**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

----

 

**FORM 10-Q/A**

 

**(MarkOne)**
| **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 ofregistrant as specified in its charter)

 
| **Delaware**                                                     | ** ** | **76-0351992**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**1517W. North Carrier Parkway #104, Grand Prairie, Texas 75050**

(Address ofprincipal executive offices)

(Zip Code)

 

**(972)375-0006**

(Registrant’stelephone 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 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

YESý NOo

 

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 ofthe Act).  Yeso  Noý

 

----

 

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 May 10, 2005, was9,739,611.

 

 

----

 

**Explanatory Note**

 

TheCompany is filing this Quarterly Report on Form 10-Q/A as Amendment No. 1to the Company’s Form 10-Q for the quarter ended March 31, 2005,originally filed on May 13, 2005 (the “Original Form 10-Q”), for thepurpose of (i) amending the Company’s Statements of Operations for thethree and six-month periods ended March 31, 2004, and the Company’s Statementof Cash Flows for the six months ended March 31, 2004, and (ii) amendingcertain disclosures in Note 2, Note 3 and in Management’s Discussion andAnalysis of Financial Condition and Results of Operations in Item 2 of Part I,in order to account for an overstatement of interest expense for 2004 ofapproximately $90,457 reported in the Original Form 10-Q, due to theCompany’s miscalculation of penalty fees payable by the Company to WasteSystems, Inc. (“WSI”), the Company’s majority stockholder, under anamended and restated revolving promissory note payable to WSI.  For theconvenience of the reader, the Quarterly Report has been restated in itsentirety.

 

**FORWARD-LOOKINGSTATEMENTS**

 

THIS QUARTERLY REPORTCONTAINS FORWARD-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

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** **

**3CICOMPLETE COMPLIANCE CORPORATION**

 

**IN 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

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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** | ** ** |

 

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

 

4

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**3CICOMPLETE COMPLIANCE CORPORATION**

**STATEMENTSOF 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**                                     | ** **    | **49,739**                                     | ** ** | **37,759**                                   | ** ** | **72,125**                                   | ** **    |
| **Other  expense-net**                            | ** ** | **18,612**                                     | ** **    | **80,474**                                     | ** ** | **93,303**                                   | ** ** | **142,370**                                  | ** **    |
| **Income  (loss) before income taxes**            | ** ** | **(7,530**                                     | **)**         | **(99,469**                                    | **)**      | **14,414**                                   | ** ** | **(290,411**                                 | **)**         |
| ** **                                        | ** ** | ** **                                     | ** **    | ** **                                     | ** ** | ** **                                   | ** ** | ** **                                   | ** **    |
| **Income  tax (expense) benefit**                 | ** ** | **(4,267**                                     | **)**         | **37,971**                                     | ** ** | **(17,707**                                  | **)**      | **111,808**                                  | ** **    |
| ** **                                        | ** ** | ** **                                     | ** **    | ** **                                     | ** ** | ** **                                   | ** ** | ** **                                   | ** **    |
| **Net  income (loss)**                            | ** ** | **$**                                          | **(11,797**   | **)**                                          | **$**      | **(61,498**                                  | **)**      | **$**                                        | **(3,293**    | **)** | **$** | **(178,603** | **)** |
| ** **                                        | ** ** | ** **                                     | ** **    | ** **                                     | ** ** | ** **                                   | ** ** | ** **                                   | ** **    |
| **Basic  earnings per share:**                    | ** ** | ** **                                     | ** **    | ** **                                     | ** ** | ** **                                   | ** ** | ** **                                   | ** **    |
| **Basic  net income (loss) per share**            | ** ** | **$**                                          | **(0.00**     | **)**                                          | **$**      | **(0.00**                                    | **)**      | **$**                                        | **(0.00**     | **)** | **$** | **(0.01** | **)** |
| ** **                                        | ** ** | ** **                                     | ** **    | ** **                                     | ** ** | ** **                                   | ** ** | ** **                                   | ** **    |
| **Diluted  earnings per share:**                  | ** ** | ** **                                     | ** **    | ** **                                     | ** ** | ** **                                   | ** ** | ** **                                   | ** **    |
| **Diluted  net income (loss) per share**          | ** ** | **$**                                          | **(0.00**     | **)**                                          | **$**      | **(0.00**                                    | **)**      | **$**                                        | **(0.00**     | **)** | **$** | **(0.01** | **)** |

 

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

 

5

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**3CICOMPLETE COMPLIANCE CORPORATION**

**STATEMENTOF 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)**                                                                        | ** ** | **$**                                        | **(3,293**  | **)**                                        | **$**      | **(178,603** | **)** |
| **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**                                   | ** **  | **(111,808**                                 | **)**      |
| **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**                                   | ** ** |
| **Increase  in notes payable, other**                                                         | ** ** | **464,084**                                  | ** **  | **595,315**                                  | ** ** |
| **(Decrease)Increase  in accounts payable**                                                   | ** ** | **(224,221**                                 | **)**       | **42,764**                                   | ** ** |
| **Decrease  in accounts payable, affiliated companies**                                       | ** ** | **(398,070**                                 | **)**       | **(299,160**                                 | **)**      |
| **(Decrease)Increase  in accrued liabilities**                                                | ** ** | **(7,552**                                   | **)**       | **274,799**                                  | ** ** |
| **Increase  in deferred revenue**                                                             | ** ** | **4,064**                                    | ** **  | **—**                                   | ** ** |
| ** **                                                                                    | ** ** | ** **                                   | ** **  | ** **                                   | ** ** |
| **Total  adjustments to net income**                                                          | ** ** | **112,365**                                  | ** **  | **684,507**                                  | ** ** |
| **Net  cash used by operating activities**                                                    | ** ** | **109,072**                                  | ** **  | **505,904**                                  | ** ** |
| ** **                                                                                    | ** ** | ** **                                   | ** **  | ** **                                   | ** ** |
| **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:**                                                     | ** ** | ** **                                   | ** **  | ** **                                   | ** ** |
| **Reduction  of note payable to majority shareholders**                                       | ** ** | **(118,459**                                 | **)**       | **(556,160**                                 | **)**      |
| **Net  cash provided in financing activities**                                                | ** ** | **(118,459**                                 | **)**       | **(556,160**                                 | **)**      |
| ** **                                                                                    | ** ** | ** **                                   | ** **  | ** **                                   | ** ** |
| **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** | ** ** |

 

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

 

6

----

 

**NOTE1—DESCRIPTION OF BUSINESS**

 

**Organizationand Basis of Presentation**

 

3CI Complete ComplianceCorporation (the “Company” or “3CI”), a Delaware corporation, is engaged in thecollection and transportation of biomedical waste in the southern UnitedStates.

 

Effective October 1,1998, after approval by the then properly constituted 3CI Board of Directors(the “Board”), 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, par value$0.01 per share (“Common Stock”), and 100% of the shares of Common Stock to beissued by the Company as a result of the conversion of the Company’s preferredstock (the “Preferred Stock”).  See Note 5 for details on the conversionof the Preferred Stock to Common Stock.

 

The accompanyingunaudited condensed financials statements have been prepared in accordance withaccounting principles generally accepted in the United States, for interimfinancial 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.  Operatingresults for the six-month period ended March 31, 2005 are not necessarilyindicative of the results that may be expected for the year ending September 30,2005.

 

For further information,refer to the consolidated financial statements and footnotes included in theCompany’s annual report on Form 10-K for the year ended September 30,2004.

 

**NOTE2—NET (LOSS) INCOME PER SHARE**

 

The following table setsforth the computation of net income (loss) per common share:

 
| ** **                                                        | ** ** | **Three  months ended  March 31,** | ** ** | **Three  months ended  March 31,** | ** ** | **Six  months ended  March 31,** | ** ** | **Six  months ended  March 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                                        | ** ** | **2005**                                | ** ** | **2004**                                | ** ** | **2005**                              | ** ** | **2004**                              | ** ** |
| Numerator:                                                        |       |                                    |       |                                    |       |                                  |       |                                  |       |
|                                                              |       |                                    |       |                                    |       |                                  |       |                                  |       |
| Net income  (loss)                                                |       | $                                       | (11,797    | )                                       | $          | (61,498                               | )          | $                                     | (3,293     | ) | $ | (178,603 | ) |
| 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      | )                                       | $          | (0.00                                 | )          | $                                     | (0.00      | ) | $ | (0.01 | ) |
| Diluted net  income (loss) per common share                       |       | $                                       | (0.00      | )                                       | $          | (0.00                                 | )          | $                                     | (0.00      | ) | $ | (0.01 | ) |

 

The effect of theconversion of the preferred shares on the above basic and diluted net incomeper share calculations is based upon (i) the Company’s interpretation thatthe appropriate 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) thefact that all issued and outstanding shares of the Preferred Stock wereconverted on April 6, 2003 (See Note 5).

 

Stock options were notincluded in the March 31, 2005 computations as they were antidilutive.

 

**NOTE3—PROMISSORY NOTE**

 

The Company hasoutstanding an amended and restated revolving promissory note payable to WSI(the “Note”), with an outstanding principal balance of $1,184,659 as of March 31,2005.  Effective September 30, 2004, the Note was amended andrestated to extend the maturity date of the Note to April 3, 2006 withmonthly payments of $25,000.  The interest rate on the Note is the primelending rate (5.75% as of March 31, 2005), as such rate may change fromtime to time, published under “Money Rates” in*The Wall Street Journal* (Southwestern Edition), not to exceed 13%.

 

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The Note is subordinatedto all security interests under a certain Settlement Agreement effective January 10,1996, by and among the Company, James H. Shepherd, James Michael Shepherd,Richard T. McElhannon (collectively, the “Shepherd Parties”), WSI and certainformer directors and officers of the Company (the “Shepherd SettlementAgreement”), which was assigned to Stericycle on May 1, 2002, butotherwise is secured by substantially all of the Company’s assets.  TheNote requires the Company to achieve a minimum level of EBITDA of $500,000,after excluding (i) certain expenses associated with the dispute regardingthe conversion rate of the Preferred Stock, and (ii) certain expensesassociated with the Louisiana Suit (as hereinafter defined), for the quartersending September 30, 2004 and for each trailing six-month period of eachquarterly 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 expensefor all debt was $37,759 and $72,125 for the six months ended March 31,2005 and March 31, 2004, respectively.

 

**NOTE4—INCOME TAXES**

 

As of September 30,2004 the Company had eligible net operating loss carry forwards for federalincome tax purposes of approximately $9,237,692 which will begin expiring in2010. The Company also had state net operating losses at September 30,2004. Based on Section 382 of the Internal Revenue Code relating tochanges in ownership of the Company, utilization of the net operating losscarry forwards is subject to an annual limitation of approximately $995,000 fornet operating losses created prior to September 30, 1998. All netoperating losses created after September 30, 1998 are not subject to anylimitations and are available to be used for 20 years after they areproduced. As such, the deferred tax asset and the related valuation allowancefor net operating loss carry forwards were reduced to account for the portionof the net operating loss carry forwards the Company will not be able toutilize.

 

During the fourth quarterof 2003, the Company reevaluated the estimated amount of valuation allowancerequired in light of the profitability achieved during 2003 and 2002 as well asprofitability expected in future years. As a result, the Company reduced thevaluation allowance on deferred tax assets in accordance with SFAS No. 109,“Accounting for Income Taxes,” to an amount that the Company believes is morelikely than not of being recovered.  Accordingly, an income tax benefit ofapproximately $3,484,000 was reflected in the fourth quarter of 2003.  Theamount of net deferred tax assets estimated to be recoverable was based uponthe Company’s assessment of the likelihood of near-term operating income.

 

**NOTE5—PREFERRED STOCK**

 

**PreferredStock Conversion**

 

Pursuant to thecertificates of designation governing the Preferred Stock, all 7,750,000 sharesof Preferred Stock automatically converted on April 6, 2003. The Companyhas not issued any shares of Common Stock and has not recorded any increase inthe outstanding Common Stock related to the conversion of the Preferred Stock.

 

Prior to April 6,2003, WSI and Stericycle asserted that the conversion rate of the PreferredStock is such that each share of Preferred Stock is convertible into thatnumber of shares of Common Stock determined by dividing $7,000,000 (withrespect to the Series B Preferred Stock) or $750,000 (with respect to the Series CPreferred Stock) by the market value of the Common Stock on the date ofconversion. On April 6, 2003, the per share closing price of the CommonStock was $0.21. Accordingly, the Company would have issued 36,904,761 sharesof Common Stock upon conversion of the Preferred Stock under thisinterpretation, which would have increased WSI’s ownership percentage toapproximately 91.2% of the outstanding shares of Common Stock and the combinedWSI and Stericycle ownership percentage to approximately 93.2%.

 

WSI and Stericycle’sinterpretation of the conversion rate is contrary to the Company’sinterpretation 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 that the appropriate conversion rate isthe per share market value of the Common Stock on the conversion notice date,less $1.00 per share, but that the conversion rate shall not be less than $1.00per share (the “Agreed Maximum Conversion Rate”). Under this interpretation,since the per share market value of the Common Stock was less than $1.00 on April 6,2003, the Company would have issued 7,750,000 shares of Common Stock uponconversion of the Preferred Stock, which would have increased WSI’s ownershippercentage to approximately 76.6% of the outstanding shares of Common Stock andthe combined WSI and Stericycle ownership percentage to approximately 81.9%.

 

On April 2, 2003,the Company, WSI and Stericycle entered into an Agreement to Defer Conversionof Preferred Stocks (the “Agreement to Defer Conversion”), pursuant to whichall parties agreed that the Company will not issue any Common Stock uponconversion of the Preferred Stock until a judicial judgment as to theappropriate conversion rate has become final and non-appealable.

 

On May 9, 2003, theCompany filed a declaratory judgment action seeking a judicial determination ofthe appropriate conversion rate of the Preferred Stock. On August 22,2003, the Company filed an original petition for declaratory judgment and toenforce the Settlement Agreement, dated July 17, 1997, pursuant to whichthe Preferred Stock was issued. In its petition, the Company requests the Courtestablish the conversion rate of the Preferred Stock to be the Agreed MaximumConversion Rate and confirm the issuance of

 

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no more than 7,750,000shares of Common Stock to WSI as of April 6, 2003. WSI subsequently fileda motion to have the Court declare that the Preferred Stock is convertible into36,704,761 shares of Common Stock.  The parties are currently conductingdiscovery in this proceeding.

 

**PreferredStock Dividends**

 

There are unanimouswritten consents of the Board declaring dividends on the Series BPreferred 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 dividends called forpayment in cash from funds legally available for the payment of dividends, asand when the Board may direct by further resolution. However, none of theseunanimous consents are executed by all of the individuals who were members ofthe Board at the date of such unanimous consents, and none of the dividendshave been paid.  There were no undeclared dividends as of March 31,2005 and March 31, 2004.

 

On December 22,2003, the independent and disinterested members of the Board, relying on anopinion of counsel expert in Delaware corporate law and acting on behalf of theBoard, determined that (i) the previous declarations of dividends on thePreferred Stock in the aggregate amount of $2,203,717 (collectively, the “PreferredStock Dividends”) had not been effective to declare and obligate the Company topay such dividends, and (ii) the Preferred Stock Dividends cannot now belawfully declared and paid on the Preferred Stock. As a consequence of thesedeterminations, the Company reversed the Preferred Stock Dividend entries onthe Company’s books and records and restated its financial statements for theyears ended September 30, 2000, 2001 and 2002.  These restatementsreflect a removal of (a) dividends payable on the Preferred Stock as acurrent liability on the Company’s balance sheets and as an adjustment of netincome (loss) applicable to common shareholders on the statements ofoperations, and (b) the Preferred Stock Dividends as a line item on theCompany’s statements of shareholders’ equity and statements of cash flows.

 

WSI was the holder of thePreferred Stock. The Company has been advised by WSI, Stericycle and themembers of the Board who are affiliates of WSI and Stericycle that they believethe Company remains obligated to pay the Preferred Stock Dividends aspreviously declared in the Board resolutions and as previously recorded on theCompany’s books. If WSI and Stericycle’s position is correct, the PreferredStock Dividends would be paid by the Company in cash from funds legallyavailable for the payment of dividends as and when the Board may direct byfurther resolution. Due to WSI, Stericycle and their affiliates’ announcedposition on the Preferred Stock Dividends, the Company has determined theamount of such dividends to be a contingent liability of $2,203,717.

 

**NOTE6—NOTE PAYABLE**

 

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

 

**NOTE7—COMMITMENTS AND CONTINGENCIES**

 

See Note 5 of the Notesto the Financial Statements above for a discussion of certain contingentliabilities of the Company related to the Preferred Stock.

 

The Company is aplaintiff jointly with Larry F. Robb, individually, on behalf of a classcomprised of the Company’s minority stockholders, in material litigation in theFirst Judicial District Court in Shreveport, Louisiana, against Stericycle andthe four affiliates of Stericycle who are or were directors of 3CI.  See Part II,Item 1, Legal Proceedings for a description of this litigation.

 

The Company operateswithin the regulated medical waste disposal industry, which is subject tointense governmental regulation at the federal, state and local levels. TheCompany believes it is currently in compliance in all material respects withall applicable laws and regulations governing the medical waste disposalbusiness. However, continuing expenditures may be required in order for theCompany 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.

 

The Company is subject tocertain other litigation and claims arising in the ordinary course ofbusiness.  In the opinion of management of the Company, the amountsultimately payable, if any, as a result of such claims and assessments will nothave a materially adverse effect on the Company’s financial position, resultsof operations or net cash flows.

 

**Item2.   Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

The Company is engaged inthe business of medical waste management services in the southern UnitedStates.  The Company’s customers include regional medical centers, majorhospitals, clinics, medical and dental offices, veterinarians, pharmaceuticalcompanies, retirement homes, medical testing laboratories and other medicalwaste generators.  The following is a discussion of some events that mayallow a better understanding of the progression of the Company’s financialposition and operating results.

 

The Company hashistorically financed its working capital needs, capital expenditures andacquisitions primarily using borrowings

 

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from WSI and internallygenerated funds. Currently, the Company’s only borrowed indebtedness consistsof money borrowed from WSI under the Note and annual insurance premiumfinancing.  As of March 31, 2005, September 30, 2004, and March 31,2004, the outstanding balances under the WSI Note were in the aggregateprincipal 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’sfinancial statements above for a discussion of the reversal of the Company’sPreferred Stock Dividends on its books and records.  See Note 4 for adiscussion of the change in the Company’s deferred tax assets valuation in thefourth quarter of the Company’s 2003 fiscal year.

 

**RESULTSOF 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                                   |       | 1,116                                 |       | 2,126 |   | 2,332 |   |
| (Loss) income  from operations                |       | 33                                      |       | 30                                    |       | 146 |   | (76 | ) |
| Interest expense                              |       | 22                                      |       | 49                                    |       | 38 |   | 72 |   |
| Other expense,  net                           |       | 19                                      |       | 80                                    |       | 93 |   | 142 |   |
| Income tax  expense (benefit)                 |       | 4                                       |       | (38                                   | )          | 18 |   | (111 | ) |
| Net (Loss)  Income                            |       | $                                       | (12        | )                                     | $          | (61 | ) | $ | (3 | ) | $ | (179 | ) |
| Depreciation and  amortization                |       | 110                                     |       | 119                                   |       | 217 |   | 245 |   |
| Interest  expense, net                        |       | 22                                      |       | 49                                    |       | 38 |   | 72 |   |
| Income tax  expense (benefit)                 |       | 4                                       |       | (38                                   | )          | 18 |   | (111 | ) |
| EBITDA (1)                                    |       | 124                                     |       | 69                                    |       | 270 |   | 27 |   |

 

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(1)  EBITDA iscalculated as the sum of net income, plus interest expense, income tax expense,depreciation expense and amortization expense, to the extent deducted incalculating net income.  The Company considers EBITDA to be a widelyaccepted financial indicator of a company’s operating performance and abilityto service debt, fund capital expenditures and expand its business. EBITDA is not calculated in the same way by all companies and therefore may notbe comparable to similarly titled measures reported by other companies. EBITDA is not a measure on accordance with accounting principles generallyaccepted in the United States.  EBITDA should not be considered as analternative to net income, as an indicator of operating performance or as analternative to cash flow as a measure of liquidity.  The funds depicted bythe measure may not be available for management’s discretionary use due tolegal or functional requirements, debt service, other commitments anduncertainties.

 

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

 

***Revenues*** decreased by $205,496, or6.3%, to $3,070,762 during the three-month period ended March 31, 2005,from $3,276,258 for the three month period ended March 31, 2004. Thisdecrease is primarily related to a reduction in the volume of wastehandled.  Substantially all of this reduction in volume was attributableto the Company’s efforts to focus on small quantity generators which providehigher margins at lower volumes while reducing the focus on less profitablelarger 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 $2,011,040 for the three-month period ended March 31,2004.  This decrease was primarily attributable to a decrease inprocessing costs.  Cost of services as a percentage of revenues decreasedto 60.9% compared to 61.4% during the three months ended March 31, 2005and March 31, 2004 respectively.  This percentage decrease wasprimarily attributable to a decrease in processing costs.

 

***Depreciation and amortization*** expensefor 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.This decrease was primarily due to assets still employed in the Company’soperations being fully depreciated.

 

***Selling, general and 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,as compared to 34.0% for the three months ended March 31, 2004.

 

***Interest expense*** for the three monthsended March 31, 2005 decreased by $27,582 or 55.5%, to $22,157 from $49,739during the three months ended March 31, 2004.  This decrease wasprimarily due to penalties paid and accrued due to the Company’s failure tomeet the EBITDA covenant under the Note on March 31, 2004, which was 3% ofthe outstanding principal balance of the Note.

 

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***Earnings before interest, taxes, depreciation andamortization (“EBITDA”)*** for the quarter ended March 31,2005, totaled $124,707 or 4.1% of revenue compared to $69,292 or 2.1% ofrevenue for the quarter ended March 31, 2004.  The difference wasprimarily reflective of better gross margins, lower sales, general andadministrative expense, and lower other expenses.

 

**Sixmonths ended March 31, 2005 compared to six months ended March 31,2004:**

 

***Revenues*** decreased by $407,766 or6.1%, to $6,228,134 during the six months ended March 31, 2005, from$6,635,900 for the six month period ended March 31, 2004. This decrease isprimarily related to a reduction in the volume of waste handled. Substantially all of this reduction in volume was attributable to the Company’sefforts to focus on small quantity generators which provide higher margins atlower volumes while reducing the focus on less profitable larger quantitygenerators.

 

***Cost of services*** decreased $396,073,or 9.6%, to $3,739,187, during the six months ended March 31, 2005,compared to $4,135,260 for the six month period ended March 31,2004.  This decrease was primarily attributable to a decrease inprocessing costs and a decrease in transportation costs due to increased routeefficiency.  Cost of revenues as a percentage of revenues decreased to60.0% during the six months ended March 31, 2005, as compared to 62.3%during the six months ended March 31, 2004.

 

***Depreciation and amortization*** expensefor 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.This decrease was primarily due to assets still employed in the Company’soperations being fully depreciated.

 

***Selling, general and 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 $34,366or 47.6% to $37,759 during the six months ended March 31, 2005 as comparedto $72,125 during the six months ended March 31, 2004.  This decreasewas due to the penalties paid and accrued due to the Company’s failure to meetthe EBITDA covenant under the Note on March 31, 2004, which was 3% of theoutstanding principal balance of the Note.

 

***Earnings before interest, taxes, depreciation andamortization (“EBITDA”)*** totaled $269,546 or 4.3% ofrevenue for the six months ended March 31, 2005 compared to $26,811 or0.4% of revenue for the six months ended March 31, 2004.  Thedifference of $242,735 was primarily reflective of better gross margins andlower expenses.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company hashistorically financed its working capital needs, capital expenditures andacquisitions primarily using advances from WSI and internally generated funds.The Company’s borrowed indebtedness currently consists only of amounts owed toWSI under the Note and annual insurance premium financing.

 

The Note had anoutstanding principal balance of $1,184,659 as of March 31, 2005. Effective September 30, 2004, the Note was amended and restated to extendthe 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 (5.75%as of March 31, 2005), as such rate may change from time to time,published under “Money Rates” in*The WallStreet Journal* (Southwestern Edition), not to exceed 13%.

 

The Note requires theCompany to achieve a minimum level of EBITDA of $500,000, after excluding (i) certainexpenses associated with the dispute regarding the conversion rate of thePreferred Stock, and (ii) certain expenses associated with the LouisianaSuit, for the quarters ending September 30, 2004 and for each trailingsix-month period of each quarterly period thereafter until maturity.  Asof March 31, 2005, the Company was in compliance with the required levelof EBITDA under the Note.

 

In addition to the termnote facility described above, the Note includes a revolving credit agreementunder which the Company can borrow up to $100,000; the Company has noborrowings outstanding under the revolving credit agreement.  Borrowingsunder the Note may be prepaid at any time without penalty.  The Note issubordinated to all security interests under the Shepherd Settlement Agreement,which were assigned to Stericycle on May 1, 2002, but otherwise is securedby substantially all of the Company’s assets.

 

The Company has notattempted to obtain a credit facility from any source other than its existingfacility with WSI, and does not know whether it could or could not obtain acredit facility with an independent third-party lender, but believes that ifsuch a facility was available, it could be at higher interest rates and couldrequire additional operating and financing restrictions than those under theNote.

 

During 2003 and 2004, theCompany incurred material legal expenses substantially related to its disputeswith Stericycle and WSI regarding the correct conversion rate of the PreferredStock and an investigation by the Special Committee into allegations made bycertain minority stockholders of the Company in the Louisiana Suit. During the2004 fiscal year, these legal expenses were in excess of $1 million. In December 2004,at the direction of the Special Committee, the Company joined with the minoritystockholders of the Company as a plaintiff in the Louisiana Suit, which is scheduledfor trial in the Fall of 2005. Although the Company cannot predict what itsfinancial investment will be related to the Louisiana Suit, the Companybelieves that prosecution of the Louisiana Suit will

 

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continue to require acommitment of its financial resources and that the amount of this commitmentmay be material. See Part II, Item 1, Legal Proceedings.

 

During 2004 and 2005, theCompany’s transportation fuel costs have increased significantly. Although theCompany 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 had eligible net operating loss carry forwards for federalincome tax purposes of approximately $9,237,692 which begin expiring in2010.  The Company also had state net operating losses at September 30,2004. Based on Section 382 of the Internal Revenue Code relating tochanges in ownership of the Company, utilization of the net operating losscarry forwards is subject to an annual limitation of approximately $995,000 fornet operating losses created prior to September 30, 1998. All netoperating losses created after September 30, 1998 are not subject to anylimitations and are available to be used for 20 years after they areproduced. As such, the deferred tax asset and the related valuation allowancefor net operating loss carry forwards were reduced to account for the portionof the net operating loss carry forwards the Company will not be able toutilize.

 

During the fourth quarterof 2003, the Company reevaluated the estimated amount of valuation allowancerequired in light of the profitability achieved during 2003 and 2002 as well asprofitability expected in future years.  As a result, the Company reducedthe valuation allowance on deferred tax assets in accordance with SFAS No. 109,“Accounting for Income Taxes,” to an amount the Company believes is more likelythan not of being recovered. Accordingly, an income tax benefit ofapproximately $3,484,000 was reflected in the fourth quarter of 2003. Theamount of net deferred tax assets estimated to be recoverable was based uponthe Company’s assessment of the likelihood of near-term operating income.

 

The Company had networking capital, exclusive of the Note, on March 31, 2005 of $1,958,376,compared to $1,978,944 on September 30, 2004, which was a decrease ofapproximately 1%, or $20,568.

 

Net cash provided byoperating activities was $109,072 during the six-month period ended March 31,2005, compared to $505,904 in cash provided by operating activities during thesix-month period ended March 31, 2004.  The decrease in cash providedfrom operations of $396,832 was predominantly due to a decrease in accountspayable and accounts payable to affiliated companies, as well as a decrease inaccrued liabilities.  Cash required byhigher inventory levels was offset by cash provided from lower other assets,and increases in prepaid expenses – primarily prepaid insurance - were offsetby financing of this under other notes payable.

 

Net cash used ininvesting activities for the six months ended March 31, 2005, was $137,620compared to $85,982 for the same period in 2004.  The $51,638 increasereflected increased investment in equipment.

 

Net cash used in financingactivities was $118,459 for the six-month period ended March 31, 2005,compared to $556,160 during the six-month period ended March 31,2004.  The $437,701 decrease was primarily due to smaller principalpayments by the Company on the Note.

 

**Item3.   Qualitative Disclosure about Market Risk**

 

The Company’s exposure tomarket risk includes the possibility of rising interest rates in connectionwith the Note, thereby increasing its debt service obligation, which couldadversely affect the Company’s cash flows.  The interest rate on the Noteis variable and tied to the prime rate not to exceed 13%.  An increase inthe prime rate of 1% would have the effect of increasing interest expense byapproximately $11,846 over 12 months.  The Company does not utilizederivative financial instruments to mitigate the risks of changes in interestrates.

 

**Item4.   Controls and Procedures**

 

The Company maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the Company’s filings under the Securities ExchangeAct of 1934 is recorded, processed, summarized and reported within the periodsspecified in the rules and forms of the Securities and ExchangeCommission.  This information is accumulated and communicated to theCompany’s management including the Chief Executive Officer and the ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosures.  The Company’s management including the Chief ExecutiveOfficer and the Chief Financial Officer recognizes that any set of controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives.

 

Under the supervision andwith the participation of the Company’s management, including the ChiefExecutive Officer and the Chief Financial Officer, the Company conducted anevaluation of its disclosure controls and procedures within 90 days of thefiling date of this report.  Based on this evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosures controls and procedures are effective in alerting them on a timelybasis to material information required to be disclosed in the Company’speriodic filings.

 

There have been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect these controls subsequent to the date of theevaluation referenced in the foregoing paragraph.

 

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**PART II- OTHER INFORMATION**

 

**Item 1.   LegalProceedings**

 

**LouisianaMinority Stockholder Litigation**

 

On June 20, 2002,Larry F. Robb, individually, on behalf of a class comprised of the Company’sminority stockholders, and derivatively on behalf of the Company (collectively,the “Louisiana Plaintiffs”), filed cause no. 467704-A,*Robb et al. v. Stericycle, Inc. et al.*(the “Louisiana Suit”), in the First Judicial District Court, Caddo Parish,Louisiana (the “Court”). In the Louisiana Suit, the Louisiana Plaintiffsoriginally asserted numerous claims of minority stockholder oppression, breachof fiduciary duty and unjust enrichment against WSI, Stericycle, the fouraffiliates of Stericycle who are or were directors of 3CI (the “StericycleAffiliates”) and the Company’s President and Chief Executive Officer.

 

After conducting aninvestigation into the facts, arguments and other matters that in its view arerelated to the issues raised in the Louisiana Suit, a Special Committee of theBoard, composed of the independent directors on the Board determined that theclaims against Stericycle, WSI and the Stericycle Affiliates (the “LouisianaDefendants”) in the Louisiana Suit have merit and warrant prosecution by theCompany.

 

In December 2004,the Company and the Louisiana Plaintiffs filed a joint petition (the “JointPetition”), which amended and superseded the Plaintiffs’ First AmendedPetition.  Pursuant to the Joint Petition (i) the Company hasrealigned itself as a plaintiff in the Louisiana Suit and joins on its ownbehalf in the prosecution of the claims asserted by the Louisiana Plaintiffs inthe Louisiana Suit against Stericycle, WSI and the Stericycle Affiliates, and (ii) theCompany’s President and Chief Executive Officer was non-suited.

 

In connection with theLouisiana Suit, the Company entered into an Agreement for Joint Prosecution(the “Joint Prosecution Agreement”) with the Louisiana Plaintiffs and The WynneLaw Firm, legal counsel to the Louisiana Plaintiffs in the LouisianaSuit.  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 JointProsecution Agreement was not to become effective until the date, if ever, thatthe Court approved all of the following: (i) certification of theLouisiana Plaintiffs’ claims as a class action; (ii) The Wynne Law Firm asclass counsel to the Louisiana Plaintiffs; and (iii) the Joint ProsecutionAgreement.  On February 10, 2005, the Court (i) granted classcertification, and (ii) approved The Wynne Law Firm as class counsel, andon April 21, 2005, the Court formally approved the Joint ProsecutionAgreement. The Joint Prosecution Agreement became effective on April 21,2005.

 

On January 24, 2005,the Stericycle Affiliates filed Defendants’ Amended and Restated Answer,Affirmative Defenses, Third-Party Petition, and Counterclaims (the “Counterclaim”)against the Company and the following Third-Party Defendants:  Otley L.Smith III; John R. Weaver, a former Chief Financial Officer of theCompany;  Robert M. Waller, a former director of the Company; Curtis W.Crane, a former Chief Financial Officer of the Company; Charles D. Crochet, aformer director and Chief Executive Officer of the Company; David J.Schoonmaker, a former director of the Company; Stephen B. Koenigsberg; andKevin J. McManus.  In the Counterclaim, the Stericycle Affiliates assertedcontribution and indemnity claims against the Company and the Third-PartyDefendants and breaches of fiduciary duties and facilitation or causation ofinsider trading against the members of the Special Committee, individually.

 

On April 6, 2005 theStericycle Affiliates filed a motion for judgment on the pleadings, assertingthat, with one exception, the claims asserted in the Joint Petition belong tothe Company and that the class does not have standing to pursue thoseclaims.  A hearing on this motion is set for May 16, 2005.

 

On April 21, 2005, ahearing was held on the Counterclaim.  The Court found that the StericycleAffiliates had failed to properly state claims for contribution orindemnity against the Company or the Third-Party Defendants.  TheCourt granted the Stericycle Affiliates until May 6, 2005 to file anamended Counterclaim repleading their claims.  In addition, the Courtstayed the claims asserted against the Special Committeemembers until further order of the Court terminating or modifying thestay.

 

On May 6, 2005, theStericycle Affiliates filed Defendants’ Amended Third-Party Petition andCounterclaims in which the Stericycle Affiliates set forth the samecontribution, indemnity and breach of fiduciary duty claims as in theCounterclaim and added a negligent misrepresentation claim against the Companyand the Third-Party Defendants.  The Company intends to seek a dismissal,or alternatively a stay, of these claims.

 

The Special Committee hasbeen informed that the Stericycle Affiliates strongly disagree with the claimsstated in the Joint Petition and that they believe such claims are withoutfactual or legal basis.  Further, the Stericycle Affiliates have informedthe Special Committee that they believe they have fulfilled all of their dutiesas directors and will vigorously defend the claims against them.

 

**Item2.    Changes in Securities**

 

None.

 

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**Item3.    Defaults upon Senior Securities**

 

None.

 

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

 

None.

 

**Item 5.  Other Information**

 

None.

 

**Item 6.    Exhibits**

 

The following is a listof 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

 

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: September 8, 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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