<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 1-11097
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3CI COMPLETE COMPLIANCE CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 76-0351992
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
910 Pierremont, #312 Shreveport, LA. 71106
------------------------------------------
(Address of principal executive offices)
(Zip Code)
(318)869-0440
-------------
(Registrant's telephone number, including area code)
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
---------------
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
The number of shares of Common Stock outstanding as of the close of
business on May 14, 1998 was 9,787,325.
<PAGE> 2
3CI COMPLETE COMPLIANCE CORPORATION
I N D E X
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1998 (unaudited) and September 30, 1997................ 3
Consolidated Statements of Operations for the three months and
six months ended March 31, 1998 and 1997 (unaudited)............. 4
Consolidated Statements of Cash Flows for the six months ended
March 31, 1998 and 1997 (unaudited).............................. 5
Notes to Consolidated Financial Statements (unaudited)............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 12
Item 2. Changes in Securities.............................................. 13
Item 3. Defaults Upon Senior Securities.................................... 13
Item 4. Submission of Matters to a Vote
Of Security Holders.............................................. 13
Item 5. Other Information.................................................. 13
Item 6. Exhibits and Reports on Form 8-K................................... 13
SIGNATURES..................................................................... 14
</TABLE>
2
<PAGE> 3
ITEM 1 FINANCIAL STATEMENTS
3CI COMPLETE COMPLIANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997
---------- -------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 29,280 $ --
Restricted cash 427,922 --
Accounts receivable, net allowances of $762,143 and $875,144 at March 31, 1998
and September 30, 1997, respectively 3,008,573 3,559,091
Inventory 99,263 71,886
Other current assets 988,711 440,373
----------- -----------
Total current assets 4,553,749 4,071,350
----------- -----------
Property, plant and equipment, at cost 12,241,217 10,927,159
Accumulated depreciation (3,332,517) (2,477,411)
----------- -----------
Net property, plant and equipment 8,908,700 8,449,748
----------- -----------
Excess of cost over net assets acquired, net of accumulated amortization of
$87,488 and $74,988 at March 31, 1998 and September 30, 1997 respectively 349,743 362,243
Other intangible assets, net of accumulated amortization of $186,380 and
$149,104 at March 31, 1998 and September 30, 1997, respectively 239,163 274,264
----------- -----------
Total assets $14,051,355 $13,157,605
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Bank Overdrafts $ -- $ 156,880
Notes payable 915,495 217,525
Current portion of long-term debt, unaffiliated lenders 1,223,580 1,373,617
Accounts payable 1,817,206 1,034,924
Accounts payable, affiliated companies 433,906 391,156
Accrued liabilities 1,252,809 2,188,697
Note payable majority shareholder 4,796,337 4,844,217
----------- -----------
Total current liabilities 10,439,333 10,207,016
----------- -----------
Long-term debt unaffiliated lenders, net of current portion 936,640 986,467
----------- -----------
Total liabilities 11,375,973 11,193,483
----------- -----------
Shareholders' Equity (deficit):
Preferred stock, $0 01 par value, authorized 16,050,000 shares;
Issued and outstanding 7,750,000 at March 31, 1998, 77,500 --
Preferred stock, no par value, authorized 1,000,000 shares;
Issued and outstanding 1,000,000 at September 31, 1997, respectively 7,000,000
Additional Paid-in capital - preferred stock 7,672,500 --
Common stock, $0 01 par value, authorized 40,450,000 shares;
Issued and outstanding 9,221,825 at March 31, 1998
Common stock, $0 01 par value, authorized 15,000,000 shares;
Issued and outstanding 9,154,811 at September 31, 1997, respectively 92,329 91,549
Less cost of treasury stock (11,000 shares) (16,982) --
Additional Paid-in capital - common stock 20,259,777 20,182,543
Accumulated deficit (25,409,742) (25,309,970)
----------- -----------
Total Shareholders' equity (deficit) 2,675,382 1,964,122
----------- -----------
Total liabilities and shareholders' equity (deficit) $14,051,355 $13,157,605
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE> 4
3CI COMPLETE COMPLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the For the For the
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
1998 1997 1998 1997
------------------ ------------------ ---------------- -----------------
<S> <C> <C> <C> <C>
Revenues $4,810,576 $4,635,613 $9,411,110 $9,309,272
Expenses:
Cost of Services 3,500,905 3,636,821 6,938,936 7,168,109
Depreciation and Amortization 308,423 340,354 603,402 698,146
Selling, general and administrative 773,416 790,384 1,541,313 1,596,157
---------- ---------- ---------- ----------
Net income (loss) from Operations $ 227,832 $ (131,946) $ 327,459 $ (153,140)
Other Income (expense):
Interest and other expense, (204,104) (300,403) (427,231) (624,785)
---------- ---------- ---------- ----------
Net income (loss) before income taxes 23,728 (432,349) (99,772) (777,925)
---------- ---------- ---------- ----------
Income taxes -- -- -- --
---------- ---------- ---------- ----------
Net Income (loss) $ 23,728 $ (432,349) $ ( 99,772) $ (777,925)
========== ========== ========== ==========
Weighted average shares outstanding 9,160,147 9,034,811 9,106,659 9,034,811
========== ========== ========== ==========
Net income (loss) per common share $ 0.01 $ (0.05) $ (0.01) $ (0.09)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
3CI COMPLETE COMPLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the
Six Months Ended Six Months Ended
March 31, March 31,
1998 1997
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net loss (99,772) (777,925)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 603,402 698,146
Change in assets and liabilities, net
(Increase) decrease in restricted cash (427,922) --
(Increase) decrease in accounts receivable, net 550,518 (1,303,140)
(Increase) decrease in inventory (27,377) (14,324)
(Increase) decrease in prepaid expenses (548,338) (606,193)
Increase (decrease) in accounts payable 782,282 237,296
Increase (decrease) in accounts payable,
affiliated companies 42,750 36,000
Increase (decrease) in accrued liabilities (935,888) (338,762)
----------- ----------
Total adjustments to net loss 39,427 (1,290,977)
----------- ----------
Net cash provided by (used in) operating activities (60,345) (2,068,902)
----------- ----------
Cash flow from investing activities:
Proceeds from sale of property, plant and equipment 59,389 --
Purchase of property, plant and equipment (1,072,624) (101,686)
----------- ----------
Net cash used in investing activities (1,013,235) (101,686)
----------- ----------
Cash flow from financing activities:
Increase (decrease) in bank overdrafts (156,880) 329,412
Proceeds from issuance of notes payable 1,019,471 926,392
Principal reduction of notes payable (321,501) (404,133)
Proceeds from issuance of long-term debt 286,836 425,717
Reduction of long-term debt, unaffiliated lenders (410,604) (872,800)
Repurchase of treasury stock (16,982) --
Proceeds from issuance of note payable to majority
shareholders 500,000 1,766,000
Unpaid interest added to note payable to majority
shareholders 202,520 --
----------- ----------
Net cash provided in financing activities 1,102,860 2,170,588
----------- ----------
Net decrease in cash and cash equivalents 29,280 --
----------- ----------
Cash and cash equivalents, beginning of period -- --
----------- ----------
Cash and cash equivalents, end of period $ 29,280 $ --
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
3CI COMPLETE COMPLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(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 (the
Companies). Additionally, in February 1994, WSI purchased 1,255,182 shares of
3CI common stock from American Medical Technologies (AMOT).
As a result of the transactions described above, WSI became the majority
shareholder of 3CI immediately following the acquisition of AMTC and A/MED. For
accounting purposes, AMTC and A/MED were considered the acquirer in a reverse
acquisition. The combined financial statements of AMTC and A/MED are the
historical financial statements of the Company for periods prior to the date of
the business acquisition. Historical combined shareholders' equity of AMTC and
A/MED has been retroactively restated for the equivalent number of 3CI shares
received for the assets and business operations of AMTC and A/MED, and the
combined accumulated deficit of AMTC and A/MED has been carried forward.
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
In 1997, the Financial Accounting Standards Board issued Statement 128, Earnings
per Share. Statement 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share, basic
earnings per share is very similar to the previously reported fully diluted
earnings per share. For the six months ended March 31, 1998 and 1997, the
effects of dilutive potential common shares are not considered in calculating
earnings per share because their effects would be anti-dilutive to the net loss
reported for these time periods. All earnings per share for all periods
presented have been presented to conform to Statement 128 requirements.
6
<PAGE> 7
Basic income (loss) per common share has been computed by dividing net income
(loss) for each weighted common shares outstanding for each period presented. In
October 1994, the Company acquired substantially all the assets and assumed
certain liabilities of River Bay Corporation. As part of the River Bay
acquisition the Company issued 865,500 common shares with River Bay Corporation
having the option to put the shares back to the Company. As of March 31, 1998,
565,500 shares remain outstanding in connection with the acquisition and have
been excluded from weighted average shares outstanding.
(3) BUSINESS CONDITIONS
The Company has historically funded its operations, acquisitions and debt
service through cash advances from its majority shareholder WSI. As a result of
the Companys prior expansion and program of acquisitions, the Company has
experienced liquidity deficiencies.
In October 1994, WSI made a non-interest bearing cash advance of $1,000,000 to
the Company, which was converted into 416,667 shares of Common Stock in April
1995. In the first half of 1995, WSI made non-interest bearing cash advances
totaling $4,100,000 to the Company. In June 1995, the Company executed a
$6,000,000 revolving promissory note, which was utilized in part to repay the
advances. This note was renegotiated in September 1995 (the "1995 Note"),
increasing the total available to $8,000,000 including interest, with the
principal not to exceed $7,400,000. The 1995 Note bears interest at the prime
rate and provides for the payment of interest in quarterly installments which is
automatically added to the outstanding principal balance, if not paid. The 1995
Note was due and payable on December 31, 1996, but to date, the Company has
requested and received monthly extensions of the maturity date. The 1995 Note is
presently due and payable in full on June 30, 1998. As of September 30, 1997,
1996, and 1995, the Company has borrowed $4,844,217, $8,843,000 and $4,100,000
respectively under the 1995 Note. During February 1998, the Company and WSI
converted an additional $750,000 of debt under the 1995 Note, into Series C
preferred stock.
During fiscal year 1996, the Company received cash advances from WSI in excess
of the 1995 Note. As a result, in December 1996, the Company entered into a
Revolving Credit Facility of $2.7 million including deferred interest (the "1996
Credit Facility"), with a maturity date of February 28, 1997. The maturity date
was subsequently extended to June 30, 1997. In February 1997, the Company
received a letter from the NASDAQ Stock Market, Inc. ("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 minimum
bid price of $1.00. The NASDAQ agreed to allow the Company to remain listed,
with an exception added to its trading symbol, until June 25, 1997, at which
time the Company would be required to meet the listing requirement. In June
1997, WSI converted $7,000,000 of debt into 1,000,000 shares of 3CI Series A
preferred stock and canceled the 1996 Credit Facility. This conversion allowed
the Company to meet the listing requirement of the NASDAQ. On June 26, 1997, the
NASDAQ confirmed that the Company was in compliance with all requirements
necessary for continued listing on the exchange and the exception to its trading
symbol was removed. The conversion also resulted in the reduction of a portion
of the outstanding indebtedness of the 1995 Note.
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. During
fiscal year 1998, the Company received a cash advance from WSI in the amount of
$500,000. This advance was utilized for settlement costs and expenses incurred
in the minority shareholder litigation. WSI is under no obligation to provide
additional advances under the 1995 Note and could demand payment of all
outstanding indebtedness under the 1995 Note at any time after June 30, 1998.
During the fiscal year 1997 and continuing into fiscal 1998, the Company has
continued 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 1995 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.
During February 1998, the Company and WSI converted an additional $750,000 of
debt under the 1995 Note, into Series C preferred stock. Also, during March
1998, the Company exchanged 1,000,000 shares of Series A preferred stock for
7,000,000 shares of Series B preferred stock.
During fiscal 1998, the Company repaid approximately $321,501 of its notes
payable and approximately $410,604 of its long-term debt that became due. During
the first quarter of the fiscal year 1998, the Board of Directors of the Company
authorized the repurchase of up to 150,000 shares of 3CI common stock from time
to time in the open market. Since the authorization by the board of Directors,
the Company has repurchased 11,000 shares at a cost of $16,982 as of March 31,
1998, and an additional 2,000 shares for $2,875 as of May 12, 1998.
The nature and level of competition in the medical waste industry has remained
high for several years. This condition has produced aggressive price
competition and results in pressures on profit margins. The Company competes
against companies which have access to greater capital resources. In order to
effectively compete in the industry on a long-term basis and fully realize its
business strategy, the Company will require additional and continued financing
and other assistance from its current majority shareholder and if available,
from outside sources. There is no assurance that adequate funds for these
purposes will be available when needed or, if available, on terms acceptable to
the Company.
7
<PAGE> 8
(4) COMMITMENTS AND CONTINGENCIES
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, 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 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 million,
plus attorney's fees. In addition, Mr. Grafton 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 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 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 one Warrant for
every three shares of common stock owned and (iii) pay $425,000 into escrow for
payment of plaintiff's attorneys' fees.
8
<PAGE> 9
River Bay. As previously reported, 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 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, declaratory judgment declaring the claims of 3CI against River Bay to be
subordinate to the claims of the banks, unspecified compensatory damages and for
punitive damages for least $1,000,000. The District Court stayed this action as
well, pending arbitration. 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 sought an injunction and stay of all
judicial and extra-judicial proceedings pursuant to the Put Option Agreement
until such time as the arbitration was 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 agreed to settle
the suit in consideration for the Company to repurchase the remaining 565,500
shares of Common Stock related to the Put Option Agreement for $816,364. The
outcome of this lawsuit did not have a material adverse effect on the Company's
financial position, results of operations and net cash flows.
The Company is subject to certain other litigation and claims arising in the
ordinary course of business. In the opinion of management of the Company, the
amounts ultimately payable, if any, as a result of such claims and assessments
will not have a materially adverse effect on the Company's financial position,
result of operations or net cash flows except where noted above.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following summarizes (in thousands) the Company's operations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 4,811 $ 4,636 $ 9,411 $ 9,309
Costs of Services 3,500 3,639 6,939 7,168
Selling, General and
Administrative Expense 773 790 1,541 1,596
Net income (loss) from operations 228 (132) 327 (153)
Other Expense and Stock Accretion, Net (204) (300) (427) (625)
Net income (loss) 24 (432) (100) (778)
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997:
REVENUES:
Revenues for the three month period ended March 31, 1998, increased to
$4,810,576 from revenues for the three month period ended March 31, 1997 of
$4,635,613. The increase in revenue of approximately 3.8% is primarily due to
an increase in the Company's direct collection revenue.
COSTS OF SERVICES:
Cost of services decreased by $135,916, or approximately 3.7%, to $3,500,905 for
the three months ended March 31, 1998, as compared to $3,636,821 for the three
month period ended March 31, 1997. The decrease in costs of services resulted
from the continued cost reductions achieved from converting existing large
customers from cardboard boxes to multi-used reusable containers, and the
reduction of operating costs at the Company's treatment facilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"):
Selling, General and Administrative expense for the three month period ended
March 31, 1998, decreased to $773,416 compared to $790,384 for the three month
period ended March 31, 1997. As a percentage of revenue, the expense for the
1998 period decreased to approximately 16.1% compared to approximately 17.1%
for the 1997 period. The decrease was due the reduction in the bad debt
expense and labor related costs.
DEPRECIATION AND AMORTIZATION EXPENSE for the three months ended March 31, 1998
decreased to $308,423 compared to $340,354 for the months ended March 31, 1997.
INTEREST EXPENSE decreased to $151,670 for the quarter ended March 31, 1998 from
$257,791 for the three months ended March 31, 1997. This decrease is a result of
WSI converting $7,750,000 of outstanding indebtedness owed by the Company to
WSI into preferred stock of the Company.
10
<PAGE> 11
SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31, 1997:
REVENUES:
Revenues for the six month period ended March 31, 1998, increased to $9,411,110
from revenues for the six month period ended March 31, 1997 of $9,309,272. The
increase in revenue of approximately 1.1% is primarily due to an increase in the
Companys direct collection revenue.
COSTS OF SERVICES:
Cost of services decreased to $6,938,936 for the six months ended March 31,
1998, compared to $7,168,109 for the six month period ended March 31, 1997. The
decrease in cost of services resulted from the continued cost reductions
achieved from converting existing large customers from cardboard boxes to
multi-used reusable containers, lower transportation costs and the reduction of
operating costs at the Company's treatment facilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"):
Selling, General and Administrative expense for the six month period ended March
31, 1998 decreased to $1,541,313 compared to $1,596,157 for the six month period
ended March 31, 1997. As a percentage of revenue, expenses for the 1998 period
decreased to approximately 16.4% compared to approximately 17.1% for the 1997
period. The decrease was due to the reduction in legal fees, bad debt reserves
and labor related costs.
DEPRECIATION AND AMORTIZATION EXPENSE for the six months ended March 31, 1998
decreased to $603,402 compared to $698,146.
INTEREST EXPENSE decreased to $301,290 for the six months month ended March 31,
1998 from $508,411 for the six months ended March 31, 1997. This decrease is a
result of WSI converting $7,750,000 of outstanding indebtedness owed by the
Company to WSI into preferred stock of the Company.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES:
While the Companys cash flow from operations has continued to improve, it still
experienced a cash loss from operations during the six months ended March 31,
1998. This operating cash flow loss for the first six months was primarily due
to the payment of settlement costs associated with the Company's minority
shareholder litigation, which was settled in February 1998. The Company
anticipates that it's working cash flow from operations for the remainder of
fiscal year 1998 will continue to improve.
INVESTING ACTIVITIES:
During the six months ended March 31, 1998, the Company invested approximately
$1,073,000 for transportation, machinery and equipment, computer equipment and
software, and other fixed assets.
FINANCING ACTIVITIES
The Company has historically funded its operations, acquisitions and debt
service through cash advances from its majority shareholder WSI. As a result of
the Company's prior expansion and program of acquisitions, the Company has
experienced liquidity deficiencies.
In October 1994, WSI made a non-interest bearing cash advance of $1,000,000 to
the Company, which was converted into 416,667 shares of Common Stock in April
1995. In the first half of 1995, WSI made non-interest bearing cash advances
totaling $4,100,000 to the Company. In June 1995, the Company executed a
$6,000,000 revolving promissory note, which was utilized in part to repay the
advances. This note was renegotiated in September 1995 (the "1995 Note"),
increasing the total available to $8,000,000 including interest, with the
principal not to exceed $7,400,000. The 1995 Note bears interest at the prime
rate and provides for the payment of interest in quarterly installments which
is automatically added to the outstanding principal balance, if not paid. The
1995 Note was due and payable on December 31, 1996, but to date, the Company
has requested and received monthly extensions on a monthly basis of the
maturity date. The 1995 Note is presently due and payable in full on
June 30, 1998. As of September 30, 1997, 1996, and 1995, the Company has
borrowed $4,844,217, $8,843,000 and $4,100,000 respectively under the 1995
Note. During February 1998, the Company and WSI converted an additional
$750,000 of debt under the 1995 Note, into Series C preferred stock.
During fiscal year 1996, the Company received cash advances from WSI in excess
of the 1995 Note. As a result, in December 1996, the Company entered into a
Revolving Credit Facility of $2.7 million including deferred interest (the
"1996 Credit Facility"), with a maturity date of February 28, 1997. The
maturity date was subsequently extended to June 30, 1997. In February 1997, the
Company received a letter from the NASDAQ Stock Market, Inc. ("NASDAQ")
regarding the Company's failure to meet listing requirements. These
requirements included maintaining a minimum capital and surplus of at least
$1,000,000 and a minimum bid price of $1.00. The NASDAQ agreed to allow the
Company to remain listed, with an exception added to its trading symbol, until
June 25, 1997, at which time the Company would be required to meet the listing
requirement. In June 1997, WSI converted $7,000,000 of debt into 1,000,000
shares of 3CI Series A preferred stock and canceled the 1996 Credit Facility.
This conversion allowed the Company to meet the listing requirement of the
NASDAQ. On June 26, 1997, the NASDAQ confirmed that the Company was in
compliance with all requirements necessary for continued listing on the exchange
and the exception to its trading symbol was removed. The conversion also
resulted in the reduction of a portion of the outstanding indebtedness of the
1995 Note.
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. During
fiscal year 1998, the Company received a cash advance from WSI in the amount of
$500,000. This advance was utilized for settlement costs and expenses incurred
in the minority shareholder litigation. WSI is under no obligation to provide
additional advances under the 1995 Note and could demand payment of all
outstanding indebtedness under the 1995 Note at any time after June 30, 1998.
During the fiscal year 1997 and continuing into fiscal 1998, the Company has
continued 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 1995 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.
During February 1998, the Company and WSI converted an additional $750,000 of
debt under the 1995 Note, into Series C preferred stock. Also, during March
1998, the Company exchanged 1,000,000 shares of Series A preferred stock
for 7,000,000 shares of Series B preferred stock.
During fiscal 1998, the Company has repaid approximately $321,501 of its notes
payable and approximately $410,604 of its long-term debt that became due.
During the first quarter of the fiscal year 1998, the Board of Directors of the
Company authorized the repurchase of up to 150,000 shares of 3CI common stock
from time to time in the open market. Since the authorization by the board of
Directors, the Company has repurchased 11,000 shares at cost of $16,982 as of
March 31, 1998, and an additional 2,000 shares for $2,875 as of May 12, 1998.
The nature and level of competition in the medical waste industry has remained
high for several years. This condition has produced aggressive price
competition and results in pressures on profit margins. The Company competes
against companies which have access to greater capital resources. In order to
effectively compete in the industry on a long-term basis and fully realize its
business strategy, the Company will require additional and continued financing
and other assistance from its current majority shareholder and if available,
from outside sources. There is no assurance that adequate funds for these
purposes will be available when needed or, if available, on terms acceptable to
the Company.
11
<PAGE> 12
PART II - OTHER INFORMATION
ITEM 1. 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, 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 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 million,
plus attorney's fees. In addition, Mr. Grafton 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 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 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 one Warrant for
every three shares of common stock owned and (iii) pay $425,000 into escrow for
payment of plaintiff's attorneys' fees.
River Bay. As previously reported, 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
12
<PAGE> 13
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 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, declaratory judgment declaring the claims of 3CI against River Bay to be
subordinate to the claims of the banks, unspecified compensatory damages and
for punitive damages for least $1,000,000. The District Court stayed this
action as well, pending arbitration. 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 sought an injunction and stay
of all judicial and extra-judicial proceedings pursuant to the Put Option
Agreement until such time as the arbitration was 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
agreed to settle the suit in consideration for the Company to repurchase the
remaining 565,500 shares of Common Stock related to the Put Option Agreement
for $816,364. The outcome of this lawsuit did not have a material adverse
effect on the Company's financial position, results of operations and net cash
flows.
The Company is subject to certain other litigation and claims arising in the
ordinary course of business. In the opinion of management of the Company, the
amounts ultimately payable, if any, as a result of such claims and assessments
will not have a materially adverse effect on the Company's financial position,
result of operations or net cash flows except where noted above.
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
3CI COMPLETE COMPLIANCE CORPORATION
(Company)
May 15, 1998 /s/ Charles D. Crochet
---------------------------------------
Charles D. Crochet
President (Principal Executive Officer)
May 15, 1998 /s/ Curtis W. Crane
---------------------------------------
Curtis W. Crane
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer
and Principal Accounting Officer)
14
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