SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q/A
Amendment No. 1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number 1-11097
3CI COMPLETE COMPLIANCE CORPORATION
-----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 76-0351992
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1517 W. North Carrier Pkwy, Ste 104, Grand Prairie, TX 75050
(Address of principal executive offices)
(Zip Code)
(972) 375-0006
(Registrant's telephone number, including area code)
----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
----------
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date.
The number of shares of Common Stock outstanding as of the close of
business on May 6, 2003, was 9,739,611.
Explanatory Note
The Company is filing this Quarterly Report on Form 10-Q/A as Amendment
No. 1 to the Company's Form 10-Q, originally filed on May 19, 2003, for the
purpose of (i) amending the Net Income Per Common Share table in Item 1 of Part
I; (ii) amending certain disclosures in the Business Conditions section in Item
1 of Part I and in Management's Discussion and Analysis of Financial Condition
and Results of Operations in Item 2 of Part I; and (iii) deleting the Intangible
Assets section in Item 1 of Part I. For the convenience of the reader, the
Quarterly Report has been restated in its entirety.
3CI COMPLETE COMPLIANCE CORPORATION
INDEX
<Table>
<Caption>
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of
March 31, 2003 (unaudited) and September 30, 2002 ....................... 3
Statements of Operations for the three and six months ended
March 31, 2003 and 2002 (unaudited)..................................... 4
Statements of Cash Flows for the
six months ended March 31, 2003 and 2002 (unaudited).................... 5
Notes to Financial Statements .............................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 9
Item 3. Qualitative Disclosure about Market Risk ................................... 13
Item 4. Controls and Procedures .................................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................................... 13
Item 2. Changes in Securities........................................................ 14
Item 3. Defaults Upon Senior Securities.............................................. 14
Item 4. Submission of Matters to a Vote
Of Security Holders....................................................... 14
Item 5. Other Information .......................................................... 14
Item 6. Exhibits and Reports on Form 8-K............................................. 14
SIGNATURES.................................................................................... 17
</Table>
2
3CI COMPLETE COMPLIANCE CORPORATION
BALANCE SHEETS
<Table>
<Caption>
MARCH 31, SEPTEMBER 30,
2003 2002
(UNAUDITED)
-------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,535,026 $ 898,720
Accounts receivable, net allowances of $653,165 and $622,668
at March 31, 2003 and September 30, 2002, respectively 2,561,829 3,324,529
Inventory 76,413 80,310
Prepaid expenses 578,911 326,711
Other current assets 45,230 43,363
-------------- --------------
Total current assets 4,797,409 4,673,633
-------------- --------------
Property, plant and equipment, at cost 8,457,881 8,375,654
Accumulated depreciation (5,780,055) (5,428,261)
-------------- --------------
Net property, plant and equipment 2,677,826 2,947,393
-------------- --------------
Excess of cost over net assets acquired, net of accumulated amortization of
$174,988 at March 31, 2003 and September 30, 2002 262,243 262,243
Other assets 99,283 117,581
-------------- --------------
Total assets $ 7,836,761 $ 8,000,850
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 405,670 $ 51,394
Accounts payable 497,935 435,311
Accounts payable and accrued interest to affiliated companies 477,943 863,327
Accrued liabilities 327,086 470,372
Dividends payable 2,203,717 2,042,560
Note payable to majority shareholder 3,392,492 1,002,433
-------------- --------------
Total current liabilities 7,304,843 4,865,397
-------------- --------------
Long-term note payable to majority shareholder, net of current portion -- 2,888,202
-------------- --------------
Total liabilities 7,304,843 7,753,599
-------------- --------------
Shareholders' Equity:
Preferred stock, $0 .01 par value, authorized 16,050,000 shares;
issued and outstanding 7,750,000 at March 31, 2003 and September 30, 2002, respectively 77,500 77,500
Additional paid-in capital - preferred stock 7,672,500 7,672,500
Common stock, $0.01 par value, authorized 40,450,000 shares;
Issued and outstanding 9,232,825 at March 31, 2003 and 9,232,825 at September 30, 2002 97,742 92,329
Less cost of treasury stock 34,500 shares (51,595) (51,595)
Additional paid-in capital - common stock 20,519,861 20,471,145
Accumulated deficit (27,784,090) (28,014,628)
-------------- --------------
Total shareholders' equity 531,918 247,251
-------------- --------------
Total liabilities and shareholders' equity $ 7,836,761 $ 8,000,850
============== ==============
</Table>
The accompanying notes are an integral part of these financial statements.
3
3CI COMPLETE COMPLIANCE CORPORATION
STATEMENTS OF OPERATION
(UNAUDITED)
<Table>
<Caption>
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE SIX MONTHS ENDED MARCH 31,
2003 2002 2003 2002
-------------- -------------- ------------- -------------
REVENUES $ 3,412,417 $ 4,035,817 $ 7,006,803 $ 8,305,411
EXPENSES:
COST OF SERVICES 2,217,809 2,639,472 4,506,055 5,469,052
DEPRECIATION AND AMORTIZATION 182,126 160,662 358,005 331,973
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 850,816 727,568 1,505,342 1,431,202
INTEREST EXPENSE 55,273 217,518 107,705 316,753
OTHER EXPENSE-NET 69,000 65,595 138,000 137,786
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 37,393 225,002 391,696 618,645
INCOME TAXES -- -- -- --
------------- ------------- ------------- -------------
NET INCOME $ 37,393 $ 225,002 $ 391,696 $ 618,645
============= ============= ============= =============
DIVIDENDS ON PREFERRED STOCK -- (157,654) (161,158) (318,812)
------------- ------------- ------------- -------------
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS $ 37,393 $ 67,348 $ 230,538 $ 299,833
============= ============= ============= =============
BASIC EARNINGS PER SHARE:
BASIC NET INCOME PER SHARE $ 0.00 $ 0.01 $ 0.02 $ 0.03
============= ============= ============= =============
DILUTED EARNINGS PER SHARE:
DILUTED NET INCOME PER SHARE $ 0.00 $ 0.01 $ 0.01 $ 0.04
============= ============= ============= =============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
3CI COMPLETE COMPLIANCE CORPORATION
STATEMENT OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
FOR THE SIX MONTHS ENDED MARCH 31,
2003 2002
------------- -------------
CASH FLOW FROM OPERATING ACTIVITIES:
NET INCOME $ 391,696 $ 618,645
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
GAIN ON DISPOSAL OF FIXED ASSETS -- (3,000)
DEPRECIATION AND AMORTIZATION 358,005 331,973
CHANGES IN OPERATING ASSETS AND LIABLILITES:
(INCREASE) DECREASE IN ACCOUNTS RECEIVABLE, NET 762,700 512,079
DECREASE IN INVENTORY 3,897 16,945
INCREASE IN PREPAID EXPENSES (252,200) (291,382)
(INCREASE) DECREASE IN OTHER CURRENT ASSETS AND OTHER ASSETS 10,218 (42,958)
INCREASE (DECREASE) IN ACCOUNTS PAYABLE 62,624 (179,892)
INCREASE (DECREASE) IN ACCOUNTS PAYABLE, AFFILIATED COMPANIES (385,384) 21,236
INCREASE (DECREASE) IN ACCRUED LIABILITIES (143,286) 35,629
------------ ------------
TOTAL ADJUSTMENTS TO NET INCOME 416,574 400,630
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 808,270 1,019,275
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALE OF PROPERTY, PLANT AND EQUIPMENT -- 3,000
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT (82,226) (34,464)
------------ ------------
NET CASH USED IN INVESTING ACTIVITES (82,226) (31,464)
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
PROCEEDS FROM ISSUANCE OF COMMON STOCK 54,129 222,449
PROCEEDS FROM INSURANCE NOTES PAYABLE 525,293 227,454
REDUCTION OF INSURANCE NOTES PAYABLE (171,017) (439,596)
REDUCTION OF LONG-TERM DEBT, UNAFFILIATED LENDERS -- (370,100)
REDUCTION OF NOTE PAYABLE TO MAJORITY SHAREHOLDERS (498,143) (400,000)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (89,738) (759,793)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 636,306 228,018
------------ ------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 898,720 709,563
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,535,026 $ 937,581
============ ============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
3CI COMPLETE COMPLIANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2003
(1) ORGANIZATION AND BASIS OF PRESENTATION
3CI Complete Compliance Corporation (the "Company" or "3CI"), a
Delaware Corporation, is engaged in the collection, transportation, and disposal
of biomedical waste in the southern 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 58.0% or 5,645,734 shares of the outstanding
common stock and 100% of the outstanding preferred stock of the Company. In
addition, Stericycle owns 932,770 shares of common stock directly. Through its
ownership of WSI and shares owned directly, Stericycle owns 67.5% of the
outstanding common stock.
The accompanying unaudited condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States, for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States, for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month and six-month periods ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the year ended
September 30, 2003.
The balance sheet at September 30, 2002, has been derived from the
audited finacial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
For further information, refer to the consolidated financial statements
and footnotes included in the Registrant Company's annual report on Form 10-K
for the year ended September 30, 2002.
Certain amounts in the financial statements for 2002 have been
reclassified to conform to the 2003 presentation.
6
(2) NET INCOME PER COMMON SHARE
The following table sets forth the computation of net income per common share:
<Table>
<Caption>
FOR THE THREE AND SIX MONTHS ENDED,
-------------------------------------------------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Numerator:
Net income $ 37,393 $ 225,002 $ 391,696 $ 618,645
Less preferred dividends -- (157,654) (161,158) (318,812)
-------------- -------------- -------------- --------------
Net income applicable to common shareholders $ 37,393 $ 67,348 $ 230,538 $ 299,833
Denominator:
Denominator for basic earnings per share
--weighted average shares 9,739,611 9,198,325 9,504,657 9,198,325
-------------- -------------- -------------- --------------
Effect of dilutive securities:
Preferred shares 7,750,000 8,200,724 7,750,000 8,176,711
-------------- -------------- -------------- --------------
Denominator for diluted earnings per share-adjusted
Weighted average shares and assumed conversions 17,489,611 17,399,249 17,254,657 17,375,036
-------------- -------------- -------------- --------------
Basics earnings per share $ 0.00 $ 0.01 $ 0.02 $ 0.03
-------------- -------------- -------------- --------------
Diluted earnings per share $ 0.00 $ 0.01 $ 0.02 $ 0.04
-------------- -------------- -------------- --------------
</Table>
Warrants to purchase common shares included in the calculation of
diluted earnings per share of 2002 had expired or were exercised prior to March
31, 2003. Stock options were not included in the computation as they were
antidilutive since the exercise prices ranging from $0.33 to $1.50 were greater
than the average price of the common stock.
(3) BUSINESS CONDITIONS
Over the last several quarters the Company has continued to experience
improved cash flow which has enabled it to reduce debt and to rely more on
internally generated funds to finance its working capital needs, capital
expenditures, and acquisitions and to rely less on its majority shareholder,
WSI. The Company's indebtedness currently consists of amounts owed to WSI (which
are described below) and insurance premiums that are financed over the course of
each fiscal year.
On October 1, 1998, WSI and the Company amended and restated a
revolving promissory note (the note) which was originally due September 30,
2000. Since that time the note has been extended either quarterly or
semi-annually under interest rate terms ranging from prime plus 1.0% to prime
plus 3.5% not to exceed 13%. In connection with the note extension August 1,
2000, 3CI issued warrants to WSI for the purchase of up to 351,836 shares of
common stock at an exercise price of $.20 per share. These warrants expired on
September 20, 2002. When the note was extended on October 1, 2000, 3CI issued
warrants to WSI for the purchase of up to 541,286 shares of 3CI common stock at
an exercise price of $.10 per share which were exercised on December 19, 2002.
In each of these cases the values of the warrants were included in the statement
of operations for the respective periods as interest expense.
The note was renegotiated pursuant to an agreement dated May 23, 2002
by which the maturity was extended to October 1, 2003. The terms of this
extension included an interest rate equal to the prime rate, currently 4.25%,
plus 1.0% and called for a principal payment of $700,000 at renewal and
additional monthly payments of $ 100,000 to be applied to accrued interest and
principal. The agreement also required the Company to achieve a minimum level of
EBITDA for each trailing six-month period thereafter until maturity. This level
was achieved for each of the six months ended June 30, 2002, September 30, 2002
and December 31, 2002. This level was not achieved for the six months ended
March 31, 2003. WSI waived the violation for that period.
7
(4) PREFERRED STOCK
WSI, the company's majority shareholder owns 100% or 7,000,000 shares
of the Company's series B preferred Stock. WSI also owns 100% or 750,000 shares
of the Company's series C preferred stock.
On December 31, 2002 the Company declared a $0.0208 per share dividend
on the Preferred Stock which totaled $161,158 and represented the undeclared
dividends accrued through that date. The resolution called for payment in cash
from funds legally available for the payment of dividends, as and when the Board
of Directors may direct by further resolution.
All of the Preferred Stock outstanding on April 6, 2003 was to be
automatically converted to shares of common stock on that date. However, as of
the date hereof, the Preferred Stock has not been converted into Common Stock.
The Company, WSI and Stericycle have entered into an Agreement to Defer
Conversion of Preferred Stocks, dated as of April 2, 2003 (the "Agreement to
Defer"), pursuant to which WSI has agreed not to exercise its right to convert
the Preferred Shares and that no automatic conversion of the Preferred Shares
will occur until a judicial judgment as to the appropriate conversion rate has
become final and non-appealable. A copy of the Agreement to Defer is attached to
this form 10-Q as Exhibit 10.9.
See "Legal Proceedings" herein for a description of a declaratory
judgment action filed by the Company on May 9, 2003, to obtain judicial
determination of the conversion rate of the Preferred Stock.
(5) COMMITMENTS AND CONTINGENCIES
The Company has signed a letter of intent to acquire certain assets of
an independent Houston, Texas medical waste management company, pending
completion of due diligence procedures. In April 2003 a good faith deposit of
approximately $54,000 was made with the signing of the letter of intent. The
Company intends to finance the acquisition through a bank line of credit. The
assets to be acquired will not have a material impact on the Company's assets,
debt or its revenues.
8
On July 16, 2002 a suit was filed in the First Judicial District Court
in Shreveport, Louisiana against Stericycle, Inc. and certain of 3CI's directors
which alleged minority shareholder oppression, breach of fiduciary duty and
unjust enrichment. While the Company is not party to the lawsuit, it has
contacted its insurance carrier and hired counsel to assist the Company in this
litigation. The defendants in the case have denied the allegations and intend to
defend the case vigorously.
The Company is subject to certain other litigation and claims arising
in the ordinary course of business. In the opinion of management of the Company,
the amounts ultimately payable, if any, as a result of such litigation and
claims will not have a materially adverse effect on the Company's financial
position or results of operations.
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.
See "Legal Proceedings" herein for a description of a declaratory
judgment action filed by the Company on May 9, 2003, to obtain judicial
determination of the conversion rate of the Preferred Stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is engaged in the business of medical waste management
services in the southern 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, and disposal of regulated medical waste.
9
RESULTS OF OPERATIONS
The following summarizes (in thousands) the Company's operations:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
2003 2002 2003 2002
-------- -------- -------- --------
Revenues $ 3,412 $ 4,036 $ 7,007 $ 8,305
Cost of services (2,218) (2,639)
(4,506) (5,469)
Depreciation and amortization (182) (161) (358) (332)
Selling, general and administrative (851) (728) (1,505) (1,431)
-------- -------- -------- --------
Net income from operations 161 508 638 1,073
-------- -------- -------- --------
Interest expense (55) (218) (108) (317)
Other income (expense) net (69) (66) (138) (138)
-------- -------- -------- --------
Net income $ 37 $ 225 $ 392 $ 619
======== ======== ======== ========
Earnings before interest, taxes,
depreciation and amortization (EBITDA) (1) $ 275 $ 604 $ 857 $ 1,268
======== ======== ======== ========
</Table>
(1) EBITDA is calculated as the sum of net income, plus interest expense, income
tax expense, depreciation expense, and amortization expense. We consider EBITDA
to be a widely accepted financial indicator of a company's ability to service
debt, fund capital expenditures and expand its business. EBITDA is not
calculated in the same way by all companies, is not a measurement required by
generally accepted accounting principles and does not represent cash flow from
operations as defined by generally accepted accounting principles. EBITDA should
not be considered as an alternative to net income, as an indicator of operating
performance or as an alternative to cash flow as a measure of liquidity.
- ----------
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002:
REVENUES decreased by $623,400 or approximately 15.4%, to $3,412,417 during the
three months period ended March 31, 2003, from $4,035,817 for the three-month
period ended March 31, 2002. The decrease in revenue is primarily related to a
reduction in the volume of waste handled. The reduction in volume was
attributable to the Company's efforts to focus on the professional market
segments which provide higher pricing at lower volumes while reducing the focus
on the hospital segment which provides higher volume at a typically lower
average unit price.
COST OF SERVICES decreased $421,663 or approximately 15.9%, to $2,217,809 during
the three months ended March 31, 2003, compared to $2,639,472 for the three
month period ended March 31, 2002. The reasons for the decrease were primarily
attributable to a decrease in processing fees and transportation costs. Cost of
services as a percentage of revenues decreased to 65.0uring the three months
ended March 31, 2003, as compared to 65.4% during the three months ended March
31, 2002 due to the decrease in processing fees and transportation costs.
DEPRECIATION AND AMORTIZATION expense increased to $182,126 for the three months
ended March 31, 2003, from $160,662 for the three months ended March 31, 2002.
The increase was primarily the result of the Company aquiring new assets for the
new computer system and the move of the corporate offices to Grand Prairie, TX
in June 2002.
SELLING, GENERAL AND ADMINISTRATIVE expenses increased to $850,932 during the
three months ended March 31, 2003, from $727,568, during the three months ended
March 31, 2002. Selling, general and administrative expenses increased as a
percentage of revenue to 24.9% for the three months ended March
10
31, 2003, as compared to 18.0% for the three months ended March 31, 2002
primarily due to a reduction in revenue, increased insurance costs, and
increases in compensation for employees.
INTEREST EXPENSE decreased by $162,245, or 74.6%, to $55,273 during the three
months ended March 31, 2003, as compared to $217,518 for the three month period
ended March 31, 2002. This decrease was due to the decrease in the prime
interest rate and lower principal debt balances.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION ("EBITDA")
totaled $274,676 or 8.0% of revenue for the three months ended March 31, 2003
compared to $603,182 or 14.9% of revenue for the quarter ended March 31, 2002.
This decrease was primarily the result of the reduced income and increased costs
of selling, general and administrative expenses for the three months ended March
31, 2003.
SIX MONTHS ENDED MARCH 31, 2003 COMPARED TO SIX MONTHS ENDED MARCH 31, 2002:
REVENUES decreased by $1,298,608 or 15.6%, to $7,006,803 during the six month
period ended March 31, 2003, from $8,305,411 for the six month period ended
March 31, 2002. This decrease is primarily due to a decrease in the volume of
waste handled. This reduction in the volume was attributable to the Company's
efforts to focus on the professional market segments, which provide higher
pricing at lower volumes while reducing the focus on the hospital segment, which
provides higher volume at a typically lower average unit price.
COST OF SERVICES decreased $962,997, or 17.6%, to $4,506,055, during the six
months ended March 31, 2003, compared to $5,469,052 for the six month period
ended March 31, 2002. The decrease in cost of services is attributable to the
decreased waste processing costs. Cost of services as a percentage of revenues
decreased to 64.3% during the six months ended March 31, 2003, as compared to
65.8% during the six months ended March 31, 2002. The decrease in cost of
services is attributable to the decreased waste processing and transportation
costs.
DEPRECIATION AND AMORTIZATION expense increased to $358,005 for the six months
ended March 31, 2003, from $331,973 for the six months ended March 31, 2002. The
increase was primarily the result of the Company aquiring new assets for the new
computer system and the move of the corporate offices to Grand Prairie, TX in
June 2002.
SELLING, GENERAL AND ADMINISTRATIVE expenses increased to $1,505,459 during the
six months ended March 31, 2003, from $1,431,202 during the six months ended
March 31, 2002. This increase of $74,257, or 5.2%, is primarily attributable to
increases in group insurance and compensation for employees. Selling, general
and administrative expenses increased as a percentage of revenue to 21.5% for
the six months ended March 31, 2003, as compared to 17.2% for the six months
ended March 31, 2002 primarily due to the reduction in revenue, increased
insurance and salary costs.
INTEREST EXPENSE decreased by $209,048 or 66.0% to $107,705 during the six
months ended March 31, 2003 as compared to $316,753 during the six months ended
March 31, 2002. This decrease was due to reduced debt and a reduction in the
interest rate for the WSI promissory note, which is variable and tied to the
prime interest rate.
EARNINGS BEFORE INTEREST TAXES DEPRECIATION AND AMORTOZATION ("EBITDA") totaled
$857,290 or 12.2% of revenue for the six months ended March 31, 2003 compared to
$1,267,371 or 15.3% of revenue for the six months ended March 31, 2002. This
decrease was primarily the result of the reduced income and increased costs of
selling, general and administrative expenses for the six months ended March 31,
2003.
11
LIQUIDITY AND CAPITAL RESOURCES
Over the last several quarters the Company has continued to experience
improved cash flow which has enabled it to reduce debt and to rely more on
internally generated funds to finance its working capital needs, capital
expenditures, and acquisitions and to rely less on its majority shareholder,
WSI. The Company's indebtedness currently consists of amounts owed to WSI (which
are described below) and insurance premiums that are financed over the course of
each fiscal year.
On October 1, 1998, WSI and the Company amended and restated a
revolving promissory note (the note) which was originally due September 30,
2000. Since that time the note has been extended either quarterly or
semi-annually under interest rate terms ranging from prime plus 1.0% to prime
plus 3.5% not to exceed 13%. In connection with the note extension August 1,
2000, 3CI issued warrants to WSI for the purchase of up to 351,836 shares of
common stock at an exercise price of $.20 per share. These warrants expired on
September 20, 2002. When the note was extended on October 1, 2000, 3CI issued
warrants to WSI for the purchase of up to 541,286 shares of 3CI common stock at
an exercise price of $.10 per share which were exercised on December 19, 2002.
In each of these cases the values of the warrants were included in the statement
of operations for the respective periods as interest expense.
The note was renegotiated pursuant to an agreement dated May 23, 2002
by which the maturity was extended to October 1, 2003. The terms of this
extension included an interest rate equal to the prime rate, currently 4.25%,
plus 1.0% and called for a principal payment of $700,000 at renewal and
additional monthly payments of $ 100,000 to be applied to accrued interest and
principal. The agreement also required the Company to achieve a minimum level of
EBITDA for each trailing six-month period thereafter until maturity. This level
was achieved for each of the six months ended June 30, 2002, September 30, 2002
and December 31, 2002. This level was not achieved for the six months ended
March 31, 2003. WSI waived the violation for that period.
At March 31, 2003, the Company had net working capital, exclusive of
the note payable to its majority shareholder, of $885,058 compared to a net
working capital exclusive of the note payable to its majority shareholder of
$810,669 at September 30, 2002. This increase in net working capital of $74,389
was due primarily to the increase in the dividends payable on preferred stock
and the reduction in accounts receivable.
Net cash provided by operating activities was $808,270 during the six
month period ended March 31, 2003, compared to $1,019,275 of net cash provided
by operating activities for the six month period ended March 31, 2002. This
decrease of $211,005 is due primarily to the decrease in net income during 2003.
Net cash used in investing activities for the six months ended March
31, 2003, was $82,226 compared to $31,464 for the same period in 2002. The
$50,762 increase reflects increased investment in capital equipment. The Company
utilized the $82,226 for the purchases of computer equipment and furniture and
fixtures.
Net cash used in financing activities was $89,738 during the six month
period ended March 31, 2003, as compared to net cash used in financing
activities of $759,793 during the six month period ended March 31, 2002. The
$670,055 fluctuation is due to reduced payments on long term debt and notes
payable.
12
Item 3. QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's exposure to market risk includes the possibility of
rising interest rates in connection with the Company's credit facility with WSI,
its majority shareholder, thereby increasing its debt service obligation, which
could adversely effect the Company's cash flows. The interest rate for the note
is variable and tied to the prime rate not to exceed 13%. An increase in the
prime rate of 1% would have the effect of increasing interest expense by
approximately $32,744 over 12 months.
Item 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our filings under the
Securities Exchange act of 1934 is recorded, processed, summarized and reported
within the periods specified in the rules and forms of the Securities and
Exchange Commission. This information is accumulated and communicated to our
management including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosures. Our management, including our principal executive officer and our
principal financial officer, recognizes that any set of controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures within 90 days
of the filing date of this report. Based on this evaluation, our principal
executive officer and principal financial officer concluded that our disclosure
controls and procedures are effective in alerting them on a timely basis to
material information required to be disclosed in our periodic filings.
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation referenced in the foregoing paragraph.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings -
DISPUTE OVER CONVERSION OF PREFERRED SHARES TO COMMON STOCK:
WSI and Stericycle asserted that the conversion rate of the Preferred
Stock is such that each share of Preferred Stock is convertible into that number
of shares of Common Stock determined by dividing $7,000,000 (with respect to the
Series B Preferred Stock) and 750,000 (with respect to the Series C Preferred
Stock) by the market value of the Common Stock on the date of conversion. Under
this interpretation, the conversion rate of the Preferred Stock on April 6,
2003, the automatic conversion date, the Company would have issued 36,904,761
shares of Common Stock upon conversion of the Preferred Stock.
WSI and Stericycle's interpretation of the conversion rate is contrary
to the Company's interpretation of the conversion rate. The Company believes
that if the per share market value of the Common Stock is less than $1.00, each
share of Preferred Stock would be converted into one share of Common Stock.
Under this interpretation, on April 6, 2003, the Company would have issued
7,750,000 shares of Common Stock upon conversion of the Preferred Shares.
13
The Company, WSI and Stericycle have entered into an Agreement to Defer
Conversion of Preferred Stock, dated as of April 2, 2003 (the "Agreement to
Defer"), pursuant to which WSI has agreed not to exercise its right to convert
the Preferred Stock and that no automatic conversion of the Preferred Stock will
occur until a judicial judgment as to the appropriate conversion rate has become
final and non-appealable. A copy of the Agreement to Defer is attached to this
Form 10-Q as Exhibit 10.9.
On May 9, 2003, the Company filed a petition in the 269th Judicial
District Court of Harris County, Texas (the "Court"), the court that in 1997
approved a settlement agreement pursuant to which the Company's Series B
Preferred Stock was issued. In the petition, the Company seeks a declaratory
judgment finding that each share of the Preferred Stock is convertible into one
share of Common Stock.
OTHER:
The Company is subject to certain other litigation and claims arising in
the ordinary course of business. Management believes the amounts ultimately
payable, if any, as a result of such claims and assessments will not have a
materially adverse effect on the Company's financial position, results of
operations or net cash flows.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K - None
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 Form10-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.(incorporated
by reference to Exhibit 3.5 of 3CI's report on Form 10-K
filed January 12, 1999)
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).
14
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 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. (incorporated by reference to
Exhibit 4.4 of 3CI's report on Form 10-K filed January 12,
1999).
4.2 Loan Agreement and Note Amendment dated December 18, 1998,
by 3CI and Waste Systems, Inc. (incorporated by reference to
Exhibit 4.5 of 3CI's report on Form 10-K filed January 12,
1999).
4.3 Letter Agreement and Note Amendment dated August 10, 2000 by
3CI and Waste Systems, Inc. (incorporated by reference to
Exhibit 4.3 of 3CI's report on Form 10-K filed December 29,
2000).
4.4 Letter Agreement and Note Amendment dated December 20, 2000
by 3CI and Waste Systems, Inc. (incorporated by reference to
Exhibit 4.4 of 3CI's report on Form 10-K filed December 29,
2000).
4.5 Letter Agreement and Note Amendment dated March 5, 2001 by
3CI and Waste Systems, Inc. (incorporated by reference to
Exhibit 4.5 of 3CI's report on Form 10K filed January 15,
2001)
4.6 Letter Agreement and Note Amendment dated June 26, 2001 by
3CI and Waste Systems, Inc. (incorporated by reference to
Exhibit 4.6 of 3CI's report on Form 10K filed January 15,
2002)
4.7 Letter Agreement and Note Amendment dated December 20, 2001
by 3CI and Waste Systems, Inc. (incorporated by reference to
Exhibit 4.7 of 3CI's report on Form 10K filed January 15,
2002)
4.8 Letter Agreement and Note Amendment dated May 23, 2002 by
3CI and Waste Systems, Inc. (incorporated by reference to
Exhibit 4.8 of 3CI's report on Form 10K filed January 14,
2003)
10.1 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).
10.2 Settlement Agreement dated January 1996 between James
Shepherd, Michael Shepherd and Richard T. McElhannon as
Releassors, and the Company, Georg Rethmann, Dr. Herrmann
Niehues, Jurgen Thomas, Charles Crochet and Waste Systems,
Inc., as Releasees (incorporated by reference to Exhibit
10.23 of 3CI's report on Form 10-K filed January 14, 1997).
10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7 Form of Indemnification Agreement dated June 3, 1999 entered
into between 3CI and Robert Waller (incorporated by
reference to Exhibit 10.11 of 3CI's report on Form 10-K
filed January 12, 2000).
15
10.8 LaSalle National Leasing master lease agreement dated June
18, 1999 between LaSalle National Leasing as lessor and the
Company as lessee (incorporated by reference to Exhibit
10.12 of 3CI's report on Form 10-K filed January 12, 2000).
10.9 Agreement to Defer Conversion of Preferred Stocks dated
April 2, 2003, by and among 3CI, Waste Systems, Inc. and
Stericycle, Inc.
99.1 Certification pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley act of 2002.
- ----------
REPORTS ON FORM 8-K - NONE
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
3CI COMPLETE COMPLIANCE
CORPORATION
(Registrant)
Dated: May 22, 2003
By: /s/James A. Cole
-----------------------------
James A. Cole
Chief Financial Officer,
(Principal Financial Officer and
Principal Accounting Officer)
17
CERTIFICATIONS
I, Otley L. Smith III, the President of 3CI Complete Compliance Corporation (the
"Company"), certify that:
1 I have reviewed this quarterly report on Form 10-Q/A of the Company;
2 Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statement made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3 Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
quarterly report;
4 The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within these entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5 The Company's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit
committee of the Company's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weakness in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6 The Company's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 22, 2003 /s/ Otley L. Smith III
------------------------------
Otely L. Smith III
18
I, James A. Cole, the Chief Financial Officer of 3CI Complete Compliance
Corporation (the "Company"), certify that:
1 I have reviewed this quarterly report on Form 10-Q/A of the Company;
2 Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statement made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3 Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
quarterly report;
4 The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within these entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5 The Company's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit
committee of the Company's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weakness in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6 The Company's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 22, 2003 /s/ James A. Cole
-----------------------------
James A. Cole
19
INDEX TO EXHIBITS
<Table>
<Caption>
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 Form10-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.(incorporated
by reference to Exhibit 3.5 of 3CI's report on Form 10-K
filed January 12, 1999)
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).
</Table>
<Table>
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 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. (incorporated by reference to
Exhibit 4.4 of 3CI's report on Form 10-K filed January 12,
1999).
4.2 Loan Agreement and Note Amendment dated December 18, 1998,
by 3CI and Waste Systems, Inc. (incorporated by reference to
Exhibit 4.5 of 3CI's report on Form 10-K filed January 12,
1999).
4.3 Letter Agreement and Note Amendment dated August 10, 2000 by
3CI and Waste Systems, Inc. (incorporated by reference to
Exhibit 4.3 of 3CI's report on Form 10-K filed December 29,
2000).
4.4 Letter Agreement and Note Amendment dated December 20, 2000
by 3CI and Waste Systems, Inc. (incorporated by reference to
Exhibit 4.4 of 3CI's report on Form 10-K filed December 29,
2000).
4.5 Letter Agreement and Note Amendment dated March 5, 2001 by
3CI and Waste Systems, Inc. (incorporated by reference to
Exhibit 4.5 of 3CI's report on Form 10K filed January 15,
2001)
4.6 Letter Agreement and Note Amendment dated June 26, 2001 by
3CI and Waste Systems, Inc. (incorporated by reference to
Exhibit 4.6 of 3CI's report on Form 10K filed January 15,
2002)
4.7 Letter Agreement and Note Amendment dated December 20, 2001
by 3CI and Waste Systems, Inc. (incorporated by reference to
Exhibit 4.7 of 3CI's report on Form 10K filed January 15,
2002)
4.8 Letter Agreement and Note Amendment dated May 23, 2002 by
3CI and Waste Systems, Inc. (incorporated by reference to
Exhibit 4.8 of 3CI's report on Form 10K filed January 14,
2003)
10.1 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).
10.2 Settlement Agreement dated January 1996 between James
Shepherd, Michael Shepherd and Richard T. McElhannon as
Releassors, and the Company, Georg Rethmann, Dr. Herrmann
Niehues, Jurgen Thomas, Charles Crochet and Waste Systems,
Inc., as Releasees (incorporated by reference to Exhibit
10.23 of 3CI's report on Form 10-K filed January 14, 1997).
10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7 Form of Indemnification Agreement dated June 3, 1999 entered
into between 3CI and Robert Waller (incorporated by
reference to Exhibit 10.11 of 3CI's report on Form 10-K
filed January 12, 2000).
</Table>
<Table>
10.8 LaSalle National Leasing master lease agreement dated June
18, 1999 between LaSalle National Leasing as lessor and the
Company as lessee (incorporated by reference to Exhibit
10.12 of 3CI's report on Form 10-K filed January 12, 2000).
10.9 Agreement to Defer Conversion of Preferred Stocks dated
April 2, 2003, by and among 3CI, Waste Systems, Inc. and
Stericycle, Inc.
99.1 Certification pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley act of 2002.
</Table>