corporation.
PREDECESSOR TO 3CI
Prior to the merger with AMTC and A/MED, 3CI was a majority owned
subsidiary of AMOT. In September 1991, AMOT purchased the business and assets
and assumed certain liabilities of 3CI and 3CI Transportation Systems
Corporation (the "Predecessor Companies"), both existing Texas corporations that
had been in the medical waste disposal business since 1989 and 1990,
respectively. 3CI began operations when AMOT contributed substantially all the
net assets and business operations of the Predecessor Companies to 3CI. In April
1992, the Company completed an initial public offering of Common Stock whereby
800,000 shares were sold by the Company and 580,000 shares were sold by AMOT.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of 3CI and its
divisions and/or subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
For years ended prior to September 30, 1996 the consolidated financial
statements included the Company and its wholly-owned subsidiaries, 3CI
Acquisition Corp./AMTC and 3CI Acquisition Corp./A/MED. During the year ended
September 30, 1996, the subsidiaries were merged into 3CI Complete Compliance
Corporation. Accordingly, for the year ended September 30, 1997 and 1996, the
financial statements include the accounts of 3CI and its operating divisions and
do not include any subsidiary entities.
SUBSTANTIAL DOUBT REGARDING ABILITY TO CONTINUE AS A GOING CONCERN
The Company has consistently suffered losses for the past several fiscal
years, and losses have continued in fiscal 1998. As of September 30, 1997, the
Company has a working capital deficit of $6,135,666. The Company has
historically relied on WSI, the Company's majority stockholder, for funding, and
such support was again necessary in fiscal 1997. 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 under the Promissory Note dated
September 30, 1995, which provides for deferred interest with cash advances not
to exceed $7.4 million, of which $4.8 million including deferred
57
<PAGE> 58
interest and $4.9 million including deferred interest has been drawn as of
September 30, 1997, and December 31, 1997. During the fiscal year ended
September 30, 1996, WSI made additional cash advances that were in excess of the
principal in the original Promissory Note, and the Company entered into a second
Revolving Credit Facility of $2.7 million including deferred interest, dated
December 20, 1996 with a maturity date of February 28, 1997. It is the intent of
WSI and 3CI that this Revolving Promissory Note shall evidence all sums owing by
3CI to WSI to the extent that such sums represent advances of funds to 3CI in
excess of the maximum limits fixed under that certain $8,000,000 Revolving
Promissory Note dated September 30, 1995. The Promissory Note dated September
30, 1995 had a due date of December 31, 1996 of which the Company has requested
from and received an extension to discuss with WSI the possibility of
restructuring the terms of such Promissory Note. 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 these requirements, the
NASDAQ Stock Market, Inc. allowed the Company to remain listed with an exception
added to its trading symbol. The NASDAQ Stock Market, Inc. gave the Company
until June 25, 1997, to meet the listing requirements. 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 requirements 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 for continued listing on the exchange, and the exception to its
trading symbol had been removed. In connection with the conversion of debt to
preferred stock, WSI canceled the Revolving Credit Facility of $2.7 million
dated December 20, 1996, with a maturity date of February 28, 1997, which had
been previously extended to June 30, 1997. The conversion has also resulted in
the reduction of the outstanding indebtedness of the Promissory Note dated
September 30, 1995. During the fiscal years ended September 30, 1997, 1996 and
1995 WSI has made cash advances to the Company of $2,303,000, $4,000,000 and
$4,100,000. Since the year ended September 30, 1997, the Company has not
requested nor received any cash advances from WSI. WSI is under no obligation to
provide additional advances and could demand payment on the debt at any time.
During the fiscal year of 1997, the Company had began to have discussions with a
third party lender to obtain an alternative source of financing apart from WSI.
In the event the Company and WSI do not come to a resolution on the
restructuring of the September 30, 1995 Promissory Note and the Company is
unable to obtain alternative financing, there can be no assurance that the
Company will be able to meet its obligations as they become due or realize the
recorded value of its assets and would likely be forced to seek bankruptcy
protection.
The nature and level of competition in this industry have remained at a
high level for several years. This condition has produced aggressive price
competition and results in pressure on profit margins. The Company competes
against companies which may have access to greater capital resources. In order
to compete in this industry on a long-term basis and fully realize its business
strategy, the Company will require additional and continued financing and other
assistance from its current shareholders and if available, from outside sources.
There is no assurance that adequate funds for these purposes will be available
when needed or, if available, on terms acceptable to the Company.
INVENTORY
Inventory, consisting of containers and supplies, are stated at the lower
of cost (first-in, first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation of
property, plant and equipment is calculated on the straight-line method over the
estimated useful lives of the assets. Expenditures for major renewals and
betterments are capitalized, and 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 ("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 No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed. The Company adopted
Statement No. 121 in 1996 and, has completed an analysis to determine the
impact. Prior to the adoption of Statement No. 121, in the course of preparing
its financial statements, the Company routinely reviewed assets for impairment
by reviewing expected future undiscounted net cash flows.
58
<PAGE> 59
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. At the
present time the ultimate impact of the adoption of this standard is not known
or reasonably estimable.
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 its components in a full set 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:
<TABLE>
<S> <C>
Excess of cost over net assets acquired 17.5 - 40 years
Permits 5 - 7 years
Customer lists 5 - 10 years
</TABLE>
Amortization expense charged to operations for the years ended September
30, 1997, September 30, 1996 and for the year ended September 30, 1995 was
$99,552, $839,089 and $756,893, 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 from the treatment of medical waste in the
period in which the wastes are treated.
NET LOSS PER SHARE
Net loss per common share was computed by dividing the net loss by the
weighted average number of common shares outstanding. For the years ended
September 30, 1997, 1996 and 1995, the weighted average common shares
outstanding were 9,064,071, 8,872,348, and 8,530,611, respectively. The 865,500
shares issued in connection with the acquisition of River Bay Corporation
("River Bay") have been excluded from weighted average shares outstanding. The
accretion of the Stock Put Option (Note 2) is reflected as a reduction of net
income in determining net income to common shareholders.
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<PAGE> 60
SHAREHOLDERS' EQUITY (DEFICIT)
During the fiscal year 1995, the Company increased the number of common
and preferred shares authorized to 15 million and 1 million, respectively.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to be
cash equivalents.
RESTRICTED CASH
At September 30, 1997, and September 30, 1996, the Company had cash of
none and $130,000, respectively, which was restricted pursuant to an irrevocable
standby letter of credit related to workers compensation insurance.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes
in accordance with the provisions of Statement of Financial Accounting Standards
No. 109 ("SFAS No. 109"). SFAS No. 109 requires that deferred income taxes
reflect the tax consequences of differences between the tax bases of assets and
liabilities and their financial reporting amounts.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior financial statements
to conform to the classifications used in the current financial statements.
MANAGEMENT ESTIMATES
Management has used estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could vary from the estimates that were used.
2. BUSINESS ACQUISITIONS:
RIVER BAY CORPORATION
In October 1994, the Company acquired substantially all of the assets and
assumed certain liabilities of River Bay corporation, a Mississippi Corporation
("River Bay"), in consideration for 865,500 shares of Common Stock and
additional shares of Common Stock contingent upon the profits of the operations
attributable to the assets purchased from River Bay through December 31, 1996.
In addition, the Company issued to River Bay a promissory note in the original
principal amount of $1,000,000 bearing an interest rate of 8.75%, which as
amended, provides for monthly principal payments ranging from $50,000 to
$100,000 through February 1996.
Pursuant to a Put Option Agreement with River Bay, as amended ("Put Option
Agreement"), the Company, in October 1995, repurchased 300,000 of the shares of
Common Stock issued in connection with acquisition in consideration for its
promissory note in the original principal amount of $900,000 ($3.00 per share)
and providing for monthly principal payments ranging from $25,000 to $75,000,
plus interest, through January 1997. Pursuant to the Put Option Agreement, the
Company is obligated to repurchase the remaining 565,500 shares of 3CI Common
Stock issued in connection with the acquisition at the option of River Bay, from
February 1, 1997 until April 1, 1997 for $3.00 per share. The liability
associated with the Put Option Agreement covering the remaining shares is
included in Accrued Stock Put Option on the accompanying balance sheet as of
September 30, 1996. River Bay exercised its Put Option on or about February 14,
1997, for the Company to repurchase the 565,500 shares of Common Stock. On or
about March 10, 1997, the Company commenced arbitration proceedings before the
American Arbitration Association in Houston, Texas against River Bay and Marlan
Baucum seeking to set aside the Purchase Agreement (the "Purchase Agreement")
entered into between the Company and those parties on or about October 10, 1994,
together with ancillary agreements pertaining thereto. The Company was seeking
damages and/or to set aside the Purchase Agreement and collateral agreements,
including the Put Option Agreement which, if otherwise enforceable, would have
required the payment by the Company of approximately $1,700,000 for 565,500
shares of 3CI Common Stock. In response, on April 9, 1997, Bank of Raleigh and
Smith County Bank, assignees of certain rights under the Purchase Agreement,
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<PAGE> 61
commenced a complaint for declaratory and monetary relief in the U.S. District
Court for the Southern District of Mississippi, Jackson Division in Civil Action
No. 3:97cv249BN. The Smith County Bank and Bank of Raleigh prayed declaratory
judgment declaring the arbitration provision in the Purchase Agreement to be not
binding upon said banks, the claims of 3CI against River Bay to be subordinate
to the claims of the banks, unspecified compensatory damages, and punitive
damages of at least $1,000,000. In April 1997, the Bank of Raleigh and Smith
County Bank gave notice to certain customers in the River Bay division that the
Company was in default of the Put Option Agreement and that its payments should
be directly made to the Bank of Raleigh and Smith County Bank. From these
efforts the Bank of Raleigh and Smith County Bank collected $463,000 of the
Company's accounts receivables that were pledged in the Purchase Agreement. On
or about May 10, 1997, the Company filed a Petition of Arbitration in Suit No.
422,107 of the First Judicial District Court, Caddo Parish, Louisiana, naming
River Bay and Marlan Baucum as defendants therein. This lawsuit sought an
injunction and stay of all judicial and extra-judicial proceedings pursuant to
the Put Option Agreement until such time as the arbitration is completed. This
action was removed by the defendants to the U.S. District Court for the Western
District of Louisiana, Shreveport Division in Civil Action No. 97-0578. On or
about October 14, 1997, the parties settled the lawsuits. In the settlement, the
Company agreed to repurchase the remaining 565,500 shares of Common Stock
related to the Put Option Agreement, at a price of $816,364, with payments
ranging from $100,000 to $63,500. This liability is recorded in the financial
statements at September 30, 1997.
The obligations of the Company under the Put Option Agreement and its
promissory notes payable to WSI are secured by a security interest in certain of
the assets purchased from River Bay and future accounts receivable attributable
to the assets acquired from River Bay.
River Bay has been engaged in the business of medical waste management
services in Mississippi, Tennessee, Florida, Georgia and Alabama.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 USEFUL LIFE
-------------- --------------- ----------------
<S> <C> <C>
Land $ 590,600 $ 590,600
Buildings and improvements 1,622,026 1,537,836 3-40 years
Transportation equipment 3,286,537 3,917,390 5-10 years
Machinery and equipment 5,098,484 4,859,445 5-20 years
Furniture and fixtures 329,512 490,873 3-10 years
------------- ------------
$ 10,927,159 $ 11,396,144
------------- ------------
</TABLE>
Depreciation expense charged to operations was $1,252,462, $1,385,072,
and $1,219,319 for years ending September 30, 1997,1996 and 1995, respectively.
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 $12,700
During 1996, it was necessary to replace the refractory in one of the
Company's incinerator due to the normal wear and tear. There was a net book
value of $12,700 of the previously capitalized refractory that is being
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. Also the Company made an operational decision to close
its Austin, Texas, transportation
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<PAGE> 62
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 (the 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 $500,982
In February 1994, at the time of the reverse merger of the Company, 3CI
had a lease agreement which was accounted for as a Capitalized Lease and was
being depreciated over the term of the lease agreement. During 1996, the Company
made a decision to terminate the lease agreement early due to the high cost of
maintenance of the leased transportation equipment. The Company had also,
capitalized other costs associated with these leased assets. As the
transportation equipment was returned it was necessary to write the remaining
capitalized net book value off of $500,982.
Reusable Containers $12,000
In 1996, the Company made an operational decision to move a portion of
their customer base from disposable cardboard boxes to reusable plastic
containers. A significant investment was then made in reusable plastic
containers and based upon its prior operating experience with the reusable
containers, the Company estimated that a three (3) year life was more reflective
of the reusable containers than a five (5) year life. In previous periods the
Company had estimated that the life of reusable containers was five (5) years.
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, it was necessary to change the bags inside the
scrubber at an incinerator as these bags became excessively worn and the
integrity of the bags were beginning to deteriorate. These bags had a remaining
net book value of $22,200 that were written-off as they were no longer able to
remain in service. Also, there is a write-off of a previously capitalized major
improvement that was done to the upper chamber of the incinerator. During 1996,
there was a major improvement completed 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 cost associated
with one of the Company's bar coding systems and an accounting system that would
streamline the paperwork from the transportation locations, to the incinerators,
to ultimately the accounting department (production/billing/accounting system).
This 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 appropriately wrote-off the unamortized
costs. The write-off of these capitalized costs totaled $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 (River Bay
asset acquisition), as this software was abandoned when the River Bay division
was integrated in the fourth quarter of 1996 into the 3CI accounting system.
4. NOTES PAYABLE:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
-------------------- -------------------
<S> <C> <C>
Notes payable to an insurance company, due in
monthly installments including interest of 7% to
9% through March 1998, unsecured 217,525 211,928
======= =======
</TABLE>
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5. LONG-TERM DEBT:
Long-term debt - unaffiliated lenders consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
----------------- -----------------
<S> <C> <C>
Note payable to prior owner of Incendere, at an
annual adjustable interest rate generally ranging
between 7.5% to 9.75%, with 34% of interest being
paid quarterly and 66% of interest deferred and
added to principal until May 21, 1995. Thereafter,
principal and interest are due in equal monthly
installments until maturity on May 21, 1998,
convertible into common stock at $3.00 per share,
secured by substantially all of the assets of A/MED $ 240,919 $ 615,166
Notes payable for purchased vehicles and equipment
held as collateral, due in monthly installments,
including interest, at rates ranging from 7% to
16.75%, maturing through 2002 1,302,802 991,008
Note Payable to Stone Container Corp. due in monthly
payments with interest at 10% through 1997 -- 74,539
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 816,364 375,977
------------- -------------
2,360,085 2,056,690
Less-Current portion (1,373,618) (1,314,290)
------------- -------------
$ 986,467 $ 742,400
------------- -------------
</TABLE>
Long-term debt - majority shareholder consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
----------------- -----------------
<S> <C> <C>
Revolving note payable to WSI, bearing interest
at the prime rate, due December 31, 1996 with
interest payable quarterly $ 4,844,217 $ 8,842,969
Less-current portion (4,844,217) (8,842,969)
------------- -------------
$ -- $ --
------------- -------------
</TABLE>
Effective April 1995, WSI purchased an additional 416,667 shares of
Common Stock of 3CI at $2.40 per share in consideration for the conversion of a
$1,000,000 non-interest bearing cash advance made by WSI to the Company in
November 1994.
In February, March, April, May and July 1995, WSI made non-interest
bearing cash advances totaling $4,100,000 to the Company. In June 1995, the
Company executed a $6,000,000 Revolving Promissory Note, to be funded at the
discretion of WSI, which was utilized to repay the advances not converted to
Common Stock. This Revolving Promissory Note was renegotiated in September 1995
increasing the total available to $8,000,000 including interest with the
principal portion not to exceed $7,400,000. The note bears interest at the prime
rate and was payable
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<PAGE> 64
on December 31, 1996. Interest is payable in quarterly installments which are
automatically added to the outstanding balance, if not paid. The note agreement
contains various covenants that among other things require the Company's net
after tax loss before stock accretion for the 3 months ended December 31, 1995
shall not exceed $600,000; the net after-tax income for the 3 months ended March
31, 1996, June 30, 1996 and September 30, 1996 shall be at least $100,000,
$200,000 and $300,000, respectively (excluding any expenses connected with
litigation commenced prior to September 30, 1995). Due to continuing losses the
Company was not in compliance with the loan covenants described above. In each
of the quarters for the fiscal years ending 1997 and 1996 the Company has
requested and received financial waivers and extension of the notes from WSI
related to each of the quarters. Due to the additional cash advances that were
made in excess of the principal in the original Promissory Note, the Company
entered into a second Revolving Credit Facility of $2.7 million including
deferred interest, dated December 20, 1996 with maturity date of February 28,
1997. In June 1997, WSI converted $7,000,000 of their Promissory Notes with 3CI
to preferred stock. The Company issued 1,000,000 shares of Series A Convertible
Preferred Stock, with no par value ("Series A Preferred Stock"), at $7.00 per
share or $7,000,000, to WSI, the Company's majority shareholder. The preferred
shares have cumulative dividends from the second anniversary of the original
issuance date of the Series A Preferred Stock, at the rate of $.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.
Accruals of dividends shall not bear interest.
Payments due on long-term debt, during each of the five years
subsequent to September 30, 1997 are as follows:
<TABLE>
<S> <C>
1998 .......................................................... $6,217,834
1999 .......................................................... 661,864
2000 .......................................................... 313,936
2001 .......................................................... 7,390
2002 .......................................................... 3,277
</TABLE>
The total interest expense was $902,229, $871,910 and $666,157 for the
years ended September 30, 1997, 1996 and 1995, respectively.
6. INCINERATION CONTRACTS:
The Company is a party to exclusive incineration contracts with the
Cities whereby the Company is guaranteed minimum weekly burn capacity and is
required to pay fees to the Cities based on the total pounds incinerated. These
contract rights were obtained in exchange for the Predecessor Companies
purchasing certain equipment for the Cities' incinerators which enabled the
Cities to meet all current federal and state emissions control standards. Due to
problems arising from contractual agreements with the City of Center, the
Company is presently not utilizing the incinerator at the City of Center for the
treatment of medical waste. The Company is no longer using the incinerator in
the City of Center and does not believe that discontinuing that use will have a
material effect on the Company's business.
The City of Carthage requires minimum annual payments under the combined
contracts as follows:
<TABLE>
<CAPTION>
MINIMUM REQUIRED
FOR THE YEAR ENDED SEPTEMBER 30, PAYMENTS
-------------------------------------------------------- -----------------------
<S> <C>
1998 ................................................... 1,000,000
1999 ................................................... 1,000,000
2000 ................................................... 1,000,000
------------
$ 3,000,000
============
</TABLE>
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 above
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,
for incineration fees for the years ended May 31, 1997, 1996, and 1995, of
$1,000,000, $716,000, and $596,250, respectively. In the years ended May 31,
1997, 1996, and 1995 the Company paid incineration fees of $1,401,692, $843,000,
and $750,000, respectively to
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<PAGE> 65
the City of Carthage. The Company also had minimum guaranteed payments to the
City of Center, for incineration fees for the years ended May 31, 1997, 1996,
and 1995, of $762,000, $695,000, and $495,250, respectively. In the years ended
May 31, 1996, and 1995 the Company paid incineration fees of $779,000 and
$551,000 respectively to the City of Center, in accordance with terms of the
contract, thereby meeting the annual minimum fees required.
In August 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
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 is 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. The Company
believes that the effect of not utilizing this treatment facility has not and
will not have a material adverse effect on the Company's financial position,
results of operations or cash flows.
Included in cost of sales for the years ended September 30, 1997, 1996
and 1995, is $1,429,097, $1,542,842 and $1,348,355, respectively, related to
incineration costs at the Cities since the reverse merger.
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, 1997, 1996 and 1995
representing the federal rate and an average of state income tax rates. The
components of deferred income tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1995
------------- ------------ -------------
<S> <C> <C> <C>
Deferred income tax liabilities -
Property and equipment $ 1,461,197 $ 1,115,998 $ 771,017
Other 68,735 67,200 92,513
Total deferred income tax liabilities 1,529,932 1,183,198 863,530
Deferred income tax assets
Net operating loss carryforward 8,768,841 7,910,438 3,712,934
Bad debt reserves 301,603 344,468 452,610
Other 1,402,858 940,358 523,553
------------ ----------- -----------
Total deferred income tax assets 10,473,302 9,195,264 4,689,097
Valuation allowance (8,943,370) (8,012,066) (3,825,567)
------------ ----------- -----------
Net deferred income tax asset (1,529,932) (1,183,198) (863,530)
------------ ----------- -----------
Total deferred income tax assets and
Liabilities $ -- $ -- $ --
</TABLE>
At September 30, 1997, the Company had approximately $22,320,384 of net
operating loss carryforwards for federal tax purposes which will expire
beginning in 2004 and continue through the year 2012. The Company also had state
net operating losses at September 30, 1997. The Company has established a
valuation allowance for the federal and state net operating losses of
$8,943,370, $8,012,066 and $3,825,567 as of September 30, 1997, 1996 and 1995,
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.
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<PAGE> 66
8. STOCK OPTION PLAN:
In conjunction with the business acquisition described in Note 1, a
stock option plan (the "Plan") approved by 3CI's previous shareholders in 1992
totaling 500,000 shares remained in effect. The purpose of the Plan is to
provide additional incentives to officers and employees of the Company who are
primarily responsible for the management and growth of the Company. Each option
granted pursuant to the Plan shall be designated at the time of grant as either
an "incentive stock option" or as a "non-qualified stock option". The exercise
price equals or exceeds the market price as of the grant date. At September 30,
1995, the Company had 230,000 shares outstanding under options for two officers
and one former officer of the Company, of which all were exercisable, at option
prices of $3.00 to $4.00 per share. During 1995, the Company reduced the total
shares available under the Plan to 375,000 shares, resulting in 145,000
available for future issuance as of September 30, 1997 and 1996.
During the years ended September 30, 1997 and 1996, 140,000 of the
230,000 option shares described above were canceled and a net of 47,500 option
shares were issued. As of September 30, 1997, a total of 137,500 option shares
are outstanding and a total of 237,500 option shares are available for issuance
under the Plan. The outstanding option shares vest monthly over a three-year
period. As of the year ended September 30, 1997, the exercise prices of all
options granted under the Plan have always exceeded the market price of the
Company's Common Stock.
9. CONCENTRATION OF CREDIT RISK:
The Company's customers are concentrated in the medical industry and,
therefore, changes in economic, regulatory and other factors which affect the
medical industry may impact the Company's overall credit risk. The Company
monitors the status of its receivables including follow-up directly with
customers on past due balances.
10. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107,Disclosure of Financial Instruments, requires companies to
disclose the fair value of each class of financial instruments for which it is
practical to estimate that value and for which the recorded value significantly
differs from the fair market value. The Company's primary financial instruments
are accounts receivable, notes payable, accounts payable, and accrued
liabilities. The fair value of accounts receivable approximates its carrying
amount. Because of the absence of availability of alternative financing and the
substantial doubt about the Company's ability to continue as a going concern, it
is not practical to estimate the fair values of notes payable, accounts payable
and accrued liabilities.
11. RELATED PARTY TRANSACTIONS:
In April 1995, WSI purchased an additional 416,667 shares of 3CI common
stock in consideration for the conversion by WSI of a $1,000,000 non-interest
bearing cash advance made by WSI to the Company in November 1994 ($2.40 per
share).
In February, March, April, May and July 1995, WSI made non-interest
bearing cash advances totaling $4,100,000 to the Company. In June 1995, the
Company executed a $6,000,000 Revolving Promissory Note, to be funded at the
discretion of WSI, which was utilized to repay the advances not converted to
Common Stock. This Revolving Promissory Note was renegotiated in September 1995
increasing the total available to $8,000,000 including interest with the
principal portion not to exceed $7,400,000.
Since September 30, 1996, WSI has made additional cash advances to the
Company totaling $960,000 including interest. Due to the additional cash
advances that have been made in excess of the principal in the original
Promissory Note, the Company entered into a second Revolving Credit Facility of
$2.7 million including deferred interest, dated December 20, 1996 with a
maturity date of February 28, 1997. The Promissory Note dated September 30, 1995
has a due date of December 31, 1996 of which the Company has requested from and
received a 30 day extension until January 31, 1997 to discuss with WSI the
possibility of restructuring the terms of such Promissory Note.
In June 1997, WSI, converted $7,000,000 of their Promissory Notes with
3CI preferred stock. The Company issued 1,000,000 shares of Series A Preferred
Stock at $7.00 per share or $7,000,000 million to WSI, the Company's majority
shareholder. The preferred shares have cumulative dividends from the second
anniversary of the original issuance date of the Series A Preferred Stock, at
the rate of $.5775 per share per annum, and no more, payable quarterly
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<PAGE> 67
on the 15th day of July, October, January and April of each year, commencing
with a payment on July 15, 1999. Accruals of dividends shall not bear interest.
In February 1995, the Company expensed approximately $310,000 for
certain services provided to the Company and for reimbursement of expenses
incurred on behalf of the Company.
Through 1996 and 1997, 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 the Company for such periods.
The Company had loans from WSI, its majority shareholder, outstanding
during 1997, 1996 and 1995. Related interest expense in the amount of $698,248,
$585,468, and $157,500 was recorded for the years ended September 30, 1997,
September 30, 1996, and September 30, 1995, respectively.
During 1996, 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 years ended
September 30, 1996 and 1997, totaled $22,000 and $62,000, 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 write down is included in the "Write off of Intangibles"
amount for fiscal 1996 on the Consolidated Statements of Operations. During the
fiscal year of 1995, the Company's majority shareholder sent an advisor to the
Company to review ongoing operations of the Company and to make recommendations
as to achieve profitability. From this review the Company developed specific
detail plans for its fiscal year ending September 1996. In September 1995,
management put together a business plan for the fiscal year ending 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 achieved.
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 by the competitors desire to fill the capacity, the competitor began
deep discount pricing to fill the capacity of the new treatment facility. Also,
the Company did not bring its 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 of
long-lived assets had occurred.
13. COMMITMENTS AND CONTINGENCIES:
In May 1995, a group of minority stockholders of the Company, including
Patrick Grafton, former Chief Executive Officer of the Company, acting
individually and purportedly on behalf of all minority stockholders, and on
behalf of the Company, filed suit in James T. Rash, et al v. Waste Systems,
Inc., et al., No. 95-024912 in the District Court of Harris County, Texas, 129th
Judicial District, against the Company, WSI and various directors of the
Company. The plaintiffs have alleged minority stockholder oppression, breach of
fiduciary duty, breach of contract, and "thwarting of reasonable expectations,"
and have demanded an accounting, appointment of a receiver for the sale of the
Company, unspecified actual damages and punitive damages of $10 million, plus
attorney's fees. In addition, Mr. Grafton has alleged unspecified damages as a
result of his removal as an officer and director of the Company and the
Company's failure to renew his employment agreement in March 1995, and has
alleged that such removal was wrongful and
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<PAGE> 68
ineffective. The Company's insurer has denied coverage in the lawsuit. The
Company has denied all material allegations of the lawsuit and believes that the
resolution of this matter, including attorneys' fees incurred in the Company's
defense could have a material adverse effect on the Company's financial
condition. However, the outcome of this cannot be predicted, and an adverse
decision in the lawsuit would likely have a material adverse effect on the
Company's financial condition and results of operations and cash flows. The
Company has reached an agreement in principle with some, but not all, of the
plaintiffs for the settlement of this action. The execution of the appropriate
documentation to evidence this settlement has been completed and both parties
are awaiting court approval which is set for late February 1998. The Company and
Mr. Grafton reached a settlement of Mr. Grafton's individual claims relating to
his removal as an officer and director of the Company. The terms of the
settlement reached between the Company and Mr. Grafton are confidential to both
parties. The Company accrued an amount in its fiscal year ended 1996 and 1995
financial statements which closely approximates the actual settlement.
In June 1995, the former stockholders of Med-Waste Disposal Service,
Inc. ("Med-Waste") filed suit in James H. Shepherd, et al v. 3CI Complete
Compliance Corporation, et al., No. C.V.-95-1441-1 in the Circuit Court of Hot
Springs County, Arkansas, against the Company and various current and former
officers and directors of the Company. Plaintiffs have alleged violations of
federal and state securities laws, breach of contract, common law fraud and
negligence in connection with the acquisition of Med-Waste by the Company, and
have demanded rescission, restitution, unspecified actual damages and punitive
damages of $10 million, plus attorneys' fees. The case was transferred to the
United States District Court of the Western District of Arkansas, Hot Springs
Division and in November 1996 was subsequently transferred to the United States
District Court for the Western District of Louisiana. The parties, other than
Patrick Grafton, former Chief Executive Officer of the Company, have agreed to
settle the suit in consideration of the issuance by the Company to the
plaintiffs of 250,000 shares of Common Stock and the payment by the Company to
the plaintiffs of 20% to 55% of the pre-tax profits, as defined, attributable to
the assets previously acquired from Med-Waste until such time as the shares of
Common Stock held by the plaintiffs become freely tradable and the market price
of the Common Stock averages at least $2.50 per share over a period of 42
consecutive days. In addition, the Company and WSI have agreed to repurchase the
shares of Common Stock held by the plaintiffs for $2.50 per share in certain
events, including the bankruptcy of the Company or in the event WSI ceases to be
the largest beneficial holder of the Common Stock. The obligations of the
Company to the plaintiffs are secured by a security interest in most of the
assets of the Company, and WSI has agreed to subordinate its loans to the
Company, and all related security interests, to the obligations, and the related
security interests, of the Company to the plaintiffs. This matter has been
settled by the parties and was dismissed in its entirety on July 31, 1997, by
order of the court.
The Company accrued $250,000 in expenses, which is reflected in its
September 30, 1995, financial statements, relating to the settlement of the
Med-Waste lawsuit.
In connection with an auto accident in July 1996, two suits have been
filed against the Company. Ryan O'Neil Youmans & Anita Youmans v. American 3CI,
et al, No. CV9604899, was filed in the Circuit Court of Jefferson County,
Alabama, in August 1996. Jimmy R. Whitfield & Rhonda Whitfield v. Paul Bronger,
American 3CI, et al., No. CV-96-847, was filed in the Circuit Court of Shelby
County, Alabama in November of 1996. These proceedings have been settled by the
Company's insurance carrier and the related expenditure to the Company are
reflected in the current year financial statements. The resolution to these
lawsuits did not have a material effect on the Company's financial condition,
results of operations and cash flows.
On or about March 10, 1997, the Company commenced arbitration
proceedings before the American Arbitration Association in Houston, Texas,
against River Bay Corporation ("River Bay") and Marlan Baucum seeking to set
aside a Purchase Agreement (the "Purchase Agreement") entered into between those
parties on or about October 10, 1994, together with ancillary agreements
pertaining thereto. The Company was seeking damages and/or to set aside the
Purchase Agreement and collateral agreements, including a Put Option Agreement
(the "Put Option Agreement") which, if otherwise enforceable, would require the
payment by the Company of approximately $1,700,000 for 565,500 shares of 3CI
Common Stock. In response, on April 9, 1997, Bank of Raleigh and Smith County
Bank, assignees of certain rights under the Purchase Agreement, commenced a
complaint for a declaratory and monetary relief in the U.S. District Court for
the Southern District of Mississippi, Jackson, Division in Civil Action No.
3:97cv249BN. The Bank of Raleigh and Smith County Bank prayed declaratory
judgment declaring the arbitration provision in the Purchase Agreement to be not
binding upon the said banks, the claims of 3CI against River Bay to be
subordinate to the claims of the banks, unspecified compensatory damages, and
punitive damages for least $1,000,000. In this action the Bank of Raleigh and
Smith County Bank proceeded to collect the Company's accounts receivable in the
River Bay division as it was used as
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<PAGE> 69
collateral in the Purchase Agreement, they collected approximately $463,000,
through October 14, 1997. On or about May 10, 1997, the Company filed a Petition
of Arbitration in Suit No. 422,107 of the First Judicial District Court, Caddo
Parish, Louisiana, naming River Bay and Marlan Baucum as defendants therein.
This lawsuit seeks an injunction and stay of all judicial and extra-judicial
proceedings pursuant to the Put Option Agreement until such time as the
arbitration is completed. This action was removed by the defendants to the U.S.
District Court for the Western District of Louisiana, Shreveport Division in
Civil Action No. 97-0578. The parties have agreed to settle the suit in
consideration of the Company repurchasing the remaining 565,500 shares of Common
Stock related to the Put Option Agreement for $816,364. 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 litigation and
claims will not have a materially adverse effect on the Company's financial
position, results of operations, and net cash flows.
The Company operates within the regulated medical waste disposal
industry which is subject to intense governmental regulation at the federal,
state and local levels. The Company believes it is currently in compliance in
all material respects with all applicable laws and regulations governing the
medical waste disposal business. However, continuing expenditures may be
required in order for the Company to remain in compliance with existing and
changing regulations. Furthermore, because the medical waste disposal industry
is predicated upon the existence of strict governmental regulation, any material
relaxation of regulatory requirements governing medical waste disposal or of
their enforcement could result in a reduced demand for the Company's services
and have a material adverse effect on the Company's revenues and financial
condition. The scope and duration of existing and future regulations affecting
the medical waste disposal industry cannot be anticipated and are subject to
changing political and economic pressures.
At September 30, 1995, the Company had employment agreements with
certain key employees providing for compensation of $145,000 and $130,000 for
the years ended September 30, 1997 and 1996. These agreements further provide
for a bonus based on the achievement of certain performance objectives. For the
years ended September 30, 1997, 1996 and 1995, these performance objectives were
not achieved.
At September 30, 1997 and 1996, the Company had certain noncancelable
leases, principally for office space and equipment, with various expiration
dates. The aggregate rental expenses under such leases were $823,324, $866,203,
and $735,696, for the fiscal years ended September 30, 1995, 1996, and 1997,
respectively. Future minimum rentals under such leases for the following fiscal
years aggregate $605,000 for 1998, $353,000 for 1999, $106,000 for 2000, $60,000
for 2001 and $135,000 thereafter.
The Company granted River Bay security interests in certain of the
assets purchased from River Bay and certain accounts receivable attributable to
these purchased assets to secure future debt and the Put Option.
The Company has agreed to pay the President of River Bay approximately
$65,000 over a period of 15 months related to the settlement of certain issues.
This liability is included in accrued liabilities in the September 30, 1995 and
September 30, 1996 balance sheets.
The Company has committed to reimburse WSI approximately $6,000 per
month for services provided and costs incurred by the Company's vice president.
Mr. Charles D. Crochet serves as President of the Company pursuant to an
employment agreement commencing February 1994 and ending September 1995. Mr.
Crochet was entitled to a salary of $6,250 per month in February and March 1994,
and then $7,500 per month from April through September 1994, increasing to
$9,583 per month commencing October 1994 through September 1995. This employment
agreement was renegotiated and modified in August 1995, increasing Mr. Crochet's
salary to $10,833 per month commencing October 1, 1995 and thereafter increases
to $13,333 on October 1, 1997, and continues through May 1998. As an additional
incentive to Mr. Crochet under the new employment agreement, Mr. Crochet is
eligible for an annual bonus based on Fiscal Year Pre-Tax Profits as a
percentage of revenues. The amount of such annual bonus is based on a percentage
between 6% and 10% of an amount determined by the Board of Directors from an
approved bonus plan, and such actual percentage depending upon the Company's
Pre-Tax Profits as a percentage of revenue.
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<PAGE> 70
14. SUBSEQUENT EVENTS:
The James T. Rash, et al v. Waste Systems, Inc., et al suit (see Note
13) has been settled. Court approval of such settlement was received in
February, 1998. Pursuant to the settlement, the Company has agreed to (i)
transfer 78,014 shares of its Common Stock into escrow for later conveyance to
the plaintiffs, (ii) transfer warrants for 1,002,964 shares of Common Stock into
escrow for later conveyance to the plaintiffs on the basis of one warrant for
every three shares of Common Stock owned, that are exercisable for two years
from the effective date of the Settlement Agreement at a price of $1.50 per
share, (iii) pay $425,000 into an escrow account to pay the plaintiffs'
attorneys' fees, and (iv) obtain SEC approval, if necessary, to convert the
1,000,000 shares of Series A Preferred Stock into 7,000,000 shares of Series B
Convertible Preferred Stock ("Series B Preferred Stock"). Pursuant to the terms
of the Settlement Agreement, $425,469 has been paid to the plaintiff's
attorneys' for fees and 78,014 shares of Common Stock and warrants for 1,002,964
shares of Common Stock have been placed in escrow for subsequent conveyance to
the plaintiffs.
The Company, as authorized by the necessary approvals of the Board of
Directors and the Company's majority stockholder, has approved the adoption of
an amendment (the "Amendment") to the Company's Certificate of Incorporation, as
amended, to (i) increase the authorized preferred stock, of the Company from
1,000,000 shares to 16,050,000 shares, and (ii) increase the authorized common
stock, par value $.01 per share ("Common Stock"), of the Company from 15,000,000
shares to 40,450,000 shares. The Amendment was adopted to facilitate (i) the
conversion of $7,000,000 of debt (the "Debt Conversion") owed by the Company to
WSI, the Company's largest stockholder, in exchange for 1,000,000 shares of the
Company's Series A Preferred Stock, (ii) the exchange of the Series A Preferred
Stock for 7,000,000 shares of the Company's Series B Preferred Stock, and (iii)
the conversion of an additional $750,000 of debt owed by the Company to WSI to
750,000 shares of the Company's Series C Convertible Preferred Stock (the
"Series C Preferred Stock").
Series A Preferred Stock:
In June 1997, WSI consummated the Debt Conversion by converting
$7,000,000 of debt owed to it by the Company into 1,000,000 shares of Series A
Preferred Stock, with no par value, at $7.00 per share or $7,000,000 to WSI. The
Series A Preferred Stock has cumulative dividends from the second anniversary of
the original issuance date of the Series A Preferred Stock, at the rate of
$.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. Accruals of dividends shall not bear interest.
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 (as defined below) of the Common Stock on the date
of the related Conversion Notice (as defined below).
Except as otherwise required by law or expressly provided for below, the
holders of Series A Preferred Stock shall have no voting rights. If and when the
Company shall be in default in the payment of dividends on the Series A
Preferred Stock, and such default continues for a period of two fiscal quarters,
then the holders of the outstanding shares of Series A Preferred Stock, voting
separately as a single class, shall become entitled to elect two directors of
the Company, such additional directors to serve in addition to the directors
then in office.
Series B and Series C Preferred Stock:
On February 23, 1998, the Nasdaq Small-Cap Market capital surplus
requirement for continued listing was increased to $2,000,000 (the "New Capital
Surplus Requirement"). To meet the New Capital Surplus Requirement, on February
19, 1998, the Company and WSI agreed to convert an additional $750,000 of debt
owed to WSI by the Company into 750,000 shares of Series C Preferred Stock to be
designated and issued to WSI, which has been completed. Such debt conversion has
enabled the Company to be in compliance with the New Capital Surplus
Requirement.
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The Series B or Series C Preferred Stock have a par value of $.01 per
share and will have cumulative dividends from the second anniversary of the
original issuance date of the Series B or Series C Preferred Stock, at the rate
of $.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. Accruals of dividends shall not bear interest. The Series B or 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, into
full shares of Common Stock of the Company with a Market Price of $7,000,000 for
Series B or $750,000 for Series C based on a conversion rate determined by (i)
dividing $7,000,000 for Series B or $750,000 for Series C by the Market Price of
the Common Stock on the date of the related Conversion Notice, (ii) plus an
amount of cash determined by subtracting the quotient calculated in (i) and
subtracting from $7,000,000 for Series B or $750,000 for Series C; provided
however, that at the option of the holder, the holder may convert the Series B
or 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 certain adjustments of the conversion
rate for subdivision or combination of the Common Stock.
To convert preferred stock into Common Stock, a holder of preferred
stock shall send to the Secretary of the Company a dated notice (a "Conversion
Notice") setting forth the number of shares of preferred stock to be converted,
along with the certificate representing the preferred stock to be converted.
Market Price means (i) the closing sale price on the date of a
Conversion Notice of a share of Common Stock as reported on the principal
securities exchange on which the shares of Common Stock are then listed or
admitted to trading or (ii) if not so listed, the average of the closing bid and
ask prices for a share of Common Stock on that date as quoted on the Nasdaq
National Market System or Nasdaq Small-Cap Market or (iii) if not quoted on
Nasdaq, the average of closing bid and ask price for a share of Common Stock as
quoted by the National Quotations Bureau's pink sheets or the National
Association of Securities Dealer's OTC Bulletin Board System. If the price of a
share of Common Stock shall not be so quoted, "Market Price" shall mean the fair
market value of a share of Common Stock as determined by an investment banking
firm, with expertise in the Corporation's area of business, appointed by the
judge of the 269th Judicial District Court, Harris County, Texas.
The shares of Series B or C Preferred Stock may be redeemed at any time
on or after the second anniversary of the original issuance date of the Series B
or 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. In case of redemption of only a part of the
Series B or C Preferred Stock at the time outstanding, the shares to be redeemed
shall be selected by lot.
Any shares of the Series B or C Preferred Stock redeemed, purchased or
otherwise acquired by the Company or converted into Common Stock shall be deemed
retired and shall be canceled and may not under any circumstances thereafter be
reissued or otherwise disposed of by the Company.
All shares of Series B or C Preferred Stock that have not been redeemed
or converted into Common Stock on or before the fifth anniversary of the
original issuance of the Series B Preferred Stock shall automatically without
further action of the Company or any holder of Series B or C Preferred Stock, be
converted into Common Stock based on the conversion rate then in effect.
Except as otherwise required by law or expressly provided for below, the
holders of Series B Preferred Stock shall have no voting rights. Except as
otherwise required by law, the holders of Series C Preferred Stock shall have no
voting rights. If and when the Company shall be in default in the payment of
dividends on the Series B Preferred Stock, and such default continues for a
period of two fiscal quarters, then the holders of the outstanding shares of
Series B Preferred Stock, voting separately as a single class, shall become
entitled to elect two directors of the Company, such additional directors to
serve in addition to the directors then in office.
The Company has filed the Registration Statement (Form S-1) with the
Securities and Exchange Commission to register 1,518,434 additional shares of
its Common Stock. On about February 27, 1998, an Information Statement was
mailed to the Company's stockholders informing them of the previous approval by
the Board of Directors of the Company of the corporate actions referred to above
and their subsequent adoption by the majority stockholder of the Company.
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3CI COMPLETE COMPLIANCE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO COSTS CHARGED TO BALANCE AT
CLASSIFICATION BEGINNING OF PERIOD AND EXPENSES OTHER ACCOUNTS END OF PERIOD
------------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
For the year ended September 30, 1997:
Allowance for doubtful accounts $ 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
------------------- ---------------- --------------- --------------
=================== ================ =============== ==============
For the year ended September 30, 1995:
Allowance for doubtful accounts $ 573,567 $ 838,209 $ (128,507) $ 1,283,269
------------------- ---------------- --------------- --------------
=================== ================ =============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
72
