**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 December 31,  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.

ý  Yes   o  No

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

 
|   | Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer ý |
|--------|---------------------------|--------|---------------------|--------|------------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

o  Yes   ý  No

 

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 January 31, 2006 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 MEDICAL WASTE DISPOSAL INDUSTRY, ASWELL AS OTHER RISKS DETAILED IN THE COMPANY’S FILINGS WITH THE SEC.  THECOMPANY EXPRESSLY DISCLAIMS ANY OBLIGATIONS TO RELEASE PUBLICLY ANY UPDATES ORREVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY CHANGES IN THECOMPANY’S EXPECTATIONS.

 

2

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**3CICOMPLETE COMPLIANCE CORPORATION**

 

**INDEX**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                   |   |
|-------------------|---------------------------------------------------------------------------------------------|--------|
|              |                                                                                        |   |
| Item 1.           | Financial Statements                                                                        |   |
|              |                                                                                        |   |
|              | Balance  Sheets as of December 31, 2005 and September 30, 2005                    |   |
|              |                                                                                        |   |
|              | Statements  of Operations for the three months ended December 31, 2005 and 2004        |   |
|              |                                                                                        |   |
|              | Statements  of Cash Flows for the three months ended December 31, 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  1A.         | Risk  Factors                                                                               |   |
|              |                                                                                        |   |
| Item 2.           | Unregistered Sales of Equity Securities and Use of Proceeds                                 |   |
|              |                                                                                        |   |
| 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**    |                                                                                        |

 

3

----

 

PART I -FINANCIAL INFORMATION

 

**Item 1. Financial Statements**

 

**3CICOMPLETE COMPLIANCE CORPORATION****BALANCESHEETS**

 
| ** **                                                                                                                                      | ** ** | **(Unaudited)  December 31,** | ** **    | **(Audited)  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|---------------|-----------------------------------|------------|
| ** **                                                                                                                                      | ** ** | **2005**                           | ** **    | **2005**                          |       |
| **ASSETS**                                                                                                                                      |       |                               |          |                              |       |
| ** **                                                                                                                                      | ** ** | ** **                         | ** **    | ** **                        | ** ** |
| **Current Assets:**                                                                                                                             | ** ** | ** **                         | ** **    | ** **                        | ** ** |
| **Cash and  cash equivalents**                                                                                                                  | ** ** | **$**                              | **539,933**   | ** **                        | **$**      | **603,395** | ** ** |
| **Accounts  receivable, net of allowances of $276,566 and $303,665 at December 31,  2005 and September 30, 2005, respectively**       | ** ** | **2,156,339**                      | ** **    | **2,296,834**                     | ** ** |
| **Inventory**                                                                                                                                   | ** ** | **87,693**                         | ** **    | **92,433**                        | ** ** |
| **Prepaid  expenses**                                                                                                                           | ** ** | **213,351**                        | ** **    | **363,539**                       | ** ** |
| **Deferred  income taxes**                                                                                                                      | ** ** | **107,609**                        | ** **    | **131,918**                       | ** ** |
| **Total  current assets**                                                                                                                       | ** ** | **3,104,925**                      | ** **    | **3,488,119**                     | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                         | ** **    | ** **                        | ** ** |
| **Property, plant and equipment, at cost**                                                                                                      | ** ** | **4,429,259**                      | ** **    | **4,594,444**                     | ** ** |
| **Accumulated  depreciation**                                                                                                                   | ** ** | **(3,588,602**                     | **)**         | **(3,671,260**                    | **)**      |
| **Net  property, plant and equipment**                                                                                                          | ** ** | **840,657**                        | ** **    | **923,184**                       | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                         | ** **    | ** **                        | ** ** |
| **Goodwill, net of accumulated amortization  of $547,748**                                                                                      | ** ** | **262,243**                        | ** **    | **262,243**                       | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                         | ** **    | ** **                        | ** ** |
| **Intangibles,  net of accumulated amortization of $368,375 and $349,877 at December 31,  2005 and September 30, 2005, respectively** | ** ** | **206,325**                        | ** **    | **224,823**                       | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                         | ** **    | ** **                        | ** ** |
| **Deferred income taxes**                                                                                                                       | ** ** | **4,359,112**                      | ** **    | **4,240,687**                     | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                         | ** **    | ** **                        | ** ** |
| **Other assets**                                                                                                                                | ** ** | **78,923**                         | ** **    | **78,923**                        | ** ** |
| **Total  assets**                                                                                                                               | ** ** | **$**                              | **8,852,185** | ** **                        | **$**      | **9,217,979** | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                         | ** **    | ** **                        | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                   | ** ** | ** **                         | ** **    | ** **                        | ** ** |
| **Current Liabilities:**                                                                                                                        | ** ** | ** **                         | ** **    | ** **                        | ** ** |
| **Notes  payable, current portion**                                                                                                             | ** ** | **$**                              | **33,091**    | ** **                        | **$**      | **170,199** | ** ** |
| **Accounts  payable**                                                                                                                           | ** ** | **236,168**                        | ** **    | **314,404**                       | ** ** |
| **Accounts  payable, affiliated companies**                                                                                                     | ** ** | **368,851**                        | ** **    | **338,379**                       | ** ** |
| **Accrued  liabilities**                                                                                                                        | ** ** | **1,304,726**                      | ** **    | **1,320,019**                     | ** ** |
| **Note  payable majority shareholder, current portion**                                                                                         | ** ** | **1,126,930**                      | ** **    | **1,126,930**                     | ** ** |
| **Total  current liabilities**                                                                                                                  | ** ** | **3,069,766**                      | ** **    | **3,269,931**                     | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                         | ** **    | ** **                        | ** ** |
| **Note payable majority shareholder, net of  current portion**                                                                                  | ** ** | **—**                         | ** **    | **—**                        | ** ** |
| **Note payable, net of current portion**                                                                                                        | ** ** | **14,392**                         | ** **    | **19,036**                        | ** ** |
| **Total  liabilities**                                                                                                                          | ** ** | **3,084,158**                      | ** **    | **3,288,967**                     | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                         | ** **    | ** **                        | ** ** |
| **Shareholders’ Equity :**                                                                                                                 | ** ** | ** **                         | ** **    | ** **                        | ** ** |
| **Common  stock, $0.01 par value, authorized 40,450,000 shares;**                                                                               | ** ** | ** **                         | ** **    | ** **                        | ** ** |
| **Issued  9,774,111 shares**                                                                                                                    | ** ** | **97,742**                         | ** **    | **97,742**                        | ** ** |
| **Common  stock to be issued**                                                                                                                  | ** ** | **7,750,000**                      | ** **    | **7,750,000**                     | ** ** |
| **Less  cost of treasury stock 34,500 shares**                                                                                                  | ** ** | **(51,595**                        | **)**         | **(51,595**                       | **)**      |
| **Additional  paid-in capital - common stock**                                                                                                  | ** ** | **20,519,861**                     | ** **    | **20,519,861**                    | ** ** |
| **Accumulated  deficit**                                                                                                                        | ** ** | **(22,547,981**                    | **)**         | **(22,386,996**                   | **)**      |
| **Total  shareholders’ equity**                                                                                                            | ** ** | **5,768,027**                      | ** **    | **5,929,012**                     | ** ** |
| **Total  liabilities and shareholders’ equity**                                                                                            | ** ** | **$**                              | **8,852,185** | ** **                        | **$**      | **9,217,979** | ** ** |

 

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

 

4

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**3CI COMPLETE COMPLIANCE CORPORATIONSTATEMENTS OF OPERATIONS**

 
| ** **                               | ** ** | **(Unaudited)  For the three months ended****December  31,** | ** **    |
|------------------------------------------|------------|--------------------------------------------------------------|---------------|
| ** **                               | ** ** | **2005**                                                     | ** **    | **2004** |   |
|                                     |       |                                                         |          |   |   |
| **Revenues**                             | ** ** | **$**                                                        | **2,948,046** | ** ** | **$** | **3,157,373** | ** ** |
| **Expenses:**                            |       |                                                         |          |   |   |
| **Cost of  services**                    | ** ** | **1,734,805**                                                | ** **    | **1,869,561** | ** ** |
| **Depreciation  and amortization**       | ** ** | **103,695**                                                  | ** **    | **107,290** | ** ** |
| **Selling,  general and administrative** | ** ** | **1,298,468**                                                | ** **    | **1,068,280** | ** ** |
| **Interest  expense**                    | ** ** | **23,246**                                                   | ** **    | **15,600** | ** ** |
| **Other  (income) expense, net**         | ** ** | **42,933**                                                   | ** **    | **74,691** | ** ** |
| **Income (loss) before income taxes**    | ** ** | **(255,101**                                                 | **)**         | **21,951** | ** ** |
|                                     |       |                                                         |          |   |   |
| **Income taxes**                         | ** ** | **94,116**                                                   | ** **    | **(13,440** | **)** |
|                                     |       |                                                         |          |   |   |
| **Net income (loss)**                    | ** ** | **$**                                                        | **(160,985**  | **)** | **$** | **8,511** | ** ** |
|                                     |       |                                                         |          |   |   |
| **Basic earnings per share:**            |       |                                                         |          |   |   |
| **Basic  net income (loss) per share**   | ** ** | **$**                                                        | **(0.01**     | **)** | **$** | **0.00** | ** ** |
|                                     |       |                                                         |          |   |   |
| **Diluted earnings per share:**          |       |                                                         |          |   |   |
| **Diluted  net income (loss) per share** | ** ** | **$**                                                        | **(0.01**     | **)** | **$** | **0.00** | ** ** |

 

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

 

5

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**3CICOMPLETE COMPLIANCE CORPORATION****STATEMENTSOF CASH FLOWS**

 
| ** **                                                                                    | ** ** | **(Unaudited)  For the three months ended****December 31,** | ** **   |
|-----------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|--------------|
| ** **                                                                                    | ** ** | **2005**                                                         | ** **   | **2004** |   |
|                                                                                          |       |                                                             |         |   |   |
| **Cash flows from operating activities:**                                                     |       |                                                             |         |   |   |
| **Net  income (loss)**                                                                        | ** ** | **$**                                                            | **(160,985** | **)** | **$** | **8,511** | ** ** |
| **Adjustments  to reconcile net income (loss) to net cash provided by operating activities:** |       |                                                             |         |   |   |
| **Loss  (Gain) on disposal of fixed and intangible assets**                                   | ** ** | **(5,449**                                                       | **)**        | **2,750** | ** ** |
| **Depreciation  and amortization**                                                            | ** ** | **103,695**                                                      | ** **   | **107,290** | ** ** |
| **Deferred  income taxes**                                                                    | ** ** | **(94,116**                                                      | **)**        | **13,440** | ** ** |
| **Change  in operating assets and liabilities**                                               |       |                                                             |         |   |   |
| **Decrease  in accounts receivable, net**                                                     | ** ** | **140,495**                                                      | ** **   | **76,670** | ** ** |
| **(Increase)  Decrease in inventory**                                                         | ** ** | **4,740**                                                        | ** **   | **(27,180** | **)** |
| **Decrease  in prepaid expenses**                                                             | ** ** | **150,188**                                                      | ** **   | **19,166** | ** ** |
| **Decrease  in other current assets**                                                         | ** ** | **—**                                                       | ** **   | **21,495** | ** ** |
| **Increase  (Decrease) in accounts payable**                                                  | ** ** | **(78,237**                                                      | **)**        | **7,360** | ** ** |
| **Increase  (Decrease)in accounts payable, affiliated companies**                             | ** ** | **30,472**                                                       | ** **   | **(75,740** | **)** |
| **(Decrease)  in accrued liabilities**                                                        | ** ** | **(15,293**                                                      | **)**        | **(57,739** | **)** |
| **Principal  (Decrease) of insurance notes payable**                                          | ** ** | **(136,822**                                                     | **)**        | **(24,266** | **)** |
| **Total  adjustments to net income (loss)**                                                   | ** ** | **99,673**                                                       | ** **   | **63,246** | ** ** |
| **Net cash  provided by (used in) operating activities**                                      | ** ** | **(61,312**                                                      | **)**        | **71,757** | ** ** |
|                                                                                          |       |                                                             |         |   |   |
| **Cash flows from investing activities:**                                                     |       |                                                             |         |   |   |
| **Proceeds  from sale of property, plant and equipment**                                      | ** ** | **10,700**                                                       | ** **   | **15,200** | ** ** |
| **Purchase  of property, plant and equipment**                                                | ** ** | **(7,922**                                                       | **)**        | **(139,076** | **)** |
| **Net cash  provided by (used in) investing activities:**                                     | ** ** | **2,778**                                                        | ** **   | **(123,876** | **)** |
| ** **                                                                                    | ** ** | ** **                                                       | ** **   | ** ** | ** ** |
| **Cash flows from financing activities:**                                                     |       |                                                             |         |   |   |
| **Reduction  of note payable to majority shareholders**                                       | ** ** | **—**                                                       | ** **   | **(60,566** | **)** |
| **Payments  on equipment notes**                                                              | ** ** | **(4,928**                                                       | **)**        | **(4,928** | **)** |
| **Net cash  flows used in financing activities**                                              | ** ** | **(4,928**                                                       | **)**        | **(65,494** | **)** |
|                                                                                          |       |                                                             |         |   |   |
| **Net decrease in cash and cash equivalents**                                                 | ** ** | **(63,462**                                                      | **)**        | **(117,613** | **)** |
|                                                                                          |       |                                                             |         |   |   |
| **Cash and cash equivalents, beginning of  period**                                           | ** ** | **603,395**                                                      | ** **   | **710,353** | ** ** |
|                                                                                          |       |                                                             |         |   |   |
| **Cash and cash equivalents, end of period**                                                  | ** ** | **$**                                                            | **539,933**  | ** ** | **$** | **592,740** | ** ** |
|                                                                                          |       |                                                             |         |   |   |
| **Supplemental Disclosures:**                                                                 |       |                                                             |         |   |   |
|                                                                                          |       |                                                             |         |   |   |
| **Cash  paid for interest**                                                                   | ** ** | **$**                                                            | **2,779**    | ** ** | **$** | **143,741** | ** ** |
|                                                                                          |       |                                                             |         |   |   |
| **Non-Cash  Activities:**                                                                     |       |                                                             |         |   |   |
| **Acquisition  of vehicles with notes payable**                                               | ** ** | **—**                                                       |         | **$** | **53,604** |   |

 

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

 

6

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**3CICOMPLETE COMPLIANCE CORPORATION****NOTES TO FINANCIAL STATEMENTS****December 31, 2005**

 

**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, transportation and disposalof regulated medical waste in the south and southeastern United States.

 

Effective October 1, 1998, after approval by the then properlyconstituted 3CI Board of Directors, 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 outstanding common stock ofthe Company (“Common Stock”) and 100% of the shares of Common Stock to beissued by the Company as a result of the conversion of the Company’s preferredstock (“Preferred Stock”). See Note 6 for details on the conversion of thePreferred 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 Form10-Q and Article 10 of RegulationS-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 three-month period ended December 31,2005 are not necessarily indicative of the results that may be expected for theyear ended September 30, 2006.

 

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, 2005.

 

Certain reclassifications have been made to the September 30, 2005financial statements to conform to the December 31, 2005presentation.  Such reclassifications had no effect on net income asoriginally reported.

 

**NOTE 2—SHARE BASED COMPENSATION**

 

Prior to October 1, 2005, 3CI accounted for its stock option plansusing the intrinsic value method of accounting provided under APB Opinion No. 25,“Accounting for Stock Issued to Employees,” (APB 25) and relatedinterpretations, as permitted by FASB Statement No. 123, “Accounting forStock-Based Compensation,” (SFAS 123) under which no compensation expense wasrecognized for stock option grants pursuant to the 1992 Stock Option Plan.Accordingly, share-based compensation was included as a pro forma disclosure inthe financial statement footnotes and continues to be provided for periodsprior to fiscal 2006.

 

Effective October 1, 2005, 3CI adopted the fair value recognitionprovisions of FASB Statement No. 123(R), “Share-Based Payment,” (SFAS123R) under the modified prospective. Since the Company’s only stock optiongranted is fully vested and the requisite service period has been completed,when new options are granted, compensation cost would include the cost for allshare-based payments granted after September 30, 2005, based on the grantdate fair value estimated in accordance with the provisions of SFAS 123(R).Results for prior periods have not been restated.

 

The fair value of each option award is estimated as of the date ofgrant using a Black-Scholes option pricing model. Expected volatility is basedon historical volatility of 3CI’s stock and other factors. The risk-free ratefor the expected term of the option would be based on the U.S. Treasury yieldcurve in effect at the time of grant.

 

The adoption of this standard did not have a material impact on theCompany as only 75,000 options granted to one officer of the Company, of whichall are fully vested and none have been exercised, forfeited or expired.  These options have an exercise price of $0.33per share and were outstanding at the beginning of the fiscal year.

 

**NOTE 3—NET INCOME (LOSS) PER SHARE**

 

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

 
| ** **                                                        | ** ** | **Three  months ended  December 31,  2005** | ** ** | **Three  months ended  December 31,  2004** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| Numerator:                                                        |       |                                             |       |                                             |       |
| Net income  (loss)                                                |       | $                                                | (160,985   | )                                                | $          | 8,511 |   |
| Denominator  for basic earnings per share-weighted average shares |       | 17,489,611                                       |       | 17,489,611                                       |       |
| Effect of  dilutive shares:                                       |       |                                             |       |                                             |       |
| Preferred  shares                                                 |       | —                                           |       | —                                           |       |
| Options                                                           |       | —                                           |       | 33,713                                           |       |
| Denominator  for diluted earnings per share                       |       | 17,489,611                                       |       | 17,523,324                                       |       |
|                                                              |       |                                             |       |                                             |       |
| Basic net  income (loss) per share                                |       | $                                                | (0.01      | )                                                | $          | 0.00 |   |
| Diluted net  income (loss) per common share                       |       | $                                                | (0.01      | )                                                | $          | 0.00 |   |

 

7

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The effect of the conversion of the preferred shareson the above basic and 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 Preferred Stock were converted on April 6, 2003. See Note 5 fordetails on the conversion of the Preferred Stock to Common Stock.

 

Stock options were not included in the December 31, 2005computations as they were antidilutive due to the net losses incurred by theCompany.

 

**NOTE 4—PROMISSORY NOTE**

 

The Company has an amended and restated revolving promissory notepayable to WSI (the “Note”), with an outstanding balance of $1,126,930 as of December 31,2005.  The Company is required to make monthly payments of principal andaccrued interest under the Note of $25,000.  On August 12, 2005, theCompany and WSI modified the Note, effective July 1, 2005, to deferpayments of $25,000 until January 5, 2006, at which time the monthlyprincipal and interest repayments of $25,000 resumed. As of January 31,2006, the Company and WSI entered into a Second Note Modification Agreementpursuant to which the maturity date of the Note has been extended until theearlier of June 30, 2006, or the final effective date of the settlementagreement in the Louisiana Suit.  Theinterest rate on the Note is the prime lending rate (7.25% as of December 31,2005), as such rate may change from time to time, published under “Money Rates”in*The Wall Street Journal*(Southwestern Edition), not to exceed 13%.

 

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 December 31, 2005, the Company was in compliancewith the required level of EBITDA under the Note.

 

As of September 30, 2005 and December 31, 2005, theoutstanding principal balance under the Note was $1,126,930 (plus accruedinterest on the Note of $23,947 and $43,668, respectively).  Total interest expense for all debt was$23,246 and $15,600 for the quarters ended December 31, 2005 and 2004,respectively.

 

**NOTE 5—INCOME TAXES**

 

As of September 30, 2005 the Company had net operating loss carryforwards for federal income tax purposes of approximately $10,350,000 whichbegin expiring in 2010. The Company also had state net operating losses at September 30,2005. Based on Internal Revenue Code Section 382 relating to changes inownership of the Company, utilization of the net operating loss carry forwardsis subject to an annual limitation of approximately $995,000 for net operatinglosses created prior to September 30, 1998. All net operating lossescreated after September 30, 1998 are not subject to any limitations andare available to be used for 20 years after they are produced. As such,the deferred tax asset and the related valuation allowance for net operatingloss carry forwards were reduced to account for the portion of the netoperating loss carry forwards the Company will not be able to utilize.

 

During the fourth quarters of the Company’s 2005 and 2003 fiscal years,the Company re-evaluated the estimated amount of valuation allowance requiredin light of the profitability achieved during 2003 and 2002 as well asprofitability expected in future years. As a result, the Company reduced the valuation allowance on deferred taxassets in accordance with SFAS No. 109, “Accounting for Income Taxes,” toan amount the Company believes is more likely than not of being recovered.  Accordingly, an income tax benefit of$1,024,166 was reflected in the fourth quarter of the 2005 fiscal year and anincome tax benefit of approximately $3,483,616 was reflected in the fourthquarter of the 2003 fiscal year. The amount of net deferred tax assetsestimated to be recoverable was based upon the Company’s assessment of thelikelihood of near term operating income.

 

**NOTE 6—PREFERRED STOCK**

 

**Preferred Stock Conversion**

 

Pursuant to the certificates of designation governing the PreferredStock, all 7,750,000 shares of Preferred Stock automatically

 

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converted on April 6, 2003. The Company has not issued any sharesof Common Stock and has not recorded any increase in the outstanding CommonStock related to the conversion of the Preferred Stock.

 

Prior to April 6, 2003, WSI and Stericycle asserted the conversionrate of the Preferred Stock is such that each share of Preferred Stock isconvertible 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 (withrespect to the Series C Preferred Stock) by the market value of the CommonStock on the date of conversion. On April 6, 2003, the per share closingprice of the Common Stock was $0.21. Accordingly, the Company would have issued 36,904,761 shares of CommonStock upon conversion of the Preferred Stock under this interpretation, whichwould have increased WSI’s ownership percentage to 91.2% of the outstandingshares of Common Stock and the combined WSI and Stericycle ownership percentageto 93.2%.

 

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 the appropriate conversionrate is the per share market value of the Common Stock on the conversion noticedate, less $1.00 per share, but the conversion rate shall not be less than$1.00 per share (the “Agreed Maximum Conversion Rate”).  Under this interpretation, since the pershare 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 uponconversion of the Preferred Stock, which would have increased WSI’s ownershippercentage to 76.6% of the outstanding shares of Common Stock and the combinedWSI and Stericycle ownership percentage to 81.9%.

 

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 the Company will not issueany 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 in connection with James T. Rash, et. al. v. WasteSystems, Inc. (the “1995 Action”), which was the original proceedingpursuant to which the Preferred Stock was issued by the Company.  On August 22, 2003, the Company filed anoriginal petition for declaratory judgment (the “2003 Action”) and to enforcethe Settlement Agreement, dated July 17, 1997, pursuant to which thePreferred Stock was issued. In its petition, the Company requests the courtestablish the conversion rate of the Preferred Stock to be the Agreed MaximumConversion Rate and confirm the issuance of no more than 7,750,000 shares ofCommon Stock to WSI as of April 6, 2003. WSI subsequently filed a motionto have the court declare that the Preferred Stock is convertible into36,904,761 shares of Common Stock.

 

Pursuant to the terms of the Settlement Agreement inthe Louisiana Suit (as discussed in Note 7), the Company, a class of minoritystockholders of the Company, WSI, Stericycle and the four individual affiliatesof Stericycle who are or were members of 3CI’s Board of Directors (the “StericycleAffiliates”) have agreed to settle and compromise all claims that were broughtor could have been brought in the 2003 Action or in the 1995 Action (subject toany provisions arising under the 1997 judgment in that case).  For purposes of the settlement, the partieshave stipulated that the Agreed Maximum Conversion Rate that is the subjectmatter of the declaratory judgment claims asserted in those cases shall be1:1.  As a result, upon final approval ofthe Settlement Agreement by the court in the Louisiana Suit (as defined in Note7), the Company shall issue to WSI 7,750,000 shares of Common Stock inconversion of the Preferred Stock, and the parties have agreed to dismiss withprejudice the 2003 Action and the 1995 Action (subject to any provisionsarising under the 1997 judgment entered in that case).  See Note 7 for a further description of thesettlement.

 

**Preferred Stock Dividends**

 

There are unanimous written consents of the Board of Directorsdeclaring dividends on the Series B and C Preferred Stock totaling$161,158, $637,623, $907,387 and 497,550 for each of the years ended September 30,2003, 2002, 2001 and 2000, respectively. Each of the resolutions for thedividends called for payment in cash from funds legally available for thepayment of dividends, as and when the Board of Directors may direct by furtherresolution. However, none of these unanimous consents are executed by all ofthe individuals who were members of the Board of Directors at the date of suchunanimous consents, and none of the dividends have been paid. There were noundeclared dividends as of September 30, 2003.

 

On December 22, 2003, the independent and disinterested members ofthe Board of Directors, relying on an opinion of counsel expert in Delawarecorporate law and acting on behalf of the Board, determined that (i) theprevious declarations of dividends on the Series B Preferred Stock and Series CPreferred Stock in the aggregate amount of $2,203,717 (collectively, the “PreferredStock Dividends”) had not been effective to declare and obligate the Company topay such dividends, and (ii) the Preferred Stock Dividends cannot now belawfully declared and paid on the Preferred Stock. As a consequence of thesedeterminations, the Company has reversed the Preferred Stock Dividends entrieson the Company’s books and records and has restated its financial statementsfor the years ended September 30, 2000, 2001 and 2002. These restatementsreflect as of September 30, 2000, 2001 and 2002, 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

 

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affiliates of WSI and Stericycle that they believe the Company remainsobligated to pay the Preferred Stock Dividends as previously declared in theBoard resolutions and as previously recorded on the Company’s books. If WSI,Stericycle and their affiliates’ position is correct, the Preferred StockDividends would be paid by the Company in cash from funds legally available forthe payment of dividends as and when the Board may direct by furtherresolution. Due to WSI, Stericycle and their affiliates’ announced position onthe Preferred Stock Dividends, the Company has determined the amount of suchdividends to be a contingent liability of $2,203,717.

 

**NOTE 7—COMMITMENTS AND CONTINGENCIES**

 

As of November 11, 2005, the Company and Larry F. Robb,individually, and on behalf of a class of certain of the Company’s minoritystockholders, entered into a settlement agreement (the “Settlement Agreement”)with Stericycle, WSI and the Stericycle Affiliates, in cause no. 467704-A,Robb et al. v. Stericycle, Inc. et al. (the “Louisiana Suit”) in the FirstJudicial District Court, Caddo Parish, Louisiana (the “Louisiana Court”).Pursuant to the Settlement Agreement, the parties have agreed to settle allclaims in the litigation among the parties, including, but not limited to theLouisiana Suit, in consideration for $32,500,000.

 

The minority stockholders of the Company who are members of the classin the Louisiana Suit are all persons who held Common Stock on September 30,1998, or acquired Common Stock during the class period (September 30, 1998to February 10, 2005), with certain exclusions. Anyone who has purchasedCommon Stock for the first time since February 10, 2005, is not a classmember and will not participate in the settlement proceeds distribution.

 

It is intended, as part of the settlement of the Louisiana Suit, thatStericycle will acquire sufficient shares of Common Stock so that, with theshares of Common Stock already owned by Stericycle, Stericycle willbeneficially own 90% or more of 3CI’s outstanding Common Stock. In a filingdated November 22, 2005, with the Securities and Exchange Commission (“SEC”),Stericycle reported that if it acquires 90% or more of 3CI’s outstanding CommonStock, it intends to conduct a “short-form” merger under Delaware law at theearliest practicable time after such acquisition as it determines. IfStericycle consummates such a merger, it would own all of 3CI’s Common Stock.

 

On December 16, 2005, the Louisiana Court preliminarily approvedthe terms of the Settlement Agreement and the notice to class members.  The Settlement Agreement and all of its termsremain subject to final court approval. The Louisiana Court has scheduled ahearing on final approval for 1:30 p.m. on February 21, 2006.

 

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 be required in order for theCompany to remain in compliance with existing and changing regulations.  Furthermore, because the medical wastedisposal industry is predicated upon the existence of strict governmentalregulation, any material relaxation of regulatory requirements governingmedical waste disposal or of their enforcement could result in a reduced demandfor the Company’s services and have a material adverse effect on the Company’srevenues and financial condition. The scope and duration of existing and futureregulations affecting the medical waste disposal industry cannot be anticipatedand are subject to changing political and economic pressures.

 

On May 30, 2003, the mother and personal representative of theestate of Matthew Eldridge filed a wrongful death action styled, SavannahGeorgia Eldridge, individually and David Eldridge, as personal representativeof the estate of Matthew Eldridge, deceased v. Terri Moore, as personalrepresentative of the estate of Robert J. Moore, II, deceased, and 3CIComplete Compliance Corporation d/b/a American 3CI, et al., cause No. 03-5-12120,in the 267th Judicial District Court of Jackson County, Texas.  Plaintiffs’ claims arise out of an April 17,2003, automobile accident in which Matthew Eldridge died when his car wasstruck by a vehicle driven by Robert J. Moore. Plaintiffs allege Mr. Moorewas operating his vehicle negligently and in the course and scope of hisemployment with 3CI, and 3CI is vicariously liable for Mr. Moore’snegligence. Plaintiffs also allege that 3CI negligently directed Mr. Mooreto operate his vehicle in an impaired condition. Plaintiffs claim damages in anamount not to exceed $30,000,000.

 

The parties have been and continue to conduct discovery in the case,which is preliminarily set for trial on March 20, 2006.  The Company believes Mr. Moore was notin the course and scope of its employment at the time of the accident and theCompany was not negligent in its conduct with regard to Mr. Moore. TheCompany intends to vigorously defend itself against the Plaintiff’s claims, andbelieves, to the extent any liability might be assessed against it, suchliability will covered by insurance.

 

See Note 6 for a discussion of certain contingent liabilities of theCompany related to the Preferred Stock.

 

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 material adverse effect on the Company’s financialposition, results of operations or net cash flows.

 

** Item2.   Management’s Discussion and Analysis of Financial Conditionand Results of Operations**

 

The Company is engaged in the business of medical waste managementservices in the south and southeastern United States.  The Company’scustomers include regional medical centers, clinics, medical and dentaloffices, veterinarians, pharmaceutical companies, retirement homes, medicaltesting laboratories and other medical waste generators.  The following isa discussion of some events that may allow a better understanding of theprogression of the Company’s financial position and operating results.

 

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The Company has historically financed its working capital needs,capital expenditures and acquisitions primarily using internally generatedfunds and borrowings from WSI. Currently, the Company’s only borrowedindebtedness consists of money borrowed from WSI under the Note.  As of December 31,2005 and December 31, 2004, the outstanding balances under the Note werein the aggregate principal amounts of approximately $1,126,930****and $1,242,551, respectively.   See Liquidity andCapital Resources herein and Note 4.

 

See Note 5 for a discussion of the change in the Company’s deferred taxassets valuation in the fourth quarter of the Company’s 2005 and 2003 fiscalyears.  See Note 6 to the Company’sfinancial statements above for a discussion of the reversal of the Company’sPreferred Stock Dividends on its books and records.

 

**RESULTS OF OPERATIONS**

 

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

 
| ** **                                    | ** ** | **Three Months  Ended  December 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Revenues                                      |       | $                                          | 2,948      |   | $ | 3,157 |   |
| Cost of services                              |       | 1,735                                      |       | 1,870 |   |
| Depreciation and amortization                 |       | 104                                        |       | 107 |   |
| Selling, general and administrative  expenses |       | 1,298                                      |       | 1,068 |   |
| (Loss) income from operations                 |       | (189                                       | )          | 112 |   |
| Interest expense                              |       | 23                                         |       | 16 |   |
| Other expense, net                            |       | 43                                         |       | 75 |   |
| Income tax (expense) benefit                  |       | —                                     |       | (13 | ) |
| Net Income (Loss)                             |       | (255                                       | )          | 9 |   |
|                                          |       |                                       |       |   |   |
| Add back:                                     |       |                                       |       |   |   |
| Depreciation                                  |       | 85                                         |       | 98 |   |
| Amortization                                  |       | 19                                         |       | 9 |   |
| Interest expense                              |       | 23                                         |       | 16 |   |
| Income tax expense (benefit)                  |       | —                                     |       | 13 |   |
|                                          |       |                                       |       |   |   |
| EBITDA(1)                                     |       | $                                          | (128       | ) | $ | 145 |   |

 

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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 on 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.

 

**Three months ended December 31, 2005compared to three months ended December 31, 2004:**

 

***Revenues***decreased by $209,327, or 6.6%, to $2,948,046 from $3,157,373 during thethree-month period ended December 31, 2005 compared to the three-monthperiod ended December 31, 2004. This decrease is primarily related to areduction in the volume of waste collected by the Company.  The reductionin volume was attributable to the Company’s focus on smaller quantitygenerators with higher margins at lower volumes while reducing the focus onless profitable larger quantity generators.

 

***Cost of services***decreased by $134,756, or 7.2%, to $1,734,805 from $1,869,561 during the threemonths ended December 31, 2005 compared to the three months ended December 31,2004. This decrease was primarily attributable to decreased processingcosts.  Cost of services as a percentage of revenues decreased to 58.8%compared to 59.2% during the three months ended December 31, 2005 and December 31,2004, respectively.

 

***Depreciation andamortization*** expense for the three months ended December 31,2005 decreased $3,595 to $103,695 compared to $107,290 for the three monthsended December 31, 2004. This decrease was primarily due to assets stillemployed in the Company’s operations being fully depreciated.

 

***Selling, general andadministrative*** expenses for the three months endedDecember 31, 2005 increased $230,188, or 21.5%, to $1,298,468 from$1,068,280 during the three months ended December 31, 2004.  Theincrease was primarily due to higher legal fees

 

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incurred by the Company in connection with the Louisiana Suit, whichwere $672,198 and $325,000 for the quarters ended December 31, 2005 and2004, respectively – an increase of $347,198.

 

***Interest expense***for the quarter ended December 31, 2005 increased by $7,646, or 49%, to$23,246 from $15,600 during the three months ended December 31,2004.  This increase was primarily due to the higher interest rate underthe Note.   During the 12 months ended December 31, 2005, theaggregate principal balance of the Note decreased by $115,621, or 9.3%, from$1,242,551 to $1,126,930.

 

***Earnings beforeinterest taxes depreciation and amortization (“EBITDA”)***totaled $(128,153) for the quarter ended December 31, 2005, compared to$144,841 for the quarter ended December 31, 2004.  The decrease wasprimarily due to higher legal fees incurred by the Company in connection withthe Louisiana Suit during the quarter ended December 31, 2005.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company has historically financed its working capital needs,capital expenditures and acquisitions primarily using internally generatedfunds and advances from WSI. The Company’s borrowed indebtedness currentlyconsists only of amounts owed to WSI under the Note.

 

The Note had an outstanding principal balance of $1,126,930 as of December 31,2005.  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.  On August 12, 2005, the Company and WSImodified the Note, effective July 1, 2005, to defer payments of $25,000until January 5, 2006, at which time the monthly principal and interestrepayments of $25,000 resumed.  Pursuantto a Second Note Modification Agreement, dated as of January 31, 2006, asdescribed in Part II, Item 5, Other Information, WSI has agreed to extendthe maturity date of the Note until the earlier of June 30, 2006, or thefinal effective date of the settlement agreement in the Louisiana Suit. The interest rate on the Note is the prime lending rate (7.25% as of December 31,2005), as such rate may change from time to time, published under “Money Rates”in*The Wall Street Journal*(Southwestern Edition), 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 (as hereinafter defined), for thequarters ending September 30, 2004 and for each trailing six-month periodof each quarterly period thereafter until maturity.  As of December 31,2005, the Company was in compliance with the required level of EBITDA under theNote.

 

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.

 

During 2003, 2004 and 2005, the Company incurred material legalexpenses related to its disputes and litigation with Stericycle and itsaffiliates. During the 2005 and 2004 fiscal years, these legal expenses wereapproximately $1,900,000 and $1,500,000, respectively. As of November 11,2005, the Company entered into a Settlement Agreement with the parties to theLouisiana Suit, pursuant to which the parties agreed to settle all known andunknown claims among the parties and their affiliates. This SettlementAgreement has received preliminary approval, but remains subject to finalapproval by the Louisiana Court.  Untilsuch final approval is obtained and the settlement is concluded, managementbelieves the Louisiana Suit and the 2003 Action and related issues may continueto require a commitment of its financial resources, and the amount of suchcommitment could be material.  See Part II,Item 1 – Legal Proceedings, Louisiana Litigation, for a further discussion ofthe settlement.

 

During 2004 and 2005, the Company’s transportation fuel costs increasedsignificantly. In 2005 the Company imposed a fuel surcharge on its customers tomitigate the effect of the elevated fuel cost on the Company’s operations. TheCompany’s management believes this action offsets any adverse impact on theCompany’s financial performance.

 

As of September 30, 2005 the Company had net operating loss carryforwards for federal income tax purposes of approximately $10,350,000, whichwill begin expiring in 2010. The Company also had state net operating losses atDecember 31, 2005. Based on Internal Revenue Code Section 382relating to changes in ownership of the Company, utilization of the net operatingloss carry forwards is subject to an annual limitation of approximately$995,000 for net operating losses created prior to September 30, 1998. Allnet operating losses created after September 30, 1998 are not subject toany limitations and are available to be used for 20 years after they areproduced. As such, the deferred tax asset and the related valuation allowancefor net operating loss carry forwards were reduced to account for the portionof the net operating loss carry forwards the Company will not be able toutilize.

 

During the fourth quarters of fiscal 2005 and 2003, the Companyre-evaluated the estimated amount of valuation allowance required in light ofthe profitability achieved during 2003 and 2002 as well as profitabilityexpected in future years. As a result, the Company reduced the valuationallowance on deferred tax assets in accordance with SFAS No. 109, “Accountingfor Income Taxes,” to an amount the Company believes is more likely than not ofbeing recovered. Accordingly, an income tax benefit of $1,024,166 was reflectedin the fourth quarter of the 2005 fiscal year and an income tax benefit ofapproximately $3,483,616 was reflected in the fourth quarter of the 2003 fiscalyear. The amount of net deferred tax assets estimated to be recoverable wasbased upon the

 

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Company’s assessment of the likelihood of near term operating income.

 

The Company had net working capital, exclusive of the Note, on December 31,2005 of $1,162,089, compared to $1,345,118 on September 30, 2005, whichwas a decrease of approximately 14%, or $183,029.

 

Net cash (used by)  provided byoperating activities was $(61,312) during the three-month period ended December 31,2005, compared to $71,757 for the three-month period ended December 31,2004.  The decrease was due to a higher net loss for the period, and thenet effect of lower insurance notes payable offset by lower accountsreceivable, inventory and prepaid expenses.

 

Net cash provided by (used in) investing activities for the threemonths ended December 31, 2005, was $2,778 compared to $(123,876) for thesame period in 2004.  The decrease reflected the Company’s lowerinvestment in equipment.

 

Net cash used in financing activities was $4,928 for the three-monthperiod ended December 31, 2005, compared to $65,494 during the three-monthperiod ended December 31, 2004.  The $60,566 decrease was primarilydue to suspension of principal payments on the Note by the Company during thequarter ended December 31, 2005.

 

**Item 3.   QualitativeDisclosure about 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 primerate not to exceed 13%.  An increase in the prime rate of 1% would havethe effect 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.

 

The Company also has exposure to commodity pricingfor gas and diesel fuel used by the Company’s trucks.  The Company does not hedge these items tomanage the exposure.

 

**Item 4.   Controls andProcedures**

 

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 SEC.  This information is accumulated and communicated to theCompany’s management including the Chief Executive Officer and the ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosures.  The Company’s management including the Chief ExecutiveOfficer and the Chief Financial Officer recognizes that any set of controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control 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 as of the end of the period covered by 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 controlssubsequent to the date of the evaluation referenced in the foregoing paragraph.

 

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PART II - OTHER INFORMATION

 

**Item 1.   Legal Proceedings**

 

**Louisiana Litigation**

 

As reported in the Company’s Form 8-K filed with the SEC on November 17,2005, the Company entered a Settlement Agreement dated November 11, 2005,(the “Settlement Agreement”) with the other parties 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 “LouisianaCourt”).

 

As reported in the Company’s Form 8-K filed with the SEC on December 22,2005, the Louisiana Court preliminarily approved on December 18, 2005, byorder dated December 16, 2005, the terms of the Settlement Agreement andthe form of notice to class members regarding the terms of the SettlementAgreement.  This notice was sent to themembers of the class of the minority stockholders of the Company who held sharesof the Company’s common stock on September 30, 1998 or who acquired theCompany’s common stock between September 30, 1998 and February 10,2005 (the “Class”).  The notice to Class membersincludes a $0.60 per share allocation as the consideration for the Common Stockto be purchased by Stericycle as part of the settlement and to be paid to Class memberswho file validated claims and who still hold their shares when the settlementreceives final approval by the Louisiana Court.   The balance of the $32,500,000 settlementamount, after deducting fees and expenses that currently are not anticipated toexceed $12,600,000, will be paid to Class members who file validatedclaims for their alleged damages in proportion to the length of time they heldCommon Stock from September 30, 1998 to February 10, 2005.

 

Subject to the Louisiana Court’s final approval, the Company intends topay approximately $1,000,000 of the $32,500,000 settlement proceeds from theLouisiana Suit to its employees as of December 31, 2005, who remainemployed with the Company through the effective time of the settlement.  Such payments to the Company’s employees willbe made pursuant to an employee retention program that the Special Committee ofthe Board of Directors of the Company will administer.  The Special Committee is comprised of the twomembers of the Board of Directors of the Company who are not affiliated withStericycle.  For a further description ofthis employee retention program, see Part II, Item 5 – Other Information.

 

The Settlement Agreement and all of its terms, including those setforth in the notice sent to Class members in December 2005, remainsubject to final approval by the Louisiana Court. The parties continue tonegotiate the procedures necessary to effectuate the Settlement Agreement andto prepare more formal documents, including releases, as contemplated by theSettlement Agreement.

 

The Louisiana Court has scheduled a hearing at 1:30 p.m. on February 21,2006, for final approval of the terms of the Settlement Agreement. Upon finalapproval of the settlement by the Louisiana Court, the parties to the LouisianaSuit have agreed to dismiss with prejudice the Louisiana Suit, the 2003 Actionand the 1995 Action (subject to any provisions arising under the 1997 judgmententered in that case).

 

Pursuant to the notice to class members, any objections to thesettlement, including allocation of the settlement proceeds, were required tobe filed by February 6, 2006.  As ofFebruary 10, 2006, three objections to the settlement had been filed with theLouisiana Court by 3CI stockholders.  Oneobjection has been filed by a group of five Class members (the “Group”),  the second objection has been filed by theCompany’s President and Chief Executive Officer and the third objection hasbeen filed by a single stockholder in Colorado. The Group objects to, among other things: (a) the failure to provideClass members prompt notice with full disclosure of the terms of the SettlementAgreement and related information, (b) a too low and arbitrary determination of$0.60 per share allocated as the purchase consideration for the Common Stock inthe settlement, (c) a disproportionate and discriminatory distribution ofsettlement proceeds favoring certain Class members over others, and (d) paymentof the Class counsel’s fees based on the full settlement amount, which includesthe amount allocated to the purchase of the Common Stock and not merely thedamages portion of the settlement amount. The second objection, which has been filed by the Company’s Presidentand Chief Executive Officer, seeks to have options held by him to purchaseCommon Stock that vested during the Class period treated as Common Stock ownedduring the Class period for purposes of distributing the settlement proceeds.  The single stockholder from Colorado objectsto, among other things, (x) the loss of a stockholder’s right to receive anysettlement proceeds for failure to timely respond to the notice of thesettlement sent to Class members, (y) an inadequate amount of time for responsegiven to stockholders to the notice of settlement, and (z) the apparentdisregard of the fair market value of the Common Stock in establishing the$0.60 per share allocation given to the Company’s Common Stock in thesettlement.

 

It is intended, as part of the settlement of the Louisiana Suit, thatStericycle will acquire sufficient shares of Common Stock so that, with theshares of Common Stock already owned by Stericycle and WSI, Stericycle willbeneficially own 90% or more of 3CI’s Common Stock. In a filing with the SECdated November 22, 2005, Stericycle reported that if it acquires 90% ormore of 3CI’s outstanding Common Stock, it intends to conduct a “short-form”merger under Delaware law at the earliest practicable time after suchacquisition as it determines. If Stericycle consummates such a merger, it wouldown all of 3CI’s Common Stock.

 

**Judicial Filings Regarding the ConversionRate of the Preferred Stock**

 

See Note 6 Preferred Stock, Preferred Stock Conversion, for a discussion of the litigationregarding the conversion rate of the Preferred Stock.

 

**Wrongful Death Action**

 

The wrongful death action, Savannah Georgia Eldridge, individuallyand David Eldridge, as personal representative of the estate of MatthewEldridge, deceased v. Terri Moore, as personal representative of theestate of Robert J. Moore, II, deceased, and 3CI Complete ComplianceCorporation d/b/a American 3CI, et al., cause no. 03-5-12120, in the 267thState District Court of Jackson County, Texas, has been set for trial on March 20,2006.  The Company previously reportedthis suit in its Form 10-K for the fiscal year ended September 30,2005.

 

**Other**

 

The Company is subject to certain other litigation and claims arisingin the ordinary course of business. Management believes the amounts ultimatelypayable, if any, as a result of such claims and assessments will not have amaterially adverse effect on the Company’s financial position, results ofoperations or net cash flows.

 

14

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| **Item 1A.** | **Risk  Factors**                                                |
|--------------|------------------------------------------------------------------|
|         |                                                             |
| None.        |                                                             |
|         |                                                             |
| **Item 2.**  | **Unregistered Sales  of Equity Securities and Use of Proceeds** |
|         |                                                             |
| None.        |                                                             |
|         |                                                             |
| **Item 3.**  | **Defaults Upon  Senior Securities**                             |
|         |                                                             |
| None.        |                                                             |
|         |                                                             |
| **Item 4.**  | **Submission of  Matters to a Vote of Security Holders**         |
|         |                                                             |
| None.        |                                                             |
|         |                                                             |
| **Item 5.**  | **Other Information**                                            |
|              |                                                                  |  |

 

**Second Note Modification Agreement**

 

The Company and WSI entered into a Second Note Modification Agreement,dated as of January 31, 2006, pursuant to which WSI agreed to extend thematurity date of the Note until the earlier of June 30, 2006, or the finaleffective date of the settlement agreement in the Louisiana Suit.  The Second Note Modification Agreement is attached hereto as Exhibit 10.1,and is incorporated herein by reference.

 

**Employee Retention Program**

 

As of December 31, 2005, the Company established an employee retentionprogram (the “Program”), under which, subject to approval of the LouisianaCourt, the Company will pay approximately $1,000,000 of the settlement proceedsfrom the Louisiana Suit to its employees who remain employed with the Companythrough the final settlement of the Louisiana Suit.  Pursuant to the terms of such Program, theCompany has entered into retention award agreements with its employees.  The Special Committee of the Board ofDirectors established the Program on behalf of the Company to assist theCompany in maintaining its operations prior to the time the Louisiana Court’sorder approving the settlement becomes final and non-appealable (the “EffectiveTime of Settlement”) by giving the Company’s employees incentive to remain withthe Company through such time.  TheSpecial Committee will administer the Program on behalf of the Company.

 

Eligible employees under the Program shall be entitled to receive alump-sum cash payment either on, or as soon as administratively practicablefollowing, the Effective Time of Settlement. Notwithstanding the Program, the Company may terminate an employee’semployment at any time.  However, if anemployee’s employment with the Company is terminated by the Company or by theemployee, in certain circumstances, the employee may nonetheless be entitled toreceive a retention payment.  Retentionpayment amounts that are forfeited or cancelled pursuant to the terms of theProgram may be redistributed and paid to other eligible employees of theCompany.

 

The Special Committee determined the amounts of the retention awards tovarious employees under the Program, based on many factors, including, but notlimited to, the job description and its importance to the Company in maintainingoperations during the affected time period; the duties and responsibilities ofeach employee in his or her job position; the ability of each employee toperform his or her job; and the length of time of employment of each employee.  The Company has no obligation to pay anyretention award to any employee unless the Settlement Agreement receives final,non-appealable approval by the Louisiana Court and the settlement proceedsthereunder are distributed pursuant to the terms of the Settlement Agreement.

 

The Program and the initial form of Retention AwardAgreement are attached hereto as Exhibits 10.2 and 10.3, respectively, and areincorporated herein by reference.

 

**Item6.   Exhibits**

 

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

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                          |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                               |
| 10.1                |       | Second Note  Modification Agreement, dated as of January 31, 2006, by and between 3CI  Complete Compliance Corporation and Waste Systems, Inc. |
| 10.2                |       | 3CI Employee  Retention Program.                                                                                                                         |
| 10.3                |       | Form of  Retention Award Agreement, dated as of December 31, 2005.                                                                             |
| 31.1                |       | Certification  of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 302 of                       |

 

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|   |   | 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. |

 

16

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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: February 10, 2006 | 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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