**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

----

 

 

**FORM10-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  March 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**

 

**3CICOMPLETE COMPLIANCE CORPORATION**

(Exact name of registrantas specified 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 principalexecutive offices)

(Zip Code)

 

**(972)375-0006**

(Registrant’s telephonenumber, including area code)

 

----

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

YESý  NOo

 

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 or anyamendment 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 May 10, 2005, was 9,739,611.

 

 

----

 

**FORWARD-LOOKINGSTATEMENTS**

 

THIS QUARTERLY REPORT CONTAINSFORWARD-LOOKING STATEMENTS CONCERNING THE COMPANY’S BUSINESS ANDOPERATIONS.  ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTEDIN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, THESE EXPECTATIONS AND THERELATED STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES, AND OTHER FACTORS THATCOULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THESE RISKS, UNCERTAINTIES, AND OTHER FACTORS INCLUDE, BUT ARE NOT LIMITED TO,ADVERSE WEATHER CONDITIONS, FLUCTUATIONS IN CUSTOMER DEMAND, COMPETITIVEACTIVITY AND PRICING PRESSURE AND GENERAL ECONOMIC CONDITIONS AFFECTING THEBIO-MEDICAL WASTE DISPOSAL INDUSTRY, AS WELL AS OTHER RISKS DETAILED IN THECOMPANY’S FILINGS WITH THE SEC.  THE COMPANY EXPRESSLY DISCLAIMS ANYOBLIGATIONS TO RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO THESEFORWARD-LOOKING STATEMENTS TO REFLECT ANY CHANGES IN THE COMPANY’SEXPECTATIONS.

 

2

----

 

**3CI COMPLETE COMPLIANCE CORPORATION**

 

**I N D E X**

*** ***
| **PART I.**    | **FINANCIAL INFORMATION**                                   |
|----------------|-------------------------------------------------------------|
|           |                                                        |
| Item 1.        | Financial Statements                                        |
|           |                                                        |
|           | Balance Sheets as of                                        |
|           | March 31, 2005 and September 30, 2004                       |
|           |                                                        |
|           | Statements of Operations for the three and  six months      |
|           | ended March 31, 2005 and 2004                               |
|           |                                                        |
|           | Statements of Cash Flows for the                            |
|           | six months ended March 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 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** |
|           |

 

3

----

 

PART I - FINANCIAL INFORMATION

 

**Item 1. Financial Statements**

**3CICOMPLETE COMPLIANCE CORPORATION**

**BALANCE****SHEETS**

** **
| ** **                                                                                                                          | ** ** | **March 31,**   | ** **    | **September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|---------------|-------------------|------------|
| ** **                                                                                                                          | ** ** | **2005**        | ** **    | **2004**          | ** ** |
| ** **                                                                                                                          | ** ** | **(unaudited)** | ** **    | **(Audited)**     | ** ** |
| **ASSETS**                                                                                                                          |       |            |          |              |       |
| ** **                                                                                                                          | ** ** | ** **      | ** **    | ** **        | ** ** |
| **Current  Assets:**                                                                                                                | ** ** | ** **      | ** **    | ** **        | ** ** |
| ** **                                                                                                                          | ** ** | ** **      | ** **    | ** **        | ** ** |
| **Cash  and cash equivalents**                                                                                                      | ** ** | **$**           | **563,346**   | ** **        | **$**      | **710,353** | ** ** |
| **Accounts  receivable, net allowances of $87,476 and $218,819 at March 31, 2005 and  September 30, 2004, respectively**            | ** ** | **2,435,765**   | ** **    | **2,765,159**     | ** ** |
| **Inventory**                                                                                                                       | ** ** | **121,677**     | ** **    | **69,916**        | ** ** |
| **Prepaid  expenses**                                                                                                               | ** ** | **774,766**     | ** **    | **480,837**       | ** ** |
| **Deferred  income taxes**                                                                                                          | ** ** | **111,706**     | ** **    | **127,955**       | ** ** |
| **Other  current assets**                                                                                                           | ** ** | **4,575**       | ** **    | **70,800**        | ** ** |
| **Total  current assets**                                                                                                           | ** ** | **4,011,835**   | ** **    | **4,225,020**     | ** ** |
| ** **                                                                                                                          | ** ** | ** **      | ** **    | ** **        | ** ** |
| **Property,  plant and equipment, at cost**                                                                                         | ** ** | **6,080,067**   | ** **    | **6,787,197**     | ** ** |
| **Accumulated  depreciation**                                                                                                       | ** ** | **(4,160,041**  | **)**         | **(4,820,503**    | **)**      |
| **Net  property, plant and equipment**                                                                                              | ** ** | **1,920,026**   | ** **    | **1,966,694**     | ** ** |
| ** **                                                                                                                          | ** ** | ** **      | ** **    | ** **        | ** ** |
| **Excess  of cost over net assets acquired, net of accumulated amortization of $547,748  at March 31, 2005 and September 30, 2004** | ** ** | **262,243**     | ** **    | **262,243**       | ** ** |
| ** **                                                                                                                          | ** ** | ** **      | ** **    | ** **        | ** ** |
| **Intangibles,  net of accumulated amortization of $314,024 and $291,884 at March 31, 2005  and September 31, 2004**                | ** ** | **260,676**     | ** **    | **282,816**       | ** ** |
| ** **                                                                                                                          | ** ** | ** **      | ** **    | ** **        | ** ** |
| **Deferred  income taxes**                                                                                                          | ** ** | **3,219,027**   | ** **    | **3,220,484**     | ** ** |
| ** **                                                                                                                          | ** ** | ** **      | ** **    | ** **        | ** ** |
| **Other  assets**                                                                                                                   | ** ** | **78,922**      | ** **    | **78,923**        | ** ** |
| **Total  assets**                                                                                                                   | ** ** | **$**           | **9,752,729** | ** **        | **$**      | **10,036,180** | ** ** |
| ** **                                                                                                                          | ** ** | ** **      | ** **    | ** **        | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                       | ** ** | ** **      | ** **    | ** **        | ** ** |
| **Current  Liabilities:**                                                                                                           | ** ** | ** **      | ** **    | ** **        | ** ** |
| **Notes  payable**                                                                                                                  | ** ** | **$**           | **678,710**   | ** **        | **$**      | **242,729** | ** ** |
| **Accounts  payable**                                                                                                               | ** ** | **264,935**     | ** **    | **489,157**       | ** ** |
| **Accounts  payable, affiliated companies**                                                                                         | ** ** | **295,432**     | ** **    | **693,502**       | ** ** |
| **Accrued  liabilities**                                                                                                            | ** ** | **812,804**     | ** **    | **820,359**       | ** ** |
| **Deferred  Revenue**                                                                                                               | ** ** | **4,393**       | ** **    | **329**           | ** ** |
| **Note  payable majority shareholder, current portion**                                                                             | ** ** | **238,092**     | ** **    | **246,400**       | ** ** |
| **Total  current liabilities**                                                                                                      | ** ** | **2,294,366**   | ** **    | **2,492,476**     | ** ** |
| ** **                                                                                                                          | ** ** | ** **      | ** **    | ** **        | ** ** |
| **Note  payable majority shareholder, net of current portion**                                                                      | ** ** | **946,567**     | ** **    | **1,056,717**     | ** ** |
| **Note  payable other, net of current portion**                                                                                     | ** ** | **28,102**      | ** **    | **—**        | ** ** |
| ** **                                                                                                                          | ** ** | ** **      | ** **    | ** **        | ** ** |
| **Total  liabilities**                                                                                                              | ** ** | **3,269,035**   | ** **    | **3,549,193**     | ** ** |
| ** **                                                                                                                          | ** ** | ** **      | ** **    | ** **        | ** ** |
| **Shareholders’  Equity:**                                                                                                     | ** ** | ** **      | ** **    | ** **        | ** ** |
| **Common  stock, $0.01 par value, authorized 40,450,000 shares; Issued 9,774,611**                                                  | ** ** | **97,742**      | ** **    | **97,742**        | ** ** |
| **Common  stock to be issued (Note 5)**                                                                                             | ** ** | **7,750,000**   | ** **    | **7,750,000**     | ** ** |
| **Less  cost of treasury stock 34,500 shares**                                                                                      | ** ** | **(51,595**     | **)**         | **(51,595**       | **)**      |
| **Additional  paid-in capital - common stock**                                                                                      | ** ** | **20,519,861**  | ** **    | **20,519,861**    | ** ** |
| **Accumulated  deficit**                                                                                                            | ** ** | **(21,832,314** | **)**         | **(21,829,021**   | **)**      |
| **Total  shareholders’ equity**                                                                                                | ** ** | **6,483,694**   | ** **    | **6,486,987**     | ** ** |
| **Total  liabilities and shareholders’ equity**                                                                                | ** ** | **$**           | **9,752,729** | ** **        | **$**      | **10,036,180** | ** ** |
| ** **                                                                                                                          | ** ** | ** **      | ** **    | ** **        | ** ** |
| **The accompanying notes are an integral part of  these financial statements.**                                                     |

 

4

----

 

**3CICOMPLETE COMPLIANCE CORPORATION**

**STATEMENTS OF OPERATION**

**(UNAUDITED)**
| ** **                                                                      | ** ** | **For the three months  ended March 31,** | ** **    | **For the three months  ended March 31,** | ** ** | **For the six months ended March 31,** | ** ** | **For the six months ended March 31,** | ** **    |
|---------------------------------------------------------------------------------|------------|-------------------------------------------|---------------|-------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|---------------|
| ** **                                                                      | ** ** | **2005**                                  | ** **    | **2004**                                  | ** ** | **2005**                               | ** ** | **2004**                               | ** **    |
| ** **                                                                      | ** ** | ** **                                | ** **    | ** **                                | ** ** | ** **                             | ** ** | ** **                             | ** **    |
| **Revenues**                                                                    | ** ** | **$**                                     | **3,070,762** | ** **                                | **$**      | **3,276,258**                          | ** ** | **$**                                  | **6,228,134** | ** ** | **$** | **6,635,900** | ** ** |
| **Expenses:**                                                                   | ** ** | ** **                                | ** **    | ** **                                | ** ** | ** **                             | ** ** | ** **                             | ** **    |
| **Cost of  services**                                                           | ** ** | **1,869,633**                             | ** **    | **2,011,040**                             | ** ** | **3,739,187**                          | ** ** | **4,135,260**                          | ** **    |
| **Depreciation  and amortization**                                              | ** ** | **110,080**                               | ** **    | **119,022**                               | ** ** | **217,373**                            | ** ** | **245,097**                            | ** **    |
| **Selling,  general and administrative expenses**                               | ** ** | **1,057,810**                             | ** **    | **1,115,452**                             | ** ** | **2,126,098**                          | ** ** | **2,331,459**                          | ** **    |
| **Interest  expense**                                                           | ** ** | **22,157**                                | ** **    | **140,153**                               | ** ** | **37,759**                             | ** ** | **162,539**                            | ** **    |
| **Other  expense-net**                                                          | ** ** | **18,612**                                | ** **    | **80,474**                                | ** ** | **93,303**                             | ** ** | **142,370**                            | ** **    |
| **Income  (loss) before income taxes**                                          | ** ** | **(7,530**                                | **)**         | **(189,883**                              | **)**      | **14,414**                             | ** ** | **(380,825**                           | **)**         |
| ** **                                                                      | ** ** | ** **                                | ** **    | ** **                                | ** ** | ** **                             | ** ** | ** **                             | ** **    |
| **Income  tax (expense) benefit**                                               | ** ** | **(4,267**                                | **)**         | **73,105**                                | ** ** | **(17,707**                            | **)**      | **146,942**                            | ** **    |
| ** **                                                                      | ** ** | ** **                                | ** **    | ** **                                | ** ** | ** **                             | ** ** | ** **                             | ** **    |
| **Net  income (loss)**                                                          | ** ** | **$**                                     | **(11,797**   | **)**                                     | **$**      | **(116,778**                           | **)**      | **$**                                  | **(3,293**    | **)** | **$** | **(233,883** | **)** |
| ** **                                                                      | ** ** | ** **                                | ** **    | ** **                                | ** ** | ** **                             | ** ** | ** **                             | ** **    |
| **Basic  earnings per share:**                                                  | ** ** | ** **                                | ** **    | ** **                                | ** ** | ** **                             | ** ** | ** **                             | ** **    |
| **Basic  net income (loss) per share**                                          | ** ** | **$**                                     | **(0.00**     | **)**                                     | **$**      | **(0.01**                              | **)**      | **$**                                  | **(0.00**     | **)** | **$** | **(0.01** | **)** |
| ** **                                                                      | ** ** | ** **                                | ** **    | ** **                                | ** ** | ** **                             | ** ** | ** **                             | ** **    |
| **Diluted  earnings per share:**                                                | ** ** | ** **                                | ** **    | ** **                                | ** ** | ** **                             | ** ** | ** **                             | ** **    |
| **Diluted  net income (loss) per share**                                        | ** ** | **$**                                     | **(0.00**     | **)**                                     | **$**      | **(0.01**                              | **)**      | **$**                                  | **(0.00**     | **)** | **$** | **(0.01** | **)** |
| ** **                                                                      | ** ** | ** **                                | ** **    | ** **                                | ** ** | ** **                             | ** ** | ** **                             | ** **    |
| ** **                                                                      | ** ** | ** **                                | ** **    | ** **                                | ** ** | ** **                             | ** ** | ** **                             | ** **    |
| ** **                                                                      | ** ** | ** **                                | ** **    | ** **                                | ** ** | ** **                             | ** ** | ** **                             | ** **    |
| **The accompanying notes are an integral part of  these financial statements.** |

 

5

----

 

**3CICOMPLETE COMPLIANCE CORPORATION**

**STATEMENT OF CASH FLOWS**

**(UNAUDITED)**

** **
| ** **                                                                                    | ** ** | **For the six months  ended March 31,** | ** **  | **For the six months  ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------|-------------|-----------------------------------------|------------|
| ** **                                                                                    | ** ** | **2005**                                | ** **  | **2004**                                | ** ** |
| ** **                                                                                    | ** ** | ** **                              | ** **  | ** **                              | ** ** |
| **Cash  flow from operating activities:**                                                     | ** ** | ** **                              | ** **  | ** **                              | ** ** |
| **Net  income (loss)**                                                                        | ** ** | **$**                                   | **(3,293**  | **)**                                   | **$**      | **(233,883** | **)** |
| **Adjustments  to reconcile net income (loss) to net cash provided by operating activities:** | ** ** | ** **                              | ** **  | ** **                              | ** ** |
| ** **                                                                                    | ** ** | ** **                              | ** **  | ** **                              | ** ** |
| **(Gain)Loss  on disposal of fixed assets**                                                   | ** ** | **(10,944**                             | **)**       | **4,921**                               | ** ** |
| **Depreciation  and amortization**                                                            | ** ** | **217,373**                             | ** **  | **245,097**                             | ** ** |
| **Deferred  taxes**                                                                           | ** ** | **17,707**                              | ** **  | **(146,942**                            | **)**      |
| **Changes  in operating assets and liabilities:**                                             | ** ** | ** **                              | ** **  | ** **                              | ** ** |
| **Decrease  in accounts receivable, net**                                                     | ** ** | **324,814**                             | ** **  | **424,051**                             | ** ** |
| **(Decrease)Increase  in inventory**                                                          | ** ** | **(51,761**                             | **)**       | **12,240**                              | ** ** |
| **Increase  in prepaid expenses**                                                             | ** ** | **(293,929**                            | **)**       | **(514,400**                            | **)**      |
| **Decrease  in other current assets and other assets**                                        | ** ** | **70,800**                              | ** **  | **10,688**                              | ** ** |
| **(Decrease)Increase  in accounts payable**                                                   | ** ** | **(224,221**                            | **)**       | **42,764**                              | ** ** |
| **Decrease  in accounts payable, affiliated companies**                                       | ** ** | **(398,070**                            | **)**       | **(208,746**                            | **)**      |
| **(Decrease)Increase  in accrued liabilities**                                                | ** ** | **(7,552**                              | **)**       | **274,799**                             | ** ** |
| **Increase  in deferred revenue**                                                             | ** ** | **4,064**                               | ** **  | **—**                              | ** ** |
| ** **                                                                                    | ** ** | ** **                              | ** **  | ** **                              | ** ** |
| **Total  adjustments to net income**                                                          | ** ** | **(355,986**                            | **)**       | **144,472**                             | ** ** |
| **Net  cash used by operating activities**                                                    | ** ** | **(355,012**                            | **)**       | **(89,411**                             | **)**      |
| ** **                                                                                    | ** ** | ** **                              | ** **  | ** **                              | ** ** |
| **Cash  flow from investing activities:**                                                     | ** ** | ** **                              | ** **  | ** **                              | ** ** |
| **Proceeds  from sale of property, plant and equipment**                                      | ** ** | **39,200**                              | ** **  | **48,201**                              | ** ** |
| **Purchase  of property, plant and equipment**                                                | ** ** | **(176,820**                            | **)**       | **(134,183**                            | **)**      |
| **Net  cash used in investing activities**                                                    | ** ** | **(137,620**                            | **)**       | **(85,982**                             | **)**      |
| ** **                                                                                    | ** ** | ** **                              | ** **  | ** **                              | ** ** |
| **Cash  flow from financing activities:**                                                     | ** ** | ** **                              | ** **  | ** **                              | ** ** |
| **Increase(Decrease)  of notes payable, other**                                               | ** ** | **464,084**                             | ** **  | **595,315**                             | ** ** |
| **Reduction  of note payable to majority shareholders**                                       | ** ** | **(118,459**                            | **)**       | **(556,160**                            | **)**      |
| **Net  cash provided in financing activities**                                                | ** ** | **345,625**                             | ** **  | **39,155**                              | ** ** |
| ** **                                                                                    | ** ** | ** **                              | ** **  | ** **                              | ** ** |
| **Net  (decrease)increase in cash and cash equivalents**                                      | ** ** | **(147,007**                            | **)**       | **(136,238**                            | **)**      |
| ** **                                                                                    | ** ** | ** **                              | ** **  | ** **                              | ** ** |
| **Cash  and cash equivalents, beginning of period**                                           | ** ** | **710,353**                             | ** **  | **1,057,054**                           | ** ** |
| ** **                                                                                    | ** ** | ** **                              | ** **  | ** **                              | ** ** |
| **Cash  and cash equivalents, end of period**                                                 | ** ** | **$**                                   | **563,346** | ** **                              | **$**      | **920,816** | ** ** |
| ** **                                                                                    | ** ** | ** **                              | ** **  | ** **                              | ** ** |
| ** **                                                                                    | ** ** | ** **                              | ** **  | ** **                              | ** ** |
| **The  accompanying notes are an integral part of these financial statements.**               |

 

6

----

 

**NOTE1****—DESCRIPTION OF BUSINESS**

 

**Organization and Basis ofPresentation**

 

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, after approval by the then properlyconstituted 3CI Board of Directors (the “Board”), Stericycle Inc., aDelaware corporation (“Stericycle”), acquired 100% of the common stock of WasteSystems, Inc. (“WSI”) for $10 million. As a result of thetransaction, WSI became a wholly-owned subsidiary of Stericycle. Stericycledirectly and indirectly through WSI owns 67.5% or 6,578,504 shares of theCompany’s outstanding common stock, par value $0.01 per share (“Common Stock”),and 100% of the shares of Common Stock to be issued by the Company as a resultof the conversion of the Company’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 toForm 10-Q and Article 10 of Regulation S-X.  Accordingly, they do notinclude all 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 six-month period ended March 31,2005 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 the yearended 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  March 31,  2005** | ** ** | **Three  months ended  March 31,  2004** | ** ** | **Six  months ended  March 31,  2005** | ** ** | **Six  months ended  March 31,  2004** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
|                                                              |       |                                     |       |                                     |       |                                   |       |                                   |       |
| Numerator:                                                        |       |                                     |       |                                     |       |                                   |       |                                   |       |
|                                                              |       |                                     |       |                                     |       |                                   |       |                                   |       |
| Net income  (loss)                                                |       | $                                        | (11,797    | )                                        | $          | (116,778                               | )          | $                                      | (3,293     | ) | $ | (233,883 | ) |
| 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                                                           |       | —                                   |       | —                                   |       | —                                 |       | —                                 |       |
| Warrants                                                          |       | —                                   |       | —                                   |       | —                                 |       | —                                 |       |
| Denominator for  diluted earnings per share                       |       | 17,489,611                               |       | 17,489,611                               |       | 17,489,611                             |       | 17,489,611                             |       |
|                                                              |       |                                     |       |                                     |       |                                   |       |                                   |       |
| Basic net income  (loss) per share                                |       | $                                        | (0.00      | )                                        | $          | (0.01                                  | )          | $                                      | (0.00      | ) | $ | (0.01 | ) |
| Diluted net  income (loss) per common share                       |       | $                                        | (0.00      | )                                        | $          | (0.01                                  | )          | $                                      | (0.00      | ) | $ | (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 were not included in the March 31, 2005 computations asthey 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 $1,184,659 as of March 31, 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 Note is the prime lending rate (5.75% as of March 31, 2005), as suchrate may change from time to time, published under “Money Rates” in*The Wall Street Journal* (SouthwesternEdition), not to exceed 13%.

 

7

----

 

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 the Company’sassets.  The Note requires the Company to achieve a minimum level ofEBITDA of $500,000, after excluding (i) certain expenses associated with thedispute regarding 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 March 31, 2005,the Company was in compliance with the required level of EBITDA under the Note.

 

Total interest expense for all debt was $22,157 and $140,153 for thesix months ended March 31, 2005 and March 31, 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 toSeptember 30, 1998. All net operating losses created afterSeptember 30, 1998 are not subject to any limitations and are available tobe used for 20 years after they are produced. As such, the deferred taxasset and the related valuation allowance for net operating loss carry forwardswere reduced to account for the portion of the net operating loss carryforwards the Company will not be able to 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 onApril 6, 2003. The Company has not issued any shares of Common Stock andhas not recorded any increase in the outstanding Common Stock related to theconversion of 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%.

 

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

 

8

----

 

no more than 7,750,000 shares of Common Stock to WSI as ofApril 6, 2003. WSI subsequently filed a motion to have the Court declarethat the Preferred Stock is convertible into 36,704,761 shares of CommonStock.  The parties are currently conducting discovery in this proceeding.

 

**Preferred Stock Dividends**

 

There are unanimous written consents of the Board declaring dividendson the Series B Preferred Stock and Series C Preferred Stock totaling$161,158, $637,623, $907,387 and $497,550 for each of the years 2003, 2002,2001 and 2000, respectively.  Each of the resolutions for these dividendscalled for payment in cash from funds legally available for the payment ofdividends, as and when the Board may direct by further resolution. However,none of these unanimous consents are executed by all of the individuals whowere members of the Board at the date of such unanimous consents, and none ofthe dividends have been paid.  There wereno undeclared dividends as of March 31, 2005 and March 31, 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) the Preferred Stock Dividends cannot now be lawfully declared andpaid on the Preferred Stock. As a consequence of these determinations, theCompany reversed the Preferred Stock Dividend entries on the Company’s booksand records and restated its financial statements for the years ended September30, 2000, 2001 and 2002.  These restatements reflect a removal of (a)dividends payable on the Preferred Stock as a current liability on the Company’sbalance sheets 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—NOTE PAYABLE**

 

During the quarter ended March 31, 2005 the Company financed its annualinsurance premium over a 12-month period at a 5.0% per annum interest rate.

 

**NOTE 7—COMMITMENTS AND CONTINGENCIES**

 

See Note 5 of the Notes to the Financial Statements above for adiscussion of certain contingent liabilities of the Company related to thePreferred Stock.

 

The Company is a plaintiff jointly with Larry F. Robb, individually, onbehalf of a class comprised of the Company’s minority stockholders, in materiallitigation in the First Judicial District Court in Shreveport, Louisiana,against Stericycle and the four affiliates of Stericycle who are or weredirectors 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 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 Discussion and Analysis of Financial Condition andResults 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

 

9

----

 

from WSI and internally generated funds. Currently, the Company’s onlyborrowed indebtedness consists of money borrowed from WSI under the Note andannual insurance premium financing.  As of March 31, 2005, September 30,2004, and March 31, 2004, the outstanding balances under the WSI Note were inthe aggregate principal amounts of approximately $1,184,659, $1,303,117 and $1,869,485,respectively.   See Liquidity and Capital Resources herein and Note3.

 

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  March 31,** | ** ** | **Six Months  Ended  March 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **2005**                           | ** ** | **2004**                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                          |       |                               |       |                             |       |   |   |   |   |
| Revenues                                      |       | $                                  | 3,071      |                             | $          | 3,276 |   | $ | 6,228 |   | $ | 6,636 |   |
| Cost of services                              |       | 1,870                              |       | 2,011                            |       | 3,739 |   | 4,135 |   |
| Depreciation and  amortization                |       | 110                                |       | 119                              |       | 217 |   | 245 |   |
| Selling, general  and administrative expenses |       | 1,058                              |       | 1,115                            |       | 2,126 |   | 2,332 |   |
| (Loss) income  from operations                |       | 33                                 |       | 31                               |       | 146 |   | (76 | ) |
| Interest expense                              |       | 22                                 |       | 140                              |       | 38 |   | 163 |   |
| Other expense,  net                           |       | 19                                 |       | 81                               |       | 93 |   | 142 |   |
| Income tax  expense (benefit)                 |       | 4                                  |       | (73                              | )          | 18 |   | (147 | ) |
| Net (Loss)  Income                            |       | $                                  | (12        | )                                | $          | (117 | ) | $ | (3 | ) | $ | (234 | ) |
| Depreciation and  amortization                |       | 110                                |       | 140                              |       | 217 |   | 245 |   |
| Interest  expense, net                        |       | 22                                 |       | 119                              |       | 38 |   | 163 |   |
| Income tax  expense (benefit)                 |       | 4                                  |       | (73                              | )          | 18 |   | (147 | ) |
| EBITDA (1)                                    |       | 124                                |       | 69                               |       | 270 |   | 27 |   |

----

(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 March 31, 2005compared to three months ended March 31, 2004:**

 

***Revenues*** decreased by $205,496, or 6.3%, to$3,070,762 during the three-month period ended March 31, 2005, from $3,276,258for the three month period ended March 31, 2004. This decrease is primarilyrelated to a reduction in the volume of waste handled.  Substantially allof this reduction in volume was attributable to the Company’s efforts to focuson small quantity generators which provide higher margins at lower volumeswhile reducing the focus on less profitable larger quantity generators.

 

***Cost of services*** decreased by $141,407, or 7.0%, to$1,869,633 during the three months ended March 31, 2005, compared to $2,011,040for the three-month period ended March 31, 2004.  This decrease wasprimarily attributable to a decrease in processing costs.  Cost ofservices as a percentage of revenues decreased to 60.9% compared to 61.4%during the three months ended March 31, 2005 and March 31, 2004respectively.  This percentage decrease was primarily attributable to adecrease in processing costs.

 

***Depreciation andamortization***expense for the three months ended March 31, 2005 decreased $8,942 or 7.5% to$110,080 compared to $119,022 for the three months ended March 31, 2004. Thisdecrease was primarily due to assets still employed in the Company’s operationsbeing fully depreciated.

 

***Selling, generaland administrative*** expenses for the three months ended March 31, 2005 decreased 5.2% or$57,642 to $1,057,810 from $1,115,452 during the three months ended March 31,2004.  Sales, general and administrative expenses increased as apercentage of revenue to 34.4% for the three months ended March 31, 2005, ascompared to 34.0% for the three months ended March 31, 2004.

 

***Interest expense*** for the three months ended March 31,2005 decreased by $117,996 or 84.2%, to $22,157 from $140,153 during the threemonths ended March 31, 2004.  This decrease was primarily due to penaltiespaid and accrued due to the Company’s failure to meet the EBITDA covenant underthe Note at December 31, 2003 and March 31, 2004, which was 3% of theoutstanding principal balance of the Note.

 

10

----

 

***Earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”)*** for the quarter ended March 31, 2005,totaled $124,707 or 4.1% of revenue compared to $69,292 or 2.1% of revenue forthe quarter ended March 31, 2004.  The difference was primarily reflectiveof better gross margins, lower sales, general and administrative expense, andlower other expenses.

 

**Six months ended March 31, 2005 comparedto six months ended March 31, 2004:**

 

***Revenues*** decreased by $407,766 or 6.1%, to$6,228,134 during the six months ended March 31, 2005, from $6,635,900 for thesix month period ended March 31, 2004. This decrease is primarily related to areduction in the volume of waste handled.  Substantially all of thisreduction in volume was attributable to the Company’s efforts to focus on smallquantity generators which provide higher margins at lower volumes whilereducing the focus on less profitable larger quantity generators.

 

***Cost of services*** decreased $396,073, or 9.6%, to$3,739,187, during the six months ended March 31, 2005, compared to $4,135,260for the six month period ended March 31, 2004.  This decrease wasprimarily attributable to a decrease in processing costs and a decrease intransportation costs due to increased route efficiency.  Cost of revenuesas a percentage of revenues decreased to 60.0% during the six months endedMarch 31, 2005, as compared to 62.3% during the six months ended March 31,2004.

 

***Depreciation andamortization***expense for the six months ended March 31, 2005 decreased $27,724 or 11.3% to$217,373 compared to $245,097 for the six months ended March 31, 2004. Thisdecrease was primarily due to assets still employed in the Company’s operationsbeing fully depreciated.

 

***Selling, generaland administrative*** expenses for the six months ended March 31, 2005 decreased 8.8% or$205,361 to $2,126,098 from $2,331,459 during the six months ended March 31,2005.  Sales, general and administrative expenses decreased as apercentage of revenue to 34.1% for the six months ended March 31, 2005 ascompared to 35.1% for the six months ended March 31, 2004.

 

***Interest expense*** decreased by $124,780 or 76.8% to$37,759 during the six months ended March 31, 2005 as compared to $162,539during the six months ended March 31, 2004.  This decrease was due to thepenalties paid and accrued due to the Company’s failure to meet the EBITDAcovenant under the Note at December 31, 2003 and March 31, 2004, which was 3%of the outstanding principal balance of the Note.

 

***Earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”)*** totaled $269,546 or 4.3% of revenue forthe six months ended March 31, 2005 compared to $26,811 or 0.4% of revenue forthe six months ended March 31, 2004.  The difference of $242,735 wasprimarily reflective of better gross margins and lower expenses.

 

**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 and annual insurancepremium financing.

 

The Note had an outstanding principal balance of $1,184,659 as of March31, 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 primelending rate (5.75% as of March 31, 2005), as such rate may change from time totime, published under “Money Rates” in*TheWall 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) certain expensesassociated 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 March 31, 2005, the Company was in compliance withthe 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 obtain a credit facility from anysource other than its existing facility with WSI, and does not know whether itcould or could not obtain a credit facility with an independent third-partylender, but believes that if such a facility was available, it could be athigher interest rates and could require additional operating and financingrestrictions than those under the Note.

 

During 2003 and 2004, the Company incurred material legal expensessubstantially related to its disputes with Stericycle and WSI regarding thecorrect conversion rate of the Preferred Stock and an investigation by theSpecial Committee into allegations made by certain minority stockholders of theCompany in the Louisiana Suit. During the 2004 fiscal year, these legalexpenses were in excess of $1 million. In December 2004, at thedirection of the Special Committee, the Company joined with the minoritystockholders of the Company as a plaintiff in the Louisiana Suit, which isscheduled for trial in the Fall of 2005. Although the Company cannot predictwhat its financial investment will be related to the Louisiana Suit, theCompany believes that prosecution of the Louisiana Suit will

 

11

----

 

continue to require a commitment of its financial resources and thatthe amount of this commitment may be material. See Part II, Item 1, LegalProceedings.

 

During 2004 and 2005, the Company’s transportation fuel costs haveincreased significantly. Although the Company is considering various ways tomitigate the effect of this elevated fuel cost on its operations, the expenseof high fuel cost in the 2005 fiscal year could have an adverse impact on theCompany’s financial performance.

 

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 toSeptember 30, 1998. All net operating losses created afterSeptember 30, 1998 are not subject to any limitations and are available tobe used for 20 years after they are produced. As such, the deferred taxasset and the related valuation allowance for net operating loss carry forwardswere reduced to account for the portion of the net operating loss carryforwards the Company will not be able to 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 approximately $3,484,000was reflected in the fourth quarter of 2003. The amount of net deferred taxassets estimated to be recoverable was based upon the Company’s assessment ofthe likelihood of near-term operating income.

 

The Company had net working capital, exclusive of the Note, on March31, 2005 of $1,958,376, compared to $1,978,944 on September 30, 2004, which wasa decrease of approximately 1%, or $20,568.

 

Net cash used by operating activities was $355,012 during the six-monthperiod ended March 31, 2005, compared to $89,411 in cash used by operatingactivities during the six-month period ended March 31, 2004.  The increasewas due primarily to a decrease in accounts payable.

 

Net cash used in investing activities for the six months ended March31, 2005, was $137,620 compared to $85,982 for the same period in 2004. The $51,638 increase reflected increased investment in equipment.

 

Net cash provided from financing activities was $345,625 for thesix-month period ended March 31, 2005, compared to $39,155 during the six-monthperiod ended March 31, 2004.  The $306,470 increase was primarily due tosmaller principal payments by the Company on the Note.

 

**Item3.   Qualitative Disclosure aboutMarket 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 $11,846 over 12months.  The Company does not utilize derivative financial instruments tomitigate the risks of changes in interest rates.

 

**Item4.   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 and forms ofthe Securities and Exchange Commission.  This information is accumulatedand communicated to the Company’s management including the Chief ExecutiveOfficer and the Chief Financial Officer, as appropriate, to allow timelydecisions 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 controlssubsequent to the date of the evaluation referenced in the foregoing paragraph.

 

12

----

 

**PART II****- OTHER INFORMATION**

 

**Item1****.   Legal Proceedings**

 

**Louisiana Minority StockholderLitigation**

 

On June 20, 2002, Larry F. Robb, individually, on behalf of aclass comprised of the Company’s minority stockholders, and derivatively onbehalf of the Company (collectively, the “Louisiana Plaintiffs”), filed causeno. 467704-A,*Robb et al. v.Stericycle, Inc. et al.* (the “Louisiana Suit”), in the FirstJudicial District Court, Caddo Parish, Louisiana (the “Court”). In theLouisiana Suit, the Louisiana Plaintiffs originally asserted numerous claims ofminority stockholder oppression, breach of fiduciary duty and unjust enrichmentagainst WSI, Stericycle, the four affiliates of Stericycle who are or weredirectors of 3CI (the “Stericycle Affiliates”) and the Company’s President andChief Executive Officer.

 

After conducting an investigation into the facts, arguments and othermatters that in its view are related to the issues raised in the LouisianaSuit, a Special Committee of the Board, composed of the independent directorson the Board determined that the claims against Stericycle, WSI and theStericycle Affiliates (the “Louisiana Defendants”) in the Louisiana Suit havemerit and warrant prosecution by the Company.

 

In December 2004, the Company and the Louisiana Plaintiffs filed ajoint petition (the “Joint Petition”), which amended and superseded the Plaintiffs’First Amended Petition.  Pursuant to theJoint Petition (i) the Company has realigned itself as a plaintiff in theLouisiana Suit and joins on its own behalf in the prosecution of the claimsasserted by the Louisiana Plaintiffs in the Louisiana Suit against Stericycle,WSI and the Stericycle Affiliates, and (ii) the Company’s President andChief Executive Officer was non-suited.

 

In connection with the Louisiana Suit, the Company entered into anAgreement for Joint Prosecution (the “Joint Prosecution Agreement”) with theLouisiana Plaintiffs and The Wynne Law Firm, legal counsel to the LouisianaPlaintiffs in the Louisiana Suit. Pursuant to the Joint Prosecution Agreement, the Company and theLouisiana Plaintiffs agreed to jointly prosecute the claims asserted in theLouisiana Suit and to seek monetary damages and equitable remedies on behalf ofboth the Company and the Louisiana Plaintiffs. By its terms, the Joint Prosecution Agreement was not to become effectiveuntil the date, if ever, that the Court approved all of the following:(i) certification of the Louisiana Plaintiffs’ claims as a class action;(ii) The Wynne Law Firm as class counsel to the Louisiana Plaintiffs; and(iii) the Joint Prosecution Agreement. On February 10, 2005, the Court (i) granted class certification, and(ii) approved The Wynne Law Firm as class counsel, and on April 21, 2005, theCourt formally approved the Joint Prosecution Agreement. The Joint ProsecutionAgreement became effective on April 21, 2005.

 

On January 24, 2005, the Stericycle Affiliates filed Defendants’Amended and Restated Answer, Affirmative Defenses, Third-Party Petition, andCounterclaims (the “Counterclaim”) against the Company and the following Third-PartyDefendants:  Otley L. Smith III; John R.Weaver, a former Chief Financial Officer of the Company;  Robert M.Waller, a former director of the Company; Curtis W. Crane, a former ChiefFinancial Officer of the Company; Charles D. Crochet, a former director andChief Executive Officer of the Company; David J. Schoonmaker, a former directorof the Company; Stephen B. Koenigsberg; and Kevin J. McManus.  In theCounterclaim, the Stericycle Affiliates asserted contribution and indemnityclaims against the Company and the Third-Party Defendants and breaches offiduciary duties and facilitation or causation of insider trading against themembers of the Special Committee, individually.

 

On April 6, 2005 the Stericycle Affiliates filed a motion for judgmenton the pleadings, asserting that, with one exception, the claims asserted inthe Joint Petition belong to the Company and that the class does not havestanding to pursue those claims.  Ahearing on this motion is set for May 16, 2005.

 

On April 21, 2005, ahearing was held on the Counterclaim. The Court found that the Stericycle Affiliates had failedto properly state claims for contribution or indemnity against the Companyor the Third-Party Defendants.  The Court granted the StericycleAffiliates until May 6, 2005 to file an amended Counterclaim repleading theirclaims.  In addition, the Court stayedthe claims asserted against the Special Committee members untilfurther order of the Court terminating or modifying the stay.

 

On May 6, 2005, the Stericycle Affiliates filed Defendants’ AmendedThird-Party Petition and Counterclaims in which the Stericycle Affiliates setforth the same contribution, indemnity and breach of fiduciary duty claims asin the Counterclaim and added a negligent misrepresentation claim against theCompany and the Third-Party Defendants.  The Company intends to seek a dismissal, oralternatively a stay, of these claims.

 

The Special Committee has been informed that the Stericycle Affiliatesstrongly disagree with the claims stated in the Joint Petition and that theybelieve such claims are without factual or legal basis.  Further, the Stericycle Affiliates haveinformed the Special Committee that they believe they have fulfilled all oftheir duties as directors and will vigorously defend the claims against them.

 

**Item2****.    Changes in Securities**

 

None.

 

13

----

 

**Item3****.    Defaults upon Senior Securities**

 

None.

 

**Item4****.    Submission of Matters to a Vote ofSecurity Holders**

 

None.

 

**Item5****.  Other Information**

 

None.

 

**Item6.    Exhibits**

 

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

 

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                    |
|--------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |       |                                                                                                                                                               |
| 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. |

 

14

----

 

SIGNATURES

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                | 3CI COMPLETE COMPLIANCE  CORPORATION |
|---------------------|--------------------------------------|
|                | (Registrant)                         |
|                |                                 |   |
| Dated: May 13, 2005 | By:                                  | /s/ Matthew D. Peiffer |   |
|                |                                 | Matthew D. Peiffer |
|                |                                 | Chief Financial  Officer, Secretary and  Treasurer  (Principal Financial Officer and  Principal Accounting Officer) |

 

15

----