ITEM 1. BUSINESS
GENERAL.
3CI Complete Compliance Corporation ("3CI" or the "Company") was incorporated in Delaware in 1991. The Company is engaged in the business of medical waste management services. It services customers in a number of states in and contiguous to the south and southeastern United States, including Alabama, Arkansas, Georgia, Florida, Louisiana, Mississippi, Oklahoma, Tennessee, and Texas. The Company's customers include regional medical centers, major hospitals, clinics, medical and dental offices, veterinarians, pharmaceutical companies, retirement homes, medical testing laboratories and other medical waste generators. Services to customers include collection, transportation, bar code identification and treatment by third parties. The Company also provides training to customers on compliance with regulations, use of containers, documentation and tracking.
"Medical waste" or "biomedical waste," as used herein, is broadly defined to mean any liquid or solid waste generated in the diagnosis, treatment or immunization of human beings or animals or in related research, that may result in an infectious disease. State and federal regulations tend to focus on regulated and infectious medical waste, which includes pathological wastes, including tissues, organs and body parts; blood and the products or components of blood; "sharps," including needles, scalpels, pipettes and other medical instruments; waste from surgery or autopsy; dialysis wastes, including contaminated disposable equipment and supplies; cultures and stocks of infectious agents, including cultures from medical and pathological laboratories; and various other biological wastes and discarded materials contaminated with or exposed to blood, excretion and secretions from human beings or animals. Also included are pharmaceutical wastes. Except as discussed below, "Medical waste" or "biomedical waste" as used herein, does not include "hazardous waste," as such term is commonly defined under state and federal regulations.
The Company believes the key to success in the medical waste management business is to provide customers a total solution to their medical waste compliance and disposal needs at competitive prices. To achieve and sustain a competitive advantage in the medical waste disposal industry, the Company provides the products and services described below to its customers.
MEDICAL WASTE CONTAINERS
The Company's policy is to accept medical waste from customers only if it is packaged in containers provided or approved by the Company. The Company furnishes its customers with multiple containers, reusable plastic carts, plastic reusable and rigid cardboard containers for disposal of medical waste products. These containers are clearly marked with the "biohazard" symbol to draw attention to their contents and are lined with specialized plastic bags and sealed to minimize potential contact with the medical waste products by health care workers and medical waste handlers. The Company also furnishes its customers with rigid reusable plastic containers clearly marked as biohazardous and designed to contain certain types of medical waste, such as hypodermic needles, scalpels and other so-called "sharps". Each container is specifically designed for the type of waste it will hold and meets or exceeds governmental specifications as to construction and strength. The Company believes that its emphasis on proper containerization results in safer medical waste disposal and minimizes potential hazards or liabilities to the Company and its customers.
The Company also provides reusable plastic containers for certain customers. The Company believes the use of reusable containers has the potential to lower costs to the Company. The rigid, plastic containers generally are larger than the disposable boxes and can therefore hold greater volumes of waste.
TRANSPORTATION
An important element of the Company's business strategy is to maximize the efficiency with which it collects and transports regulated medical waste. Therefore, the Company operates a specially equipped fleet of trucks, tractors and trailers (dry and refrigerated) to provide strict control of transportation services for the acceptance and transportation of containerized medical waste. Drivers are trained in Department of Transportation ("DOT") procedures for the transportation of medical waste. The Company has in place contingency plans to respond immediately to any type of spill, leakage or other emergency that may occur during transportation and provides emergency services to customers upon request.
DOCUMENTATION AND REPORTING
The bar code label affixed to each of the Company's medical waste containers is used in conjunction with computers, laser scanners and digital scales to document the handling, treatment, disposal and weighing of the customer's medical waste stream. Bar coded containers allow proper documentation and tracking of waste materials and meet all applicable local, state and federal regulations concerning packaging and labeling of medical waste materials. The Company provides its customers on a regular basis with medical waste destruction reports that document the acceptance, transportation, treatment and third party verification of their medical waste disposal. The Company's detailed documentation provides information on all waste it accepts including the individual container bar code number, point of origin, date and time of pick up, date and time of treatment, weight at time of treatment and certificate of destruction.
DISPOSAL
The Company utilizes permitted treatment facilities throughout its operating territory. There is ample capacity available in the area and the Company attempts to optimize its cost structure by utilizing treatment sources nearest its customer base. These facilities include incinerators and autoclaves. The Company formerly operated two incinerators and a Chem-clave(TM) unit in Springhill, Louisiana. In December 2001 the decision was made to permanently idle this equipment in order to avoid significant capital costs to upgrade and maintain the equipment to comply with more restrictive EPA requirements and to reduce overall treatment costs. In addition the Company holds a treatment permit at a leased location in Birmingham, Alabama where the Company formerly operated an incinerator and a microwave unit which were also permanently idled in December 2001. The Company continues to track and record the movement of medical waste through all phases of its handling and treatment, in compliance with governmental regulations.
The Company enters into medical waste disposal agreements with customers for the collection of their medical waste according to a schedule agreed upon between the parties. The Company accepts medical waste that has been packaged by customers in containers provided by the Company and provides transportation to treatment facilities. The Company uses a bar code technology to track and record the movement of medical waste through all phases of its handling in compliance with applicable governmental regulations.
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 instructs health care workers in the most efficient methods of handling, recording and documenting their waste streams in compliance with local, state and federal regulations. The Company will, on request, review a customer's internal waste collection and
control system or assist the customer in developing an internal system to provide for the efficient management of medical waste within the customer's facility from its creation to the point of its acceptance by the Company.
CUSTOMERS
The Company's health care customer base is diverse, with about 8,500 accounts in Texas, Louisiana, Mississippi, Alabama, Arkansas, Florida, Georgia, and Tennessee, including regional medical centers, major hospitals, specialty clinics, individual medical and dental practitioners, dialysis centers, veterinary clinics, nursing homes and assisted care residences, among others. The Company is not dependent upon a single customer or a few customers, and no individual customer generates three percent or more of the Company's revenues.
SALES AND MARKETING
The Company divides its market into two categories within each geographic region: the hospital market and the professional market. The hospital market consists principally of medical centers, major hospitals, major teaching institutions involved in medicine and research and major medical complexes. The professional market consists principally of physician and dental offices, laboratories, nursing and convalescent homes, medical and veterinarians' offices, and clinics and mortuaries.
The Company uses a multi-part strategy to increase its presence and customer base in a particular geographical market. First, Company representatives meet personally with a prospective customer to detail the Company's services and to negotiate a disposal agreement that reflects the prospective customer's service needs. Second, the Company seeks endorsements or referral relationships with hospitals and professional associations in the market areas. The Company seeks to achieve a mix of both hospital and professional accounts which maximizes its resources in each given market area.
The Company's sales strategy includes sales personnel in each region to maximize the Company's presence. The Company also utilizes a telemarketing program to produce new customer leads as well as ensure customer satisfaction and loyalty. Customer satisfaction is also achieved by the Company's representatives participation in medical waste audits and proper packaging in-services.
The Company produces an OSHA Compliance Manual which assists the customers with compliance of OSHA regulations. A quarterly newsletter is also provided to customers to update changes and developments related to federal regulations as well as addressing questions that may effect their facilities.
COMPETITION
The market for regulated medical waste collection and processing services is highly competitive and requires substantial labor and capital resources. The Company experiences intense competition from national, regional and local waste disposal (i.e., collection) companies as well as national, regional and local companies providing integrated medical waste services (i.e., collection and processing). These companies compete directly with the Company for business from medical waste generators located in the Company's regional markets. In addition, the Company faces competition from businesses and other organizations that are attempting to commercialize alternate treatment technologies collectively to member groups of regulated medical waste generators. The Company's majority shareholder, Waste Systems, Inc. ("WSI") is owned by Stericycle, Inc. ("Stericycle"), which also operates in some of the Company's operating markets.
INSURANCE COVERAGE
The medical waste disposal industry involves potentially significant risks of statutory, contractual, tort and common law liability. The Company carries a range of insurance coverage, including a comprehensive general liability policy in the amount of $1,000,000 with a combined single limit for bodily injury and property damage, and a $5,000,000 excess umbrella liability policy. The Company also carries $1,000,000 per occurrence of transportation liability insurance coverage, which includes coverage for environmental damage caused by waste spillage or other forms of pollution occurring during transportation. The Company believes that the types of insurance it carries and amounts of coverage are sufficient to protect the Company against the covered liabilities. There can be no assurance, however, the Company's insurance will be adequate under all circumstances or that the Company will be able to maintain its current insurance at existing levels and prices.
EMPLOYEES
As of January 14, , 2003, the Company had approximately 122 full-time and two part-time employees. Two of the employees are employed in executive capacities; the remaining are in transportation operations, sales positions and administrative and clerical capacities. None of the Company's employees are subject to collective bargaining agreements.
GOVERNMENTAL REGULATIONS
GENERAL. All aspects of the Company's business are heavily regulated. The Company's collection, hauling, processing and disposal activities are governed by numerous federal, state and local agencies and authorities under laws, rules and ordinances relating to the definition, generation, segregation, handling and packaging of medical waste. In addition, facility citing, construction, operations, occupational training, safety, air, water and incineration ash characteristics and disposal are regulated under different but related laws, rules and ordinances. The Company believes it has all required permits and is in compliance with the various laws and regulations to which it is subject.
The Company's activities are subject to federal laws and regulations relating to public health and the environment. In addition to those federal environmental and public health related laws that apply generally to the Company's activities, there are a number of federal laws and regulations 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.
TREATMENT FACILITIES. In December 2001, the decision was made to idle the Company's treatment facilities and to contract the treatment of medical waste to a third party. The Company intends to maintain treatment permits at its existing locations. These efforts typically involve the expenditure of substantial resources without any assurance of success. Such permits may include: (i) air quality permits relating to the emissions from treatment facilities, (ii) solid waste permits relating to storage, receipt and treatment of medical waste, the storage and disposal of residues from the treatment facilities, and ancillary air pollution control equipment relative to incinerators, (iii) waste-water discharge permits, (iv) storm water discharge permits, (v) site permits, such as zoning or special use permits, relating to the appropriateness of sites for a waste processing facility under applicable zoning regulations, (vi) building permits and (vii) occupancy permits. Air quality permits and site permits, and in some cases solid waste permits, can be difficult to obtain, and may take a year or longer to be issued.
Companies in the medical waste disposal industry often face resistance to various permit applications from local and regional organizations, citizens groups and residents because of the nature of the waste and the perceived threat to air quality and public health caused by waste processing. The Company often must conduct a public relations campaign, with an emphasis on education, to overcome local opposition, which often is highly political and emotional. Furthermore, once granted, permits often are subject to continuing review and may be challenged either in court or otherwise even after construction or operations have commenced. Accordingly, the Company's operations could be subject to
suspension or termination even after substantial funds have been expended in reliance upon state or local regulatory approvals.
Operating permits generally incorporate performance standards. The failure to comply with such standards could subject the Company to the suspension or revocation of its permits or financial penalties for failure to comply with permit requirements The Company believes that it is in compliance will all such standards.
TRANSFER STATIONS. Transfer of medical waste, generally from a small local pick-up vehicle to a large transport trailer, is necessary to consolidate and transport waste in an economical fashion to regional processing centers. Most states permit such transfer operations under their solid waste regulatory authority or their department of health. After receiving local approvals, such as necessary zoning or special use permits, application may be made to the appropriate state solid waste authority.
STATE TRANSPORT PERMITS. Transportation permits currently are required in a number of states. Some states require permits only if waste is picked up in that state, while others require permits to transport waste through the state. These permits generally include driver safety and training, waste packaging, labeling and tracking requirements. The Company currently holds all necessary hauling permits in each state in which it conducts operations. There can be no assurance that any of the Company's current permits will be renewed or that, if the Company is able to identify and secure additional locations for treatment or other waste processing facilities or transfer stations, all necessary permits will be obtained, or that if such permits are granted that they will be granted in a timely manner or under conditions that will be acceptable to the Company.
THE OCCUPATIONAL SAFETY AND HEALTH ACT ("OSHA"). OSHA gives the federal government the authority to regulate the management of infectious medical waste. Liability may be imposed under the general duty clause found in Section 654 of OSHA. This section requires employers to provide a place of employment that is free from recognized and preventable hazards that are likely to cause serious physical harm to employees. The regulations promulgated under OSHA require employers to give notice to employees regarding the presence of hazardous chemicals and to train employees in the use of such substances. This may be found to apply in the case of chemicals that could be present in infectious medical waste.
OSHA contains rules regarding exposure to blood born pathogens, which increase the cost of providing medical waste management services. These rules impose, among other things, engineering and work practice controls, use of personal protective clothing and equipment, training, medical surveillance, labeling and record keeping requirements with respect to occupational exposure to blood and other potentially infectious materials.
THE RESOURCE CONSERVATION AND RECOVERY ACT OF 1976 ("RCRA"). RCRA establishes a regulatory program administered by the Environmental Protection Agency ("EPA") covering the generation, storage, transportation, treatment and disposal of hazardous waste. RCRA defines "hazardous waste" as any solid waste, or combination of solid waste, which because of quantity, concentration, physical, chemical, or infectious characteristics may:
(a) cause, or significantly contribute to, an increase in mortality or an increase in serious irreversible or incapacitating reversible illness; or
(b) poses a substantial present or potential hazard to human health or the environment when improperly treated, stored, transported or disposed of, or otherwise managed.
Although this general statutory definition of hazardous waste may provide the EPA with the authority to regulate at least certain infectious medical wastes as hazardous wastes, the EPA has not
chosen to do so. To date, infectious medical wastes have not been listed by the EPA as hazardous waste, nor has being infectious been designated by the EPA as one of the characteristics of a hazardous waste. Thus, infectious medical wastes, which do not otherwise qualify as hazardous wastes, currently are not subject to regulation under RCRA as hazardous wastes.
Although the EPA has not chosen to regulate infectious wastes as hazardous wastes, it has developed and issued informal guidance outlining practical approaches to infectious waste management. Moreover, although RCRA does not comprehensively address the area of medical waste, certain wastes common to the medical field currently are listed as hazardous wastes and, therefore, certain medical wastes may be subject to the requirements of RCRA. With respect to those solid wastes, 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.
Finally, facility ash may constitute hazardous waste depending upon the composition and characteristics of the waste ash generated by the incineration technology employed. If so, the ash would be subject to the hazardous waste transportation, disposal and other hazardous waste management requirements of RCRA discussed above. However, beginning in December 2001, as the Company is no longer incinerating medical waste or handling ash, it would not be subject to these requirements.
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 of 1994. The DOT regulations contain packaging and labeling requirements, which are imposed on different waste categories, depending on the perceived hazards of each category. The regulations impose the most stringent requirements on packages containing over four liters gross volume of "etiologic agents", which are defined as "viable microorganism(s) or (their) toxin(s), which cause or may cause human disease," and are limited to certain agents listed in the Hazardous Materials Regulations. These standards are intended to prevent the release of such agents into the environment. The DOT requirements are intended to supplement etiologic waste regulations promulgated by the Public Health Service of the U.S. Department of Health and Human Services.
A significant portion of the waste the Company handles is "Regulated Medical Waste", which as defined in the DOT Regulations, includes cultures and stocks, pathological waste, human blood and any blood products, sharps, animal waste, isolation waste, and unused sharps. These wastes are considered to be of medium danger. To meet the packaging standards, packages containing these wastes must be rigid, leak resistant and impervious to moisture, of sufficient strength to prevent tearing or bursting while under normal conditions of use and handling, sealed to prevent leakage during transport, puncture resistant for sharps and sharps with residual fluids, and break resistant and tightly sealed for fluids in quantities greater than 20 cubic centimeters. The DOT regulations also prescribe labeling standards for all infectious and regulated waste and testing protocols for manufacturers and suppliers of packaging.
In addition, the Company generally is subject to regulation by the DOT and may be subject to regulation by the Interstate Commerce Commission pursuant to a number of other statutes and bodies of regulation, some of which specifically pertain to the transport of medical waste and which address, among other things, vehicle operating procedures and the training of persons to operate commercial vehicles carrying hazardous materials.
CERCLA. Federal regulations are included in the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Super-fund Amendments and Reauthorization Act of 1986 ("CERCLA"), which in general imposes strict liability in the event of a release or threatened release of hazardous substances from a facility. Certain medical wastes may be categorized as hazardous substances under CERCLA.
FEDERAL CLEAN AIR ACT. The Federal Clean Air Act and related regulations may apply to the air emissions from the Company's incineration facilities. The Clean Air Act establishes, among other things, comprehensive air permitting and enforcement programs. These regulatory programs are based on several types of air quality standards: national air quality standards, national emissions standards for hazardous air pollutants, new source performance standards, technology-based standards and acid disposition requirements. The Company is required to design, construct and operate its facilities in accordance with the Federal Clean Air Act and obtain all permits and approvals required therein. Beginning in December 2001, as the Company was no longer operating medical waste treatment facilities, so it is not currently subject to the Federal Clean Air Act as it would apply to such facilities.
FEDERAL CLEAN WATER ACT. Water discharges from the disposal processes, if any, and storm water discharges may be regulated under the Federal Clean Water Act and implementing regulations. Pursuant to the Federal Clean Water Act, the EPA has promulgated extensive effluent and water quality standards as well as permitting requirements for industrial discharges of water. The Company is required to design, construct and operate its facilities in accordance with the Federal Clean Water Act and obtain all permits and approvals required therein. As the Company is not currently operating medical waste treatment facilities, it is not subject to the Federal Clean Water Act as it would apply to such facilities.
THE FOOD AND DRUG ADMINISTRATION ("FDA"). The Company is subject to regulation by the FDA and the corresponding agencies of the states and foreign countries in which the Company sells its products. Such regulation, among other things, relates to the testing, marketing, export and manufacture of medical devices. The FDA considers sharps containers to be "medical devices", as defined under the Federal Food, Drug, and Cosmetic Act. Most sharps containers, according to the FDA, are class II accessories to sharps devices.
STATE REGULATION
The states in which the Company operates generally have complex regulatory frameworks governing, among other issues, the storage, treatment, labeling, transport and disposal of medical waste. The Company's vehicles, packaging, facilities and operating procedures are subject to detailed and comprehensive regulation on the state level. 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.
ITEM 2.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in approximately 3,200 square feet of office space in Grand Prairie, Texas which is held under a lease expiring in June 2003, under which the Company paid approximately $39,600 during fiscal 2002. The Company relocated its offices from Shreveport, Louisiana in June 2002.
The Company believes that its facilities are adequate for its current and foreseeable needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On July 16, 2002 a suit was filed in the First Judicial District Court in Shreveport, Louisiana against Stericycle, Inc. and certain of 3CI' s directors, which alleged minority shareholder oppression, breach of fiduciary duty and unjust enrichment. While the Company is not party to the lawsuit, we have contacted our insurance carrier and hired counsel to assist the Company in this litigation. The defendants in the case have denied the allegations and intend to defend the case vigorously.
The Company is subject to certain other litigation and claims arising in the ordinary course of business. Management believes the amounts ultimately payable, if any, as a result of such claims and assessments will not have a materially adverse effect on the Company's financial position, results of operations or net cash flows.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during the fourth quarter of the fiscal year ended September 30, 2002.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded over-the-counter on the OTC Bulletin Board under the symbol "TCCC." The following table provides the high and low bid quotations for the OTC Bulletin for each of the quarterly periods indicated for the fiscal years ended September 30, 2002 and 2001. These quotations indicated the inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
As of January 14, 2003, the approximate number of owners of record of the Company's Common Stock was 425, and the closing sale price of the Common Stock on January 14, 2003 was $0.32.
The Company declared, but did not pay, preferred stock dividends of $637,623 and $907,387 during the fiscal years ended September 30, 2002 and 2001 respectively. The Company has never paid dividends on its Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following information is derived from the Company's audited financial statements. This data should be read in conjunction with the financial statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Report.
(a) Refer to Note 4 to the audited financial statements for further discussion
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ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
On December 19, 2001, the Company made the decision to close all of its treatment facilities which consisted of two incinerators and a Chem-clave(TM) unit in Springhill, Louisiana, and an incinerator and a microwave unit located in Birmingham, Alabama. These facilities were temporarily idled during the fourth quarter of 2001 while management evaluated whether to incur significant capital costs to
upgrade and maintain the equipment to comply with more restrictive EPA requirements. Subsequently, on December 19, 2001, the decision was made to close the internal facilities and seek out less expensive treatment fees at external sources. Management, after considering the necessary upgrades to the existing facilities as well as the treatment capacity available at other sources, determined that this equipment had no remaining value. As a result, the treatment related assets were written down to their fair value of zero. The write down of fixed assets totaled $2,631,885 and is reflected on a separate line on the statement of operations for the fiscal year ended September 30, 2001 and is also reflected in the decrease in fixed assets and total assets.
The Company has substantial indebtedness owed to WSI. This indebtedness currently consists of a note in the principal amount of $3,890,635. In 1997 and 1998, through a series of transactions described below, certain additional debt that the Company owed to WSI previously was converted into 7,000,000 shares of the Company's Series B Convertible Preferred Stock, par value $.01 per share (the "Series B Preferred Stock") and 750,000 shares of the Company's Series C Convertible Preferred Stock, par value $.01 per share (the "Series C Preferred Stock"). The Series B Preferred Stock and Series C Preferred Stock have substantially identical terms. See "--Liquidity and Capital Resources."
YEAR ENDED SEPTEMBER 30, 2002 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 2001
REVENUES decreased by $2,992,873, or 15.9%, to $15,825,284 during the fiscal year ended September 30, 2002, from $18,818,157 for the fiscal year ended September 30, 2001. This decrease is primarily related to a reduction in the volume of waste handled. The reduction in volume was attributable to the Company's efforts to focus on small quantity generators which provide higher margins at lower volumes while reducing the focus on less profitable larger quantity generators.
COST OF SERVICES BEFORE DEPRECIATION AND AMORTIZATION AND FIXED ASSET WRITE-DOWN decreased $2,548,209 or 20.0%, to $10,204,857 during the year ended September 30, 2002, compared to $12,753,066 for fiscal 2001. The decrease was primarily attributable to a decrease in the volume of waste handled, lower treatment and transportation costs. For the year ended 2002 gross margin before depreciation and amortization and fixed asset write-down increased to 35.5% compared to 32.2% of revenue for the fiscal year ended 2001.
DEPRECIATION AND AMORTIZATION expense decreased $893,435 or 55.9% to $703,794 for fiscal year ended 2002, from $1,597,229 for fiscal 2001. In the fourth quarter of fiscal 2001, the Company wrote-down its waste treatment equipment to its fair market value of zero based upon the decision to cease processing waste internally. The write-down of $2,631,885 is reflected as a separate line in the statement of operations for the fiscal year ended September 30, 2001.
SELLING, GENERAL AND ADMINISTRATIVE expenses increased $318,598 or 11.9% to $2,992,753 or 18.9% of revenue during the fiscal year ended September 30, 2002 from $2,674,155, or 14.2% of revenue during the year ended September 30, 2001. This increase is primarily the result of decreased revenue as well as an increase in bad debt expense. In June 2002 the Company relocated its offices from Shreveport, Louisiana to Grand Prairie, Texas. The employee turnover due to the move created a delay in billing and collection of accounts receivable which led to the increase to the bad debt reserve. Bad debt expense totaled $396,634 in fiscal 2002 compared to $125,021 in fiscal 2001.
INTEREST EXPENSE decreased by $418,607, or 47.3%, to $466,842 during the fiscal year ended September 30, 2002, as compared to $885,449 in the fiscal year ended September 30, 2001. This decrease was primarily due to reduced debt and a decrease in the interest rate for the WSI promissory note, which is variable and tied to the prime interest rate.
OTHER INCOME AND EXPENSE increased by $61,938 or 37.5% to $227,211 during the fiscal year ended September 30, 2002, from $165,273 for the fiscal year ended September 30, 2001. The increase was due to an increase in payments made under a profit sharing agreement.
YEAR ENDED SEPTEMBER 30, 2001 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 2000
REVENUES increased by $1,601,379, or 9.3%, to $18,818,157 during the fiscal year ended September 30, 2001, from $17,216,778 for the fiscal year ended September 30, 2000. This increase is primarily due to an increase in pricing necessary to cover higher operating costs.
COST OF SERVICES BEFORE DEPRECIATION AND AMORTIZATION AND FIXED ASSET WRITE-DOWN increased $675,626 or 5.6%, to $12,753,066 during the year ended September 30, 2001, compared to $12,077,440 for fiscal 2000. The increase was primarily attributable to higher fuel costs and higher internal treatment costs including equipment maintenance and higher transportation costs incurred in routing waste to external sites while facilities were not operational. Cost of services before depreciation and amortization and fixed asset write down as a percentage of revenues decreased to 67.8% during 2001 from 70.1% during 2000 primarily due to increased revenue. For the year ended 2001 gross margin before depreciation and amortization and fixed asset write-down increased to 32.2% compared to 29.9% of revenue for the fiscal year ended 2000.
DEPRECIATION AND AMORTIZATION expense decreased $107,033 or 6.3% to $1,597,229 for fiscal year ended 2001, from $1,704,262 for fiscal 2000. This decrease was related to certain assets becoming fully depreciated. In the fourth quarter of fiscal 2001, the Company wrote-down its waste treatment equipment to its fair market value of zero based upon the decision to cease processing waste internally. The write-down of $2,631,885 is reflected as a separate line in the statement of operations for the fiscal year ended September 30, 2001.
SELLING, GENERAL AND ADMINISTRATIVE expenses decreased $185,237 or 6.5% to $2,674,155 or 14.2% of revenue during the fiscal year ended September 30, 2001 from $2,859,392, or 16.6% of revenue during the year ended September 30, 2000. This decrease is primarily the result of increased revenue as well as reductions in salaries and various other administrative expenses.
INTEREST EXPENSE decreased by $136,401, or 13.3%, to $885,449 during the fiscal year ended September 30, 2001, as compared to $1,021,850 in the fiscal year ended September 30, 2000. This decrease was primarily due to lower commitment fees and a decrease in the interest rate for the WSI promissory note, which is variable and tied to the prime interest rate.
OTHER INCOME AND EXPENSE increased by $24,883 to $165,273 during the fiscal year ended September 30, 2001, from $140,390 for the fiscal year ended September 30, 2000. The increase was due to an increase in payments made under a profit sharing agreement.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2002, 2001, and 2000, the Company invested approximately $70,144, $159,831, $410,885, respectively, for transportation, machinery and equipment at its treatment and transportation locations, as well as computer equipment and software.
The Company has historically financed its working capital needs, capital expenditures, and acquisitions using advances from WSI, its majority shareholder, internally generated funds, and borrowings from third parties. The Company's indebtedness currently consists of amounts owed to WSI (which are described below), and a portion of the Company's insurance premiums that are financed over the course of each fiscal year.
On October 1, 1998, WSI and the Company amended and restated a revolving promissory note (the note) which was originally due September 30, 2000. As of June 30, 2000, the Company notified WSI that it anticipated it would fail to meet a net income requirement under the note for the quarter ended June 30, 2000. The note was renegotiated and extended at that time and the default was waived.
Since that time the note has been extended either quarterly or semi-annually under interest rate terms ranging from prime plus 1.0% to prime plus 3.5% not to exceed 13%. In connection with the note extension on August 1, 2000, 3CI issued warrants to WSI for the purchase of up to 351,836 shares of 3CI common stock at an exercise price of $0.20 per share. These warrants expired on September 20, 2002. When the Note was extended on October 1, 2000, 3CI issued warrants to WSI for the purchase of up to 541,286 shares of 3CI common stock at an exercise price of $.10 per share which were exercised on December 19, 2002. In each of these cases the values of the warrants were included in the statement of operations for the respective periods as interest expense.
An agreement effective October 1, 2001 extended the note's maturity to July 1, 2002. The terms of this extension included a reduction of the interest rate to the prime rate plus 1.0% and called for a principal payment of $200,000 at renewal and an additional $200,000 principal payment in June 2002. The agreement also required the Company to achieve minimum levels of EBITDA for each of the six-month periods ended March 31, 2002 and June 30, 2002. This level was not achieved for the six months ended March 31, 2002 requiring the Company to record an additional $120,404 in interest expense.
The note was renegotiated pursuant to an agreement dated May 23, 2002 by which the maturity was extended to October 1, 2003. The terms of this extension included an interest rate equal to the prime rate, currently 4.25%, plus 1.0% and called for a principal payment of $700,000 at renewal and additional monthly payments of $100,000 to be applied to accrued interest and principal. The agreement also required the Company to achieve a minimum level of EBITDA for the six-month period ended June 30, 2002 and for each trailing six month period thereafter until maturity. This level was achieved for the six months ended June 30, 2002 and September 30, 2002.
At September 30, 2002 the Company had a net working capital deficit of $191,764 compared to a net working capital deficit of $3,938,161 at September 30, 2001. This increase of $3,746,397 was due to the overall reduction in debt and the classification of a portion of the note payable to the majority shareholder to long term debt.
Net cash provided by operating activities was $2,374,051 for the year ended September 30, 2002, compared to $1,116,881 for the year ended September 30, 2001. This increase reflects the Company's increase in income from operations. Net cash provided by operations was $1,116,881, during the year ended September 30, 2001, compared to net cash provided by operations of $1,429,540 during the year ended September 30, 2000. This decrease reflected the Company's increase in accounts receivable and decrease in accounts payable during the fiscal year ended 2001.
Net cash used in investing activities for the year ended September 30, 2002, was $430 compared to $87,015 for the fiscal year ended September 30, 2001. This decrease primarily reflects a decrease in capital expenditures. Net cash used in investing activities for the year ended September 30, 2001, was $87,015 compared to net cash used in investing activities of $358,434 for the fiscal year ended September 30, 2000. The decrease was the result of reduced capital spending during the year ended September 30, 2001.
Net cash used in financing activities was $2,184,464 in the fiscal year ended 2002 compared to $881,492 in the fiscal year ended 2001. This increase reflected the Company's efforts to reduce affiliated and un-affiliated debt during the year. The Company utilized cash provided by improved cash flows to repay over $2,000,000 in debt during the year. Cash used in investing activities totaled $881,492 for the fiscal year ended 2001 compared to $746,304 during the year ended September 30, 2000. The difference was related to increased payments of the note to its majority shareholder and other debt.
Earnings before interest, taxes, depreciation and amortization (EBITDA) totaled $2,400,463 for the fiscal year ended September 30, 2002, which reflected a decrease of $825,200 from the corresponding period for 2001, which totaled $3,225,663. This decrease was primarily due to reduced
revenue in fiscal 2002. EBITDA increased $1,086,107 in fiscal 2001 to $3,225,663 from $2,139,556 in fiscal 2000. This increase was due to the Company's increased profitability from operations in fiscal 2001.
The Company considers EBITDA to be a widely accepted financial indicator of a company's ability to service debt, fund capital expenditures, and expand its business. In addition, the note payable to the majority shareholder includes a debt covenant based on the Company's six month rolling EBITDA.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. The Company believes that the following are several of the more critical accounting policies that currently effect the presentation of the Company's financial condition and results of operations.
Allowance for Doubtful Accounts
The Company's allowance for doubtful accounts reflects reserves for customer receivables to reduce the accounts receivable balance to amounts expected to be collected. Management uses significant judgment in estimating uncollectible amounts. In estimating uncollectible amounts, management considers factors such as current overall economic conditions, industry-specific economic conditions, historical customer performance, and anticipated customer performance. While management believes the Company's processes effectively address its exposure for doubtful accounts, changes in the factors considered may require adjustment to the allowance for doubtful accounts recorded by the Company.
Self Insurance
The Company is self-insured for certain losses related to employee health care benefits. Stop loss-coverage with a third party insurer is used to limit the Company's exposure. The recorded liability, $60,196 and $136,575 at September 30, 2002 and 2001, represents an estimate of the ultimate cost of claims incurred as of the balance sheet date. The estimated liability is not discounted and is established based upon analysis of historical data and is reviewed by management to ensure that the liability is appropriate. While the Company believes these estimates are reasonable based on the information currently available, if actual trends, including the severity or frequency of claims or fluctuations in premiums, differ from estimates, the financial results could be impacted.
ITEM 7A.
ITEM 7A. QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's exposure to market risk includes the possibility of rising interest rates in connection with the Company's credit facility with WSI, its majority shareholder, thereby increasing its debt service obligation, which could adversely effect the Company's cash flows. The interest rate for the note is variable and tied to the prime rate not to exceed 13%. An increase in the prime rate of 1% would have the effect of increasing interest expense by approximately $38,906 over 12 months.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedule listed in Item 14(a)(1) and 14(a)(2) are annexed to this report as a separate section.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - NONE
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
During the fiscal year ended September 30, 2002 the Board of Directors held four meetings. Each of the current Directors who then were in office attended at least 75% of the meetings of the Board of Directors and each committee thereof on which such Director served, with the exception of Jack Schuler, who was in attendance at 25% of the meetings. The Board of Directors has an Audit Committee and a Compensation Committee.
AUDIT COMMITTEE - The Audit Committee met four times during the fiscal year and is currently composed of three members, Messers ten Brink, Schoonmaker, and Waller. All members of the Audit Committee, with the exception of Mr. ten Brink, are independent in accordance with the existing requirements of the Securities Exchange Commission. The functions of the Audit Committee include meeting with the Company's independent auditors annually to review financial results, audited financial statements, internal financial controls and procedures and audit plans and recommendations. The Audit Committee also recommends the selection, retention or termination of the Company's independent auditors, approves services provided by the independent public accountants before providing such services, and evaluates the possible effect the performance of such services will have on the accountants' independence. The Board of Directors adopted a written charter for the Audit Committee effective October 23, 2000.
COMPENSATION COMMITTEE - The Compensation Committee met once during the fiscal year ended September 30, 2001, and is currently composed of Messrs. Schoonmaker, Waller and Tomasello. The Compensation Committee recommends to the Board of Directors the compensation for the Company's executive officers; administers and makes awards under the Company's compensation plans; and monitors and makes recommendations with respect to the Company's various employee benefit plans.
The following table sets forth certain information as of January 14, 2003, with respect to the Directors and executive officers of the Company. All Directors hold office until the next annual meeting of stockholders of the Company, and until their successors are duly elected and qualified.
(1) Serves on the Company's compensation committee
(2) Serves on the Company's audit committee
There are no arrangements or understandings with respect to the selection of officers and directors and there are no family relationships between any of such persons. Messrs. Jack Schuler, Mark Miller, Frank J.M. ten Brink and Anthony Tomasello are senior officers of Stericycle, which is the Company's majority shareholder.
The following is a summary of the business background and experience of each of the persons named above:
JACK W. SCHULER has served as a Director of the Company since October 1998. Mr. Schuler has served as Chairman of the Board of Directors of Stericycle, Inc. since January 1990. From January 1987 to August 1989, Mr. Schuler served as President and Chief Operating Officer of Abbott Laboratories, a diversified health care company, where he served as a director from April 1985 to August 1989. Mr. Schuler serves as a director of Chiron Corporation, Medtronic, Inc. and Ventana Medical Systems, Inc. He is a co-founder of Crabtree Partners LLC, a private investment firm in Lake Forest, Illinois, which was formed in June 1995. Mr. Schuler received a B.S. degree in mechanical engineering from Tufts University and a M.B.A. degree from the Stanford University Graduate School of Business Administration.
OTLEY L. SMITH III has served as President and a Director of the Company since June 2000. From 1998 until 2000, he served as a consultant to businesses in the medical waste industry. In 1986 he founded Med-Compliance Services, Inc. and served as President until 1998. In 1995, he founded Technology 2100, Inc. and managed the development of a new medical waste treatment technology that was approved for use by the U.S. EPA (FIFRA) and several states. For the past ten years Mr. Smith has served as an industry representative in public sector initiatives to standardize medical waste management regulations in several southwestern states.
JAMES A. COLE - James A. Cole has served as Chief Financial Officer since October, 2002. From 1990 through 2002 he served as President and Founder of Hidden Oaks Ventures, an investment and consulting company. Prior to that he served in various management positions including President, Chief Financial Officer and Chief Executive Officer for various companies including Stevens International, Diddle Graphics, Datahand Systems, Tri-Steel Structures and Applebee's International. Mr. Cole has degrees in Finance and Accounting as well as an MBA from Indiana University and is a C.P.A.
MARK C. MILLER has served as a Director of the Company since October 1998. Mr. Miller has served as Stericycle's President and Chief Executive Officer and a Director since May 1992. From May 1989 until he joined Stericycle, Mr. Miller served as Vice President for Pacific Asia and Africa in the International Division of Abbott Laboratories, which he joined in 1976 and where he held a number of management and marketing positions. He is a Director of Affiliated Research Centers, Inc., which provides clinical research for pharmaceutical companies, and is a Director of Lake Forest Hospital. Mr. Miller received a B.S. degree in computer science from Purdue University.
FRANK J.M. TEN BRINK has served as a Director since October 1998. Mr. Ten Brink has served as Stericycle's Vice President, Finance and Chief Financial Officer since June 1997. From 1991 until 1996, he served as Chief Financial Officer of Hexacomb Corporation, and from 1996 until joining Stericycle, he served as Chief Financial Officer of Telular Corporation. Prior to 1991, Mr. ten Brink held various financial management positions with Interlake Corporation and Continental Bank of Illinois. He received a B.B.A. degree in international business and an M.B.A. degree in finance from the University of Oregon.
ANTHONY J. TOMASELLO has served as a Director since October 1998. Mr. Tomasello has served as Stericycle's Executive Vice President and Chief Technical Officer since January 1999 and previously had served as Vice President, Operations, since August 1990. For eight years prior to joining Stericycle, Mr. Tomasello was President and Chief Operating Officer of Pi Enterprises and Orbital Systems, companies providing process and automation services. Mr. Tomasello received a B.S. degree in mechanical engineering from the University of Pittsburgh.
DAVID J. SCHOONMAKER has served as a Director since February 1998. Mr. Schoonmaker has served as President and Chief Executive Officer of RxThermal, Inc., a company that permits, designs, builds, and operates medical waste treatment facilities, since 1989. Mr. Schoonmaker is President of New York Environmental Services Corp, Health Care Waste Services, and BMWNC,
Inc. Mr. Schoonmaker received a B.S. degree in chemistry from the University of California and an M.B.A. from California State College.
ROBERT M. WALLER has served as a Director since April 1999. Mr. Waller is currently Executive Vice President of Medline Industries, Inc. He has served in that capacity since 2001. From 2000 to 2001 Mr. Waller served as Chief Operating Officer of Urbanfetch.com. From 1994 to 2001 Mr. Waller served as President of RMW Logistics. From 1992 until 1994 Mr. Waller served as Chief Operating Officer of DSC Logistics. Mr. Waller received a B.S. degree in business administration from Northwestern University and a M.B.A from Lake Forest Graduate School of Management.
DIRECTOR COMPENSATION
During the fiscal year ended September 30, 2002, Directors who are officers or employees of the Company or associated with WSI received no additional compensation for their services as members of the Board of Directors. Directors who are not officers or employees currently receive $2,000 for each meeting attended in person, $500 for each telephonic meeting, and $500 for each committee meeting of the Board of Directors and were awarded options to purchase shares of Common Stock.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's Directors, executive officers, and persons who own more than 10% of a registered class of its equity securities to file reports of ownership and reports of changes in ownership of such equity securities with the Securities and Exchange Commission (the "SEC"). Directors, executive officers and greater than 10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such forms furnished to the Company and written representations that no other reports were required, the Company believes that all of its Directors, executive officers and greater than 10% stockholders complied with all Section 16(a) filing requirements.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the cash compensation awarded to, earned by or paid to the Company's executive officers for the fiscal years ended September 30, 2000, September 30, 2001 and September 30, 2002 who received bonus and salary, which exceeded $100,000 in any of the years ended 2000, 2001 and 2002.
- --------------------------------------------------------------------------------
(1) On June 8, 2000 Charles Crochet, resigned. Otley L. Smith was appointed as the Company's President on June 8, 2000. The salary for 2000 represents a partial year.
(2) On June 8, 2000 Mr. Smith received an option to purchase 75,000 shares of common stock at $0.33 per share of which 25,000 vested after one year with the remaining 50,000 shares vesting evenly over the next two years.
2002 OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table provides certain information regarding unexercised options to purchase shares of Common Stock granted by the Company to the named executives during the fiscal year ended September 30, 2002. No executives exercised any Common Stock options during fiscal 2002.
- ----------
(1) The exercise price per share exceeded the closing price of a share of Common Stock on September 30, 2002, and accordingly, none of Mr. Smith's stock options were in the money at fiscal year end.
EMPLOYMENT AGREEMENTS
Mr. Smith serves as the Company's President pursuant to a letter agreement signed June 6, 2000. The agreement specifies Mr. Smith's salary to be $125,000 annually. This agreement also calls for an option to purchase 75,000 shares of the Company's common stock at $0.33 per share of which 25,000 shares vested after one year and the remainder of which vests evenly over the second and third year after issuance. Also, as an additional incentive, Mr. Smith is eligible for an annual bonus of up to $40,000 based on the Company achieving certain goals related to earnings and cash flow. Mr Smith received $20,000 under this agreement during the fiscal year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of the Company has a compensation committee which recommends to the board of directors the compensation for executive officers, administers and makes awards under our compensation plans, and monitors and makes recommendations with respect to our various employee benefits plans. During the fiscal year 2002, the following persons served on the compensation committee and participated in the deliberations concerning executive officer compensation: Anthony J. Tomasello, David Schoonmaker and Robert Waller. None of these persons serve on the compensation committee of any other company.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of January 14, 2003 the number of shares of Common Stock beneficially owned by each (i) director (ii) executive officer, (iii) 5% beneficial owners and (iv) all Directors 5% beneficial owners and executive officers of the Company as a group. Except as noted below, each holder has sole voting and investment power with respect to all shares of common stock listed as owned by such person.
- ----------
(1) Includes all shares of Common Stock with respect to which each Director directly, through any contract, arrangement, understanding, relationship or otherwise, has or shares the power to vote or direct voting of such shares or to dispose or direct the disposition of such shares. Including shares that may be purchased under stock options within 60 days.
(2) A Schedule 13D dated May 1, 2002 reflects that WSI is the beneficial owner of 5,104,448 shares of common stock. Such Schedule 13D reflects that Stericycle, Inc owns 100% of WSI. Assumes the conversion of 7,750,000 shares of preferred stock owned by WSI into 7,750,000 shares of common stock and includes 541,286 shares which WSI acquired via the exercise of warrants on December 19, 2002. Additionally, a schedule 13D filed May 1, 2002 reflects that Stericycle, Inc. owns 932,770 shares. Including these shares held directly by Stericycle, Inc., and those held through WSI, and assuming conversion of preferred stock, Stericycle, Inc. owns 81.9%. Without assumed conversion of preferred shares Stericycle directly and through WSI owns 67.5%.
(3) Includes 57,740 shares issuable upon the exercise of vested options.
(4) Includes 80,000 shares issuable upon the exercise of vested options.
(5) Includes 50,000 shares issuable upon the exercise of vested options
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 30, 1998, Stericycle acquired 100% of the stock of WSI for $10 million (the "Transaction"). As a result of the Transaction, WSI became a wholly owned subsidiary of Stericycle. As of December 19, 2002, WSI owns 58.0% or 5,645,734 shares of the Company's Common Stock and 100% of the Company's outstanding preferred stock, consisting of 7,000,000 shares of Series B preferred stock and 750,000 shares of Series C preferred stock . The Preferred Stock is convertible into 7,750,000 shares of Common Stock, which if converted, would increase WSI's ownership percentage to 76.6%. Together the shares owned directly by Stericycle and indirectly through WSI including the assumed conversion of the preferred shares total 14,328,504 or 81.9%.
As of September 30, 2002 the Company owed $3,890,635 to WSI under a certain amended and restated promissory note which is more fully described in "Management's Discussion and Analysis of Financial Conditions and Results of Operations Liquidity and Capital Resources."
In June 1999, the Company established a master lease agreement in the amount of $3,000,000 with LaSalle National Leasing Corporation. Of the total, $2,000,000 is to be utilized for the leasing of transportation equipment of which $82,312 and $179,569 had been utilized at September 30, 2002 and 2001 respectively, and $1,000,000 for the financing of equipment, none of which was being utilized at September 30, 2002 and $398,851 of which been utilized at September 30, 2001. This agreement is guaranteed by Stericycle, Inc. which owns 100% of WSI.
The Company is insured under Stericycle's Umbrella Insurance policy. The Company accrued $15,761, $16,067, and $10,025 for this coverage in the fiscal years ended September 30, 2002, 2001 and 2000 respectively which is included in sales general and administrative expenses.
The Company outsources the treatment of its medical waste to treatment facilities in Terrell, Texas; Conroe, Texas; Memphis, Tennessee; Beaver Dam, Kentucky; Reserve, Louisiana and Lake City, Georgia which are owned by Stericycle, the parent of WSI, its majority shareholder. The treatment fees are paid currently in accordance with 30-day terms. In addition, Stericycle treated waste at the 3CI treatment facilities in Springhill, Louisiana and Birmingham, Alabama during the year during the fiscal years ended September 30, 2001 and 2000. Treatment fees charged by Stericycle totaled $2,598,399, $1,144,378 and $177,085 at the various facilities for the fiscal years ended September 30, 2002, 2001 and 2000, respectively, which are included in Costs of Services for the respective years. Stericycle incurred $102,965 in treatment fees at 3CI facilities during fiscal 2001 and $45,395 in 2000 which is included in Revenues for the respective years. Commencing in 2002, Stericycle also provides long-haul transportation services during the year for the Company. Transportation fees for these services totaled $912,642 for the year ended September 30, 2002 and are included in Costs of Services for that year. In February 1999, the Company entered into a 36 month operating lease agreement with Stericycle Inc., to lease medical waste containers. The rental expense recorded for the year ended September 30, 2002, was $20,255, and $24,300 for each of the fiscal years 2001, and 2000.
The Company parks trucks and trailers at Stericycle transportation depots at Reserve, Louisiana and Memphis, Tennessee. Stericycle did not charge the Company for such use of these facilities. Also during the year, the Company utilized Stericycle personnel for tax preparation and analysis and was provided with internal audit services from a firm utilized by Stericycle. Stericycle did not charge the Company for these services.
On May 1, 2002 Stericycle, Inc., the Company's majority shareholder, completed a transaction in which they purchased from James H. Shepherd, James Michael Shepherd and Richard T. McElhannon (the "sellers") certain profit-sharing rights, put rights, and other rights of the sellers under a settlement agreement entered into with the company in January 1996. The purchase included interest in all security agreements, mortgages and other instruments securing the Company's various obligations to the sellers under the settlement agreement, and 932,770 shares of the Company's common stock owned by the sellers. During the fiscal year ended September 30, 2002 the Company paid $138,000 to Stericycle under the profit sharing terms of this agreement.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. This information is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, including our principal executive officer and our principal accounting officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures within 90 days of the filing date of this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in alerting them on a timely basis to material information required to be disclosed in our periodic filings.
There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in the foregoing paragraph.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
1. Financial Statements
The audited financial statements and reports as detailed in the Index to Financial Statements and Schedules for the year ended September 30, 2002, the year ended September 30, 2001 and the year ended September 30, 2000, required in response to Item 8 of Form 10-K are annexed to this report as a separate section.
2. Financial Statement Schedule
The financial statement schedule for the year ended September 30, 2002, the year ended September 30, 2001, and the year ended September 30, 2000, required by Item 8 of Form 10-K, is annexed to this report as a separate section.
(b) REPORTS ON FORM 8-K FILED IN THE FOURTH QUARTER OF 2001:
None
(c) EXHIBITS - THE RESPONSE TO THIS PORTION OF ITEM 14 IS SUBMITTED AS A SEPARATE SECTION OF THIS REPORT.
EXHIBITS
* Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
3CI COMPLETE COMPLIANCE CORPORATION (Company)
January 14, 2003 /s/ Otley L. Smith III ---------------------- Otley L. Smith III President (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
CERTIFICATIONS
I, Otley L. Smith III, the President of 3CI Complete Compliance Corporation (the "Company"), certify that:
1 I have reviewed this annual report on Form 10-K of the Company;
2 Based on my knowledge, this annual report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3 Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report;
4 The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 13d-14) for the Company and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within these entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date");
5 The Company's other certifying officer and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and
6 The Company's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: January 14, 2003 /s/ Otley L. Smith III ---------------------- Otely L. Smith III
CERTIFICATIONS
I, James A. Cole, the Chief Financial Officer of 3CI Complete Compliance Corporation (the "Company"), certify that:
1 I have reviewed this annual report on Form 10-K of the Company;
2 Based on my knowledge, this annual report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3 Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report;
4 The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 13d-14) for the Company and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within these entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date");
5 The Company's other certifying officer and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and
6 The Company's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: January 14, 2003 /s/ James A. Cole ----------------- James A. Cole Chief Financial Officer
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
All other Schedules are omitted because they are not required, are not applicable or the required information is presented elsewhere herein.
REPORT OF INDEPENDENT AUDITORS
To The Stockholders and Board Directors of 3CI Complete Compliance Corporation:
We have audited the accompanying consolidated balance sheets of 3CI Complete Compliance Corporation as of September 30, 2002 and 2001 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended September 30, 2002. Our audits also included the financial statement schedule listed in the Index at item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of 3CI Complete Compliance Corporation as of September 30, 2002 and 2001 and the consolidated results of its operations and cash flows for each of the three years in the period ended September 30, 2002, in conformity accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements effective on October 1, 2001, the Company changed its method of accounting for goodwill to conform with statement of Financial Accounting Standards 142, Goodwill and Other Intangible Assets.
ERNST & YOUNG LLP
Chicago, Illinois January 9, 2003
3CI COMPLETE COMPLIANCE CORPORATION BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
3CI COMPLETE COMPLIANCE CORPORATION STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
3CI COMPLETE COMPLIANCE CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
The accompanying notes are an integral part of these financial statements.
3CI COMPLETE COMPLIANCE CORPORATION STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
3CI COMPLETE COMPLIANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
ORGANIZATION AND BASIS OF PRESENTATION
3CI Complete Compliance Corporation (the Company or 3CI), a Delaware Corporation, is engaged in the collection, transportation, treatment and disposal of biomedical waste in the south and southeastern United States.
Effective October 1, 1998, after approval by the then properly constituted 3CI Board of Directors, Stericycle Inc., a Delaware corporation ("Stericycle") acquired 100% of the common stock of Waste Systems, Inc. ("WSI") for $10 million. As a result of the Transaction, WSI became a wholly-owned subsidiary of Stericycle. Stericycle directly and indirectly through WSI owns 67.5% or 6,578,504 shares of the outstanding common stock and 100% of the outstanding preferred stock of the Company.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash equivalents primarily represents highly liquid investments with a maturity of three months or less when purchased.
INVENTORIES
Inventories, 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 and amortization, which includes the depreciation of assets recorded under capital leases, are computed using the straight-line method over the estimated useful lives of the assets. Expenditures for major renewals and betterments are capitalized; expenditures for repairs and maintenance are charged to expense as incurred.
INTANGIBLE ASSETS
Effective October 1, 2001, the Company adopted Statement of Financial Accounting Standards 142 "Goodwill and Other Intangible Assets" (SFAS 142), which resulted in the discontinuance of the amortization of goodwill. Under SFAS 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized, but will be subject to at least annual impairment tests.
Other intangible assets will continue to be amortized over their useful lives. The Company has completed its transitional and goodwill impairment evaluation and determined that its goodwill was not impaired. Amortization expense for goodwill was $25,000 for the years ended September 30, 2001 and 2000. The Company's goodwill was $262,243 at September 30, 2002 and 2001.
The Company's other intangible assets at September 30, 2002 and 2001 were $32,000 and $56,000, respectively. Amortization expense for other intangible assets was $24,000 for each of the years ending
September 30, 2002 and 2001. The remaining $32,000 of other intangible assets will be amortized as follows:
As required by SFAS 142, the results for the prior years have not been restated. A reconciliation of the net loss as if SFAS 142 had been adopted is presented below for the fiscal years ended September 30, 2001 and 2000.
There would be no change to the 2001 or 2000 reported basic loss per share or diluted loss per share as a result of the discontinuance of amortization of goodwill.
REVENUE RECOGNITION
The Company generally recognizes revenue when the treatment of the regulated medical waste is completed on-site or the waste is processed by a third party.
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. Deferred tax liabilities and assets are determined based on the differences between the financial statement and tax base of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
FINANCIAL INSTRUMENTS
The Company's primary financial instruments are accounts receivable, notes payable, and accounts payable. The fair values of these financial instruments were not materially different from their carrying values. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of accounts receivable. Credit risk is minimized as a result of the large size of the Company's customer base. No single customer represents greater than 3% of total accounts receivable. The Company performs ongoing credit evaluation of its customers and maintains allowances for potential credit losses. These losses, when incurred, have been within the range of management's expectations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could vary from the estimates that were used.
STOCK COMPENSATION
As permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), the Company uses the intrinsic value method to account for stock options as set forth in Accounting Principals Board No. 25, Accounting for Stock Issued to Employees (APB 25).
NOTE 3 - DIVESTITURES
In February 2001, the Company transferred to Stericycle, through WSI approximately 70 customer accounts located in the Houston, Texas area in exchange for a reduction in interest due under the Amended Promissory Note of approximately $67,816. The accounts represented approximately $200,000 in annual revenue during the fiscal year ended September 30, 2000. The Company recognized a gain for $67,816 which is included in the Consolidated Statement of Operations as other income (expense).
NOTE 4 - PROPERTY, PLANT EQUIPMENT
Property, plant and equipment consists of the following at September 30:
Depreciation expense charged to operations was $679,794, $1,548,229, and $1,580,710 for the years ending September 30, 2002, 2001, and 2000, respectively.
On December 19, 2001, the Company made the decision to permanently close all of its treatment facilities which consisted of two incinerators and a chem-clave unit in Springhill, Louisiana and an incinerator and a microwave unit in Birmingham, Alabama. These facilities were temporarily idled during the fourth quarter of 2001 while management evaluated whether to incur significant capital costs to upgrade and maintain the equipment to comply with more restrictive EPA requirements. Subsequently, in December 2001, the decision was made to close the internal facilities and seek out less expensive treatment fees at external sources. Management, after considering the upgrades necessary for the existing facilities as well as the treatment capacity at other sources, determined that this equipment had no remaining value. As a result, the treatment related assets were written down to their fair value of zero and in September 2001 the Company took a charge for the write-down of certain treatment related assets which totaled $2,631,885. Total gross costs for this equipment was $6,047,225 with related accumulated depreciation of $3,415,340.
NOTE 5 - NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of net income (loss) per common share:
For additional information regarding outstanding employee stock options and outstanding warrants, see note 9.
Preferred stock, stock options and warrants to purchase shares of common stock outstanding during fiscal years ended September 30, 2001 and 2000, were not included in the computation of diluted earnings per share because the effect would be antidilutive. Stock options were not included in the September 30, 2002 computation as they were antidilutive since the exercise prices ranging from $0.59 to $1.50 were greater than the average price of the common stock. Preferred shares were not included because the effect would be antidilutive.
NOTE 6 - NOTES PAYABLE
Notes payable consists of the following at September 30:
NOTE 7 - LONG TERM DEBT
Long-term debt - unaffiliated lenders consists of the following at September 30, 2001:
Note payable to majority shareholder consists of the following at September 30:
The Company has historically financed its working capital needs, capital expenditures, and acquisitions using advances from WSI, its majority shareholder, internally generated funds, and borrowings from third parties. The Company's indebtedness currently consists of amounts owed to WSI (which are described below), and a portion of the Company's insurance premiums that are financed over the course of each fiscal year.
On October 1, 1998, WSI and the Company amended and restated a revolving promissory note (the Note) which was originally due September 30, 2000. As of June 30, 2000, the Company notified WSI that it anticipated it would fail to meet a net income requirement under the Note for the quarter ended June 30, 2000. The Note was renegotiated and extended at that time and the default was waived. Since that time the Note has been extended either quarterly or semi-annually under terms ranging from prime plus 1.0% to prime plus 3.5% not to exceed 13%. In connection with the note extension on August 1, 2000, 3CI issued warrants to WSI for the purchase of up to 351,836 shares of 3CI common stock at an exercise price of $0.20 per share which expired on September 20, 2002. When the Note was extended on October 1, 2000, 3CI issued warrants to WSI for the purchase of up to 541,286 shares of 3CI common stock at an exercise price of $.10 per share which were to have expired on December 20, 2002. Stericycle exercised these warrants on December 19, 2002. In each of these cases the values of the warrants were included in the statement of operations for the respective periods as interest expense.
An agreement effective October 1, 2001 extended the note's maturity to July 1, 2002. The terms of this extension included a reduction of the interest rate to the prime rate, plus 1.0% and called for a principal payment of $200,000 at renewal and an additional $200,000 principal payment in June 2002. The agreement also required the Company to achieve minimum levels of EBITDA for each of the six-month periods ended March 31, 2002 and June 30, 2002. This level was not achieved for the six months ended March 31, 2002 requiring the Company to record an additional $120,404 in interest expense.
The note was renegotiated pursuant to an agreement dated May 23, 2002 by which the note was extended to October 1, 2003. The terms of this extension included an interest rate equal to the prime rate, currently 4.25%, plus 1.0% and called for principal payment of $700,000 at renewal and additional monthly payments of $100,000 to be applied to accrued interest and principal. The agreement also required the Company to achieve a minimum level of EBITDA for the six-month period ended June 30, 2002 and for each trailing six month period thereafter until maturity. This level was achieved for the six months ended June 30, 2002 and September 30, 2002.
Total interest expense was $466,842, $885,449, and $1,021,850, for the years ended September 30, 2002, 2001 and 2000, respectively.
NOTE 8 - INCOME TAXES
The Company's deferred tax liabilities and assets as of September 30, are as follows:
During the year ended September 30, 2002, the Company utilized approximately $1,817,300 of its net operating loss carryforward to offset current year taxable income.
At September 30, 2002, the Company had net operating loss carryforwards for federal income tax purposes of approximately $17,700,000, which will begin expiring in 2009. The Company also had state net operating losses at September 30, 2002. Based on Internal Revenue Code Section 382 relating to changes in ownership of the Company, utilization of the net operating loss carryforwards is subject to an annual limitation of $995,000 for net operating losses created prior to September 30, 1998. All net operating losses created after September 30, 1998 are not subject to any limitations and are available to be used for 20 years after they are produced. As such, the deferred tax asset and the related valuation allowance for net operating loss carryforwards were reduced during the current year to account for the portion of the net operating loss carryforwards the Company will not be able to utilize. For financial reporting purposes, the entire amount of net deferred tax assets has been offset by a valuation allowance due to uncertainty regarding realization as an asset.
NOTE 9 - STOCK OPTIONS AND WARRANTS
In 1992, the Company's Board of Directors and shareholders approved a stock option plan (the Plan), which provides for the granting of 500,000 shares of common stock in the form of stock options to employees, officers and directors. 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".
During fiscal 2002 the Company issued 100,000 options at exercise prices ranging from $0.20 to $0.28 per share which vest evenly over a three year period. During fiscal 2001 the Company did not issue any stock options. During the fiscal year ended 2000 the Company issued 75,000 options at $0.33 of which 25,000 shares vested after one year with the remaining shares vesting evenly over the next two years.
As of September 30, 2002, the Company had outstanding 305,000 option shares with exercise prices ranging from $.20 to $1.50.
A summary of stock option information follows:
Utilizing the intrinsic value method of APB 25, the Company recognized $12,186, $15,888, and $47,088, of compensation expense related to stock options during the years ended September 30, 2002, 2001 and 2000 respectively. The following table illustrates the Company's net income (loss) on a pro forma basis as if stock options had been accounted for under the fair value method recommended by SFAS 123.
The fair value of stock options used to compute pro forma net loss is the estimated present value at the grant date using the Black Sholes option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rates of approximately 3% in 2002 and 5% in 2001 and 2000; and an expected volitility of 0.92 in 2002 and 0.97 in 2000; and a weighted-average expected option life of five years.
NOTE 10 - RELATED PARTY TRANSACTION
On September 30, 1998, Stericycle acquired 100% of the stock of WSI for $10 million (the "Transaction"). As a result of the Transaction, WSI became a wholly owned subsidiary of Stericycle. As of December 19, 2002, WSI owns 58.0% or 5,645,734 shares of the Company's Common Stock and 100% of the Company's outstanding preferred stock, consisting of 7,000,000 shares of Series B preferred stock and 750,000 shares of Series C preferred stock . The Preferred Stock is convertible into 7,750,000 shares of Common Stock, which if converted, would increase WSI's ownership percentage to 76.6%. Together the shares owned directly by Stericycle and indirectly through WSI including the assumed conversion of the preferred shares total 14,328,504 or 81.9%.
As of September 30, 2002 the Company owed $3,890,635 to WSI under a certain amended and restated promissory note which is more fully described in "Management's Discussion and Analysis of Financial Conditions and Results of OperationsLiquidity and Capital Resources" and in Note 7.
In June 1999, the Company established a master lease agreement in the amount of $3,000,000 with LaSalle National Leasing Corporation. Of the total, $2,000,000 is to be utilized for the leasing of transportation equipment of which $82,312 and $179,569 had been utilized at September 30, 2002 and 2001 respectively, and $1,000,000 for the financing of equipment, none of which was being utilized at September 30, 2002 and $398,851 of which been utilized at September 30, 2001. This agreement is guaranteed by Stericycle, Inc. which owns 100% of WSI.
The Company is insured under Stericycle's Umbrella Insurance policy. The Company accrued $15,761, $16,067, and $10,025 for this coverage in the fiscal years ended September 30, 2002, 2001 and 2000 respectively which is included in sales general and administrative expenses.
The Company outsources the treatment of its medical waste to treatment facilities in Terrell, Texas; Conroe, Texas; Memphis, Tennessee; Beaver Dam, Kentucky; Reserve Louisiana and Lake City; Georgia which are owned by Stericycle, the parent of WSI, its majority shareholder. The treatment fees are paid currently in accordance with 30-day terms. In addition, Stericycle treated waste at the 3CI treatment facilities in Springhill, Louisiana and Birmingham; Alabama during the year during the fiscal years ended September 30, 2001 and 2000. Treatment fees charged by Stericycle totaled $2,598,399, $1,144,378 and $177,085 at the various facilities for the fiscal years ended September 30, 2002, 2001 and 2000, respectively, which are included in Costs of Services for the respective years. Stericycle incurred $102,965 in treatment fees at 3CI facilities during fiscal 2001 and $45,395 in 2000 which is included in Revenues for the respective years. Commencing in 2002, Stericycle also provides long-haul transportation services during the year for the Company. Transportation fees for these services totaled $912,642 for the year ended September 30, 2002 and are included in Costs of Services for that year. In February 1999, the Company entered into a 36 month operating lease agreement with Stericycle Inc., to lease medical waste containers. The rental expense recorded for the years ended September 30, 2002, was $20,255, and $24,300 for each of the fiscal year 2001, and 2000.
The Company parks trucks and trailers at Stericycle transportation depots at Reserve, Louisiana and Memphis, Tennessee. Stericycle did not charge the Company for such use of these facilities. Also during the year, the Company utilized Stericycle personnel for tax preparation and analysis and was provided with internal audit services from a firm utilized by Stericycle. Stericycle did not charge the Company for these services.
On May 1, 2002 Stericycle, Inc., the Company's majority shareholder, completed a transaction in which they purchased from James H. Shepherd, James Michael Shepherd and Richard T. McElhannon (the "sellers") certain profit-sharing rights, put rights, and other rights of the sellers under a settlement agreement entered into with the company in January 1996. The purchase included interest in all security agreements, mortgages and other instruments securing the Company's various obligations to the sellers under the settlement agreement, and 932,770 shares of the Company's common stock owned by the sellers. During the fiscal year ended September 30, 2002 the Company paid $138,000 to Stericycle under the profit sharing terms of this agreement.
NOTE - 11 PREFERRED STOCK
In June 1997, WSI converted $7,000,000 of their promissory note with 3CI Complete Compliance Corporation to preferred stock. The Company issued 1,000,000 shares of Series A cumulative convertible preferred stock, with no par value, at $7.00 per share or $7,000,000, to WSI, the Company's majority shareholder. The Series A preferred shares were not entitled to receive any fixed dividends but were entitled to receive such cash dividends as may have been declared from time to time by the Board of Directors. The Series A Preferred Stock holders were entitled to receive, if declared by the Corporation's Board of Directors, cumulative dividends from the second anniversary of the original issuance date, at the rate of $0.5775 per share per annum. Had such dividends been declared by the Board of Directors, they would have been cumulative from the second anniversary of the original issuance date of the Series A Preferred Stock. Accruals of dividends do not bear interest. No such dividends were declared.
In February 1998, Waste Systems, Inc., exchanged the 1,000,000 shares of the Series A Preferred Stock for 7,000,000 shares of Series B cumulative convertible preferred stock, with a par value $.01. The Series B preferred stock holders are entitled to receive, if declared by the Corporation's Board of Directors, out of the assets of the Corporation legally available for such payment, cumulative dividends from the second anniversary of the original issuance date, at the rate of $0.0825 per share per annum. These dividends if declared will be 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 preferred stock. Accruals of dividends shall not bear interest. For so long as any shares of Series B preferred stock are outstanding, the Corporation shall not purchase or redeem any shares of its par value $.01 common stock, ("Common Stock") or declare or pay any dividend on its Common Stock without the written consent of the holders of a majority interest in the Series B preferred stock.
The shares of Series B preferred stock may be redeemed at any time on or after the second anniversary of the original issuance date, at the option of the Company, in whole or in part, at a per share redemption price equal to $1.00 plus accrued dividends if any. In the case of redemption of only a part of the Series B Preferred stock the shares to be redeemed shall be selected by lot.
Subject to certain adjustments, the series B preferred stock shall be convertible at the option of the record holder thereof, at any time after the second anniversary of the original issuance thereof, in whole, or from time to time in part, in the manner provided, into common stock. The Series B preferred stock may be converted at any time on or after the second anniversary of the original issuance thereof, in whole but not in part, into full shares of common stock of the Corporation with a market price of $7,000,000 based on a conversion rate determined by (i) dividing $7,000,000 by the market price of the common stock on the date of the conversion, (ii) plus an amount of cash determined by subtracting the quotient calculated in (i) and subtracting from $7,000,000; provided however, that at the option of the holder, the holder may convert the Series B preferred stock into solely that number of shares of common stock determined as provided in (i), and forego obtaining the additional common stock issuable as calculated in (ii), subject to such adjustments, if any, of the conversion rate and the securities or other property issuable upon such conversion. Any shares of the Series B preferred stock which have not been converted as of April 6, 2003 will automatically be converted to shares of common stock subject to the above conversion formulas.
During February 1998, the Company and WSI converted an additional $750,000 of debt under the 1995 Note, into 750,000 shares of Series C Convertible preferred stock which have cumulative dividends, with a par value $.01. The Series C preferred stock holders are entitled to receive, when, and if declared by the Corporation's Board of Directors cumulative dividends from the second anniversary of the original issuance date, at the rate of $0.0825 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, of dividends accrued from the second anniversary of the original issuance date of the Series C preferred stock. For so long as any shares of Series C preferred stock shall be outstanding, without the written consent of the holders of a majority in interest of the series C preferred stock, the Corporation shall not (i) purchase or redeem any shares of its par value $.01 common stock, or declare or pay any dividend on its Common Stock.
The shares of Series C preferred stock may be redeemed at any time on or after the second anniversary of the original issuance date of the Series C preferred stock, at the option of the Company in whole or, from time to time in part, in any such case at a per share redemption price equal to $1.00, plus accrued dividends, if any.
Subject to certain adjustments, the Series C preferred stock shall be convertible at the option of the record holder thereof, at any time after the second anniversary of the original issuance thereof, in whole, or from time to time in part, in the manner provided, into common stock. The Series C preferred stock may be converted at any time on or after the second anniversary of the original issuance thereof, in whole but not in part, in to full shares of Common Stock of the Corporation with a market price of $750,000 based on a conversion rate determined by (i) dividing $750,000 by the market price of the common stock on the date of the conversion, (ii) plus an amount of cash determined by subtracting the quotient calculated in (i) and subtracting from $750,000; provided however, that at the option of the holder, the holder may convert the Series C preferred stock into solely that number of shares of common stock determined as provided in (i), and forego obtaining the additional common stock issuable as calculated in (ii), subject to such adjustments, if any, of the conversion rate and the securities or other property issuable upon such conversion. Any shares of the series C preferred stock which has not been converted as of April 6, 2003 will automatically be converted subject to the above conversion formulas.
The Board of Directors declared dividends on the series B and C preferred shares totaling $637,623, $907,387, and 497,550 for each of the years ended September 30, 2002, 2001 and 2000 respectively. Each of the resolutions for the dividends called for payment in cash from funds legally
available for the payment of dividends, as and when the Board of Directors may direct by further resolution. None of the dividends have been paid. There were no undeclared dividends as of September 30, 2002.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
On July 16, 2002 a suit was filed in the First Judicial District Court in Shreveport, Louisiana against Stericycle, Inc. and certain of 3CI' s directors which alleged minority shareholder oppression, breach of fiduciary duty and unjust enrichment. While the Company is not party to the lawsuit, we have contacted our insurance carrier and hired counsel to assist the Company in this litigation. The defendants in the case have denied the allegations and intend to defend the case vigorously.
The Company is subject to certain other litigation and claims arising in the ordinary course of business. In the opinion of management of the Company, the amounts ultimately payable, if any, as a result of such claims and assessments will not have materially adverse effect on the Company's financial position, result of operations or net cash flows.
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.
NOTE 13 - LEASE COMMITMENT
At September 30, 2002, the Company had certain noncancelable leases, principally for office space and equipment, with various expiration dates. Future minimum rentals under these leases for the following fiscal years are as follows:
Total rent expense for the fiscal years ended September 30, 2002, 2001, and 2000 totaled $288,571, $263,632 and $252,158 respectively.
NOTE 14 - EMPLOYEE BENEFIT PLAN
Under a plan approved by the Board of Directors in 2000, the Company has a 401(k) defined contribution retirement plan covering substantially all employees of the Company. Each participant may elect to defer a portion of his or her compensation subject to certain limitations. The Company has the right to make a discretionary contribution under the plan agreement. The Company has not made any contribution in 2002, 2001 or 2000.
3CI COMPLETE COMP.LIANCE CORPORATION VALUATION AND QUALIFYING ACCOUNTS
Schedule II ================================================================================
EXHIBIT INDEX
* Filed herewith