UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended June 30, 2004
		For the quarterly period ended December 31, 2004
OR		OR
o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the transition period from to
		Commission file number 1-11097

Commission file number 1-11097

3CI COMPLETE COMPLIANCE CORPORATION

(Exact name of registrant as specified in its charter)

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

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

YES ý NO o

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

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

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

The number of shares of Common Stock outstanding as of the close of business on ~~August~~February 47, ~~2004~~2005, was 9,739,611.

FORWARD-LOOKING STATEMENTS

“THIS QUARTERLY REPORT CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING THE COMPANY’S BUSINESS AND OPERATIONS. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, THESE EXPECTATIONS AND THE RELATED STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES, AND OTHER FACTORS THAT COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THESE RISKS, UNCERTAINTIES, AND OTHER FACTORS INCLUDE, BUT ARE NOT LIMITED TO, ADVERSE WEATHER CONDITIONS, FLUCTUATIONS IN CUSTOMER DEMAND, COMPETITIVE ACTIVITY AND PRICING PRESSURE AND GENERAL ECONOMIC CONDITIONS AFFECTING THE BIO-MEDICAL WASTE DISPOSAL INDUSTRY, AS WELL AS OTHER RISKS DETAILED IN THE COMPANY’S FILINGS WITH THE SEC. THE COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATIONS TO RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY CHANGES IN THE COMPANY’S EXPECTATIONS.”

3CI COMPLETE COMPLIANCE CORPORATION

I N D E X

PART I	FINANCIAL INFORMATION
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Balance Sheets as of June 30, 2004 and September 30, 2003
	Balance Sheets as of December 31, 2004 and September 30, 2004
	Statements of Operations for the three and nine months ended June 30, 2004 and 2003
	Statements of Operations for the three months ended December 31, 2004 and 2003
	Statements of Cash Flows for the nine months ended June 30, 2004 and 2003
	Statements of Cash Flows for the three months ended December 31, 2004 and 2003
	Notes to Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
PART II	OTHER INFORMATION
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 Ofof Security Holders
Item 5.	Other Information
Item 6.	Exhibits ~~and Reports on Form 8-K~~
SIGNATURES

PART I –- FINANCIAL INFORMATION

Item 1. Financial Statements

3CI COMPLETE COMPLIANCE CORPORATION

BALANCE SHEETS

	June 30, 2004			September 30, 2003
	December 31, 2004			September 30, 2004
	(unaudited)
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	~~399~~592,~~666~~740		$	1710,~~057,055~~353
Accounts receivable, net allowances of $401,437 and $622,668 at June 30, 2004 and September 30, 2003, respectively	2,128,551			2,540,388
Accounts receivable, net allowances of $182,859 and $218,819 at December 31, 2004 and September 30, 2004, respectively	2,689,419			2,765,159
Inventory	6997,~~502~~096			7369,~~525~~916
Prepaid expenses	~~761~~461,~~221~~671			~~337~~480,~~314~~837
Deferred income taxes	~~157~~114,~~274~~501			~~157~~127,~~274~~955
Other current assets	349,~~582~~305			1670,~~320~~800
Total current assets	34,~~519~~004,~~796~~732			4,~~181~~225,~~876~~020
Property, plant and equipment, at cost	6,~~904~~551,~~561~~971			76,~~430~~787,~~398~~197
Accumulated depreciation	(4,~~845~~562,~~082~~362		)	(54,~~186~~820,~~243~~503		)
Net property, plant and equipment	21,~~059~~989,~~479~~609			21,~~244~~966,~~155~~694
Excess of cost over net assets acquired, net of accumulated amortization of $174,988 at June 30, 2004 and September 30, 2003	262,243			262,243
Goodwill, net of accumulated depreciation of $547,748	262,243			262,243
Intangibles, net of accumulated amortization of $208,902 and $173,693 at June 30, 2004 and September 31, 2003	415,396			450,607
Intangibles, net of accumulated amortization of $300,953 and $291,884 at December 31, 2004 and September 30, 2004, respectively	273,746			282,816
Deferred income taxes	3,~~302~~220,~~592~~489			3,~~326~~220,~~342~~484
Other assets	78,923			78,~~438~~923
Total assets	$	9,~~638~~829,~~429~~742		$	10,~~543~~036,~~661~~180
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Notes payable	$	~~403~~181,~~243~~009		$	22242,~~821~~729
Accounts payable	90496,~~512~~517			~~332~~489,~~870~~157
Accounts payable, affiliated companies	96617,~~377~~762			~~423~~693,~~602~~502
Accrued liabilities	~~685~~762,~~398~~949			~~600~~820,~~976~~359
Note payable majority shareholder, current portion	1,587,213			1,123,537
Deferred Revenue	930			329
Total current liabilities	2,862,743			2,503,806
Note payable majority shareholder, current portion	249,183			246,400
Note payable majority shareholder, net of current portion	—			1,302,108
Total current liabilities	2,308,350			2,492,476
Total liabilities	2,862,743			3,805,914
Note payable majority shareholder, net of current portion	993,368			1,056,717
Shareholders’ Equity:
Note payable other	32,526			—
Common stock, $0.01 par value, authorized 40,450,000 shares; Issued and outstanding 9,739,611	97,742			97,742
Total liabilities	3,334,244			3,549,193
Shareholder’s Equity:
Common stock, $0.01 par value, authorized 40,450,000 shares; Issued and outstanding 9,774,111 shares	97,742			97,742
Common stock to be issued (Note 5)	7,750,000			7,750,000
Less cost of treasury stock 34,500 shares	(51,595		)	(51,595		)
Additional paid-in capital - common stock	20,519,861			20,519,861
Additional Paid-in capital – common stock	20,519,861			20,519,861
Accumulated deficit	(21,~~540~~820,~~322~~510		)	(21,~~578~~829,~~261~~021		)
Total shareholders’ equity	6,775,686			6,737,747
Total Shareholders’ equity	6,495,498			6,486,987
Total liabilities and shareholders’ equity	$	9,~~638~~829,~~429~~742		$	10,~~543~~036,~~661~~180

The accompanying notes are an integral part of these financial statements.

3CI COMPLETE COMPLIANCE CORPORATION

STATEMENTS OF OPERATION

(UNAUDITED)

	For the three months ended June 30,					For the nine months ended June 30,
	2004		2003			2004		2003
Revenues	$	3,217,564	$	3,439,572		$	9,853,464	$	10,446,375
Expenses:
Cost of services	1,787,659		1,989,164			5,852,913		6,495,219
Depreciation and amortization	106,953		153,909			352,084		511,914
Selling, general and administrative expenses	831,406		1,045,648			3,163,878		2,549,576
Interest expense	49,286		30,417			121,411		138,121
Other expense-net	90,163		(9,255		)	301,489		130,160
Income before income taxes	352,097		229,689			61,689		621,385
Income tax expenses	135,555		—			23,750		—
Net income	$	216,542	$	229,689		$	37,939	$	621,385
Net income applicable to common shareholders	$	216,542	$	229,689		$	37,939	$	621,385
Basic earnings per share:
Basic net income per share	$	0.01	$	0.02		$	—	$	0.05
Diluted earnings per share:
Diluted net income per share	$	0.01	$	0.01		$	—	$	0.04

The accompanying notes are an integral part of these financial statements.

3CI COMPLETE COMPLIANCE CORPORATION

~~STATEMENT~~ STATEMENTS OF ~~CASH FLOWS~~OPERATIONS

(UNAUDITED)

	(Unaudited)
	For the three months ended December 31,
	2004			2003

Revenues	$	3,157,373		$	3,359,642
Expenses:
Cost of services	1,869,561			2,124,220
Depreciation and amortization	107,290			126,074
Selling, general and administrative	1,068,280			1,208,904
Interest expense	15,600			22,386
Other expense, net	74,691			69,000

Income (loss) before income taxes	21,951			(190,942		)

Income tax (expense) benefit	(13,440		)	73,837

Net (loss) income	$	8,511		$	(117,105	)

Basic earnings per share:
Basic net (loss) income per share	$	0.00		$	(0.01	)

Diluted earnings per share:
Diluted net (loss) income per share	$	0.00		$	(0.01	)

	For the nine months ended June 30,
	2004			2003
Cash flow from operating activities:
Net income	$	37,939		$	621,385
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on disposal of fixed assets	(1,225		)	(64,139		)
Depreciation and amortization	352,084			511,914
Deferred tax asset	23,750			—
Changes in operating assets and liabilities:
Decrease in accounts receivable, net	411,837			993,365
Decrease (Increase) in inventory	4,023			(8,595		)
Increase in prepaid expenses	(423,907		)	(154,429		)
Decrease in other assets	12,253			27,879
Decrease in accounts payable	(242,358		)	(90,447		)
Decrease in accounts payable, affiliated companies	(327,225		)	(407,623		)
Increase in insurance note payable	380,422			275,067
Increase (Decrease) in accrued liabilities	84,422			(5,975		)
Total adjustments to net income	274,076			1,077,017
Net cash provided by operating activities	312,015			1,698,402
Cash flow from investing activities:
Acquisition of intangible assets from Air N Sea	—			(504,300		)
Proceeds from sale of property, plant and equipment	81,375			—
Purchase of property, plant and equipment	(212,348		)	(181,903		)
Net cash used in investing activities	(130,973		)	(686,203		)
Cash flow from financing activities:
Proceeds from issuance of common stock	—			54,129
Reduction of note payable to majority shareholders	(838,432		)	(865,172		)
Net cash used in financing activities	(838,432		)	(811,043		)
Net (decrease) increase in cash and cash equivalents	(657,389		)	201,156
Cash and cash equivalents, beginning of period	1,057,055			898,720
Cash and cash equivalents, end of period	$	399,666		$	1,099,896

The accompanying notes are an integral part of these financial statements.

3CI COMPLETE COMPLIANCE CORPORATION

~~NOTES TO~~STATEMENTS ~~FINANCIAL~~OF ~~STATEMENTS June 30,~~CASH ~~2004~~FLOWS

	(Unaudited)
	For the three months ended December 31,
	2004			2003
Cash flows from operating activities:
Net income (loss)	$	8,511		$	(117,105	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Loss (Gain) on disposal of equipment	2,750			(6,024		)
Depreciation and amortization	107,290			126,074
Deferred income tax	13,440			(73,837		)
Decrease (increase) in accounts receivable, net	75,740			208,765
Decrease (increase) in inventory	(27,180		)	6,454
Decrease in prepaid expenses	19,166			44,625
Decrease in other assets and other current assets	21,495			10,809
Increase in accounts payable	7,360			312,270
Decrease in accounts payable, affiliated companies	(75,740		)	(202,971		)
Increase in accrued liabilities and deferred revenue	(56,809		)	123,278
Total adjustments to net income (loss)	87,512			549,443
Net cash provided by operating activities	96,023			432,338

Cash flows from investing activities:
Proceeds from sale of property, plant and equipment	15,200			20,701
Purchase of property, plant and equipment	(139,076		)	(107,886		)
Net cash used in investing activities:	(123,876		)	(87,185		)

Cash flows from financing activities:
Proceeds from issuance of notes payable	221,046			—
Principal reduction of notes payable	(250,240		)	(22,821		)
Reduction of note payable to majority shareholders	(60,566		)	(276,691		)
Net cash used in financing activities	(89,760		)	(299,512		)

Net increase (decrease) in cash and cash equivalents	(117,613		)	45,641

Cash and cash equivalents, beginning of period	710,353			1,057,055

Cash and cash equivalents, end of period	$	592,740		$	1,102,696

The accompanying notes are an integral part of these financial statements.

3CI COMPLETE COMPLIANCE CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 2004

NOTE 1—DESCRIPTION OF BUSINESS

Organization and Basis of Presentation

3CI Complete Compliance Corporation (the “Company” or “3CI”), a ~~Delaware~~ Delaware corporation, is engaged in the collection, transportation and ~~transportation~~disposal of biomedical waste in the ~~southwestern~~southern ~~and southeastern~~ United States.

Effective October 1, 1998, after approval by the then properly constituted 3CI Board of Directors, Stericycle Inc., a Delaware corporation (“Stericycle”), acquired 100% of the common stock of Waste Systems, Inc. (“WSI”) for $10 million. As a result of the transaction, WSI became a wholly-owned subsidiary of Stericycle. Stericycle directly and indirectly through WSI owns ~~(i)~~ 67.5% or 6,578,504 shares of the Company’s outstanding common stock, ~~par value $0.01 per share~~ (“Common Stock”), and ~~(ii)~~ 100% of the ~~Company’s~~shares ~~Series~~of ~~B Preferred~~Common Stock, ~~par~~to ~~value~~be ~~$0.01~~issued ~~per~~by ~~share~~the ~~(“Series~~Company Bas ~~Preferred~~a result ~~Stock”),~~of ~~and 100%~~the conversion of the Company’s ~~Series~~preferred Cstock ~~Preferred Stock, par value $0.01 per share~~ (“~~Series C~~ Preferred Stock,” ~~and together with the Series B Preferred Stock, the “Preferred Stock”~~)~~, all of which shares of Preferred Stock were converted~~. ~~into~~See ~~Common Stock on April~~Note 6,5 ~~2003. The~~for ~~Company~~details ~~has~~on ~~not~~the ~~issued~~conversion ~~any shares~~ of ~~Common Stock and has not recorded any increase in~~ the ~~outstanding~~Preferred ~~Common~~ Stock ~~related~~ to ~~such conversion. See~~Common ~~Note 5~~Stock.

The accompanying unaudited condensed financials statements have been prepared in accordance with accounting principles generally accepted in the United States, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the ~~three~~ ~~and nine~~ three-month period ended ~~June~~December 3031, 2004 are not necessarily indicative of the results that may be expected for the year ~~ended~~ ended September 30, ~~2004~~2005.

For further information, refer to the consolidated financial statements ~~and~~ and footnotes included in the Company’s annual report on Form 10-K for the year ended September 30, ~~2003~~2004.

~~Certain~~NOTE ~~amounts~~2—NET inINCOME ~~the~~(LOSS) ~~financial~~PER statements for 2003 have been reclassified to conform to the 2004 presentation. For the Statement of Cash Flows, proceeds and payments on the Insurance Notes Payable have been reclassified for 2003 from cash flow from financing activities to cash flow from operating activities. The Company believes that the notes are an operating liability and that the reclassification in the Statement of Cash Flows better reflects their nature.SHARE

NOTE 2—NET (LOSS) INCOME PER SHARE

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

	Three months ended June 30, 2004		Three months ended June 30, 2003			Nine months ended June 30, 2004		Nine months ended June 30, 2003
	Three months ended December 31, 2004		Three months ended December 31, 2003
Numerator:
Net income	$	216,542	$	252,575		$	37,939	$	621,385
Net income (loss)	$	8,511	$	(117,105	)
Denominator for basic earnings per share-weighted average shares	17,489,611		9,739,611			17,489,611		9,582,399
Denominator for basic earnings per share—weighted average shares	17,489,611		17,489,611
Effect of dilutive shares:
Preferred Shares	—		~~7,750,000~~—			—		~~7,750,000~~
Warrants								95,026
Options	33,713		—
Denominator for diluted earnings per share	17,~~489~~523,~~611~~324		17,489,611			~~17,489,611~~		~~17,427,425~~
Basic net income per share	$	0.01	$	0.02		$	—	$	0.05
Basic net income (loss) per share	$	0.00	$	(0.01	)
Diluted net income per common share	$	0.01	$	0.01		$	—	$	0.04
Diluted net income (loss) per common share	$	0.00	$	(0.01	)

The effect of the ~~conversion of the~~ preferred shares on the above basic and diluted net ~~income~~loss per share ~~calculations~~calculation is based upon (i) the Company’s interpretation that the appropriate conversion rate of the Preferred Stock is the per share ~~market~~ market value of the Common Stock on the conversion notice date, less $1.00 per share, but in no event is the conversion rate less than $1.00 per share and (ii) the fact that ~~the~~all ~~preferred~~issued and outstanding shares of Preferred Stock were converted on April 6, 2003. (See ~~Notes 5~~Note ~~and 7~~5).

Stock options were not included in the ~~June~~December 3031, ~~2004 and~~ 2003 computations as they were antidilutive since the ~~exercise~~Company ~~prices~~had ~~ranging~~a ~~from $0.28~~loss toin ~~$0.59~~that ~~were greater than the average price of the common stock~~period.

NOTE 3—PROMISSORY NOTE

The Company has ~~historically~~outstanding ~~financed~~an ~~its~~amended ~~working~~and ~~capital~~restated ~~needs,~~revolving promissory note ~~capital~~payable ~~expenditures~~to ~~and~~WSI ~~acquisitions~~(the ~~primarily~~“Note”), ~~using~~with ~~advances~~an ~~from~~outstanding ~~WSI~~principal ~~and~~balance of $1,242,551 ~~internally~~as ~~generated~~of ~~funds~~December 31, 2004. ~~The~~Effective September 30, ~~Company’s~~2004, ~~borrowed~~the ~~indebtedness~~Note ~~currently~~was ~~consists~~amended ~~only~~and ofrestated ~~amounts~~to ~~owed~~extend ~~under~~the maturity date of the Note anto ~~amended~~April 3, ~~and~~2006 ~~restated~~with ~~revolving~~monthly ~~promissory~~payments ~~note~~of ~~payable~~$25,000. The tointerest ~~WSI~~rate (on the “Note~~”), which~~ ~~had~~is anthe ~~original~~prime lending ~~aggregate~~rate ~~principal~~(5.25% ~~amount~~as of $5December 31,~~487~~ 2004),~~308~~ as ofsuch rate may change from ~~October 1~~time to time, ~~1998~~published under “Money Rates” in The Wall Street Journal (Southwestern Edition), not to exceed 13%.

The Note is ~~payable~~subordinated into ~~monthly~~all ~~payments~~security ofinterests ~~$100,000,~~under ~~due~~a oncertain ~~the first~~Settlement ~~day~~Agreement ofeffective ~~each~~January 10, ~~month~~1996, ~~which~~by ~~are~~and ~~applied~~among tothe ~~principal~~Company, ~~and~~James ~~accrued interest~~H. ~~calculated~~Shepherd, atJames ~~the~~Michael ~~prime~~Shepherd, ~~lending~~Richard ~~rate~~T. ~~(4%~~McElhannon ~~as of June 30~~(collectively, ~~2004~~the “Shepherd Parties”), asWSI ~~such~~and ~~may change~~certain ~~from~~former ~~time~~directors toand ~~time,~~officers ~~published~~of ~~under~~the Company (the “~~Money~~Shepherd Settlement ~~Rates~~Agreement”), inwhich ~~The~~was ~~Wall~~assigned ~~Street~~to ~~Journal (Southwestern~~Stericycle ~~Edition)~~on ~~(the~~May ~~“Prime~~1, ~~Rate”)~~2002, ~~not~~but otherwise tois ~~exceed~~secured ~~13%~~by substantially all of the Company’s assets. InThe ~~addition~~Note requires the Company to ~~the~~achieve ~~term~~a ~~note~~minimum ~~facility described~~level ~~above~~of EBITDA of $500,000, ~~the~~after excluding ~~Note~~(i) ~~includes~~certain aexpenses ~~revolving~~associated ~~credit~~with ~~agreement~~the ~~under~~dispute ~~which~~regarding the ~~Company~~conversion ~~can~~rate ~~borrow~~of upthe toPreferred Stock, and ~~including~~(ii) ~~$100,000;~~certain expenses associated with the ~~Company~~Louisiana ~~has~~Suit no(as ~~borrowings outstanding~~hereinafter ~~under~~defined), for the ~~revolving~~quarters ~~credit~~ending ~~agreement. Borrowings~~September 30, 2004 ~~under~~and ~~the~~for ~~Note~~each ~~may~~trailing besix-month ~~prepaid~~period atof ~~any~~each ~~time~~quarterly ~~without~~period thereafter ~~penalty~~until maturity. ~~The~~As ~~Note~~of ~~matures on October~~December 131, 2004, the Company was in compliance with the required level of EBITDA under the Note.

~~The~~Total interest ~~Note~~expense isfor ~~subordinated to~~ all ~~security~~debt ~~interests~~was ~~under a certain Settlement Agreement effective January 10~~$15,600 ~~1996, by~~ and among the Company, James H. Shepherd, James Michael Shepherd, Richard T. McElhannon (collectively, the “Shepherd Parties”), WSI and certain former directors and officers of the Company (the “Shepherd Settlement Agreement”), which was assigned to Stericycle on May 1, 2002, but otherwise is secured by substantially all of the Company’s assets. Pursuant to the Note, the Company is required to achieve each fiscal quarter a minimum level of $~~900~~22,~~000 of~~386 ~~EBITDA (earnings before interest, taxes, depreciation and amortization)~~ for ~~the~~ ~~then trailing six-month period, excluding certain expenses associated with~~ the ~~dispute~~quarters ~~regarding~~ended ~~the conversion rate of the Preferred Stock. If the minimum EBITDA level is not achieved at the end of any such six-month period~~December 31, ~~the Note requires the Company to pay~~ to2004 ~~WSI a fee equal to 3% per annum of the outstanding principal balance of the Note at the end of such period. The Company~~ and ~~WSI~~2003, ~~are currently negotiating a modification of the minimum level of EBITDA that the Company is required to achieve under the Note in accordance with the Company’s budgeted financial results~~respectively.

Total interest expense under the Note was $100,816 and $138,121 for the nine months ended June 30, 2004 and 2003, respectively. The Company was not in compliance under the EBITDA covenant of the Note at June 30, 2004, March 31, 2004 and December 31, 2003. On March 17, 2004, the Company paid to WSI a penalty fee of approximately $64,469 in connection with such non-compliance as of December 31, 2003. The Company has recently notified WSI that it has determined that the Company overpaid this penalty fee by approximately $48,352. The overpayment resulted from the Company not calculating the amount of the penalty fee on a per annum basis, as required by the Note. The Company will request that WSI refund the full amount of the overpayment to the Company. The Company had also previously accrued approximately $56,084 as interest expense in connection with its failure to comply with the EBITDA covenant of the Note as of March 31, 2004, but has not yet paid this penalty fee to WSI. Similarly, the Company has recently determined that it overstated this $56,084 accrual by approximately $42,064 because of a failure to calculate the amount of the penalty fee on a per annum basis. The Company has accrued approximately $11,904 in connection with its failure to comply with the EBITDA covenant of the Note as of June 30, 2004, and has not yet paid this penalty fee to WSI. This $11,904 accrual has been calculated on a per annum basis in accordance with the Note. The Company is determining whether it has overpaid any other penalty fees previously paid to WSI pursuant to the Note and has amended the March 31, 2004 10-Q to account for the overstatement of interest expense in the approximate amount of $90,414.

The Company has requested an additional amendment to the Note, which would exclude from its EBITDA covenant calculation not only certain expenses associated with the dispute regarding the conversion rate of the Company’s Preferred Stock, which has previously been agreed to by WSI, but also certain expenses primarily associated with the allegations of the Company’s minority stockholders in Robb et al. v. Stericycle, Inc. et al. and the Special Committee’s investigation of those allegations. See Part II, Item I, Legal Proceedings.

NOTE 4—INCOME TAXES

AtAs of September 30, ~~2003~~2004, the Company had eligible net operating loss carry ~~carryforwards~~forwards for federal income tax purposes of approximately $109,~~555~~237,~~000~~ 692, which began ~~will begin~~ expiring in 2004. The Company also had state net operating losses at September 30, ~~2003~~2004. Based on Section 382 of the Internal Revenue Code relating to changes in ownership of the Company, utilization of the net operating loss ~~carryforwards~~carry forwards is subject to an annual limitation of approximately $995,000 for net operating losses created prior to September 30, 1998. All net operating losses created after September 30, 1998 are not subject to any limitations and are available to be used for 20 years after they are produced. As such, the deferred tax asset and the related valuation allowance for net operating loss carry forwards were reduced to account for the portion of the net operating loss carry forwards the Company will not be able to utilize.

7During the fourth quarter of 2003, the Company reevaluated the estimated amount of valuation allowance required in light of the profitability achieved during 2003 and 2002 as well as profitability expected in future years. As a result, the Company reduced the valuation allowance on deferred tax assets in accordance with SFAS No. 109, “Accounting for Income Taxes,” to an amount the Company believes is more likely than not of being recovered. Accordingly, an income tax benefit of approximately $3,484,000 was reflected in the fourth quarter of 2003. The amount of net deferred tax assets estimated to be recoverable was based upon the Company’s assessment of the likelihood of near-term operating income.

$995,000 for net operating losses created prior to September 30, 1998. All net operating losses created after September 30, 1998 are not subject to any limitations and are available to be used for 20 years after they are produced. As such, the deferred tax asset and the related valuation allowance for net operating loss carryforwards were reduced at September 30, 2003 to account for the portion of the net operating loss carryforwards the Company will not be able to utilize.8

During the fourth quarter of the Company’s 2003 fiscal year, the Company reevaluated the estimated amount of valuation allowance required in light of the profitability achieved during 2003 and 2002 as well as profitability expected in future years. As a result, the Company decreased the valuation allowance on deferred tax assets in accordance with SFAS No. 109, “Accounting for Income Taxes,” to an amount that the Company believes is more likely than not of being recovered based upon the Company’s assessment of the likelihood of near term operating income.

NOTE 5—PREFERRED STOCK

Preferred Stock Conversion

Pursuant to the ~~Certificates~~certificates of ~~Designation~~designation governing the Preferred Stock, all 7,750,000 shares of Preferred Stock automatically converted on April 6, 2003. The Company has not issued any shares of Common Stock and has not recorded any increase in the 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 Preferred Stock is such that each share of Preferred Stock is convertible into that number of shares of Common Stock determined by dividing $7,000,000 (with respect to the Series B Preferred Stock) or $750,000 (with respect to the Series C Preferred Stock) by the market value of the Common Stock on the date of conversion. On April 6, 2003, the per share closing price of the Common Stock was $0.21. Accordingly, the Company would have issued 36,904,761 shares of Common Stock upon conversion of the Preferred Stock under this interpretation, which would have increased WSI’s ownership percentage to ~~approximately~~ 91.2% of the outstanding shares of Common Stock and the combined WSI and Stericycle ownership percentage to ~~approximately~~ 93.2%.

WSI and Stericycle’s interpretation of the conversion rate is contrary to the Company’s interpretation of the conversion rate. Based on the ~~Certificates~~ certificates of designations ~~Designations~~ governing the Preferred Stock, certain documents ~~executed~~ executed contemporaneously with the issuance of the Preferred Stock, and the intent of the parties at the time of issuance of the Preferred Stock and the execution of these documents, the Company believes ~~that~~ the appropriate conversion rate is the 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 $1.00 per 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 upon conversion of the Preferred Stock, which would have increased WSI’s ownership percentage to ~~approximately~~ 76.6% of the outstanding shares of Common Stock and the combined WSI and Stericycle ownership percentage to ~~approximately~~ 81.9%.

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

On May 9, 2003, the Company filed a declaratory judgment action seeking a judicial determination of the appropriate conversion rate of the ~~Preferred~~ Preferred Stock. On August 22, 2003, the Company filed an original petition for declaratory judgment and to enforce the Settlement Agreement, dated July 17, 1997, pursuant to which the Preferred Stock was issued. In its petition, the Company requests the ~~Court~~court establish the conversion rate of the Preferred Stock to be the Agreed Maximum Conversion Rate and confirm the issuance of no more than 7,750,000 shares of Common Stock to WSI as of April 6, 2003. WSI subsequently filed a motion to have the ~~Court~~court declare that the Preferred Stock is convertible into 36,704,761 shares of Common Stock. The parties are ~~currently~~ currently conducting discovery in this proceeding. ~~See Part II, Item 1, Legal Proceedings.~~

Preferred Stock Dividends

There are unanimous written consents of the Company’s Board of Directors ~~declaring~~ declaring dividends on the Series B ~~Preferred Stock~~ and Series C Preferred Stock totaling $161,158, $637,623, $907,387 and $497,550 for each of the years ended September 30, 2003, 2002, 2001, and 2000, respectively. Each of ~~these~~the resolutions for ~~the~~ these dividends called for payment in cash from funds legally available for the payment of dividends, as and when the Board of Directors may direct by further resolution. However, none of these unanimous consents are executed by all of the individuals who were members of the Board of Directors at the date of such unanimous consents, and none of the dividends have been paid. There were no undeclared dividends as of September 30, 2003 and September 30, 2004.

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 on behalf of the Board, determined that (i) the ~~previous~~ previous declarations of dividends on the ~~Preferred Stock in the aggregate amount of $2,203,717 (collectively, the “Preferred Stock Dividends”) had not been effective to declare and obligate the Company to pay such dividends, and (ii)~~Series ~~the~~B Preferred Stock ~~Dividends cannot now be lawfully declared~~ and paid on the Preferred Stock. As a consequence of these determinations, the Company reversed the Preferred Stock Dividend entries on the Company’s books and records and restated its financial statements for the years ended SeptemberSeries ~~30,~~C ~~2001, 2002 and 2003. These restatements reflect for the quarter ended December 31, 2002, a removal of (a) dividends payable on the~~ Preferred Stock asin ~~a current liability on~~ the Company’s balance sheets and as an adjustment of net income (loss) applicable to common shareholders on the statements of operations, and (b) the Preferred Stock Dividends as a line item on the Company’s statements of shareholders’ equity and statements of cash flows.

WSI was the holder of the Preferred Stock. The Company has been advised by WSI, Stericycle and the members of the Board who are affiliates of WSI and Stericycle that they believe the Company remains obligated to pay the Preferred Stock Dividends as previously declared in the Board resolutions and as previously recorded on the Company’s books. If WSI and Stericycle’s position is correct, the Preferred Stock Dividends would be paid by the Company in cash from funds legally available for the payment of dividends as and when the Board may direct by further resolution. Due to WSI, Stericycle and their affiliates’ announced position on the Preferred Stock Dividends, the Company has determined the amount of such dividends to be a contingent liability of $2,203,717. See Part II, Item 1, Legal Proceedings.

NOTE 6—NOTE PAYABLE

During the quarter ended June 30, 2004, the Company financed its annual insurance premium over a 12-month period of time at a 5% per annum interest rate.

NOTE 7—COMMITMENTS AND CONTINGENCIES

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

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

The Company is a defendant in Medical Waste Services of America LLC v. American 3CI Complete Compliance Corporation, cause no. 02-65105, in the 151st Judicial District 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 waste and for breach of contract. Plaintiff alleges that the Company has failed to pay for the treatment and disposal of medical waste at the plaintiff’s Birmingham, Alabama facility. Further, plaintiff alleges that the Company agreed to deliver an additional amount of medical waste to plaintiff’s facility for treatment and disposal at a predetermined price, which the Company has failed to do. 3CI contends that the plaintiff has breached the contract by unilaterally increasing the contract price. The parties are currently in discovery, and the Company cannot at this time predict the outcome of this litigation.

~~governmental~~aggregate amount ~~regulation~~of $2,203,717 ~~any~~(collectively, ~~material~~the ~~relaxation~~“Preferred ofStock ~~regulatory~~Dividends”) had not been ~~requirements~~effective ~~governing~~to ~~medical~~declare ~~waste~~and ~~disposal~~obligate orthe ofCompany ~~their~~to ~~enforcement~~pay ~~could~~such dividends, and ~~result~~(ii) the inPreferred aStock ~~reduced~~Dividends ~~demand~~cannot ~~for~~now ~~the~~be ~~Company’s~~lawfully ~~services~~declared and paid ~~have~~on the Preferred Stock. As a ~~material~~consequence of these determinations, the ~~adverse~~Company ~~effect~~has reversed the Preferred Stock Dividends entries on the Company’s books ~~revenues~~and records and has restated its financial ~~condition.~~statements ~~The~~for ~~scope~~the ~~and~~years ended ~~duration~~September 30, 2000, 2001 and 2002. These restatements reflect as of ~~existing~~September 30, 2000, 2001 and ~~future~~2002, ~~regulations~~a ~~affecting~~removal ~~the~~of ~~medical~~(a) dividends ~~waste~~payable on the Preferred ~~disposal~~Stock ~~industry~~as ~~cannot~~a becurrent ~~anticipated~~liability on the Company’s balance sheets and ~~are~~as ~~subject~~an adjustment of net income (loss) applicable to ~~changing~~common ~~political~~shareholders on the statements of operations, and ~~economic~~(b) the ~~pressures~~Preferred Stock Dividends as a line item on the Company’s statements of shareholders’ equity and statements of cash flows.

WSI was the holder of the Preferred Stock. The Company has been advised by WSI, Stericycle and the members of the Board who are affiliates of WSI and Stericycle that they believe the Company remains obligated to pay the Preferred Stock Dividends as previously declared in the Board resolutions and as previously recorded on the Company’s books. If WSI, Stericycle and their affiliates’ position is correct, the Preferred Stock Dividends would be paid by the Company in cash from funds legally available for the payment of dividends as and when the Board may direct by further resolution. Due to WSI’s, Stericycle’s and their affiliates’ announced position on the Preferred Stock Dividends, the Company has determined the amount of such dividends to be a contingent liability of $2,203,717.

NOTE 6—COMMITMENTS AND CONTINGENCIES

See Note 5 for a discussion of certain contingent liabilities of the Company related to the Preferred Stock.

The Company is a plaintiff jointly with Larry F. Robb, individually, on behalf of a class comprised of the Company’s minority stockholders, in material litigation in the First Judicial District Court in Shreveport, Louisiana, against Stericycle and the 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 operates within the regulated medical waste disposal industry, which is subject to intense governmental regulation at the federal, state and local levels. The Company believes it is currently in compliance in all material respects with all applicable laws and regulations governing the medical waste disposal business. However, continuing expenditures may be required in order for the Company to remain in compliance with existing and changing regulations. Furthermore, because the medical waste disposal industry is predicated upon the existence of strict governmental regulation, any material relaxation of regulatory requirements governing medical waste disposal or of their enforcement could result in a reduced demand for the Company’s services and have a material adverse effect on the Company’s revenues and financial condition. The scope and duration of existing and future regulations affecting the medical waste disposal industry cannot be anticipated and are subject to changing political and economic pressures.

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

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

The Company is engaged in the business of medical waste management services in the southern ~~south and southeastern~~ United States. The Company’s customers include regional medical centers, major hospitals, clinics, medical and dental offices, veterinarians, ~~pharmaceutical~~ pharmaceutical companies, retirement homes, medical testing laboratories and other medical waste generators. The following is a discussion of some events that may allow a better understanding of the progression of the Company’s financial position and operating results.

The Company has historically financed its working capital needs, ~~capital~~ capital expenditures and acquisitions primarily using borrowings from WSI and internally generated funds. Currently, the Company’s only borrowed indebtedness consists of money borrowed from WSI under the Note and annual insurance premium financing. As of June 30, 2004, March 31, 2004, September 30, 2003 and March 31, 2003, the outstanding balances under the WSI Note were in the aggregate principal amounts of approximately $1,587,213, $1,869,485, $2,425,645 and $3,392,492, respectively. See Liquidity and Capital Resources herein and Note 3 to the Company’s financial statements.

See Note 5 to the Company’s financial statements above for a discussion of the reversal of the Company’s Preferred Stock Dividends on its books and records and the restatement of its financial statements for the years ended September 30, 2001, 2002 and 2003.

During the fourth quarter of the Company’s 2003 fiscal year, the Company reevaluated the estimated amount of valuation allowance required in light of the profitability achieved during 2003 and 2002 as well as profitability expected in future years. As a result, the Company increased the valuation allowance on deferred tax assets in accordance with SFAS No. 109, “Accounting for Income Taxes,” to an amount that 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 fourth quarter of the Company’s 2003 fiscal year. The amount of net deferred tax assets estimated to be recoverable was based upon the Company’s assessment of the likelihood of near term operating income.

indebtedness consists of money borrowed from WSI under the Note. As of December 31, 2004, and December 31, 2003, the outstanding balances under the Note were in the aggregate principal amounts of approximately $1,242,551 and $2,148,954, respectively. See Liquidity and Capital Resources herein and Note 3.

See Note 5 to the Company’s financial statements above for a discussion of the reversal of the Company’s Preferred Stock Dividends on its books and records. See Note 4 for a discussion of the change in the Company’s deferred tax assets valuation in the fourth quarter of the Company’s 2003 fiscal year.

RESULTS OF OPERATIONS

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

	Three Months Ended June 30,						Nine Months Ended June 30,
	Three Months Ended December 30,
	2004			2003			~~2004~~		~~2003~~
Revenues	$	3,~~218~~157		$	3,~~440~~360		$	~~9,853~~	$	~~10,446~~
Cost of services	1,~~788~~870			12,~~989~~124			~~5,853~~		~~6,495~~
Depreciation and amortization	107			~~154~~126			~~352~~		~~512~~
Selling, general and administrative expenses	~~831~~1,068			1,~~046~~209			~~3,164~~		~~2,550~~
Income from operations	492			251			484		889
(Loss) income from operations	112			(99		)
Interest expense	4916			3022			~~121~~		~~138~~
Other expense, net	9075			(970		)	~~301~~		~~130~~
Income taxes	136			—			24		—
Income tax (expense) benefit	(13		)	74
Net Income	$	217		$	230		$	38	$	621
Net Income (Loss)	9			(117		)
Add back:
Depreciation	98			111
Amortization	9			15
Interest expense	16			22
Income tax expense (benefit)	13			(74		)
EBITDA(1)	$	145		$	(43	)

~~Three~~(1) EBITDA ~~months~~is ~~ended~~calculated as the sum of net income, plus interest expense, income ~~June 30~~tax expense, ~~2004~~depreciation ~~compared~~expense, and amortization expense to ~~three~~the ~~months~~extent deducted ~~ended~~in ~~June~~calculating net income. The Company considers EBITDA to be a widely accepted financial indicator of a company’s operating performance and ability to service debt, fund capital expenditures and expand its business. EBITDA is not calculated in the same way by all companies and therefore may not be comparable to similarly titled measures reported by other companies. EBITDA is not a measure on accordance with accounting principles generally accepted in the United States. EBITDA should not be considered as an alternative to net income, as an indicator of operating performance or as an alternative to cash flow as a measure of liquidity. 30 The funds depicted by the measure may not be available for management’s discretionary use due to legal or functional requirements, ~~2003:~~debt service, other commitments and uncertainties.

~~Revenues decreased~~Three bymonths ~~$222,008, or 6.5%, to $3,217,564 during the three-month period~~ ended ~~June~~December 3031, 2004, ~~from~~compared ~~$3,439,572~~to ~~for the~~ three~~-month~~ months ~~period~~ ended ~~June~~ December 3031, 2003. This decrease is primarily related to a reduction in the volume of waste handled. Substantially all of this reduction in volume was attributable to the Company’s efforts to focus on small quantity generators which provide higher margins at lower volumes while reducing the focus on less profitable larger quantity generators.:

~~Cost~~Revenues ~~of services~~ decreased by $~~201~~203,~~505~~000, or ~~10.1~~6%, to $13,~~787~~157,~~659~~000 from $3,360,000 during the three-month ~~months~~period ended ~~June~~ December 3031, 2004, compared to ~~$1,989,164 for~~ the three-month period ended ~~June~~ December 3031, 2003. This decrease ~~was~~ is primarily ~~attributable~~related to a ~~decrease~~reduction in ~~processing~~the ~~and~~volume aof ~~decrease~~waste inhandled. The ~~transportation~~reduction ~~costs~~in ~~due~~volume towas ~~increased~~attributable ~~route~~to ~~efficiency. Cost of services as a~~the

~~percentage of revenues decreased to 55.6% compared to 57.8% during the~~Company’s ~~three~~focus ~~months~~on ~~ended~~smaller ~~June 30,~~quantity ~~2004~~generators ~~and~~with ~~June 30,~~higher ~~2003~~margins ~~respectively. This~~at ~~percentage~~lower ~~decrease~~volumes ~~was primarily~~while ~~attributable~~reducing tothe afocus ~~decrease~~on inless ~~processing~~profitable ~~and~~larger aquantity ~~decrease in transportation costs due to increased route efficiency~~generators.

~~Depreciation~~Cost ~~and amortization~~of ~~expense~~services ~~for~~decreased ~~the~~by ~~three months ended June 30, 2004 decreased~~ $46254,~~957~~000, or ~~30.5~~12%, to $~~106~~1,~~952~~870,000 from ~~compared to~~ $~~153~~2,~~909~~124,000 ~~for~~during the three months ended December 31, 2004 compared to ~~June~~the three months ended December 3031, 2003. This decrease was primarily attributable to ~~the~~decreased ~~depreciable useful~~processing ~~lives~~and transportation costs. Cost of services ~~assets~~as ~~still~~a ~~employed~~percentage inof ~~the~~revenues ~~Company’s~~decreased ~~operations~~to ~~having~~59.2% ~~expired~~compared to 63.2% during the ~~quarter~~three months ended December 31, 2004 and December 31, 2003 respectively.

~~Selling,~~Depreciation ~~general~~ and ~~administrative~~ ~~expenses~~amortization expense for the three months ended ~~June~~ December 3031, 2004 decreased ~~20.5% or~~ $~~214~~19,~~241~~000 to $~~831~~107,~~407~~000 ~~from~~compared to $1126,~~045,648 during~~000 for the three months ended ~~June~~December 3031, 2003. ~~Selling,~~ ~~general~~This ~~and~~decrease ~~administrative~~was ~~expenses~~primarily ~~decreased~~due ~~as a percentage of revenue~~ to ~~25.8%~~assets ~~for the three months ended June 30, 2004,~~still asemployed ~~compared~~in ~~to 30.4% for~~ the ~~three~~Company’s ~~months~~operations ~~ended~~being ~~June 30,~~fully ~~2003 due primarily to timing issues related to legal expenses~~depreciated.

~~Interest~~Selling, ~~expense~~general and administrative expenses for the three months ended ~~June~~December 3021, 2004 ~~increased~~decreased by $18141,~~869~~000, or 6211.07%, to $491,~~286~~068,000 from $301,~~417~~ 209,000 during the three months ended ~~June~~December 3031, 2003. ~~This~~The ~~increase~~decrease was ~~due~~primarily ~~to the penalties paid and accrued~~ due to ~~the Company’s failure~~ to ~~meet~~lower ~~the~~professional ~~EBITDA covenant of the Note at December 31, 2003, March 31, 2004 and June 30, 2004, which is currently 3% per annum of the outstanding principal balance of the Note~~fees.

~~Nine~~Interest ~~months~~expense for the quarter ended ~~June~~ December 3031, 2004 decreased ~~compared~~by $6,000 or 27.3%, to ~~nine~~$16,000 ~~months~~from $22,000 during the three months ended ~~June~~December 3031, 2003:. This decrease was primarily due to the reduced principal balance of the Note. During the 12 months ended December 31, 2004, the Company reduced the aggregate principal balance of the Note by $906,403, or 42.2%, from $2,148,954 to $1,242,551.

~~Revenues~~Earnings before interest taxes depreciation ~~decreased~~and byamortization (“EBITDA”) totaled $~~592~~145,~~911~~000 or 54.76%, toof ~~$9,853,464~~revenue ~~during~~for the ~~nine-month~~quarter ~~period~~ ended ~~June~~ December 3031, 2004, ~~from~~compared to $10(43,~~446,375~~000) for the ~~nine-month~~quarter ~~period~~ ended ~~June~~ December 3031, 2003. ~~This decrease is primarily related to a reduction in the~~ ~~volume~~The ofimprovement ~~waste handled. Substantially all of this reduction in volume~~ was ~~attributable to~~ the ~~Company’s~~result ~~efforts~~of ~~to focus~~increased onincome ~~small~~from ~~quantity~~operations ~~generators~~and ~~which provide higher margins at lower~~decreases ~~volumes~~in ~~while~~professional ~~reducing the focus on less profitable larger quantity generators~~fees.

Cost of services decreased $642,306, or 9.9%, to $5,852,913, during the nine months ended June 30, 2004, compared to $6,495,219 for the nine-month period ended June 30, 2003. This decrease was primarily attributable to a decrease in processing and a decrease in transportation costs due to increased route efficiency. Cost of revenues as a percentage of revenues decreased to 59.4% during the nine months ended June 30, 2004, as compared to 62.2% during the nine months ended June 30, 2003. This decrease was primarily attributable to a decrease in processing and a decrease in transportation costs due to increased route efficiency.

Depreciation and amortization expense for the nine months ended June 30, 2004 decreased $159,830 or 31.2% to $352,084 compared to $511,914 for the nine months ended June 30, 2003. This decrease was primarily attributable to the depreciable useful lives of assets still employed in the Company’s operations having expired during the nine months ended June 30, 2004.

Selling, general and administrative expenses for the period increased 24.1% or $614,302 to $3,163,878 during the nine months ended June 30, 2004 from $2,549,576 during the nine months ended June 30, 2003. Selling, general and administrative expenses increased as a percentage of revenue to 32.1% for the nine months ended June 30, 2004 as compared to 24.4% for the nine months ended June 30, 2003 due primarily to increases in legal expenses and information technology consulting fees. Substantially all of these increased legal fees are related to the legal proceedings described in Part II, Item 1, Legal Proceedings below.

Interest expense decreased by $16,710 or 12.1% to $121,411 during the nine months ended June 30, 2004 as compared to $138,121 during the nine months ended June 30, 2003. This decrease was due to a lower principal balance on the Note to majority shareholder.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically financed its working capital needs, capital expenditures and acquisitions primarily using advances from WSI and internally generated funds. The Company’s borrowed indebtedness currently consists only of amounts owed to WSI under the Note ~~and financed annual insurance premiums~~.

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

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

In addition to the term note facility described above, the Note includes a revolving credit agreement under which the Company can borrow up to $100,000; the Company has no borrowings outstanding under the revolving credit agreement. Borrowings under the Note may be prepaid at any time without penalty. The Note is subordinated to all security interests under the Shepherd Settlement Agreement, which were assigned to Stericycle on May 1, 2002, but otherwise is secured by substantially all of the Company’s assets.

The Company has not attempted to arrange credit from any source other than WSI and does not know whether it could or could not obtain a credit facility with an independent third-party lender. In addition, no assurance can be given that if such a credit facility was arranged, it would be on terms or conditions as favorable as those of the Note.

~~The~~During 2003 ~~Note~~and is2004, ~~payable~~the inCompany ~~monthly~~incurred ~~payments~~material oflegal ~~$100,000,~~expenses ~~due on the first~~substantially ~~day~~related ofto ~~each~~its ~~month,~~disputes ~~which~~with ~~are~~Stericycle ~~applied~~and toWSI ~~principal~~regarding ~~and~~the ~~accrued interest~~correct ~~calculated~~conversion atrate of the ~~prime~~Preferred ~~lending~~Stock ~~rate~~and ~~(4%~~an asinvestigation ofby ~~March 31,~~the ~~2004), as such~~Special ~~may~~Committee ~~change~~into ~~from~~allegations ~~time~~made toby ~~time,~~certain ~~published~~minority ~~under~~stockholders ~~“Money~~of ~~Rates”~~the Company in ~~The~~the ~~Wall~~Louisiana ~~Street~~Suit. ~~Journal~~During ~~(Southwestern Edition) (~~the ~~“Prime~~2004 ~~Rate”)~~fiscal year, ~~not~~these tolegal ~~exceed~~expenses ~~13%.~~were in Asexcess of ~~June~~$1 ~~30,~~million. In December 2004, ~~and~~at the direction of the ~~June 30,~~Special ~~2003~~Committee, the ~~outstanding~~Company ~~balances~~joined ~~under~~with the ~~Note~~minority ~~were~~stockholders inof the ~~aggregate~~Company ~~principal~~as ~~amounts~~a ofplaintiff ~~approximately~~in ~~$1,587,213~~the ~~and~~Louisiana $3Suit,~~890,635,~~ which is scheduled for trial in ~~respectively.~~the InFall ~~addition~~of to2005. Although the ~~term~~Company ~~note~~cannot ~~facility~~predict ~~described~~what ~~above,~~its ~~the~~financial ~~Note~~investment ~~includes~~will abe ~~revolving~~related ~~credit~~to ~~agreement~~the ~~under~~Louisiana ~~which~~Suit, the Company ~~can~~believes ~~borrow~~that upprosecution toof ~~and~~the ~~including~~Louisiana ~~$100,000;~~Suit ~~the~~will ~~Company~~continue ~~has~~to norequire ~~borrowings~~a ~~outstanding~~commitment ~~under~~of ~~the~~its financial ~~revolving~~resources ~~credit~~and ~~agreement.~~that ~~Borrowings~~the ~~under~~amount ~~the~~of ~~Note~~this commitment may be ~~prepaid~~material. ~~at any~~See ~~time~~Part II, ~~without~~Item ~~penalty. The Note matures on October~~ 1, ~~2004~~Legal Proceedings.

~~The Note is subordinated to all security interests under the Shepherd~~During ~~Settlement Agreement~~2004, ~~which were assigned to Stericycle on May 1, 2002, but otherwise is secured by substantially all of~~ the Company’s ~~assets.~~transportation ~~Pursuant~~fuel ~~to the~~costs ~~Note,~~increased significantly. Although the Company is ~~required~~considering tovarious ~~achieve~~ways ~~each~~to ~~fiscal~~mitigate ~~quarter a minimum level of $900,000 of EBITDA (earnings before interest, taxes, depreciation and amortization) for~~ the ~~then~~effect ~~trailing six-month period, excluding certain expenses associated with the dispute regarding the conversion rate~~ of ~~the Preferred~~this ~~Stock. If the minimum EBITDA~~elevated ~~level~~fuel iscost ~~not~~on ~~obtained~~its ~~at the end of any such six-month period~~operations, the ~~Note requires~~expense ~~the Company to pay to WSI a fee equal to 3% per annum~~ of ~~the outstanding~~high ~~principal~~fuel ~~balance~~cost ofin the ~~Note~~2005 ~~at the end of such period. The Company and WSI are currently~~fiscal ~~negotiating~~year acould ~~modification~~have ofan ~~the~~adverse ~~minimum~~impact ~~level~~on ~~of EBITDA that~~ the Company ~~is required to achieve under the Note in accordance with the Company~~’s ~~budgeted~~ financial ~~results~~performance.

~~The~~As ~~Company was not in compliance under the EBITDA covenant~~ of ~~the Note at June~~September 30, 2004, ~~March 31, 2004 and December 31, 2003. On March 17, 2004,~~ the Company ~~paid to~~had ~~WSI~~eligible anet ~~penalty~~operating ~~fee~~loss ofcarry ~~approximately~~forwards ~~$64,469~~for infederal ~~connection~~income ~~with~~tax ~~such non-compliance~~purposes as of ~~December 31, 2003.~~ ~~The Company has recently notified WSI that it has determined that the Company overpaid this penalty fee by~~ approximately $489,~~352. The overpayment resulted from the Company not calculating the amount of the penalty fee on a per annum basis~~237,692 aswhich ~~required by~~began ~~the~~expiring ~~Note~~in 2004. The Company ~~will~~also ~~request that~~had ~~WSI~~state ~~refund~~net ~~the full amount of the overpayment to the Company. The Company~~operating ~~had~~losses ~~also~~at ~~previously accrued approximately $56~~September 30,~~084~~ as2004. ~~interest~~Based ~~expense~~on ~~in connection~~Section 382 ~~with its failure to comply with the EBITDA covenant~~ of the ~~Note as~~Internal ofRevenue ~~March 31,~~Code ~~2004,~~relating ~~but~~to ~~has~~changes ~~not~~in ~~yet~~ownership ~~paid~~of ~~this penalty fee to WSI. Similarly,~~ the Company, ~~has~~utilization ~~recently~~of ~~determined~~the ~~that~~net itoperating ~~overstated~~loss ~~this~~carry ~~$56,084~~forwards ~~accrual~~is bysubject ~~approximately $42,062 because of a failure~~ to ~~calculate~~an ~~the~~annual ~~amount~~limitation of ~~the penalty fee on a per annum~~ ~~basis. The Company has accrued~~ approximately $11995,~~904~~000 infor ~~connection~~net ~~with~~operating ~~its~~losses ~~failure~~created prior to ~~comply with the EBITDA~~September 30, ~~covenant~~1998. ofAll ~~the~~net ~~Note~~operating aslosses ofcreated ~~June~~after September 30, ~~2004,~~1998 ~~and~~are ~~has~~ not ~~yet paid this~~ ~~penalty~~subject ~~fee~~ to ~~WSI. This~~any ~~$11,904 accrual~~limitations ~~has~~and ~~been~~are ~~calculated~~available onto abe ~~per~~used ~~annum~~for ~~basis~~20 years inafter they ~~accordance~~are ~~with the Note~~produced. ~~The~~ ~~Company~~As issuch, ~~determining whether~~the itdeferred ~~has~~tax ~~overpaid~~asset ~~any~~and ~~other~~the ~~penalty~~related ~~fees previously paid to WSI pursuant~~valuation toallowance ~~the~~for ~~Note~~net ~~and~~operating ~~has~~loss ~~amended~~carry ~~the~~forwards ~~March 31,~~were ~~2004~~reduced ~~10-Q~~ to account for the ~~overstatement~~portion of ~~interest~~the ~~expense~~net inoperating loss carry forwards the ~~approximate~~Company ~~amount~~will ofnot ~~$90,414~~be able to utilize.

~~The~~During the ~~Company~~fourth ~~has~~quarter ~~requested~~of an2003, ~~additional~~the ~~amendment~~Company toreevaluated the ~~Note,~~estimated ~~which~~amount of ~~would~~valuation ~~exclude~~allowance ~~from~~required ~~its~~in ~~EBITDA~~light ~~covenant~~of ~~calculation~~the ~~not~~profitability ~~only~~achieved ~~certain~~during ~~expenses~~2003 ~~associated~~and ~~with~~2002 ~~the~~as ~~dispute~~well ~~regarding~~as ~~the~~profitability ~~conversion~~expected ~~rate~~in offuture years. As a result, the Company’s reduced the valuation ~~Preferred~~allowance ~~Stock,~~on ~~which~~deferred ~~has~~tax ~~previously~~assets ~~been~~in ~~agreed~~accordance towith bySFAS ~~WSI~~No. 109, ~~but~~“Accounting for ~~also~~Income ~~certain expenses~~Taxes,” ~~primarily~~to ~~associated~~an ~~with~~amount the ~~allegations~~Company believes is more likely than not of being ~~the~~recovered. ~~Company’s~~Accordingly, ~~minority~~an income tax benefit of approximately $3,484,000 ~~stockholders~~was reflected in ~~Robb~~the etfourth ~~al.~~quarter vof 2003. ~~Stericycle,~~The amount of net deferred tax ~~Inc.~~assets etestimated ~~al.~~to ~~and~~be ~~the~~recoverable ~~Special~~was ~~Committee~~based upon the Company’s ~~investigation~~assessment of ~~those~~ ~~allegations. See~~the ~~Part~~likelihood ~~II,~~of ~~Item~~near-term I,operating ~~Legal Proceedings~~income.

~~Since June 2003, the~~ The Company ~~has~~had ~~not~~net ~~attempted~~working tocapital, ~~arrange~~exclusive ~~credit from~~of ~~third-party~~the ~~sources~~Note, ~~but~~on ~~believes that if such funds were available~~December 31, ~~they~~ ~~would~~2004 beof at$1,945,565, ~~higher~~compared ~~interest~~to ~~rates~~$1,978,944 ~~and~~on ~~could~~September 30, ~~require~~2004, ~~additional operating and~~which ~~financing~~was ~~restrictions~~a ~~from~~decrease ~~those~~of ~~under~~approximately ~~the~~2%, ~~WSI~~or ~~Note~~$33,379.

13Net cash provided by operating activities was $96,023 during the three-month period ended December 31, 2004, compared to $432,338 for the three-month period ended December 31, 2003. The decrease was due to the decrease in accrued liabilities and increase in deferred tax assets and accounts receivable. The Company is continuing its efforts to collect on delinquent receivables.

~~At September 30, 2003, the Company had net operating loss~~Net ~~carryforwards~~cash ~~for~~used ~~federal income tax purposes of approximately $10,555,000 which will begin expiring~~ in ~~2004.~~investing ~~The~~activities ~~Company~~for ~~also~~the ~~had~~three ~~state~~months ~~net~~ended ~~operating losses at September~~December 3031, ~~2003. Based on Section 382 of the Internal Revenue Code relating to changes in ownership of the Company~~2004, ~~utilization of~~ ~~the~~was ~~net operating loss carryforwards is subject to an annual limitation of approximately~~ $~~995~~123,~~000~~876 ~~for~~compared ~~net operating losses created prior~~ to ~~September 30,~~ ~~1998. All net operating losses created after September 30~~$87,185 ~~1998 are not subject to any limitations and are available to be used~~ for ~~20 years~~the ~~after~~same ~~they~~period ~~are~~in ~~produced~~2003. The ~~As such~~$36, ~~the deferred tax~~691 ~~asset~~increase ~~and~~reflected ~~the~~increased ~~related~~investment ~~valuation~~in ~~allowance for net operating loss carryforwards were reduced to account for the portion of the net operating loss carryforwards the Company will not be able to utilize~~equipment.

~~During the fourth quarter of the Company’s 2003 fiscal year, the~~Net ~~Company~~cash ~~reevaluated~~used ~~the estimated amount of valuation allowance required~~ in ~~light~~ offinancing ~~the~~activities ~~profitability~~was ~~achieved during 2003 and 2002 as well as profitability expected in future years. As a result~~$89,760 ~~the~~for ~~Company increased~~ the ~~valuation~~ ~~allowance~~three-month onperiod ~~deferred~~ended ~~tax assets in accordance with SFAS No.~~December ~~109~~31, ~~“Accounting for Income Taxes,” to an amount that the Company~~ ~~believes is more likely than not of being recovered. Accordingly~~2004, ancompared ~~income~~to ~~tax benefit of approximately~~ $3299,~~483,616~~512 ~~was~~during ~~reflected in~~ the ~~fourth~~three-month ~~quarter~~period ofended ~~the~~December 31, ~~Company’s~~ 2003 ~~fiscal year~~. The ~~amount~~$209,752 ofdecrease ~~net~~was ~~deferred~~primarily ~~tax~~due ~~assets estimated~~ to be ~~recoverable~~smaller ~~was~~principal ~~based~~payments by ~~upon~~ the Company’s ~~assessment~~on of the ~~likelihood of near term operating income~~Note.

At June 30, 2004, the Company had net working capital, exclusive of the Note, of $2,244,266 compared to a net working capital exclusive of the Note of $2,801,607 at September 30, 2003. This decrease in net working capital of $557,341 was due primarily to the decrease in accounts receivable.

Net cash provided by operating activities was $312,015 during the nine-month period ended June 30, 2004, compared to $1,698,402 for the nine-month period ended June 30, 2003. The difference is due to a decrease in net income.

Net cash used in investing activities for the nine months ended June 30, 2004, was $130,973 compared to $686,203 for the same period in 2003. The $555,230 increase reflected increased investment in equipment net of proceeds from the sale of equipment.

Net cash used in financing activities was $838,432 for the nine-month period ended June 30, 2004, compared to $811,043 during the nine-month period ended June 30, 2003. The $27,389 net decrease was due to the principal reduction of the Note.

Item 3. Qualitative Disclosure about Market Risk

The Company’s exposure to market risk includes the possibility of rising interest rates in connection with the Note, thereby increasing its debt ~~service~~ service obligation, which could adversely affect the Company’s cash flows. The interest rate on the Note is variable and tied to the ~~Prime~~prime ~~Rate~~rate not to exceed 13%. An increase in the prime rate of 1% would have the effect of ~~increasing~~ increasing interest expense by approximately $1519,~~872~~590 over 12 months. ~~The~~ ~~Company does not utilize derivative financial instruments to mitigate the risks of changes in interest rates.~~The

Company does not utilize derivative financial instruments to mitigate the risks of changes in interest rates.

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. This information is accumulated and communicated to the Company’s management including the Chief Executive Officer and the Chief ~~Financial~~ Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. The Company’s management, including the Chief Executive Officer and the Chief Financial Officer recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, the Company conducted an evaluation of its disclosure controls and procedures within 90 days of the filing date of this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosures controls and procedures are effective in alerting them on a timely basis to material information required to be disclosed in the Company’s periodic filings.

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in the foregoing paragraph.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Judicial Filings Regarding the Conversion Rate of the Preferred Stock

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

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

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

On October 24, 2003, Don Smith, Ghere-Smith Interests, Inc., Tidel Technologies, Inc. f/k/a American Medical Technologies, Inc., Jim Rash, individually and in his capacity as representative of the certified class of minority shareholders of 3CI, and Larry Robb, individually and as proposed co-representative of the same certified class (collectively, the “Minority Stockholders”), answered and/or intervened in the 2003 Action, cross- claimed against WSI and filed a third-party petition against Stericycle.

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

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

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 Board unanimously appointed a Special Committee comprised of the independent Directors on the Company’s Board of Directors who are not affiliated with Stericycle or WSI. The Special Committee was initially established to act on behalf of the Company in connection with the Company’s dispute with WSI and Stericycle as to the appropriate conversion rate of the Preferred Stock. See Part II, Item 1, Legal Proceedings - Louisiana Minority Stockholder Litigation for a further description of the authority of the Special Committee.

Louisiana Minority Stockholder Litigation

On June 20, 2002, Larry F. Robb, individually, on behalf of a class comprised of the Company’s minority 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~~ First Judicial District Court, Caddo Parish, Louisiana (the “~~Louisiana Suit~~Court”). In ~~this~~the Louisiana ~~suit~~Suit, the Louisiana Plaintiffs ~~assert~~originally asserted numerous claims of minority stockholder oppression, breach of fiduciary duty and unjust enrichment against WSI, Stericycle, the four affiliates of Stericycle who are or were directors of 3CI (the ~~Company,~~“Stericycle Affiliates”) and Otley L. Smith III, the Company’s President and Chief Executive Officer ~~of the Company (collectively, the “Louisiana Defendants”)~~.

~~The Louisiana~~As ~~Plaintiffs~~of ~~contend~~January 8, ~~that~~2004, ~~since~~the ~~Stericycle’s~~Board ~~acquisition~~expanded the authority of ~~WSI~~the inSpecial ~~September 1998,~~Committee ~~Stericycle~~to ~~has~~grant ~~unfairly~~the ~~and~~Special ~~improperly~~Committee ~~exercised~~the ~~control over~~exclusive ~~3CI~~power toand ~~the~~authority ~~detriment~~on behalf of the Company’s ~~minority~~to ~~stockholders~~(i) make ~~in contravention~~all ~~of various contractual~~inquiries, ~~common~~conduct ~~law~~all investigations and ~~statutory~~gather ~~duties.~~all ~~Among other~~information ~~things,~~related to the Louisiana ~~Plaintiffs~~Suit, ~~allege~~or ~~that~~any actions ~~the~~or ~~Louisiana~~proceedings ~~Defendants have~~related to such suit; (iii) ~~deprived~~make ~~the~~or ~~Company~~approve all decisions of ~~revenues~~the byCompany ~~imposing~~related ~~unfavorable~~to ~~loan obligations~~the ~~and~~Louisiana ~~avoidable~~Suit, ~~expenses~~including on the Company~~; (ii) usurped 3CI~~’s ~~business~~filing, ~~and~~amending, ~~business~~maintaining, ~~opportunities~~prosecuting ~~and~~or ~~diverted~~settling ~~its~~of ~~assets~~any ~~for~~legal ~~Stericycle’s~~proceedings ~~benefit~~related to such suit; and (iii) ~~depressed~~exercise ~~the~~such ~~value~~other ofpower and authority that may be exercised by the ~~Common~~full ~~Stock~~Board with regard to the foregoing. The Special ~~Louisiana~~Committee is composed of Stephen B. Koenigsberg and Kevin J. McManus, ~~Plaintiffs~~who ~~further~~are ~~allege~~the ~~that~~independent ~~Stericycle~~directors ~~has~~on ~~breached~~the anBoard ~~agreement~~not ~~entered~~affiliated with Stericycle ~~into~~or WSI. Robert M. Waller, previously a member of the Special Committee, for personal reasons, resigned from the ~~protection~~Board ofon ~~3CI’s~~March 11, ~~minority~~2004. ~~stockholders~~The Special Committee appointed legal counsel to assist it in ~~connection~~its ~~with~~investigation of the ~~Stericycle~~Louisiana Plaintiffs’s ~~acquisition~~allegations ofand ~~WSI~~to gather all information related to the Louisiana Suit.

~~Based on these~~After ~~and~~conducting ~~other~~an ~~allegations,~~investigation into the ~~Louisiana~~facts, ~~Plaintiffs~~arguments ~~seek to recover actual~~ and ~~punitive~~ ~~damages and a variety of equitable and~~ other ~~relief,~~matters ~~including forfeiture~~that ~~or rescission of various disputed transactions, a constructive trust~~in ofits ~~all~~view ~~benefits~~are ~~Stericycle~~related ~~has~~to ~~derived on business usurped from~~ the ~~Company~~issues ~~or not~~raised ~~offered~~in to the ~~Company~~Louisiana ~~and~~Suit, ~~an order requiring Stericycle to buy~~ the ~~capital~~Special ~~stock~~Committee ofhas ~~the~~determined ~~minority~~that ~~stockholders of~~ the ~~Company~~claims atagainst ~~the~~Stericycle, ~~relative~~WSI ~~value~~and of the ~~Company’s shares to~~ Stericycle’s ~~shares~~Affiliates at (the ~~time~~“Louisiana ~~Stericycle~~Defendants”) ~~gained~~in ~~control over~~ the ~~Company,~~Louisiana ~~i.e.~~Suit ~~one~~have merit ~~share~~and ofwarrant ~~Stericycle~~prosecution ~~common~~by ~~stock for every five shares of~~ the Company~~’s Common Stock~~.

On ~~or about~~ ~~October~~December 2710, ~~2003~~2004, the Company, at the direction of the Special Committee, and the Louisiana Plaintiffs filed ~~their~~a motion with the Court seeking leave to file a joint petition (the “Joint Petition”), which was granted on December 14, 2004. The Joint Petition amends and supersedes the Plaintiffs’ First Amended Petition ~~adding~~filed with the Court on October 27, 2003. Pursuant to the Joint Petition (i) the Company has realigned itself as a ~~derivative~~plaintiff ~~defendant~~in the Louisiana Suit and joins on its own behalf in the prosecution of the claims asserted by the Louisiana Plaintiffs in the Louisiana Suit against Stericycle, WSI and the Stericycle Affiliates, and (ii) Otley L. ~~The~~Smith III, the Company’s ~~has~~President ~~not~~and ~~yet~~Chief Executive Officer, previously named as a ~~answered~~defendant ~~this~~in ~~petition~~the Louisiana Suit, has been non-suited.

~~As of~~The ~~January 8,~~Louisiana ~~2004,~~Plaintiffs ~~the~~and ~~Board expanded~~ the ~~authority~~Company ofallege in the ~~Special~~Joint ~~Committee such~~Petition that the Louisiana ~~Special~~Defendants ~~Committee~~wrongfully ~~now~~(i) diverted ~~has~~ the ~~exclusive~~Company’s ~~power~~cash and ~~authority on~~ ~~behalf~~assets, ~~of the Company to~~ (iii) ~~make~~manipulated ~~all inquiries, conduct all investigations~~ and ~~gather~~increased ~~all~~the ~~information~~Company’s ~~related~~debt to ~~the Louisiana Suit~~WSI, ~~the~~ ~~1995~~(iii) directly ~~Action~~ and ~~the~~indirectly ~~2003~~increased ~~Action,~~Stericycle’s orand ~~any~~WSI’s ~~actions or proceedings related to any~~percentage ownership of the ~~foregoing;~~Company, (iiiv) ~~make~~forced ~~or approve all decisions of~~ the Company ~~related~~ to ~~the~~declare ~~Louisiana~~significant cash ~~Suit,~~dividends ~~the~~on ~~1995~~its ~~Action~~Preferred ~~and~~Stock ~~the~~payable ~~2003~~to ~~Action~~WSI, ~~including~~(v) usurped the Company’s ~~filing,~~corporate ~~amending~~opportunities, ~~maintaining,~~(vi) misappropriated ~~prosecuting~~the ~~or settling of any legal~~Company’s ~~proceedings~~customers, ~~related to such suits; and~~ (~~iii~~vii) ~~exercise~~unfairly ~~such~~competed ~~other power and authority that may be exercised by the full Board~~ with ~~regard to~~ the ~~foregoing. The~~Company, ~~Special Committee is composed of Stephen B. Koenigsberg~~ and ~~Kevin~~ J.(viii) ~~McManus,~~operated ~~who are~~ the ~~independent~~Company ~~directors on the Board not affiliated~~ with ~~Stericycle or WSI. Robert M. Waller, previously a member of~~ the ~~Special~~goal ~~Committee, for personal reasons, resigned from the Board~~ of ~~Directors~~maximizing ~~on March 11, 2004. The Special~~Stericycle’s ~~Committee~~profitability ~~has~~and ~~appointed~~furthering ~~legal counsel to assist it in its investigation of the Louisiana Plaintiffs~~Stericycle’s ~~allegations~~integration ~~and to gather all information related to the Louisiana Suit~~plan.

In the ~~June 2004~~Joint Petition, the Louisiana Plaintiffs ~~filed~~and ~~a motion to certify~~ the ~~Louisiana~~Company ~~Suit~~jointly aspray for a judgment ~~class~~against ~~action~~the ~~and~~Louisiana ~~served~~Defendants ~~discovery~~for ~~relating~~actual todamages ~~the~~and punitive ~~request~~damages; for ~~class~~forfeiture ~~certification~~of on all ~~parties~~fees, ~~including the Company. In response~~payments, ~~the Company~~warrants, atCommon ~~the~~Stock ~~direction of~~and ~~the Special Committee, filed a motion with the Louisiana court to stay~~ all ~~proceedings~~other informs ~~the litigation (including discovery) pending the completion~~ of ~~the~~ ~~Special~~value ~~Committee’s~~which ~~investigation. After~~Stericycle aand ~~hearing~~WSI onhave ~~the~~received ~~motion~~from ~~in June 2004,~~ the ~~court extended the~~ Company~~’s deadline for responding to the Louisiana Plaintiffs’ discovery~~ ~~pending~~and ~~completion~~its ofminority ~~the~~stockholders; ~~Special~~unwinding ~~Committee~~Stericycle’s ~~investigation,~~acquisition ~~but~~of ~~allowed~~ the ~~other~~Shepherd ~~parties~~Parties’ to3CI-related ~~proceed~~interests ~~with~~and ~~discovery~~disgorging inall ~~the~~benefits ~~interim. The~~realized ~~Company~~by Stericycle ~~does~~from ~~not~~that ~~have sufficient~~transaction; ~~information~~returning to ~~predict~~ the ~~outcome~~Company ofall ~~the~~shares ~~Louisiana~~of ~~Suit.~~Common Stock

acquired by WSI pursuant to warrants; declaring the Preferred Stock Dividends null and void; requiring a buyout of the Company’s minority stockholders; establishing a constructive trust on all profits or benefits realized by the Louisiana Defendants as the result of the disputed transactions; disqualification of any Stericycle director, officer or other representative from serving on the Board; attorney’s and expert witness fees; and pre- and post-judgment interest. The Louisiana Plaintiffs and the Company also request injunctive relief in order to remove the current Stericycle representatives from the Board, prohibit Stericycle thereafter from electing any of its representatives to the Board and require Stericycle and WSI to vote their Common Stock for nominees to the Board who are nominated by the independent directors on the Board. The Court has set a trial date of September 12, 2005 if the suit is tried before a jury, and a trial date of October 4, 2005, if the suit is tried to the judge. The Company intends to vigorously prosecute the claims set forth in the Joint Petition.

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

In order to avoid any potential for confusion and conflict that may arise if the Company and the Louisiana Plaintiffs separately prosecuted such claims against Stericycle, WSI and the Stericycle Affiliates, the Company, at the direction of the Special Committee, has entered into an Agreement for Joint Prosecution by and among the Company, the Louisiana Plaintiffs and The Wynne Law Firm, legal counsel to the Louisiana Plaintiffs in the Louisiana Suit (the “Joint Prosecution Agreement”).

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

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

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

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 Third-Party Defendants Otley L. Smith III; John R. Weaver, a former Chief Financial Officer of the Company; Robert M. Waller, a former director of the Company; Curtis W. Crane, a former Chief Financial Officer of the Company; Charles D. Crochet, a former director and Chief Executive Officer of the Company; David J. Schoonmaker, a former director of the Company; Stephen B. Koenigsberg; and Kevin J. McManus. In the Counterclaim, the Stericycle Affiliates assert that the Company and the Third-Party Defendants, based on their alleged relationships with one another and/or participation in the transactions at issue in the Joint Petition, are liable to the Stericycle Affiliates in contribution for some or all of the claims and damages asserted in the Joint Petition. In addition, the Stericycle Affiliates allege that the members of the Special Committee, individually, breached their fiduciary duties to the Company by, among other things, failing to conduct a thorough investigation and analysis of the Louisiana Plaintiffs’ claims prior to entering into the Joint Prosecution Agreement. Finally, the Stericycle Affiliates allege that the members of the Special Committee facilitated or caused insider trading of the Company’s Common Stock by failing to investigate, or causing an increase in, the share price and trading volume of the Common Stock during the Fall of 2004.

The Company and the Special Committee categorically deny the claims asserted by the Stericycle Affiliates, and intend to vigorously defend those claims while continuing to pursue the claims stated in the Joint Petition. The Company and the Third-Party Defendants have not yet filed their answers or responses to the Counterclaim.

Item 2. Changes in Securities

None.

16Item 3. Defaults Upon Senior Securities

~~Item 3~~None. ~~Defaults upon Senior Securities~~

The Company failed to achieve the minimum EBITDA level under the Note at the end of the six-month periods ended March 31, 2004 and June 30, 2004, and has not yet paid to WSI the required penalty fees thereunder. Therefore, the Company could be deemed to be in default under the Note. See Note 3 and Part I, Item 2, Management Discussion & Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources for a description of the Note and the required penalty fees thereunder.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits ~~and Reports on Form 8-K~~

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

Exhibit Number		Description

31.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002.
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002.

b) Reports on Form 8-K

None.

SIGNATURES

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

	3CI COMPLETE COMPLIANCE	~~3CI COMPLETE COMPLIANCE~~
	CORPORATION	~~CORPORATION~~
	(Registrant)	~~(Registrant)~~
Dated: August 16, 2004		By:	/s/ Donald P. Zima
Dated: February 14, 2005	By:	/s/ Matthew D. Peiffer
			Donald P. Zima
		Matthew D. Peiffer
	Chief Financial Officer, Secretary and Treasurer
		Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)
			(Principal Financial Officer and Principal Accounting Officer)

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