** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

| **ý** |   | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                                                                                                                                           |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|       |   | **For  the quarterly period ended December 31, 2003**                                                                                                                                                                                                                                                                                                                                                                                                  |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **OR**     |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **o**      |   | **Transition Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934**                                                                                                                                                                                                                                                                                                                                                          |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|       |   | **For  the transition period from                                     to                                  ** |

 

**Commissionfile number 1-11097**

 

**3CI COMPLETE COMPLIANCE CORPORATION**

(Exact name of registrantas specified in its charter)

 
|                                                               | **Delaware**                                                     |   | **76-0351992**                        |
|--------------------------------------------------------------------|------------------------------------------------------------------|--------|---------------------------------------|
|                                                               | (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                               |                                                             |   |                                  |
| **1517 W  North Carrier Parkway #104, Grand Prairie, Texas 75050** |
| (Address of principal  executive offices)                          |
| (Zip Code)                                                         |
|                                                               |
| **(972)  375-0006**                                                |
| (Registrant’s telephone  number, including area code)         |
|                                                                    |                                                                  |        |                                       |

 

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

YES ýNO o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this form 10-Qor any amendment to this Form 10-Q.

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 2b-2 of the Act).  Yes [ ]  No [X]

 

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Indicate the number of shares outstanding of each ofthe issuer’s classes of Common Stock, as of the latest practicable date.

 

The number of shares of Common Stock outstanding as ofthe close of business on February 9, 2004, was 9,739,611.

 

 

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**FORWARD-LOOKING STATEMENTS**

 

“THIS QUARTERLY REPORT CONTAINSFORWARD-LOOKING STATEMENTS CONCERNING THE COMPANY’S BUSINESS ANDOPERATIONS.  ALTHOUGH THE COMPANYBELIEVES THAT THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS AREREASONABLE, THESE EXPECTATIONS AND THE RELATED STATEMENTS ARE SUBJECT TO RISKS,UNCERTAINTIES, AND OTHER FACTORS THAT COULD CAUSE THE ACTUAL RESULTS TO DIFFERMATERIALLY FROM THOSE PROJECTED.  THESERISKS, 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.  THECOMPANY EXPRESSLY DISCLAIMS ANY OBLIGATIONS TO RELEASE PUBLICLY ANY UPDATES ORREVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY CHANGES IN THECOMPANY’S EXPECTATIONS.”

 

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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, 2003  and September 30, 2003                   |   |
|           |                                                        |   |
|           | Statements of Operations for  the three months              |   |
|           | ended  December 31, 2003 and 2002                           |   |
|           |                                                        |   |
|           | Statements of Cash Flows for  the                           |   |
|           | three  months ended December 31, 2003 and 2002              |   |
|           |                                                        |   |
|           | 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 and Reports  on Form 8-K                           |   |
|           |                                                        |   |
| **SIGNATURES** |                                                        |
|                |                                                             |        |  |

 

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**Item1. Financial Statements**

** **

**3CICOMPLETE COMPLIANCE CORPORATION**

**BALANCE SHEETS**

 
|                                                                                                                                  |   | **December 31,  2003** |           | **September 30,  2003** |       |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|----------------|-------------------------|------------|
|                                                                                                                                  |   | **(Unaudited)**        |           | **(Audited)**           |       |
| **ASSETS**                                                                                                                            |   |                   | ** **     |                    | ** ** |
|                                                                                                                                  |   |                   | ** **     |                    | ** ** |
| **Current Assets:**                                                                                                                   |   |                   | ** **     |                    | ** ** |
| **Cash and cash equivalents**                                                                                                         |   | **$**                  | **1,102,696**  | ** **              | **$**      | **1,057,055** | ** ** |
| **Accounts receivable, net allowances of $405,786 and  $409,164  at December 31, 2003 and September 30, 2003, respectively**          |   | **2,331,623**          | ** **     | **2,540,388**           | ** ** |
| **Inventory**                                                                                                                         |   | **67,071**             | ** **     | **73,525**              | ** ** |
| **Prepaid expenses**                                                                                                                  |   | **292,689**            | ** **     | **337,314**             | ** ** |
| **Deferred income taxes**                                                                                                             |   | **157,274**            | ** **     | **157,274**             | ** ** |
| **Other current assets**                                                                                                              |   | **5,596**              | ** **     | **16,320**              | ** ** |
| **Total current assets**                                                                                                              |   | **3,956,949**          | ** **     | **4,181,876**           | ** ** |
|                                                                                                                                  |   |                   | ** **     |                    | ** ** |
| **Property, plant and equipment, at cost**                                                                                            |   | **7,380,370**          | ** **     | **7,430,398**           | ** ** |
| **Accumulated depreciation**                                                                                                          |   | **(5,154,010**         | **)**          | **(5,186,243**          | **)**      |
| **Net property, plant and equipment**                                                                                                 |   | **2,226,360**          | ** **     | **2,244,155**           | ** ** |
|                                                                                                                                  |   |                   | ** **     |                    | ** ** |
| **Goodwill, net of accumulated depreciated of $174,988**                                                                              |   | **262,243**            | ** **     | **262,243**             | ** ** |
| **Intangibles, net of accumulated amortization of  $188,763 and $173,693  at December 31, 2003 and September 30, 2003, respectively** |   | **435,537**            | ** **     | **450,607**             | ** ** |
| **Deferred income taxes**                                                                                                             |   | **3,400,179**          | ** **     | **3,326,342**           |       |
| **Other assets**                                                                                                                      |   | **78,353**             | ** **     | **78,438**              | ** ** |
|                                                                                                                                  |   |                   | ** **     |                    | ** ** |
| **Total assets**                                                                                                                      |   | **$**                  | **10,359,621** | ** **              | **$**      | **10,543,661** | ** ** |
|                                                                                                                                  |   |                   | ** **     |                    | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                         |   |                   | ** **     |                    | ** ** |
| **Current Liabilities:**                                                                                                              |   |                   | ** **     |                    | ** ** |
| **Notes payable**                                                                                                                     |   | **$**                  | **—**     | ** **              | **$**      | **22,821** | ** ** |
| **Accounts payable**                                                                                                                  |   | **645,140**            | ** **     | **332,870**             | ** ** |
| **Accounts payable, affiliated companies**                                                                                            |   | **220,631**            | ** **     | **423,602**             | ** ** |
| **Accrued liabilities**                                                                                                               |   | **724,254**            | ** **     | **600,976**             | ** ** |
| **Note payable majority shareholder, current portion**                                                                                |   | **2,148,954**          | ** **     | **1,123,537**           | ** ** |
| **Total current liabilities**                                                                                                         |   | **3,738,979**          | ** **     | **2,503,806**           | ** ** |
|                                                                                                                                  |   |                   | ** **     |                    | ** ** |
| **Note payable majority shareholder, net of current  portion**                                                                        |   | **—**             | ** **     | **1,302,108**           | ** ** |
|                                                                                                                                  |   |                   | ** **     |                    | ** ** |
| **Total liabilities**                                                                                                                 |   | **3,738,979**          | ** **     | **3,805,914**           | ** ** |
|                                                                                                                                  |   |                   | ** **     |                    | ** ** |
| **Shareholder’s Equity:**                                                                                                        |   |                   | ** **     |                    | ** ** |
| **Common stock, $0.01 par value, authorized 40,450,000  shares;  Issued and outstanding 9,739,611 shares**                            |   | **97,742**             | ** **     | **97,742**              | ** ** |
| **Common stock to be issued (Note 5)**                                                                                                |   | **7,750,000**          | ** **     | **7,750,000**           | ** ** |
| **Less cost of treasury stock 34,500 shares**                                                                                         |   | **(51,595**            | **)**          | **(51,595**             | **)**      |
| **Additional Paid-in capital – common stock**                                                                                    |   | **20,519,861**         | ** **     | **20,519,861**          | ** ** |
| **Accumulated deficit**                                                                                                               |   | **(21,695,366**        | **)**          | **(21,578,261**         | **)**      |
| **Total Shareholders’ equity**                                                                                                   |   | **6,620,642**          | ** **     | **6,737,747**           | ** ** |
| **Total liabilities and shareholders’ equity**                                                                                   |   | **$**                  | **10,359,621** | ** **              | **$**      | **10,543,661** | ** ** |

 

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

 

1

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**3CI COMPLETE COMPLIANCE CORPORATIONSTATEMENTS OF OPERATIONS**

 
|                                     |   | **(Unaudited)**                              |          |
|------------------------------------------|--------|----------------------------------------------|---------------|
|                                     |   | **For the  three months ended December 31,** |          |
|                                     |   | **2003**                                     |          | **2002** | ** ** |
|                                     |   |                                         | ** **    |   | ** ** |
| **Revenues**                             |   | **$**                                        | **3,359,642** | ** ** | **$** | **3,594,386** | ** ** |
| **Expenses:**                            |   |                                         | ** **    |   | ** ** |
| **Cost  of services**                    |   | **2,124,220**                                | ** **    | **2,288,245** | ** ** |
| **Depreciation  and amortization**       |   | **126,074**                                  | ** **    | **175,879** | ** ** |
| **Selling,  general and administrative** |   | **1,208,904**                                | ** **    | **654,527** | ** ** |
| **Interest  expense**                    |   | **22,386**                                   | ** **    | **52,432** | ** ** |
| **Other  expense, net**                  |   | **69,000**                                   | ** **    | **69,000** | ** ** |
|                                     |   |                                         | ** **    |   | ** ** |
| **Income  (loss) before income taxes**   |   | **(190,942**                                 | **)**         | **354,303** | ** ** |
|                                     |   |                                         | ** **    |   | ** ** |
| **Income  taxes**                        |   | **(73,837**                                  | **)**         | **—** | ** ** |
|                                     |   |                                         | ** **    |   | ** ** |
| **Net  (loss) income**                   |   | **$**                                        | **(117,105**  | **)** | **$** | **354,303** | ** ** |
|                                     |   |                                         | ** **    |   | ** ** |
| **Basic  earnings per share:**           |   |                                         | ** **    |   | ** ** |
| **Basic  net (loss) income per share**   |   | **$**                                        | **(0.01**     | **)** | **$** | **0.04** | ** ** |
|                                     |   |                                         | ** **    |   | ** ** |
| **Diluted  earnings per share:**         |   |                                         | ** **    |   | ** ** |
| **Diluted  net (loss) income per share** |   | **$**                                        | **(0.01**     | **)** | **$** | **0.02** | ** ** |

 

**The accompanying notes are anintegral part of these financial statements.**

 

2

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**3CI COMPLETE COMPLIANCE CORPORATIONSTATEMENTS OF CASH FLOWS**

 
|                                                        |   | **(Unaudited)**                              |          |
|-------------------------------------------------------------|--------|----------------------------------------------|---------------|
|                                                        |   | **For the  three months ended December 31,** |          |
|                                                        |   | **2003**                                     |          | **2002** |   |
| **Cash  flows from operating activities:**                  |   |                                         | ** **    |   | ** ** |
| **Net  income (loss)**                                      |   | **$**                                        | **(117,105**  | **)** | **$** | **354,303** | ** ** |
| **Adjustments  to reconcile net income (loss) to net cash** |   |                                         | ** **    |   | ** ** |
| **provided  by operating activities:**                      |   |                                         | ** **    |   | ** ** |
| **Gain  on disposal of equipment**                          |   | **(6,024**                                   | **)**         | **—** | ** ** |
| **Depreciation  and amortization**                          |   | **126,074**                                  | ** **    | **175,879** | ** ** |
| **Deferred  income tax asset**                              |   | **(73,837**                                  | **)**         |   | ** ** |
| **Decrease  (increase) in accounts receivable, net**        |   | **208,765**                                  | ** **    | **(615,217** | **)** |
| **Decrease  (increase) in inventory**                       |   | **6,454**                                    | ** **    | **(10,876** | **)** |
| **Decrease  in prepaid expenses**                           |   | **44,625**                                   | ** **    | **148,670** | ** ** |
| **Decrease  in other assets and other current assets**      |   | **10,809**                                   | ** **    | **29,028** | ** ** |
| **Increase  in accounts payable**                           |   | **312,270**                                  | ** **    | **24,731** | ** ** |
| **Decrease  in accounts payable, affiliated companies**     |   | **(202,971**                                 | **)**         | **(109,600** | **)** |
| **Increase  in accrued liabilities**                        |   | **123,278**                                  | ** **    | **23,808** | ** ** |
| **Total  adjustments to net income (loss)**                 |   | **549,443**                                  | ** **    | **(333,577** | **)** |
| **Net  cash provided by (used in) operating activities**    |   | **432,338**                                  | ** **    | **20,726** | ** ** |
|                                                        |   |                                         | ** **    |   | ** ** |
| **Cash  flows from investing activities:**                  |   |                                         | ** **    |   | ** ** |
| **Proceeds  from sale of property, plant and equipment**    |   | **20,701**                                   | ** **    | **—** | ** ** |
| **Purchase  of property, plant and equipment**              |   | **(107,886**                                 | **)**         | **(22,692** | **)** |
| **Net  cash used in investing activities:**                 |   | **(87,185**                                  | **)**         | **(22,692** | **)** |
|                                                        |   |                                         | ** **    |   | ** ** |
| **Cash  flows from financing activities:**                  |   |                                         | ** **    |   | ** ** |
| **Principal  reduction of notes payable**                   |   | **(22,821**                                  | **)**         | **(51,394** | **)** |
| **Reduction  of note payable to majority shareholders**     |   | **(276,691**                                 | **)**         | **(245,243** | **)** |
| **Proceeds  from issuance of common stock**                 |   | **—**                                   | ** **    | **54,129** | ** ** |
| **Net  cash used in financing activities**                  |   | **(299,512**                                 | **)**         | **(242,508** | **)** |
|                                                        |   |                                         | ** **    |   | ** ** |
| **Net  increase (decrease) in cash and cash equivalents**   |   | **45,641**                                   | ** **    | **(244,474** | **)** |
|                                                        |   |                                         | ** **    |   | ** ** |
| **Cash  and cash equivalents, beginning of period**         |   | **1,057,055**                                | ** **    | **898,720** | ** ** |
|                                                        |   |                                         | ** **    |   | ** ** |
| **Cash  and cash equivalents, end of period**               |   | **$**                                        | **1,102,696** | ** ** | **$** | **654,246** | ** ** |

 

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

 

3

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**3CI COMPLETE COMPLIANCE CORPORATIONNOTES TO FINANCIAL STATEMENTSDecember 31, 2003**

 

**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 south and southeasternUnited States.

 

Effective October 1,1998, after approval by the then properly constituted 3CI Board of Directors,Stericycle Inc., a Delaware corporation (“Stericycle”), acquired 100% ofthe common stock of Waste Systems, Inc. (“WSI”) for $10 million. As aresult of the transaction, WSI became a wholly- owned subsidiary of Stericycle.Stericycle directly and indirectly through WSI owns (i) 67.5% or 6,578,504shares of the outstanding common stock, par value $0.01 per share (“CommonStock”), and (ii) 100% of the Company’s Series B Preferred Stock, par value$0.01 per share (“Series C referred Stock”, and together with the Series Bpreferred Stock, the “Preferred Stock”), all of which shares of Preferred Stockwere converted into Common Stock on April 6, 2003.  See Note 5.

 

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 10 ofRegulation S-X.  Accordingly, they donot include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements.  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 periodended December 31, 2003 are not necessarily indicative of the results that maybe expected for the year ended September 30, 2004.

 

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, 2003.

 

Certain amounts in thefinancial statements for 2002 have been reclassified to conform to the 2003presentation.

 

**NOTE2—NET (LOSS) INCOME PER SHARE**

 

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

 
|                                                                   |   | **Three  months ended  December 31,  2003** |     | **Three  months ended  December 31,  2002** |   |
|------------------------------------------------------------------------|--------|---------------------------------------------|----------|---------------------------------------------|--------|
|                                                                   |   |                                        |     |                                        |   |
| Numerator:                                                             |   |                                        |     |                                        |   |
| Net income  (loss)                                                     |   | $                                           | (117,105 | )                                           | $      | 354,303 |   |
| Denominator for  basic earnings per share—weighted average shares |   | 17,489,611                                  |     | 9,274,811                                   |   |
| Effect of  dilutive shares:                                            |   |                                        |     |                                        |   |
|                                                                   |   |                                        |     |                                        |   |
| Preferred Shares                                                       |   | —                                      |     | 7,750,000                                   |   |
| Warrants                                                               |   |                                        |     | 278,880                                     |   |
| Denominator for  diluted earnings per share                            |   | 17,489,611                                  |     | 17,303,691                                  |   |
|                                                                   |   |                                        |     |                                        |   |
| Basic net income  (loss) per share                                     |   | $                                           | (0.01    | )                                           | $      | 0.04 |   |
| Diluted net  income (loss) per common share                            |   | $                                           | (0.01    | )                                           | $      | 0.02 |   |

 

4

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The effect of thepreferred shares on the above basic and diluted net income per sharecalculation is based upon (i) the Company’s interpretation that theappropriate conversion rate is the per share market value of the Common Stockon the conversion notice date, less $1.00 per share, but in no event is theconversion rate less than $1.00 per share and (ii) the fact that thepreferred shares were converted on April 6, 2003. (See Notes 5 and 6)

 

Stock options were not included in the December 30,2003 and 2002 computations as they were antidilutive since the exercise pricesranging from $0.28 to $0.59 were greater than the average price of the commonstock. Preferred shares are not included in the December 31, 2003 computationsas they were antidilutive since the Company has a loss in that period.  

 

 

 

 

**NOTE3—PROMISSORY NOTE**

 

The Company hasoutstanding an amended and restated revolving promissory note payable to WSI(the “Note”), which had an original aggregate principal amount of $5,487,308.

 

In connection with a Noteextension as of October 1, 2000, 3CI issued warrants to WSI for thepurchase of up to 541,286 shares of Common Stock at an exercise price of $0.10per share. WSI exercised these warrants on December 18, 2002. The valuesof the warrants were included in the statement of operations for the respectiveperiods as interest expense.

 

An agreement effectiveOctober 1, 2001 extended the Note’s maturity to July 1, 2002. Theterms of this extension included a reduction of the interest rate to the primerate, plus 1.0% and called for a principal payment of $200,000 at renewal andan additional $200,000 principal payment in June 2002. The agreement alsorequired the Company to achieve minimum levels of EBITDA for each of thesix-month periods ended March 31, 2002 and June 30, 2002. This levelwas not achieved for the six months ended March 31, 2002 requiring theCompany to record an additional $120,404 in interest expense.

 

Pursuant to an agreementdated May 23, 2002, the Note was amended to extend its maturity toOctober 1, 2003, and to make the Note payable in quarterly payments ofprincipal and interest, with interest calculated at the prime rate, plus 1.0%,and to require a principal payment of $700,000. In addition, this amendmentrequired the commencement of monthly payments of $100,000 to be applied toaccrued interest and principal commencing June 1, 2002, and continuing onthe first day of each month thereafter. The agreement also required the Companyto achieve a minimum level of $900,000 in EBITDA for the six-month period endedJune 30, 2002 and for each trailing six-month period of each quarterlyperiod thereafter until maturity.

 

By agreement with WSIeffective July 1, 2003, the interest rate on the Note was reduced to theprime lending rate (4% as of December 31, 2003), as such may change fromtime to time, published under “Money Rates” in The Wall Street Journal(Southwestern Edition), not to exceed 13%.

 

On or aboutSeptember 19, 2003, by agreement with WSI, the EBITDA calculation covenantof the Note was amended (i) effective for the Company’s fiscal quarterended March 31, 2003, to exclude a portion of the Company’s reserve forbad debt, and (ii) effective for the Company’s fiscal quarter endedJune 30, 2003, and for subsequent quarters, to exclude certain expensesassociated with the dispute regarding the conversion rate of the PreferredStock.  Under the Note, failure to attain the minimum level of EBITDA requiresthe Company to pay a penalty fee equal to three (3%) percent of the outstandingprincipal balance of the Note at the end of the applicable quarter.  This penalty fee would be recorded asadditional interest expense.

 

Pursuant to an agreementdated as of October 1, 2003, between the Company and WSI, the Note wasagain amended to extend the maturity date of the Note to October 1, 2004.Total interest expense was $22,386 and $52,432 for the three months endedDecember 31, 2003 and 2002, respectively.

 

The Company has requestedan additional amendment to the Note, which would exclude from the EBITDAcalculation under the Note (i) certain expenses associated with the disputeregarding the conversion rate of Preferred Stock for the Company’s fiscalquarter ended March 31, 2003, and (ii) certain fees and expenses associatedwith all of the litigation described in Part II — Item I hereto for theCompany’s fiscal quarter ended December 31, 2003.

 

**NOTE4—INCOME TAXES**

 

At September 30,2003 the Company had eligible net operating loss carryforwards for federalincome tax purposes of approximately $10,555,000 which will begin expiring in2004. The Company also had state net operating losses at September 30,2003. Based on Internal Revenue Code Section 382 relating to changes inownership of the Company, utilization of the net operating loss carryforwardsis subject to an annual limitation of approximately

 

5

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$995,000 for netoperating losses created prior to September 30, 1998. All net operatinglosses created after September 30, 1998 are not subject to any limitationsand are available to be used for 20 years after they are produced. Assuch, the deferred tax asset and the related valuation allowance for netoperating loss carryforwards were reduced at September 30, 2003 to account forthe portion of the net operating loss carryforwards the Company will not beable to utilize.

 

During the fourth quarterof the Company’s 2003 fiscal year, the Company reevaluated the estimated amountof valuation allowance required in light of the profitability achieved during2003 and 2002 as well as profitability expected in future years. As a result,the Company increased the valuation allowance on deferred tax assets inaccordance with SFAS No. 109, “Accounting for Income Taxes,” to an amountthat the Company believes is more likely than not of being recovered 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 theSeries C Preferred Stock) by the market value of the Common Stock on thedate of conversion. On April 6, 2003, the per share closing price of theCommon Stock was $0.21. Accordingly, the Company would have issued 36,904,761shares of 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 onApril 6, 2003, the Company would have issued 7,750,000 shares of CommonStock upon conversion of the Preferred Stock, which would have increased WSI’sownership percentage to approximately 76.6% of the outstanding shares of CommonStock and the combined WSI and Stericycle ownership percentage to approximately81.9%.

 

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 to enforcethe Settlement Agreement, dated July 17, 1997, pursuant to which thePreferred Stock was issued. In its petition, the Company requests the Courtestablish the conversion rate of the Preferred Stock to be the Agreed MaximumConversion Rate and confirm the issuance of no more than 7,750,000 shares ofCommon Stock to WSI as of April 6, 2003. WSI subsequently filed a motionto have the Court declare that the Preferred Stock is convertible into36,704,761 shares of Common Stock. The parties are currently conducting discoveryin this proceeding.   See Part II, Item1, Legal Proceedings.

 

6

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**PreferredStock Dividends**

 

There are unanimouswritten consents of the Board of Directors declaring dividends on theSeries B Preferred Stock and Series C Preferred Stock totaling $161,158,$637,623, $907,387 and $497,550 for each of the years 2003, 2002, 2001, 2000,respectively.  Each of these resolutionsfor the dividends 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.

 

On December 22,2003, the independent and disinterested members of the Board of Directors,relying on an opinion of counsel expert in Delaware corporate law and acting onbehalf of the Board, determined that (i) the previous declarations ofdividends on the Preferred Stock in the aggregate amount of $2,203,717(collectively, the “Preferred Stock Dividends”) had not been effective todeclare and obligate the Company to pay such dividends, and (ii) thePreferred Stock Dividends cannot now be lawfully declared and paid on thePreferred Stock. As a consequence of these determinations, the Company reversedthe Preferred Stock Dividends entries on the Company’s books and records andrestated its financial statements for the years ended September 30, 2001 and2002.  These restatements reflect forthe quarter ended December 31, 2002, a removal of (a) dividends payable on thePreferred Stock as a current liability on the Company’s balance sheets and asan adjustment of net income (loss) applicable to common shareholders on thestatements of operations, and (b) the Preferred Stock Dividends as a line itemon the Company’s statements of shareholders’ equity and statements of cashflows.

 

WSI was the holder of thePreferred Stock. The Company has been advised by WSI, Stericycle and the fourmembers 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.  See, Part II, Item 1, Legal Proceedings.

 

**NOTE6—COMMITMENTS AND CONTINGENCIES**

 

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

 

On June 20, 2002, asuit was filed by Larry F. Robb, individually, on behalf of a class comprisedof the Company’s minority stockholders, and derivatively on behalf of theCompany, in the First Judicial District Court in Shreveport, Louisiana againstStericycle, certain of 3CI’s directors and the Company’s President and ChiefExecutive Officer which alleged minority stockholder oppression, breach offiduciary duty and unjust enrichment. On or about October 27, 2003, theplaintiffs in this suit filed their First Amended Petition adding the Companyas a derivative defendant. The Company has contacted its insurance carrier andhas hired counsel to assist the Company in this litigation.  See Part II, Item 1, Legal Proceedings.

 

The Company is adefendant in Medical Waste Services of *AmericaLLC*v. *American 3CI CompleteCompliance Corporation*, cause no. 02-65105, in the 151st JudicialDistrict Court of Harris County, Texas. In this suit, the plaintiff seeks approximately $818,800 in damages,interest and attorney’s fees for failure to pay for treatment of medical wasteand for breach of contract.  Plaintiffalleges that the Company has failed to pay for treatment and disposal ofmedical waste at the plaintiff’s Birmingham, Alabama facility.  Further, plaintiff alleges that the Companyagreed to deliver an additional amount of medical waste to plaintiff’s facilityfor treatment and disposal at a predetermined price, which the Company hasfailed to do.  3CI contends that theplaintiff has breached the contract by unilaterally increasing the contractprice.  The parties are currently indiscovery, and the Company cannot at this time predict the outcome of thislitigation.

 

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

 

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governmental regulation,any material relaxation of regulatory requirements governing medical wastedisposal or of their enforcement could result in a reduced demand for theCompany’s services and have a material adverse effect on the Company’s revenuesand financial condition. The scope and duration of existing and futureregulations affecting the medical waste disposal industry cannot be anticipatedand are subject to changing political and economic pressures.

 

The Company is subject tocertain other litigation and claims arising in the ordinary course of business.In the opinion of management of the Company, the amounts ultimately payable, ifany, as a result of such claims and assessments will not have materiallyadverse effect on the Company’s financial position, results of operations or netcash flows.

 

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

 

The Company is engaged inthe business of medical waste management services in the south and southeasternUnited States.  The Company’s customersinclude regional medical centers, major hospitals, clinics, medical and dentaloffices, veterinarians, pharmaceutical companies, retirement homes, medicaltesting laboratories and other medical waste generators.  The following is a discussion of some eventsthat may allow a better understanding of the progression of the Company’sfinancial position and operating results.

 

The Company hashistorically financed its working capital needs, capital expenditures andacquisitions primarily using borrowings from WSI and internally generatedfunds. Currently, the Company’s only borrowed indebtedness consists of moneyborrowed from WSI under the Note.  As ofDecember 31, 2003, and December 31, 2002, the outstanding balances underthe WSI Note were in the aggregate principal amounts of approximately$2,148,954 and $3,645,392, respectively.  See Liquidity and Capital Resources herein and Note 3.

 

See Note 5 and 6 to theCompany’s financial statements above for a discussion of the reversal of theCompany’s Preferred Stock Dividends on its books and records and therestatement of its financial statements for the years ended September 30, 2001and 2002.

 

During the fourth quarterof the Company’s 2003 fiscal year, the Company reevaluated the estimated amountof valuation allowance required in light of the profitability achieved during2003 and 2002 as well as profitability expected in future years. As a result,the Company increased the valuation allowance on deferred tax assets inaccordance with SFAS No. 109, “Accounting for Income Taxes,” to an amountthat the Company believes is more likely than not of being recovered.Accordingly, an income tax benefit of approximately $3,483,616 was reflected inthe fourth quarter. The amount of net deferred tax assets estimated to berecoverable was based upon the Company’s assessment of the likelihood of nearterm operating income.

 

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**RESULTS OF OPERATIONS**

 

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

 
|                                         |   | **Three Months  Ended  December 30,** |   |
|----------------------------------------------|--------|---------------------------------------|--------|
|                                         |   | **2003**                              |   | **2002** |   |
|                                         |   |                                  |   |   |   |
| Revenues                                     |   | $                                     | 3,360  |   | $ | 3,594 |   |
| Cost of services                             |   | 2,124                                 |   | 2,288 |   |
| Depreciation and amortization                |   | 126                                   |   | 176 |   |
| Selling, general and administrative expenses |   | 1,209                                 |   | 655 |   |
| (Loss) income from operations                |   | (99                                   | )      | 475 |   |
| Interest expense                             |   | 22                                    |   | 52 |   |
| Other expense, net                           |   | 70                                    |   | 69 |   |
| Income taxes                                 |   | (74                                   | )      |   |   |
| (Loss) Income                                |   | (117                                  | )      | 354 |   |
| Depreciation                                 |   | 111                                   |   | 170 |   |
| Amortization                                 |   | 15                                    |   | 6 |   |
| Interest expense, net                        |   | 22                                    |   | 52 |   |
| Income taxes                                 |   | (74                                   | )      |   |   |
| EBITDA(1)                                    |   | $                                     | (43    | ) | $ | 582 |   |
|                                              |        |                                       |        |  |  |  |  |  |

 

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(1)  EBITDA is calculated as the sum of netincome, plus interest expense, income tax expense, depreciation expense, andamortization expense to the extent deducted in calculating 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 byall companies and therefore may not be comparable to similarly titled measuresreported by other companies.  EBITDA isnot a measure on accordance with accounting principles generally accepted inthe 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 beavailable for management’s discretionary use due to legal or functionalrequirements, debt service, other commitments and uncertainties.

 

**Threemonths ended December 31, 2003 compared to three months ended December 31,2002:**

 

***Revenues*** decreased by$234,744, or 6.5%, to $3,359,642 during the three month period ended December31, 2003, from $3,594,386 for the three month period ended December 31, 2002.This decrease is primarily related to a reduction in the volume of wastehandled.  The reduction in volume wasattributable to the Company’s efforts to focus on small quantity generatorswhich provide higher margins at lower volumes while reducing the focus on lessprofitable larger quantity generators.

 

***Cost of services***decreased by $164,025, or 7.2%, to $2,124,220 during the three months endedDecember 31, 2003, compared to $2,288,245 for the three month period endedDecember 31, 2002.  This decrease wasprimarily attributable to a decrease in processing and transportationcosts.  Cost of services as a

 

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percentage of revenuesdecreased to 63.2% compared to 63.7% during the three months ended December 31,2003 and December 31, 2002 respectively.

 

***Depreciation and amortization*** expense for the three monthsended December 31, 2003 decreased $49,805 or 28.3% to $126,074 compared to$175,879 for the three months ended December 31, 2002. This decrease wasprimarily attributable to the depreciable useful lives of assets still employedin our operations having expired during the quarter. 

 

***Selling, general and administrative***expensesfor the period increased 84.7% or $554,377 to $1,208,904 from $654,527 duringthe three months ended December 31, 2002. Sales, general and administrative expenses increased as a percentage ofrevenue to 36.0% for the three months ended December 31, 2003, as compared to18.2% for the three months ended December 31, 2002 due primarily to increasesin legal expenses and information technology consulting fees.   Substantially all of these increased legalfees are related to the legal proceedings described in Part II, Item 1, LegalProceedings below.

 

***Interestexpense*** for the quarter ended December 31, 2003 decreasedby $30,046 or 57.3%, to $22,386 from $52,432 during the three months endedDecember 31, 2002.  This decrease wasprimarily due to reduced debt and a decrease in the interest rate under theNote, which is variable and tied to the prime interest rate, currently at 4%.During the twelve months ended December 31, 2003 the Company reduced its debtpayable by $1,496,438.

 

***Earningsbefore interest taxes depreciation and amortization (“EBITDA”)***

 

Earnings before interesttaxes depreciation and amortization totaled $(42,482) or (1.3%) of revenuecompared to $582,614 or 16.2% of revenue for the quarter ended December 31,2002.  The difference was primarilyreflective of the increase in legal and professional fees.

 

**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.

 

The Note is payable inmonthly payments of $100,000, due on the first day of each month, which areapplied to principal and accrued interest calculated at the prime lending rate(4% as of December 31, 2003), as such may change from time to time, publishedunder “Money Rates” in *The Wall StreetJournal* (Southwestern Edition) (the “Prime Rate”), not to exceed13%. As of December 31, 2003, and December 31, 2002, the outstandingbalances under the Note were in the aggregate principal amounts of approximately$2,148,954 and $3,645,392, respectively. In addition to the term note facilitydescribed above, the Note includes a revolving credit agreement under which theCompany can borrow up to and including $100,000; the Company has no borrowingsoutstanding under the revolving credit agreement. Borrowings under the Note maybe prepaid at any time without penalty. The Note matures on October 1,2004.

 

The Note is subordinatedto all security interests under a certain settlement agreement, the interest towhich are held by Stericycle, but otherwise is secured by substantially all ofthe Company’s assets. Pursuant to the Note, the Company is required to achieveeach fiscal quarter a minimum level of $900,000 of EBITDA (earnings beforeinterest, taxes, depreciation and amortization) for the then trailing six-monthperiod, excluding certain expenses associated with the dispute regarding theconversion rate of the Preferred Stock.

 

The Company was indefault under the EBITDA covenant in the Note at March 31, 2003 and at December31, 2003.  The Company is attempting tonegotiate an amendment of the EBITDA covenant to exclude (i) as of March 31,2003, certain expenses associated with the dispute regarding the conversionrate of the Preferred Stock, and (ii) as of December 31, 2003, certain fees andexpenses associated with all of the litigation described in Part II – Item Ihereto.  If the Company is unable toobtain such amendment, it will be required to pay under the terms of the Notepenalty fees to WSI of approximately $101,775 for the March 31, 2003 defaultand $64,000 for the December 31, 2003 default.

 

Since June 2003, theCompany has not attempted to arrange credit from third-party sources, butbelieves that if such funds were available, they would be at higher interestrates and could require additional operating and financing restrictions thanthose under the Note.

 

 

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At September 30,2003, the Company had net operating loss carryforwards for federal income taxpurposes of approximately $10,555,000 which will begin expiring in 2004. TheCompany also had state net operating losses at September 30, 2003. Basedon Internal Revenue Code Section 382 relating to changes in ownership ofthe Company, utilization of the net operating loss carryforwards is subject toan annual limitation of approximately $995,000 for net operating losses createdprior to September 30, 1998. All net operating losses created afterSeptember 30, 1998 are not subject to any limitations and are available tobe used for 20 years after they are produced. As such, the deferred taxasset and the related valuation allowance for net operating loss carryforwardswere reduced to account for the portion of the net operating loss carryforwardsthe Company will not be able to utilize.

 

During the fourth quarterof the Company’s 2003 fiscal year, the Company reevaluated the estimated amountof valuation allowance required in light of the profitability achieved during2003 and 2002 as well as profitability expected in future years. As a result,the Company increased the valuation allowance on deferred tax assets inaccordance with SFAS No. 109, “Accounting for Income Taxes,” to an amountthat the Company believes is more likely than not of being recovered. Accordingly,an income tax benefit of approximately $3,483,616 was reflected in the fourthquarter. The amount of net deferred tax assets estimated to be recoverable wasbased upon the Company’s assessment of the likelihood of near term operatingincome.

 

At December 31, 2003, theCompany had net working capital, exclusive of the note payable to its majorityshareholder, of $2,366,924 compared to a net working capital exclusive of thenote payable to its majority shareholder of $2,801,607 at September 30, 2003.  This decrease in net working capital of$434,683 was due primarily to the increase in accounts payable.

 

Net cash provided by operating activities was $432,338during the three month period ended December 31, 2003, compared to $20,726 forthe three month period ended December 31, 2002.  The difference due to the decrease in accounts receivable.  The Company is continuing its efforts tocollect on delinquent receivables.

 

Net cash used in investing activities for the threemonths ended December 31, 2003, was $87,185 compared to $22,692 for the sameperiod in 2002.  The $64,493 increasereflected increased investment in equipment.

 

Net cash used infinancing activities was $299,512 for the three month period ended December 31,2003, compared to $242,508 during the three month period ended December 31,2002.  The $57,004 increase was due to alarger portion of the payment made by the Company on the Note being applied tothe outstanding principal amount of the Note since the interest rate under theNote has decreased..

 

Item 3.   **QualitativeDisclosure about Market Risk**

 

The Company’sexposure to market risk includes the possibility of rising interest rates inconnection with the Note, thereby increasing its debt service obligation, whichcould adversely affect the Company’s cash flows.  The interest rate on the Note is variable and tied to the primerate not to exceed 13%.  An increase inthe prime rate of 1% would have the effect of increasing interest expense byapproximately $21,490 over 12 months. The Company does not utilize derivative financial instruments tomitigate the risks of changes in interest rates.

 

Item 4.   **Controls and Procedures**

 

The Companymaintains disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in the Company’s filings under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the periods specified in the rules and forms of the Securities andExchange Commission.  This informationis accumulated and communicated to the Company’s management including the ChiefExecutive Officer and the Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosures.  The Company’s management including the Chief Executive Officerand the Chief Financial Officer

 

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recognizes that any set of controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives.

 

Under thesupervision and with the participation of the Company’s management, includingthe Chief Executive Officer and the Chief Financial Officer, the Companyconducted an evaluation of its disclosure controls and procedures within 90days of the filing date of this report. Based on this evaluation, the Company’s Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosures controls andprocedures are effective in alerting them on a timely basis to materialinformation required to be disclosed in the Company’s periodic 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.

 

PART II - OTHER INFORMATION

 

Item 1.    Legal Proceedings-

 

**JudicialFilings Regarding the Conversion Rate of the Preferred Stock**

 

On May 9, 2003, the Company filed a declaratoryjudgment action in the 269th District Court in Harris County, Texas (the“Court”) seeking a judicial determination of the appropriate conversion rate ofthe Preferred Stock. The Company filed the declaratory judgment action inconnection with *James T. Rash, et. al. v.Waste Systems, Inc.*, the Company and certain of the Company’sformer directors and officers (the “1995 Action”), which was the originalproceeding pursuant to which the Preferred Stock was issued by the Company.

 

Following a hearing in the 1995 Action and forjurisdictional reasons, the Company elected to initiate a new action (the “2003Action”), and on August 22, 2003, filed an original petition fordeclaratory judgment and to enforce the Settlement Agreement, datedJuly 17, 1997, pursuant to which the Preferred Stock was issued. In thispetition, the Company requests the Court establish the conversion rate of thePreferred Stock to be the Agreed Maximum Conversion Rate and confirm theissuance of no more than 7,750,000 shares of Common Stock to WSI as ofApril 6, 2003.

 

On October 3, 2003, WSI filed a motion to enforcejudgment in the 1995 Action and to have the Court declare that the PreferredStock is convertible into 36,904,761 shares of Common Stock. The Companyopposed WSI’s motion to enforce the judgment. Following a hearing, the Court abatedWSI’s motion on November 10, 2003.

 

On October 24, 2003, Don Smith, Ghere-SmithInterests, Inc., Tidel Technologies, Inc. f/k/a American MedicalTechnologies, Inc., Jim Rash, individually and in his capacity asrepresentative of the certified class of minority shareholders of 3CI, andLarry Robb, individually and as proposed co-representative of the samecertified class (collectively, the “Minority Stockholders”), answered and/orintervened in the 2003 Action, cross- claimed against WSI and filed a third-partypetition against Stericycle.

 

The Minority Stockholders have asserted, on behalf ofall minority stockholders of 3CI, many of the same claims of fraud, breach offiduciary duty, unjust enrichment and other acts of minority stockholderoppression, as they have alleged in the Louisiana Suit (as defined anddiscussed below). In addition, the Minority Stockholders have asked the Courtto deny 3CI’s request for declaratory relief, find that Stericycle and WSI haveabused their duties to the minority stockholders and declare that Stericycleand WSI, among other things, (i) forfeit all fees, payments, dividends,warrants, preferred stock, common stock, profit shares and all other forms ofvalue which Stericycle and WSI have extracted from 3CI and its minority owners,(ii) pay actual damages of at least $28 million and reasonablepunitive damages, and (iii) buy the capital stock of the minoritystockholders of the Company at the relative value of 3CI’s shares toStericycle’s shares at the time Stericycle gained control over 3CI, i.e. oneshare of Stericycle common stock for every five shares of Common Stock.

 

On December 3, 2003, Stericycle filed itsoriginal answer to the Minority Stockholders’ third-party petition, and onDecember 24, 2003, WSI filed its answer and counter-petition in the 2003Action. In their respective filings, Stericycle and WSI have denied allmaterial allegations and reasserted their claims that the Preferred Stock is

 

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convertible into 36,904,761 shares of Common Stock.The parties are currently conducting discovery in the 2003 Action.

 

As of September 4, 2003, the full Boardunanimously appointed a Special Committee comprised of the independentDirectors on the Company’s Board of Directors who are not affiliated withStericycle or WSI.  The SpecialCommittee was initially established to act on behalf of the Company inconnection with the Company’s dispute with WSI and Stericycle as to the appropriateconversion rate of the Preferred Stock. See Part II, Item 1, Legal Proceedings - Louisiana Minority StockholderLitigation for a further description of the authority of the Special Committee.

 

**Louisiana Minority StockholderLitigation**

 

On June 20, 2002, Larry F. Robb, individually, onbehalf of a class comprised of the Company’s minority stockholders, andderivatively on behalf of the Company (collectively, the “LouisianaPlaintiffs”), filed cause no. 467704-A, *Robbet al. v. Stericycle, Inc. et al.*, in the First Judicial District Court, Caddo Parish, Louisiana (the“Louisiana Suit”). In this suit, the Louisiana Plaintiffs assert numerousclaims of minority stockholder oppression, breach of fiduciary duty and unjustenrichment against Stericycle, the four directors of 3CI who are also affiliatesof Stericycle, and the President and Chief Executive Officer of the Company(collectively, the “Louisiana Defendants”).

 

The Louisiana Plaintiffs contend that sinceStericycle’s acquisition of WSI in September 1998, Stericycle has unfairlyand improperly exercised control over 3CI to the detriment of the Company’sminority stockholders in contravention of various contractual, common law andstatutory duties. Among other things, the Louisiana Plaintiffs allege that theLouisiana Defendants have (i) deprived the Company of revenues by imposingunfavorable loan obligations and avoidable expenses on the Company;(ii) usurped 3CI’s business and business opportunities and diverted itsassets for Stericycle’s benefit; and (iii) depressed the value of the CommonStock. The Louisiana Plaintiffs further allege that Stericycle has breached anagreement entered into for the protection of 3CI’s minority stockholders inconnection with Stericycle’s acquisition of WSI.

 

Based on these and other allegations, the LouisianaPlaintiffs seek to recover actual and punitive damages and a variety ofequitable and other relief, including forfeiture or rescission of variousdisputed transactions, a constructive trust of all benefits Stericycle hasderived on business usurped from the Company or not offered to the Company andan order requiring Stericycle to buy the capital stock of the minoritystockholders of the Company at the relative value of the Company’s shares toStericycle’s shares at the time Stericycle gained control over the Company,i.e. one share of Stericycle common stock for every five shares of theCompany’s Common Stock.

 

On or about October 27, 2003, the LouisianaPlaintiffs filed their First Amended Petition adding the Company as aderivative defendant. The Company has not yet answered this petition. However,the other parties in the Louisiana Suit currently are proceeding withdiscovery. The Company does not have sufficient information to predict theoutcome of the Louisiana Suit.

 

As ofJanuary 8, 2004, the Board expanded the authority of the Special Committeesuch that the Special Committee now has 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, the1995 Action and the 2003 Action, or any actions or proceedings related to anyof the foregoing; (ii) make or approve all decisions of the Companyrelated to the Louisiana Suit, the 1995 Action and the 2003 Action, includingthe Company’s filing, amending, maintaining, prosecuting or settling of anylegal proceedings related to such suits; and (iii) exercise such otherpower and authority that may be exercised by the full Board with regard to theforegoing. The Special Committee is composed of Stephen B. Koenigsberg, KevinJ. McManus and Robert M. Waller, who are the independent directors on theBoard not affiliated with Stericycle or WSI. The Special Committee has recently appointed legalcounsel to assist it in its investigation of the Louisiana Plaintiffs’allegations and to gather all information related to the Louisiana Suit.

 

Item 2.    Changes inSecurities –

 

None.

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Item 3.    Defaultsupon Senior Securities –

 

The note payable to majority shareholder issubordinated to all security interests under a certain settlement agreement,the interest to which are held by Stericycle, but otherwise is secured bysubstantially all of the Company's assets. Pursuant to the Note, the Company isrequired to achieve each fiscal quarter a minimum level of $900,000 of EBITDA(earnings before interest, taxes, depreciation and amortization) for the thentrailing six-month period, excluding certain expenses associated with thedispute regarding the conversion rate of the Preferred Stock. 

 

The Company was in default under the EBITDA covenantin the Note at March 31, 2003 and at December 31, 2003.  The Company is attempting to negotiate anamendment of the EBITDA covenant to exclude (i) as of March 31, 2003, certainexpenses associated with the dispute regarding the conversion rate of thePreferred Stock, and (ii) as of December 31, 2003, certain fees and expensesassociated with all of the litigation described in Part II – Item I hereto.  If the Company is unable to obtain suchamendment, it will be required to pay under the terms of the Note penalty feesto WSI of approximately $101,775 for the March 31, 2003 default and $64,000 forthe December 31, 2003 default. 

 

 

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

 

None.

 

Item 5.  Other Information –

 

None.

 

Item 6.    Exhibitsand Reports on Form 8-K –

 

a) Exhibits.  The following is alist of the exhibits filed with this form 10Q.

 

 
| **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. |

 

 

**b)  Reports on Form 8-K**

 

**None.**

 

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SIGNATURES

 

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                     |                                                                                                              | 3CI COMPLETE COMPLIANCE |   |
|--------------------------|-------------------------------------------------------------------------------------------------------------------|-------------------------|--------|
|                     |                                                                                                              | CORPORATION             |   |
|                     |                                                                                                              | (Registrant)            |   |
|                     |                                                                                                              |                    |   |
|                     |                                                                                                              |                    |   |
| Dated: February 17, 2004 | By:                                                                                                               | /s/ Donald P. Zima      |   |
|                     |                                                                                                              | Donald P. Zima          |
|                     |                                                                                                              |
|                     | Chief  Financial Officer, Secretary  and Treasurer(Principal Financial Officer and  Principal Accounting Officer) |                    |
|                          |                                                                                                                   |                         |        |  |  |  |  |  |

 

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