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 destruction by controlled high temperature incineration, autoclav, microwave and chemical grinding and heating technologies. 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 Also included are out of date or off specification pharmaceutical wastes. "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.
DISPOSAL TECHNOLOGY
INCINERATION. The Company operates two incinerators with a capacity to treat 36 tons of medical waste per day at its Springhill, Louisiana facility and one incinerator with a treatment capacity of 12 tons per day at its Birmingham, Alabama location. The incineration process is a two-stage process that ensures the complete destruction of all pathogens. Most medical waste consists of disposable paper and plastic products, which burn readily. In an incinerator, medical waste is first burned and reduced to ash. The resulting gases are then heated in the incinerator to a temperature of approximately 1800(Degree)F to 2000(Degree)F, assuring the destruction of all pathogens. This process produces exhaust gas that is subsequently passed through scrubbers and bag houses to incinerator stacks to ensure compliance with applicable air quality standards. The remaining ash, which at this stage is sterilized and free of pathogens, is then transported by truck to licensed landfills. Ash currently is not considered hazardous under regulations of the Environmental Protection Agency ("EPA"), but is regulated at the state level by various state agencies.
AUTOCLAVING. The Company treats a portion of its waste using autoclaving. A conventional steam autoclave is a large cylindrical chamber with a vacuum lock door. It uses high temperature steam in a multi-stage process to sterilize or disinfect waste. In some processing facilities the treated waste is then transported to a landfill without any shredding, while in others the treated waste is fed into a shredder/grinder to render the waste unrecognizable and to reduce volume.
Although there are a range of other methods used for disposal of medical waste, such as the use of microwave technology, incineration and autoclaving are the most widely used technologies in the United States. The other technologies below are accepted, but are either new or developing.
MICROWAVE. The Company operates one microwave unit with a capacity to treat 10.8 tons of medical waste per day at its Birmingham, Alabama location. The microwave process is an alternative technology that is compact and designed to shred and treat medical waste in an enclosed environment. The process uses a combination of steam and microwave heat to destroy any pathogens that are present. The resultant waste is then classified as ordinary municipal solid waste and is disposed of in an approved solid waste landfill.
CHEM-CLAV. The Company operates one Chem-Clav unit with a capacity to treat 24 tons of medical waste per day at its Springhill, Louisiana facility. The Chem-Clav is a chemically enhanced steam autoclave that uses sodium hypocholrite to sanitize the medical waste before its introduction into the steam autoclave. The Chem-Clave process runs waste through a grinder prior to treatment to enhance sterilization and to render it unrecognizable. The treated waste is then transferred to an approved landfill.
ALTERNATIVE TECHNOLOGIES; TECHNOLOGICAL OBSOLESCENCE
The regulated medical waste management industry presents continuing opportunities for the development of alternative treatment and disposal technologies. These alternative technologies may emphasize operating cost efficiencies, reductions in the volume of regulated medical waste generated or other environmental factors.
DISPOSAL AGREEMENTS
The Company enters into medical waste disposal agreements with customers for the collection of their medical waste according to a schedule agreed upon between the parties. The Company accepts medical waste that has been packaged by customers in containers the Company provides and transports it in Company vehicles to treatment facilities the Company owns or for which the Company has long-term contractual rights. The Company uses a bar code technology to track and record the movement of medical waste through all phases of its handling and treatment, in compliance with applicable governmental regulations.
The Company also enters into disposal agreements with other medical waste transporters and manufacturers and distributors of pharmaceuticals for the treatment and related documentation of medical waste and out dated pharmaceuticals. The Company intends to continue to enter into such agreements to the extent possible in order to maximize utilization of its treatment capacity without affecting its service to its regular 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 including, reusable plastic carts, plastic reusable containers, 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.
Beginning in 1996, the Company began to increase the use of 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.
INCINERATION CONTRACTS
The Company had exclusive incineration rights, for a capacity of 30 tons per day, at an incinerator operated by the City of Carthage, Texas, which expired in June 1999. In order to maintain its rights under the agreement, the Company was required to pay minimum annual fees of approximately $550,000 to $1,000,000 during the term of the agreement. During the contract period ending May 31, 1999, 1998, and 1997, the Company paid fees in the aggregate amount of approximately $492,235, $1,277,033, and $1,401,692 respectively under the agreement. The Company elected not to pay the minimum fee for the period ended May 31, 1999 required to retain exclusivity as the sole company to treat medical waste at the facility.
The Company also had exclusive incineration rights at an incinerator operated by the City of Center, Texas under an agreement expiring in June 1998, subject to various renewal options. In order to maintain its exclusive rights under the agreement, the Company was required to pay minimum annual fees of approximately $300,000 to $900,000 during the term of the agreement. During fiscal 1997, the Company paid fees in the aggregate amount of approximately $27,000 under the agreement.
During fiscal year 1996, the Company became aware that the City of Center was not meeting certain contractual obligations. The most critical obligation was the City of Center's breach of the exclusivity clause in the contract. The Company stopped using the City of Center's incinerator and ceased making payments of burn fees. In 1997, the City of Center filed a lawsuit to recover $80,000 for the non-payment of burn fees and the Company filed counter claims against the City of Center for the breach of the exclusivity in the contract. The lawsuit was settled. The City of Center has foregone its claim of burn fees as originally demanded and agreed to make installment payments over 24 months to the Company in the aggregate amount of $380,000 for breaking the exclusivity of the contract. The Company received $200,000 of this settlement in October 1998, with the remaining balance of $180,000 to be paid over 24 months. The balance as of September 30, 1999 is $105,000.
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 and treats, 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.
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 or federal regulations. The Company will, on request, review a customer's internal waste collection and control system or assist the customer in developing an internal system to provide for the efficient management of medical waste within the customer's facility from its creation to the point of its acceptance by the Company.
CUSTOMERS
The Company's health care customer base is diverse, with about 15,000 accounts in Arkansas, Florida, Georgia, Louisiana, Texas, Alabama, Mississippi, 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 five percent or more of the Company's revenues.
SALES AND MARKETING
The Company divides its market into three categories within each geographic region: the hospital market, the professional market and the third party market. The hospital market consists principally of medical centers, major hospitals, major teaching institutions involved in medicine and research and major medical complexes. The professional market consists principally of physician and dental offices, laboratories, nursing and convalescent homes, medical and veterinarians' offices, and clinics and mortuaries. The third party market consists principally of pharmaceutical manufacturers and distributors and other medical waste transportation companies.
The Company uses a three-fold strategy to increase its presence and customer base in a particular geographical market. First, Company representatives meet personally with a prospective customer to describe the Company's services and to negotiate a disposal agreement that reflects the prospective customer's service needs. Second, the Company uses direct mail to establish potential customer leads, particularly in the professional market. Third, the Company seeks endorsements or referral relationships with hospitals and professional associations in the market areas. The Company seeks to achieve a mix of both hospital and professional accounts which maximizes its resources in each given market area.
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 $2,000,000 excess umbrella liability policy. The Company carries $3,000,000 per occurrence of such coverage for the incineration facilities used by the Company. The Company also carries $1,000,000 per occurrence of transportation liability insurance coverage, which includes coverage for environmental damage caused by waste spillage or other forms of pollution occurring during transportation. The Company believes that the types of insurance it carries and amounts of coverage are customary in the industry and 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 it's current insurance at existing levels and prices, or at all.
EMPLOYEES
A September 30, 1999, the Company had approximately 176 full-time and 8 part-time employees. Two of the employees are employed in executive capacities, the remainder are in transportation operations, treatment facility operations, sales positions and administrative and clerical capacities. None of the Company's employees are subject to collective bargaining agreements. The Company has not experienced any strikes or work stoppages and considers its relationship with its employees to be satisfactory.
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'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 which directly pertain to the handling, transport and processing of medical waste. The most pertinent of these federal environmental and public health laws are discussed below.
TREATMENT FACILITIES. The Company is required to obtain permits at federal, local and state levels for the construction and operation of treatment facilities. 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.
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 necessary hauling permits in Arkansas, Louisiana, Texas, Mississippi, Alabama, Georgia, Florida, Oklahoma, and Tennessee. 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 borne 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.
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 Company's medical waste processing facilities may be regulated under certain other environmental statutes. 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.
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 Air Act and the Federal Clean Water Act and obtain all permits and approvals required therein.
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. The Company's incineration facilities are required to include controlled air combustion units, air quality control equipment, pollution control equipment and ancillary control and monitoring equipment. All facilities are required to provide monitoring equipment. State regulatory authorities may inspect Company operations on a regular basis and assess fines and penalties or may halt operations for failures by the Company to follow specific regulations. In addition, the failure of state regulatory agencies to issue required permits or renewals, or any delays by such agencies, could have a material adverse impact on the Company's operations.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases approximately 6,100 square feet of office space in Shreveport, Louisiana under a lease expiring in December 2000. The Company paid approximately $77,328 during fiscal 1999 under the lease. A summary description of the Company's operating properties is set forth below:
The Company believes that its facilities are adequate for its current and foreseeable needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is subject to certain 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, 1999.
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." On March 15, 1999, the Company received notification from the NASDAQ Stock Market, of its failure to meet the minimum bid price requirement for continued listing of its common stock for trading on the NASDAQ SmallCap Market. The Company requested and received an oral hearing that took place on July 29, 1999, before a NASDAQ Listing Qualifications Panel (the "Panel") to determine the Company's continued listing. On September 14, 1999, the Company was informed that the Panel determined that the Company's securities would be delisted from the NASDAQ Stock Market effective with the close of business on September 14, 1999. The securities of the Company were immediately eligible to be traded on the OTC Bulletin Board. On September 27, 1999, the Company requested that the written record of the panel decision be reviewed by the NASDAQ Listing and Hearing Review Council ("Review Council"). The Company has been notified that the Review Council will likely issue its decision in March 2000.
The following table provides the high and low bid quotations for the NASDAQ small-cap market up to September 14, 1999, and on the OTC Bulletin Board thereafter for each of the quarterly periods indicated. These quotations reflect the inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
As of December 29, 1999, the approximate number of holders of record of the Company's Common Stock was 425, and the closing sale price of the Common Stock on January 11, 2000 was $0.687.
The Company did not pay any dividends during fiscal year ended 1999 and has never paid any dividends on its capital stock. The Company currently expects that it will retain future earnings for use in the operation and expansion of its business and does not anticipate paying any cash dividends in the foreseeable future.
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.
(1) The fiscal 1995 balances include the acquisition of the assets of River Bay Corporation after the acquisition date.
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ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is engaged in the business of medical waste management services in the southwestern and southeastern United States. The Company's customers include regional medical centers, major hospitals, clinics, medical and dental offices, veterinarians, pharmaceutical companies, retirement homes, medical testing laboratories and other medical waste generators. Services include collection, transportation, bar code identification and destruction by controlled, high temperature incineration and alternative treatment technologies.
Competition in the medical waste industry has been high for several years. The Company competes against companies that have access to greater capital resources. One of those competitors is Stericycle, Inc. which owns 100% of the capital stock of Waste Systems, Inc. (WSI), the Company's majority shareholder. During fiscal year 1999, the medical waste industry became more consolidated. In November 1999, Stericycle, Inc. completed the purchased of the medical waste assets formerly operated by Browning-Ferris Industries, Inc., its largest competitor, from Allied Waste.
The Company has substantial indebtedness owed to WSI. This indebtedness currently consists of an October, 1998 note in the principal amount of $5,774,165. 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" and Note 12 to the financial statements.)
YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1998
REVENUES decreased by $887,401, or 4.7%, to $18,121,295 during the fiscal year ended September 30, 1999, from $19,008,696 for the fiscal year ended September 30, 1998. This decrease is primarily a result of the Company selling off certain routes in its Oklahoma territory.
COST OF SERVICES decreased $1,449,349, or 10.3%, to $12,609,173 during the year ended September 30, 1999, compared to $14,058,522 for fiscal 1998. The decrease is attributable to lower costs at the Company's treatment facilities and a reduction in transportation cost, as well as the sale of certain routes in the Company's Oklahoma territory. Cost of revenues as a percentage of revenues decreased to 69.6% during 1999 from 74.0% during 1998. Gross margin before depreciation and amortization totaled 30.4% of revenue compared to 26% for the fiscal year ended.
DEPRECIATION AND AMORTIZATION expense increased $453,082 or 34.9% to $1,750,702 for fiscal 1999 from $1,297,620 for fiscal 1998. This increase is primarily due to management's decision on September 30, 1998 to revise the useful lives of certain incinerators, bag houses and other treatment technology based upon a review of expected remaining useful lives of these assets. This change in accounting estimate increased depreciation expense by approximately $285,000 for 1999.
SELLING, GENERAL AND ADMINISTRATIVE expenses decreased $79,828, or 2.6% to $3,030,843 during the year ended September 30, 1999 from $3,110,671 during the year ended September 30, 1998. The decrease was primarily attributable to the reduction in salaries and other professional fees. Selling, general and administrative, as a percentage of revenue increased to 16.7% in fiscal 1999 from 16.4% in fiscal 1998.
INTEREST EXPENSE increased by $249,696, or 37.7%, to $911,411 during the fiscal year ended September 30, 1999, from $661,715 in fiscal 1998. This increase resulted from increased borrowings to purchase capital equipment and an increase in its interest rate from WSI.
OTHER INCOME AND EXPENSE increased approximately $620,755 or 471% to $752,476 due primarily to the sale of certain of the Company's routes in Oklahoma.
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1997
REVENUES increased by $218,947, or 1.2%, to $19,008,696 during the fiscal year ended September 30, 1998, from $18,789,749 for the fiscal year ended September 30, 1997. This increase is primarily attributable to the Company focusing on higher margin generators of medical waste, offset by lower service fees that resulted from increasing price competition in the industry.
COST OF SERVICES decreased $227,312, or 1.6%, to $14,058,522 during the year ended September 30, 1998, compared to $14,285,834 for fiscal 1997. The principal reasons for the decrease were due to the reduction of outside incineration fees and from lowered transportation costs. Cost of services as a percentage of revenues decreased to 74.0% during 1998 from 76.0% during 1997. Gross margin as a percentage of revenues before depreciation and amortization was 26% compared to 24% for the year ended 1997.
DEPRECIATION AND AMORTIZATION expense decreased to $1,297,620 for fiscal 1998 from $1,352,015 for fiscal 1997. The decrease was attributable to the completed depreciation of certain assets during 1997.
SELLING, GENERAL AND ADMINISTRATIVE expenses increased to $3,110,671 during the year ended September 30, 1998 from $3,080,398 during the year ended September 30, 1997. The increase was primarily attributable to legal fees. Selling, general and administrative as a percentage of revenue remained constant at 16.4%.
INTEREST EXPENSE decreased by $240,514, or 26.7%, to $661,715 during the fiscal year ended September 30, 1998, from $902,229 in fiscal 1997. This decrease resulted from WSI converting $7,750,000 of outstanding indebtedness owed by the Company to WSI into preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its working capital needs, capital expenditures, and acquisitions using internally generated funds as well as borrowings from third parties and advances from WSI. The Company's indebtedness currently consists of amounts owed to WSI described below, insurance premiums that are financed over the course of each fiscal year, debt incurred in connection with the leasing of the Chem-Clav unit, and the indebtedness incurred in connection with the purchase of rolling stock.
During fiscal 1999, 1998, and 1997, the Company invested approximately $688,345, $2,789,934, and $1,416,758 respectively, for transportation, machinery and equipment at its treatment and transportation locations, computer equipment and software. The 1998 amount includes approximately $810,000 for the construction of the Chem-Clav unit at the Company's Springhill, Louisiana treatment facility.
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, and $1,000,000 for the financing of equipment, of which $633,583 had been utilized at September 30, 1999. This agreement is guaranteed by Stericycle, Inc. which owns 100% of WSI.
In June 1995, the Company executed a $6,000,000 revolving promissory note with WSI (the 1995 Note"). The 1995 Note was renegotiated in September 1995, to increase the total borrowings available thereunder to $8,000,000 including interest, with the principal not to exceed $7,400,000. The 1995 Note was due and payable in full on September 30, 1998, at which time the company had outstanding borrowings of $5,004,403.
During fiscal year 1996, the Company received cash advances from WSI in excess of amounts available under the 1995 Note. As a result, in December 1996, the Company and WSI entered into a $2.7 million Revolving Credit Facility (the "1996 Credit Facility"), with a maturity date of February 28, 1997. The maturity date was subsequently extended to June 30, 1997.
In June 1997, WSI converted $7,000,000 of debt into 1,000,000 shares of the Company's Series A preferred stock and canceled the 1996 Credit Facility the Company had with WSI and reduced the outstanding indebtedness of the 1995 Note owed to WSI by $4,300,000. During February 1998, the Company and WSI converted an additional $750,000 of debt under the 1995 Note into Series C preferred stock. In March 1998, the Company exchanged 1,000,000 shares of Series A preferred stock for 7,000,000 shares of Series B preferred stock.
On October 1, 1998, WSI and the Company, amended and restated a revolving promissory note which had been extended from its original maturity date in 1997 (the Note). Amounts due under the Note totaled approximately $5,770,000 as of September 30, 1999 including approximately $145,000 of accrued interest. The principal balance of approximately $5,600,000 consisted of approximately $5,004,000 due under the original note, $483,000 of accounts payable to WSI added to the note on October 1, 1998, and approximately $144,000 of accrued and unpaid interest, which was capitalized and added to the principal balance effective January 1, 1999. The Note bears interest at the prime rate, which is currently 8.5%, plus 2.0%. The Company is required to maintain a minimum level of net worth and comply with certain performance related covenants. Interest under the note is due and payable in quarterly installments on the last business day of each calendar quarter. The outstanding principal of this note and accrued but unpaid interest was originally due September 30, 1999. As of September 30, 1999, the Company had exercised its option to extend the note to March 31, 2000. Under the Note, 3CI may also extend the maturity to a date not later than September 30, 2000.
The Company is in the process of obtaining proposals from WSI, as well as, third parties related to the refinancing and extension of the existing note payable. WSI intends to support the Company through the year 2000.
At September 30, 1999, the Company had net working capital, exclusive of the note payable to its majority shareholder, of $870,443 compared to a negative net working capital of ($1,781,086) and ($1,291,449) at September 30, 1998 and 1997, respectively. This increase in net working capital of $2,651,529 was due to higher cash balances, lower current liabilities and an overall improvement in the Company's financial condition resulting from increased cash flow from operations.
Net cash provided by operating activities was $1,732,430 during the year ended September 30, 1999, compared to $1,228,643 for the year ended September 30, 1998. This increase reflects an improvement in the Company's income from operations. Net cash provided by operations was $1,228,643 during the year ended September 30, 1998, compared to cash provided by operations of $111,180 during the year ended September 30, 1997. The change primarily reflects the Company's profitability in 1998, which was offset by the decrease in accrued liabilities.
Net cash provided by investing activities for the year ended September 30, 1999, was $1,545. This increase reflected the proceeds from the sale of certain routes in the Oklahoma territory and the reduction in the level of capital expenditures from the year ended September 30, 1998. Capital expenditures for 1999 were $688,345 compared to capital expenditures of $2,789,934 for 1998. Capital expenditures in fiscal 1999, were primarily for transportation equipment and containers. Capital expenditures for 1998 were $2,789,934, primarily for expansion and improvements of existing treatment facilities, transportation equipment and containers. Capital expenditures in 1997 were $1,416,758.
Net cash used in financing activities was ($1,497,588) during the year ended September 30, 1999 compared to net cash provided by financing activities of $1,346,630 during the year ended September 30, 1998. The difference is primarily the result of repayment of long term debt and notes payable and
reduced borrowings. Net cash provided by financing activities during the year ended September 30, 1998, was $1,346,630 as compared to net cash provided by financing activities of $1,056,705 during the year ended September 30, 1997.
Earnings before interest, taxes, depreciation and amortization increased by $1,262,561 to $3,233,755 for the year ended September 30, 1999 as compared to $1,971,224 for the same period ended September 30, 1998. This increase consisted principally of the sale of certain routes described above totaling approximately $920,000 and an overall improvement in the operations of the Company.
YEAR 2000 ISSUES
The Company has modified its information technology for the year 2000 and has converted critical data processing systems. The Company has substantially completed a Year 2000 review at a cost of approximately $50,000, which is reflected in general and administrative expenses for the year ended September 30, 1999. The Company has an established plan to address additional hardware and software issues related to its business. The year 2000 plan comprised a plan for existing hardware and software, and a larger project to upgrade the Company's overall business information systems. The Company has conducted an extensive search for other potential year 2000 issues that could affect its business.
The Company has developed a contingency plan for certain critical applications. The contingency plans involve, among other actions, manual workarounds, increasing parts and supplies inventories, and adjusting staffing strategies.
While the Company has developed contingency plans, to address possible failure scenarios, the Company recognizes that there are "worst case" scenarios which may develop and are largely outside the Company's control. The Company recognizes the risks associated with extended infrastructure (power, water, telecommunications, fuels) failure, the interruption of customer and other payments to the Company and the failure of equipment or software that could impact customer services despite assurances of third parties. Other potential worst case scenarios include devices and systems failing to operate properly; material and unplanned expenditures to correct unanticipated year 2000 failures, extended payment delays from the Company's payers; or litigation related to any of the above; and costs associated with extended labor intensive contingency plans.
Additionally, the Company believes that if any material phase or aspect of its year 2000 project is not completed timely; or if certain mission critical suppliers and venders, are not able to deliver goods or services after December 31, 1999; or if its contingency plans do not anticipate and effectively address actually experienced year 2000 related problems or do not effectively address unanticipated year 2000 related problems, then the Company's results of operations and financial condition, as well as its day-to-day business operations and its ability to provide its services could be materially adversely affected.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND 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 the 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. An increase or decrease in the prime rate of 1% would have the effect of increasing or decreasing interest expense by approximately $56,000 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
On September 10, 1999, Heard, McElroy & Vestal LLP was dismissed from its role as principal accountants. The decision to engage Ernst & Young, LLP for the audit of the financial statements for the fiscal year ended September 30, 1999 was recommended by the Company's audit committee of Board of Directors primarily in an effort to reduce outside accounting fees and to benefit from Ernst & Young's national reputation.
In connection with the audits of the years ended September 30, 1998 and 1997, and the subsequent interim period through September 10, 1999, there were no disagreements with Heard, McElroy & Vestal LLP on any matter of accounting principles or practices, financial disclosure, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with their opinion to the subject matter of the disagreement.
The audit reports of Heard, McElroy & Vestal LLP on the financial statements of 3CI Complete Compliance Corporation as of and for the years ended September 30, 1998 and 1997, did not contain any adverse opinion or disclaimer of opinion; however, the 1998 and 1997 financial statements were prepared assuming that the Company would continue as a going concern. The auditors' original reports included an explanatory paragraph that described circumstances that raised substantial doubt about the Company's ability to continue as a going concern.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of December 29, 1999, 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.
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 beneficially owns 55.5% of the outstanding shares of the Common Stock and 100% of the preferred stock of the Company.
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.
CHARLES D. CROCHET has served as President and a Director of the Company since February 1994. Mr. Crochet founded and served as President of a predecessor of the Company and has worked in the medical waste business since 1988. Prior to 1988, Mr. Crochet was employed for over ten years in senior positions with two public, national companies engaged in the business of hazardous waste management. Mr. Crochet received a B.S./B.A. degree in business management from University of Louisiana, at Lafayette.
CURTIS W. CRANE has served as Chief Financial Officer of the Company since September 1995. From 1993 until 1995, he served as Chief Financial Officer for NDE Environmental Corporation and from 1988 until 1993, he served as Director of Finance and Tax for Lone Star Steel Company. Mr. Crane received a B.B.A. degree in accounting from the University of Texas.
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 a 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 has also been President of BMWNC, Inc. a commercial incinerator of medical waste, since 1995. 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 has served as President of RMW Logistics, since 1994. 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, 1999, 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 such 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 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 President for the fiscal years ended September 30, 1997, September 30, 1998 and September 30, 1999. No other named executive officer received bonus and salary, which exceeded $100,000 in 1997, 1998 and 1999.
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(1) In July 1998, Mr. Crochet received an option to purchase 180,000 shares of Common Stock at $1.50 per share that vests in annual increments of 60,000 shares on July 31 of each year for three years commencing July 31, 1999. All of such options expire July 31, 2008.
(2) Under the terms of Mr. Crochet's current employment agreement, which became effective June 1, 1998, certain options that Mr. Crochet held for a total of 122,500 shares of Common Stock were converted into new options for 84,000 shares of Common Stock and repriced. At the time of such repricing, 32,500 options had an exercise price of $3.00 per share and 90,000 options had an exercise price of $2.00 per share. The 84,000 new options have an exercise price of $1.50 per share and expire August 31, 2005.
1999 STOCK OPTION GRANTS
The following table provides certain information regarding stock options granted to the Company's Chief Financial Officer and its independent directors during the fiscal year ended September 30, 1999, including the potential realizable value over the term of the options (i.e., the period from the date of grant to the date of expiration) based upon assumed rates of stock appreciation of 5% and 10%, compound annually. These amounts do not represent the Company's estimate of future appreciation of the price of its Common Stock. The Company did not grant stock options to any other named executive officer during the fiscal year ended September 30, 1999.
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(1) The percentage shown in the table reflects options for a total of 215,000 shares of Common Stock granted to employees during the fiscal year ended September 30, 1999. All of these options were granted under the Company's 1992 Option Plan.
(2) The potential realizable value was calculated on the basis of the term of each option on its grant date, assuming that the fair market value of the underlying stock on the grant date appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price.
(3) The options vest in three annual installments of 30,000 shares each on April 27, 2000, 2001 and 2001.
(4) The Company issued 25,000 stock options, which were immediately vested and another 50,000 options, which will vest 100% on April 27, 2000.
(5) The Company issued 50,000 options that will vest 100% on April 27, 2000.
1999 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, 1999. No executives exercised any Common Stock options during fiscal 1999.
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(1) The exercise price per share exceeded the closing price of a share of Common Stock on September 30, 1999, and accordingly, none of Mr. Crochet's stock options were in the money at fiscal year end.
EMPLOYMENT AGREEMENTS
Charles D. Crochet serves as the Company's President pursuant to an employment agreement that commenced on June 1, 1998 and expires May 31, 2001. The Board of Directors established Mr. Crochet's salary at $160,000 during the term of the agreement. Adjustments are to be made annually to reflect any increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers as published by the United States Department of Labor, Bureau of Labor Statistics; provided however, that should there be a decline in the index in any year of the term of the agreement, there shall be no downward adjustment of the base salary. As an additional incentive to Mr. Crochet under the new employment agreement, Mr. Crochet is eligible for an annual bonus ranging from 5% to 15% based on the Company's earnings before interest, taxes, depreciation and net operating profit exceeding specified levels.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year 1999, the following persons served on the Board of Directors and participated in the deliberations concerning executive officer compensation: Anthony J. Tomasello, David Schoonmaker and Robert Waller.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, to the best of the Company's' knowledge, as of December 31, 1999, regarding the beneficial ownership (as defined by Rule 13d-3 of the Securities Exchange Act of 1934) of the Company's Common Stock by (i) each person who is known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) each Director of the Company, (iii) by each executive officer named in the Summary Compensation Table, and (iv) by all Directors and executive officers of the Company as a group. Unless otherwise noted, each person has sole voting power and sole investment power with respect to shares owned.
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(1) A Schedule 13D dated October 14, 1998 reflects that WSI is the beneficial owner of 5,104,448 shares of Common Stock. Such Schedule 13D reflects that WSI is owned 100% by Stericycle, Inc. Includes the conversion of 7,750,000 shares of preferred stock owned by WSI into 7,750,000 shares of Common Stock.
(2) Includes the exercise of 260,272 warrants that expire April 2000.
(4) Includes shares issued in the acquisition of the Med-Waste assets and settlement of a lawsuit.
(5) Includes 10,172 shares held in the name of Mr. Crochet's son. Also included are 114,000 stock options and 15,237 warrants that expire in April 2000.
(6) Includes 30,000 stock options.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 18, 1998, WSI and the Company, entered into a Loan Agreement and Note Amendment (the "New Loan") whereby WSI loaned $750,000 to 3CI. The New Loan bore interest at Prime Rate, which was 7.75%, plus 3.0%. The outstanding principal balance of the New Loan was due and payable on September 30, 1999. This note was repaid in full as of September 30, 1999.
On September 30, 1998, Stericycle acquired 100% of the common stock of WSI for $10 million (the "Transaction"). As a result of the Transaction, WSI became a wholly-owned subsidiary of Stericycle. WSI owns 55.5% or 5,104,448 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.
On October 1, 1998, WSI and the Company entered into the Amended and Restated promissory Note (the Note). The Note was in the principal amount of approximately $5,488,000. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations--Overview."
During 1999, the Company made purchases of business forms with a company owned by the father of Curtis W. Crane, the Chief Financial Officer of the Company. Payments to the business forms Company during fiscal year ended September 30, 1999 totaled $70,000.
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, and $1,000,000 for the financing of equipment, of which $633,583 had been
utilized at September 30, 1999. This agreement is guaranteed by Stericycle, Inc. which owns 100% of WSI.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
1. Financial Statements
The audited financial statements and reports as detailed in the Index to Financial Statements and Schedules for the year ended September 30, 1999, the year ended September 30, 1998 and the year ended September 30, 1997, 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, 1999, the year ended September 30, 1998, and the year ended September 30, 1997, 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 1999:
The Company filed a Form 8-K in August 1999 to report the dismissal of the Company's independent auditors Heard, McElroy & Vestal LLP and the appointment of Ernst & Young LLP as the Company's independent public auditors.
(c) EXHIBITS - THE RESPONSE TO THIS PORTION OF ITEM 14 IS SUBMITTED AS A SEPARATE SECTION OF THIS REPORT.
EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1. Certificate of Incorporation as amended (incorporated by reference to Exhibit 3(a) of 3CI's registration statement on Form S-1 (No. 33-45632) effective April 14, 1992). 3.2. Amendment to 3CI's Certificate of Incorporation, as amended effective June 13, 1995 (incorporated by reference to Exhibit 3.1 of 3CI's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995). 3.3. Amendment to 3CI's Certificate of Incorporation, as amended effective March 23, 1998 (incorporated by reference to Exhibit 3.3 of 3CI's registration statement on Form S-1 (No. 333-48499), filed March 24, 1998).
3.4 Bylaws, effective May 14, 1995 (incorporated by reference to Exhibit 3.2 of 3CI's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995). 3.5 Amendment of Bylaws effective October 1, 1998. 3.6. Certificate of Designations of 3CI's Series A Preferred Stock without par value (incorporated by reference to Exhibit 3.6 of 3CI's registration statement on Form S-1 (No. 333-48499), filed March 24, 1998). 3.7. Certificate of Designations of 3CI's Series B Preferred Stock without par value (incorporated by reference to Exhibit 3.7 of 3CI's registration statement on Form S-1 (No. 333-48499), filed March 24, 1998). 3.8. Certificate of Designations of 3CI's Series C Preferred Stock without par value (incorporated by reference to Exhibit 3.8 of 3CI's registration statement on Form S-1 (No. 333-48499), filed March 24, 1998). 4.1. Warrant dated September 11, 1998, issued to Klein Bank as escrow agent with respect to 11,061 shares of Common Stock. 4.2. Escrow Agreement dated March 6, 1998 between 3CI and Klein Bank as escrow agent (incorporated by reference to Exhibit 4.7 of 3CI's registration statement on Form S-1 (No. 333-48499), filed March 24, 1998). 10.1 First Amendment to Escrow Agreement dated as of April 22, 1998, between 3CI and Klein Bank. 10.2 Amended and Restated Secured Promissory Note dated October 1, 1998, in the principal amount of $5,487,307.13 between 3CI and Waste Systems, Inc. 10.3 Loan Agreement and Note Amendment dated December 18, 1998, by 3CI and Waste Systems, Inc. 10.4 1992 Stock Option Plan of 3CI (incorporated by reference to Exhibit 10(m) of 3CI's registration statement on Form S-1 (No. 33-45632) effective April 14, 1992). 10.5 Settlement Agreement dated January 1996 between James Shepherd, Michael Shepherd and Richard T. McElhannon as Releassors, and the Company, George Rethmann, Dr. Herrmann Niehues, Jurgen Thomas, Charles Crochet and Waste Systems, Inc., as Releasees (incorporated by reference to Exhibit 10.23 of 3CI's report on Form 10-K filed January 14, 1997). 10.6 Exchange Agreement between 3CI and Waste Systems, Inc. dated as of June 24, 1997 (incorporated by reference to Exhibit 10.12 of 3CI's registration statement on Form S-1 (No. 333-48499), filed March 24, 1998). 10.7 Stock Purchase and Note Modification Agreement between 3CI and Waste Systems, Inc. dated as of February 19, 1998 (incorporated by reference to Exhibit 10.13 of 3CI's registration statement on Form S-1 (No. 333-48499), filed March 24, 1998). 10.8 Employment Agreement dated May 30, 1998, between 3CI and Charles D. Crochet (incorporated by reference to Exhibit 10.9 of 3CI's registration statement on Form S-1 (No. 333-48499), filed March 24, 1998). 10.9 Agreement dated September 30, 1998 among 3CI, Waste Systems, Inc. and Stericycle, Inc. regarding Section 203 of the Delaware General Corporation Law. (incorporated by reference to Exhibit 10.14 of 3CI's report on Form 10-K filed January 12, 1999.) 10.10 Form of Indemnification Agreement dated August 26, 1998 entered into between 3CI and Valerie Banner, David Schoonmaker, Charles Crochet, Juergen Thomas, Dr. Werner Kook and Dr. Clemens Pues. (incorporated by reference to Exhibit 10.15 of 3CI's report on Form 10-K filed January 12, 1999.) 10.11* Form of Indemnification Agreement dated June 3, 1999 entered into between 3CI and Robert Waller 10.12* LaSalle National Leasing master lease agreement dated June 18, 1999 between LaSalle National Leasing as lessor and the Company as lessee. 27.1* Financial Data Schedule
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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 12, 2000 /s/ Charles D. Crochet ---------------------- Charles D. Crochet President (Principal Executive Officer)
January 12, 2000 /s/ Curtis W. Crane ------------------- Curtis W. Crane Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
All other Schedules are omitted because they are not required, are not applicable or the required information is presented elsewhere herein.
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board Directors of 3CI Complete Compliance Corporation:
We have audited the accompanying balance sheet of 3CI Complete Compliance Corporation as of September 30, 1999 and the related statement of operations, shareholders' equity and cash flows for the year then ended. Our audit 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 audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 3CI Complete Compliance Corporation as of September 30, 1999 and the results of its operations and cash flows for the year then ended in conformity with generally accepted accounting principles. 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.
ERNST & YOUNG LLP
Chicago, Illinois November 17, 1999
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board Directors of 3CI Complete Compliance Corporation:
We have audited the accompanying balance sheet of 3CI Complete Compliance Corporation as of September 30, 1998 and the related statements of operations, shareholders' equity (deficit) and cash flows for the years ended September 30, 1998 and 1997. These financial statements and schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 3CI Complete Compliance Corporation as of September 30, 1998 and the results of its operations and cash flows for the years ended September 30, 1998 and 1997 in conformity with generally accepted accounting principles.
In our report dated January 11, 1999, we expressed an unqualified opinion on the subject financial statements and included an explanatory paragraph enumerating conditions that raised substantial doubt about the company's ability to continue as a going concern. As explained in Note 1, because of events occurring during the year ended September 30, 1999, the explanatory paragraph is no longer considered necessary.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
HEARD, McELROY & VESTAL, LLP
Shreveport, Louisiana January 11, 1999, except for Note 1, as to which the date is November 17, 1999
3CI COMPLETE COMPLIANCE CORPORATION BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
3CI COMPLETE COMPLIANCE CORPORATION STATEMENTS OF OPERATION
The accompanying notes are an integral part of these financial statements.
3CI COMPLETE COMPLIANCE CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these financial statements.
3CI COMPLETE COMPLIANCE CORPORATION STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
3CI COMPLETE COMPLIANCE CORPORATION NOTES TO 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. WSI owns 55.5% or 5,104,448 shares of the outstanding common stock and 100% of the outstanding preferred stock of the Company.
BUSINESS CONDITIONS
The Company consistently suffered losses for several of the past fiscal years, but beginning in fiscal year ended September 30, 1998, the Company has reported income and has positive cash flows from operations. As of September 30, 1998, the Company had a working capital deficit of $6,785,489 and a positive shareholders equity of $2,759,511.
The Company has historically relied on Waste Systems, Inc. ("WSI"), the Company's majority stockholder, for funding, and such support was again necessary in fiscal 1998. During the fiscal years ended September 30, 1998 and 1997 WSI made cash advances to the Company of $500,000, $2,303,000. As more fully described in Note 7, the 1995 Note was amended and restated on October 1, 1998.
As more fully described in Note 7, on December 18, 1998, the Company completed a Loan Agreement and Note Amendment whereby WSI loaned the Company $750,000. Such note was due on September 30, 1999. The note was repaid as of September 30, 1999.
As of September 30, 1998, WSI was under no obligation to provide additional advances. During 1998, the Company had discussions with third party lenders to obtain alternative sources of financing apart from WSI. In the event the Company and WSI did not come to a resolution on the possible additional restructuring and/or extensions on the above notes and the Company was unable to obtain alternative financing, there could be no assurance that the Company would be able to meet its obligations as they became due or realize the recorded value of its assets and would likely have been forced to seek bankruptcy protection.
The nature and level of competition in this industry was at a high level for several years. This condition resulted in pressure on profit margins. The Company competes against companies which may have access to greater capital resources. In order to compete in this industry on a long-term basis and fully realize its business strategy, the Company required additional and continued financing and other assistance from its current shareholders and if available, from outside sources. There was no assurance that adequate funds for these purposes would be available when needed or, if available, on terms acceptable to the Company.
During 1999 the Company addressed the issues related to the concerns expressed in the preceding paragraphs. As described in note 3 below, the Company reorganized its operations by selling certain less profitable customer routes in its Oklahoma territory in January 1999. This created a one-time increase in liquidity and contributed to an improvement in the overall profit margin of the Company. In
addition, this reduction in the waste stream and the completion of the Chem-Clav unit at its Springhill, Louisiana plant, allowed the Company to restructure its use of available treatment capacity which reduced outside treatment cost. Also during 1999, the Company was able to benefit from its relationship with its majority shareholder to obtain more favorable rates for property and liability and workers compensation insurance. These steps led to an improved cash flow from operations which allowed the Company to fund its operations and to repay principal and interest to its majority shareholder (see Note 7).
The Company is in the process of obtaining proposals from WSI as well as third parties related to the refinancing and extension of the existing note payable. WSI intends to support the Company through the year 2000.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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
Intangible assets are amortized on a straight-line method as follows:
Amortization expense charged to operations for the years ended September 30, 1999, 1998 and 1997 was $115,552, $99,552 and $99,552, respectively. The Company continually evaluates the value and future benefits of its intangible assets. Under this approach, the carrying value of goodwill would be reduced if it becomes probable that the Company's best estimate for expected undiscounted future cash flows of the related business would be less than the carrying amount of goodwill over its remaining amortization period. For the three-year period ended September 30, 1999, there were no adjustments to the carrying amounts of goodwill resulting from these evaluations.
REVENUE RECOGNITION
The Company recognizes revenue when the treatment of the regulated medical waste is completed on-site or the waste is shipped off-site for processing and disposal. For waste shipped off-site, all costs are recognized at time of shipment.
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, accounts payable, and accrued liabilities. 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 5% 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).
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial statements to conform to the classifications used in the current year financial statements.
NOTE 3 - DIVESTITURES
In January 1999, the Company sold a portion of its Oklahoma customer routes and a waste transfer permit for a Tulsa, Oklahoma location to a competitor. The Company received total consideration of $920,000 consisting primarily of cash, as well as a note receivable and certain customer routes of the competitor located in Texas. In addition, the Company was granted a right of first refusal to purchase all or substantially all of the assets of the competitor which right was then conveyed to its majority shareholder in exchange for $155,000 in forgiveness of debt. The Company recognized a gain on this transaction of $910,954, which is included in the 1999 Statement of Operations as other income (expense).
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at September 30:
Depreciation expense charged to operations was $1,635,150, $1,198,068, and $1,252,463 for the years ending September 30, 1999, 1998, and 1997, respectively. On October 1, 1998 the Company changed the depreciable lives of certain assets based upon a review of the expected remaining useful lives of these assets. The effect of these changes in estimates resulted in the decrease of 1999 operating income and net income of approximately $285,000 ($.02 per share). Substantially all of the Company's property, plant and equipment has been pledged as collateral against certain of the Company's liabilities.
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 10.
Preferred stock, stock options and warrants, to purchase shares of common stock outstanding during 1997, were not included in the computation of diluted earnings per share in these years because the Company had a net loss in 1997 and the effect would be antidilutive. In 1999 and 1998, stock options and warrants were not included because they were antidilutive, as the exercise prices ranging from $3.00 to $1.50 were greater than the average price of the common stock.
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:
Note payable to majority shareholder consists of the following at September 30:
On October 1, 1998, WSI and the Company, amended and restated a revolving promissory note which had been extended from its original maturity date in 1997 (the Note). Amounts due under the Note totaled approximately $5,774,000 as of September 30, 1999 including approximately $143,000 of accrued interest. The principal balance of approximately $5,631,000 consisted of approximately $5,004,000 due under the original note, $483,000 of accounts payable to WSI added to the note on October 1, 1998, and approximately $144,000 of accrued and unpaid interest, which was capitalized and added to the principal balance effective January 1, 1999. The Note bears interest at the prime rate, which is currently 8.5%, plus 2.0%. Interest under the note is due and payable in quarterly installments on the last business day of each calendar quarter. The outstanding principal of this note and accrued but unpaid interest was originally due September 30, 1999. As of September 30, 1999, the Company had exercised its option to extend the note to March 31, 2000. Under the Note, 3CI may also extend the maturity to a date not later than September 30, 2000. The Company is required to maintain a minimum level of net worth and comply with certain performance related covenants.
The Company is in the process of obtaining proposals from WSI, as well as, third parties related to the refinancing and extension of the existing note payable. WSI intends to support the Company through the year 2000.
On December 18, 1998, WSI and the Company entered into a Loan Agreement and Note Amendment (the "New Loan") whereby WSI loaned $750,000 to 3CI. The New Loan bore interest at Prime Rate, which was 7.75% plus 3.0%. The outstanding principal balance of the New Loan was due and payable on September 30, 1999. This note was repaid in full as of September 30, 1999.
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, and $1,000,000 for the financing of equipment, of which $633,583 had been utilized at September 30, 1999. This agreement is guaranteed by Stericycle, Inc. which owns 100% of WSI.
Payments due on long-term debt, during each of the five years subsequent to September 30, 1999 are as follows:
Total interest expense was $911,411, $661,715 and $902,229 for the years ended September 30, 1999, 1998 and 1997, respectively.
NOTE 8 - INCINERATION CONTRACTS
The Company was a party to exclusive incineration contracts with the cities of Carthage and Center, Texas (the "Cities") whereby the Company was guaranteed a minimum weekly burn capacity subject to meeting certain annual minimum burn fees. In January 1997, the City of Center, Texas filed suit in City of Center vs. 3CI Complete Compliance Corporation, Cause No. CV 9:97-CV-125, in United States District Court Eastern District of Texas. The City filed the lawsuit to recover damages arising out of a delinquent account of 3CI. 3CI filed counterclaims seeking damages arising out of the alleged breach of exclusivity and tortuous interference by the City of Center. The Company and the City of Center reached a settlement of the disputed claims whereby the City of Center would give up their claim for the outstanding burn fees of approximately $80,000 and pay to the Company $380,000 in settlement for breaking the exclusivity agreement in the contract. The Company received $200,000 of this settlement in October 1998, with the remaining balance of $180,000 to be paid over 24 months. The balance as of September 30, 1999 is $105,000.
During 1999 the expansion of internal treatment capacity enabled the Company to reduce outside treatment fees by treating waste internally, which was formerly treated at the Carthage facility. Consequently, the $1,000,000 in fees required to retain the exclusivity agreement with the City of Carthage expired. However, the Company does retain a guaranteed capacity at the City of Carthage, of approximately 5,000,000 pounds which is based upon the level of treatment between June 1998 and May 1999.
In order to retain the exclusivity with the City of Carthage, the Company had a minimum guaranteed payments for incineration fees for the years ended May 31, 1999, 1998, and 1997, of $1,000,000. In the years ended May 31, 1999, 1998, and 1997 the Company paid incineration fees of $492,235, $1,277,033 and $1,401,692, respectively to the City of Carthage. The Company also had minimum guaranteed payments to the City of Center, Texas for incineration fees for the years ended May 31, 1997 of $762,000. In the year ended May 31, 1997 Company paid incineration fees of $27,000 to the City of Center.
Included in cost of sales for the years ended September 30, 1999, 1998 and 1997, is $271,805, $1,199,384 and $1,429,097 respectively, related to incineration costs at the City of Carthage.
NOTE 9 - INCOME TAXES
The Company's deferred tax liabilities and assets as of September 30, are as follows:
At September 30, 1999, the Company had net operating loss carryforwards for federal income tax purposes of approximately $24,866,551, which will expire beginning in 2004. The Company also had state net operating losses at September 30, 1999. Because of separate return limitations, change in ownership limitations, and the weight of available evidence, it is more likely than not that some portion or possibly all of the net operating losses will not be available for use by the Company. The Company has established a valuation allowance for the federal and state net operating losses of $8,377,514, and $8,929,871 as of September 30, 1999 and 1998 respectively. The change in the valuation allowance in 1999 was due to 1999 pretax income.
NOTE 10 - STOCK OPTION 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 1999, the Company issued 215,000 stock options at exercise prices ranging from $0.594 to $1.00. During 1998, the Company issued 84,000 stock options issued at a exercise price of $1.50, in exchange for the cancellation of 32,500 and 90,000 previously issued stock options which were exercisable at a price of $3.00 per share and $2.00 per share, respectively. The Company issued 180,000 stock options of the Company's common stock at an exercise price $1.50 per share during 1998.
As of September 30, 1999 and 1998, the Company had issued 484,000 and 269,000 of the 500,000 options share described above. The outstanding option shares vest annually over a three year period.
A summary of stock option information follows:
The outstanding options at September 30, 1999 have a weighted average remaining contractual life of 9.02 years.
Utilizing the intrinsic value method of APB 25, the Company recognized $24,000 during the year ended September 30, 1999. Had stock options been accounted for under the fair value method recommended by SFAS 123, the Company's net income (loss) as follows would have been on a pro forma basis.
The fair value of stock options used to compute pro forma net income (loss) is the estimated present value at the grant date using the minimum value option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rates of 5.00% for 1999 and 4.65% for 1998; and a weighted-average expected option life of five years.
The Company, in connection with the settlement of a lawsuit with a group of its minority stockholders issued the minority shareholder class warrants to purchase up to 1,002,964 shares of common stock at $1.50 per share. At September 30, 1999 all of these warrants were outstanding. They expire in April 2000.
NOTE 11 - RELATED PARTY TRANSACTION
The Company had notes payable to WSI, its majority shareholder, of $5,774,165 and $5,004,403, as September 30, 1999 and 1998, respectively. In addition, the Company owed current accounts payables to WSI of $2,125 and $483,406 as of September 30, 1999 and 1998, respectively. Related interest expense in the amount of $590,638, $410,596 and $698,248, was recorded for the years ended September 30, 1999, 1998, and 1997, respectively. Transactions and other information relating to the debt owed to WSI are more fully described in Note 7 above.
The Company treats medical waste at a treatment facility in Terrill, Texas which is owned by Stericycle, Inc., the parent of WSI, its majority shareholder. The treatment fees are paid currently in accordance with 30-day terms. 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 at September 30, 1999, was $12,153.
During the fiscal year ended 1998, the Company shared certain facilities, personnel and administrative services with WSI.
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, and $1,000,000 for the financing of equipment, of which $633,583 had been utilized at September 30, 1999. This agreement is guaranteed by Stericycle, Inc. which owns 100% of WSI.
The Company purchased business forms from a company owned by the father of Curtis W. Crane, the Chief Financial Officer of the Company. The payments made were $70,000, $72,000, and $62,000, during fiscal years ended September 30, 1999, 1998, and 1997, respectively.
NOTE - 12 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 Company'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 would 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 Company's Board of Directors, out of the assets of the Company 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 Company 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 Company 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.
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 shall be entitled to receive, when, and if declared by the Company's Board of Directors cumulative dividends from the second anniversary of the original issuance date, 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 Company 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 Company 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.
No dividends for Series B or Series C preferred stock were declared by the Board of Directors as of September 30, 1999. The accumulated undeclared Preferred Stock dividend totaled $159,844 at September 30, 1999.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
In September 1998, Insurance Company of the State of Pennsylvania filed suit in Insurance Company of the State of Pennsylvania v. 3CI Complete Compliance Corporation, No. CV98-1756S, in the United Sates District Court of Louisiana, Shreveport, Louisiana. The plaintiffs have alleged approximately $390,000 in unpaid premiums for workers compensation insurance policies allegedly issued between February 1994 and February 1997. This lawsuit was settled in February 1999 by the payment of $255,000.
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 14 - LEASE COMMITMENT
At September 30, 1999, 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, totaled $263,632, $252,158, and $262,169 for 1999, 1998 and 1997 respectively.
3CI COMPLETE COMPLIANCE CORPORATION VALUATION AND QUALIFYING ACCOUNTS
Schedule II ================================================================================
EXHIBIT INDEX
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