**SECURITIESAND EXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

**FORM10-Q**

 

**(MarkOne)**
| **ý** | ** ** | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934**                                                                                                                                                                                                                                                                                                                        |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** ** | ** ** | **For  the quarterly period ended December 31, 2004**                                                                                                                                                                                                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **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 ofregistrant as 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 principal  executive offices)                           |
| (Zip Code)                                                          |
|                                                                |       |                                  |
| **(972)  375-0006**                                                 |
| (Registrant’s  telephone number, including area code)          |
|                                                                     |            |                                       |  |  |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.

 

YES    ýNO    o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this form 10-Q or any amendment to this Form 10-Q.

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 2b-2 of theAct).  Yes  o  No ý

 

Indicate the number ofshares outstanding of each of the issuer’s classes of Common Stock, as of thelatest practicable date.

 

The number of shares ofCommon Stock outstanding as of the close of business on February 7, 2005,was 9,739,611.

 

 

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**FORWARD-LOOKING STATEMENTS**

 

THISQUARTERLY REPORT CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING THE COMPANY’SBUSINESS AND OPERATIONS.  ALTHOUGH THE COMPANY BELIEVES THAT THEEXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, THESEEXPECTATIONS AND THE RELATED STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES,AND OTHER FACTORS THAT COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROMTHOSE PROJECTED.  THESE RISKS, UNCERTAINTIES, AND OTHER FACTORS INCLUDE,BUT ARE NOT LIMITED TO, ADVERSE WEATHER CONDITIONS, FLUCTUATIONS IN CUSTOMERDEMAND, COMPETITIVE ACTIVITY AND PRICING PRESSURE AND GENERAL ECONOMICCONDITIONS AFFECTING THE BIO-MEDICAL WASTE DISPOSAL INDUSTRY, AS WELL AS OTHERRISKS DETAILED IN THE COMPANY’S FILINGS WITH THE SEC.  THE COMPANYEXPRESSLY 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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**3CI COMPLETE COMPLIANCE CORPORATION**

 

**I N D E X**

 
| **PART I.**    | **FINANCIAL INFORMATION**                                                                   |
|----------------|---------------------------------------------------------------------------------------------|
|           |                                                                                        |
| Item 1.        | Financial Statements                                                                        |
|           |                                                                                        |
|           | Balance Sheets as of December 31,  2004 and September 30, 2004                    |
|           |                                                                                        |
|           | Statements  of Operations for the three months ended December 31, 2004 and 2003        |
|           |                                                                                        |
|           | Statements  of Cash Flows for the three months ended December 31, 2004 and 2003        |
|           |                                                                                        |
|           | 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

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PARTI - FINANCIAL INFORMATION

 

**Item 1.Financial Statements**

 

**3CI COMPLETE COMPLIANCE CORPORATION**

**BALANCE SHEETS**

 
| ** **                                                                                                                                      | ** ** | **December   31,  2004** | ** **    | **September  30,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|---------------|--------------------------|------------|
| ** **                                                                                                                                      | ** ** | **(Unaudited)**               | ** **    | ** **               | ** ** |
| **ASSETS**                                                                                                                                      | ** ** | ** **                    | ** **    | ** **               | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                    | ** **    | ** **               | ** ** |
| **Current Assets:**                                                                                                                             | ** ** | ** **                    | ** **    | ** **               | ** ** |
| **Cash and cash equivalents**                                                                                                                   | ** ** | **$**                         | **592,740**   | ** **               | **$**      | **710,353** | ** ** |
| **Accounts receivable, net allowances of $182,859  and $218,819 at December 31, 2004 and September 30, 2004,  respectively**          | ** ** | **2,689,419**                 | ** **    | **2,765,159**            | ** ** |
| **Inventory**                                                                                                                                   | ** ** | **97,096**                    | ** **    | **69,916**               | ** ** |
| **Prepaid expenses**                                                                                                                            | ** ** | **461,671**                   | ** **    | **480,837**              | ** ** |
| **Deferred income taxes**                                                                                                                       | ** ** | **114,501**                   | ** **    | **127,955**              | ** ** |
| **Other current assets**                                                                                                                        | ** ** | **49,305**                    | ** **    | **70,800**               | ** ** |
| **Total current assets**                                                                                                                        | ** ** | **4,004,732**                 | ** **    | **4,225,020**            | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                    | ** **    | ** **               | ** ** |
| **Property, plant and equipment, at cost**                                                                                                      | ** ** | **6,551,971**                 | ** **    | **6,787,197**            | ** ** |
| **Accumulated depreciation**                                                                                                                    | ** ** | **(4,562,362**                | **)**         | **(4,820,503**           | **)**      |
| **Net property, plant and equipment**                                                                                                           | ** ** | **1,989,609**                 | ** **    | **1,966,694**            | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                    | ** **    | ** **               | ** ** |
| **Goodwill, net of accumulated depreciation of  $547,748**                                                                                      | ** ** | **262,243**                   | ** **    | **262,243**              | ** ** |
| **Intangibles, net of accumulated amortization of  $300,953 and $291,884 at December 31, 2004 and September 30, 2004,  respectively** | ** ** | **273,746**                   | ** **    | **282,816**              | ** ** |
| **Deferred income taxes**                                                                                                                       | ** ** | **3,220,489**                 | ** **    | **3,220,484**            | ** ** |
| **Other assets**                                                                                                                                | ** ** | **78,923**                    | ** **    | **78,923**               | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                    | ** **    | ** **               | ** ** |
| **Total assets**                                                                                                                                | ** ** | **$**                         | **9,829,742** | ** **               | **$**      | **10,036,180** | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                    | ** **    | ** **               | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                   | ** ** | ** **                    | ** **    | ** **               | ** ** |
| **Current Liabilities:**                                                                                                                        | ** ** | ** **                    | ** **    | ** **               | ** ** |
| **Notes payable**                                                                                                                               | ** ** | **$**                         | **181,009**   | ** **               | **$**      | **242,729** | ** ** |
| **Accounts payable**                                                                                                                            | ** ** | **496,517**                   | ** **    | **489,157**              | ** ** |
| **Accounts payable, affiliated companies**                                                                                                      | ** ** | **617,762**                   | ** **    | **693,502**              | ** ** |
| **Accrued liabilities**                                                                                                                         | ** ** | **762,949**                   | ** **    | **820,359**              | ** ** |
| **Deferred Revenue**                                                                                                                            | ** ** | **930**                       | ** **    | **329**                  | ** ** |
| **Note payable majority shareholder, current  portion**                                                                                         | ** ** | **249,183**                   | ** **    | **246,400**              | ** ** |
| **Total current liabilities**                                                                                                                   | ** ** | **2,308,350**                 | ** **    | **2,492,476**            | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                    | ** **    | ** **               | ** ** |
| **Note payable majority shareholder, net of  current portion**                                                                                  | ** ** | **993,368**                   | ** **    | **1,056,717**            | ** ** |
| **Note payable other**                                                                                                                          | ** ** | **32,526**                    | ** **    | **—**               | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                    | ** **    | ** **               | ** ** |
| **Total liabilities**                                                                                                                           | ** ** | **3,334,244**                 | ** **    | **3,549,193**            | ** ** |
| **Shareholder’s Equity:**                                                                                                                  | ** ** | ** **                    | ** **    | ** **               | ** ** |
| **Common stock, $0.01 par value, authorized  40,450,000 shares;  Issued and outstanding 9,774,111 shares**                                      | ** ** | **97,742**                    | ** **    | **97,742**               | ** ** |
| **Common stock to be issued (Note 5)**                                                                                                          | ** ** | **7,750,000**                 | ** **    | **7,750,000**            | ** ** |
| **Less cost of treasury stock 34,500 shares**                                                                                                   | ** ** | **(51,595**                   | **)**         | **(51,595**              | **)**      |
| **Additional Paid-in capital – common stock**                                                                                              | ** ** | **20,519,861**                | ** **    | **20,519,861**           | ** ** |
| **Accumulated deficit**                                                                                                                         | ** ** | **(21,820,510**               | **)**         | **(21,829,021**          | **)**      |
| **Total Shareholders’ equity**                                                                                                             | ** ** | **6,495,498**                 | ** **    | **6,486,987**            | ** ** |
| **Total liabilities and shareholders’ equity**                                                                                             | ** ** | **$**                         | **9,829,742** | ** **               | **$**      | **10,036,180** | ** ** |

 

**The accompanying notes are an integral part of thesefinancial statements.**

 

4

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**3CI COMPLETE COMPLIANCE CORPORATION**

**STATEMENTS OF OPERATIONS**

 
| ** **                              | ** ** | **(Unaudited)**                                   | ** **    |
|-----------------------------------------|------------|---------------------------------------------------|---------------|
| ** **                              | ** ** | **For the three months ended  December 31,** | ** **    |
| ** **                              | ** ** | **2004**                                          | ** **    | **2003** | ** ** |
| ** **                              | ** ** | ** **                                        | ** **    | ** ** | ** ** |
| **Revenues**                            | ** ** | **$**                                             | **3,157,373** | ** ** | **$** | **3,359,642** | ** ** |
| **Expenses:**                           | ** ** | ** **                                        | ** **    | ** ** | ** ** |
| **Cost of services**                    | ** ** | **1,869,561**                                     | ** **    | **2,124,220** | ** ** |
| **Depreciation and amortization**       | ** ** | **107,290**                                       | ** **    | **126,074** | ** ** |
| **Selling, general and administrative** | ** ** | **1,068,280**                                     | ** **    | **1,208,904** | ** ** |
| **Interest expense**                    | ** ** | **15,600**                                        | ** **    | **22,386** | ** ** |
| **Other expense, net**                  | ** ** | **74,691**                                        | ** **    | **69,000** | ** ** |
| ** **                              | ** ** | ** **                                        | ** **    | ** ** | ** ** |
| **Income (loss) before income taxes**   | ** ** | **21,951**                                        | ** **    | **(190,942** | **)** |
| ** **                              | ** ** | ** **                                        | ** **    | ** ** | ** ** |
| **Income tax (expense) benefit**        | ** ** | **(13,440**                                       | **)**         | **73,837** | ** ** |
| ** **                              | ** ** | ** **                                        | ** **    | ** ** | ** ** |
| **Net (loss) income**                   | ** ** | **$**                                             | **8,511**     | ** ** | **$** | **(117,105** | **)** |
| ** **                              | ** ** | ** **                                        | ** **    | ** ** | ** ** |
| **Basic earnings per share:**           | ** ** | ** **                                        | ** **    | ** ** | ** ** |
| **Basic net (loss) income per share**   | ** ** | **$**                                             | **0.00**      | ** ** | **$** | **(0.01** | **)** |
| ** **                              | ** ** | ** **                                        | ** **    | ** ** | ** ** |
| **Diluted earnings per share:**         | ** ** | ** **                                        | ** **    | ** ** | ** ** |
| **Diluted net (loss) income per share** | ** ** | **$**                                             | **0.00**      | ** ** | **$** | **(0.01** | **)** |

 

**The accompanying notes are an integral part of thesefinancial statements.**

 

5

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**3CI COMPLETE COMPLIANCE CORPORATION**

**STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                    | ** ** | **(Unaudited)**                                   | ** **  |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------------|-------------|
| ** **                                                                                    | ** ** | **For the three months ended  December 31,** | ** **  |
| ** **                                                                                    | ** ** | **2004**                                          | ** **  | **2003** | ** ** |
| **Cash flows from operating activities:**                                                     | ** ** | ** **                                        | ** **  | ** ** | ** ** |
| **Net income (loss)**                                                                         | ** ** | **$**                                             | **8,511**   | ** ** | **$** | **(117,105** | **)** |
| **Adjustments to reconcile net income (loss) to  net cash provided by operating activities:** | ** ** | ** **                                        | ** **  | ** ** | ** ** |
| ** **                                                                                    | ** ** | ** **                                        | ** **  | ** ** | ** ** |
| **Loss (Gain) on disposal of equipment**                                                      | ** ** | **2,750**                                         | ** **  | **(6,024** | **)** |
| **Depreciation and amortization**                                                             | ** ** | **107,290**                                       | ** **  | **126,074** | ** ** |
| **Deferred income tax**                                                                       | ** ** | **13,440**                                        | ** **  | **(73,837** | **)** |
| **Decrease (increase) in accounts receivable, net**                                           | ** ** | **75,740**                                        | ** **  | **208,765** | ** ** |
| **Decrease (increase) in inventory**                                                          | ** ** | **(27,180**                                       | **)**       | **6,454** | ** ** |
| **Decrease in prepaid expenses**                                                              | ** ** | **19,166**                                        | ** **  | **44,625** | ** ** |
| **Decrease in other assets and other current  assets**                                        | ** ** | **21,495**                                        | ** **  | **10,809** | ** ** |
| **Increase in accounts payable**                                                              | ** ** | **7,360**                                         | ** **  | **312,270** | ** ** |
| **Decrease in accounts payable, affiliated  companies**                                       | ** ** | **(75,740**                                       | **)**       | **(202,971** | **)** |
| **Increase in accrued liabilities and deferred  revenue**                                     | ** ** | **(56,809**                                       | **)**       | **123,278** | ** ** |
| **Total adjustments to net income (loss)**                                                    | ** ** | **87,512**                                        | ** **  | **549,443** | ** ** |
| **Net cash provided by operating activities**                                                 | ** ** | **96,023**                                        | ** **  | **432,338** | ** ** |
| ** **                                                                                    | ** ** | ** **                                        | ** **  | ** ** | ** ** |
| **Cash flows from investing activities:**                                                     | ** ** | ** **                                        | ** **  | ** ** | ** ** |
| **Proceeds from sale of property, plant and  equipment**                                      | ** ** | **15,200**                                        | ** **  | **20,701** | ** ** |
| **Purchase of property, plant and equipment**                                                 | ** ** | **(139,076**                                      | **)**       | **(107,886** | **)** |
| **Net cash used in investing activities:**                                                    | ** ** | **(123,876**                                      | **)**       | **(87,185** | **)** |
| ** **                                                                                    | ** ** | ** **                                        | ** **  | ** ** | ** ** |
| **Cash flows from financing activities:**                                                     | ** ** | ** **                                        | ** **  | ** ** | ** ** |
| **Proceeds from issuance of notes payable**                                                   | ** ** | **221,046**                                       | ** **  | **—** | ** ** |
| **Principal reduction of notes payable**                                                      | ** ** | **(250,240**                                      | **)**       | **(22,821** | **)** |
| **Reduction of note payable to majority  shareholders**                                       | ** ** | **(60,566**                                       | **)**       | **(276,691** | **)** |
| **Net cash used in financing activities**                                                     | ** ** | **(89,760**                                       | **)**       | **(299,512** | **)** |
| ** **                                                                                    | ** ** | ** **                                        | ** **  | ** ** | ** ** |
| **Net increase (decrease) in cash and cash  equivalents**                                     | ** ** | **(117,613**                                      | **)**       | **45,641** | ** ** |
| ** **                                                                                    | ** ** | ** **                                        | ** **  | ** ** | ** ** |
| **Cash and cash equivalents, beginning of period**                                            | ** ** | **710,353**                                       | ** **  | **1,057,055** | ** ** |
| ** **                                                                                    | ** ** | ** **                                        | ** **  | ** ** | ** ** |
| **Cash and cash equivalents, end of period**                                                  | ** ** | **$**                                             | **592,740** | ** ** | **$** | **1,102,696** | ** ** |

 

**The accompanying notes are an integral part of thesefinancial statements.**

 

6

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**3CI COMPLETE COMPLIANCE CORPORATION**

**NOTES TO FINANCIAL STATEMENTS**

**December 31, 2004**

 

**NOTE 1—DESCRIPTION OF BUSINESS**

 

**Organization and Basis of Presentation**

 

3CIComplete Compliance Corporation (the “Company” or “3CI”), a Delawarecorporation, is engaged in the collection, transportation and disposal ofbiomedical waste in the southern United States.

 

EffectiveOctober 1, 1998, after approval by the then properly constituted 3CI Boardof Directors, Stericycle Inc., a Delaware corporation (“Stericycle”),acquired 100% of the common stock of Waste Systems, Inc. (“WSI”) for$10 million. As a result of the transaction, WSI became a wholly-ownedsubsidiary of Stericycle. Stericycle directly and indirectly through WSI owns67.5% or 6,578,504 shares of the Company’s outstanding common stock (“CommonStock”) and 100% of the shares of Common Stock to be issued by the Company as aresult of the conversion of the Company’s preferred stock (“Preferred Stock”).See Note 5 for details on the conversion of the Preferred Stock to Common Stock.

 

Theaccompanying unaudited condensed financials statements have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and with the instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included. Operating results for the three-month period ended December 31, 2004 arenot necessarily indicative of the results that may be expected for the yearended September 30, 2005.

 

Forfurther information, refer to the consolidated financial statements andfootnotes included in the Company’s annual report on Form 10-K for the yearended September 30, 2004.

 

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

 

Thefollowing table sets forth the computation of net income (loss) per commonshare:

 
| ** **                                                             | ** ** | **Three  months ended  December 31,  2004** | ** ** | **Three  months ended  December 31,  2003** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| Numerator:                                                             |       |                                             |       |                                             |       |
| Net  income (loss)                                                     |       | $                                                | 8,511      |                                             | $          | (117,105 | ) |
| 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                            |       | 17,523,324                                       |       | 17,489,611                                       |       |
|                                                                   |       |                                             |       |                                             |       |
| Basic  net income (loss) per share                                     |       | $                                                | 0.00       |                                             | $          | (0.01 | ) |
| Diluted  net income (loss) per common share                            |       | $                                                | 0.00       |                                             | $          | (0.01 | ) |

 

7

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Theeffect of the preferred shares on the above basic and diluted net loss pershare calculation is based upon (i) the Company’s interpretation that theappropriate conversion rate of the Preferred Stock is the per share marketvalue of the Common Stock on the conversion notice date, less $1.00 per share,but in no event is the conversion rate less than $1.00 per share and(ii) the fact that all issued and outstanding shares of Preferred Stockwere converted on April 6, 2003. (See Note 5)

 

Stockoptions were not included in the December 31, 2003 computations as theywere antidilutive since the Company had a loss in that period.

 

**NOTE 3—PROMISSORY NOTE**

 

TheCompany has outstanding an amended and restated revolving promissory notepayable to WSI (the “Note”), with an outstanding principal balance of $1,242,551as of December 31, 2004.  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 rate on the Note is the primelending rate (5.25% as of December 31, 2004), as such rate may change fromtime to time, published under “Money Rates” in *TheWall Street Journal* (Southwestern Edition), not to exceed 13%.

 

TheNote is subordinated to all security interests under a certain SettlementAgreement effective January 10, 1996, by and among the Company, James H.Shepherd, James Michael Shepherd, Richard T. McElhannon (collectively, the “ShepherdParties”), WSI and certain former directors and officers of the Company (the “ShepherdSettlement Agreement”), which was assigned to Stericycle on May 1, 2002, butotherwise is secured by substantially all of the Company’s assets.  The Noterequires the Company to achieve a minimum level of EBITDA of $500,000, afterexcluding (i) certain expenses associated with the dispute regarding theconversion rate of the Preferred Stock, and (ii) certain expenses associatedwith the Louisiana Suit (as hereinafter defined), for the quarters ending September 30,2004 and for each trailing six-month period of each quarterly period thereafteruntil maturity.  As of December 31,2004, the Company was in compliance with the required level of EBITDA under theNote.

 

Totalinterest expense for all debt was $15,600 and $22,386 for the quarters ended December 31,2004 and 2003, respectively.

 

**NOTE 4—INCOME TAXES**

 

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

 

Duringthe fourth quarter of 2003, the Company reevaluated the estimated amount ofvaluation allowance required in light of the profitability achieved during 2003and 2002 as well as profitability expected in future years. As a result, theCompany reduced the valuation allowance on deferred tax assets in accordancewith SFAS No. 109, “Accounting for Income Taxes,” to an amount the Companybelieves is more likely than not of being recovered. Accordingly, an income taxbenefit of approximately $3,484,000 was reflected in the fourth quarter of2003. The amount of net deferred tax assets estimated to be recoverable wasbased upon the Company’s assessment of the likelihood of near-term operatingincome.

 

8

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**NOTE 5—PREFERRED STOCK**

 

**Preferred Stock Conversion**

 

Pursuantto the certificates of designation governing the Preferred Stock, all 7,750,000shares of Preferred Stock automatically converted on April 6, 2003. TheCompany has not issued any shares of Common Stock and has not recorded anyincrease in the outstanding Common Stock related to the conversion of thePreferred Stock.

 

Priorto April 6, 2003, WSI and Stericycle asserted that the conversion rate ofthe Preferred Stock is such that each share of Preferred Stock is convertibleinto that number of shares of Common Stock determined by dividing $7,000,000(with respect to the Series B Preferred Stock) or $750,000 (with respectto the Series C Preferred Stock) by the market value of the Common Stockon the date of conversion. On April 6, 2003, the per share closing priceof the Common Stock was $0.21. Accordingly, the Company would have issued36,904,761 shares of Common Stock upon conversion of the Preferred Stock underthis interpretation, which would have increased WSI’s ownership percentage to91.2% of the outstanding shares of Common Stock and the combined WSI andStericycle ownership percentage to 93.2%.

 

WSIand Stericycle’s interpretation of the conversion rate is contrary to theCompany’s interpretation of the conversion rate. Based on the certificates ofdesignations governing the Preferred Stock, certain documents executedcontemporaneously with the issuance of the Preferred Stock, and the intent ofthe parties at the time of issuance of the Preferred Stock and the execution ofthese documents, the Company believes the appropriate conversion rate is theper share market value of the Common Stock on the conversion notice date, 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 theper share market value of the Common Stock was less than $1.00 on April 6,2003, the Company would have issued 7,750,000 shares of Common Stock 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%.

 

OnApril 2, 2003, the Company, WSI and Stericycle entered into an Agreementto Defer Conversion of Preferred Stocks (the “Agreement to Defer Conversion”),pursuant to which all parties agreed the Company will not issue any CommonStock upon conversion of the Preferred Stock until a judicial judgment as tothe appropriate conversion rate has become final and non-appealable.

 

OnMay 9, 2003, the Company filed a declaratory judgment action seeking ajudicial determination of the appropriate conversion rate of the PreferredStock. On August 22, 2003, the Company filed an original petition fordeclaratory judgment and to enforce the Settlement Agreement, dated July 17,1997, pursuant to which the Preferred Stock was issued. In its petition, theCompany requests the court establish the conversion rate of the Preferred Stockto be the Agreed Maximum Conversion Rate and confirm the issuance of no morethan 7,750,000 shares of Common Stock to WSI as of April 6, 2003. WSIsubsequently filed a motion to have the court declare that the Preferred Stockis convertible into 36,704,761 shares of Common Stock. The parties arecurrently conducting discovery in this proceeding.

 

**Preferred Stock Dividends**

 

Thereare unanimous written consents of the Company’s Board of Directors declaringdividends on the Series B and Series 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 thesedividends 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 and September 30, 2004.

 

OnDecember 22, 2003, the independent and disinterested members of the Boardof Directors, 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 Series B Preferred Stock andSeries C Preferred Stock in the

 

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aggregateamount 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 has reversed the Preferred Stock Dividends entries on the Company’sbooks and records and has restated its financial statements for the years endedSeptember 30, 2000, 2001 and 2002. These restatements reflect as of September 30,2000, 2001 and 2002, a removal of (a) dividends payable on the PreferredStock as a current liability on the Company’s balance sheets and as anadjustment of net income (loss) applicable to common shareholders on thestatements of operations, and (b) the Preferred Stock Dividends as a lineitem on the Company’s statements of shareholders’ equity and statements of cashflows.

 

WSIwas the holder of the Preferred Stock. The Company has been advised by WSI,Stericycle and the members of the Board who are affiliates of WSI 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, Stericycle and theiraffiliates’ position is correct, the Preferred Stock Dividends would be paid bythe Company in cash from funds legally available for the payment of dividendsas and when the Board may direct by further resolution. Due to WSI’s,Stericycle’s and their affiliates’ announced position on the Preferred StockDividends, the Company has determined the amount of such dividends to be acontingent liability of $2,203,717.

 

**NOTE 6—COMMITMENTS AND CONTINGENCIES**

 

SeeNote 5 for a discussion of certain contingent liabilities of the Companyrelated to the Preferred Stock.

 

TheCompany is a plaintiff jointly with Larry F. Robb, individually, on behalf of aclass comprised of the Company’s minority stockholders, in material litigationin the First Judicial District Court in Shreveport, Louisiana, againstStericycle and the four affiliates of Stericycle who are or were directors of3CI.  See Part II, Item 1, LegalProceedings for a description of this litigation.

 

TheCompany operates within the regulated medical waste disposal industry, which issubject to intense governmental regulation at the federal, state and locallevels. The Company believes it is currently in compliance in all materialrespects with all applicable laws and regulations governing the medical wastedisposal business. However, continuing expenditures may be required in orderfor the Company to remain in compliance with existing and changing regulations.Furthermore, because the medical waste disposal industry is predicated upon theexistence of strict governmental regulation, any material relaxation ofregulatory requirements governing medical waste disposal or of theirenforcement could result in a reduced demand for the Company’s services andhave a material adverse effect on the Company’s revenues and financialcondition. The scope and duration of existing and future regulations affectingthe medical waste disposal industry cannot be anticipated and are subject tochanging political and economic pressures.

 

TheCompany is subject to certain other litigation and claims arising in theordinary course of business. In the opinion of management of the Company, theamounts ultimately payable, if any, as a result of such claims and assessmentswill not have a material adverse effect on the Company’s financial position,results of operations or net cash flows.

 

**Item 2.   ****Management’s Discussion and Analysis of Financial Conditionand Results of Operations**

 

TheCompany is engaged in the business of medical waste management services in thesouthern United States.  The Company’s customers include regional medicalcenters, major hospitals, clinics, medical and dental offices, veterinarians,pharmaceutical companies, retirement homes, medical testing laboratories andother medical waste generators.  The following is a discussion of someevents that may allow a better understanding of the progression of the Company’sfinancial position and operating results.

 

TheCompany has historically financed its working capital needs, capitalexpenditures and acquisitions primarily using borrowings from WSI andinternally generated funds. Currently, the Company’s only borrowed

 

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indebtednessconsists of money borrowed from WSI under the Note.  As of December 31,2004, and December 31, 2003, the outstanding balances under the Note werein the aggregate principal amounts of approximately $1,242,551 and $2,148,954,respectively.   See Liquidity and Capital Resources herein and Note3.

 

SeeNote 5 to the Company’s financial statements above for a discussion of thereversal of the Company’s Preferred Stock Dividends on its books and records.  See Note 4 for a discussion of the change in theCompany’s deferred tax assets valuation in the fourth quarter of the Company’s2003 fiscal year.

 

**RESULTS OF OPERATIONS**

 

Thefollowing summarizes (in thousands) the Company’s operations:

 
| ** **                                    | ** ** | **Three Months  Ended  December 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                   | ** ** | **2003** | ** ** |
| Revenues                                      |       | $                                          | 3,157      |   | $ | 3,360 |   |
| Cost  of services                             |       | 1,870                                      |       | 2,124 |   |
| Depreciation  and amortization                |       | 107                                        |       | 126 |   |
| Selling,  general and administrative expenses |       | 1,068                                      |       | 1,209 |   |
| (Loss)  income from operations                |       | 112                                        |       | (99 | ) |
| Interest  expense                             |       | 16                                         |       | 22 |   |
| Other  expense, net                           |       | 75                                         |       | 70 |   |
| Income  tax (expense) benefit                 |       | (13                                        | )          | 74 |   |
| Net  Income (Loss)                            |       | 9                                          |       | (117 | ) |
|                                          |       |                                       |       |   |   |
| Add  back:                                    |       |                                       |       |   |   |
| Depreciation                                  |       | 98                                         |       | 111 |   |
| Amortization                                  |       | 9                                          |       | 15 |   |
| Interest  expense                             |       | 16                                         |       | 22 |   |
| Income  tax expense (benefit)                 |       | 13                                         |       | (74 | ) |
|                                          |       |                                       |       |   |   |
| EBITDA(1)                                     |       | $                                          | 145        |   | $ | (43 | ) |

 

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(1) EBITDA is calculated as the sum of net income, plus interest expense, incometax expense, depreciation expense, and amortization expense to the extentdeducted in calculating net income.  The Company considers EBITDA to be awidely accepted financial indicator of a company’s operating performance andability to service debt, fund capital expenditures and expand itsbusiness.  EBITDA is not calculated in the same way by all companies andtherefore may not be comparable to similarly titled measures reported by othercompanies.  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, 2004 compared to threemonths ended December 31, 2003:**

 

***Revenues*** decreased by $203,000, or 6%, to $3,157,000from $3,360,000 during the three-month period ended December 31, 2004compared to the three-month period ended December 31, 2003. This decreaseis primarily related to a reduction in the volume of waste handled.  Thereduction in volume was attributable to the

 

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Company’sfocus on smaller quantity generators with higher margins at lower volumes whilereducing the focus on less profitable larger quantity generators.

 

***Cost of services*** decreased by $254,000, or 12%, to $1,870,000from $2,124,000 during the three months ended December 31, 2004 compared tothe three months ended December 31, 2003. This decrease was primarilyattributable to decreased processing and transportation costs.  Cost ofservices as a percentage of revenues decreased to 59.2% compared to 63.2%during the three months ended December 31, 2004 and December 31, 2003respectively.

 

***Depreciation and amortization*** expense for the three months ended December 31,2004 decreased $19,000 to $107,000 compared to $126,000 for the three monthsended December 31, 2003. This decrease was primarily due to assets stillemployed in the Company’s operations being fully depreciated.

 

***Selling, general and administrative*** expenses for the three months ended December 21,2004 decreased $141,000, or 11.7%, to $1,068,000 from $1,209,000 during thethree months ended December 31, 2003.  The decrease was primarily dueto lower professional fees.

 

***Interest expense*** for the quarter ended December 31, 2004decreased by $6,000 or 27.3%, to $16,000 from $22,000 during the three monthsended December 31, 2003.  This decrease was primarily due to the reducedprincipal balance of the Note.   During the 12 months ended December 31, 2004,the Company reduced the aggregate principal balance of the Note by $906,403, or42.2%, from $2,148,954 to $1,242,551.

 

***Earnings before interest taxes depreciationand amortization (“EBITDA”)***totaled $145,000 or 4.6% of revenue for the quarter ended December 31,2004, compared to $(43,000) for the quarter ended December 31, 2003. The improvement was the result of increased income from operations and decreasesin professional fees.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

TheCompany has historically financed its working capital needs, capitalexpenditures and acquisitions primarily using advances from WSI and internallygenerated funds. The Company’s borrowed indebtedness currently consists only ofamounts owed to WSI under the Note.

 

TheNote had an outstanding principal balance of $1,242,551 as of December 31,2004.  Effective September 30, 2004,the Note was amended and restated to extend the maturity date of the Note to April 3,2006 with monthly payments of $25,000. The interest rate on the Note is the prime lending rate (5.25% as of December 31,2004), as such rate may change from time to time, published under “Money Rates”in *The Wall Street Journal*(Southwestern Edition), not to exceed 13%.

 

TheNote requires the Company to achieve a minimum level of EBITDA of $500,000,after excluding (i) certain expenses associated with the dispute regarding theconversion rate of the Preferred Stock, and (ii) certain expenses associatedwith the Louisiana Suit, for the quarters ending September 30, 2004 andfor each trailing six-month period of each quarterly period thereafter untilmaturity.  As of December 31, 2004,the Company was in compliance with the required level of EBITDA under the Note.

 

Inaddition to the term note facility described above, the Note includes arevolving 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 maybe prepaid at any time without penalty.  TheNote is subordinated to all security interests under the Shepherd SettlementAgreement, which were assigned to Stericycle on May 1, 2002, but otherwise issecured by substantially all of the Company’s assets.

 

TheCompany has not attempted to arrange credit from any source other than WSI anddoes not know whether it could or could not obtain a credit facility with an independentthird-party lender.  In addition, noassurance can be given that if such a credit facility was arranged, it would beon terms or conditions as favorable as those of the Note.

 

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During2003 and 2004, the Company incurred material legal expenses substantiallyrelated to its disputes with Stericycle and WSI regarding the correctconversion rate of the Preferred Stock and an investigation by the SpecialCommittee into allegations made by certain minority stockholders of the Companyin the Louisiana Suit. During the 2004 fiscal year, these legal expenses werein excess of $1 million. In December 2004, at the direction of theSpecial Committee, the Company joined with the minority stockholders of theCompany as a plaintiff in the Louisiana Suit, which is scheduled for trial inthe Fall of 2005. Although the Company cannot predict what its financial investmentwill be related to the Louisiana Suit, the Company believes that prosecution ofthe Louisiana Suit will continue to require a commitment of its financialresources and that the amount of this commitment may be material. SeePart II, Item 1, Legal Proceedings.

 

During2004, the Company’s transportation fuel costs increased significantly. Althoughthe Company is considering various ways to mitigate the effect of this elevatedfuel cost on its operations, the expense of high fuel cost in the 2005 fiscalyear could have an adverse impact on the Company’s financial performance.

 

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

 

Duringthe fourth quarter of 2003, the Company reevaluated the estimated amount ofvaluation allowance required in light of the profitability achieved during 2003and 2002 as well as profitability expected 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 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.

 

TheCompany had net working capital, exclusive of the Note, on December 31,2004 of $1,945,565, compared to $1,978,944 on September 30, 2004, whichwas a decrease of approximately 2%, or $33,379.

 

Netcash provided by operating activities was $96,023 during the three-month periodended December 31, 2004, compared to $432,338 for the three-month periodended December 31, 2003.  The decrease was due to the decrease in accruedliabilities and increase in deferred tax assets and accounts receivable. The Company is continuing its efforts to collect on delinquent receivables.

 

Netcash used in investing activities for the three months ended December 31, 2004,was $123,876 compared to $87,185 for the same period in 2003.  The $36,691increase reflected increased investment in equipment.

 

Netcash used in financing activities was $89,760 for the three-month period ended December 31,2004, compared to $299,512 during the three-month period ended December 31,2003.  The $209,752 decrease was primarily due to smaller principal paymentsby the Company on the Note.

 

**Item 3.   ****Qualitative Disclosure aboutMarket Risk**

 

TheCompany’s exposure to market risk includes the possibility of rising interestrates in connection with the Note, thereby increasing its debt serviceobligation, which could adversely affect the Company’s cash flows.  Theinterest rate on the Note is variable and tied to the prime rate not to exceed13%.  An increase in the prime rate of 1% would have the effect ofincreasing interest expense by approximately $19,590 over 12 months. The

 

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Companydoes not utilize derivative financial instruments to mitigate the risks ofchanges in interest rates.

 

**Item 4.   ****Controls and Procedures**

 

TheCompany maintains disclosure controls and procedures that are designed toensure that information required to be disclosed in the Company’s filings underthe Securities Exchange Act of 1934 is recorded, processed, summarized andreported within the periods specified in the rules and forms of the Securitiesand Exchange Commission.  This information is accumulated and communicatedto the Company’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.

 

Underthe supervision and with the participation of the Company’s management,including the Chief Executive Officer and the Chief Financial Officer, theCompany conducted an evaluation of its disclosure controls and procedureswithin 90 days of the filing date of this report.  Based on thisevaluation, the Company’s Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosures controls and procedures are effectivein alerting them on a timely basis to material information required to bedisclosed in the Company’s periodic filings.

 

Therehave been no significant changes in the Company’s internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof the evaluation referenced in the foregoing paragraph.

 

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PARTII - OTHER INFORMATION

 

**Item 1.   LegalProceedings**

 

**Louisiana Minority Stockholder Litigation**

 

OnJune 20, 2002, Larry F. Robb, individually, on behalf of a class comprisedof the Company’s minority stockholders, and derivatively on behalf of theCompany (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 Otley L. Smith III, theCompany’s President and Chief Executive Officer.

 

Asof January 8, 2004, the Board expanded the authority of the SpecialCommittee to grant the Special Committee the exclusive power and authority onbehalf of the Company to (i) make all inquiries, conduct allinvestigations and gather all information related to the Louisiana Suit, or anyactions or proceedings related to such suit; (ii) make or approve alldecisions of the Company related to the Louisiana Suit, including the Company’sfiling, amending, maintaining, prosecuting or settling of any legal proceedingsrelated to such suit; and (iii) exercise such other power and authoritythat may be exercised by the full Board with regard to the foregoing. TheSpecial Committee is composed of Stephen B. Koenigsberg and Kevin J. McManus,who are the independent directors on the Board not affiliated with Stericycleor WSI. Robert M. Waller, previously a member of the Special Committee, forpersonal reasons, resigned from the Board on March 11, 2004. The SpecialCommittee appointed legal counsel to assist it in its investigation of theLouisiana Plaintiffs’ allegations and to gather all information related to theLouisiana Suit.

 

Afterconducting an investigation into the facts, arguments and other matters that inits view are related to the issues raised in the Louisiana Suit, the SpecialCommittee has determined that the claims against Stericycle, WSI and theStericycle Affiliates (the “Louisiana Defendants”) in the Louisiana Suit havemerit and warrant prosecution by the Company.

 

OnDecember 10, 2004, the Company, at the direction of the Special Committee,and the Louisiana Plaintiffs filed a motion with the Court seeking leave tofile a joint petition (the “Joint Petition”), which was granted on December 14,2004. The Joint Petition amends and supersedes the Plaintiffs’ First AmendedPetition filed with the Court on October 27, 2003. Pursuant to the JointPetition (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) Otley L. Smith III, theCompany’s President and Chief Executive Officer, previously named as adefendant in the Louisiana Suit, has been non-suited.

 

TheLouisiana Plaintiffs and the Company allege in the Joint Petition that theLouisiana Defendants wrongfully (i) diverted the Company’s cash andassets, (ii) manipulated and increased the Company’s debt to WSI,(iii) directly and indirectly increased Stericycle’s and WSI’s percentageownership of the Company, (iv) forced the Company to declare significantcash dividends on its Preferred Stock payable to WSI, (v) usurped theCompany’s corporate opportunities, (vi) misappropriated the Company’scustomers, (vii) unfairly competed with the Company, and(viii) operated the Company with the goal of maximizing Stericycle’sprofitability and furthering Stericycle’s integration plan.

 

Inthe Joint Petition, the Louisiana Plaintiffs and the Company jointly pray for ajudgment against the Louisiana Defendants for actual damages and punitivedamages; for forfeiture of all fees, payments, warrants, Common Stock and allother forms of value which Stericycle and WSI have received from the Companyand its minority stockholders; unwinding Stericycle’s acquisition of theShepherd Parties’ 3CI-related interests and disgorging all benefits realized byStericycle from that transaction; returning to the Company all shares of CommonStock

 

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acquiredby WSI pursuant to warrants; declaring the Preferred Stock Dividends null andvoid; requiring a buyout of the Company’s minority stockholders; establishing aconstructive trust on all profits or benefits realized by the LouisianaDefendants as the result of the disputed transactions; disqualification of anyStericycle director, officer or other representative from serving on the Board;attorney’s and expert witness fees; and pre- and post-judgment interest. TheLouisiana Plaintiffs and the Company also request injunctive relief in order toremove the current Stericycle representatives from the Board, prohibitStericycle thereafter from electing any of its representatives to the Board andrequire Stericycle and WSI to vote their Common Stock for nominees to the Boardwho are nominated by the independent directors on the Board. The Court has seta trial date of September 12, 2005 if the suit is tried before a jury, anda trial date of October 4, 2005, if the suit is tried to the judge. TheCompany intends to vigorously prosecute the claims set forth in the JointPetition.

 

TheSpecial Committee has been informed that the Stericycle Affiliates stronglydisagree with the claims stated in the Joint Petition and that they believesuch claims are without factual or legal basis. Further, the StericycleAffiliates have informed the Special Committee that they believe they havefulfilled all of their duties as directors and will vigorously defend theclaims against them.

 

Inorder to avoid any potential for confusion and conflict that may arise if theCompany and the Louisiana Plaintiffs separately prosecuted such claims againstStericycle, WSI and the Stericycle Affiliates, the Company, at the direction ofthe Special Committee, has entered into an Agreement for JointProsecution by and among the Company, the Louisiana Plaintiffs and The WynneLaw Firm, legal counsel to the Louisiana Plaintiffs in the Louisiana Suit (the “JointProsecution Agreement”).

 

Pursuantto the Joint Prosecution Agreement, the Company and the Louisiana Plaintiffshave agreed to jointly prosecute the claims asserted in the Louisiana Suitagainst Stericycle, WSI and the Stericycle Affiliates and to seek monetarydamages and equitable remedies on behalf of both the Company and the LouisianaPlaintiffs. The Joint Prosecution Agreement provides that two-thirds of allservices and other work performed in jointly prosecuting these claims will beperformed by the Louisiana Plaintiffs and/or The Wynne Law Firm and one-thirdof such services and other work will be performed by the Company. In addition,the Joint Prosecution Agreement provides that two-thirds of any monetaryrecoveries (as defined in the Joint Prosecution Agreement) received by theCompany and/or the Louisiana Plaintiffs that are related to, or arise out of,the claims asserted in the Louisiana Suit will be allocated to the LouisianaPlaintiffs and one-third of any monetary recoveries will be allocated to theCompany. Pursuant to the Joint Prosecution Agreement, none of the Company(directly or through its counsel), the Louisiana Plaintiffs or The Wynne LawFirm may propose, accept or authorize a settlement or compromise of any or allof the claims asserted in the Louisiana Suit without the prior written consentof the other parties.

 

TheJoint Prosecution Agreement will become effective on the date that all of thefollowing have occurred: (i) the Court certifies the Louisiana Plaintiffs’claims as a class action; (ii) the Court approves the Joint ProsecutionAgreement; and (iii) the Court approves The Wynne Law Firm as counsel tothe Louisiana Plaintiffs.  A two-dayhearing on these matters was held on February 9 and 10, 2005.  At the conclusion of that hearing, the Court(i) granted class certification; (ii) approved The Wynne Law Firm as classcounsel and (iii) preliminarily approved the Joint Prosecution Agreement,subject only to the right of any class member to object, following notice.  The Court also ordered that the LouisianaPlaintiffs’ class representative cause written notice to be given to themembers of the class to inform them of their membership in the class, theirrights to exclude themselves from such membership, their rights to object tothe Joint Prosecution Agreement and their other rights as members of the class.

 

TheCompany or the Louisiana Plaintiffs may terminate the Joint ProsecutionAgreement at any time if a material disagreement arises between the Company andthe Louisiana Plaintiffs with respect to the claims asserted in the LouisianaSuit, or if either party in good faith believes that its or their bestinterests would conflict if the parties continued to jointly prosecute all orany of the claims. Notwithstanding the termination of the Joint ProsecutionAgreement, the Company’s and the Louisiana Plaintiffs’ obligation pursuant tothe Joint Prosecution Agreement to share in any monetary recoveries receivedshall continue in full force and effect.

 

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OnJanuary 24, 2005, the Stericycle Affiliates filed Defendants’ Amended andRestated Answer, Affirmative Defenses, Third-Party Petition, and Counterclaims(the “Counterclaim”) against the Company and Third-Party Defendants Otley L.Smith III; John R. Weaver, a former Chief Financial Officer of theCompany;  Robert M. Waller, a formerdirector of the Company; Curtis W. Crane, a former Chief Financial Officer ofthe Company; Charles D. Crochet, a former director and Chief Executive Officerof the Company; David J. Schoonmaker, a former director of the Company; StephenB. Koenigsberg; and Kevin J. McManus.  Inthe Counterclaim, the Stericycle Affiliates assert that the Company and theThird-Party Defendants, based on their alleged relationships with one anotherand/or participation in the transactions at issue in the Joint Petition, areliable to the Stericycle Affiliates in contribution for some or all of theclaims and damages asserted in the Joint Petition.  In addition, the Stericycle Affiliates allegethat the members of the Special Committee, individually, breached their fiduciaryduties to the Company by, among other things, failing to conduct a thoroughinvestigation and analysis of the Louisiana Plaintiffs’ claims prior toentering into the Joint Prosecution Agreement. Finally, the Stericycle Affiliates allege that the members of theSpecial Committee facilitated or caused insider trading of the Company’s CommonStock by failing to investigate, or causing an increase in, the share price andtrading volume of the Common Stock during the Fall of 2004.

 

TheCompany and the Special Committee categorically deny the claims asserted by theStericycle Affiliates, and intend to vigorously defend those claims whilecontinuing to pursue the claims stated in the Joint Petition.The Company and the Third-Party Defendantshave not yet filed their answers or responses to the Counterclaim.

 

**Item 2.   Changesin Securities**

 

None.

 

**Item 3.   DefaultsUpon Senior Securities**

 

None.

 

**Item 4.   Submissionof Matters to a Vote of Security Holders**

 

None.

 

**Item 5.   OtherInformation**

 

None.

 

**Item 6.   Exhibits**

 

Thefollowing 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. |

 

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SIGNATURES

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                           | 3CI  COMPLETE COMPLIANCE |
|--------------------------------|--------------------------|
|                           | CORPORATION              |
|                           | (Registrant)             |
|                           |                     |   |
|                           |                     |   |
| Dated:  February 14, 2005 | By:                      | /s/  Matthew D. Peiffer |   |
|                           |                     | Matthew  D. Peiffer |
|                           |                     | Chief  Financial Officer, Secretary and  Treasurer  (Principal Financial Officer and  Principal Accounting Officer) |

 

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