**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

| **ý** | ** ** | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**                                                                                                                                                                                                                                                           |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                              |
| ** ** | ** ** | **For the quarterly period ended June 30,  2005**                                                                                                                                                                                                                                                                                                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                              |
| **OR**     |
|       |       |                                                                                                                                                                                                                                                                                                                                                              |
| **o**      | ** ** | **Transition  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**                                                                                                                                                                                                                                                          |
|       |       |                                                                                                                                                                                                                                                                                                                                                              |
| ** ** | ** ** | **For the transition period from                              to                           ** |

 

**Commissionfile number 1-11097**

 

**3CI COMPLETE COMPLIANCE CORPORATION**

(Exact name of registrant asspecified in its charter)

 

 
| **Delaware**                                                       | ** ** | **76-0351992**                         |
|--------------------------------------------------------------------|------------|----------------------------------------|
| (State or  other jurisdiction of  incorporation or organization)   |       | (I.R.S.  Employer  Identification No.) |
|                                                               |       |                                   |
| **1517 W. North Carrier Parkway #104, Grand Prairie, Texas 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 allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

YES   ý NO   o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 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 informationstatements incorporated by reference in Part III of this Form 10-Q orany 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’sclasses of Common Stock, as of the latest practicable date.

 

The number of shares of Common Stock outstanding as of the close ofbusiness on August 10, 2005 was 9,739,611.

 

 

----

 

**FORWARD-LOOKING STATEMENTS**

 

THIS QUARTERLY REPORT CONTAINS FORWARD-LOOKING STATEMENTS CONCERNINGTHE COMPANY’S BUSINESS AND OPERATIONS.  ALTHOUGH THE COMPANY BELIEVES THATTHE 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 DIFFERMATERIALLY FROM THOSE PROJECTED.  THESE RISKS, UNCERTAINTIES, AND OTHERFACTORS INCLUDE, BUT ARE NOT LIMITED TO, ADVERSE WEATHER CONDITIONS,FLUCTUATIONS IN CUSTOMER DEMAND, COMPETITIVE ACTIVITY AND PRICING PRESSURE ANDGENERAL 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 UPDATESOR REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY CHANGES IN THECOMPANY’S EXPECTATIONS.

 

----

 

**3CICOMPLETE COMPLIANCE CORPORATION**

 

**INDEX**

 
| **PART I.**  | ** ** | **FINANCIAL INFORMATION**                                                                   |
|-------------------|------------|---------------------------------------------------------------------------------------------|
|              |       |                                                                                        |
| Item 1.           |       | Financial Statements                                                                        |
|              |       |                                                                                        |
|              |       | Balance  Sheets as of June 30, 2005 and September 30, 2004                        |
|              |       |                                                                                        |
|              |       | Statements  of Operations for the three and nine months ended June 30, 2005 and 2004   |
|              |       |                                                                                        |
|              |       | Statements  of Cash Flows for the nine months ended June 30, 2005 and 2004             |
|              |       |                                                                                        |
|              |       | Notes to Financial Statements                                                               |
|              |       |                                                                                        |
| Item 2.           |       | Management’s Discussion and Analysis of Financial Condition and  Results of Operations |
|              |       |                                                                                        |
| Item 3.           |       | Quantitative and Qualitative Disclosures about Market Risk                                  |
|              |       |                                                                                        |
| Item 4.           |       | Controls and Procedures                                                                     |
|              |       |                                                                                        |
| **PART II.** | ** ** | **OTHER  INFORMATION**                                                                      |
|              |       |                                                                                        |
| Item  1.          |       | Legal  Proceedings                                                                          |
|              |       |                                                                                        |
| Item 2.           |       | Changes in Securities                                                                       |
|              |       |                                                                                        |
| Item 3.           |       | Defaults Upon Senior Securities                                                             |
|              |       |                                                                                        |
| Item 4.           |       | Submission of Matters to a Vote of Security Holders                                         |
|              |       |                                                                                        |
| Item  5.          |       | Other  Information                                                                          |
|              |       |                                                                                        |
| Item 6.           |       | Exhibits                                                                                    |
|              |       |                                                                                        |
| **SIGNATURES**    |

 

----

 

PART I - FINANCIALINFORMATION

 

**Item 1. Financial Statements**

 

**3CICOMPLETE COMPLIANCE CORPORATION**

**BALANCESHEETS**

 
| ** **                                                                                                                                   | ** ** | **June 30,  2005** | ** **    | **September 30,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|---------------|------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **(unaudited)**         | ** **    | **(Audited)**                | ** ** |
| **ASSETS**                                                                                                                                   |       |                    |          |                         |       |
| **Current  Assets:**                                                                                                                         | ** ** | ** **              | ** **    | ** **                   | ** ** |
| **Cash and  cash equivalents**                                                                                                               | ** ** | **$**                   | **645,090**   | ** **                   | **$**      | **710,353** | ** ** |
| **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**                | ** ** |
| **Inventory**                                                                                                                                | ** ** | **92,718**              | ** **    | **69,916**                   | ** ** |
| **Prepaid  expenses**                                                                                                                        | ** ** | **599,103**             | ** **    | **480,837**                  | ** ** |
| **Deferred  income taxes**                                                                                                                   | ** ** | **154,226**             | ** **    | **127,955**                  | ** ** |
| **Other  current assets**                                                                                                                    | ** ** | **—**              | ** **    | **70,800**                   | ** ** |
| **Total  current assets**                                                                                                                    | ** ** | **3,949,996**           | ** **    | **4,225,020**                | ** ** |
| ** **                                                                                                                                   | ** ** | ** **              | ** **    | ** **                   | ** ** |
| **Property,  plant and equipment, at cost**                                                                                                  | ** ** | **6,062,241**           | ** **    | **6,787,197**                | ** ** |
| **Accumulated  depreciation**                                                                                                                | ** ** | **(4,201,045**          | **)**         | **(4,820,503**               | **)**      |
| **Net  property, plant and equipment**                                                                                                       | ** ** | **1,861,196**           | ** **    | **1,966,694**                | ** ** |
| ** **                                                                                                                                   | ** ** | ** **              | ** **    | ** **                   | ** ** |
| **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**                  | ** ** |
| ** **                                                                                                                                   | ** ** | ** **              | ** **    | ** **                   | ** ** |
| **Intangibles,  net of accumulated amortization of $199,833 and $173,693 at  June 30, 2005 and September 30, 2004**                | ** ** | **243,321**             | ** **    | **282,816**                  | ** ** |
| ** **                                                                                                                                   | ** ** | ** **              | ** **    | ** **                   | ** ** |
| **Deferred  income taxes**                                                                                                                   | ** ** | **3,220,484**           | ** **    | **3,220,484**                | ** ** |
| **Other  assets**                                                                                                                            | ** ** | **78,922**              | ** **    | **78,923**                   | ** ** |
| **Total  assets**                                                                                                                            | ** ** | **$**                   | **9,616,162** | ** **                   | **$**      | **10,036,180** | ** ** |
| ** **                                                                                                                                   | ** ** | ** **              | ** **    | ** **                   | ** ** |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                               | ** ** | ** **              | ** **    | ** **                   | ** ** |
| **Current  Liabilities:**                                                                                                                    | ** ** | ** **              | ** **    | ** **                   | ** ** |
| **Notes  payable**                                                                                                                           | ** ** | **$**                   | **457,902**   | ** **                   | **$**      | **242,729** | ** ** |
| **Accounts  payable**                                                                                                                        | ** ** | **362,926**             | ** **    | **489,157**                  | ** ** |
| **Accounts  payable, affiliated companies**                                                                                                  | ** ** | **412,603**             | ** **    | **693,502**                  | ** ** |
| **Accrued  liabilities**                                                                                                                     | ** ** | **793,270**             | ** **    | **820,359**                  | ** ** |
| **Deferred  Revenue**                                                                                                                        | ** ** | **14,817**              | ** **    | **329**                      | ** ** |
| **Note  payable majority shareholder, current portion**                                                                                      | ** ** | **1,126,930**           | ** **    | **246,400**                  | ** ** |
| **Total  current liabilities**                                                                                                               | ** ** | **3,168,448**           | ** **    | **2,492,476**                | ** ** |
| ** **                                                                                                                                   | ** ** | ** **              | ** **    | ** **                   | ** ** |
| **Note  payable majority shareholder, net of current portion**                                                                               | ** ** | **—**              | ** **    | **1,056,717**                | ** ** |
| **Note  payable other, net of current portion**                                                                                              | ** ** | **23,606**              | ** **    | **—**                   | ** ** |
| **Total  liabilities**                                                                                                                       | ** ** | **3,192,054**           | ** **    | **3,549,193**                | ** ** |
| ** **                                                                                                                                   | ** ** | ** **              | ** **    | ** **                   | ** ** |
| **Shareholders’  Equity:**                                                                                                              | ** ** | ** **              | ** **    | ** **                   | ** ** |
| **Common  stock, $0.01 par value, authorized 40,450,000 shares;  Issued 9,774,111**                                                          | ** ** | **97,742**              | ** **    | **97,742**                   | ** ** |
| **Common  stock to be issued (Note 5)**                                                                                                      | ** ** | **7,750,000**           | ** **    | **7,750,000**                | ** ** |
| **Less  cost of treasury stock 34,500 shares**                                                                                               | ** ** | **(51,595**             | **)**         | **(51,595**                  | **)**      |
| **Additional  paid-in capital - common stock**                                                                                               | ** ** | **20,519,861**          | ** **    | **20,519,861**               | ** ** |
| **Accumulated  deficit**                                                                                                                     | ** ** | **(21,891,900**         | **)**         | **(21,829,021**              | **)**      |
| **Total  shareholders’ equity**                                                                                                         | ** ** | **6,424,108**           | ** **    | **6,486,987**                | ** ** |
| **Total  liabilities and shareholders’ equity**                                                                                         | ** ** | **$**                   | **9,616,162** | ** **                   | **$**      | **10,036,180** | ** ** |

 

**The accompanyingnotes are an integral part of these financial statements.**

 

1

----

 

**3CICOMPLETE COMPLIANCE CORPORATION**

**STATEMENTS OF OPERATION**

**(UNAUDITED)**

 
| ** **                                        | ** ** | **For the three months  ended June 30,** | ** **    | **For the three months  ended June 30,** | ** **  | **For the nine months  ended June 30,** | ** ** | **For the nine months  ended June 30,** | ** **    |
|---------------------------------------------------|------------|-----------------------------------------------|---------------|-----------------------------------------------|-------------|----------------------------------------------|------------|----------------------------------------------|---------------|
| ** **                                        | ** ** | **2005**                                      | ** **    | **2004**                                      | ** **  | **2005**                                     | ** ** | **2004**                                     | ** **    |
| ** **                                        | ** ** | ** **                                    | ** **    | ** **                                    | ** **  | ** **                                   | ** ** | ** **                                   | ** **    |
| **Revenues**                                      | ** ** | **$**                                         | **2,965,418** | ** **                                    | **$**       | **3,217,564**                                | ** ** | **$**                                        | **9,193,541** | ** ** | **$** | **9,853,464** | ** ** |
| **Expenses:**                                     | ** ** | ** **                                    | ** **    | ** **                                    | ** **  | ** **                                   | ** ** | ** **                                   | ** **    |
| **Cost of  services**                             | ** ** | **1,677,417**                                 | ** **    | **1,787,659**                                 | ** **  | **5,416,598**                                | ** ** | **$**                                        | **5,852,913** | ** ** |
| **Depreciation  and amortization**                | ** ** | **113,224**                                   | ** **    | **106,953**                                   | ** **  | **330,594**                                  | ** ** | **352,084**                                  | ** **    |
| **Selling,  general and administrative expenses** | ** ** | **1,193,401**                                 | ** **    | **831,406**                                   | ** **  | **3,319,492**                                | ** ** | **3,163,878**                                | ** **    |
| **Interest  expense**                             | ** ** | **24,950**                                    | ** **    | **49,286**                                    | ** **  | **62,709**                                   | ** ** | **121,411**                                  | ** **    |
| **Other expense-net**                             | ** ** | **59,996**                                    | ** **    | **90,163**                                    | ** **  | **153,299**                                  | ** ** | **301,489**                                  | ** **    |
| **Income  (loss) before income taxes**            | ** ** | **(103,570**                                  | **)**         | **352,097**                                   | ** **  | **(89,151**                                  | **)**      | **61,689**                                   | ** **    |
| ** **                                        | ** ** | ** **                                    | ** **    | ** **                                    | ** **  | ** **                                   | ** ** | ** **                                   | ** **    |
| **Income (tax)  benefit**                         | ** ** | **43,978**                                    | ** **    | **(135,555**                                  | **) ** | **26,271**                                   | ** ** | **(23,750**                                  | **)**         |
| ** **                                        | ** ** | ** **                                    | ** **    | ** **                                    | ** **  | ** **                                   | ** ** | ** **                                   | ** **    |
| **Net  income (loss)**                            | ** ** | **$**                                         | **(59,592**   | **)**                                         | **$**       | **216,542**                                  | ** ** | **$**                                        | **(62,880**   | **)** | **$** | **37,939** | ** ** |
| ** **                                        | ** ** | ** **                                    | ** **    | ** **                                    | ** **  | ** **                                   | ** ** | ** **                                   | ** **    |
| **Basic  earnings per share:**                    | ** ** | ** **                                    | ** **    | ** **                                    | ** **  | ** **                                   | ** ** | ** **                                   | ** **    |
| **Basic  net income (loss) per share**            | ** ** | **$**                                         | **—**    | ** **                                    | **$**       | **0.01**                                     | ** ** | **$**                                        | **—**    | ** ** | **$** | **—** | ** ** |
| ** **                                        | ** ** | ** **                                    | ** **    | ** **                                    | ** **  | ** **                                   | ** ** | ** **                                   | ** **    |
| **Diluted  earnings per share:**                  | ** ** | ** **                                    | ** **    | ** **                                    | ** **  | ** **                                   | ** ** | ** **                                   | ** **    |
| **Diluted  net income (loss) per share**          | ** ** | **$**                                         | **—**    | ** **                                    | **$**       | **0.01**                                     | ** ** | **$**                                        | **—**    | ** ** | **$** | **—** | ** ** |

 

**The accompanying notes are an integral partof these financial statements.**

 

2

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**3CICOMPLETE COMPLIANCE CORPORATION**

**STATEMENT OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                                     | ** ** | **For the nine months  ended June 30,** | ** **  | **For the nine months  ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------------------|-------------|----------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2005**                                     | ** **  | **2004**                                     | ** ** |
| ** **                                                                                     | ** ** | ** **                                   | ** **  | ** **                                   | ** ** |
| **Cash  flow from operating activities:**                                                      | ** ** | ** **                                   | ** **  | ** **                                   | ** ** |
| **Net  income (loss)**                                                                         | ** ** | **$**                                        | **(62,880** | **)**                                        | **$**      | **37,939** | ** ** |
| **Adjustments  to reconcile net income (loss) to net cash  provided by operating activities:** | ** ** | ** **                                   | ** **  | ** **                                   | ** ** |
| ** **                                                                                     | ** ** | ** **                                   | ** **  | ** **                                   | ** ** |
| **(Gain)Loss  on disposal of fixed assets**                                                    | ** ** | **(17,279**                                  | **)**       | **(1,225**                                   | **)**      |
| **Depreciation  and amortization**                                                             | ** ** | **330,594**                                  | ** **  | **352,084**                                  | ** ** |
| **Deferred  taxes**                                                                            | ** ** | **(26,271**                                  | **)**       | **23,750**                                   | ** ** |
| **Changes  in operating assets and liabilities:**                                              | ** ** | ** **                                   | ** **  | ** **                                   | ** ** |
| **Decrease  in accounts receivable, net**                                                      | ** ** | **306,301**                                  | ** **  | **411,837**                                  | ** ** |
| **Decrease(Increase)  in inventory**                                                           | ** ** | **(22,802**                                  | **)**       | **4,023**                                    | ** ** |
| **Increase  in prepaid expenses**                                                              | ** ** | **(118,266**                                 | **)**       | **(423,907**                                 | **)**      |
| **Decrease  in other current assets and other assets**                                         | ** ** | **70,800**                                   | ** **  | **12,253**                                   | ** ** |
| **(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**                                   | ** ** |
| **Increase  (Decrease) in note payable**                                                       | ** ** | **238,779**                                  | ** **  | **380,422**                                  | ** ** |
| **Increase  in deferred revenue**                                                              | ** ** | **14,488**                                   | ** **  | **—**                                   | ** ** |
| ** **                                                                                     | ** ** | ** **                                   | ** **  | ** **                                   | ** ** |
| **Total  adjustments to net income**                                                           | ** ** | **342,126**                                  | ** **  | **274,076**                                  | ** ** |
| **Net cash  provided (used) by operating activities**                                          | ** ** | **297,246**                                  | ** **  | **312,015**                                  | ** ** |
| ** **                                                                                     | ** ** | ** **                                   | ** **  | ** **                                   | ** ** |
| **Cash  flow from investing activities:**                                                      | ** ** | ** **                                   | ** **  | ** **                                   | ** ** |
| **Proceeds  from sale of property, plant and equipment**                                       | ** ** | **44,450**                                   | ** **  | **81,375**                                   | ** ** |
| **Purchase  of property, plant and equipment**                                                 | ** ** | **(212,772**                                 | **)**       | **(212,348**                                 | **)**      |
| **Net cash  provided (used) in investing activities**                                          | ** ** | **(168,322**                                 | **)**       | **(130,973**                                 | **)**      |
| ** **                                                                                     | ** ** | ** **                                   | ** **  | ** **                                   | ** ** |
| **Cash  flow from financing activities:**                                                      | ** ** | ** **                                   | ** **  | ** **                                   | ** ** |
| **Reduction  of note payable to majority shareholders**                                        | ** ** | **(176,187**                                 | **)**       | **(838,432**                                 | **)**      |
| **Net cash  provided (used) by financing activities**                                          | ** ** | **62,592**                                   | ** **  | **(838,432**                                 | **)**      |
| ** **                                                                                     | ** ** | ** **                                   | ** **  | ** **                                   | ** ** |
| **Net  (decrease)increase in cash and cash equivalents**                                       | ** ** | **(65,263**                                  | **)**       | **(657,389**                                 | **)**      |
| ** **                                                                                     | ** ** | ** **                                   | ** **  | ** **                                   | ** ** |
| **Cash and  cash equivalents, beginning of period**                                            | ** ** | **710,353**                                  | ** **  | **1,057,055**                                | ** ** |
| ** **                                                                                     | ** ** | ** **                                   | ** **  | ** **                                   | ** ** |
| **Cash and  cash equivalents, end of period**                                                  | ** ** | **$**                                        | **645,090** | ** **                                   | **$**      | **399,666** | ** ** |

 

**Theaccompanying notes are an integral part of these financial statements.**

 

3

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**NOTE 1—DESCRIPTION OF BUSINESS**

 

**Organization and Basis of Presentation**

 

3CI Complete Compliance Corporation (the “Company” or “3CI”), aDelaware corporation, is engaged in the collection and transportation ofbiomedical waste in the southern United States.

 

Effective October 1, 1998, Stericycle Inc., a Delawarecorporation (“Stericycle”), acquired 100% of the common stock of Waste Systems, Inc.(“WSI”) for $10 million. As a result of the transaction, WSI became awholly-owned subsidiary of Stericycle. Stericycle directly and indirectlythrough WSI owns 67.5% or 6,578,504 shares of the Company’s outstanding commonstock, par value $0.01 per share (“Common Stock”), and 100% of the shares ofCommon Stock to be issued by the Company as a result of the conversion of theCompany’s preferred stock (the “Preferred Stock”).  See Note 5 for details on the conversion ofthe Preferred Stock to Common Stock.

 

The accompanying unaudited condensed financials statements have beenprepared in accordance with accounting principles generally accepted in theUnited States, for interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X.  Accordingly, they do not includeall of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financialstatements.  In the opinion of management, all adjustments (consisting ofnormal recurring accruals) considered necessary for a fair presentation havebeen included.  Operating results for the nine-month period ended June 30,2005 are not necessarily indicative of the results that may be expected for theyear ending September 30, 2005.

 

For further information, refer to the consolidated financial statementsand footnotes included in the Company’s annual report on Form 10-K for theyear ended September 30, 2004.

 

**NOTE 2—NET (LOSS) INCOME PER SHARE**

 

The following table sets forth the computation of net income (loss) percommon share:

 
| ** **                                                        | ** ** | **Three  months ended  June 30,  2005** | ** ** | **Three  months ended  June 30,  2004** | ** ** | **Nine  months ended  June 30,  2005** | ** ** | **Nine  months ended  June 30,  2004** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
|                                                              |       |                                         |       |                                         |       |                                        |       |                                        |       |
| Numerator:                                                        |       |                                         |       |                                         |       |                                        |       |                                        |       |
|                                                              |       |                                         |       |                                         |       |                                        |       |                                        |       |
| Net income  (loss)                                                |       | $                                            | (59,592    | )                                            | $          | 216,542                                     |       | $                                           | (62,880    | ) | $ | 37,939 |   |
| Denominator  for basic earnings per share-weighted average shares |       | 17,489,611                                   |       | 17,489,611                                   |       | 17,489,611                                  |       | 17,489,611                                  |       |
| Effect of  dilutive shares:                                       |       |                                         |       |                                         |       |                                        |       |                                        |       |
|                                                              |       |                                         |       |                                         |       |                                        |       |                                        |       |
| Options and  Warrants                                             |       | —                                       |       | —                                       |       | —                                      |       | —                                      |       |
| Denominator  for diluted earnings per share                       |       | 17,489,611                                   |       | 17,489,611                                   |       | 17,489,611                                  |       | 17,489,611                                  |       |
|                                                              |       |                                         |       |                                         |       |                                        |       |                                        |       |
| Basic net  income per share                                       |       | $                                            | —     |                                         | $          | 0.01                                        |       | $                                           | —     |   | $ | — |   |
| Diluted net  income per common share                              |       | $                                            | —     |                                         | $          | 0.01                                        |       | $                                           | —     |   | $ | — |   |

 

The effect of the conversion of the preferred shares on the above basicand diluted net income per share calculations is based upon (i) theCompany’s interpretation that the appropriate conversion rate of the PreferredStock is the per share market value of the Common Stock on the conversionnotice date, less $1.00 per share, but in no event is the conversion rate lessthan $1.00 per share and (ii) the fact that all issued and outstandingshares of the Preferred Stock were converted on April 6, 2003 (SeeNote 5).

 

Stock options and warrants were not included in the June 30, 2005computations as they were antidilutive.

 

**NOTE 3—PROMISSORY NOTE**

 

The Company has outstanding an amended and restated revolvingpromissory note payable to WSI (the “Note”), with an outstanding principalbalance 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 Noteto April 3, 2006 with monthly payments of $25,000.  The interest rateon the

 

4

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Note is the prime lending rate (6.25% as of June 30, 2005), assuch 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, buteffective as of July 1, 2005, WSI has agreed to allow the Company to defermonthly principal and interest payments each in the amount of $25,000 under theNote 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 certainSettlement 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 theCompany (the “Shepherd Settlement Agreement”), which was assigned to Stericycleon May 1, 2002, but otherwise is secured by substantially all of theCompany’s assets.  The Note requires the Company to achieve a minimumlevel of EBITDA of $500,000, after excluding (i) certain expensesassociated with the dispute regarding the conversion rate of the PreferredStock, and (ii) certain expenses associated with the Louisiana Suit (ashereinafter defined), for the quarters ending September 30, 2004 and foreach trailing six-month period of each quarterly period thereafter untilmaturity.  As of June 30, 2005, the Company was in compliance withthe required level of EBITDA under the Note.

 

Total interest expense for all debt was $62,709 and $121,411 for thenine months ended June 30, 2005 and June 30, 2004, respectively.

 

**NOTE 4—INCOME TAXES**

 

As of September 30, 2004 the Company had eligible net operatingloss carry forwards for federal income tax purposes of approximately $9,237,692which will begin expiring in 2010. The Company also had state net operatinglosses at September 30, 2004. Based on Section 382 of the InternalRevenue Code relating to changes in ownership of the Company, utilization ofthe net operating loss carry forwards is subject to an annual limitation ofapproximately $995,000 for net operating losses created prior to September 30,1998. All net operating losses created after September 30, 1998 are notsubject to any limitations and are available to be used for 20 years afterthey are produced. As such, the deferred tax asset and the related valuationallowance for net operating loss carry forwards were reduced to account for theportion of the net operating loss carry forwards the Company will not be ableto utilize.

 

During the fourth quarter of 2003, the Company reevaluated theestimated amount of valuation allowance required in light of the profitabilityachieved during 2003 and 2002 as well as profitability expected in futureyears. As a result, the Company reduced the valuation allowance on deferred taxassets in accordance with SFAS No. 109, “Accounting for Income Taxes,” toan amount that the Company believes is more likely than not of beingrecovered.  Accordingly, an income taxbenefit of approximately $3,484,000 was reflected in the fourth quarter of2003.  The amount of net deferred taxassets estimated to be recoverable was based upon the Company’s assessment ofthe likelihood of near-term operating income.

 

**NOTE 5—PREFERRED STOCK**

 

**Preferred Stock Conversion**

 

Pursuant to the certificates of designation governing the PreferredStock, 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 notrecorded any increase in the outstanding Common Stock related to the conversionof the Preferred Stock.

 

Prior to April 6, 2003, WSI and Stericycle asserted that theconversion rate of the Preferred Stock is such that each share of PreferredStock is convertible into that number of shares of Common Stock determined bydividing $7,000,000 (with respect to the Series B Preferred Stock) or$750,000 (with respect to the Series C Preferred Stock) by the marketvalue of the Common Stock on the date of conversion. On April 6, 2003, theper share closing price of the Common Stock was $0.21. Accordingly, the Companywould have issued 36,904,761 shares of Common Stock upon conversion of thePreferred Stock under this interpretation, which would have increased WSI’sownership percentage to approximately 91.2% of the outstanding shares of CommonStock and the combined WSI and Stericycle ownership percentage to approximately93.2%.

 

WSI and Stericycle’s interpretation of the conversion rate is contraryto the Company’s interpretation of the conversion rate. Based on thecertificates of designations governing the Preferred Stock, certain documentsexecuted contemporaneously with the issuance of the Preferred Stock, and theintent of the parties at the time of issuance of the Preferred Stock and theexecution of these documents, the Company believes that the appropriateconversion rate is the per share market value of the Common Stock on theconversion notice date, less $1.00 per share, but that the conversion rateshall 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 Stockwas less than $1.00 on April 6, 2003, the Company would have issued7,750,000 shares of Common Stock upon conversion of the Preferred Stock, whichwould have increased WSI’s ownership percentage to approximately 76.6% of theoutstanding shares of Common Stock and the combined WSI and Stericycleownership percentage to approximately 81.9%.

 

5

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On April 2, 2003, the Company, WSI and Stericycle entered into anAgreement to Defer Conversion of Preferred Stocks (the “Agreement to DeferConversion”), pursuant to which all parties agreed that the Company will notissue any Common Stock upon conversion of the Preferred Stock until a judicialjudgment as to the appropriate conversion rate has become final andnon-appealable.

 

On May 9, 2003, the Company filed a declaratory judgment actionseeking a judicial determination of the appropriate conversion rate of thePreferred Stock. On August 22, 2003, the Company filed an originalpetition for declaratory judgment and to enforce the Settlement Agreement,dated July 17, 1997, pursuant to which the Preferred Stock was issued. Inits petition, the Company requests the court establish the conversion rate ofthe Preferred Stock to be the Agreed Maximum Conversion Rate and confirm theissuance 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 thePreferred 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 theCompany (the “Board”) declaring dividends on the Series B Preferred Stockand 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 forpayment in cash from funds legally available for the payment of dividends, asand when the Board may direct by further resolution. However, none of theseunanimous consents are executed by all of the individuals who were members ofthe Board at the date of such unanimous consents, and none of the dividendshave been paid.  There were no undeclareddividends as of June 30, 2005 and June 30, 2004.

 

On December 22, 2003, the independent and disinterested members ofthe Board, relying on an opinion of counsel expert in Delaware corporate lawand acting on behalf of the Board, determined that (i) the previousdeclarations of dividends on the Preferred Stock in the aggregate amount of$2,203,717 (collectively, the “Preferred Stock Dividends”) had not beeneffective to declare and obligate the Company to pay such dividends, and (ii) thePreferred Stock Dividends cannot now be lawfully declared and paid on thePreferred Stock. As a consequence of these determinations, the Company reversedthe Preferred Stock Dividend entries on the Company’s books and records andrestated its financial statements for the years ended September 30, 2000,2001 and 2002.  These restatements reflect a removal of (a) dividendspayable on the Preferred Stock as a current liability on the Company’s balancesheets and as an adjustment of net income (loss) applicable to commonshareholders on the statements of operations, and (b) the Preferred StockDividends as a line item on the Company’s statements of shareholders’ equityand statements of cash flows.

 

WSI was the holder of the Preferred Stock. The Company has been advisedby WSI, Stericycle and the members of the Board who are affiliates of WSI andStericycle that they believe the Company remains obligated to pay the PreferredStock Dividends as previously declared in the Board resolutions and aspreviously recorded on the Company’s books. If WSI and Stericycle’s position iscorrect, the Preferred Stock Dividends would be paid by the Company in cashfrom funds legally available for the payment of dividends as and when the Boardmay direct by further resolution. Due to WSI, Stericycle and their affiliates’announced position on the Preferred Stock Dividends, the Company has determinedthe 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 ofcertain contingent liabilities of the Company related to the Preferred Stock.

 

The Company is a plaintiff jointly with Larry F. Robb, individually andon behalf of a class comprised of the Company’s minority stockholders, inlitigation against Stericycle and the four affiliates of Stericycle who are orwere directors of 3CI.  See Part II, Item 1, Legal Proceedings for adescription of this litigation.

 

The Company operates within the regulated medical waste disposalindustry, which is subject to intense governmental regulation at the federal,state and local levels. The Company believes it is currently in compliance inall material respects with all applicable laws and regulations governing themedical waste disposal business. However, continuing expenditures may berequired in order for the Company to remain in compliance with existing andchanging regulations. Furthermore, because the medical waste disposal industryis predicated upon the existence of strict governmental regulation, anymaterial

 

6

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relaxation of regulatory requirements governing medical waste disposalor of their enforcement could result in a reduced demand for the Company’sservices and have a material adverse effect on the Company’s revenues andfinancial condition. The scope and duration of existing and future regulationsaffecting the medical waste disposal industry cannot be anticipated and aresubject to changing political and economic pressures.

 

The Company is subject to certain other litigation and claims arisingin the ordinary course of business.  In the opinion of management of theCompany, the amounts ultimately payable, if any, as a result of such claims andassessments will not have a materially adverse effect on the Company’sfinancial position, results of operations or net cash flows.

 

**Item 2.   Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

The Company is engaged in the business of medical waste managementservices in the southern United States.  The Company’s customers includeregional medical centers, major hospitals, clinics, medical and dental offices,veterinarians, pharmaceutical companies, retirement homes, medical testinglaboratories and other medical waste generators.  The following is adiscussion of some events that may allow a better understanding of theprogression 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 andinternally generated funds. Currently, the Company’s only borrowed indebtednessconsists of money borrowed from WSI under the Note.  In addition, the Company has obtainedfinancing of its annual insurance premium.  As of June 30, 2005, September 30,2004, and June 30, 2004, the outstanding balances under the Note were inthe aggregate principal amounts of approximately $1,126,930, $1,303,117 and$1,587,213, respectively.  See Liquidity and Capital Resources hereinand Note 3.

 

See Note 5 to the Company’s financial statements above for a discussionof the reversal of the Company’s Preferred Stock Dividends on its books andrecords.  See Note 4 for a discussion ofthe change in the Company’s deferred tax assets valuation in the fourth quarterof the Company’s 2003 fiscal year.

 

**RESULTS OF OPERATIONS**

 

The following summarizes (in thousands) the Company’s operations:

 
| ** **                                    | ** ** | **Three Months  Ended  June 30,** | ** ** | **Nine Months  Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                    | ** ** | **2005**                               | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                          |       |                                   |       |                                  |       |   |   |   |   |
| Revenues                                      |       | $                                      | 2,965      |                                  | $          | 3,217 |   | $ | 9,194 |   | $ | 9,853 |   |
| 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 |   |

 

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(1)  EBITDA is calculated as the sum of net income, plus interestexpense, income tax expense, depreciation expense and amortization expense, tothe extent deducted in calculating net income.  The Company considersEBITDA to be a widely accepted financial indicator of a company’s operatingperformance and ability to service debt, fund capital expenditures and expandits business.  EBITDA is not calculated in the same way by all companiesand therefore may not be comparable to similarly titled measures reported byother companies.  EBITDA is not a measure in accordance with accountingprinciples generally accepted in the United States.  EBITDA should not beconsidered as an alternative to net income, as an indicator of operatingperformance or as an alternative to cash flow as a measure of liquidity. The funds depicted by the measure may not be available for management’sdiscretionary use due to legal or functional requirements, debt service, othercommitments and uncertainties.

 

7

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**Three months ended June 30, 2005compared to three months ended June 30, 2004:**

 

***Revenues***decreased by $252,146, or 7.8%, to $2,965,418 during the three-month periodended 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 wastehandled.  Substantially all of this reduction in volume was attributableto the Company’s efforts to focus on small quantity generators which providehigher margins at lower volumes while reducing the focus on less profitablelarge 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 inprocessing costs.  Cost of services as a percentage of revenues increasedto 56.6% compared to 55.6% during the three months ended June 30, 2005 andJune 30, 2004, respectively.  This percentage increase was primarilyattributable to an increase in operating costs relative to revenues.

 

***Depreciation andamortization*** expense for the three months ended June 30,2005 increased $6,272 or 5.9% to $113,224 compared to $106,953 for the threemonths ended June 30, 2004. This increase was primarily due to an increasein amortization expense.

 

***Selling, general andadministrative*** expenses for the three months endedJune 30, 2005 increased 43.5% or $361,994 to $1,193,401 from $831,407during the three months ended June 30, 2004.  Sales, general andadministrative expenses increased as a percentage of revenue to 40.2% for thethree months ended June 30, 2005, as compared to 25.6% for the threemonths ended June 30, 2004.  Substantiallyall of this increase was due to increased legal expenses incurred by theCompany 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 penaltiesincurred in 2005 compared to the same period in 2004, when the Company failedto meet the EBITDA covenant under the Note.

 

***Earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”)***for the quarter ended June 30, 2005, totaled $34,604 or 1.2% of revenuecompared to $508,336 or 15.8% of revenue for the quarter ended June 30,2004.  The difference was primarily reflective of lower cost of servicesoffset by lower revenue and increased legal expenses related to the LouisianaSuit.

 

**Nine months ended June 30, 2005 comparedto 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. Thisdecrease is primarily related to a reduction in the volume of wastehandled.  Substantially all of this reduction in volume was attributableto the Company’s efforts to focus on small quantity generators which providehigher margins at lower volumes while reducing the focus on less profitablelarge 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 inprocessing costs and some operating expenses.  Cost of revenues as apercentage 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 andamortization*** expense for the nine months ended June 30,2005 decreased $21,490 or 6.1% to $330,594 compared to $352,084 for the ninemonths ended June 30, 2004. This decrease was primarily due to assetsstill employed in the Company’s operations being fully depreciated.

 

***Selling, general andadministrative*** 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 ninemonths ended June 30, 2005.  Sales, general and administrativeexpenses increased as a percentage of revenue to 36.1% for the nine monthsended June 30, 2005 as compared to 32.1% for the nine months ended June 30,2004.  Substantially all of this increasewas due to increased legal expenses incurred by the Company related to theLouisiana 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 tothe Company’s avoidance of penalties in 2005 compared to the same period in2004, when the Company failed to meet the EBITDA covenant under the Note.

 

***Earnings beforeinterest, 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 expensesassociated with the Louisiana Suit.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company has historically financed its working capital needs,capital expenditures and acquisitions primarily using advances from WSI andinternally generated funds. The Company’s borrowed indebtedness currentlyconsists only of amounts owed to WSI under the Note.  In addition, the Company has obtainedfinancing 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 andrestated to extend the maturity date of the Note to April 3, 2006 withmonthly payments of $25,000.  The interest rate on the Note is the PrimeRate, 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 disputeregarding the conversion rate of the Preferred Stock, and (ii) certainexpenses associated with the Louisiana Suit, for the quarters ending September 30,2004 and for each trailing six-month period of each quarterly period thereafteruntil maturity.  As of June 30, 2005, the Company was in compliancewith the required level of EBITDA under the Note.

 

In addition to the term note facility described above, the Noteincludes a revolving credit agreement under which the Company can borrow up to$100,000; the Company has no borrowings outstanding under the revolving creditagreement.  Borrowings under the Note may be prepaid at any time withoutpenalty.  The Note is subordinated to all security interests under theShepherd 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 otherthan WSI and does not know whether it could or could not obtain a creditfacility with an independent third-party lender.  If such a creditfacility could be arranged, no assurance can be given that it would be on termsor conditions as favorable as those of the Note.

 

During the 2003 and 2004 fiscal years and the first nine months of the2005 fiscal year, the Company incurred material legal expenses related to itsdisputes with Stericycle and WSI regarding the correct conversion rate of thePreferred Stock, an investigation by the Special Committee into allegationsmade by the minority stockholders of the Company and the prosecution of theCompany’s claims in the Louisiana Suit. In each of the 2004 fiscal year and thenine-month period ended June 30, 2005, these legal expenses were in excess of$1 million.  Although the Company cannotpredict what its continued financial investment will be related to theLouisiana Suit, the Company believes that prosecution of the Louisiana Suitwill continue to require a material commitment of its financial resources.Although no assurance can be given, the Company believes that it has and willcontinue to have sufficient liquidity to effectively prosecute its claims inthe Louisiana Suit.  See Part II, Item 1,Legal Proceedings.

 

In anticipation of significant legal expenses to be incurred by theCompany in connection with the Louisiana Suit and in order to provide theCompany with greater flexibility in light of these anticipated expenses, theCompany has obtained agreements to defer payments with a limited number of itsservice providers and with WSI.  The serviceproviders have orally agreed that the Company may, if it so elects, deferpayment of their fees for various time periods, if necessary.  Pursuant to a Note Modification Agreement, asdescribed in Part II, Item 5, Other Information, WSI has agreed to allow theCompany to defer monthly principal and interest payments under the Note for asix-month period.  As of August 11, 2005,the Company was current on all of its payment obligations to its vendors andservice providers and had not elected to defer any payments to its serviceproviders.

 

During 2004 and 2005, the Company’s transportation fuel costs haveincreased significantly. The Company implemented several initiatives tomitigate the effect of elevated fuel cost on its operations, but continuedincreases in fuel costs could have an adverse impact on the Company’s financialperformance in the future.

 

As of September 30, 2004, the Company had eligible net operatingloss carry forwards for federal income tax purposes of approximately $9,237,692which begin expiring in 2010.  The Company also had state net operatinglosses at September 30, 2004. Based on Section 382 of the InternalRevenue Code relating to changes in ownership of the Company, utilization ofthe net operating loss carry forwards is subject to an annual limitation ofapproximately $995,000 for net operating losses created prior to September 30,1998. All net operating losses created after September 30, 1998 are notsubject to any limitations and are available to be used for 20 years afterthey are produced. As such, the deferred tax asset and the related valuationallowance for net operating loss carry forwards were reduced to account for theportion of the net operating loss carry forwards the Company will not be ableto utilize.

 

During the fourth quarter of 2003, the Company reevaluated theestimated amount of valuation allowance required in light of the profitabilityachieved during 2003 and 2002 as well as profitability expected in futureyears.  As a result, the Company reduced the valuation allowance ondeferred tax assets in accordance with SFAS No. 109, “Accounting forIncome Taxes,” to an amount the Company believes is more likely than not ofbeing recovered. Accordingly, an income tax benefit of

 

9

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approximately $3,484,000 was reflected in the fourth quarter of 2003.The amount of net deferred tax assets estimated to be recoverable was basedupon 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, whichwas a decrease of approximately 3.6%, or $70,466.

 

Net cash provided by operating activities was $297,246 during thenine-month period ended June 30, 2005, compared to $312,015 in cash providedby 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-monthperiod ended June 30, 2005, compared to $838,432 used during thenine-month period ended June 30, 2004.  The $662,245 decrease wasprimarily due to smaller principal payments by the Company on the Note.

 

**Item 3.   Qualitative Disclosureabout Market Risk**

 

The Company’s exposure to market risk includes the possibility ofrising interest rates in connection with the Note, thereby increasing its debtservice obligation, which could adversely affect the Company’s cashflows.  The interest rate on the Note is variable and tied to the Prime Ratenot to exceed 13%.  An increase in the prime rate of 1% would have theeffect of increasing interest expense by approximately $11,269 over 12months.  The Company does not utilize derivative financial instruments tomitigate the risks of changes in interest rates.

 

**Item 4.   Controls and Procedures**

 

The Company maintains disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in the Company’sfilings under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the periods specified in the rules andforms of the Securities and Exchange Commission.  This information isaccumulated and communicated to the Company’s management including the ChiefExecutive Officer and the Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosures.  The Company’s managementincluding the Chief Executive Officer and the Chief Financial Officerrecognizes that any set of controls and procedures, no matter how well designedand operated, can provide only reasonable assurance of achieving the desiredcontrol objectives.

 

Under the supervision and with the participation of the Company’smanagement, including the Chief Executive Officer and the Chief FinancialOfficer, the Company conducted an evaluation of its disclosure controls andprocedures within 90 days of the filing date of this report.  Based onthis evaluation, the Company’s Chief Executive Officer and Chief FinancialOfficer concluded that the Company’s disclosures controls and procedures areeffective in alerting them on a timely basis to material information requiredto be disclosed in the Company’s periodic filings.

 

There have been no significant changes in the Company’s internalcontrols or in other factors that could significantly affect these controls subsequentto the date of the evaluation referenced in the foregoing paragraph.

 

**PART II - OTHER INFORMATION**

 

**Item 1.   Legal Proceedings**

 

**Louisiana Minority Stockholder Litigation**

 

In December 2004, Larry F. Robb, individuallyand on behalf of a class comprised of the Company’s minority stockholders, andthe Company (collectively, the “Plaintiffs”) filed a joint petiton in causeno. 467704-A, Robb et al. v. Stericycle, Inc. et al. (the “LouisianaSuit”), in the First Judicial District Court, Caddo Parish, Louisiana (the “StateCourt”) against WSI, Stericycle, and four individuals who are affiliates ofStericycle and are or were directors of the Company (collectively, the “StericycleAffiliates”).

 

In January 2005, the Stericycle Affiliatesfiled Defendants’ Amended and Restated Answer, Affirmative Defenses,Third-Party Petition, and Counterclaims (the “Counterclaims”) against theCompany and eight additional individuals who are or were executive officersand/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 contributionand indemnity claims against

 

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the Company and the Third-Party Defendants andbreaches of fiduciary duties and facilitation or causation of insider tradingagainst the two individual members of the Special Committee, the committee ofthe Board of Directors of the Company appointed to oversee the Louisiana Suit.

 

On April 21, 2005, the State Court found thatthe Stericycle Affiliates had failed to properly state claims forcontribution or indemnity against the Company or the Third-PartyDefendants.  The State Court dismissedthe Counterclaims and stayed the claims asserted against the SpecialCommittee members.  However, the StateCourt granted the Stericycle Affiliates the right to re-plead theirclaims.

 

On May 6, 2005, the Stericycle Affiliatesre-plead their contribution, indemnity and breach of fiduciary duty claims asset forth in the Counterclaims and added a negligent misrepresentation claimagainst the Company and the Third-Party Defendants.  After a hearing inJune, the State Court again dismissed the contribution and indemnity claims andstayed the re-plead claims asserted against the Special Committeemembers until further order of the State Court terminating or modifyingthe stay.  However, the State Courtdenied motions filed by the Company and the Third Party Defendants to dismissthe negligent misrepresentation claims. The Company believes, and the Third Party Defendants have informed theCompany that they believe, that these negligent misrepresentation claims arewithout merit.  The Company intends tovigorously defend against these claims.

 

On July 20, 2005, Plaintiffs filed an AmendedJoint Petition adding the law firm of Johnson and Colmar, legal counsel forStericycle and WSI, and two individual partners in that firm as defendants inthe Louisiana Suit.  On August 1,2005, the defendants in the Louisiana Suit removed the case to the UnitedStates District Court for the Western District of Louisiana, and on August 3,2005, Plaintiffs filed a motion to remand the case back to the StateCourt.  The motion for remand remainspending.

 

**Item 2.    Changes in Securities**

 

None.

 

**Item 3.    Defaults uponSenior Securities**

 

None.

 

**Item 4.    Submission ofMatters to a Vote of Security Holders**

 

None.

 

**Item 5.  Other Information**

 

The Company and WSI entered into a Note Modification Agreement, datedas of August 12, 2005, but effective as of July 1, 2005, pursuant to which WSIagreed to allow the Company to defer monthly principal and interest paymentseach in the amount of $25,000  under theNote, 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 “DeferralPeriod”).   The unpaid principal balanceof the Note, including the deferred payments, which equal $150,000 in theaggregate, shall continue to accrue interest until paid at the Prime Rate, notto exceed 13%, in accordance with the terms and conditions of the Note.  Following the Deferral Period, the Companyshall make monthly principal and interest payments under the Note each in theamount of $25,000 beginning on January 5, 2006, and continuing until thematurity date of the Note.

 

The Company’s borrowed indebtedness currently consists only of amountsowed to WSI under the Note.  As of thedate hereof, WSI is the record owner of 5,645,734 shares of the Company’sCommon Stock, which represents approximately 58.0% of the issued andoutstanding shares of Common Stock, and 7,750,000 shares of the Company’sPreferred Stock, which represents all of the issued and outstanding shares ofPreferred Stock. 

 

The Note Modification Agreement is attached hereto as Exhibit 10.1, andis incorporated herein by reference.

 

**Item6.    Exhibits**

 

The following is a list of the exhibits filed with this Form 10-Q.

 
| **Exhibit  Number** | ** ** | **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. |

 

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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 theundersigned thereunto duly authorized.

 

 
|                        | 3CI COMPLETE COMPLIANCE CORPORATION  (Registrant) |
|-----------------------------|---------------------------------------------------|
|                        |                                              |
|                        |                                              |
| Dated: August 15, 2005 | By:                                               | /s/ Matthew D. Peiffer |   |
|                        |                                              | Matthew D. Peiffer |
|                        |                                              | Chief Financial Officer, Secretary and  Treasurer  (Principal Financial Officer and  Principal Accounting Officer) |

 

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