<PAGE> 1
REGISTRATION NO. 333-48499
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SECURITIES AND EXCHANGE COMMISSION
--------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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3CI COMPLETE COMPLIANCE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 4950 76-0351992
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
910 Pierrepoint, Suite 312
Shreveport, Louisiana 71106
Phone: (318) 869-0440
Fax: (318) 869-4002
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Charles D. Crochet, President
3CI Complete Compliance Corporation
910 Pierrepoint, Suite 312
Shreveport, Louisiana 71106
Phone: (318) 869-0440
Fax: (318) 869-4002
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
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With copy to:
Samuel N. Allen
Porter & Hedges, L.L.P.
700 Louisiana, 35th Floor
Houston, Texas 77002-2764
Phone: (713) 226-0600
Fax: (713) 226-0229
Approximate date of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED MAY 5, 1998
PROSPECTUS
1,518,434 SHARES
3CI COMPLETE COMPLIANCE CORPORATION
COMMON STOCK
This Prospectus covers (i) up to 1,002,964 shares of common stock, par
value $.01 per share (the "Common Stock"), of 3CI Complete Compliance
Corporation (the "Company"), issuable upon the exercise of warrants to purchase
Common Stock (the "Warrants") and (ii) up to 515,470 shares of Common Stock
that are being offered for resale by certain selling stockholders of the
Company (the "Selling Stockholders"). The exercise price for the Warrants is
$1.50 per share. Therefore, if all of the Warrants are exercised, the Company
will receive net proceeds of $1,504,446. The Company will not receive any of
the proceeds from the sale of Common Stock being offered by the Selling
Stockholders.
The Common Stock is currently traded on the Nasdaq Small-Cap Market
under the symbol "TCCC." On May 4, 1998, the closing price of the Common Stock
on Nasdaq was $1 13/16 per share.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS," WHICH
BEGINS ON PAGE 5.
This Prospectus covers the distribution of shares of Common Stock
issuable upon exercise of the Warrants and the shares of Common Stock being
offered by the Selling Stockholders. The shares issued upon exercise of
Warrants will be freely tradeable in the public markets upon issuance, and
delivery of this Prospectus will not be required in connection with such sales.
The Common Stock being sold by the Selling Stockholders may be offered and sold
from time to time by the Selling Stockholders through underwriters, dealers or
agents or directly to one or more purchasers in fixed price offerings, in
negotiated transactions, at market prices prevailing at the time of sale or at
prices related to such market prices. The terms of the offering and sale of
Common Stock by the Selling Stockholders pursuant to this Prospectus, including
any initial public offering price, any discounts, commissions or concessions
allowed, reallowed or paid to underwriters, dealers or agents, the purchase
price of the Common Stock and the proceeds to the Selling Stockholders, and any
other material terms shall be as set forth in a Prospectus Supplement. See
"Plan of Distribution."
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
THE DATE OF THIS PROSPECTUS IS MAY , 1998
<PAGE> 3
SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial data
appearing elsewhere in this Prospectus, including the information under "Risk
Factors."
THE COMPANY
The Company was incorporated in Delaware in 1991 and is engaged in the
business of medical waste management services. The Company operates in
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 use of a microwave facility. The
Company also provides training to customers on compliance with regulations, use
of containers, documentation and tracking.
"Medical waste" or "biomedical waste" generally consists of 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 focus on regulated and infectious
medical waste, such as pathological waste, 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
generally is not "hazardous waste" under state and federal environmental laws.
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 or approved by the Company.
The Company then transports the medical waste in vehicles that are owned or
leased by the Company to destruction facilities, including two incinerators
and a microwave facility that are owned by the Company, and to an incinerator
with which the Company has entered into an exclusive contract. Company
employees who handle medical waste are trained in the proper techniques for the
safe handling of medical waste. The Company also serves its customers by
designing specialized on-site training systems for the identification,
segregation, handling and packaging of medical waste. These systems are
designed to assist customers in reducing their overall medical waste disposal
costs, to promote safe handling and to foster a long-term working relationship
between the Company and its customers. The systems also are designed to
facilitate the proper packaging of medical waste for disposal before handling
by Company employees. The Company uses a sophisticated bar code technology to
track and record the movement of medical waste through all phases of its
handling by the Company including collection, transportation and incineration,
in compliance with applicable governmental regulations.
The Company's executive offices are located at 910 Pierrepoint, #312,
Shreveport, Louisiana 71106 and its telephone number is (318) 869-0440.
2
<PAGE> 4
THE OFFERING
<TABLE>
<S> <C> <C>
Securities Offered by the Company . . . . . . . . . 1,002,964
Securities Offered by the Selling Stockholders . . 515,470
Common Stock outstanding after the offering(1) . . 10,714,275
Use of Proceeds . . . . . . . . . . . . . . . . . . All proceeds from the exercise of the Warrants
will be used for general corporate purposes.
The Company will not receive any proceeds form
the sale of Common Stock by the Selling Stockholders.
Nasdaq Small-Cap Market Symbol . . . . . . . . . . "TCCC"
</TABLE>
- -----------------
(1) Includes 1,002,964 shares of Common Stock issuable upon the exercise
of the Warrants. Does not include (i) 162,500 shares of Common Stock
issuable upon exercise of outstanding options and warrants and (ii)
7,750,000 shares of Common Stock issuable upon conversion of the
Company's Series B Preferred Stock and Series C Preferred Stock.
3
<PAGE> 5
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------------------- ------------------------
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenue . . . . . . . . . . . . . . 16,522,025 17,748,300 18,789,749 4,673,658 4,600,534
Gross profit . . . . . . . . . . . . . . 4,765,057 3,932,820 4,503,915 1,173,699 1,163,367
Operating income (loss) . . . . . . . . . (4,207,730) (15,203,361) 71,502 (21,194) 100,429
Loss before provision for income taxes . (5,079,885) (16,282,837) (1,088,188) (345,576) (122,702)
Net loss . . . . . . . . . . . . . . . . (5,079,885) (16,282,837) (1,088,188) (345,576) (122,702)
Net loss per share . . . . . . . . . . . (0.60) (1.84) (0.12) (0.04) (0.01)
Weighted average shares outstanding . . . 8,530,611 8,872,348 9,064,071 9,153,833 9,034,811
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
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HISTORICAL(1) PRO FORMA(1)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,476,395) (6,476,395)
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,222,269 12,222,269
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,702,912 8,874,898
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 685,003 685,003
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,834,354 2,662,368
</TABLE>
- -----------------
(1) Gives effect to (i) issuance on March 18, 1998, of 78,014 shares of
Common Stock in connection with the settlement of certain litigation,
(ii) the cancellation of 1,000,000 shares of the Company's Series A
Preferred Stock, par value (the "Series A Preferred Stock"), and
concurrent issuance of 7,000,000 shares of the Company's Series B
Preferred Stock, par value $.01 per share (the "Series B Preferred
Stock"), on March 23, 1998; and (iii) the cancellation of $750,000
worth of debt owed by the Company to Waste Systems, Inc. ("WSI") in
exchange for the issuance of 750,000 shares of the Company's Series C
Preferred Stock, par value $.01 per share (the "Series C Preferred
Stock"), on March 23, 1998.
4
<PAGE> 6
RISK FACTORS
In evaluating an investment in the Common Stock, prospective investors
should carefully consider all of the information set forth in this Prospectus
and should give particular attention to the following risk factors.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company's operations have not been profitable since the Company
was incorporated in 1991. As of December 31, 1997, the Company had an
accumulated deficit of approximately $25,432,673. For the years ended
September 30, 1997 and 1996, the Company had net losses of approximately
$1,088,188 and $16,282,837, respectively. There can be no assurance that the
Company will be able to operate profitably in the future. The Company is
subject to the risks and uncertainties inherent in the growth of a developing
business in its industry, including, among other things, limited access to
capital, difficulties and delays in obtaining necessary government permits and
authorizations, other delays in implementing its business strategy in
particular geographic service areas and significant competition.
POTENTIAL INABILITY TO FUND FUTURE CAPITAL REQUIREMENTS
The Company has historically relied on WSI, the Company's majority
stockholder, for funding. Such funding has come primarily in the form of loans
from WSI to the Company. Through the date hereof, WSI has lent the Company an
aggregate of $27,335,872. Of such amount, $22,573,913 has been converted from
debt into equity, leaving an aggregate outstanding principal amount owed to WSI
of $4,761,959. The Company anticipates a working capital deficit from
operations for the remainder of fiscal 1998 and will be dependent upon third
parties to fund its continued operations. However, WSI has expressed
reluctance in continuing to provide funding to the Company. No assurance can
be given that WSI will continue to advance funds to the Company and to forego
demand for payment, or that WSI will be willing to convert additional amounts
of debt owed into equity. In addition, no assurance can be given that the
Company will be able to obtain necessary funding from a third party. If WSI
fails to advance required funds to the Company or demands payment of current
indebtedness, or if the Company is unable to obtain funding from a third party,
the Company would have limited financing sources and could be forced to seek
bankruptcy protection. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
POTENTIAL REMOVAL FROM TRADING ON NASDAQ
The Common Stock trades on the Nasdaq Small-Cap Market. The
requirements for continued listing on the Nasdaq Small-Cap Market recently were
amended to increase the required minimum stock price and net capital standards.
The Company has failed to comply with certain of these requirements in the
past, and has been able to comply only through the conversion of debt owed to
WSI into equity. Under Nasdaq rules, the Company's Common Stock could be
removed from listing on the Nasdaq Small-Cap Market even if it is in technical
compliance with the continued listing criteria if Nasdaq determines that
continuing to meet those criteria in the future is unlikely. Therefore, there
can be no assurance that the Common Stock will continue to be traded on the
Nasdaq Small-Cap Market. If the Common Stock is removed from trading on that
market, the Common Stock still could be eligible for trading on the Nasdaq
Bulletin Board, the "pink sheets" or other over-the-counter markets, however,
such markets would not afford the liquidity available through the Nasdaq Small-
Cap Market. Removal from listing would have a material adverse effect on the
value of the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Liquidity and Capital Resources."
IMPACT OF GOVERNMENT REGULATION
The medical waste management industry is subject to extensive federal,
state and local laws and regulations. The collection, transportation,
treatment and disposal of medical waste require government permits,
authorizations and approvals, the nature of which may vary from jurisdiction to
jurisdiction, and continuing compliance with required packaging, labeling,
handling, treatment, disposal and documentation procedures, and notice and
reporting obligations. The Company believes that it has obtained all government
permits required to operate its existing business and that it
5
<PAGE> 7
is in compliance in all material respects with these permits and all applicable
laws and regulations. State and local laws and regulations change with some
frequency, however, and the amendment of existing laws or regulations or the
adoption of new laws or regulations could require the Company to obtain new
government permits or to modify its current methods of operation to comply with
these changes. There can be no assurance that the Company would be able to
obtain any such new permits or that the cost of compliance with any such
changes would not have material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Governmental
Regulation."
The permits that the Company requires are difficult and time-consuming
to obtain and, if and when issued, may be subject to conditions or restrictions
that limit the Company's ability to operate efficiently in an applicable
jurisdiction. The Company's inability to expand the geographic service areas
in which it operates, either because it is unable to obtain the necessary
permits or because they are issued under conditions or with restrictions that
are not acceptable to the Company, could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's failure to operate in compliance with the requirements
and limitations of any permit, or with the laws and regulations pursuant to
which the permit was issued, could jeopardize the permit. Routine compliance
inspections by the issuing regulatory agency funding that the Company is not
operating in compliance with a particular permit, could result in
administrative proceedings to modify, suspend or revoke the permit. Any such
modification, suspension or revocation could have a material adverse effect on
the Company's business, financial condition and results of operations.
Some permits must be renewed periodically, and there can be no
assurance that any existing or future permit that is required to be renewed
will be renewed by the issuing regulatory agency. The failure to obtain any
such renewal could have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPETITION
The Company operates within an intensely competitive industry.
Competition has resulted in substantial price reductions in virtually all
geographic areas. Although prices have stabilized in certain areas, there can
be no assurance that competitive pressures within the medical waste management
industry will not result in continued or accelerated price reductions that
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company faces competition from several national waste management
companies and many regional and local businesses in its present locations, and
will be confronted with such competition in each location where it seeks to
expand. Most of the Company's competitors are larger and have substantially
greater capital resources, regulatory experience, sales and marketing
capabilities and broader product and service offerings than the Company, and
are well established in their respective markets. Competitors could engage in
a variety of actions that may have an adverse effect on the Company's business.
These activities may include aggressive price competition, bundling of
regulated medical waste management services with other services including solid
waste management, offering a higher level of customer service, and efforts to
recruit the Company's customers.
POTENTIAL RISK OF PRODUCT LIABILITY AND POTENTIAL UNAVAILABILITY OF INSURANCE
The medical waste management industry involves potentially significant
risks of statutory, contractual, tort and common law liability. The Company's
failure to comply with applicable laws and regulations or to manage medical
waste in an environmentally safe manner could result in environmental
contamination, personal injury and property damage. The Company maintains
pollution liability, general liability and workers' compensation insurance that
the Company considers adequate to protect its business and employees. An
uninsured or partially insured claim against the Company, however, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), and similar state laws, impose
strict, joint and several liability on current and former owners and operators
6
<PAGE> 8
of facilities from which releases of hazardous substances have occurred and on
generators and transporters of the hazardous substances that come to be located
at such facilities. Certain medical wastes may be categorized as hazardous
asbestos under CERCLA. Responsible parties may be liable for substantial waste
site investigation and clean-up costs and natural resource damages, regardless
of whether they exercised due care and complied with applicable laws and
regulations. If the Company were found to be a responsible party for a
particular site, it could be required to pay the entire cost of waste site
investigation and clean-up, even though other parties also may be liable. The
Company's ability to obtain contribution from other responsible parties may be
limited by the Company's inability to identify those parties and by their
financial inability to contribute to investigation and clean-up costs. There
can be no assurance that the Company will not face claims under CERCLA or
similar state laws, or under other laws, resulting in a substantial liability
for which the Company is unable to obtain contribution from other responsible
parties and for which the Company is uninsured or only partially insured. The
Company's pollution liability insurance includes liabilities under CERCLA. The
Company may experience difficulty in the future in obtaining adequate insurance
coverage on acceptable terms. A successful claim against the Company for which
it is uninsured or only partially insured, and for which it is unable to obtain
contribution from other responsible parties, could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Governmental Regulation."
ALTERNATIVE TECHNOLOGIES; TECHNOLOGICAL OBSOLESCENCE
The 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
environmental factors. The development and commercialization of alternative
treatment or disposal technologies that are more cost-efficient than the
Company's technologies, that reduce the volume of regulated medical waste
generated, or that afford environmental benefits could place the Company at a
competitive disadvantage. The Company is aware of certain new regulated
medical waste management technologies, including the production of reusable or
degradable medical products, which, if successfully developed and
commercialized, could have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon a limited number of key management,
technical and sales personnel. The Company's future success will depend, in
part, upon its ability to attract and retain highly qualified personnel. The
Company faces competition for such personnel from other companies and
organizations, and there can be no assurance that the Company will be
successful in hiring or retaining qualified personnel. The Company has an
employment agreement with Mr. Charles D. Crochet, who serves as president,
which expires in May 1998. The Company does not have written employment
agreements with its other officers, and such officers and other key personnel
could leave the Company's employ with little or no prior notice. The Company's
loss of key personnel, especially if the loss is without advance notice, or the
Company's inability to hire or retain key personnel, could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company does not carry any key man life insurance.
EFFECT OF APPLICABLE ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW
The Company has not elected to be excluded from the provisions of
Section 203 of the Delaware General Corporation Law, which imposes certain
restrictions on transactions between a corporation and "interested
stockholders." These restrictions could operate to delay or prevent a change
in control of the Company and to discourage, impede or prevent a merger, tender
offer or proxy contest involving the Company.
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LIMITED PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF PRICES
Historically, the Common Stock has experienced low trading volumes.
Factors such as announcements by the Company or its competitors concerning
technological innovations, new commercial products or procedures, proposed
government regulations and developments or disputes relating to patents or
proprietary rights may have a significant effect on the market price of the
Common Stock. Changes in the market price of the Common Stock may bear no
relation to the Company's actual operations or financial results.
SHARES ELIGIBLE FOR FUTURE SALE
A substantial number of shares of Common Stock issuable under the
terms of certain agreements of the Company, upon the conversion of outstanding
convertible preferred stock and upon the exercise of outstanding warrants and
options will become eligible for sale in the public market at prescribed times
in the future. Sales of significant amounts of Common Stock in the public
markets could adversely affect prevailing market prices for the Common Stock.
See "Shares Eligible for Future Sale."
AUTHORIZATION OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
preferred stock with designations, rights and preferences determined from time
to time by its Board of Directors. Accordingly, the Company's Board of
Directors is empowered, without stockholder approval, to issue preferred stock
with dividend, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of Common
Stock. In the event of issuance, the preferred stock could be used, under
certain circumstances, as a method of discouraging, delaying or preventing a
change of control of the Company. See "Description of Capital Stock --
Preferred Stock."
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DIVIDEND POLICY
The Company has never paid dividends on the Common Stock and does not
anticipate paying any dividends in the foreseeable future. The Company
presently intends to retain future earnings, if any, to support the Company's
operations and growth. Any payment of cash dividends in the future will be
dependent on the amount of funds legally available therefor, the Company's
earnings, financial condition, capital requirements and other factors that the
Board of Directors may deem relevant.
USE OF PROCEEDS
Up to 1,002,964 shares of the Common Stock that are covered by this
Prospectus will be issued upon exercise of the Warrants. The Warrants are
exercisable at a price of $1.50 per share of Common Stock and expire on March
22, 2000. Assuming that all of the Warrants are exercised, the maximum net
proceeds to the Company are $1,504,446. Any net proceeds that are received
upon exercise of the Warrants will be used for general corporate purposes. The
Company will not receive any of the proceeds from the sale of shares of the
Common Stock by the Selling Stockholders.
PRICE RANGE OF THE COMMON STOCK
The Common Stock has traded on Nasdaq Small-Cap Market under the
symbol TCCC. At May 4, 1998, the Company estimates that there were
approximately 67 Common stockholders of record and 425 beneficial owners of the
Common Stock.
The following table sets forth the high and low bid quotations for the
Common Stock, as reported by Nasdaq, for each of the quarterly periods
indicated.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
Year ended September 30, 1996
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 11/16 3/4
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1 13/32
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1 39/64
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 39/64 17/16
Year ended September 30, 1997
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15/16 13/16
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15/16 1/2
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3/8
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5/8 9/16
Year ended September 30, 1998
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 11/16 3/4
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1/2 23/32
Third Quarter (through May 4, 1998) . . . . . . . . . . . . . . . . . . . . 2 1/8 1 1/8
</TABLE>
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CAPITALIZATION
The following table sets forth (i) the capitalization of the Company
at December 31, 1997, (ii) pro forma adjustments to the Company's
capitalization as of December 31, 1997 to give effect to (a) the issuance on
March 28, 1998, of 78,014 shares of Common Stock in connection with the
settlement of certain litigation, (b) the cancellation of 1,000,000 shares of
the Series A Preferred Stock and concurrent issuance of 7,000,000 shares of the
Series B Preferred Stock, and (c) the cancellation of $750,000 of debt owed by
the Company to WSI in exchange for the issuance of 750,000 shares of the Series
C Preferred Stock as if such transactions had occurred on December 31, 1997,
and (iii) the pro forma capitalization of the Company giving effect to the
foregoing transactions. This table should be read in conjunction with "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements of the
Company, including the Notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
---------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Total current liabilities . . . . . . . . . . . . . . . . . . . . . $9,702,912 (828,014) 8,874,898
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 685,003 685,003
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 10,387,915 (828,014) 9,559,901
----------- ----------- -----------
----------- ----------- -----------
Stockholders' equity:
Preferred Stock, no par value; 1,000,000 shares
authorized (16,050,000 pro forma) . . . . . . . . . . . . 1,000,000
Series A Preferred Stock; no par value; 1,000,000 shares
authorized;
1,000,000 shares outstanding (0 shares
outstanding pro forma) . . . . . . . . . . . . . . 7,000,000 (7,000,000)
Series B Preferred Stock, $.01 par value; 7,000,000 shares
authorized;
0 shares outstanding (7,000,000 shares pro forma). 7,000,000 7,000,000
Series C Preferred Stock, $.01 par value; 750,000 shares
authorized;
0 shares outstanding (750,000 shares outstanding
pro forma) . . . . . . . . . . . . . . . . . . . . 750,000 750,000
Common Stock:
$.01 par value; 15,000,000 shares authorized
(40,450,000 pro forma shares authorized,
9,154,811 shares outstanding) (9,232,825 shares
outstanding pro forma) . . . . . . . . . . . . . . 91,549 780 92,329
Treasury shares . . . . . . . . . . . . . . . . . . . . . . . . . . (7,065) (7,065)
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 20,182,543 77,234 20,259,777
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . (25,432,673) (25,432,673)
----------- ----------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . . 1,834,354 828,014 2,662,368
----------- ----------- -----------
Total debt and stockholders' equity . . . . . . . $12,222,269 -- $12,222,269
=========== =========== ===========
</TABLE>
10
<PAGE> 12
SELECTED FINANCIAL DATA
The following historical financial data as of and for each of the
years in the four-year period ended September 30, 1997 and for and at the
nine-month period ended September 30, 1993 are derived from the Company's
audited financial statements. The historical financial data presented as of
and for each of the three-month periods ended December 31, 1997 and December
31, 1996 are derived from the Company's unaudited financial statements, which
have been prepared on the same basis as the audited financial statements and,
in the opinion of management, include all adjustments (consisting of normal
recurring adjustments) necessary to present fairly all the information set
forth herein. The financial data set forth below includes the historical
financial information of American Medical Transports Corporation ("AMTC") and
A/MED, Inc. ("A/MED"); the assets and certain liabilities of which were
acquired by the Company. This data should be read in conjunction with the
financial statements of the Company and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein.
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------------------------------ NINE MONTHS
ENDED
SEPTEMBER 30,
1997 1996 1995(1) 1994(2) 1993(3)
------------ ------------ ------------ ------------ ------------
<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 32,951,661 20,729,755 12,962,443 6,399,726
Gain (loss) from operations .... 71,502 (15,203,361) (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) ...... $ (6,135,666) $(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 ........... 13,157,605 13,374,817 25,518,596 21,567,824 12,108,410
Long-term debt, net of
current ........................ 986,467 742,400 5,575,622 1,403,316 5,450,069
maturities
Shareholders, equity (deficit) . 1,964,122 (4,014,035) 11,821,339 15,892,569 1,427,962
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
SELECTED STATEMENT OF OPERATIONS
DATA: REVENUES .................... $ 4,673,658 $ 4,600,534
Costs and expenses:
Cost of sales .................. 3,499,959 3,437,167
Write off of intangibles ....... -- --
Write off of assets ............ -- --
Selling, general and
administrative ......... 836,970 767,959
Depreciation and amortization .. 357,923 294,979
Total operating expenses ....... 4,694,852 4,500,105
Gain (loss) from operations .... (21,194) 100,429
Other Expense, net ............. (324,382) (223,131)
Accretion of put option ........ -- --
------------ ------------
Net loss ....................... $ (345,576) $ (122,702)
Loss per common share .......... $ (0.04) $ (0.01)
Weighted Common Shares
Outstanding .................... 9,064,811 9,153,833
SELECTED BALANCE SHEET DATA:
Working capital (deficit) ...... $(11,020,015) $ (6,476,395)
Property, plant and
equipment, net ................. 8,345,891 8,384,132
Total Assets ........... 14,521,048 12,222,269
Long-term debt, net of
current ........................ 700,990 685,003
maturities
Shareholders, equity (deficit) . (4,359,609) 1,834,354
</TABLE>
- --------------
(1) The fiscal 1995 balances include the acquisition of River Bay Corporation
("River Bay") after the acquisition date.
(2) The fiscal 1994 balances include the acquisitions of AMTC and the A/MED and
acquisition of Med-Waste Disposal Service, Inc. ("Med-Waste") for periods
after the acquisition dates.
(3) Operating results are not comparable because the September 30, 1993 income
statement amounts are for nine months.
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
"Selected Financial Data" and the Company's Financial Statements and the notes
thereto, included elsewhere in this Prospectus.
GENERAL
The Company has historically relied upon WSI to fund its working
capital deficits. The Company anticipates a working capital deficit from
operations for the remainder of fiscal 1998 and will be dependent upon WSI or
third parties to fund its continued operations. No assurance can be given that
WSI will continue to advance funds to the Company and to forego demand for
payment of the current indebtedness of the Company, or that the Company will be
able to obtain necessary funding from third parties. If WSI fails to advance
required funds to the Company or demands payment of current indebtedness, or if
the Company is unable to obtain funding from a third party, the Company would
have limited financing sources and could be forced to seek bankruptcy
protection. See "Risk Factors--Potential Inability to Fund Future Capital
Requirements."
LIQUIDITY AND CAPITAL RESOURCES
Financing Activities. The Company has consistently incurred losses
since its inception. The Company has historically funded its operations,
acquisitions and debt service through cash advances from WSI. During fiscal
1994, advances made by WSI in the amounts of $3,100,000 and $4,671,973 were
converted to 666,670 and 1,557,324 shares of Common Stock. 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 fiscal 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 used in part to repay the advances. In
September 1995, this note was renegotiated into a revolving credit facility by
increasing the total amount available to $8,000,000 including interest, with
principal not to exceed $7,400,000 (the "First Revolving Credit Facility").
The promissory note in connection with the First Revolving Credit Facility
accrues interest at the prime rate, with a maturity date of December 31, 1996,
which has been extended to June 30, 1998. Interest is payable in quarterly
installments which is automatically added to the outstanding principal
balance, if not paid.
As of September 30, 1997, 1996, and 1995, the Company had borrowed
$4,844,217, $8,843,000 and $4,100,000, respectively, under the First Revolving
Credit Facility. See note 5 to Notes to Consolidated Financial Statements. A
significant amount of the advances from WSI have historically been non-interest
bearing, some of which were ultimately converted to equity, and interest
expense in 1997 and 1996 increased significantly as a result of the advances
made pursuant to the First Revolving Credit Facility.
During fiscal 1996, the Company received cash advances from WSI
totaling $8,842,969 in excess of the principal amount that could be borrowed
under the First Revolving Credit Facility. Due to such additional cash
advances, on December 20, 1996 the Company entered into a second revolving
credit facility with WSI in the amount of $2,700,000 including interest, with a
maturity date of February 28, 1997 which was extended to June 30, 1997 (the
"Second Revolving Credit Facility"). WSI and the Company intended that the
Second Revolving Credit Facility include all sums owed by the Company to WSI in
excess of sums borrowed under the First Revolving Credit Facility.
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,
respectively. During the first quarter of fiscal 1998, the Company had not
requested nor received any cash advances from WSI. The Company has not been
able to repay its indebtedness to WSI under the First Revolving Credit
Facility, and it has requested and received extensions and waivers on a monthly
basis from WSI, so that the Company and WSI can restructure the First Revolving
Credit Facility.
In February 1997, the Company received a letter from Nasdaq 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
12
<PAGE> 14
minimum bid price for its Common Stock of $1.00 per share. While the Company
remained out of compliance with such requirements, Nasdaq allowed the Company
to remain listed with an exception added to its trading symbol. Nasdaq 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 preferred
stock. The amount owed under the First Revolving Credit Facility was reduced
by approximately $3,900,000 and the amount owed under the Second Revolving
Credit Facility was completely eliminated. The conversion of debt by WSI
allowed the Company to meet the listing requirements of Nasdaq. On June 26,
1997, Nasdaq informed the Company that it was in compliance with all
requirements necessary for continued listing on the exchange and that the
exception to its trading symbol had been removed. See "Risk
Factors--Potential Removal from Trading on Nasdaq."
On February 19, 1998, the Company and WSI converted an additional
$750,000 of debt under the First Revolving Credit Facility into preferred
stock.
During the first quarter of fiscal 1998, the Company repaid
approximately $179,731 of its notes payable and approximately $344,685 of its
long-term debt that became due during the quarter.
During the first quarter of fiscal 1998, the Board of Directors
authorized the repurchase of up to 150,000 shares of Common Stock from time to
time in the open market. As of the date hereof, the Company has repurchased
6,000 shares for $7,107.
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 on debt incurred related to the
1994 acquisition of assets. The Company also reduced the put option from the
collections which were received by the Bank of Raleigh and Smith County Banks
by approximately $463,000, before the settlement agreement of the River Bay
lawsuit.
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 that 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 WSI, and if available, from outside sources. There is no
assurance that adequate funds for these purposes will be available from WSI or
outside sources when needed or, if available, on terms acceptable to the
Company.
Operating Activities. 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." 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. In fiscal 1996 the impaired assets
were written down by $11,385,328.
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 $1,283,219, $380,000 and $212,867,
respectively. The reserves taken in fiscal 1995 were high due to several
factors, including high employee turnover, relocation of the Company's
headquarters and difficulties in integrating the Company's management
information systems.
In August 1996, an analysis was conducted of the Company's operating
assets and systems. In conjunction with the analysis, the Company reconsidered
the use of certain operating assets as well as a result of recent experiences
and current market conditions. As a result of the analysis, the Company wrote-
off certain operating equipment which would
13
<PAGE> 15
not benefit future operations, expensed certain leasehold improvements costs
for certain closed facilities, and expensed $420,000 of computer software and
hardware that will not be used in future operations.
Investing Activities. During the first quarter of fiscal 1998, the
Company invested $262,000 for transportation, machinery and equipment, computer
equipment and software, and other fixed assets.
During fiscal 1997, the Company invested approximately $1,417,000 for
transportation, machinery and equipment at its incinerator and transportation
locations, and 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 addition to the $260,000
incurred during fiscal 1995 and $550,000 incurred before 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 fiscal 1995, the Company acquired substantially all of the
assets and certain liabilities from River Bay in exchange for 865,500 shares of
Common Stock and a $1,000,000 promissory note to River Bay. The Company has
repurchased the shares of Common Stock from River Bay pursuant to the terms of
settlement reached in litigation. See Note 1 to Consolidated Financial
Statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1996.
Revenues. Revenues for the three month period ended December 31, 1997
decreased to $4,673,658 from revenues for the three month period ended December
31, 1996 of $4,743,054. This decrease in revenue of $73,124, or 1.6%, is
primarily attributable to a reduction of third party incineration revenue.
During the quarter the Company increased its direct collection revenue by 2.4%,
while reducing the dependency of outside third party providers by 3.8%. The
industry continues to experience a downward pressure in pricing caused by
competitors attempting to gain market share through deep discount pricing.
Cost of Services. Cost of services decreased $62,792, or 1.8%, to
$3,437,167 for the three month period ended December 31, 1997 compared to
$3,499,959 for the three month period ended December 31, 1996. The decrease
was due to lower transportation costs (a reduction of $8,763), the Company's
reduced dependence on third party incineration facilities (a reduction of
$44,782), and the conversion of existing large customers from cardboard
containers to multi-use reusable containers (a reduction of $9,247).
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three month period ended December 31, 1997
decreased to $767,959 compared to $836,970 for the three month period ended
December 31, 1996. The $69,011 decrease was due to lower salaries (a reduction
of $13,015), contract labor (a reduction of $41,573), and employee overtime (a
reduction of $14,423). As a percentage of revenue, the expenses for the three
month period ended December 31, 1997 improved to 16.7% compared to 17.9% for
the three month period ended December 31, 1996.
Depreciation and Amortization. Depreciation and amortization expenses
for the three month period ended December 31, 1997 decreased to $294,979
compared to $357,923 for the three month period ended December 31, 1996.
Interest Expense. Interest expense decreased to $149,624 for the
three month period ended December 31, 1997 from $250,620 for the three month
ended December 31, 1996, primarily due to the debt conversion of WSI's
promissory notes to shares of preferred stock. See "--Liquidity and Capital
Resources--Financing Activities."
14
<PAGE> 16
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO THE YEAR ENDED SEPTEMBER 30,
1996
Revenues. Revenues increased to $1,041,449, or 5.9%, to $18,789,749
during fiscal 1997, from $17,748,300 for fiscal 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. Cost of services increased $470,354, or 3.4%, to
$14,285,834 during fiscal 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. Selling, general and
administrative expenses decreased to $3,080,398 during fiscal 1997 from
$4,343,246 during fiscal 1996. The decrease was primarily attributable to the
reduction of legal fees that the Company had accrued during fiscal 1996 that
related to a lawsuit brought by its minority stockholders. Selling, general
and administrative expenses as a percentage of revenue decreased to 16.4% in
fiscal 1997 from 24.5% in fiscal 1996.
Depreciation and Amortization. Depreciation and amortization expenses
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. Interest expense increased to $902,229 in fiscal
1997 from $839,089 in fiscal 1996, due primarily to an increase in cash
advances made by WSI.
YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO THE YEAR ENDED SEPTEMBER 30,
1995.
Revenues. Revenues increased $1,226,000, or 7%, to $17,748,000,
during fiscal 1996 from $16,522,000 for fiscal 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 an 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 a 1%
decrease, in revenue from third party generators.
Cost of Services. Cost of services increased to $13,815,480 for
fiscal 1996 compared to $11,756,968 for fiscal 1995. The increased cost of
services 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 outside incineration costs are being achieved. In addition,
the installation and the startup costs associated with the microwave unit at
Birmingham, Alabama created an increase in operating costs.
Write-Off of Intangible Assets. 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.
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.
15
<PAGE> 17
In estimating the expected future cash flows for determining whether
the assets were impaired and if expected future cash flows are 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's forecast for fiscal 1997. Also, in the fourth
quarter of fiscal 1996, the Company's majority stockholder indicated that it
was 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.
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.
Selling, General and Administrative. Selling, general and
administrative 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 continued litigation the
Company felt it necessary to accrue an additional $1,000,000 for legal costs
for the fourth quarter of fiscal year 1996.
Depreciation and Amortization. Depreciation and amortization expenses
increased to $2,224,161 for fiscal 1996 from $1,976,212 for fiscal 1995, due
principally to the start of the new incinerator located in Birmingham, Alabama.
Interest Expense. Interest expense increased to $839,089 in fiscal
1996 from $655,080 in fiscal 1995, due primarily to the increase in advances
made by WSI.
Write-Off of Fixed Assets in Fiscal 1996 Totaled $1,183,000. A
complete analysis was conducted of the Company's operating assets and systems.
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. It was necessary to replace the
refractory in one of the Company's incinerators due to normal wear and
tear. There was a net book value of $12,700 of the previously
capitalized refractory that was written off.
Leasehold Improvements $80,000. The Company updated and
refurbished several of its transportation and incinerator locations to
make the locations more functional and efficiently operational. The
Company also made an operational decision to close its Austin, Texas,
transportation location to reduce operating 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 $500,982. In February 1994, at the
time of the acquisitions of AMTC and A/MED, the Company had a lease
agreement, which was accounted for as a capitalized lease, and the
equipment leased thereunder was being depreciated over the term of the
lease agreement. During 1996, the Company terminated the lease due to
the high cost of maintenance of the leased transportation equipment.
The Company had also capitalized other costs associated with these
leased assets, and Company wrote off the remaining net book value when
the lease was terminated. As the transportation equipment was
returned it was necessary to write off the remaining capitalized net
book value of $500,982.
Reusable Containers $12,000. The Company moved a portion of
its customer base from disposable cardboard boxes to reusable plastic
containers. A significant investment was then made in reusable
plastic containers, and based upon its prior operating experience with
the reusable containers, the Company estimated that a three year life
was more reflective of the reusable containers than a five year life.
In previous periods, the
16
<PAGE> 18
Company had estimated that the life of reusable containers was five
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. 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.
Additionally, 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 costs associated with a bar coding system
and an accounting system that would streamline the paperwork from the
transportation locations, the incinerators, and 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 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 the River Bay acquisition, as this software was
abandoned when the River Bay division was integrated into the
Company's accounting system during the fourth quarter of 1996.
17
<PAGE> 19
BUSINESS
GENERAL
The Company was incorporated in Delaware in 1991 and is engaged in the
business of medical waste management services. The Company operates in
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 uses a microwave facility. The
Company also provides training to customers on compliance with regulations, use
of containers, documentation and tracking.
"Medical waste" or "biomedical waste" generally consists of 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 focus on regulated and infectious
medical waste, such as 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"
generally is not "hazardous waste" under state and federal environmental laws.
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. The Company provides the
following products and services to its customers.
Disposal of Medical Waste. 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 or
approved by the Company. The Company then transports the medical waste in
vehicles that are owned or leased by the Company to incineration facilities
owned by the Company or for which the Company has long-term contractual
rights. Medical waste also is transported to the Company's microwave unit for
treatment.
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 maximize use 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 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. 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 containers results in safer disposal and minimizes potential hazards or
liability to the Company and its customers.
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,
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<PAGE> 20
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's ("DOT")
procedures for the transportation of medical waste. The Company has 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. Medical waste is removed from the Company vehicles by
trained employees working on location at the Company's facilities and is loaded
onto conveyors that deliver it to the incinerators and the microwave unit. The
medical waste is incinerated or microwaved soon after delivery.
Disposal and Incineration. The Company owns an incinerator in
Springhill, Louisiana, with a capacity to treat 36 tons of medical waste per
day. The Company also owns an 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, both of which are located in Birmingham, Alabama.
In addition, the Company also has exclusive incineration rights under
a long-term contract, for a capacity of 30 tons per day, at an incinerator
operated by the City of Carthage, Texas. In order to maintain its rights under
the agreement, the Company is required to pay minimum annual fees of
approximately $550,000 to $1,000,000 during the term of the agreement. The
contract expires in June 1, 1998 and is subject to various renewal options.
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 amounts of approximately $779,000 and $27,000,
respectively, under the agreement. During fiscal 1996, the Company became
aware that certain contractual obligations were not being met by the City of
Center, including the breach of the exclusivity clause in the agreement. The
Company is presently not using the incinerator at the City of Center.
Documentation and Reporting. 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 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. 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. 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
receipt, 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.
Pricing. The Company has experienced intense competition in pricing.
Profit margins have declined and could deteriorate further if price cutting
within the industry persists. During fiscal 1997, there continued to be
downward pressure in pricing by competitors to maintain and increase market
share. Due to continued deep discounting with hospital accounts, the Company
directed more of its marketing efforts toward the professional market accounts,
such as physicians offices, laboratories, nursing and convalescent homes,
veterinary clinics and mortuaries.
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<PAGE> 21
CUSTOMERS AND MARKETS
Customers. The Company's health care customer base is diverse, with
about 15,000 accounts in Alabama, Arkansas, Florida, Georgia, Kansas,
Louisiana, Mississippi, Missouri, Oklahoma, Tennessee and Texas. These
accounts include 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 (i) the
hospital market, (ii) the professional market and (iii) 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, medical clinics, laboratories, nursing and convalescent
homes, veterinary clinics and mortuaries. The third party market consists
principally of pharmaceutical manufacturers and distributors and other medical
waste transportation companies.
The Company uses a three-fold strategy to increase its presence and
customer base in a particular geographical market. First, Company
representatives meet personally with a prospective customer to describe the
Company's services and to negotiate a disposal agreement that reflects the
prospective customer's service needs. Second, the Company uses direct mail to
establish potential customer leads, particularly in the professional market.
Third, the Company seeks endorsements or referral relationships with hospitals
and professional associations in the market areas. The Company's sales efforts
are supplemented by several strategic marketing agreements with state
associations under which the Company has received endorsements or marketing
assistance.
DISPOSAL TECHNOLOGY
Incineration. The incineration process is a two-stage process that
ensures the complete destruction of all pathogens. Most medical waste consists
of disposable paper and plastic products that 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 degrees F to
2000 degrees F, assuring the destruction of all pathogens. This process
produces exhaust gas, which is passed through scrubbers and bag houses of
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 Environmental Protection Agency (the "EPA") regulations, but is
regulated at the state level by various state agencies.
Microwave. The microwave process is an alternative technology that is
compact and designed to shred and treat medical waste in an enclosed
environment. The process uses a combination of steam and microwave heat to
destroy any pathogens that are present. The resultant waste is then classified
as ordinary municipal solid waste and is disposed of in an approved solid waste
landfill.
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 water
generators. Management believes that Browning Ferris, Inc. is the Company's
main competitor in its operating regions.
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<PAGE> 22
ACQUISITIONS
The Company has relied on acquisitions of other companies for the
expansion of its business. The following is a discussion of the acquisitions
that have been consummated by the Company since its inception.
A/MED, Inc. 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 of American Medical Transports
Corporation ("AMTC"), two majority-owned subsidiaries of WSI, in consideration
for 2,640,350 shares of Common Stock. 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 an additional 565,160 shares of Common Stock. For
accounting purposes, the acquisitions of A/MED and AMTC were treated as reverse
acquisitions. The acquired companies were engaged in the business of medical
waste management services in Oklahoma, Louisiana, New Mexico and Texas. As a
result of the acquisitions of A/MED and AMTC, and the additional acquisition of
shares of Common Stock by WSI from a third party, WSI beneficially currently
owns a majority of the outstanding shares of Common Stock.
Med-Waste Disposal Service, Inc. 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
of 525,000 shares of Common Stock and an additional 145,470 shares that were
earned pursuant to an earnout arrangement. Med-Waste was engaged in the
business of medical waste management services in Arkansas.
The acquisition of Med-Waste was 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. See
"Business --Legal Proceedings."
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 a promissory note in the original principal
amount of $1,000,000, which, as amended, provided for monthly principal
payments by the Company ranging from $50,000 to $100,000 through February 1996.
River Bay had been engaged in the business of medical waste management services
in Alabama, Florida, Georgia, Mississippi and Tennessee.
Pursuant to the terms of the purchase agreement entered into between
River Bay and the Company, River Bay was provided a put option whereby the
Company could be required to repurchase 865,500 shares of Common Stock acquired
by River Bay under the purchase agreement. In October 1995, River Bay
exercised its put option and the Company repurchased 300,000 of the shares of
Common Stock 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.
On or about February 14, 1997, River Bay exercised its put option for the
Company to repurchase the additional 565,500 shares of Common Stock. After
River Bay exercised its put option for the additional 565,500 shares, the
Company brought an arbitration action against River Bay, whereby, in part, it
sought to have the purchase agreement and the put option set aside. 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. See "--Legal
Proceedings."
GOVERNMENTAL REGULATION
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, incineration ash
characteristics and disposal are regulated under different but related laws,
rules and ordinances.
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<PAGE> 23
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 that apply generally to the
Company's activities, there are a number of federal laws and regulations that
directly pertain to the handling, transport and processing of medical waste.
The most pertinent of these federal environmental and public health laws are
discussed below.
Incineration Facilities. The Company is required to obtain permits at
local, state and federal levels for the construction and operation of
incineration facilities, which have to date and may continue to involve the
expenditure of substantial resources without any assurance of success. Such
permits may include (i) air quality permits, relating to the emissions from
incineration facilities, (ii) solid waste permits, relating to storage, receipt
and treatment of medical waste, the storage and disposal of residues from the
incineration facilities and ancillary air pollution control equipment for
incinerators, (iii) waste-water discharge permits, (iv) storm water discharge
permits, (v) site permits, such as zoning or special use permits, relating to
the appropriateness of the site for a waste processing facility under
applicable zoning regulations, (vi) building permits and (vii) occupancy
permits. Air quality permits and site permits, and in some cases, solid waste
permits, can be difficult to obtain, and may take a year or longer to be
issued.
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, 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 require permits for 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 Alabama, Arkansas, Florida, Georgia, Kansas,
Louisiana, Mississippi, Missouri, Oklahoma, Tennessee and Texas.
There can be no assurances that any of the Company's current permits
will be renewed or that, if the Company is able to identify and secure
additional locations for incineration or other waste processing facilities or
transfer stations, all necessary permits will be obtained, or that if such
permits are granted that they will be granted in a timely manner or under
conditions that will be acceptable to the Company.
The Occupational Safety and Health Act ("OSHA"). OSHA gives the
federal government the authority to regulate the management of infectious
medical waste. Liability may be imposed under the general duty clause found in
Section 654 of OSHA. This section requires employers to provide a place of
employment that is free from recognized and preventable hazards that are likely
to cause serious physical harm to employees. The regulations promulgated under
OSHA require employers to give notice to employees regarding the presence of
hazardous chemicals and to train
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<PAGE> 24
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 that 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 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 (i) cause, or significantly contribute to, an
increase in mortality or an increase in serious irreversible or incapacitating
reversible illness; or (ii) 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 that 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 that 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.
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.
U.S. Department of Transportation. The Company's medical waste
transportation activities are subject to federal regulation by the DOT pursuant
to the Hazardous Waste Materials Transportation Act (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 that
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.
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<PAGE> 25
The DOT Regulations also prescribe labeling standards for all
infectious and regulated waste and testing protocols for manufacturers and
suppliers of packaging. These regulations have not become final and have been
postponed a number of times.
In addition, the Company is generally subject to regulation by the DOT
and may be subject to regulation by the Interstate Commerce Commission pursuant
to a number of other statutes and bodies of regulation, some of which
specifically pertain to the transport of medical waste and which address, among
other things, vehicle operating procedures and the training of persons to
operate commercial vehicles carrying hazardous materials.
CERCLA. Federal regulations are included in the Comprehensive
Environmental Response, Compensation and Liability Act, as amended by the
Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"), which in
general imposes strict liability in the event of a release or threatened
release of hazardous substances from a facility. Certain medical wastes may be
categorized as hazardous substances under CERCLA.
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 (the "Clean Air Act"), 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 (the "Clean Water Act").
Pursuant to the 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 Clean Air Act and the 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. 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 are required to
include controlled air combustion units, air quality control equipment,
pollution control equipment and ancillary control and monitoring equipment.
All facilities are required to provide monitoring equipment. State regulatory
authorities may inspect Company operations on a regular basis and assess fines
and penalties or may halt operations for failures by the Company to follow
specific regulations. In addition, the failure of state regulatory agencies to
issue required permits or renewals, or any delays by such agencies, could have
a material adverse impact on the Company's operations.
PROPERTY
The Company's principal executive offices are located in approximately
6,100 square feet of office space in Shreveport, Louisiana. This office space
is leased pursuant to a lease that expires December 2001. The monthly rental
under such lease is $6,100.
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<PAGE> 26
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-
LOCATION TYPE OF FACILITY CAPACITY END (9/30/97) OWNED/LEASE
-------- ---------------- -------- ------------- -----------
<S> <C> <C> <C> <C>
Shreveport, LA Corporate Office Leased
San Marcos, TX Sales Office and Transport Leased
Tulsa, OK Sales, Transportation and Leased
Transfer
Carthage, TX Sales and Transportation Leased
Grand Prairie, TX Sales and Transportation Leased
Metairie, LA Sales and Transportation Leased
Fresno, TX Transfer, and Transportation Owned
Station, and Sales Office
Birmingham, AL Transportation and Sales Leased
Jackson, MS Sales, Transfer Station, Owned Land
Transportation
Springhill, LA Transportation and Sales Owned
Bismarck, AR Transfer Station, and Sales Leased
Carthage, TX Incinerator 30 tons/day 72.0% 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>
EMPLOYEES
At April 30, 1998, the Company had approximately 200 full-time and
five 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.
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 $2,000,000 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.
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<PAGE> 27
LEGAL PROCEEDINGS
James T. Rash, et al. v. Waste Systems, Inc., et al. In May 1995, a
group of minority stockholders of the Company, including Patrick Grafton, the
former Chief Executive Officer of the Company, acting individually and on
behalf of all minority stockholders and the Company, filed suit against the
Company, WSI and various Directors of the Company in the District Court of
Harris County, Texas. The plaintiffs alleged minority stockholder oppression,
breach of fiduciary duty and breach of contract and "thwarting of reasonable
expectations" and demanded an accounting, appointment of a receiver for the
sale of the Company, unspecified actual damages and punitive damages of
$10,000,000, 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 further alleged that such removal was wrongful and ineffective.
The Company's insurer has denied coverage in the lawsuit. The Company denied
all material allegations of the lawsuit. 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 also reached an agreement with the plaintiffs to settle this action,
which has been completed and has been approved by the court. Pursuant to the
settlement, the Company has agreed to (i) issue 78,014 shares of Common Stock
to the plaintiffs, (ii) issue Warrants for 1,002,964 shares of Common Stock to
the plaintiffs on the basis of one Warrant for every three shares of Common
Stock owned and (iii) pay $425,000 of plaintiff's attorneys' fees.
James H. Shepherd, et al. v. 3CI Complete Compliance Corporation. In
June 1995, the former stockholders of Med-Waste filed suit against the Company
and various current and former officers and Directors of the Company in the
Circuit Court of Hot Spring County, Arkansas. Plaintiffs 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
demanded rescission, restitution, unspecified actual damages and punitive
damages of $10,000,000, plus attorney's fees. The parties, other than Patrick
Grafton, 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 if 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.
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.
River Bay. 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
565,500 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 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.
26
<PAGE> 28
MANAGEMENT
The following is a list of the executive officers and Directors of the
Company as of March 19, 1998, their ages, positions and offices with the
Company, and periods during which they have served in such positions and
offices. 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 DIRECTOR SINCE
---- --- -------- --------------
<S> <C> <C> <C>
Dr. Werner Kook . . . . . . 45 Chairman of the Board and Director 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 . . . . . . 53 Director 1994
Valerie L. Banner . . . . . 42 Director 1998
David J. Schoonmaker. . . . 53 Director 1998
</TABLE>
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
predecessor of the Company and has worked in the medical waste business since
1988. Before 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. Before 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 15 years as Chief Financial Officer of
certain companies associated with the Edelhoff families, which are leading
waste management companies in Europe, and has served as a Director of WSI since
1996.
Dr. Clemens Pues has served as a Director and Vice President of the
Company since October 1995. Dr. Pues also is President of WSI. 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. Before 1994, Dr. Pues was
employed at the University of Muenster as assistant professor in international
management for four years.
Valerie L. Banner has served as a Director of the Company since
February 1998. Ms. Banner has been a self employed corporate/securities lawyer
since April 1996. From 1993 to 1996 she was Vice President, General Counsel
and Secretary for Team, Inc., a professional full service provider of
industrial services, and from 1990 to 1993 she was General Counsel for Team,
Inc. Ms. Banner served as a securities lawyer with Browning-Ferris Industries,
Inc., a waste management company, from 1984 to 1990. Ms. Banner began her
career in 1979 at the Houston, Texas, law firm of Andrews & Kurth L.L.P.
27
<PAGE> 29
David J. Schoonmaker has served as a Director of the Company since
February 1998. Mr. Schoonmaker has served as President and Chief Executive
Officer of RxThermal, Inc., a company that was formed to permit, design, build
and operate medical waste treatment facilities, since 1989 and as President and
Chief Executive Officer of BMWNC, Inc., a commercial incinerator of medical
waste, since 1995.
The executive officers of the Company serve at the pleasure of the
Board and are subject to annual appointment by the Board. 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. Dr. Kook and Dr. Pues are employed by
certain waste management companies controlled by the Rethmann families.
Juergen Thomas is employed by a waste management company controlled by the
Edelhoff families. The Rethmann and Edelhoff families collectively own 100% of
WSI.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the all
forms of compensation awarded to, earned by or paid to the Company's Chief
Executive Officer for the fiscal years ended September 30, 1995, September 30,
1996 and September 30, 1997. No other named executive officer received bonus
and salary which exceeded $100,000 in 1995, 1996 or 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
---------------------------------- ----------------------------------
SECURITIES
UNDER-
OTHER ANNUAL RESTRICTED LYING ALL
NAME AND PRINCIPAL COMPENSA- STOCK OPTIONS/ LTIP OTHER
POSITION YEAR SALARY BONUS TION AWARDS($) SARS(#) PAYOUTS COMPENSATION
-------- ---- ------ ----- ---- --------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles D. Crochet 1997 $145,000 -- -- -- -- -- --
President 1996 $130,000 -- -- -- -- -- --
1995 $115,000 -- -- -- 90,000 (1) -- --
</TABLE>
- -----------------
(1) In February 1994, Mr. Crochet received an option to purchase 90,000
shares of Common Stock at $3.00 per share vesting over a three year
period at 1/36 per month on a cumulative basis. Of these shares,
32,500 have vested and the remaining shares have been terminated
pursuant to the terms of the new employment agreement executed between
Mr. Crochet and the Company in August 1995. Pursuant to the terms of
the August 1995 employment agreement, Mr. Crochet was granted an
option to purchase 90,000 shares of Common Stock at $2.00 per share,
vesting over a three year period at 1/36 per month on a cumulative
basis.
OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted to executive officers during the fiscal
year ended September 30, 1997.
28
<PAGE> 30
OPTION EXERCISES AND YEAR-END VALUES
The following table sets forth information regarding unexercised
options to purchase shares of Common Stock granted by the Company to the named
executives. No executives exercised any Common Stock options during fiscal
1997.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY
AT FISCAL YEAR-YEAR(#) AT FISCAL YEAR-YEAR(1)
------------------------------- -----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Charles D. Crochet 95,000 27,500 -- --
</TABLE>
- -----------------
(1) The "value" of any option set forth in the table above is determined
by subtracting the amount which must be paid upon exercise of the
options from the market value of the underlying Common Stock as of
September 30, 1997 (based on the closing sales price as reported by
the Nasdaq Small-Cap Market). 32,500 options have an exercise price
of $3.00 and 90,000 options have an exercise price of $2.00. The
exercise price for all options exceeded the market value of the
underlying Common Stock as of September 30, 1997. Therefore, no
options were in- the-money at fiscal year-end.
TEN-YEAR OPTION REPRICINGS
The following table sets forth certain information with respect to
stock options canceled and new options granted at the new exercise price during
the last ten years to executive officers of the Company.
<TABLE>
<CAPTION>
LENGTH OF
ORIGINAL
MARKET OPTION
PRICE EXERCISE TERM
NUMBER OF OF STOCK AT PRICE AT REMAINING
OPTIONS TIME OF TIME AT
REPRICED OR REPRICING OF REPRICING NEW REPRICING
AMENDED OR OR EXERCISE OF
NAME DATE (#) AMENDMENT AMENDMENT PRICE AMENDMENT
---- ---- --- --------- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Charles D. Crochet (1) 8/31/95 57,500 $1.25 $3.00 $2.00 23 months
</TABLE>
- -----------------
(1) In August 1995, Mr. Crochet entered into a new employment agreement
with the Company whereby Mr. Crochet received an option to purchase an
additional 90,000 shares of Common Stock at $2.00 per share vesting
over a three-year period at 1/36 per month on a cumulative basis. Mr.
Crochet retained options to purchase 32,500 shares which were vested
under the terms of his previous employment agreement.
BOARD OF DIRECTORS REPORT ON REPRICING OF OPTIONS
Since the Company was founded in 1991, Mr. Charles D. Crochet, the
President of the Company, is the only person whose stock options have been
repriced. In August 1995, the Board of Directors authorized the exchange and
repricing of certain outstanding stock options (the "Old Options") held by Mr.
Crochet, whereby Mr. Crochet could voluntarily surrender certain existing stock
options and receive new stock options (the "New Options") on the terms
described below. The Board of Directors noted that the overall purpose of the
Option Plan is to attract and retain the services of the Company's employees
and to provide incentives to such person to exert maximum efforts for the
Company's success. The Board of Directors concluded that the decline in the
market value of the Common Stock had frustrated these purposes and diminished
the value of the Company's stock option program as an element of the
29
<PAGE> 31
Company's compensation arrangements. Accordingly, the Board of Directors
adopted a repricing program with the elements described below.
In connection with the repricing, Mr. Crochet exchanged an aggregate
of 57,500 shares subject to Old Options for 57,500 shares of New Options. Mr.
Crochet also received options to purchase an additional 32,500 shares at $2.00
per share at the time of the repricing. The exercise price of the Old Options
was $3.00 per share and the exercise price of all New Options is $2.00 per
share. The market price of the Company's Common Stock at the time of the
repricing was $1.25 per share. The New Options vest at the rate of 1/36 per
month over a three-year period. The Old Options exchanged by Mr. Crochet had a
remaining term of eight years and one month.
EMPLOYMENT AGREEMENTS
Charles D. Crochet serves as President of the Company pursuant to an
employment agreement. On August 31, 1995, the Company renewed Mr. Crochet's
employment agreement increasing his salary to $10,833 per month commencing
October 1, 1995 through September 30, 1996, to $12,083 per month from October
1, 1996 through September 30, 1997, and to $13,333 per month from October 1,
1997 through May 31, 1998. As an additional incentive to Mr. Crochet under the
new employment agreement, Mr. Crochet is eligible for an annual bonus based on
fiscal year pre-tax profits as a percentage of revenues. The amount of such
annual bonus is based on a percentage between 6% and 10% of an amount
determined by the Board of Directors from an approved bonus plan, such actual
percentage depending upon the Company's pre-tax profits as a percentage of
revenue.
In addition, in February 1994, Mr. Crochet also received an option to
purchase 90,000 shares of 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 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.
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.
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 fiscal
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. Mr. Crochet
also served as the President of the Company and Dr. Pues also served as Vice
President and Assistant Secretary of the Company during fiscal 1997.
CERTAIN TRANSACTIONS
In June 1997, WSI, the majority stockholder of the Company, and the
Company entered into an agreement pursuant to which WSI converted $7,000,000 of
debt into 1,000,000 shares of Series A Preferred Stock. The $7,000,000 of debt
that was converted into Series A Preferred Stock included (i) approximately
$3,900,000 of the amounts owed under the First Revolving Credit Facility and
(ii) all amounts owed under the Second Revolving Credit Facility.
On July 17, 1997, the Company entered into a Settlement Agreement (the
"Settlement Agreement'), to settle the case of James T. Rash, et al. v. Waste
Systems, Inc., et al. In accordance with the terms of the Settlement
Agreement, the Company and WSI converted 1,000,000 shares of the Series A
Preferred Stock that were owned by WSI into
30
<PAGE> 32
7,000,000 shares of the Series B Preferred Stock. The conversion of the Series
A Preferred Stock into shares of Series B Preferred Stock was completed on
March 24, 1998.
The Company and WSI entered into a Stock Purchase and Note
Modification Agreement, dated as of February 19, 1998 (the "Stock Purchase and
Modification Agreement"), pursuant to which WSI converted $750,000 of
outstanding debt under the First Revolving Credit Facility into the right to
receive 750,000 shares of Series C Preferred Stock.
In 1996 and 1997, the Company shared certain facilities, personnel and
administrative services with WSI, of which the costs to the Company were
negligible.
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 fiscal years 1996 and 1997. There were outstanding invoices
totaling $20,000 and $7,000 due to Crochet Equipment Company at September 30,
1996 and 1997, respectively.
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 such company during fiscal years ended September 30,
1996 and 1997, totaled $22,000 and $62,000, respectively.
31
<PAGE> 33
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth as of April 30, 1998 the number of
shares of the Common Stock owned by (i) each Director of the Company, (ii) each
executive officer named in the Summary Compensation Table above, (iii) all of
the Company's Directors and executive officers as a group, and (iv) each
Selling Stockholder. Unless otherwise indicated, each holder has sole voting
and investment power (or shares such powers with his or her spouse) with
respect to the shares of Common Stock owned by such holder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BENEFICIALLY
OFFERING OWNED AFTER THE OFFERING
--------------------- SHARES -------------------------
NAME AND ADDRESS PERCENT BEING PERCENT OF
OF BENEFICIAL OWNER NUMBER OF CLASS OFFERED NUMBER CLASS
- ------------------- --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Waste Systems, Inc.(1) ..................... 5,104,448 52.6% -- 5,104,448 52.56%
910 Pierrepoint, Suite 312
Shreveport, Louisiana 71106
River Bay Corporation(2) ................... 565,500 5.8% -- 565,500 5.82%
P. O. Box 13313
Jackson, Mississippi 39236
American Medical Technologies, Inc. (3) .... 680,818 7.0% -- 680,818 7.01%
5847 San Felipe, Suite 900
Houston, Texas 77057
Charles D. Crochet(4) ...................... 168,209 1.7% -- 168,209 1.73%
910 Pierrepoint, Suite 312
Shreveport, Louisiana 71106
Dr. Werner Kook ............................ -- -- -- -- --
910 Pierrepoint, Suite 312
Shreveport, Louisiana 71106
Dr. Clemens Pues ........................... -- -- -- -- --
910 Pierrepoint, Suite 312
Shreveport, Louisiana 71106
Juergen Thomas(5) .......................... -- -- -- -- --
910 Pierrepoint, Suite 312
Shreveport, Louisiana 71106
Valerie L. Banner .......................... -- -- -- -- --
910 Pierrepoint, Suite 312
Shreveport, Louisiana 71106
David J. Schoonmaker ....................... -- -- -- -- --
910 Pierrepoint, Suite 312
Shreveport, Louisiana 71106
Wynne & Maney .............................. 120,000 1.2% 120,000 -- 1.24%
2730 Texas Commerce Tower
Houston, Texas 77002-2913
James Shepherd ............................. 477,889 4.9% 177,889 300,000 1.83%
P.O. Box 416
Arkadelphia, AR 71923
Michael Shepherd ........................... 239,247 2.5% 134,247 105,000 1.38%
P.O. Box 416
Arkadelphia, AR 71923
Richard McElhannon ......................... 203,334 2.1% 83,334 120,000 0.86%
P.O. Box 416
Arkadelphia, AR 71923
All Executive Officers and Directors as a
Group (7 persons) .................. 168,209 1.7% -- 168,209 1.73%
</TABLE>
32
<PAGE> 34
- -----------------
(1) A Schedule 13D dated April 17, 1995, reflects that 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 is the
beneficial owner of 865,500 shares and has sole voting and dispositive
power with respect to such shares. The Company repurchased 300,000
shares from River Bay in October 1997.
(3) The information sets forth, to the best of the Company's knowledge,
American Medical Technologies, Inc.'s beneficial ownership.
(4) Includes 6,500 shares held in the name of Mr. Crochet's son, Chase
Crochet. Also included are 112,500 shares which Mr. Crochet has the
right to acquire pursuant to the Option Plan and 10,000 options that
will vest in May 1998.
(5) Does not include 5,104,448 shares of Common Stock that are owned by
WSI, of which Mr. Thomas is a beneficial owner because he is a
Director of WSI.
PLAN OF DISTRIBUTION
This Prospectus relates to the issuance of up to 1,002,964 shares of
Common Stock issuable upon exercise of the Warrants and 515,470 shares of
Common Stock being offered for resale by the Selling Stockholders (the "Resale
Shares"). The exercise price for the Warrants is $1.50 per share. Therefore,
if all of the Warrants are exercised, the Company will receive net proceeds of
$1,504,446. The Company will not receive any of the proceeds from the sale of
the Common Stock being offered by the Selling Stockholders.
The Company has been advised by the Selling Stockholders that the
Resale Shares may be sold or distributed from time to time by the Selling
Stockholders directly to one or more purchasers (including pledgees) or through
brokers, dealers or underwriters who may act solely as agents or may acquire
Resale Shares as principals, at market prices prevailing at the time of sale,
at prices related to such prevailing market prices negotiated prices, or at
fixed prices, which may be changed. The distribution of the Resale Shares may
be effected in one or more of the following methods: (i) ordinary brokers'
transactions, which may include long or short sales; (ii) transactions
involving cross or block trades or otherwise in any market or markets where the
Company's Common Stock is traded; (iii) purchases by brokers, dealers or
underwriters as principal and resale by such purchasers for their own accounts;
(iv) "at the market" to or through market makers or into an existing market for
the Common Stock; (v) in other ways not involving market makers or established
trading markets, including direct sales to purchasers or sales effected through
agents; (vi) through transactions
33
<PAGE> 35
in options, swaps or other derivatives (whether exchange-listed or otherwise),
or (vii) any combination of the foregoing, or by any other legally available
means.
To the extent not described herein and as otherwise required by law,
the Company will file, during any period in which offers or sales are being
made, a supplement to this Prospectus or a post-effective amendment to the
Registration Statement of which this Prospectus is a part, which sets forth,
with respect to a particular offering, the specific number of Resale Shares to
be sold, the name of the selling shareholder, the sales price, the name of any
participating broker, dealer, underwriter or agent, any applicable commission
or discount and any other material information with respect to the plan of
distribution.
In order to comply with the securities laws of certain states, if
applicable, the Common Stock offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in
certain states the shares of Common Stock offered hereby may not be sold unless
they have been registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirement is available and
compliance therewith is effected.
The Selling Stockholders and any brokers, dealers, agents or
underwriters that participate with the Selling Stockholders in the distribution
of the Common Stock offered hereby may be deemed to be "underwriters" within
the meaning of the Securities Act, in which event any commissions or discounts
received by such brokers, dealers, agents or underwriters and any profit on the
resale of the Common Stock offered hereby and purchased by them may be deemed
to be underwriting commissions or discounts under the Securities Act.
The Common Stock is listed for trading on the Nasdaq Small-Cap Market.
SHARES ELIGIBLE FOR FUTURE SALE
Pursuant to the terms of the Settlement Agreement, the Company is to
issue to members of the settlement class a total of 78,014 shares of Common
Stock and Warrants which are exercisable for a total of 1,002,964 shares of
Common Stock. The 78,014 shares of Common Stock will be freely tradeable by
the holders thereof upon issuance. The Common Stock issuable upon exercise of
the Warrants will be issued pursuant to the Registration Statement of which
this Prospectus forms a part.
The Company currently has outstanding 7,000,000 shares of Series B
Preferred Stock that are convertible into a maximum of 7,000,000 shares of
Common Stock, and 750,000 shares of Series C Preferred Stock that are
convertible into a maximum of 750,000 shares of Common Stock. The Common Stock
issuable upon conversion of the Series B Preferred Stock and Series C Preferred
Stock will be restricted securities upon issuance, and therefore, will be
tradeable only in accordance with Rule 144, as discussed below. The Company
has issued options to purchase an aggregate of 162,500 shares of Common Stock.
As of May 4, 1998, options exercisable for 157,500 shares of Common Stock were
vested. The shares issuable upon exercise of these options may be subject to
immediate resale into the public markets without restriction.
Rule 144 governs resales of "restricted securities" for the account of
any person (other than an issuer), and restricted and unrestricted securities
for the account of an "affiliate" of the issuer. Restricted securities
generally include any securities acquired directly or indirectly from an issuer
or its affiliates which were not issued or sold in connection with a public
offering registered under the Securities Act. An affiliate of the issuer is
any person who directly or indirectly controls, is controlled by, or is under
common control with, the issuer. Affiliates of the Company generally include
its directors, executive officers, and persons directly or indirectly owning
10% or more of the outstanding Common Stock. Under Rule 144, unregistered
sales of restricted Common Stock cannot be made until one year from the later
of its acquisition from the Company or an affiliate of the Company.
Thereafter, restricted Common Stock may be resold without registration subject
to Rule 144's volume limitation, aggregation, broker transactions and notice-
filing requirements, and requirements concerning publicly available information
about the Company (the "Applicable Requirements"). Resales by the Company's
affiliates of restricted and unrestricted Common Stock are subject to the
34
<PAGE> 36
Applicable Requirements. The volume limitations provide that a person (or
persons who must aggregate their sales) cannot, within any three-month period,
sell more than the greater of one percent of then outstanding shares, or the
average weekly reported trading volume during the four calendar weeks preceding
each such sale. A non-affiliate may resell restricted Common Stock which has
been held for two years free of the Applicable Requirements.
Significant stockholders of the Company currently hold 6,389,975
shares of Common Stock that are eligible for sale into the public market
pursuant to Rule 144, all of which are held by persons who are able to sell
under Rule 144 subject to the Applicable Requirements.
DESCRIPTION OF CAPITAL STOCK
The Company's Certificate of Incorporation provides for authorized
capital stock of 56,500,000 shares, consisting of 40,450,000 shares of Common
Stock, par value $.01 per share, and 16,050,000 shares of preferred stock,
without par value.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share in the
election of directors and on all other matters on which stockholders are
entitled or permitted to vote. Holders of Common Stock are not entitled to
cumulative voting rights. Therefore, holders of a majority of the shares
voting for the election of directors can elect all the directors. Subject to
the terms of any outstanding series of preferred stock, the holders of Common
Stock are entitled to dividends in such amounts and at such times as may be
declared by the Company's Board of Directors out of funds legally available
therefor. Upon liquidation or dissolution, holders of Common Stock are
entitled to share ratably in all net assets available for distribution to
stockholders after payment of any liquidation preferences to holders of
preferred stock. Holders of Common Stock have no redemption, conversion or
preemptive rights.
PREFERRED STOCK
The Board of Directors has the authority to cause the Company to issue
up to the authorized number of shares of preferred stock in one or more series,
to designate the number of shares constituting any series, and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, voting rights, redemption and conversion rights and liquidation
preferences of such series, without further action by the stockholders. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of the Common Stock.
The Board of Directors has designated 1,000,000 shares of Preferred
Stock as Series A Convertible Preferred Stock ("Series A Preferred Stock"),
7,000,000 shares of Preferred Stock as Series B Convertible Preferred Stock
("Series B Preferred Stock"), and 750,000 shares of Preferred Stock as Series C
Convertible Preferred Stock ("Series C Preferred Stock"). As of the date
hereof, there are no shares of Series A Preferred Stock issued and outstanding.
As of the date hereof, 7,000,000 shares of Series B Preferred Stock and
750,000 shares of Series C Preferred Stock, are issued and outstanding. A
general description of the rights, preferences, privileges and voting powers of
the Series B and C Preferred Stock are set forth below.
The holders of shares of Series B or C Preferred Stock shall be
entitled to receive, when, and if declared by the Company's Board of Directors,
cumulative dividends from the second anniversary of the original issuance date
of the Series B or C Preferred Stock, at the rate of $.0825 per share per
annum, payable quarterly on the 15th day of July, October, January and April of
each year, commencing with a payment on July 15, 1999. Such dividends shall be
cumulative from the second anniversary of the original issuance date of the
Series B or C Preferred Stock. For so long as any shares of Series B or C
Preferred Stock shall be outstanding, without the written consent of the
holders of a majority in interest of the Series B or C Preferred Stock, the
Company shall not (i) purchase or redeem any shares of its Common Stock, or
(ii) declare, pay or set apart for any payment any dividend on its Common
Stock.
35
<PAGE> 37
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 at a per share
redemption price equal to $1.00, plus accrued dividends, if any. 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.
In the event of the dissolution, liquidation or winding up of the
affairs of the Company, whether voluntary or involuntary, or in the event of
its insolvency, there shall be paid to the holders of the Series B or C
Preferred Stock an amount equal to that which would have been payable if the
Series B or C Preferred Stock had been redeemed on the date of such payment
before any distribution of assets or payment shall be made to the holders of
any other class of capital stock of the Company. If the assets of the Company
available for distribution to the holders of Series B or C Preferred Stock
shall be insufficient to permit payment to the holders of the Series B or C
Preferred Stock of the full amount or amounts aforesaid, then the entire assets
of the Company shall be distributed ratably among the holders of the Series B
or C Preferred Stock then outstanding according to the number of shares held by
each. After the amounts provided for above have been paid or distributed, any
assets remaining shall be paid to or distributed among the holders of Common
Stock pro rata on a per share basis.
Except as otherwise required by law or expressly provided for below,
the holders of Series B Preferred Stock shall not have 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.
The shares of Series B or C Preferred Stock do not have preemptive or
subscription rights.
WARRANTS
Each Warrant entitles the holder to purchase at any time until April
6, 2000 one share of Common Stock at an exercise price of $1.50 per share. The
number of shares issued upon exercise of the Warrants is subject to adjustment
as the result of a stock split, combination of shares or stock dividends
payable with respect to the Common Stock. If the Company shall engage in a
merger, consolidation, reorganization, recapitalization or similar transaction,
each Warrant share becomes exercisable for the stock, securities and other
consideration that the holder of the number of shares of Common Stock subject
to the Warrant would have been entitled to receive in any such merger,
consolidation, reorganization, recapitalization or similar transaction (with
appropriate adjustment, if any, to the exercise price).
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is Harris Trust
& Savings Bank, Houston, Texas.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock offered
hereby will be passed on for the Company by Porter & Hedges, L.L.P., Houston,
Texas.
36
<PAGE> 38
EXPERTS
The consolidated statements of 3CI Complete Compliance Corporation for
the year ended September 30, 1995 included in this Prospectus and elsewhere in
the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein and elsewhere in the Registration Statement in
reliance upon the authority of said firm as experts in giving said reports.
The consolidated statements of 3CI Complete Compliance Corporation for
the years ended September 30, 1996 and September 30, 1997 included in this
Prospectus and elsewhere in the Registration Statement have been audited by
Heard, McElroy & Vestal, LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein and elsewhere in
the Registration Statement in reliance upon the authority of said firm as
experts in giving said reports.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith, files
reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and
other information may be inspected and copied at the public reference
facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C., at the Commission's regional offices at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and
World Trade Center, 13th Floor, New York, New York 10007; and at the offices of
Nasdaq at 1735 K Street, N.W., Washington, D.C. 20006. Copies of such material
may also be obtained from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Such information also may be obtained on the Internet through the
Commission's, EDGAR database at http://www.sec.gov.
37
<PAGE> 39
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 . . . . . . . . . . . . . F-2
Report of Independent Public Accountants Arthur Andersen LLP . . . . . . . . . . . . . . . . . F-3
Audited Consolidated Balance Sheets -- September 30, 1997 and 1996 . . . . . . . . . . . . . . F-5
Audited Consolidated Statements of Operations for the years ended September 30, 1997, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Audited Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
September 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Audited Consolidated Statements of Cash Flows for the years ended September 30, 1997, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Notes to Audited Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . F-10
Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-27
Unaudited Consolidated Balance Sheets - December 31, 1997 and September 30, 1997 . . . . . . . F-28
Unaudited Consolidated Statements of Operations for the three months ended December 31, 1997
and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-29
Unaudited Consolidated Statements of Cash Flows for the three months ended December 31, 1997
and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-30
Notes to Unaudited Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . F-31
</TABLE>
F-1
<PAGE> 40
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 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
F-2
<PAGE> 41
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,
F-3
<PAGE> 42
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
F-4
<PAGE> 43
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
Common stock, $0.01 par value, authorized 15,000,000 shares; 7,000,000 --
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.
F-5
<PAGE> 44
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.
F-6
<PAGE> 45
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 accrued
interest to equity -- -- 416,667 4,167 995,833 -- 1,000,000
Purchase of River Bay -- -- 865,500 8,655 -- -- 8,655
Net loss -- -- (5,079,885) (5,079,885)
--------- ---------- ---------- ----------- ----------- ------------ ------------
Balance at September 30, 1995 -- -- 9,504,841 95,049 19,665,235 (7,938,945) 11,821,339
Issuance of Med-Waste earnout
shares 145,470 1,455 196,008 197,463
Issuance of Med-Waste
settlement shares 250,000 2,500 247,500 250,000
Net loss (16,282,837) (16,282,837)
--------- ---------- ---------- ----------- ----------- ------------ ------------
Balance at September 30, 1996 -- -- 9,900,311 99,004 20,108,743 (24,221,782) (4,014,035)
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.
F-7
<PAGE> 46
3C1 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 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, 72,000 12,110 304,230
affiliated companies
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:
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.
F-8
<PAGE> 47
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.
F-9
<PAGE> 48
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
F-10
<PAGE> 49
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.
F-11
<PAGE> 50
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> <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.
F-12
<PAGE> 51
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,
F-13
<PAGE> 52
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> <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
F-14
<PAGE> 53
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>
F-15
<PAGE> 54
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
F-16
<PAGE> 55
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 $.05775 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
F-17
<PAGE> 56
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.
F-18
<PAGE> 57
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 $.05775 per share per annum, and no more, payable quarterly
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<PAGE> 58
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> 59
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> 60
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> 61
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
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<PAGE> 62
completed. Such debt conversion has enabled the Company to be in compliance
with the New Capital Surplus Requirement.
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
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<PAGE> 63
Company of the corporate actions referred to above and their subsequent
adoption by the majority stockholder of the Company.
F-25
<PAGE> 64
3CI COMPLETE COMPLIANCE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
================================================================================
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
CLASSIFICATION PERIOD EXPENSES ACCOUNTS 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.
F-26
<PAGE> 65
3CI COMPLETE COMPLIANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets: $ -- $ --
Cash and cash equivalents
Restricted cash -- --
Accounts receivable, net allowances of $836,272 and $875,144
at December 31, 1997 and September 30, 1997, respectively 2,991,378 3,559,091
Inventory 58,152 71,886
Other current assets 176,987 440,373
------------ ------------
Total current assets 3,226,517 4,071,350
------------ ------------
Property, plant and equipment, at cost 11,096,459 10,927,159
Accumulated depreciation (2,712,327) (2,477,411)
------------ ------------
Net property, plant and equipment 8,384,132 8,449,748
------------ ------------
Excess of cost over net assets acquired, net of accumulated
amortization of $81,238 and $74,988 at December 31, 1997 and
September 30, 1997, respectively 355,993 362,243
Other intangible assets, net of accumulated amortization of $167,752 and
$149,104 at December 31, 1997 and September 30, 1997, respectively 255,627 274,264
------------ ------------
Total assets $ 12,222,269 $ 13,157,605
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Bank overdrafts $ 24,176 $ 156,880
Notes payable 38,794 217,525
Current portion of long-term debt, unaffiliated lenders 1,330,396 1,373,617
Accounts payable 1,535,526 1,034,924
Accounts payable, affiliated companies 409,156 391,156
Accrued liabilities 1,416,118 2,188,697
Note payable majority shareholder 4,948,746 4,844,217
------------ ------------
Total current liabilities 9,702,912 10,207,016
------------ ------------
Long-term debt unaffiliated lenders, net of current portion 685,003 986,467
------------ ------------
Total liabilities 10,387,915 11,193,483
------------ ------------
Shareholders' Equity (deficit);
Preferred stock, no par value, authorized 1,000,000 shares; issued and
outstanding 1,000,000 at December 31, 1997 and September 30, 1997,
respectively 7,000,000 7,000,000
Treasury Stock (7,065)
Common Stock, $0.01 par value, authorized 15,000,000 shares; issued
and outstanding 9,154,811 at December 31, 1997 and September 30,
1997, respectively 91,549 91,549
Additional Paid-in capital 20,182,543 20,182,543
Accumulated deficit (25,432,673) (25,309,970)
------------ ------------
Total Shareholders' equity (deficit) 1,834,354 1,964,122
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 12,222,269 $ 13,157,605
============ ============
</TABLE>
F-27
<PAGE> 66
3CI COMPLETE COMPLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
-------------- --------------
<S> <C> <C>
Revenues $ 4,600,534 $ 4,673,658
Expenses:
Cost of Services 3,437,167 3,499,959
Depreciation and Amortization 294,979 357,923
Selling, general and administrative 767,959 836,970
-------------- --------------
Net income (loss) from Operations $ 100,439 $ (21,194)
Other Income (expense):
Interest and other expense (223,131) (324,382)
-------------- --------------
Loss before income taxes and accretion of stock put (122,702) (345,576)
-------------- --------------
Income taxes -- --
-------------- --------------
Net loss $ (122,702) $ (345,576)
============== ==============
Weighted average shares outstanding 9,153,833 9,034,811
============== ==============
Net loss per common share $ (0.01) $ (0.04)
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 67
3CI COMPLETE COMPLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
-------------- --------------
<S> <C> <C>
Cash flow from operating activities:
Net loss (122,702) (345,576)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
(Gain) loss on disposal of fixed and intangible assets 34,888 --
Depreciation and amortization 294,979 357,923
Unpaid interest included in long-term debt
Change in assets and liabilities, net
(Increase) decrease in accounts receivable, net 567,713 (1,395,304)
(Increase) decrease in inventory 13,734 (36,940)
(Increase) decrease in prepaid expenses 263,386 144,547
Increase (decrease) in accounts payable 500,602 400,364
Increase (decrease) in accounts
payable, affiliated companies 18,000 18,000
Increase (decrease) in accrued liabilities (772,579) (160,898)
-------------- --------------
Total adjustments to net loss 920,723 (672,308)
-------------- --------------
Net cash provided by (used in) operating activities 798,021 (1,017,884)
-------------- --------------
Cash flow from investing activities:
Proceeds from sale of property, plant and equipment 22,325 16,083
Purchase of property, plant and equipment (261,690) (232,536)
-------------- --------------
Net cash used in investing activities (239,365) (216,453)
-------------- --------------
Cash flow from financing activities:
Increase (decrease) in bank overdrafts (132,704) 387,695
Proceeds from issuance of notes payable -- --
Principal reduction of notes payable (178,731) (144,449)
Reduction of long-term debt, (344,685) (300,437)
unaffiliated lenders (7,065)
Repurchase of treasury stock
Proceeds from issuance of note payable
to majority shareholders -- 1,096,000
Unpaid interest added to note payable
to majority shareholders 104,529 195,528
-------------- --------------
Net decrease in cash and cash equivalents -- --
-------------- --------------
Cash and cash equivalents, beginning of period -- --
-------------- --------------
Cash and cash equivalents, end of period $ -- $ --
============== ==============
</TABLE>
F-29
<PAGE> 68
3CI COMPLETE COMPLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
(1) 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. 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.
THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN PREPARED, WITHOUT
AUDIT, BY THE COMPANY PURSUANT TO THE RULES AND REGULATIONS OF THE SECURITIES
AND EXCHANGE COMMISSION. AS APPLICABLE UNDER SUCH REGULATIONS, CERTAIN
INFORMATION AND FOOTNOTE DISCLOSURES NORMALLY INCLUDED IN FINANCIAL STATEMENTS
PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES HAVE BEEN
CONDENSED OR OMITTED. THE COMPANY BELIEVES THAT THE PRESENTATION AND
DISCLOSURES HEREIN ARE ADEQUATE TO MAKE THE INFORMATION NOT MISLEADING AND THE
FINANCIAL STATEMENTS REFLECT ALL ADJUSTMENTS AND ARE OF A NORMAL RECURRING
NATURE WHICH ARE NECESSARY FOR A FAIR PRESENTATION OF THESE FINANCIAL
STATEMENTS. THESE FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN THE COMPANY'S ANNUAL REPORT
ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1997, AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
(2) NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share was computed by dividing net income
(loss) for each quarterly period by the weighted average number of common
shares outstanding for each period. In October 1994, the Company acquired
substantially all the assets and assumed certain liabilities of River Bay
Corporation ("River Bay"). The 565,500 shares that remain issued in connection
with the acquisition of River Bay have been excluded from weighted average
shares outstanding. In conjunction with the business acquisition with respect
to AMTC and A/MED the weighted average shares outstanding have been
retroactively restated for reverse acquisition accounting to reflect the
equivalent shares based on the conversion ratio established in the merger
transaction. The effect of stock options and warrants is antidilutive and is
therefore not considered in the calculation of net loss per common share.
(3) BUSINESS CONDITIONS
The Company has consistently suffered losses for the past several
fiscal years, and losses have continued in fiscal 1998. As of December 31,
1997, the Company has a working capital deficit of $6,476,395, but a positive
shareholders equity of $1,834,354. 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 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 have 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 Promissory Note shall evidence all
F-30
<PAGE> 69
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 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 to for continued listing on the exchange, 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 and continuing into
fiscal 1998, the Company has begun to have discussions 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
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.
(4) 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, that such removal was wrongful and ineffective. The Company's
insurer has denied coverage in the lawsuit. The Company has denied all
material allegations of the lawsuit and believes that the resolution of this
matter, including attorneys fees incurred in the Company's defense could have a
material adverse effect on the Company's financial condition. However, the
outcome of this cannot be predicted, and an adverse decision in the lawsuit
would likely have a material adverse effect on the Company's financial
condition and results of operations 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
F-31
<PAGE> 70
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.
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 ("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 have 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 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.
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,
F-32
<PAGE> 71
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.
F-33
<PAGE> 72
================================================================================
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED ON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
PURCHASE, ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO PURCHASE, SUCH SECURITIES IN ANY CIRCUMSTANCE IN WHICH SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Summary Financial Information . . . . . . . . . . . . . . . . . . . . 4
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Price range of Common Stock . . . . . . . . . . . . . . . . . . . . . 9
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . 11
Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . 12
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Summary Compensation Table . . . . . . . . . . . . . . . . . . . . 28
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . 30
Principal and Selling Stockholders . . . . . . . . . . . . . . . . 32
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . 33
Shares Eligible for Future Sale . . . . . . . . . . . . . . . . . . 34
Description of Capital Stock . . . . . . . . . . . . . . . . . . . 35
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Available Information . . . . . . . . . . . . . . . . . . . . . . . 37
Index to Financial Statements . . . . . . . . . . . . . . . . . . F-1
</TABLE>
================================================================================
1,518,434 SHARES
3CI COMPLETE COMPLIANCE
CORPORATION
COMMON STOCK
--------------------
PROSPECTUS
--------------------
MAY __, 1998
<PAGE> 73
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC registration fee . . . . . . . . . . . . . . . . . . . . . . . . $ 504
NASDAQ application and listing fees . . . . . . . . . . . . . . . . . 7,500
Printing and engraving expenses . . . . . . . . . . . . . . . . . . . 5,000
Legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . . 15,000
Blue Sky fees and expenses (including legal expenses) . . . . . . . . 5,000
Accounting fees and expenses . . . . . . . . . . . . . . . . . . . . 10,000
Transfer agent and registrar fees and expenses . . . . . . . . . . . 500
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,496
---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law (the "DGCL") grants every corporation the
power to indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending, or completed action, suit, or proceeding,
whether civil, criminal, administrative, or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise,
against expenses (including attorneys' fees) judgments, fines, and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit, or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
The DGCL also grants every corporation the power to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending, or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue, or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the extent
that the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper.
The DGCL provides that to the extent that a present or former director or
officer of a corporation has been successful on the merits or otherwise in
defense of any action, suit, or proceeding referred to in the statute, or in
defense of any claim, issue, or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
The DGCL also provides that expenses (including attorneys' fees) incurred by an
officer or director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director
II-1
<PAGE> 74
or officer to repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the corporation as authorized in
this section
Article X of the Company's By-Laws requires the Company to indemnify its
directors, officers, employees and agents in accordance with the DGCL. Article X
of the Company's By-Laws also provides that the Company shall indemnify
directors, officers, employees and agents of the Company that are involved with
actions by or in the right of the Corporation, in accordance with the DGCL.
Expenses incurred in defending a civil or criminal action are to be paid in
advance, as permitted by the DGCL.
The Certificate of Incorporation of the Company, as amended (the "Certificate of
Incorporation"), provides that the personal liability of the Directors of the
Company is eliminated to the fullest extent permitted by the DGCL. The
Certificate of Incorporation also provides that to the fullest extent permitted
by provisions of the DGCL discussed above indemnify any and all persons the
Company has the power to indemnify under such section.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In February 1996, the Company issued 83,334 shares to Richard McElhannon, 83,333
shares to James Shepherd and 83,333 shares to Michael Shepherd in connection
with the settlement of a lawsuit styled James H. Shepherd et al v. 3CI Complete
Compliance Corporation. Such shares were issued in reliance upon the exemption
from registration under Section 4(2) of the Securities Act.
In January 1996, the Company issued 94,556 shares to James Shepherd and 50,914
shares to Michael Shepherd in connection with the earnout provision of the
original settlement agreement. Such shares were issued in reliance upon
exemption from registration under Section 4(2) of the Securities Act.
On July 3, 1997, the Company issued 120,000 shares to Patrick Grafton in
connection with the settlement of Mr. Grafton's employment claims. Such shares
were issued in reliance upon exemption from registration under Section 4(2) of
the Securities Act.
On March 18, 1998, the Company issued 78,014 shares of Common Stock to Klein
Bank as escrow agent in connection with settlement of a lawsuit. Such shares
were issued in reliance upon the exemption from registration under Section
3(a)(10) of the Securities Act.
On March 18, 1998, the Company issued warrants to purchase 1,002,964 shares of
Common Stock in connection with the settlement of a lawsuit. Such warrants were
issued in reliance upon the exemption from registration under Section 3(a)(10)
of the Securities Act.
ITEM 16. EXHIBITS.
The following is a list of all the exhibits filed as part of the Registration
Statement.
<TABLE>
<CAPTION>
EXHIBIT
-------
NUMBER IDENTIFICATION OF EXHIBIT
------ -------------------------
<S> <C>
2.1 -- 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).
2.2 -- 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).
2.3 -- 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>
II-2
<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT
-------
NUMBER IDENTIFICATION OF EXHIBIT
------ -------------------------
<S> <C>
2.4 -- 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).
2.5 -- 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).
2.6 -- 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).
2.7 -- 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 -- Certificate of Incorporation as amended (incorporated by reference to Exhibit 3(a) of
3CI's registration statement on Form S-1 (No. 33-45632) effective April 14, 1992).
3.2 -- Amendment to Certificate of Incorporation effective June 13, 1995 (incorporated by
reference to Exhibit 3.1 of 3CI's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1995).
3.3 -- Amendment to Certificate of Incorporation effective March 23, 1998.
3.4 -- 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).
3.5 -- Bylaws effective May 14, 1995 (incorporated by reference to Exhibit 3.2 of 3CI's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995).
3.6 -- Certificate of Designations of the Company's Series A Preferred Stock without par value.
3.7 -- Certificate of Designations of the Company's Series B Preferred Stock without par value.
3.8 -- Certificate of Designations of the Company's Series C Preferred Stock without par value.
4.1 -- 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 -- 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).
4.3 -- 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).
4.4 -- 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).
4.5 -- Revolving Promissory Note dated September 30, 1995 in the principal amount of $8,000,000
between 3CI and WSI (incorporated by reference to Exhibit 4.4 of the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1995).
4.6 -- Warrant dated March 18, 1998 issued to Klein Bank as escrow agent with respect to
1,002,964 shares of Common Stock.
4.7 -- Escrow Agreement dated March 6, 1998 between the Company and Klein Bank as escrow agent.
5.1 -- Opinion of Porter & Hedges, L.L.P. with respect to legality of securities.
</TABLE>
II-3
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
------ -------------------------
<S> <C>
10.1 -- 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 -- 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 -- First Amendment dated July, 1993 to Contract between 3CI and City of Carthage, Texas
(incorporated by reference to Exhibit 10.3 of 3CI's Annual Report on Form 10-K for the
fiscal year ended September 30, 1993).
10.4 -- 1992 Stock Option Plan of 3CI (incorporated by reference to Exhibit 10(m) of 3CI's
registration statement on Form S-1 (No. 33-45632) effective April 14, 1992).
10.5 -- Security Agreement 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).
10.6 -- Security Agreement dated October 10, 1994, between 3CI Complete Compliance Corporation
and River Bay Corporation (incorporated by reference to Exhibit 1.8 of 3CI's report on
Form 8-K filed October 27, 1994).
10.7 -- Mortgage, Security Agreement, Assignment of Leases and Financing Statement dated October
10, 1994, among 3CI Complete Compliance Corporation, 3CI Acquisition Corp., A/A/MED and
River Bay Corporation (incorporated by reference to Exhibit 1.9 of 3CI's report on Form
8-K filed October 27, 1994).
10.8 -- Debt Subordination Agreement dated October 10, 1994, among 3CI Complete Compliance
Corporation, 3CI Acquisition Corp./A/MED, River Bay Corporation, Marlan Baucum, Zeb
Baucum, III, Diedra Baucum, The Smith County Bank and the Bank of Raleigh (incorporated
by reference to Exhibit 1.10 of 3CI's report on Form 8-K filed October 27, 1994).
10.9 -- Employment Agreement dated August 31, 1995, between 3CI and Charles D. Crochet.
10.10 -- 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).
10.11 -- Settlement Agreement dated January 1996 between James Shepherd, Michael Shepherd and
Richard T. McElhannon as Releasors, and the Company, Georg Rethmann, Dr. Herrmann
Niehues, Juergen 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).
10.12 -- Exchange Agreement between 3CI Complete Compliance Corporation and Waste Systems, Inc.
dated as of June 24, 1997.
10.13 -- Stock Purchase and Note Modification Agreement between 3CI Complete Compliance
Corporation and Waste Systems, Inc. dated as of February 19, 1998.
23.1 -- Consent of Porter & Hedges, L.L.P. (included in Exhibit 5.1).
*23.2 -- Consent of Heard, McElroy & Vestal, L.L.P.
*23.3 -- Consent of Arthur Andersen LLP.
</TABLE>
- -----------------
* Filed herewith.
II-4
<PAGE> 77
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in this registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this registration
statement or any material change to such information in this
registration statement; provided, however, that subparagraphs
(i) and (ii) do not apply if the information required to be
included in a post-effective amendment by those paragraphs is
contained in the periodic reports filed by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities and
Exchange Act of 1934 that are incorporated by reference in
this registration statement.
(2) That for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered
herein, and the offering of such Securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officer and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of
the Company in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-5
<PAGE> 78
SIGNATURE
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form S-1 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Shreveport, State of Louisiana on May 5, 1998.
3CI COMPLETE COMPLIANCE CORPORATION
By: /s/ CHARLES D. CROCHET
------------------------------------
Charles D. Crochet, President
POWER OF ATTORNEY
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities indicated on May 5, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
DR. WERNER KOOK*
- ---------------------------------------- Chairman of the Board of Directors
Dr. Werner Kook
/s/ CHARLES D. CROCHET
- ---------------------------------------- President and Director
Charles D. Crochet
/s/ CURTIS W. CRANE
- ---------------------------------------- Chief Financial Officer, Secretary and
Curtis W. Crane Treasurer
DR. CLEMENS PUES*
- ---------------------------------------- Vice President and Director
Dr. Clemens Pues
THOMAS JUERGEN*
- ---------------------------------------- Director
Thomas Juergen
VALERIE L. BANNER*
- ---------------------------------------- Director
Valerie L. Banner
DAVID SCHOONMAKER*
- ---------------------------------------- Director
David Schoonmaker
*By: /s/ CURTIS W. CRANE
------------------------------------
Curtis W. Crane,
As Attorney-in-Fact
</TABLE>
II-6
<PAGE> 79
INDEX TO EXHIBITS
The following is a list of all the exhibits filed as part of the
Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT
-------
NUMBER IDENTIFICATION OF EXHIBIT
------ -------------------------
<S> <C> <C>
2.1 -- 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).
2.2 -- 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).
2.3 -- 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).
2.4 -- 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).
2.5 -- 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).
2.6 -- 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).
2.7 -- 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 -- Certificate of Incorporation as amended (incorporated by reference to Exhibit 3(a) of
3CI's registration statement on Form S-1 (No. 33-45632) effective April 14, 1992).
3.2 -- Amendment to Certificate of Incorporation effective June 13, 1995 (incorporated by
reference to Exhibit 3.1 of 3CI's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1995).
3.3 -- Amendment to Certificate of Incorporation effective March 23, 1998.
3.4 -- 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).
3.5 -- Bylaws effective May 14, 1995 (incorporated by reference to Exhibit 3.2 of 3CI's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995).
3.6 -- Certificate of Designations of the Company's Series A Preferred Stock without par value.
3.7 -- Certificate of Designations of the Company's Series B Preferred Stock without par value.
3.8 -- Certificate of Designations of the Company's Series C Preferred Stock without par value.
4.1 -- 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 -- 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).
4.3 -- 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).
</TABLE>
i
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
------ -------------------------
<S> <C> <C>
4.4 -- 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).
4.5 -- Revolving Promissory Note dated September 30, 1995 in the principal amount of $8,000,000
between 3CI and WSI (incorporated by reference to Exhibit 4.4 of the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1995).
4.6 -- Warrant dated March 18, 1998 issued to Klein Bank as escrow agent with respect to
1,002,964 shares of Common Stock.
4.7 -- Escrow Agreement dated March 6, 1998 between the Company and Klein Bank as escrow agent.
5.1 -- Opinion of Porter & Hedges, L.L.P. with respect to legality of securities.
10.1 -- 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 -- 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 -- First Amendment dated July, 1993 to Contract between 3CI and City of Carthage, Texas
(incorporated by reference to Exhibit 10.3 of 3CI's Annual Report on Form 10-K for the
fiscal year ended September 30, 1993).
10.4 -- 1992 Stock Option Plan of 3CI (incorporated by reference to Exhibit 10(m) of 3CI's
registration statement on Form S-1 (No. 33-45632) effective April 14, 1992).
10.5 -- Security Agreement 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).
10.6 -- Security Agreement dated October 10, 1994, between 3CI Complete Compliance Corporation
and River Bay Corporation (incorporated by reference to Exhibit 1.8 of 3CI's report on
Form 8-K filed October 27, 1994).
10.7 -- Mortgage, Security Agreement, Assignment of Leases and Financing Statement dated October
10, 1994, among 3CI Complete Compliance Corporation, 3CI Acquisition Corp., A/A/MED and
River Bay Corporation (incorporated by reference to Exhibit 1.9 of 3CI's report on Form
8-K filed October 27, 1994).
10.8 -- Debt Subordination Agreement dated October 10, 1994, among 3CI Complete Compliance
Corporation, 3CI Acquisition Corp./A/MED, River Bay Corporation, Marlan Baucum, Zeb
Baucum, III, Diedra Baucum, The Smith County Bank and the Bank of Raleigh (incorporated
by reference to Exhibit 1.10 of 3CI's report on Form 8-K filed October 27, 1994).
10.9 -- Employment Agreement dated August 31, 1995, between 3CI and Charles D. Crochet.
10.10 -- 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).
10.11 -- Settlement Agreement dated January 1996 between James Shepherd, Michael Shepherd and
Richard T. McElhannon as Releasors, and the Company, Georg Rethmann, Dr. Herrmann
Niehues, Juergen 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).
10.12 -- Exchange Agreement between 3CI Complete Compliance Corporation and Waste Systems, Inc.
dated as of June 24, 1997.
</TABLE>
ii
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT
-------
NUMBER IDENTIFICATION OF EXHIBIT
------ -------------------------
<S> <C> <C>
10.13 -- Stock Purchase and Note Modification Agreement between 3CI Complete Compliance
Corporation and Waste Systems, Inc. dated as of February 19, 1998.
23.1 -- Consent of Porter & Hedges, L.L.P. (included in Exhibit 5.1).
*23.2 -- Consent of Heard, McElroy & Vestal, L.L.P.
*23.3 -- Consent of Arthur Andersen LLP.
</TABLE>
- -----------------
* Filed herewith.
iii
<PAGE> 1
EXHIBIT 23.2
[HEARD MCELROY & VESTAL LLP LETTERHEAD]
Consent of Independent Public Accountants
We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated January 13, 1998, except for Note 14, as to
which the date is March 20, 1998, in the Registration Statement on Amendment
No. 1 to Form S-1 and related Prospectus of 3CI Complete Compliance Corporation
for the registration of 1,518,434 shares of its Common Stock.
/s/ HEARD MCELROY & VESTAL, LLP
Shreveport, Louisiana
May 5, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated January 10, 1996 on the consolidated financial statements of 3CI Complete
Compliance Corporation for the year ended September 30, 1995 and all references
to our Firm included in this registration statement on Form S-1 dated May 6,
1998, 1998 filed by 3CI Complete Compliance Corporation.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Houston, Texas
May 5, 1998
