SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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| For the quarterly period ended June 30, 2005 |
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OR | ||
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| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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| 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 |
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1517 W. North Carrier Parkway #104, Grand Prairie, Texas 75050 | ||
(Address of principal executive offices) | ||
(Zip Code) | ||
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(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 ý NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-Q or any amendment to this Form 10-Q.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 2b-2 of the Act). Yes o No ý
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 August 10, 2005 was 9,739,611.
FORWARD-LOOKING STATEMENTS
THIS QUARTERLY REPORT CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING THE COMPANY’S BUSINESS AND OPERATIONS. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, THESE EXPECTATIONS AND THE RELATED STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES, AND OTHER FACTORS THAT COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THESE RISKS, UNCERTAINTIES, AND OTHER FACTORS INCLUDE, BUT ARE NOT LIMITED TO, ADVERSE WEATHER CONDITIONS, FLUCTUATIONS IN CUSTOMER DEMAND, COMPETITIVE ACTIVITY AND PRICING PRESSURE AND GENERAL ECONOMIC CONDITIONS AFFECTING THE BIO-MEDICAL WASTE DISPOSAL INDUSTRY, AS WELL AS OTHER RISKS DETAILED IN THE COMPANY’S FILINGS WITH THE SEC. THE COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATIONS TO RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY CHANGES IN THE COMPANY’S EXPECTATIONS.
3CI COMPLETE COMPLIANCE CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
3CI COMPLETE COMPLIANCE CORPORATION
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| June 30, |
| September 30, |
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| (unaudited) |
| (Audited) |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
| $ | 645,090 |
| $ | 710,353 |
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Accounts receivable, net allowances of $132,791 and $218,819 at June 30, 2005 and September 30, 2004, respectively |
| 2,458,859 |
| 2,765,159 |
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Inventory |
| 92,718 |
| 69,916 |
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Prepaid expenses |
| 599,103 |
| 480,837 |
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Deferred income taxes |
| 154,226 |
| 127,955 |
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Other current assets |
| — |
| 70,800 |
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Total current assets |
| 3,949,996 |
| 4,225,020 |
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Property, plant and equipment, at cost |
| 6,062,241 |
| 6,787,197 |
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Accumulated depreciation |
| (4,201,045 | ) | (4,820,503 | ) | ||
Net property, plant and equipment |
| 1,861,196 |
| 1,966,694 |
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Excess of cost over net assets acquired, net of accumulated amortization of $174,988 at June 30, 2005 and September 30, 2004 |
| 262,243 |
| 262,243 |
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Intangibles, net of accumulated amortization of $199,833 and $173,693 at |
| 243,321 |
| 282,816 |
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Deferred income taxes |
| 3,220,484 |
| 3,220,484 |
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Other assets |
| 78,922 |
| 78,923 |
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Total assets |
| $ | 9,616,162 |
| $ | 10,036,180 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current Liabilities: |
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Notes payable |
| $ | 457,902 |
| $ | 242,729 |
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Accounts payable |
| 362,926 |
| 489,157 |
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Accounts payable, affiliated companies |
| 412,603 |
| 693,502 |
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Accrued liabilities |
| 793,270 |
| 820,359 |
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Deferred Revenue |
| 14,817 |
| 329 |
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Note payable majority shareholder, current portion |
| 1,126,930 |
| 246,400 |
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Total current liabilities |
| 3,168,448 |
| 2,492,476 |
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Note payable majority shareholder, net of current portion |
| — |
| 1,056,717 |
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Note payable other, net of current portion |
| 23,606 |
| — |
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Total liabilities |
| 3,192,054 |
| 3,549,193 |
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Shareholders’ Equity: |
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Common stock, $0.01 par value, authorized 40,450,000 shares; |
| 97,742 |
| 97,742 |
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Common stock to be issued (Note 5) |
| 7,750,000 |
| 7,750,000 |
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Less cost of treasury stock 34,500 shares |
| (51,595 | ) | (51,595 | ) | ||
Additional paid-in capital - common stock |
| 20,519,861 |
| 20,519,861 |
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Accumulated deficit |
| (21,891,900 | ) | (21,829,021 | ) | ||
Total shareholders’ equity |
| 6,424,108 |
| 6,486,987 |
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Total liabilities and shareholders’ equity |
| $ | 9,616,162 |
| $ | 10,036,180 |
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The accompanying notes are an integral part of these financial statements.
1
3CI COMPLETE COMPLIANCE CORPORATION
(UNAUDITED)
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| For the three months |
| For the three months |
| For the nine months |
| For the nine months |
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| 2005 |
| 2004 |
| 2005 |
| 2004 |
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Revenues |
| $ | 2,965,418 |
| $ | 3,217,564 |
| $ | 9,193,541 |
| $ | 9,853,464 |
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Expenses: |
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Cost of services |
| 1,677,417 |
| 1,787,659 |
| 5,416,598 |
| $ | 5,852,913 |
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Depreciation and amortization |
| 113,224 |
| 106,953 |
| 330,594 |
| 352,084 |
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Selling, general and administrative expenses |
| 1,193,401 |
| 831,406 |
| 3,319,492 |
| 3,163,878 |
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Interest expense |
| 24,950 |
| 49,286 |
| 62,709 |
| 121,411 |
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Other expense-net |
| 59,996 |
| 90,163 |
| 153,299 |
| 301,489 |
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Income (loss) before income taxes |
| (103,570 | ) | 352,097 |
| (89,151 | ) | 61,689 |
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Income (tax) benefit |
| 43,978 |
| (135,555 | ) | 26,271 |
| (23,750 | ) | ||||
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Net income (loss) |
| $ | (59,592 | ) | $ | 216,542 |
| $ | (62,880 | ) | $ | 37,939 |
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Basic earnings per share: |
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Basic net income (loss) per share |
| $ | — |
| $ | 0.01 |
| $ | — |
| $ | — |
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Diluted earnings per share: |
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Diluted net income (loss) per share |
| $ | — |
| $ | 0.01 |
| $ | — |
| $ | — |
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The accompanying notes are an integral part of these financial statements.
2
3CI COMPLETE COMPLIANCE CORPORATION
(UNAUDITED)
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| For the nine months |
| For the nine months |
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| 2005 |
| 2004 |
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Cash flow from operating activities: |
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Net income (loss) |
| $ | (62,880 | ) | $ | 37,939 |
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Adjustments to reconcile net income (loss) to net cash |
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(Gain)Loss on disposal of fixed assets |
| (17,279 | ) | (1,225 | ) | ||
Depreciation and amortization |
| 330,594 |
| 352,084 |
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Deferred taxes |
| (26,271 | ) | 23,750 |
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Changes in operating assets and liabilities: |
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Decrease in accounts receivable, net |
| 306,301 |
| 411,837 |
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Decrease(Increase) in inventory |
| (22,802 | ) | 4,023 |
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Increase in prepaid expenses |
| (118,266 | ) | (423,907 | ) | ||
Decrease in other current assets and other assets |
| 70,800 |
| 12,253 |
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(Decrease)Increase in accounts payable |
| (126,230 | ) | (242,358 | ) | ||
Decrease in accounts payable, affiliated companies |
| (280,899 | ) | (327,225 | ) | ||
(Decrease)Increase in accrued liabilities |
| (27,089 | ) | 84,422 |
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Increase (Decrease) in note payable |
| 238,779 |
| 380,422 |
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Increase in deferred revenue |
| 14,488 |
| — |
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Total adjustments to net income |
| 342,126 |
| 274,076 |
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Net cash provided (used) by operating activities |
| 297,246 |
| 312,015 |
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Cash flow from investing activities: |
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Proceeds from sale of property, plant and equipment |
| 44,450 |
| 81,375 |
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Purchase of property, plant and equipment |
| (212,772 | ) | (212,348 | ) | ||
Net cash provided (used) in investing activities |
| (168,322 | ) | (130,973 | ) | ||
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Cash flow from financing activities: |
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Reduction of note payable to majority shareholders |
| (176,187 | ) | (838,432 | ) | ||
Net cash provided (used) by financing activities |
| 62,592 |
| (838,432 | ) | ||
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Net (decrease)increase in cash and cash equivalents |
| (65,263 | ) | (657,389 | ) | ||
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Cash and cash equivalents, beginning of period |
| 710,353 |
| 1,057,055 |
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Cash and cash equivalents, end of period |
| $ | 645,090 |
| $ | 399,666 |
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The accompanying notes are an integral part of these financial statements.
3
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 and transportation of biomedical waste in the southern United States.
Effective October 1, 1998, Stericycle Inc., a Delaware corporation (“Stericycle”), acquired 100% of the common stock of Waste Systems, Inc. (“WSI”) for $10 million. As a result of the transaction, WSI became a wholly-owned subsidiary of Stericycle. Stericycle directly and indirectly through WSI owns 67.5% or 6,578,504 shares of the Company’s outstanding common stock, par value $0.01 per share (“Common Stock”), and 100% of the shares of Common Stock to be issued by the Company as a result of the conversion of the Company’s preferred stock (the “Preferred Stock”). See Note 5 for details on the conversion of the Preferred Stock to Common Stock.
The accompanying unaudited condensed financials 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 nine-month period ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending September 30, 2005.
For further information, refer to the consolidated financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended September 30, 2004.
NOTE 2—NET (LOSS) INCOME PER SHARE
The following table sets forth the computation of net income (loss) per common share:
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| Three |
| Three |
| Nine |
| Nine |
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Numerator: |
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Net income (loss) |
| $ | (59,592 | ) | $ | 216,542 |
| $ | (62,880 | ) | $ | 37,939 |
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Denominator for basic earnings per share-weighted average shares |
| 17,489,611 |
| 17,489,611 |
| 17,489,611 |
| 17,489,611 |
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Effect of dilutive shares: |
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Options and Warrants |
| — |
| — |
| — |
| — |
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Denominator for diluted earnings per share |
| 17,489,611 |
| 17,489,611 |
| 17,489,611 |
| 17,489,611 |
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Basic net income per share |
| $ | — |
| $ | 0.01 |
| $ | — |
| $ | — |
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Diluted net income per common share |
| $ | — |
| $ | 0.01 |
| $ | — |
| $ | — |
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The effect of the conversion of the preferred shares on the above basic and diluted net income per share calculations is based upon (i) the Company’s interpretation that the appropriate conversion rate of the Preferred Stock is the per share market value of the Common Stock on the conversion notice date, less $1.00 per share, but in no event is the conversion rate less than $1.00 per share and (ii) the fact that all issued and outstanding shares of the Preferred Stock were converted on April 6, 2003 (See Note 5).
Stock options and warrants were not included in the June 30, 2005 computations as they were antidilutive.
NOTE 3—PROMISSORY NOTE
The Company has outstanding an amended and restated revolving promissory note payable to WSI (the “Note”), with an outstanding principal balance of $1,126,930 as of June 30, 2005. Effective September 30, 2004, the Note was amended and restated to extend the maturity date of the Note to April 3, 2006 with monthly payments of $25,000. The interest rate on the
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Note is the prime lending rate (6.25% as of June 30, 2005), as such rate may change from time to time, published under “Money Rates” in The Wall Street Journal (Southwestern Edition), (the “Prime Rate”), not to exceed 13%. Pursuant to a Note Modification Agreement, dated as of August 12, 2005, but effective as of July 1, 2005, WSI has agreed to allow the Company to defer monthly principal and interest payments each in the amount of $25,000 under the Note for a six-month period, commencing with the payment due on July 5, 2005, through and including the payment due on December 5, 2005. See Part II, Item 5, Other Information for a description of the Note Modification Agreement.
The Note is subordinated to all security interests under a certain Settlement Agreement effective January 10, 1996, by and among the Company, James H. Shepherd, James Michael Shepherd, Richard T. McElhannon (collectively, the “Shepherd Parties”), WSI and certain former directors and officers of the Company (the “Shepherd Settlement Agreement”), which was assigned to Stericycle on May 1, 2002, but otherwise is secured by substantially all of the Company’s assets. The Note requires the Company to achieve a minimum level of EBITDA of $500,000, after excluding (i) certain expenses associated with the dispute regarding the conversion rate of the Preferred Stock, and (ii) certain expenses associated with the Louisiana Suit (as hereinafter defined), for the quarters ending September 30, 2004 and for each trailing six-month period of each quarterly period thereafter until maturity. As of June 30, 2005, the Company was in compliance with the required level of EBITDA under the Note.
Total interest expense for all debt was $62,709 and $121,411 for the nine months ended June 30, 2005 and June 30, 2004, respectively.
NOTE 4—INCOME TAXES
As of September 30, 2004 the Company had eligible net operating loss carry forwards for federal income tax purposes of approximately $9,237,692 which will begin expiring in 2010. The Company also had state net operating losses at September 30, 2004. Based on Section 382 of the Internal Revenue Code relating to changes in ownership of the Company, utilization of the net operating loss carry forwards is subject to an annual limitation of approximately $995,000 for net operating losses created prior to September 30, 1998. All net operating losses created after September 30, 1998 are not subject to any limitations and are available to be used for 20 years after they are produced. As such, the deferred tax asset and the related valuation allowance for net operating loss carry forwards were reduced to account for the portion of the net operating loss carry forwards the Company will not be able to utilize.
During the fourth quarter of 2003, the Company reevaluated the estimated amount of valuation allowance required in light of the profitability achieved during 2003 and 2002 as well as profitability expected in future years. As a result, the Company reduced the valuation allowance on deferred tax assets in accordance with SFAS No. 109, “Accounting for Income Taxes,” to an amount that the Company believes is more likely than not of being recovered. Accordingly, an income tax benefit of approximately $3,484,000 was reflected in the fourth quarter of 2003. The amount of net deferred tax assets estimated to be recoverable was based upon the Company’s assessment of the likelihood of near-term operating income.
NOTE 5—PREFERRED STOCK
Preferred Stock Conversion
Pursuant to the certificates of designation governing the Preferred Stock, all 7,750,000 shares of Preferred Stock automatically converted on April 6, 2003. The Company has not issued any shares of Common Stock and has not recorded any increase in the outstanding Common Stock related to the conversion of the Preferred Stock.
Prior to April 6, 2003, 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) or $750,000 (with respect to the Series C Preferred Stock) by the market value of the Common Stock on the date of conversion. On April 6, 2003, the per share closing price of the Common Stock was $0.21. Accordingly, the Company would have issued 36,904,761 shares of Common Stock upon conversion of the Preferred Stock under this interpretation, which would have increased WSI’s ownership percentage to approximately 91.2% of the outstanding shares of Common Stock and the combined WSI and Stericycle ownership percentage to approximately 93.2%.
WSI and Stericycle’s interpretation of the conversion rate is contrary to the Company’s interpretation of the conversion rate. Based on the certificates of designations governing the Preferred Stock, certain documents executed contemporaneously with the issuance of the Preferred Stock, and the intent of the parties at the time of issuance of the Preferred Stock and the execution of these documents, the Company believes that the appropriate conversion rate is the per share market value of the Common Stock on the conversion notice date, less $1.00 per share, but that the conversion rate shall not be less than $1.00 per share (the “Agreed Maximum Conversion Rate”). Under this interpretation, since the per share market value of the Common Stock was less than $1.00 on April 6, 2003, the Company would have issued 7,750,000 shares of Common Stock upon conversion of the Preferred Stock, which would have increased WSI’s ownership percentage to approximately 76.6% of the outstanding shares of Common Stock and the combined WSI and Stericycle ownership percentage to approximately 81.9%.
5
On April 2, 2003, the Company, WSI and Stericycle entered into an Agreement to Defer Conversion of Preferred Stocks (the “Agreement to Defer Conversion”), pursuant to which all parties agreed that the Company will not issue any Common Stock upon conversion of the Preferred Stock until a judicial judgment as to the appropriate conversion rate has become final and non-appealable.
On May 9, 2003, the Company filed a declaratory judgment action seeking a judicial determination of the appropriate conversion rate of the Preferred Stock. On August 22, 2003, the Company filed an original petition for declaratory judgment and to enforce the Settlement Agreement, dated July 17, 1997, pursuant to which the Preferred Stock was issued. In its petition, the Company requests the court establish the conversion rate of the Preferred Stock to be the Agreed Maximum Conversion Rate and confirm the issuance of no more than 7,750,000 shares of Common Stock to WSI as of April 6, 2003. WSI subsequently filed a motion to have the court declare that the Preferred Stock is convertible into 36,704,761 shares of Common Stock. The parties are currently conducting discovery in this proceeding.
Preferred Stock Dividends
There are unanimous written consents of the Board of Directors of the Company (the “Board”) declaring dividends on the Series B Preferred Stock and Series C Preferred Stock totaling $161,158, $637,623, $907,387 and $497,550 for each of the fiscal years 2003, 2002, 2001 and 2000, respectively. Each of the resolutions for these dividends called for payment in cash from funds legally available for the payment of dividends, as and when the Board may direct by further resolution. However, none of these unanimous consents are executed by all of the individuals who were members of the Board at the date of such unanimous consents, and none of the dividends have been paid. There were no undeclared dividends as of June 30, 2005 and June 30, 2004.
On December 22, 2003, the independent and disinterested members of the Board, relying on an opinion of counsel expert in Delaware corporate law and acting on behalf of the Board, determined that (i) the previous declarations of dividends on the Preferred Stock in the aggregate amount of $2,203,717 (collectively, the “Preferred Stock Dividends”) had not been effective to declare and obligate the Company to pay such dividends, and (ii) the Preferred Stock Dividends cannot now be lawfully declared and paid on the Preferred Stock. As a consequence of these determinations, the Company reversed the Preferred Stock Dividend entries on the Company’s books and records and restated its financial statements for the years ended September 30, 2000, 2001 and 2002. These restatements reflect a removal of (a) dividends payable on the Preferred Stock as a current liability on the Company’s balance sheets and as an adjustment of net income (loss) applicable to common shareholders on the statements of operations, and (b) the Preferred Stock Dividends as a line item on the Company’s statements of shareholders’ equity and statements of cash flows.
WSI was the holder of the Preferred Stock. The Company has been advised by WSI, Stericycle and the members of the Board who are affiliates of WSI and Stericycle that they believe the Company remains obligated to pay the Preferred Stock Dividends as previously declared in the Board resolutions and as previously recorded on the Company’s books. If WSI and Stericycle’s position is correct, the Preferred Stock Dividends would be paid by the Company in cash from funds legally available for the payment of dividends as and when the Board may direct by further resolution. Due to WSI, Stericycle and their affiliates’ announced position on the Preferred Stock Dividends, the Company has determined the amount of such dividends to be a contingent liability of $2,203,717.
NOTE 6—COMMITMENTS AND CONTINGENCIES
See Note 5 to the financial statements above for a discussion of certain contingent liabilities of the Company related to the Preferred Stock.
The Company is a plaintiff jointly with Larry F. Robb, individually and on behalf of a class comprised of the Company’s minority stockholders, in litigation against Stericycle and the four affiliates of Stericycle who are or were directors of 3CI. See Part II, Item 1, Legal Proceedings for a description of this litigation.
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
6
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.
The Company is subject to certain other litigation and claims arising in the ordinary course of business. In the opinion of management of the Company, the amounts ultimately payable, if any, as a result of such claims and assessments will not have a materially adverse effect on the Company’s financial position, results of operations or net cash flows.
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 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. The following is a discussion of some events that may allow a better understanding of the progression of the Company’s financial position and operating results.
The Company has historically financed its working capital needs, capital expenditures and acquisitions primarily using borrowings from WSI and internally generated funds. Currently, the Company’s only borrowed indebtedness consists of money borrowed from WSI under the Note. In addition, the Company has obtained financing of its annual insurance premium. As of June 30, 2005, September 30, 2004, and June 30, 2004, the outstanding balances under the Note were in the aggregate principal amounts of approximately $1,126,930, $1,303,117 and $1,587,213, respectively. See Liquidity and Capital Resources herein and Note 3.
See Note 5 to the Company’s financial statements above for a discussion of the reversal of the Company’s Preferred Stock Dividends on its books and records. See Note 4 for a discussion of the change in the Company’s deferred tax assets valuation in the fourth quarter of the Company’s 2003 fiscal year.
RESULTS OF OPERATIONS
The following summarizes (in thousands) the Company’s operations:
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| Three Months |
| Nine Months |
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| 2005 |
| 2004 |
| 2005 |
| 2004 |
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Revenues |
| $ | 2,965 |
| $ | 3,217 |
| $ | 9,194 |
| $ | 9,853 |
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Cost of services |
| 1,677 |
| 1,788 |
| 5,417 |
| 5,853 |
| ||||
Depreciation and amortization |
| 113 |
| 107 |
| 331 |
| 352 |
| ||||
Selling, general and administrative expenses |
| 1,194 |
| 831 |
| 3,319 |
| 3,164 |
| ||||
(Loss) income from operations |
| (19 | ) | 491 |
| 127 |
| 484 |
| ||||
Interest expense |
| 25 |
| 49 |
| 63 |
| 121 |
| ||||
Other expense, net |
| 60 |
| 90 |
| 153 |
| 301 |
| ||||
Income tax expense (benefit) |
| (43 | ) | 135 |
| (26 | ) | 24 |
| ||||
Net (Loss) Income |
| $ | 61 |
| $ | 217 |
| $ | (63 | ) | $ | 38 |
|
Depreciation and amortization |
| 113 |
| 107 |
| 331 |
| 352 |
| ||||
Interest expense, net |
| 25 |
| 49 |
| 63 |
| 121 |
| ||||
Income tax expense (benefit) |
| (43 | ) | 135 |
| (26 | ) | 24 |
| ||||
EBITDA (1) |
| 34 |
| 508 |
| 304 |
| 535 |
|
(1) EBITDA is calculated as the sum of net income, plus interest expense, income tax expense, depreciation expense and amortization expense, to the extent deducted in calculating net income. The Company considers EBITDA to be a widely accepted financial indicator of a company’s operating performance and ability to service debt, fund capital expenditures and expand its business. EBITDA is not calculated in the same way by all companies and therefore may not be comparable to similarly titled measures reported by other companies. EBITDA is not a measure in accordance with accounting principles generally accepted in the United States. 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. The funds depicted by the measure may not be available for management’s discretionary use due to legal or functional requirements, debt service, other commitments and uncertainties.
7
Three months ended June 30, 2005 compared to three months ended June 30, 2004:
Revenues decreased by $252,146, or 7.8%, to $2,965,418 during the three-month period ended June 30, 2005, from $3,217,564 for the three month period ended June 30, 2004. This decrease is primarily related to a reduction in the volume of waste handled. Substantially all of this reduction in volume was attributable to the Company’s efforts to focus on small quantity generators which provide higher margins at lower volumes while reducing the focus on less profitable large quantity generators.
Cost of services decreased by $110,242, or 6.2%, to $1,677,417 during the three months ended June 30, 2005, compared to $1,787,659 for the three-month period ended June 30, 2004. This decrease was primarily attributable to a decrease in processing costs. Cost of services as a percentage of revenues increased to 56.6% compared to 55.6% during the three months ended June 30, 2005 and June 30, 2004, respectively. This percentage increase was primarily attributable to an increase in operating costs relative to revenues.
Depreciation and amortization expense for the three months ended June 30, 2005 increased $6,272 or 5.9% to $113,224 compared to $106,953 for the three months ended June 30, 2004. This increase was primarily due to an increase in amortization expense.
Selling, general and administrative expenses for the three months ended June 30, 2005 increased 43.5% or $361,994 to $1,193,401 from $831,407 during the three months ended June 30, 2004. Sales, general and administrative expenses increased as a percentage of revenue to 40.2% for the three months ended June 30, 2005, as compared to 25.6% for the three months ended June 30, 2004. Substantially all of this increase was due to increased legal expenses incurred by the Company related to the Louisiana Suit. See Part II, Item 1, Legal Proceedings.
Interest expense for the three months ended June 30, 2005 decreased by $24,336 or 49.4%, to $24,950 from $49,286 during the three months ended June 30, 2004. This decrease was primarily due to the Company’s avoidance of penalties incurred in 2005 compared to the same period in 2004, when the Company failed to meet the EBITDA covenant under the Note.
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the quarter ended June 30, 2005, totaled $34,604 or 1.2% of revenue compared to $508,336 or 15.8% of revenue for the quarter ended June 30, 2004. The difference was primarily reflective of lower cost of services offset by lower revenue and increased legal expenses related to the Louisiana Suit.
Nine months ended June 30, 2005 compared to nine months ended June 30, 2004:
Revenues decreased by $659,923 or 6.7%, to $9,193,541 during the nine months ended June 30, 2005, from $9,853,464 for the nine-month period ended June 30, 2004. This decrease is primarily related to a reduction in the volume of waste handled. Substantially all of this reduction in volume was attributable to the Company’s efforts to focus on small quantity generators which provide higher margins at lower volumes while reducing the focus on less profitable large quantity generators.
Cost of services decreased $436,315, or 7.5%, to $5,416,598, during the nine months ended June 30, 2005, compared to $5,852,913 for the nine-month period ended June 30, 2004. This decrease was primarily attributable to a decrease in processing costs and some operating expenses. Cost of revenues as a percentage of revenues decreased to 58.9% during the nine months ended June 30, 2005, as compared to 59.4% during the nine months ended June 30, 2004.
Depreciation and amortization expense for the nine months ended June 30, 2005 decreased $21,490 or 6.1% to $330,594 compared to $352,084 for the nine months ended June 30, 2004. This decrease was primarily due to assets still employed in the Company’s operations being fully depreciated.
Selling, general and administrative expenses for the nine months ended June 30, 2005 increased 4.9% or $155,614 to $3,319,492 from $3,163,878 during the nine months ended June 30, 2005. Sales, general and administrative expenses increased as a percentage of revenue to 36.1% for the nine months ended June 30, 2005 as compared to 32.1% for the nine months ended June 30, 2004. Substantially all of this increase was due to increased legal expenses incurred by the Company related to the Louisiana Suit. See Part II, Item 1, Legal Proceedings.
Interest expense decreased by $58,702 or 48.3% to $62,709 during the nine months ended June 30, 2005 as compared to $121,411 during the nine months ended June 30, 2004. This decrease was primarily due to the Company’s avoidance of penalties in 2005 compared to the same period in 2004, when the Company failed to meet the EBITDA covenant under the Note.
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) totaled $304,152 or 3.3% of revenue for the nine months ended June 30, 2005 compared to $535,184 or 5.4% of revenue for the nine months ended June 30, 2004. The decrease of $231,032 was primarily due to higher legal expenses associated with the Louisiana Suit.
8
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its working capital needs, capital expenditures and acquisitions primarily using advances from WSI and internally generated funds. The Company’s borrowed indebtedness currently consists only of amounts owed to WSI under the Note. In addition, the Company has obtained financing of its annual insurance premium.
The Note had an outstanding principal balance of $1,126,930 as of June 30, 2005. Effective September 30, 2004, the Note was amended and restated to extend the maturity date of the Note to April 3, 2006 with monthly payments of $25,000. The interest rate on the Note is the Prime Rate, not to exceed 13%.
The Note requires the Company to achieve a minimum level of EBITDA of $500,000, after excluding (i) certain expenses associated with the dispute regarding the conversion rate of the Preferred Stock, and (ii) certain expenses associated with the Louisiana Suit, for the quarters ending September 30, 2004 and for each trailing six-month period of each quarterly period thereafter until maturity. As of June 30, 2005, the Company was in compliance with the required level of EBITDA under the Note.
In addition to the term note facility described above, the Note includes a revolving credit agreement under which the Company can borrow up to $100,000; the Company has no borrowings outstanding under the revolving credit agreement. Borrowings under the Note may be prepaid at any time without penalty. The Note is subordinated to all security interests under the Shepherd Settlement Agreement, which were assigned to Stericycle on May 1, 2002, but otherwise is secured by substantially all of the Company’s assets.
The Company has not attempted to borrow funds from any source other than WSI and does not know whether it could or could not obtain a credit facility with an independent third-party lender. If such a credit facility could be arranged, no assurance can be given that it would be on terms or conditions as favorable as those of the Note.
During the 2003 and 2004 fiscal years and the first nine months of the 2005 fiscal year, the Company incurred material legal expenses related to its disputes with Stericycle and WSI regarding the correct conversion rate of the Preferred Stock, an investigation by the Special Committee into allegations made by the minority stockholders of the Company and the prosecution of the Company’s claims in the Louisiana Suit. In each of the 2004 fiscal year and the nine-month period ended June 30, 2005, these legal expenses were in excess of $1 million. Although the Company cannot predict what its continued financial investment will be related to the Louisiana Suit, the Company believes that prosecution of the Louisiana Suit will continue to require a material commitment of its financial resources. Although no assurance can be given, the Company believes that it has and will continue to have sufficient liquidity to effectively prosecute its claims in the Louisiana Suit. See Part II, Item 1, Legal Proceedings.
In anticipation of significant legal expenses to be incurred by the Company in connection with the Louisiana Suit and in order to provide the Company with greater flexibility in light of these anticipated expenses, the Company has obtained agreements to defer payments with a limited number of its service providers and with WSI. The service providers have orally agreed that the Company may, if it so elects, defer payment of their fees for various time periods, if necessary. Pursuant to a Note Modification Agreement, as described in Part II, Item 5, Other Information, WSI has agreed to allow the Company to defer monthly principal and interest payments under the Note for a six-month period. As of August 11, 2005, the Company was current on all of its payment obligations to its vendors and service providers and had not elected to defer any payments to its service providers.
During 2004 and 2005, the Company’s transportation fuel costs have increased significantly. The Company implemented several initiatives to mitigate the effect of elevated fuel cost on its operations, but continued increases in fuel costs could have an adverse impact on the Company’s financial performance in the future.
As of September 30, 2004, the Company had eligible net operating loss carry forwards for federal income tax purposes of approximately $9,237,692 which begin expiring in 2010. The Company also had state net operating losses at September 30, 2004. Based on Section 382 of the Internal Revenue Code relating to changes in ownership of the Company, utilization of the net operating loss carry forwards is subject to an annual limitation of approximately $995,000 for net operating losses created prior to September 30, 1998. All net operating losses created after September 30, 1998 are not subject to any limitations and are available to be used for 20 years after they are produced. As such, the deferred tax asset and the related valuation allowance for net operating loss carry forwards were reduced to account for the portion of the net operating loss carry forwards the Company will not be able to utilize.
During the fourth quarter of 2003, the Company reevaluated the estimated amount of valuation allowance required in light of the profitability achieved during 2003 and 2002 as well as profitability expected in future years. As a result, the Company reduced the valuation allowance on deferred tax assets in accordance with SFAS No. 109, “Accounting for Income Taxes,” to an amount the Company believes is more likely than not of being recovered. Accordingly, an income tax benefit of
9
approximately $3,484,000 was reflected in the fourth quarter of 2003. The amount of net deferred tax assets estimated to be recoverable was based upon the Company’s assessment of the likelihood of near-term operating income.
The Company had net working capital, exclusive of the Note, on June 30, 2005 of $1,908,478, compared to $1,978,944 on September 30, 2004, which was a decrease of approximately 3.6%, or $70,466.
Net cash provided by operating activities was $297,246 during the nine-month period ended June 30, 2005, compared to $312,015 in cash provided by operating activities during the nine-month period ended June 30, 2004.
Net cash used in investing activities for the nine months ended June 30, 2005, was $168,322 compared to $130,973 for the same period in 2004. The $37,349 increase reflected lower disposals of surplus equipment.
Net cash used in financing activities was $176,187 for the nine-month period ended June 30, 2005, compared to $838,432 used during the nine-month period ended June 30, 2004. The $662,245 decrease was primarily due to smaller principal payments by the Company on the Note.
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 Note, thereby increasing its debt service obligation, which could adversely affect the Company’s cash flows. The interest rate on 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 $11,269 over 12 months. The Company does not utilize derivative financial instruments to mitigate the risks of changes in interest rates.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s 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 the Company’s management including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. The Company’s management including the Chief Executive Officer and the Chief 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 the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, the Company conducted an evaluation of its disclosure controls and procedures within 90 days of the filing date of this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosures controls and procedures are effective in alerting them on a timely basis to material information required to be disclosed in the Company’s periodic filings.
There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in the foregoing paragraph.
Louisiana Minority Stockholder Litigation
In December 2004, Larry F. Robb, individually and on behalf of a class comprised of the Company’s minority stockholders, and the Company (collectively, the “Plaintiffs”) filed a joint petiton in cause no. 467704-A, Robb et al. v. Stericycle, Inc. et al. (the “Louisiana Suit”), in the First Judicial District Court, Caddo Parish, Louisiana (the “State Court”) against WSI, Stericycle, and four individuals who are affiliates of Stericycle and are or were directors of the Company (collectively, the “Stericycle Affiliates”).
In January 2005, the Stericycle Affiliates filed Defendants’ Amended and Restated Answer, Affirmative Defenses, Third-Party Petition, and Counterclaims (the “Counterclaims”) against the Company and eight additional individuals who are or were executive officers and/or directors of the Company during the period from 1998 through the present (collectively, the “Third-Party Defendants”). In the Counterclaims, the Stericycle Affiliates asserted contribution and indemnity claims against
10
the Company and the Third-Party Defendants and breaches of fiduciary duties and facilitation or causation of insider trading against the two individual members of the Special Committee, the committee of the Board of Directors of the Company appointed to oversee the Louisiana Suit.
On April 21, 2005, the State Court found that the Stericycle Affiliates had failed to properly state claims for contribution or indemnity against the Company or the Third-Party Defendants. The State Court dismissed the Counterclaims and stayed the claims asserted against the Special Committee members. However, the State Court granted the Stericycle Affiliates the right to re-plead their claims.
On May 6, 2005, the Stericycle Affiliates re-plead their contribution, indemnity and breach of fiduciary duty claims as set forth in the Counterclaims and added a negligent misrepresentation claim against the Company and the Third-Party Defendants. After a hearing in June, the State Court again dismissed the contribution and indemnity claims and stayed the re-plead claims asserted against the Special Committee members until further order of the State Court terminating or modifying the stay. However, the State Court denied motions filed by the Company and the Third Party Defendants to dismiss the negligent misrepresentation claims. The Company believes, and the Third Party Defendants have informed the Company that they believe, that these negligent misrepresentation claims are without merit. The Company intends to vigorously defend against these claims.
On July 20, 2005, Plaintiffs filed an Amended Joint Petition adding the law firm of Johnson and Colmar, legal counsel for Stericycle and WSI, and two individual partners in that firm as defendants in the Louisiana Suit. On August 1, 2005, the defendants in the Louisiana Suit removed the case to the United States District Court for the Western District of Louisiana, and on August 3, 2005, Plaintiffs filed a motion to remand the case back to the State Court. The motion for remand remains pending.
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
The Company and WSI entered into a Note Modification Agreement, dated as of August 12, 2005, but effective as of July 1, 2005, pursuant to which WSI agreed to allow the Company to defer monthly principal and interest payments each in the amount of $25,000 under the Note, for a six-month period, commencing with the payment due on July 5, 2005, through and including the payment due on December 5, 2005 (the “Deferral Period”). The unpaid principal balance of the Note, including the deferred payments, which equal $150,000 in the aggregate, shall continue to accrue interest until paid at the Prime Rate, not to exceed 13%, in accordance with the terms and conditions of the Note. Following the Deferral Period, the Company shall make monthly principal and interest payments under the Note each in the amount of $25,000 beginning on January 5, 2006, and continuing until the maturity date of the Note.
The Company’s borrowed indebtedness currently consists only of amounts owed to WSI under the Note. As of the date hereof, WSI is the record owner of 5,645,734 shares of the Company’s Common Stock, which represents approximately 58.0% of the issued and outstanding shares of Common Stock, and 7,750,000 shares of the Company’s Preferred Stock, which represents all of the issued and outstanding shares of Preferred Stock.
The Note Modification Agreement is attached hereto as Exhibit 10.1, and is incorporated herein by reference.
The following is a list of the exhibits filed with this Form 10-Q.
Exhibit |
| Description |
|
|
|
10.1 |
| Note Modification Agreement, dated as of August 12, 2005. |
31.1 |
| Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 |
| Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 |
| Certification of the Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002. |
32.2 |
| Certification of the Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002. |
11
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 | ||
|
| ||
|
| ||
Dated: August 15, 2005 | By: | /s/ Matthew D. Peiffer |
|
|
| Matthew D. Peiffer | |
|
| Chief Financial Officer, Secretary and Treasurer |
12