0000950137-01-504259.txt : 20011107
0000950137-01-504259.hdr.sgml : 20011107
ACCESSION NUMBER: 0000950137-01-504259
CONFORMED SUBMISSION TYPE: S-3/A
PUBLIC DOCUMENT COUNT: 3
FILED AS OF DATE: 20011102
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: STERICYCLE INC
CENTRAL INDEX KEY: 0000861878
STANDARD INDUSTRIAL CLASSIFICATION: HAZARDOUS WASTE MANAGEMENT [4955]
IRS NUMBER: 363640402
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: S-3/A
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-68622
FILM NUMBER: 1774415
BUSINESS ADDRESS:
STREET 1: 28161 NORTH KEITH DRIVE
STREET 2: SUITE 410
CITY: LAKE FOREST
STATE: IL
ZIP: 60045
BUSINESS PHONE: 8473675910
MAIL ADDRESS:
STREET 1: 1419 LAKE COOK RD
STREET 2: STE 410
CITY: DEERFIELD
STATE: IL
ZIP: 60015
S-3/A
1
c64701a4s-3a.txt
AMENDMENT #4 TO REGISTRATION STATEMENT
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 2, 2001
REGISTRATION NO. 333-68622
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 4
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
STERICYCLE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3640402
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
28161 NORTH KEITH DRIVE, LAKE FOREST, ILLINOIS 60045
(847) 367-5910
(Address, including zip code, and telephone number, including
area code of Registrant's principal executive offices)
---------------------
MARK C. MILLER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
STERICYCLE, INC.
28161 NORTH KEITH DRIVE, LAKE FOREST, ILLINOIS 60045
(847) 367-5910
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
The Commission is requested to send copies of all communications to:
CRAIG P. COLMAR ALLISON R. SCHNEIROV
MICHAEL BONN SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
JOHNSON AND COLMAR FOUR TIMES SQUARE
300 SOUTH WACKER DRIVE, SUITE 1000, NEW YORK, NEW YORK 10036
CHICAGO, ILLINOIS 60606 (212) 735-3000
(312) 922-1980
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED NOVEMBER 2, 2001
2,700,000 Shares
[STERICYCLE LOGO]
Common Stock
---------------------
We are selling 1,000,000 shares of common stock and the selling
stockholders are selling 1,700,000 shares of common stock. Stericycle will not
receive any proceeds from the sale of shares by the selling stockholders.
Our common stock is quoted on The Nasdaq National Market under the symbol
"SRCL." The last reported sale price on November 1, 2001, was $49.76 per share.
The underwriters have an option to purchase a maximum of 405,000 additional
shares from the selling stockholders to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO PROCEEDS TO SELLING
PUBLIC COMMISSIONS STERICYCLE STOCKHOLDERS
-------- ------------- ----------- -------------------
Per Share........................... $ $ $ $
Total............................... $ $ $ $
Delivery of the shares of common stock will be made on or about ,
.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Joint Book-Running Managers
CREDIT SUISSE FIRST BOSTON UBS WARBURG
---------------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC. WILLIAM BLAIR & COMPANY
The date of this prospectus is , .
STERICYCLE LOGO
USA MAP
Founded in 1989, Stericycle is the largest provider of regulated medical
waste management services in the United States, serving over 259,000 customers
in the United States, Canada, Puerto Rico and Mexico. Stericycle and its
subsidiaries operate 36 treatment/collection centers, four of which utilize
Stericycle's proprietary Electro-Thermal-Deactivation treatment technology and
95 additional transfer and collection sites.
Steri-Fuel(R), Steri-Plastic(R) and Steri-Tub(R) are registered trademarks
and Stericycle(R) and the nine-circle design are registered service marks of the
Company.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN THE COMMON STOCK AND THE IMPOSITION OF A PENALTY BID, DURING AND
AFTER THE UNDERWRITING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE
NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
TABLE OF CONTENTS
PAGE
----
SUMMARY............................... 1
RISK FACTORS.......................... 7
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS.................. 14
INDUSTRY AND MARKET DATA.............. 14
USE OF PROCEEDS....................... 15
PRICE RANGE OF COMMON STOCK........... 15
DIVIDEND POLICY....................... 16
CAPITALIZATION........................ 17
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 19
PAGE
----
BUSINESS.............................. 26
MANAGEMENT............................ 41
MANAGEMENT OWNERSHIP AND SELLING
STOCKHOLDERS........................ 43
DESCRIPTION OF CAPITAL STOCK.......... 46
SHARES ELIGIBLE FOR FUTURE SALE....... 48
UNDERWRITING.......................... 49
NOTICE TO CANADIAN RESIDENTS.......... 51
LEGAL MATTERS......................... 52
EXPERTS............................... 52
WHERE YOU MAY FIND ADDITIONAL
INFORMATION......................... 52
INDEX TO FINANCIAL STATEMENTS......... F-1
---------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
ii
PROSPECTUS SUMMARY
The following summarizes some of the more detailed information included
elsewhere or incorporated by reference in this prospectus. Unless otherwise
indicated, all information in this prospectus assumes that the underwriters'
over-allotment option is not exercised. See "Underwriting." Because the
following is only a summary, it does not contain all of the information that may
be important to you. You should read the entire prospectus carefully, including
"risk factors" and our financial statements and related notes, before deciding
to invest in our common stock. Unless the context requires otherwise, references
to "Stericycle," "we," "us" and "our" refer to Stericycle, Inc. and its
subsidiaries.
STERICYCLE, INC.
OVERVIEW
We are the largest regulated medical waste management company in North
America, serving over 259,000 customers throughout the United States, Canada,
Puerto Rico and Mexico. We have the only fully integrated, national medical
waste management network. Our network includes 36 treatment/ collection centers
and 95 additional transfer and collection sites. We use this network to provide
the industry's broadest range of services, including medical waste collection,
transportation and treatment and related consulting, training and education
services and products. Our treatment technologies include our proprietary
electro-thermal-deactivation system, or ETD, as well as traditional methods such
as autoclaving and incineration. For the years ended December 31, 2000 and 1999,
our revenues were $323.7 million and $132.8 million, respectively, and our net
income was $14.5 million and $14.0 million, respectively. For the six months
ended June 30, 2001 and 2000, our revenues were $174.4 million and $157.2
million, respectively, and our net income was $10.6 million and $6.9 million,
respectively.
We benefit from significant customer diversification, with no single
customer accounting for more than 1% of revenues, and our top 10 customers
accounting for less than 3% of revenues. Our two principal groups of customers
include approximately 255,000 small medical waste generators such as outpatient
clinics, medical and dental offices and long-term and sub-acute care facilities
and approximately 4,500 large medical waste generators such as hospitals, blood
banks and pharmaceutical manufacturers. Small accounts tend to be more likely to
outsource medical waste management services and tend to be more service oriented
and less price sensitive. We are targeting new customers through our large
proprietary database of potential new small account customers and our dedicated
sales force. We successfully increased the proportion of revenues from small
account customers from 33% of revenues in the fourth quarter of 1996 to 57% in
the second quarter of 2001.
We have long-term customer contracts of between one and five years with
substantially all of our customers. In addition, many of our contracts with
small accounts have automatic renewal provisions. We believe that the services
we offer are compelling to our customers because they allow our customers to
avoid the significant capital and operating costs that they would have to incur
if they were internally to manage their regulated medical waste. Moreover, by
outsourcing these services and purchasing consulting and other services from us,
our customers reduce or eliminate the risks associated with regulatory non-
compliance.
INDUSTRY OVERVIEW
The large, fragmented medical waste industry has experienced significant
growth since its inception. The regulated medical waste industry arose with the
Medical Waste Tracking Act of 1988 or MWTA, which Congress enacted in response
to media attention after medical waste washed ashore on ocean beaches,
particularly in New York and New Jersey. Since the 1980s, governmental
regulation has increasingly required the proper handling and disposal of the
medical waste generated by the health care industry. Regulated medical waste is
generally described as any medical waste that can cause an infectious disease,
including single-use disposable items, such as needles, syringes, gloves and
other medical supplies; cultures and stocks of infectious agents; and blood and
blood products.
1
An independent study estimated the size of the regulated medical waste
market in the United States in 2000 to be approximately $1.5 billion. We believe
that the worldwide market for regulated medical waste management services is
currently approximately $3.0 billion and is in excess of $10.0 billion when
including ancillary services we provide such as training, education, product
sales and consulting services. Industry growth is driven by a number of factors.
These factors include:
- pressure to reduce hospital costs, increasing hospital outsourcing of
services such as medical waste management;
- a shift in patient care from higher cost acute-care settings to less
expensive, smaller, off-site treatment alternatives, increasing the
number and importance of small account customers;
- the aging of the U.S. population, increasing the consumption of health
care services and the related generation of medical waste; and
- extensive federal, state and local regulations related to environmental
protection and employee safety, increasing the cost and complexity of
medical waste disposal.
COMPETITIVE STRENGTHS
We believe that we benefit from the following competitive strengths:
- a market leader with an established national network of treatment centers
and transfer and collection sites servicing customers in 48 states;
- a diverse yet integrated range of services, including regulatory
compliance, education and employee safety programs as well as medical
waste management;
- low-cost operations reflecting operating efficiencies created by the
geographic density of our customers and our vertical integration of
medical waste collection, transportation, treatment and disposal
services;
- a geographically diverse customer base, comprised of both large and small
quantity medical waste generators from a range of healthcare providers,
mitigating the loss of any particular customer;
- the largest sales force in the medical waste industry; and
- an experienced senior management team, which collectively has over 70
years of management experience in the health care and waste management
industries.
BUSINESS STRATEGY
Our goals are to strengthen our position as the largest provider of
integrated services in the regulated medical waste industry and to continue to
improve our profitability. Components of our strategy to achieve these goals
include:
- improving margins by increasing our base of small account customers and
focusing on service strategies that more efficiently meet the needs of
our large account customers;
- leveraging our existing base of customers by expanding the range of
services and products we offer to include new services such as our
Steri-Safe(SM) OSHA compliance service;
- seeking complementary acquisitions that expand our national network of
treatment centers and increase our customer base; and
- continuing to capitalize on Clean Air regulations that have significantly
increased the cost of medical waste treatment and led to the closure of
hospital incinerators.
2
RECENT DEVELOPMENTS
On October 10, 2001, we refinanced our senior secured credit facility to
increase our revolving credit facility from $50.0 million to $80.0 million and
extend its maturity. We also reallocated the amounts available under the Term A
and Term B components of our credit facility and extended their maturities. The
Term A component was increased from $75.0 million to $100.0 million and the Term
B component was reduced from $150.0 million to $75.0 million. The interest rates
on both of our term loans and the revolving line of credit were reduced. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."
On November 2, 2001, we announced earnings for the quarter ended September
30, 2001. Revenues for the quarter were $91.3 million, up 12.6% from revenues of
$81.1 million for the same quarter in 2000. Income from operations for the
quarter was $19.7 million, up 25.9% from income from operations of $15.7 million
for the same quarter in 2000. Net income for the quarter was $6.3 million, up
84.5% from net income of $3.4 million for the same quarter in 2000. Earnings per
share (diluted) for the quarter were $0.30, up 76.6% from earnings per share
(diluted) of $0.17 for the same quarter in 2000.
For the nine months ended September 30, 2001, revenues increased to $265.6
million, up 11.5% from revenues of $238.3 million for the same period in 2000.
Income from operations for the period increased to $56.6 million, up 21.3% from
income from operations of $46.7 million for the same period in 2000. Net income
for the period increased to $16.9 million, up 64.7% from net income of $10.3
million for the same period in 2000. Earnings per share (diluted) for the period
increased to $0.81, up 56.1% from earnings per share (diluted) of $0.52 for the
same period in 2000.
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 2001 2000 2001
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenues............................................ $81,066 $91,261 $238,291 $265,645
Cost of revenues.................................... 49,151 54,794 144,769 159,913
Selling general and administrative expenses......... 14,765 16,717 43,975 48,795
Acquisition-related costs........................... 1,483 20 2,890 347
------- ------- -------- --------
Income from operations.............................. 15,667 19,730 46,657 56,590
Interest expense, net............................... (9,684) (8,857) (29,186) (27,133)
Other expense....................................... (144) (313) (172) (1,039)
------- ------- -------- --------
Income before income taxes.......................... 5,839 10,560 17,299 28,418
Income tax expense.................................. 2,406 4,225 7,007 11,472
------- ------- -------- --------
Net income.......................................... $ 3,433 $ 6,335 $ 10,292 $ 16,946
======= ======= ======== ========
Diluted net income per common share................. $ 0.17 $ 0.30 $ 0.52 $ 0.81
======= ======= ======== ========
Weighted average number of common shares and common
stock equivalent shares outstanding--diluted...... 20,096 21,098 19,878 20,876
OTHER OPERATING DATA:
EBITDA(1)........................................... $21,326 $25,831 $ 63,900 $ 74,650
Depreciation and amortization....................... 5,803 6,414 17,415 18,737
Net cash provided by operating activities........... 5,439 47,011
Net cash used in investing activities............... (11,899) (24,518)
Net cash used in financing activities............... (10,666) (12,355)
BALANCE SHEET DATA (as of September 30, 2001):
Cash, cash equivalents and short-term investments.................................... $ 13,137
Total assets......................................................................... 620,643
Long-term debt net of current maturities............................................. 325,857
Convertible preferred stock.......................................................... 72,996
Shareholders' equity................................................................. 154,243
---------------
(1)Calculated for any period as the sum of net income, plus net interest
expense, income tax expense, depreciation expense and amortization expense.
EBITDA includes acquisition-related costs. See "-- Summary Consolidated
Financial Data," Note (4).
3
THE OFFERING
Common stock offered by us.......... 1,000,000 shares
Common stock offered by the selling
stockholders...................... 1,700,000 shares(1)
Total common stock offered.......... 2,700,000 shares
Common stock to be outstanding
after the offering................ 18,386,321 shares(2)
Use of proceeds by us............... To repurchase up to 35% of our $125
million outstanding 12 3/8% senior
subordinated notes due 2009 and pay
redemption premiums thereon. We will
not receive any proceeds from the sale
of common stock by the selling
stockholders. See "Use of Proceeds."
Nasdaq National Market symbol....... SRCL
---------------
(1) These shares will be issued upon the conversion of a portion of the shares
of our Series A convertible preferred stock owned by the selling
stockholders.
(2) The number of shares of common stock to be outstanding after the offering is
based on the number of shares outstanding as of October 1, 2001. This figure
excludes:
- 1,871,876 shares issuable upon the exercise of outstanding stock options,
at a weighted average exercise price of $20.53 per share;
- 90,139 shares issuable upon the exercise of outstanding warrants, at a
weighted average exercise price of $16.11 per share;
- 791,656 shares reserved for issuance under options that may be granted
under our stock option plans; and
- 2,839,863 shares issuable upon the conversion of the selling
stockholders' remaining shares of our Series A convertible preferred
stock.
---------------------
We are organized as a Delaware corporation. Our principal executive offices
are located at 28161 North Keith Drive, Lake Forest, Illinois 60045. Our
telephone number is (847) 367-5910. Our website address is
http://www.stericycle.com. The information on our website is not incorporated
as a part of this prospectus.
4
SUMMARY CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------- ----------------------------------
2000 2001
----------------------- -----------------------
PRO PRO
1998 1999 ACTUAL FORMA(2),(3) 2000 ACTUAL FORMA(2),(3)
-------- --------- -------- ------------ -------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS
DATA(1):
Revenues........................ $ 66,681 $ 132,848 $323,722 $323,722 $157,225 $174,384 $174,384
Cost of revenues................ 45,328 86,123 196,345 196,345 95,618 105,119 105,119
Selling, general and
administrative expenses....... 14,929 26,480 59,457 59,457 29,210 32,078 32,078
Acquisition-related costs....... -- 7,961 4,454 4,454 1,407 327 327
-------- --------- -------- -------- -------- -------- --------
Income from operations.......... 6,424 12,284 63,466 63,466 30,990 36,860 36,860
Interest expense, net........... (64) (5,051) (39,227) (33,236) (19,502) (18,276) (15,328)
Other income, net............... 1 565 (423) (423) (28) (726) (726)
-------- --------- -------- -------- -------- -------- --------
Income before income taxes...... 6,361 7,798 23,816 29,807 11,460 17,858 20,806
Income tax expense (benefit).... 648 (6,170) 9,305 11,701 4,601 7,247 8,426
-------- --------- -------- -------- -------- -------- --------
Net income...................... $ 5,713 $ 13,968 $ 14,511 $ 18,105 $ 6,859 $ 10,611 $ 12,380
======== ========= ======== ======== ======== ======== ========
Diluted net income per common
share......................... $ 0.51 $ 0.92 $ 0.72 $ 0.86 $ 0.35 $ 0.51 $ 0.57
======== ========= ======== ======== ======== ======== ========
Weighted average number of
common shares and common stock
equivalent shares
outstanding -- diluted........ 11,264 15,242 20,093 21,093 19,824 20,730 21,730
OTHER OPERATING DATA:
EBITDA(4)....................... $ 10,489 $ 22,728 $ 86,512 $ 86,512 $ 42,574 $ 48,819 $ 48,819
Depreciation and amortization... 4,064 9,879 23,469 23,469 11,612 12,323 12,323
Net cash provided by (used in)
operating activities.......... 4,862 11,777 10,469 (646) 23,305
Net cash used in investing
activities.................... (23,753) (425,628) (15,600) (4,937) (10,614)
Net cash provided by (used in)
financing activities.......... 14,800 431,912 (11,547) (9,148) (12,193)
JUNE 30, 2001
-----------------------------
ACTUAL AS ADJUSTED(5),(6)
-------- ------------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 3,483 $ 3,483
Total assets................................................ 595,885 594,438
Long-term debt, net of current maturities................... 328,562 286,189
Convertible preferred stock................................. 72,339 45,023
Shareholders' equity........................................ 144,920 214,887
---------------
(1) See "Business -- Acquisitions History" and Note 4 to the consolidated
financial statements for information concerning our acquisitions. The
comparability of the information for the periods presented has been affected
by these acquisitions.
(2) Adjusted on a pro forma basis to give effect to the sale of the 1,000,000
shares of common stock offered by us in this offering (at an assumed public
offering price of $49.76 per share, and after deducting underwriting
discounts and commissions and estimated offering expenses payable by us) and
to the application of our estimated net proceeds to the redemption of a
portion of our senior subordinated notes, with a resulting reduction of
interest expense, but without giving effect to payment of a redemption
premium of $5.1 million and the write-off of $1.4 million in related
deferred financing costs. These reductions will be reflected as an
extraordinary item in the statement of operations in the period in which the
redemption occurs and have been reflected net of income tax expense of $2.6
million in the as adjusted balance sheet data. See "Use of Proceeds."
5
(3) Adjusted on a pro forma basis to give effect to the refinancing of our
senior secured credit facility on October 10, 2001, pursuant to which we
increased our revolving credit facility, reallocated the term loan
components and extended their maturities, and reduced the interest rates
that we are charged. The pro forma adjustment to interest expense net is
$0.9 million and $0.4 million for the year ended December 31, 2000 and for
the six months ended June 30, 2001, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."
(4) Calculated for any period as the sum of net income, plus net interest
expense, income tax expense, depreciation expense and amortization expense.
EBITDA includes acquisition-related charges of $8.0 million, $4.5 million,
$1.4 million and $0.3 million for the years ended December 31, 1999 and 2000
(actual and pro forma) and the six months ended June 30, 2000 and 2001
(actual and pro forma), respectively. We consider EBITDA to be a widely
accepted financial indicator of a company's 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 in 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. The funds depicted by this measure may
not be available for management's discretionary use due to legal or
functional requirements, debt service, other commitments and uncertainties.
(5) Adjusted to give effect to the issuance of the 1,700,000 shares of common
stock offered by the selling stockholders in this offering, which were
issued upon the conversion of a portion of their shares of our Series A
convertible preferred stock. See Note (2).
(6) Adjusted to give effect to the refinancing of our senior secured credit
facility on October 10, 2001. See Note (3).
6
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The trading price of our common stock could decline due to
any of these risks, and you could lose all or part of your investment.
RISKS RELATED TO OUR INDUSTRY
WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION WITH WHICH IT IS FREQUENTLY
DIFFICULT, EXPENSIVE AND TIME-CONSUMING TO COMPLY.
The medical waste management industry is subject to extensive federal,
state and local laws and regulations relating to the collection, transportation,
packaging, labeling, handling, documentation, reporting, treatment and disposal
of regulated medical waste. Our business requires us to obtain many permits,
authorizations, approvals, certificates or other types of governmental
permission from every jurisdiction where we operate.
We believe that we currently comply in all material respects with all
applicable permitting requirements. State and local regulations change often,
however, and new regulations are frequently adopted. Changes in the applicable
regulations could require us to obtain new permits or to change the way in which
we operate. We might be unable to obtain the new permits that we require, and
the cost of compliance with new or changed regulations could be significant.
The permits that we require, especially those to build and operate
treatment and transfer facilities, are difficult and time-consuming to obtain.
They may also contain conditions or restrictions that limit our ability to
operate efficiently, and they may not be issued as quickly as we need (or at
all). If we cannot obtain the permits that we need when we need them, or if they
contain unfavorable conditions, it could substantially impair our operations and
reduce our revenues.
THE HANDLING AND TREATMENT OF HAZARDOUS MEDICAL WASTE CARRIES WITH IT THE RISK
OF PERSONAL INJURY TO EMPLOYEES AND OTHERS.
Our business requires us to handle materials that may be infectious,
poisonous, corrosive or dangerous to life and property in other ways. While we
strive to handle such materials with care and in accordance with accepted and
safe methods, the possibility of accidents, leaks, spills, and acts of God
always exists. Examples of how people and property may be exposed to such
materials include:
- truck accidents;
- damaged or leaking containers;
- improper storage of medical waste by customers;
- vandalism, arson or sabotage;
- placement by customers of materials into the waste stream that we are not
authorized or able to process, such as nuclear waste and certain body
parts and tissues; or
- malfunctioning treatment plant equipment.
Human beings, animals or property might be injured, sickened or damaged by
exposure to medical waste. This in turn could result in lawsuits in which we are
found liable for such injuries, and substantial damages could be awarded against
us.
While we carry liability insurance intended to cover such contingencies,
particular instances, claims, damages or events may occur that are not insured
against or are inadequately insured against. An uninsured or underinsured loss
could be substantial and could impair our profitability and reduce our
liquidity.
7
THE HANDLING OF MEDICAL WASTE EXPOSES US TO THE RISK OF ENVIRONMENTAL
LIABILITIES WHICH MAY NOT BE COVERED BY INSURANCE.
As a company engaged in medical waste management, we face risks of
liability for environmental contamination. The federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, or CERCLA, and
similar state laws impose strict liability on current or former owners and
operators of facilities that release hazardous substances into the environment
as well as on the businesses that generate those substances and the businesses
that transport them to the facilities. Responsible parties may be liable for
substantial investigation and clean-up costs even if they operated their
businesses properly and complied with applicable federal and state laws and
regulations.
Liability under CERCLA may be joint and several, which means that if we
were found to be a business with responsibility for a particular CERCLA site, we
could be required to pay the entire cost of the investigation and clean-up even
though we were not the party responsible for the release of the hazardous
substance and even though other companies might also be liable.
Our pollution liability insurance excludes liabilities under CERCLA. Thus,
if we were to incur liability under CERCLA and if we could not identify other
parties responsible under the law whom we can compel to contribute to our
expenses, the cost to us could be substantial and could impair our profitability
and reduce our liquidity.
THE LEVEL OF GOVERNMENTAL ENFORCEMENT OF ENVIRONMENTAL REGULATIONS HAS AN
UNCERTAIN EFFECT ON OUR BUSINESS AND COULD REDUCE THE DEMAND FOR OUR SERVICES.
We believe that the government's strict enforcement of laws and regulations
relating to medical waste collection and treatment has been good for our
business. These laws and regulations increased the demand for our services. We
also believe that laws and regulations that made it more difficult or expensive
to use technologies that compete with our ETD process, such as incineration,
have previously given us a competitive advantage. This advantage has diminished,
however, and is likely to be further reduced, because we have increased our own
use of autoclaving and incineration, mainly as a result of purchasing companies,
including the Browning-Ferris Industries, Inc., or BFI, medical waste business,
that use these processes. Approximately 88% of our current capacity to treat
regulated medical waste is provided by incineration and autoclaving, and this
percentage is likely to increase in the future as we acquire other companies
which use these treatment technologies. See "Business -- Treatment
Technologies."
A relaxation of standards or other changes in governmental regulation of
medical waste, such as:
- encouraging use of landfills;
- removing obstacles to the use of incineration and autoclaving, thus
allowing the continued use of existing on-site incinerators by medical
waste generators without having to incur additional compliance costs; or
- reducing manpower and money used to enforce environmental regulations
favorable to our operations;
could increase the number of competitors or reduce the need for our services.
WE MAY BE REQUIRED TO PAY FINES AND PENALTIES FOR VIOLATIONS OF ENVIRONMENTAL
REGULATIONS OR OUR PERMITS.
From time to time we are subject to governmental proceedings to enforce
regulations relating to the handling and treatment of medical waste. We have had
to pay fines and penalties and to undertake remedial work at our facilities. We
may be subject to similar proceedings in the future. Government enforcement
actions also may be initiated against us based on claims that we are violating
our permits. Such proceedings could distract management attention from our
business operations and any resulting fines or shut-downs could reduce our
profitability.
8
RISKS RELATED TO OUR BUSINESS
IF WE ARE UNABLE TO ACQUIRE OTHER MEDICAL WASTE BUSINESSES, OUR REVENUE AND
PROFIT GROWTH MAY BE SLOWED.
Our growth strategy is based in part on our ability to acquire other
medical waste businesses. We do not know whether in the future we will be able
to:
- identify suitable businesses to buy;
- complete the purchase of those businesses on terms acceptable to us;
- improve the operations of the businesses that we buy and successfully
integrate their operations into our own; or
- avoid or overcome any concerns expressed by regulators.
We compete with other potential buyers for the acquisition of other medical
waste companies. This competition may result in fewer opportunities to purchase
companies that are for sale. It may also result in higher purchase prices for
the businesses that we want to purchase.
In addition, we also cannot be certain that we will:
- have enough money;
- be able to borrow enough money on reasonable terms;
- be able to issue stock or debt instruments (like promissory notes) as
consideration for the purchase; or
- be able to raise enough money by issuing stock or through other financing
methods;
to complete the purchases of the businesses that we want to acquire.
We also do not know whether our growth strategy will continue to be
effective. Our business is significantly larger than before, and new
acquisitions may not have the desired benefits that we have expected in the
past.
AGGRESSIVE PRICING BY EXISTING COMPETITORS AND THE ENTRANCE OF NEW COMPETITORS
COULD DRIVE DOWN OUR PROFITS AND SLOW OUR GROWTH.
The medical waste industry is very competitive. This has required us in the
past to reduce our prices, especially to large account customers, and
competition may require us to reduce our prices in the future. Substantial price
reductions could significantly reduce our earnings.
We face important competition from a large number of small, local
competitors. Because it requires very little money or technical know-how to
compete with us in the collection and transport of medical waste, there are a
large number of regional and local companies in the industry. We face
competition from these businesses and that competition may exist in each
location into which we try to expand in the future. Our competitors could take
actions that would hurt our growth strategy, including the support of
regulations which could delay or prevent us from obtaining or keeping permits.
They might also give financial support to citizens' groups that oppose our plans
to locate a treatment or transfer facility at a particular location. See
"Business -- Competition."
Other sources of competition include large waste generators, such as some
hospitals, who maintain their own treatment facilities. These and other
yet-unidentified competitors could prevent us from obtaining new customers and
could take existing customers away from us.
9
WE REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SERVICE OUR SUBSTANTIAL INDEBTEDNESS,
WHICH REDUCES THE CASH AVAILABLE TO FINANCE OUR INTERNAL GROWTH AND OUR
ACQUISITION OF OTHER MEDICAL WASTE BUSINESSES.
We have a substantial amount of indebtedness. As of June 30, 2001, our
total long-term indebtedness was $328.6 million, net of current maturities, and
we had the ability to borrow a further $50.0 million under our revolving credit
facility. Our required debt service payments during 2001, 2002 and 2003 are $4.1
million, $15.6 million and $17.3 million, respectively.
Our ability to make payments on our indebtedness, as well as to fund our
operations and future growth, depends upon our ability to generate cash. Our
success in doing so depends upon the results of our operations and upon general
economic, financial, competitive, regulatory and other factors beyond our
control.
Our indebtedness could:
- make us more vulnerable to unfavorable economic conditions;
- make it more difficult to pursue the acquisition of other medical waste
management businesses; and
- require us to dedicate or reserve a large portion of our cash flow from
operations to making payments on our indebtedness, which would prevent us
from using it for other purposes.
RESTRICTIONS IN OUR DEBT INSTRUMENTS MAY LIMIT OUR ABILITY TO PAY DIVIDENDS,
INCUR ADDITIONAL DEBT, MAKE ACQUISITIONS AND MAKE OTHER INVESTMENTS.
Our debt instruments contain covenants that restrict our ability to make
distributions to stockholders or other payments unless we satisfy certain
financial tests and comply with various financial ratios. If we do not do so,
our creditors could declare a default under our debt instruments, and our
indebtedness could be declared immediately due and payable. Our ability to
comply with the provisions of our debt instruments may be affected by changes in
economic or business conditions beyond our control.
Our debt instruments also contain covenants that limit our ability to incur
additional indebtedness, acquire other businesses and make capital expenditures,
and impose various other restrictions. These covenants could affect our ability
to operate our business and may limit our ability to take advantage of potential
business opportunities as they arise.
THE LOSS OF OUR SENIOR EXECUTIVES COULD AFFECT OUR ABILITY TO MANAGE OUR
BUSINESS PROFITABLY.
We depend on a small number of senior executives. Our future success will
depend, among other things, upon our ability to keep these executives and to
hire other highly qualified employees at all levels. We compete with other
potential employers for employees, and we may not be successful in hiring and
keeping the executives and other employees that we need. We do not have written
employment agreements with our President and Chief Executive Officer or other
executive officers, and officers and other key employees could leave us with
little or no prior notice, either individually or as part of a group. Our loss
or inability to hire key employees could impair our ability to manage our
business and direct its growth.
OUR EXPANSION INTO FOREIGN COUNTRIES EXPOSES US TO UNFAMILIAR REGULATIONS AND
MAY EXPOSE US TO NEW OBSTACLES TO GROWTH.
We plan to grow both in the United States and in foreign countries. We have
established operations in Canada, Mexico, Argentina, Australia and South Africa
and have entered into ETD equipment sales and licensing agreements in Brazil and
Japan.
10
Foreign operations carry special risks. Although our business in foreign
countries has not yet been affected, our business in the countries in which we
currently operate and those in which we may operate in the future could be
limited or disrupted by:
- government controls;
- import and export license requirements;
- political or economic insecurity;
- trade restrictions;
- changes in tariffs and taxes;
- our unfamiliarity with laws, regulations, and customs;
- restrictions on repatriating foreign profits back to the United States;
or
- difficulties in staffing and managing international operations.
Foreign governments and agencies often establish permit and regulatory
standards different from those in the United States. If we cannot obtain foreign
regulatory approvals, or if we cannot get them when we expect, our growth and
profitability from international operations could be limited. Fluctuations in
currency exchange rates and increases in duty rates for ETD equipment could have
similar effects. See "Business -- Business Strategy" and " -- Marketing and
Sales."
THE COMPETITIVE ADVANTAGES OF OUR ETD TREATMENT PROCESS AND OTHER ASPECTS OF OUR
BUSINESS DEPEND ON PATENTS AND PROPRIETARY RIGHTS.
We own ten United States patents relating to the ETD treatment process or
other aspects of processing medical waste. We have filed or have been assigned
patent applications in several foreign countries and have received patents in
nine of them.
Pending or future patent applications may not be granted, issued patents
may not provide us with competitive advantages, and our patents may be
challenged by other parties. In addition, other companies may develop similar
processes or avoid our patents. Litigation or administrative proceedings may be
necessary to enforce the patents issued to us or to determine the scope and
validity of others' proprietary rights. Any litigation or administrative
proceeding could result in substantial cost to us and distraction of our
management. A ruling against us in any litigation or administrative proceeding
could expose us to new competition and depress our earnings.
Our commercial success also depends on our not infringing patents issued to
other parties. Patents belonging to other parties may require us to alter our
processes, pay licensing fees or cease using any current or future processes,
and as a result, we may be unable to license the technology rights that we may
require at a reasonable cost or at all. If we can not obtain a license to any
infringing technology that we currently use, it could have a material adverse
effect on our business.
We own registered and unregistered trademarks and service marks. There can
be no assurance that our registered or unregistered trademarks or service marks
will not infringe upon the rights of other parties. The requirement to change
any of our trademarks, service marks or trade names could result in the loss of
any goodwill associated with that trademark, service mark or trade name and
could entail significant expense. See "Business -- Patents and Proprietary
Rights."
OUR EARNINGS COULD DECLINE IF WE WRITE-OFF INTANGIBLE ASSETS, SUCH AS GOODWILL.
As a result of purchase accounting for our various acquisitions, our
balance sheet at June 30, 2001 contains an intangible asset designated as excess
of cost over net assets of purchased operations totaling $412.8 million. Using
an amortization period of 25 years for goodwill, except for goodwill related to
our acquisition of the medical waste business of Browning Ferris Industries,
Inc., which is being amortized over 40 years, amortization expense relating to
this intangible asset was approximately $13.8 million for the year ended
December 31, 2000 and $6.9 million for the six months ended June 30, 2001.
Beginning in the
11
first quarter of 2002, we will apply new financial accounting rules under which
goodwill will no longer be amortized, but will be subject to annual impairment
tests.
On an ongoing basis, we evaluate, based upon expected undiscounted cash
flows, whether facts and circumstances indicate any impairment of value of
intangible assets such as goodwill. As circumstances after an acquisition can
change, the value of these intangible assets may not be realized by us. If we
determine that a significant impairment has occurred, we would be required to
write-off the impaired portion of goodwill and other unamortized intangible
assets, which could have a material adverse effect on our results of operations
in the period in which the write-off occurs.
RISKS RELATED TO THIS OFFERING
THE BFI MEDICAL WASTE BUSINESS FINANCIAL STATEMENTS FOR A PERIOD OF THE
1999 FISCAL YEAR ARE NOT INCLUDED IN THIS REGISTRATION STATEMENT AND THE BFI
MEDICAL WASTE BUSINESS FINANCIAL STATEMENTS FOR THE 1999 FISCAL YEAR THAT ARE
INCORPORATED IN THIS REGISTRATION STATEMENT BY REFERENCE ARE UNAUDITED AND
THEREFORE MAY NOT ACCURATELY REFLECT WHAT THE RESULTS OF OPERATIONS OF THE BFI
MEDICAL WASTE BUSINESS WOULD HAVE BEEN FOR THAT PERIOD.
This registration statement does not include or incorporate by reference
any financial statements of the BFI medical waste business for the period from
July 1, 1999 until November 12, 1999, the date that we completed our acquisition
of the BFI medical waste business. The results of operations for the BFI medical
waste business for the nine months ended June 30, 1999 that are incorporated by
reference in this registration statement are unaudited and may not accurately
reflect what the results of operations of the BFI medical waste business would
have been for that period, and therefore are not necessarily indicative of the
results of operations for the full 1999 fiscal year.
THE FINANCIAL INFORMATION FOR THE BFI MEDICAL WASTE BUSINESS INCORPORATED
BY REFERENCE IN THIS REGISTRATION STATEMENT FOR PERIODS PRIOR TO THE BFI
ACQUISITION DOES NOT NECESSARILY REFLECT THE RESULTS OF OPERATIONS THAT WOULD
HAVE RESULTED IF THE BFI MEDICAL WASTE BUSINESS HAD OPERATED AS AN INDEPENDENT
ENTITY PRIOR TO THE BFI ACQUISITION.
Prior to the BFI acquisition, the assets of the BFI medical waste business
that we acquired from Allied Waste Industries, Inc. were not a legal entity or
subsidiary and did not operate as a discrete operating unit. The financial
statements for the BFI medical waste business incorporated by reference in this
registration statement for periods prior to our acquisition of the BFI medical
waste business were prepared from the historical accounting records of Allied
and do not purport to be a complete presentation of the results of operations of
the assets of the BFI medical waste business that we acquired. The BFI medical
waste business financial statements were prepared for the purposes of complying
with the rules and regulations of the SEC. In particular, these financial
statements do not include many selling, general and administrative costs that
the BFI medical waste business would have incurred had it been operated as an
independent business during those periods.
THE PRICE OF OUR STOCK IS SUBJECT TO WIDE FLUCTUATION.
The market price of our common stock may be highly volatile. The market
price of our shares may vary widely depending on:
- general economic conditions;
- news related to Stericycle;
- the action of federal economic regulators;
- the overall condition of the stock market;
- the market's perception of the medical waste industry;
12
and many other factors. For example, our stock price may be subject to wide
fluctuations in price if we or our competitors announce transactions, disputes,
settlements, government actions, economic losses or gains or other important
events or information. See "Price Range of Common Stock."
SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD ADVERSELY AFFECT OUR
STOCK PRICE.
The market price of our common stock could decline as a result of sales by
our existing stockholders after this offering or the perception that these sales
could occur. These sales also might make it difficult for us to sell equity
securities in the future at a time and at a price that we consider appropriate.
In addition, some existing stockholders have the ability to require us to
register their shares.
13
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements of our intentions, beliefs, expectations or predictions for the
future, denoted by the words "anticipate," "believe," "estimate," "expect,"
"project," "imply," "intend," "foresee" and similar expressions, and sentences
stating that we "will" or "are going to" take a certain action or experience a
certain set of circumstances, are forward-looking statements. These statements
reflect our current views about future events. All of these forward-looking
statements are subject to risks, uncertainties and assumptions. These risks,
uncertainties and assumptions include those identified in this "Risk Factors"
section and in the "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" sections of this prospectus, and
include the following:
- changes in laws or regulations affecting the medical waste industry
generally and our operations in particular;
- failure properly to manage our cash resources, particularly in light of
our substantial indebtedness;
- hazards associated with handling and treating medical waste generally,
which might lead to tort liability or increased government restriction on
our activities;
- inability to continue our acquisition strategy for any reason, including
failure to achieve necessary governmental approvals;
- problems arising with respect to our international expansion programs and
foreign joint-venture strategies; and
- industry-wide market factors and other general economic and business
conditions.
Although we believe that the expectations reflected in these
forward-looking statements are reasonable, our actual results could differ
materially from those expectations as a result of these factors and those listed
in this section and elsewhere throughout this prospectus, and incorporated by
reference in this prospectus, many of which are beyond our control. There can be
no assurance our expectations will prove to have been correct. We are under no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events, or otherwise. In light of these risks,
uncertainties, and assumptions, the events described in the forward-looking
statements in this prospectus and the documents it incorporates might not occur.
INDUSTRY AND MARKET DATA
In this prospectus, we rely on and refer to information and statistics
regarding the medical waste industry and the sectors in which we compete. We
obtained this information and statistics from various third party sources and
our own internal estimates. We believe that these third party sources and
estimates are reliable, but we have not independently verified them.
14
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common stock in the
offering are estimated to be $46.6 million at an assumed public offering price
of $49.76 per share, after deducting underwriting discounts and commissions and
estimated offering expenses payable by us. We will not receive any proceeds from
the sale of shares by the selling stockholders.
We intend to use our net proceeds from the offering for the redemption of a
portion of our senior subordinated notes. In November 1999, as part of the
financing for our acquisition of the medical waste management business of BFI,
we incurred indebtedness through the sale of $125 million of senior subordinated
notes due November 15, 2009. These notes bear fixed annual interest at the rate
of 12 3/8%, payable semi-annually in arrears. Up to 35.0% of the notes are
redeemable on one or more occasions before November 15, 2002 at a redemption
price of 112.375% of the aggregate principal amount of notes redeemed, plus
accrued and unpaid interest to the redemption date, using the net cash proceeds
of one or more equity offerings. The trustee under the indenture governing our
senior subordinated notes, State Street Bank and Trust Company, will select the
particular notes to be redeemed on a pro rata basis, by lot or in accordance
with any other method that the trustee considers fair and appropriate. The
balance, if any, of our net proceeds from the offering may be used to repay
indebtedness under our senior secured credit facility or for general corporate
purposes.
Three of our directors, Messrs. Dammeyer, Patience and Schuler, each own
$1.25 million of our senior subordinated notes. Investment funds affiliated with
Bain Capital LLC hold $12.0 million of our senior subordinated notes.
PRICE RANGE OF COMMON STOCK
Since August 23, 1996, the Company's common stock has traded on the Nasdaq
National Market under the symbol "SRCL." The following table sets forth, for the
periods indicated, the high and low sale prices of the common stock as reported
on The Nasdaq National Market:
PRICE RANGE OF
COMMON STOCK
-----------------
HIGH LOW
------- -------
1999:
First Quarter............................................... $18.000 $11.438
Second Quarter.............................................. 15.500 9.500
Third Quarter............................................... 16.313 11.875
Fourth Quarter.............................................. 19.750 14.375
2000:
First Quarter............................................... 25.313 15.188
Second Quarter.............................................. 25.875 19.000
Third Quarter............................................... 27.000 20.125
Fourth Quarter.............................................. 42.250 24.063
2001:
First Quarter............................................... 47.000 26.000
Second Quarter.............................................. 51.870 38.480
Third Quarter............................................... 52.990 33.700
Fourth Quarter(1)........................................... 51.100 40.800
---------------
(1) From October 1, 2001 through November 1, 2001.
On November 1, 2001, the last reported sale price of the common stock on
The Nasdaq National Market was $49.76 per share.
15
DIVIDEND POLICY
We have never paid cash dividends on our capital stock. We currently expect
that we will retain future earnings for use in our operations, including the
payment of interest on our indebtedness and the expansion of our business.
Accordingly, we do not anticipate paying any cash dividends in the foreseeable
future. We are prohibited from paying cash dividends under the terms of the
trust indenture pursuant to which we sold $125 million of senior subordinated
notes. We are restricted from paying cash dividends under our senior secured
credit facility and under an agreement in connection with the industrial
development revenue bonds issued to finance the construction of our treatment
facility at Woonsocket, Rhode Island.
16
CAPITALIZATION
The following table sets forth, as of June 30, 2001, our actual
capitalization and our capitalization as adjusted to give effect to (i) the
receipt and application as described under "Use of Proceeds" of the estimated
net proceeds from the sale of the 1,000,000 shares of common stock that we are
offering (at an assumed public offering price of $49.76 per share, and after
deducting underwriting discounts and commissions and estimated offering expenses
payable by us) and to (ii) the refinancing of our senior secured credit facility
on October 10, 2001, pursuant to which we increased our revolving credit
facility and extended its maturity, reallocated the term loan components and
extended their maturities, and reduced the interest rates that we are charged.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."
JUNE 30, 2001
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
Short-term debt:
Current portion of long-term debt......................... $ 6,942 $ 7,849
Long-term debt:
Senior secured credit facility:
Revolving credit facility.............................. -- 27,280
Term loan A............................................ 62,812 95,000
Term loan B............................................ 135,000 74,625
Senior subordinated notes................................. 125,000 83,534
Industrial development bonds and other.................... 5,750 5,750
-------- --------
Total long-term debt, net of current portion...... 328,562 286,189
Redeemable preferred stock:
Series A convertible preferred stock ($.01 par value;
100,000 shares authorized; 74,625 shares issued and
outstanding, 46,545 shares issued and outstanding as
adjusted(1))........................................... 72,339 45,023
Common shareholders' equity:
Common stock ($.01 par value; 30,000,000 shares
authorized; 15,483,640 shares issued and outstanding,
18,183,640 shares issued and outstanding as
adjusted(2))........................................... 155 182
Additional paid-in capital................................ 144,279 218,166
Accumulated other comprehensive loss...................... (2,027) (2,027)
Retained earnings (deficit)............................... 2,513 (1,434)
-------- --------
Total shareholders' equity........................ 144,920 214,887
-------- --------
Total capitalization.............................. $552,763 $553,948
======== ========
---------------
(1) Adjusted to give effect to the conversion of a portion of the selling
stockholders' shares of our Series A convertible preferred stock in
connection with this offering.
(2) Adjusted to give effect to the issuance of the 1,700,000 shares of common
stock offered by the selling stockholders in this offering, which were
issued upon the conversion of a portion of their shares of our Series A
convertible preferred stock.
17
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data.
The statements of operations data for the years ended December 31, 1998, 1999
and 2000 and the balance sheet data at December 31, 1999 and 2000 have been
derived from our consolidated financial statements, which are included elsewhere
in this prospectus and which have been audited by Ernst & Young LLP, independent
auditors. The statements of operations data for the years ended December 31,
1996 and 1997 and the balance sheet data at December 31, 1996, 1997 and 1998
have been derived from our audited consolidated financial statements which are
not included in this prospectus. The statements of operations data for the six
months ended June 30, 2000 and 2001 and the balance sheet data at June 30, 2001
are derived from our unaudited condensed consolidated financial statements
included elsewhere in this prospectus. The balance sheet data at June 30, 2000
are derived from our unaudited condensed consolidated financial statements which
are not included in this prospectus. Our condensed consolidated financial
statements include all adjustments, consisting of normal recurring adjustments,
that we consider necessary for a fair presentation of our financial position and
results of operations for those periods. Operating results for the six months
ended June 30, 2001 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 2001. The data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements, condensed consolidated financial statements and related notes
included elsewhere in this prospectus. We did not declare any cash dividends
during any of the periods for which consolidated financial data is presented.
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
------- ------- ------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA(1):
Revenues..................................... $24,542 $46,166 $66,681 $132,848 $323,722 $157,225 $174,384
Cost of revenues............................. 19,423 34,109 45,328 86,123 196,345 95,618 105,119
Selling, general and administrative
expenses................................... 7,556 10,671 14,929 26,480 59,457 29,210 32,078
Acquisition related costs.................... -- -- -- 7,961 4,454 1,407 327
------- ------- ------- -------- -------- -------- --------
Income (loss) from operations................ (2,437) 1,386 6,424 12,284 63,466 30,990 36,860
Interest income (expense), net............... 48 190 (64) (5,051) (39,227) (19,502) (18,276)
Other income, net............................ -- -- 1 565 (423) (28) (726)
------- ------- ------- -------- -------- -------- --------
Income (loss) before income taxes............ (2,389) 1,576 6,361 7,798 23,816 11,460 17,858
Income tax expense (benefit)................. -- 146 648 (6,170) 9,305 4,601 7,247
------- ------- ------- -------- -------- -------- --------
Net income (loss)............................ $(2,389) $ 1,430 $ 5,713 $ 13,968 $ 14,511 $ 6,859 $ 10,611
======= ======= ======= ======== ======== ======== ========
Diluted net income (loss) per common share... $ (0.32) $ 0.13 $ 0.51 $ 0.92 $ 0.72 $ 0.35 $ 0.51
======= ======= ======= ======== ======== ======== ========
Weighted average number of common shares and
common stock equivalent shares
outstanding -- diluted..................... 7,471 10,766 11,264 15,242 20,093 19,824 20,730
DECEMBER 31, JUNE 30,
------------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
------- ------- ------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................ $17,749 $ 5,374 $ 1,819 $ 19,629 $ 2,947 $ 4,891 $ 3,483
Total assets................................. 55,155 61,226 97,755 595,786 597,982 585,507 595,885
Long-term debt, net of current maturities.... 4,591 3,475 23,460 355,444 345,104 349,601 328,562
Convertible preferred stock.................. -- -- -- 69,195 71,437 70,487 72,339
Shareholders' equity......................... 40,014 45,026 53,651 118,114 134,700 124,529 144,920
---------------
(1) See "Business -- Acquisitions History" and Note 4 to the consolidated
financial statements for information concerning our acquisitions. The
comparability of the information for the periods presented has been affected
by these acquisitions.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements, condensed consolidated financial statements and related notes
included elsewhere in this prospectus.
BACKGROUND
We were incorporated in March 1989. We provide regulated medical waste
collection, transportation and treatment services to our customers and related
training and education programs and consulting services. We also sell ancillary
supplies and transport pharmaceuticals, photographic chemicals, lead foil and
amalgam for recycling in selected geographic service areas. We are also
expanding into international markets through joint ventures or by licensing our
proprietary technology and selling associated equipment.
Our revenues have increased from $1.6 million in 1991 to $323.7 million in
2000. We derive our revenues from services to two principal types of customers:
(i) long-term and sub-acute care facilities, outpatient clinics, medical and
dental offices, biomedical companies, municipal entities and other smaller-
quantity generators of regulated medical waste ("small account" customers) and
(ii) hospitals, blood banks, pharmaceutical manufacturers and other
larger-quantity generators of regulated medical waste ("large account"
customers). Substantially all of our services are provided pursuant to customer
contracts specifying either scheduled or on-call regulated medical waste
management services, or both. Contracts with small account customers generally
provide for annual price increases and have an automatic renewal provision
unless the customer notifies us prior to completion of the contract. Contracts
with hospitals and other large account customers, which may run for more than
one year, typically include price escalator provisions, which allow for price
increases generally tied to an inflation index or set at a fixed percentage. As
of June 30, 2001, we served over 259,000 customers.
We have established operations in Canada, Mexico, Argentina, Australia and
South Africa and have entered into ETD equipment sales and licensing agreements
in Brazil and Japan.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
The following summarizes (in thousands) our operations:
SIX MONTHS ENDED JUNE 30,
-----------------------------------
2000 2001
---------------- ----------------
Revenues......................................... $157,225 100.0% $174,384 100.0%
Cost of revenues................................. 95,618 60.8 105,119 60.3
-------- --------
Gross profit..................................... 61,607 39.2 69,265 39.7
Selling, general and administrative expenses..... 29,210 18.6 32,078 18.4
-------- --------
Income from operations before acquisition-related
costs.......................................... 32,397 20.6 37,187 21.3
Acquisition-related costs........................ 1,407 0.9 327 0.2
-------- --------
Income from operations........................... 30,990 19.7 36,860 21.1
Net income....................................... 6,859 4.4 10,611 6.1
Depreciation and amortization.................... 11,612 7.4 12,323 7.1
EBITDA(1)........................................ 42,574 27.1 48,819 28.0
Earnings per share -- diluted.................... $ 0.35 $ 0.51
---------------
(1) Calculated for any period as the sum of net income, plus net interest
expense, income tax expense, depreciation expense and amortization expense,
to the extent deducted in calculating net income.
REVENUES. Revenues increased $17.2 million, or 10.9%, to $174.4 million
during the six months ended June 30, 2001 from $157.2 million during the
comparable period in 2000 as a result of our continued strategy of focusing on
sales to higher-margin small account customers, higher international
19
equipment sales and higher revenues by 3CI Complete Compliance Corporation, of
which our wholly-owned subsidiary, Waste Systems, Inc. is a majority
shareholder. International equipment revenues during the six months ended June
30, 2001 increased $2.1 million to $3.2 million from $1.0 million during the
comparable period in 2000. During the six months ended June 30, 2001,
acquisitions contributed approximately $1.3 million to the increase in revenues
as compared to the prior year. For the six months, our base internal revenue
growth for small account customers increased approximately 9% while revenues
from large account customers also increased by approximately 3%.
COST OF REVENUES. Cost of revenues increased $9.5 million, or 9.9%, to
$105.1 million during the six months ended June 30, 2001 from $95.6 million
during the comparable period in 2000. The increase was primarily due to higher
energy and labor costs and volume growth. The gross margin percentage increased
to 39.7% during the six months ended June 30, 2001 from 39.2% during the same
period in 2000 as a result of productivity improvements offsetting the higher
energy and labor costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $32.1 million for the six months ended June
30, 2001 from $29.2 million for the comparable period in 2000. The increase was
largely the result of higher administrative expenses related to the
international business and spending on the Steri-Safe(SM) compliance program and
other strategic marketing investments. Selling, general and administrative
expenses as a percent of revenues decreased to 18.4% during the six months ended
June 30, 2001 from 18.6% during the comparable period in 2000. Excluding
amortization, selling, general and administrative expenses as a percent of
revenue increased to 14.4% during the six months ended June 30, 2001 from 14.3%
during the comparable period in 2000.
ACQUISITION-RELATED COSTS. During the six months ended June 30, 2001, we
incurred acquisition-related costs of $0.3 million related to the integration of
the BFI acquisition.
INCOME FROM OPERATIONS. Income from operations increased to $36.9 million
for the six months ended June 30, 2001 from $31.0 million for the comparable
period in 2000. The increase was due to higher revenues and lower
acquisition-related costs offset by higher cost of revenues and selling, general
and administrative expenses during the six months. Income from operations as a
percentage of revenue increased to 21.1% during the six months ended June 30,
2001 from 19.7% during the same period in 2000 as a result of productivity
improvements and lower acquisition-related costs.
EBITDA. EBITDA increased by 14.7% to $48.8 million or 28.0% of revenue for
the six months ended June 30, 2001, as compared to $42.6 million or 27.1% of
revenue for the comparable period in 2000. The increase in EBITDA is primarily
due to the factors described above.
INTEREST EXPENSE. Interest expense decreased to $18.5 million during the
six months ended June 30, 2001 from $19.8 million during the comparable period
in 2000 primarily due to decreased interest rates on debt incurred in connection
with the BFI acquisition and repayments on that debt.
OTHER EXPENSE. Other expense increased to $0.7 million during the six
months ended June 30, 2001 from $0.03 million during the comparable period in
2000 primarily due to a one time accrual in state and local taxes of $0.4
million and minority interest expense related to our foreign subsidiaries as
opposed to minority interest income during the comparable period in 2000.
NET INCOME. Net income increased to $10.6 million for the six months ended
June 30, 2001 from $6.9 million for the comparable period in 2000. The increase
was due to higher income from operations and lower interest expense partially
offset by higher other expense and income tax expense.
20
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
The following summarizes (in thousands) our operations:
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 2000
---------------- ----------------
Revenues......................................... $132,848 100.0% $323,722 100.0%
Cost of revenues................................. 86,123 64.8 196,345 60.7
-------- --------
Gross profit..................................... 46,725 35.2 127,377 39.3
Selling, general and administrative expenses..... 26,480 19.9 59,457 18.4
-------- --------
Income from operations before acquisition-related
costs.......................................... 20,245 15.2 67,920 21.0
Acquisition-related costs........................ 7,961 6.0 4,454 1.4
-------- --------
Income from operations........................... 12,284 9.2 63,466 19.6
Net income....................................... 13,968 10.5 14,511 4.5
Depreciation and amortization.................... 9,879 7.4 23,469 7.2
EBITDA........................................... 22,728 17.1 86,512 26.7
Earnings per share -- diluted.................... $ 0.92 $ 0.72
REVENUEs. Our revenues increased $190.9 million, or 143.7%, to $323.7
million during the year ended December 31, 2000 from $132.8 million during the
year ended December 31, 1999, as we had a full year of revenues from our
acquisition of BFI's medical waste business in November 1999 and we continued to
focus on sales to higher-margin small account customers while simultaneously
paring specified higher-revenue but lower-margin accounts with large account
customers. Revenues generated from the sale of machinery and licensing of
technology internationally were $7.2 million during 2000 as compared to $5.9
million during 1999. During 2000, acquisitions contributed approximately $180.0
million to the increase in our revenues from 1999. For the year, internal growth
for small account customers increased approximately 8.0% while revenues from
large account customers increased by approximately 3.5%.
COST OF REVENUES. Our cost of revenues increased $110.2 million, or
128.0%, to $196.3 million during the year ended December 31, 2000, from $86.1
million during the year ended December 31, 1999. The increase was primarily due
to the substantial increase in revenues during 2000 compared to 1999 and to the
cost of equipment sold internationally. Our gross margin percentage increased to
39.3% during 2000 from 35.2% during 1999 as a result of the further integration
of the BFI medical waste business into our existing infrastructure, lower costs
relating to the changing mix of small account versus large account customers,
higher gross margins on international equipment sales, and increased utilization
of treatment capacity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses increased to $59.5 million during the year ended
December 31, 2000, from $26.5 million during the year ended December 31, 1999.
This increase was largely the result of increases in selling and marketing
expenses and goodwill amortization as a result of the BFI acquisition. Bad debt
expense increased during 2000 to $1.6 million from $0.8 million in 1999 as a
result of increased sales. Selling, general and administrative expenses as a
percentage of revenue decreased to 18.4% during 2000 from 19.9% during 1999.
Excluding amortization, selling, general and administrative expenses as a
percent of revenue decreased to 14.1% during 2000 from 16.7% during 1999.
ACQUISITION-RELATED COSTS. During the year ended December 31, 2000 we
incurred integration and other non-recurring acquisition costs of $4.5 million
related to the BFI acquisition as compared to $8.0 million during the year ended
December 31, 1999. These costs included severance and facility closure costs,
other non-recurring acquisition-related costs, and transition related expenses.
We anticipate that we will incur an additional $0.5 million in
acquisition-related costs during the year ended December 31, 2001.
INCOME FROM OPERATIONS. Income from operations increased to $63.5 million
during the year ended December 31, 2000 from $12.3 million during the year ended
December 31, 1999. The increase was due to
21
higher revenues and lower acquisition-related costs, offset by higher costs of
revenues and selling, general and administrative expenses during the period.
Income from operations as a percentage of revenue increased to 19.6% during the
year ended December 31, 2000 from 9.2% during the same period in 1999 as a
result of productivity improvements and lower acquisition-related costs relative
to the BFI acquisition.
EBITDA. EBITDA increased by 280.6% to $86.5 million or 26.7% of revenues
for the year ended December 31, 2000, as compared to $22.7 million or 17.1% of
revenues for the year ended December 31, 1999. The increase in EBITDA is
primarily due to the factors described above.
INTEREST EXPENSE AND INTEREST INCOME. Interest expense increased to $39.8
million during the year ended December 31, 2000, from $6.2 million during the
year ended December 31, 1999, primarily due to increased borrowings in
connection with the BFI acquisition. Interest income decreased to $0.6 million
during 2000, from $1.1 million during 1999, primarily due lower cash balances
throughout the year.
INCOME TAX EXPENSE. Income tax expense for the year ended December 31,
2000 reflects an effective tax rate of approximately 39.1% for federal and state
income taxes. Income tax expense for the year ended December 31, 1999 reflects a
one time tax benefit of $6.3 million recorded in compliance with FASB 109.
NET INCOME. Net income increased to $14.5 million during the year ended
December 31, 2000 from $14.0 million during the year ended December 31, 1999.
The increase was due to higher income from operations offset by higher interest,
other and income tax expense.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
The following summarizes (in thousands) our operations:
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1999
---------------- ----------------
Revenues......................................... $ 66,681 100.0% $132,848 100.0%
Cost of revenues................................. 45,328 68.0 86,123 64.8
-------- --------
Gross profit..................................... 21,353 32.0 46,725 35.2
Selling, general and administrative expenses..... 14,929 22.4 26,480 19.9
-------- --------
Income from operations before acquisition-related
costs.......................................... 6,424 9.6 20,245 15.2
Acquisition-related costs........................ -- -- 7,961 6.0
-------- --------
Income from operations........................... 6,424 9.6 12,284 9.2
Net income....................................... 5,713 8.6 13,968 10.5
Depreciation and amortization.................... 4,064 6.1 9,879 7.4
EBITDA........................................... 10,489 15.7 22,728 17.1
Earnings per share -- diluted.................... $ 0.51 $ 0.92
REVENUES. Our revenues increased $66.1 million, or 99.2%, to $132.8
million during the year ended December 31, 1999 from $66.7 million during the
year ended December 31, 1998 as we completed the acquisition of the medical
waste business from BFI and continued to focus on sales to higher-margin small
account customers while simultaneously paring specified higher-revenue but
lower-margin accounts with large account customers. Revenues generated from the
sale of machinery internationally were $5.9 million during the year ended
December 31, 1999 as compared to $6.0 million during 1998. During 1999,
acquisitions contributed approximately $61.5 million to the increase in our
revenues from 1998. For the year, internal growth for small account customers
increased approximately 15.8% while revenues from large account customers
decreased by approximately 1.3%.
COST OF REVENUES. Our cost of revenues increased $40.8 million, or 90.0%,
to $86.1 million during the year ended December 31, 1999, from $45.3 million
during the year ended December 31, 1998. The increase was primarily due to the
completion of the BFI acquisition and the substantial increase in revenues
during 1999 compared to 1998 and to the cost of equipment sold internationally.
Our gross margin percentage increased to 35.2% during 1999, from 32.0% during
1998, as a result of the further
22
integration of new acquisitions into our existing infrastructure, lower costs
relating to the changing mix of small account versus large account customers and
increased utilization of treatment capacity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses increased to $26.5 million during the year ended
December 31, 1999, from $14.9 million during the year ended December 31, 1998.
This increase was largely the result of increases in selling and marketing
expenses and goodwill amortization as a result of our acquisitions, expansion of
our sales network, and increased administrative expenses related to the higher
volume. Selling, general and administrative expenses as a percentage of revenues
decreased to 19.9% during 1999 from 22.4% during 1998. Excluding amortization,
selling, general and administrative expenses as a percent of revenues decreased
to 16.7% during 1999 from 20.1% during 1998.
ACQUISITION-RELATED COSTS. During the fourth quarter of 1999, we incurred
integration and other non-recurring acquisition costs of $8.0 million related to
the BFI acquisition. These costs included severance and facility closure costs,
other non-recurring acquisition-related costs, and transition related expenses.
INCOME FROM OPERATIONS. Income from operations increased to $12.3 million
during the year ended December 31, 1999 from $6.4 million during the year ended
December 31, 1998. The increase was due to higher revenues offset by higher cost
of revenues and selling, general and administrative expenses and
acquisition-related costs. Income from operations as a percentage of revenue
decreased to 9.2% during the year ended December 31, 1999 from 9.6% during the
same period in 1999 as a result of acquisition-related costs relative to the BFI
acquisition.
EBITDA. EBITDA increased by 116.7% to $22.7 million, or 17.1% of revenues
for the year ended December 31, 1999, as compared to $10.5 million, or 15.7% of
revenues for the year ended December 31, 1998. The increase in EBITDA was
primarily due to the factors described above.
INTEREST EXPENSE AND INTEREST INCOME. Interest expense increased to $6.2
million during the year ended December 31, 1999, from $0.8 million during the
year ended December 31, 1998, primarily due to increased borrowings for the BFI
acquisition. Interest income also increased to $1.1 million during 1999, from
$0.7 million during 1998, primarily due to interest income on the investment of
excess funds from the secondary offering of public stock that we completed in
February 1999.
OTHER INCOME AND EXPENSE. During the year ended December 31, 1999, a
one-time gain of $0.8 million on the sale of routes by 3CI Complete Compliance
Corporation, of which our wholly-owned subsidiary, Waste Systems, Inc. is a
majority shareholder, was partially offset by a one-time cash expense of $0.2
million for warrants issued with bridge loan borrowings in December 1998 and
January 1999.
INCOME TAX EXPENSE. Income tax expense for the year ended December 31,
1999 reflects a one time tax benefit of $6.3 million recorded in compliance with
FASB 109. Under FASB 109, we are required to recognize our net deferred tax
assets if we believe that we are more likely than not to benefit from our
carryforward losses and tax credits in future years.
NET INCOME. Net income increased to $14.0 million during the year ended
December 31, 1999 from $5.7 million during the year ended December 31, 1998. The
increase was due to higher income from operations, other income and a one-time
tax expense benefit offset by higher interest expense.
LIQUIDITY AND CAPITAL RESOURCES
In November 1999, we completed the acquisition of BFI's medical waste
business in the United States, Canada and Puerto Rico. Prior to our acquisition,
BFI had been the largest provider of regulated medical waste services in the
United States, with revenues of $201.7 million for the 12 months ended June 30,
1999. The purchase price for the acquisition was $410.5 million in cash. We paid
the purchase price from the following sources, in addition to cash on hand: (i)
$225.0 million in borrowings under the term loan facilities of a new senior
secured credit facility that we established with DLJ Capital Funding, Inc., an
affiliate of Credit Suisse First Boston Corporation, Bankers Trust Company and
Bank of America, N.A.; (ii) $125.0 million in proceeds from the sale of our
12 3/8% senior subordinated notes due
23
November 2009; and (iii) $75.0 million in proceeds from the issuance of new
Series A convertible preferred stock to certain investment funds associated with
Bain Capital, LLC and Madison Dearborn Partners, LLC. These transactions were
completed concurrently with the completion of our acquisition of BFI's medical
waste business. As a result we are a substantially leveraged company. We also
recorded a substantial increase in goodwill and other intangible assets in
connection with the BFI acquisition, and we have experienced a corresponding
large increase in amortization expense.
On October 10, 2001, we refinanced our senior secured credit facility to
increase our revolving credit facility and extend its maturity, reallocate the
term loan A and B components of the facility and extend their maturities, and
reduce the interest rates that we are charged. Under the amendment and
restatement of our existing credit agreement, we increased our revolving credit
facility from $50.0 million to $80.0 million and extended its maturity from
November 11, 2005 to September 30, 2006. We also reallocated the term loan
components of the credit facility, increasing the lower-interest Term A
component from $75.0 million to $100.0 million and extending its maturity from
November 11, 2005 to September 30, 2006, and reducing the higher-interest Term B
component from $150.0 million to $75.0 million and extending its maturity from
November 10, 2006 to September 30, 2007. Both term loans will be repaid in
quarterly installments on the last business day of March, June, September and
December beginning on January 1, 2002.
The refinancing of our senior secured credit facility reduces the interest
rates that we are charged by reducing the applicable margin added to the
relevant interest rate. Our borrowings continue to bear interest at fluctuating
interest rates determined, at our election in advance for any quarterly or other
applicable interest period, by reference to (i) a "base rate" (the higher of the
reference rate at Bank of America, N.A. or 0.5% above the rate on overnight
federal funds transactions) or (ii) the London Interbank Offered Rate, or LIBOR,
plus, in either case, the applicable margin within the relevant range of margins
provided in the credit agreement. The applicable margin is based upon our
leverage ratio. The initial margin for interest rates on borrowings under our
revolving credit facility and the Term A component is 1.375% on base rate loans
and 2.375% on LIBOR loans, and the initial margin for interest rates on
borrowings under the Term B component is 1.75% on base rate loans and 2.75% on
LIBOR loans.
Our amended and restated credit facility is secured by a lien on
substantially all of our assets and all of the assets of our subsidiaries
(except for the assets of 3CI and our foreign subsidiaries) and by a pledge of
all of the stock of our wholly-owned domestic subsidiaries, all of our stock in
3CI and Medam, and 65% of our stock in Med-Tech. The amended and restated credit
facility also requires us to comply with various quarterly and other financial
covenants. As of November 1, 2001, we had $190.0 million of borrowings
outstanding under our senior secured credit facility.
Dividends on our Series A convertible preferred stock are payable in kind
in additional shares of convertible preferred stock and accrue at the annual
rate of 3.375%, subject to adjustment.
At June 30, 2001, our working capital was $43.2 million compared to working
capital of $47.9 million at December 31, 2000. The decrease in working capital
is primarily due to lower accounts receivable and other current asset balances.
As noted, we have available a $50.0 million revolving line of credit under our
senior secured credit facility which is secured by our accounts receivable and
all of our other assets. At June 30, 2001 we had no borrowings under this line.
Net cash provided by operating activities was $23.3 million during the six
months ended June 30, 2001 compared to net cash used in operations of $0.6
million for the comparable period in 2000. This increase primarily reflects
better collections of accounts receivable in 2001 compared to 2000 and higher
net income, depreciation and amortization expenses, accrued liability and
deferred revenue balances partially offset by a lower accounts payable balance
and higher other asset balances.
Net cash used in investing activities for the six months ended June 30,
2001 was $10.6 million compared to $4.9 million for the comparable period in
2000. This increase is primarily attributable to the increase in capital
expenditures and investments in international joint ventures. Capital
expenditures were $6.6 million for the six months ended June 30, 2001, primarily
for upgrades to our incinerator treatment
24
facilities, compared to $3.6 million for the same period in 2000. This rate of
capital spending is within the 4-5% of revenues that we anticipated spending
during 2001. After the upgrades are completed we will have 15-22% of our
treatment capacity in incineration and 78-85% in non-incineration technologies
such as autoclave and ETD. Investments in acquisitions and international joint
ventures for the six months ended June 30, 2001 were $4.0 million versus $1.6
million in the comparable period in 2000.
Net cash used in financing activities was $12.2 million during the six
months ended June 30, 2001 compared to $9.1 million for the comparable period in
2000. During the first six months of 2001 we made repayments of $14.7 million in
debt and capital leases which consisted of approximately $6.5 million in
scheduled repayments and $8.2 million in prepayments.
Our other financial obligations include industrial development revenue
bonds issued on behalf of and guaranteed by us to finance our Woonsocket, Rhode
Island treatment facility and equipment. These bonds, which had an outstanding
aggregate balance of $0.8 million as of June 30, 2001 at fixed interest rates
ranging from 6.5% to 7.375% are due in various amounts through June 2017. In
addition, we have issued various promissory notes in connection with
acquisitions during 1997, 1998 and 2000, consisting primarily of a 10-year note
issued as a part of the Environmental Control Corporation, Inc. acquisition,
which had an outstanding balance of $1.4 million at June 30, 2001.
We anticipate that our operating cash flow, together with borrowings under
our senior secured credit facility, will be sufficient to meet our anticipated
future operating expenses, capital expenditures and debt service obligations as
they become due and for the next 12 months and the foreseeable future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risks arising from changes in interest rates on
our senior secured credit facility. Our interest rate exposure results from
changes in LIBOR or the base rate which are used to determine the applicable
interest rates under our term loans and revolving credit facility. Our potential
loss over one year that would result from a hypothetical, instantaneous and
unfavorable change of 100 basis points in the interest rate on all of our
variable rate obligations would be approximately $0.3 million. Fluctuations in
interest rates will not affect the interest payable on our senior subordinated
notes, which is fixed.
We have entered into interest rate swap/collar agreements that effectively
convert a portion of our floating-rate debt to a fixed-rate basis for the next
two years, thus reducing the impact of interest rate changes on future interest
expense. Approximately 85% ($175 million) of our outstanding variable rate debt
was covered by interest rate swap/collar agreements at June 30, 2001. The
differential to be paid or received is accrued monthly as an adjustment to
interest expense.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill will no longer be amortized but
will be subject to annual impairment tests in accordance with the statements.
Other intangible assets will continue to be amortized over their useful lives.
We will apply the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the statements is expected to result in an
increase in net income of $7.2 million ($0.36 per diluted share) per year.
During 2002, we will perform the first of the required impairment tests of
goodwill and indefinite lived intangible assets as of January 1, 2002, but have
not yet determined what the effect of these tests will be on our earnings and
financial position.
25
BUSINESS
COMPANY OVERVIEW
We are the largest regulated medical waste management company in North
America, serving over 259,000 customers throughout the United States, Canada,
Puerto Rico and Mexico. We have the only fully integrated, national medical
waste management network. Our network includes 36 treatment/ collection centers
and 95 additional transfer and collection sites. We use this network to provide
the industry's broadest service offering, including medical waste collection,
transportation and treatment and related consulting, training and education
services and products. Our treatment technologies include our proprietary
electro-thermal-deactivation system, or ETD, as well as traditional methods such
as autoclaving and incineration.
We benefit from significant customer diversification, with no single
customer accounting for more than 1% of revenues, and our top 10 customers
accounting for less than 3% of revenues. Our two principal groups of customers
include approximately 255,000 small medical waste generators such as outpatient
clinics, medical and dental offices and long-term and sub-acute care facilities
and approximately 4,500 large medical waste generators such as hospitals, blood
banks and pharmaceutical manufacturers.
We believe that the services we offer are compelling to our customers
because they allow our customers to avoid the significant capital and operating
costs that they would have to incur if they were internally to manage their
regulated medical waste. Moreover, by outsourcing these services and purchasing
consulting and other services from us, our customers reduce or eliminate their
risk of the large fines associated with regulatory non-compliance.
INDUSTRY OVERVIEW
The regulated medical waste industry arose with the Medical Waste Tracking
Act of 1988, or MWTA, which Congress enacted in response to media attention
after medical waste washed ashore on ocean beaches, particularly in New York and
New Jersey. Since the 1980s, government regulation has increasingly required the
proper handling and disposal of the medical waste generated by the health care
industry. Regulated medical waste is generally described as any medical waste
that can cause an infectious disease, including single-use disposable items,
such as needles, syringes, gloves and other medical supplies; cultures and
stocks of infectious agents; and blood and blood products.
An independent study estimated the size of the regulated medical waste
market in the United States in 2000 to be approximately $1.5 billion. We believe
that the worldwide market for regulated medical waste management services is
currently approximately $3.0 billion and is in excess of $10.0 billion when
ancillary services such as training, education, product sales and consulting
services are taken into account. Industry growth is driven by a number of
factors. These factors include:
PRESSURE TO REDUCE HOSPITAL COSTS. The health care industry is under
pressure to reduce costs and improve efficiency. To accomplish this reduction,
it is using outside contractors to perform some services, including medical
waste management. We believe that our medical waste management services help
health care providers reduce costs by reducing their medical waste tracking,
handling and compliance costs, reducing their potential liability related to
employee exposure to bloodborne pathogens and other infectious material, and
reducing the amount of money invested in on-site treatment of medical waste.
SHIFT TO OFF-SITE TREATMENT. We believe that managed care and other health
care cost-containment pressures are causing patient care to shift from
institutional higher-cost acute-care settings to less expensive, smaller,
off-site treatment alternatives. Many common diseases and conditions are now
being treated in smaller non-institutional settings. We believe that these
non-institutional alternate-site health care expenditures will continue to grow
as cost-cutting pressures increase.
AGING OF U.S. POPULATION. According to industry statistics, the "baby
boom" generation (births between 1946 and 1964) constitutes approximately 30% of
the United States population. The relative size of this generation, combined
with declining birth rates, will continue to result in an increase in the
average
26
age of the population, while falling mortality rates ensure that the average
person will live longer. As people age, they typically require more medical
attention and a wider variety of tests and procedures. In addition, as
technology improves, more tests and procedures become available. All of these
factors lead to increased generation of medical waste.
ENVIRONMENTAL AND SAFETY REGULATION. We believe that many businesses which
are not currently using outsourced medical waste services are unaware of the
need for proper training of employees and the Occupational Safety and Health
Administration, or OSHA, requirements regarding the handling of medical waste.
These businesses include restaurants, casinos, hotels and generally all
businesses where employees may come into contact with bloodborne pathogens. In
addition, home health care is currently unregulated and may become subject to
similar bloodborne pathogen regulations in the future.
Our industry is subject to extensive regulation beyond the MWTA. For
example, the new stringent Clean Air Act regulations adopted in 1997 limit the
discharge into the atmosphere of pollutants released by medical waste
incineration. These regulations are expected to increase the costs of operating
medical waste incinerators and to result in significant closures of on-site
treatment facilities, thereby increasing the demand for off-site treatment
services. In 1997, the U.S. Environmental Protection Agency, or EPA, estimated
that approximately 83-90% of small medical waste incinerators, 60-95% of medium
medical waste incinerators and up to 35% of large medical waste incinerators in
the United States will be closed over the next several years. In addition, OSHA
has issued regulations concerning employee exposure to bloodborne pathogens and
other potentially infectious materials that require, among other things, special
procedures for the handling and disposal of medical waste and annual training of
all personnel who may be exposed to blood and other body fluids. We believe that
these regulations will help to expand the market for our services beyond
traditional providers of health care.
COMPETITIVE STRENGTHS
We believe that we benefit from the following competitive strengths:
MARKET LEADERSHIP. We are the largest provider of medical waste management
services in the United States, with the only national network of services. As a
result of our market leadership position, we provide our customers with
superior, vertically-integrated services as well as a variety of products, and
we are the only industry participant able to provide national accounts with
local service. We believe that our leading market position provides us with more
operating leverage and a unique competitive advantage in attracting and
retaining customers as compared to our smaller regional and local competitors.
BROAD RANGE OF SERVICES. We offer our customers a broad range of services
to help them develop internal systems and processes which allow them to manage
their medical waste efficiently and safely from the point of generation through
treatment and disposal. For example, we have developed programs to help train
our customers' employees on the proper methods of handling medical waste in
order to reduce potential employee exposure. Other services include those
designed to help clients ensure and maintain compliance with OSHA and other
relevant regulations. We also supply specially designed containers for use by
most of our large account customers, including our Steri-Tub(R) container, a
reusable leak and puncture-resistant container, made from recycled plastic,
which we developed and patented.
ESTABLISHED NATIONAL NETWORK. Our 36 treatment/collection centers and our
over 259,000 customers in 48 states give us the largest and the only national
network in the regulated medical waste industry. In addition, we also serve
customers in Canada, Mexico and Puerto Rico. The extensive federal, state and
local laws and regulations governing the regulated medical waste industry
typically require some type of governmental approval for new facilities. These
approvals are frequently opposed by elected officials, local residents or
citizen groups, and can be difficult to obtain. We have significant experience
in obtaining and maintaining these permits, authorizations and other types of
governmental approvals. We believe that a network similar in scale and scope to
ours would be expensive and time-consuming for a competitor to develop.
27
LOW-COST OPERATIONS. We are often the low-cost provider within the markets
we serve. Our low costs result from our vertically integrated network and our
broad geographic presence. As a result, we are able to: increase our route
densities, which permits our drivers to make more stops per shift; minimize the
distance traveled by our collection vehicles to treatment facilities; and
increase the utilization of our equipment and facilities to treat more of the
waste that we collect internally. Our next largest competitor in the U.S. market
has four treatment facilities, and we believe that most of our competitors do
not have fully integrated operations. We believe that our vertically-integrated
operations provide us with a competitive advantage over smaller, less integrated
competitors.
DIVERSE CUSTOMER BASE AND REVENUE STABILITY. We have developed strong
contracts and service agreements with a diverse network of established
customers. Our top 10 customers account for less than 3% of revenues, and no
single customer accounts for more than 1% of revenues. We believe that our
diverse customer base would mitigate the impact of the loss of any particular
customer. We are also generally protected from regulatory changes and other
factors which affect our costs, because our contracts typically contain
provisions which allow us to adjust our prices to reflect any additional costs
caused by changes in regulations or any other increases in our operating costs.
STRONG SALES NETWORK AND PROPRIETARY DATABASE. We have the largest sales
force in the medical waste industry. We use both telemarketing and direct sales
efforts to obtain new customers. In addition, we have developed a large
proprietary database of potential new small account customers, which we believe
gives us a competitive advantage in identifying and reaching these higher-margin
accounts.
EXPERIENCED SENIOR MANAGEMENT TEAM. Our four most senior executives and
the Chairman of our Board of Directors collectively have over 70 years of
management experience in the health care and waste management industries. Our
Chief Executive Officer, Mark C. Miller, had more than 15 years of senior
management experience at Abbott Laboratories and, since joining us in 1992 as
Chief Executive Officer, has been with us during our growth from an early stage
venture capital concept to the industry leader. Richard T. Kogler joined us in
late 1998 as Executive Vice President for domestic operations and Chief
Operating Officer. Mr. Kogler previously served in senior roles with American
Disposal Services, Inc. and Waste Management, Inc. Anthony J. Tomasello has been
our Executive Vice President for international operations and Chief Technical
Officer since January 1999, and previously was our Vice President, Operations
beginning in 1990. Mr. Tomasello was previously president and chief operating
officer of Pi Enterprises and Orbital Systems. Frank J.M. ten Brink, our
Executive Vice President and Chief Financial Officer, previously served as chief
financial officer of Telular, Inc. and Hexacomb Corporation. Jack W. Schuler,
our Chairman, is also currently chairman of the board of directors of Ventana
Medical Systems. Mr. Schuler was previously president and chief operating
officer of Abbott Laboratories.
BUSINESS STRATEGY
Our goals are to strengthen our position as the largest provider of
integrated services in the regulated medical waste industry and to continuously
improve our profitability. Components of our strategy to achieve these goals
include:
IMPROVE MARGINS. We intend to continue actively to work to improve our
margins by increasing our base of small account customers and focusing on
service strategies that more efficiently meet the needs of our large account
customers. We have successfully raised the percentage of our revenues from small
account customers from 33% of revenues in the fourth quarter of 1996 to 57% in
the second quarter of 2001, which has contributed to an increase in our
operating income margins. Small account customers typically do not produce a
sufficient volume of regulated medical waste on an individual basis to justify
capital expenditures on their own waste treatment facilities or the expense of
hiring regulatory compliance personnel. We believe that the number of small
account customers and the opportunities for sales of ancillary services and
products to both large and small account customers will continue to grow.
EXPAND RANGE OF SERVICES AND PRODUCTS. We believe that we have the
opportunity to expand our business by increasing the range of products and
services that we offer to our existing customers. For example, we are expanding
our collection and treatment services through the inclusion of materials like
28
photographic chemicals, lead foils and amalgam used in dental and radiology
laboratories. In addition, we now offer a broad range of OSHA compliance and
consulting services to our dental customers and have begun to offer these
services to other types of customers. Because our drivers call on numerous
medical facilities on a routine basis, we also offer many single-use disposable
medical supplies to our medical customers, and we may increase these offerings
in the future.
SEEK COMPLEMENTARY ACQUISITIONS. As described below, we actively seek
strategic opportunities to acquire businesses that expand our national network
of treatment centers and increase our customer base. We believe that strategic
acquisitions can enable us to gain operating efficiencies through increased
capacity utilization and increased route density as well as to expand the
geographic service areas in which we operate.
CAPITALIZE ON OUTSOURCING DUE TO CLEAN AIR REGULATIONS. The Clean Air Act
regulations have increased both the capital costs required to bring many
existing incinerators into compliance and the operating costs of continued
compliance. The EPA expects that many hospitals will shut down their
incinerators in response to regulations adopted in 1997, which limit the
discharge into the atmosphere of pollutants released by medical waste
incineration. We plan to capitalize on the anticipated movement by hospitals to
outsource medical waste treatment rather than incur the cost of installing the
air pollution control systems necessary to comply with these EPA regulations.
Because our facilities are modern and well maintained, we believe that our
future capital expenditures required to bring our incinerators into compliance
with these new regulations will be covered within our normal capital expenditure
budgets.
ACQUISITIONS
EVALUATION AND INTEGRATION. We believe that our management team has
substantial experience in evaluating potential acquisition candidates and
determining whether a particular medical waste management business can be
successfully integrated into our business. In determining whether to proceed
with a business acquisition, we evaluate a number of factors including:
- the financial impact of the proposed acquisition, including the effect on
our cash flow and earnings per share;
- the historical and projected financial results of the target company;
- the purchase price negotiated with the seller and our expected internal
rate of return;
- the composition and size of the target company's customer base;
- the efficiencies that we can achieve by integrating the target company
with one or more of our existing operations;
- the potential for enhancing or expanding our geographic service area and
allowing us to make other acquisitions in the same service area;
- the experience, reputation and personality of the target company's
management;
- the target company's reputation for customer service and relationships
with the communities that it serves; and
- whether the acquisition gives us any strategic advantages over our
competition.
We have established an efficient procedure for integrating newly-acquired
companies into our business while minimizing disruption of our operations. Once
a business is acquired, we implement programs designed to improve customer
service, sales, marketing, routing, equipment utilization, employee
productivity, operating efficiencies and overall profitability.
ACQUISITIONS HISTORY. We completed a total of 43 acquisitions from 1993
through 1999, highlighted by our acquisition in November 1999 of BFI's medical
waste business in the United States, Canada and Puerto Rico. Prior to this
acquisition, BFI had been the largest provider of regulated medical waste
services in the United States, with revenues of $201.7 million for the 12 months
ended June 30, 1999.
29
From January 2000 through July 2001, we completed a further 10
acquisitions, as follows:
SELLER DATE MARKETS SERVED
------ ---- --------------
American Medical Disposal, Inc. ........ July 2001 Oklahoma, Texas, Nebraska,
Arkansas and Missouri
Trans Med Ltd. ......................... April 2001 New York
Bio-Safe America, Inc. ................. April 2001 Florida
A & J Medwaste, Inc. ................... October 2000 Florida
Waste Management of New York, Inc. ..... September 2000 New York
Environmental Solutions LLC............. August 2000 Minnesota
Sharps Away (JS Holdings, Inc.)......... August 2000 Minnesota
Stick Proof Company..................... July 2000 North Carolina
Med Tech Environmental Services, May 2000 New York
Inc. .................................
American Medical Waste, Inc. ........... March 2000 California
SERVICES AND OPERATIONS
Our services and operations are comprised of collection, transportation,
treatment, disposal and recycling, together with related training and education
programs, consulting services and product sales. We have 36 treatment/collection
facilities located in 25 states, Puerto Rico, Canada and Mexico that serve over
259,000 customers, consisting of approximately 255,000 small account customers
and approximately 4,500 large account customers. We develop programs to help our
customers handle, separate and contain medical waste. We also advise our health
care customers on the proper methods of recording and documenting their medical
waste management to comply with federal, state and local regulations. In
addition, we offer consulting services to our health care customers to assist
them in reducing the amount of medical waste they generate.
COLLECTION AND TRANSPORTATION. We consider efficiency of collection and
transportation to be a critical element of our operations because it represents
the largest component of our operating costs. We try to maximize the number of
stops on each route. We use a tracking system for our collection vehicles that
helps to improve efficiency. We try to match the size of our collection vehicles
to the amount of medical waste to be collected at a particular stop or on a
particular route. We collect reusable containers or corrugated boxes of medical
waste from our customers at intervals depending upon customer requirements,
terms of service and volume of medical waste produced. The containers or boxes
are inspected at each customer's site prior to pickup. The waste is then
transported directly to one of our treatment facilities or to one of our
transfer stations where it is combined with other medical waste and transported
to a treatment facility. In some select circumstances we transport medical waste
to other specially-licensed medical waste treatment facilities. We transport
small quantities of specific hazardous substances, such as photographic fixer,
lead foils and dental amalgam, from certain of our customers to a metals
recycling operation.
The use of transfer stations is another important component of our
collection and transportation operations. We utilize transfer stations in a "hub
and spoke" configuration which allows us to expand our geographic service area
and increase the volume of medical waste that can be treated at a particular
facility. Smaller loads of waste containers are temporarily held at the transfer
stations until they can be consolidated into full truckloads and transported to
a treatment facility.
As part of our collection operations, we supply specially-designed
containers for use by most of our large account customers and many of our larger
small account customers. We have developed a reusable leak and
puncture-resistant container, made from recycled plastic, which we call the
Steri-Tub(R) container. The plastic container enables our customers to reduce
costs by reducing the number of times that medical waste is handled, eliminating
the cost (and weight) of corrugated boxes and potentially reducing liability
resulting from human contact with medical waste. The plastic containers are
designed to maximize the loads that will fit within the cargo compartments of
standard trucks and trailers. We believe that these features make the
Steri-Tub(R) plastic container superior to our competitors' reusable containers.
If a
30
customer generates a large volume of waste, we will place a large temporary
storage container or trailer on the customer's premises. In order to maximize
regulatory compliance and minimize potential liability, we will not accept
medical waste unless it is properly packaged by customers in containers that we
have either supplied or approved.
TREATMENT AND DISPOSAL. Upon arrival at a treatment facility, containers
or boxes of medical waste are scanned to verify that they do not contain any
unacceptable substances like radioactive material. Any container or box that is
discovered to contain unacceptable waste is returned to the customer. In some
cases our operating permits require that unacceptable waste be reported to
regulatory authorities. After inspection, the waste is treated using one of our
various treatment technologies. Upon completion of the particular process, the
resulting waste or incinerator ash is transported for resource recovery,
recycling or disposal in a nonhazardous waste landfill operated by parties
unaffiliated with us. After the plastic containers such as Steri-Tub(R)
containers have been emptied, they are washed, sanitized and returned to
customers for re-use.
CONSULTING SERVICES. Before medical waste is picked up by our trucks, our
integrated waste management approach attempts to "build in" efficiencies that
will yield logistical advantages. For example, our consulting services can
assist our customers in reducing the volume of medical waste that they generate.
In addition, we provide customers with the documentation necessary for
compliance with laws, which, if they complete the documentation properly, will
reduce interruptions to their businesses to verify compliance.
DOCUMENTATION. We provide complete documentation to our customers for all
medical waste that we collect, including the name of the generator, date of
pick-up and date of delivery to a treatment facility. We believe that our
documentation system meets all applicable federal, state and local regulations
regarding the packaging and labeling of medical waste, including regulations
issued by the U.S. Department of Transportation, or DOT, OSHA and state and
local authorities. This documentation is sometimes used by our customers to
prove that they are in compliance with these regulations. These customers will
often pay for us to store, retrieve and reprint old manifests and other
documentation. We believe that our ability to offer document archiving and
retrieval services represents a competitive advantage.
MARKETING AND SALES
MARKETING STRATEGY. We have the largest sales force in the medical waste
industry. We use both telemarketing and direct sales efforts to obtain new
customers. In addition, we have developed a large proprietary database of
potential new small account customers, which we believe gives us a competitive
advantage in identifying and reaching these higher-margin accounts.
Our more than 900 drivers also may participate in our marketing and sales
efforts by actively soliciting small account customers while they service their
routes.
SMALL ACCOUNT CUSTOMERS. We have targeted small account customers as a
growth area. We believe that these customers offer high profit potential
compared to other potential customers. Typical small account customers are
individual or small groups of doctors, dentists and other health care providers
who are widely dispersed and generate only small amounts of medical waste. These
customers are very concerned about having the medical waste picked up and
disposed of in compliance with applicable state and federal regulations. We
believe that these customers view the potential risks of non-compliance with
applicable state and federal medical waste regulations as disproportionate to
the cost of the services that we provide. We believe that this factor has been
the basis for the significantly higher gross margins that we have achieved with
our small account customers relative to our large account customers.
Our Steri-Safe(SM) service, which, after market testing in 1999, we began
to offer to select new and existing small account customers in 2000, provides an
integrated medical waste management and compliance-assistance service for small
account customers who typically lack the internal personnel and systems to
comply with OSHA bloodborne regulations. Customers for our Steri-Safe(SM)
service pay a
31
predetermined fee in advance for medical waste collection and treatment services
and can also choose from available packages of training and education services
and products designed to help them to comply with OSHA regulations. We believe
that the implementation of our Steri-Safe(SM) service will provide us with new
and enhanced opportunities to leverage our existing customer base through the
program's prepayment structure and diversified product and service offerings.
We also operate several "mail-back" programs through which we can reach
small account customers located in outlying areas that would be inefficient to
serve using our regular route structure.
LARGE ACCOUNT CUSTOMERS. We believe that we have been successful in
serving large account customers and plan to continue to serve those customers as
long as satisfactory levels of profitability can be maintained. Our marketing
and sales efforts to large account customers are conducted by full-time account
executives whose responsibilities include identifying and attracting new
customers and serving our existing account base of approximately 4,500 large
account customers. In addition to securing new contracts, our marketing and
sales personnel provide consulting services to our health care customers,
assisting them in reducing the amount of medical waste that they generate,
training their employees on safety issues and implementing programs to audit,
classify and segregate medical waste in a proper manner.
We believe that the implementation of more stringent Clean Air Act and
other federal regulations directly and indirectly affecting medical waste will
enable us to improve our marketing efforts to large account customers because
the additional costs that they will incur to comply with these regulations will
make the costs of our services more attractive, particularly relative to their
use of their own incinerators.
NATIONAL ACCOUNTS. As a result of our extensive geographic coverage, we
are the only medical waste business capable of servicing national account
customers (i.e., customers requiring medical waste disposal services at various
geographically dispersed locations). We will continue to selectively focus on
national accounts.
CONTRACT AND SERVICE AGREEMENTS. We have long-term contracts with
substantially all of our customers. We negotiate individual service agreements
with each large account and small account customer. Although we have a standard
form of agreement, particularly for small account customers, terms may vary
depending upon the customer's service requirements and the volume of medical
waste generated and, in some jurisdictions, requirements imposed by statute or
regulation. Service agreements typically include provisions relating to the
types of containers, frequency of collection, pricing, treatment and
documentation for tracking purposes. Each agreement also specifies the
customer's obligation to pack its medical waste in approved containers.
Substantially all of our agreements with small account customers contain
automatic renewal provisions.
Service agreements are generally for a period of one to five years,
although customers may terminate on written notice and, in most service areas,
upon payment of a penalty. Many payment options are available, including flat
monthly, quarterly or annual charges. We may set our prices on the basis of the
number of containers that we collect, the weight of the medical waste that we
collect and treat, the number of collection stops that we make on the customer's
route, the number of collection stops that we make for a particular multi-site
customer, and other factors.
We have a diverse customer base, with no single customer accounting for
more than 1% of revenues, and our top 10 customers accounting for less than 3%
of revenues. We do not believe that the loss of any single customer would have a
material adverse effect on our business, financial condition or results of
operations.
INTERNATIONAL
We have also expanded beyond the United States and Canada. In 1996, we
entered into an agreement with a Brazilian company, Companhia Auxiliar de Viacao
e Obras, or CAVO, to assist in exploring opportunities for the commercialization
of our medical waste management technology in South America. This relationship
was expanded in July 1998, when we entered into an agreement for an exclusive
license
32
to use our ETD technology in Brazil and for the sale to CAVO of two fully
integrated ETD processing lines for use in treating medical waste in the Sao
Paulo, Brazil metropolitan market.
In 1998, we formed Medam S.A. de C.V., or Medam, a Mexican joint venture
company, to utilize our ETD technology to treat medical waste primarily in the
Mexico City market. Medam operates a treatment facility with a 50 metric-ton per
day capacity. This facility, which is the largest medical waste treatment
facility permitted to date in Mexico, became operational in June 1998. In
September 1999, we increased our interest in Medam from 24.5% to 49.0%, and in
July 2000, we acquired a further 15.0% to give us a 64.0% interest in the joint
venture. In August 2001, Medam completed the acquisition of Mexico City-based
medical waste management company, Tecnicas Medio Ambientales Winco S.A. de C.V.
In 1999, we established a joint venture in Argentina, Medam, B.A. Srl, to
utilize our ETD technology to treat medical waste primarily in the Buenos Aires
market. We also entered into agreements to supply ETD equipment and license ETD
technology and other proprietary rights to Medam B.A., and to provide consulting
assistance to Medam B.A. in the installation, start-up and validation of the ETD
processing equipment in the joint venture's treatment facility in Buenos Aires.
In June 2000, we entered into agreements with Aso Cement Co., Ltd and Aso
Mining Co., Ltd, to establish an ETD processing facility in Japan. Under these
agreements, we will supply ETD processing equipment to Aso and provide
consulting assistance to Aso in the installation, start-up and validation of the
ETD equipment. In addition, we exclusively licensed to Aso our ETD technology
and other proprietary rights for use in certain select territories within Japan.
In August 2000, we established a joint venture, Evertrade Medical Waste
(Proprietary) Limited, a South Africa corporation, to utilize our ETD technology
to treat medical waste in the Republic of South Africa. We also entered into
agreements to supply ETD equipment and license ETD technology and other
proprietary rights to Evertrade Medical Waste, and to provide consulting
assistance to Evertrade Medical Waste in the installation, start-up and
validation of the ETD processing equipment in the joint venture's treatment
facility in South Africa.
In August 2001, we concluded an agreement with SteriCorp Limited, an
Australian company, under which we provided financing to SteriCorp through the
purchase of convertible notes, licensed to it our ETD technology for use in
Australia, New Zealand, Malaysia, Indonesia and Thailand and agreed to sell to
it an ETD processing line and assist in its installation.
TREATMENT TECHNOLOGIES
We primarily use three treatment technologies for treating regulated
medical waste: autoclaving, incineration and our proprietary ETD technology. Our
current capacity to treat regulated medical waste is approximately divided among
these technologies in the following percentages:
- autoclaving...................... 70%
- incineration..................... 18%
- our proprietary ETD technology... 12%
We vary our treatment of medical waste among available treatment
technologies based on the type of waste and capacity and pricing considerations
in each service area, in order to minimize operating costs and capital
investments.
AUTOCLAVING. Autoclaving treats medical waste with steam at high
temperature and pressure to kill pathogens. Autoclaving alone does not change
the appearance of waste, and recognizable medical waste may not be accepted by
some landfill operators, but autoclaving may be combined with a shredding or
grinding process to render the medical waste unrecognizable.
INCINERATION. Incineration burns medical waste at elevated temperatures
and reduces it to ash. Incineration reduces the volume of waste, and it is the
recommended treatment and disposal option for some types of medical waste such
as anatomical waste or residues from chemotherapy procedures. Air
33
emissions from incinerators can contain certain byproducts which are subject to
federal, state and, in some cases, local regulation. In some circumstances the
ash byproduct of incineration may be regulated.
ETD TREATMENT PROCESS. ETD includes a system for grinding medical waste.
After grinding, ETD uses an oscillating field of low-frequency radio waves to
heat medical waste to temperatures that destroy pathogens such as viruses,
bacteria, fungi and yeast, without melting the plastic content of the waste. ETD
employs low-frequency radio waves because they can penetrate deeper than
high-frequency waves, like microwaves, which can penetrate medical waste of a
typical density only to a depth of approximately five inches. ETD uses
frequencies that match the physical properties of medical waste, enabling the
ETD treatment process to kill pathogens at temperatures as low as 90 degreesC.
Although ETD is effective in destroying pathogens present in anatomical waste,
we do not currently treat anatomical waste using the ETD process.
We believe that ETD offers advantages over many other methods of treating
medical waste. We believe that it is easier to get permits for ETD facilities
than for incineration facilities because ETD does not produce fluid or air
pollution. ETD facilities also can be more cost-effective to construct than
incinerators or autoclaves with shredding capability. ETD also renders medical
waste unrecognizable and thus more acceptable for landfills and reduces the
volume of waste as well. It may also facilitate recycling of polypropylene
plastics and some of the ETD-treated waste may be used for fuel in
"waste-to-energy" electrical plants.
FACILITIES
We lease office space for our corporate offices in Lake Forest, Illinois.
We own or lease four ETD treatment facilities, 10 incineration facilities, 17
autoclave facilities and five facilities that use a combination of these methods
or other methods (including two facilities owned or leased by 3CI). All of our
treatment facilities also serve as collection sites. We own or lease 95
additional transfer and collection sites (including six sites owned or leased by
3CI). We consider that these facilities are adequate for our present and
anticipated needs. Substantially all of our owned facilities are pledged to
secure our indebtedness under our senior credit facility.
We do not own or operate any landfills or any other type of disposal site.
After treatment, all remaining waste materials are transported to unaffiliated
parties for permanent disposal.
COMPETITION
The medical waste services industry is highly competitive. It consists of
many different types of service providers, including a large number of regional
and local companies. Another major source of competition is the on-site
treatment of medical waste by some large-quantity generators, particularly
hospitals.
In addition, we face potential competition from businesses that are
attempting to commercialize alternate treatment technologies or products
designed to reduce or eliminate the generation of medical waste, such as
reusable or degradable medical products.
We compete for service agreements primarily on the basis of
cost-effectiveness, quality of service and geographic location. We also attempt
to compete by demonstrating to customers that we can do a better job in reducing
their potential liability. Our ability to obtain new service agreements may be
limited by the fact that a potential customer's current vendor may have an
excellent service history or a long-term service contract or may offer prices to
the potential customer that are lower than ours.
GOVERNMENTAL REGULATION
We operate within the medical waste management industry, which is subject
to extensive and frequently changing federal, state and local laws and
regulations. This statutory and regulatory framework
34
imposes compliance burdens and risks on us, including requirements to obtain and
maintain government permits. These permits grant us the authority, among other
things:
- to construct and operate treatment and transfer facilities;
- to transport medical waste within and between relevant jurisdictions; and
- to handle particular regulated substances.
Our permits must be periodically renewed and are subject to modification or
revocation by the regulatory authority. We are also subject to regulations that
govern the definition, generation, segregation, handling, packaging,
transportation, treatment, storage and disposal of medical waste. We are also
subject to extensive regulations designed to minimize employee exposure to
medical waste. In addition, we are subject to foreign laws and regulations.
FEDERAL REGULATION. There are at least four federal agencies that have
authority over medical waste. These agencies are the EPA, OSHA, the U.S. DOT and
the U.S. Postal Service. These agencies regulate medical waste under a variety
of statutes and regulations.
Medical Waste Tracking Act of 1988. In the late 1980s, the EPA outlined a
two-year demonstration program pursuant to MWTA, which was added to the Resource
Conservation and Recovery Act of 1976. The MWTA was adopted in response to
health and environmental concerns over infectious medical waste after medical
waste washed ashore on beaches, particularly in New York and New Jersey, during
the summer of 1988. Public safety concerns grew following media reports of
careless management of medical waste. The MWTA was intended to be the first step
in addressing these problems. The primary objective of the MWTA was to ensure
that medical wastes which were generated in a covered state and which posed
environmental problems, including an unsightly appearance, were delivered to
disposal or treatment facilities with minimum exposure to waste management
workers and the public. The MWTA's tracking requirements included accounting for
all waste transported and imposed civil and criminal sanctions for violations.
In regulations implementing the MWTA, the EPA defined medical waste and
established guidelines for its segregation, handling, containment, labeling and
transport. The MWTA demonstration program expired in 1991, but the MWTA
established a model followed by many states in developing their specific medical
waste regulatory frameworks.
Clean Air Act Regulations. In August 1997, the EPA adopted regulations
under the Clean Air Act Amendments of 1990 that limit the discharge into the
atmosphere of pollutants released by medical waste incineration. These
regulations required every state to submit to the EPA for approval a plan to
meet minimum emission standards for these pollutants. See "-- State and Local
Regulation." In 1997, the EPA estimated that of the approximately 1,100 small,
690 medium and 460 large medical waste incinerators in operation in May 1996,
approximately 83-90% of the small incinerators, 60-95% of the medium
incinerators and up to 35% of the large incinerators will be closed as hospitals
seek less expensive methods of medical waste disposal rather than incur the cost
of installing the necessary air pollution control systems to comply with the
EPA's regulations. We currently operate 10 incinerators. Because our facilities
are modern and well maintained, we believe that our future capital expenditures
required to bring our incinerators into compliance with these new regulations
will be covered by our normal capital expenditure budget. We believe that we
will be successful in obtaining all necessary federal and state permits to
continue the operation of our incinerators. The Natural Resources Defense
Council, an environmental organization, has sued the EPA challenging the
validity of its regulations on the grounds that the minimum emissions standards
are too lenient. If successful, this lawsuit could result in the EPA's adoption
of stricter air emissions standards for medical waste incinerators. Stricter
emissions standards could benefit us if the result is that hospitals and other
generators increase or accelerate their use of outside medical waste treatment
contractors like us. Stricter emissions standards could also increase the cost
to bring our own incinerators into compliance with the more stringent standards.
We might also face price increases for treatment of medical waste that we
deliver to other parties for incineration.
35
Occupational Safety and Health Act of 1970. The Occupational Safety and
Health Act of 1970 authorizes OSHA to issue occupational safety and health
standards. OSHA regulations are designed to minimize the exposure of employees
to hazardous work environments. Various standards apply to certain aspects of
our operations. These regulations govern, among other things:
- exposure to bloodborne pathogens and other potentially infectious
materials;
- lock out/tag out procedures;
- medical surveillance requirements;
- use of respirators and personal protective equipment;
- emergency planning;
- hazard communication;
- noise;
- ergonomics; and
- forklift safety.
We are subject to unannounced OSHA safety inspections at any time.
Our employees are required by our policy to receive new employee training,
annual refresher training and training in their specific tasks. As part of our
medical surveillance program, employees receive pre-employment physicals,
including drug testing, annually-required medical surveillance and exit
physicals. We also subscribe to a drug-free workplace policy.
Resource Conservation and Recovery Act of 1976. In 1976, Congress passed
the Resource Conservation and Recovery Act of 1976, or RCRA, as a response to
growing public concern about problems associated with the handling and disposal
of solid and hazardous waste. RCRA required the EPA to promulgate regulations
identifying hazardous wastes. RCRA also created standards for the generation,
transportation, treatment, storage and disposal of solid and hazardous wastes.
These standards included a documentation program for the transportation of
hazardous wastes and a permit system for solid and hazardous waste disposal
facilities. Medical wastes are currently considered non-hazardous solid wastes
under RCRA. However, some substances collected by us from some of our customers,
including photographic fixer developer solutions, lead foils and dental amalgam,
are considered hazardous wastes.
We use landfills operated by parties unrelated to us for the disposal of
treated medical waste from two of our ETD facilities and for the disposal of
incinerator ash and autoclaved waste. Waste is not regulated as hazardous under
RCRA unless it contains hazardous substances exceeding certain quantities or
concentration levels, meets specified descriptions, or exhibits specific
hazardous characteristics. Following treatment, waste from our ETD and autoclave
facilities is disposed of as nonhazardous waste. At our incineration facilities,
we test ash from the incineration process to determine whether it must be
disposed of as hazardous waste.
We employ quality control measures to check incoming medical waste for
specific types of hazardous substances. Our customer agreements also require our
customers to exclude different kinds of hazardous substances or radioactive
materials from the medical waste they provide us. We use a different type of
contract for the relatively small number of customers from whom we pick up
hazardous wastes.
DOT Regulations. The U.S. DOT, has put regulations into effect under the
Hazardous Materials Transportation Authorization Act of 1994 which require us to
package and label medical waste in compliance with designated standards, and
which incorporate bloodborne pathogens standards issued by OSHA. Under these
standards, we must, among other things, identify our packaging with a
"biohazard" marking on the outer packaging, and our medical waste container must
be sufficiently rigid and strong to prevent tearing or bursting and must be
puncture-resistant, leak-resistant, properly sealed and impervious to moisture.
36
DOT regulations also require that a transporter be capable of responding on
a 24-hour-a-day basis in the event of an accident, spill, or release to the
environment of a hazardous material. We have entered into an agreement with
CHEMTREC, an organization that provides 24-hour emergency spill notification in
the United States and Canada, to provide this service, and we also have
agreements with several emergency response organizations to provide spill
cleanup services in some of our service areas.
Our drivers are trained on topics such as safety, hazardous materials,
medical waste, hazardous chemicals and infectious substances. Employees are
trained to deal with emergency spills and releases of hazardous materials, and
we have a written contingency plan for these events. Our vehicles are outfitted
with spill control equipment and the drivers are trained in its use.
Comprehensive Environmental Response, Compensation and Liability Act of
1980. The Comprehensive Environmental Response, Compensation and Liability Act
of 1980, or CERCLA, established a regulatory and remedial program to provide for
the investigation and cleanup of facilities that have released or threaten to
release hazardous substances into the environment. CERCLA and state laws similar
to it may impose strict, joint and several liability on the current and former
owners and operators of facilities from which releases of hazardous substances
have occurred and on the generators and transporters of the hazardous substances
that come to be located at these facilities. Responsible parties may be liable
for substantial site investigation and cleanup costs and natural resource
damages, regardless of whether they exercised due care and complied with
applicable laws and regulations. If we were found to be a responsible party for
a particular site, we could be required to pay the entire cost of the site
investigation and cleanup, even though other parties also may be liable. This
result would be the case if we were unable to identify other responsible
parties, or if those parties were financially unable to contribute money to the
cleanup.
United States Postal Service. We have obtained a permit from the U.S.
Postal Service to conduct our "mail-back" program, pursuant to which customers
mail approved "sharps" (needles, knives, broken glass and the like) containers
directly to our treatment facilities.
STATE AND LOCAL REGULATION. We conduct business in numerous states. Each
state has its own regulations related to the handling, treatment and storage of
medical waste. Although there are many differences among the various state laws
and regulations, many states have followed the medical waste model under the
MWTA and are implementing programs under RCRA. In each of the states where we
operate a treatment facility or a transfer station, we are required to comply
with numerous state and local laws and regulations as well as our operating plan
for each site. State agencies involved in regulating the medical waste industry
are frequently the departments of health and environmental protection agencies.
In addition, many local governments have ordinances, local laws and regulations,
such as zoning and health regulations, that affect our operations.
States usually regulate medical waste as a solid or "special" waste and not
as a hazardous waste under RCRA. State definitions of medical waste include:
- microbiological waste (cultures and stocks of infectious agents);
- pathology waste (human body parts from surgical procedures and
autopsies);
- blood and blood products; and
- sharps.
Most states require segregation of different types of medical waste at the
hospital or other location where they were created. A majority of states require
that the universal biohazard symbol or a label appear on medical waste
containers. Storage regulations may apply to the party generating the waste, the
treatment facility, the transport vehicle, or all three. Storage rules seek to
identify and secure the storage area for public safety as well as set standards
for the manner and length of storage. Many states require employee training for
safe environmental cleanup through emergency spill and decontamination plans.
Many states also require that transporters carry spill equipment in their
vehicles. Those states whose regulatory framework relies on the MWTA model have
tracking document systems in place. Some states (Washington, for example)
regulate the prices that we may charge.
37
We maintain numerous governmental permits and licenses to conduct our
business. Our permits vary from state to state based upon our activities within
that state and on the applicable state and local laws and regulations. These
permits include:
- transport permits for solid waste, medical waste and hazardous
substances;
- permits to construct and operate treatment facilities;
- permits to construct and operate transfer stations;
- permits governing discharge of sanitary water and registration of
equipment under air regulations;
- approvals for the use of ETD and other technologies to treat medical
waste; and
- various business operator's licenses.
We believe that we are currently in compliance in all material respects
with our permits and applicable laws and regulations.
Pursuant to medical waste incinerator regulations adopted by the EPA in
1997, every state was required by September 1998 to adopt a plan to comply with
federal guidelines which, among other things, limit the release of some airborne
pollutants from medical waste incinerators to levels prescribed by the EPA. Each
state's implementation plan must be at least as restrictive as the federal
emissions standards. If a state in which we operate an incinerator adopts more
stringent limits than the federal emissions standards, it could be very
expensive for us to bring our incinerator into compliance with the state's
requirements. See "-- Governmental Regulation -- Federal Regulation -- Clean Air
Act Regulations."
FOREIGN AND TERRITORIAL REGULATION. We presently conduct business in
several provinces in Canada. Our activities in British Columbia are governed at
the federal level by the Canadian Transportation of Dangerous Goods Act and the
Canadian Environmental Protection Act, and at the provincial level by comparable
legislation. The Canadian Environmental Protection Act regulates, among other
things, the transborder movement of medical waste. The federal Transportation of
Dangerous Goods Act regulates the movement of dangerous goods, including
infectious substances, by all modes of transportation. It imposes joint and
several liability on all persons who are responsible for, or who caused or
contributed to the release of any dangerous substance into the environment. Any
business engaged in a regulated activity is presumed to be liable for any
release, unless the business can demonstrate that it acted reasonably.
Provincial legislation typically regulates the storage, transportation and
disposal of waste, including biomedical waste, and imposes strict, joint and
several liability for all the costs of cleanup of contaminated sites.
We presently conduct business in the United States territory of Puerto
Rico. Our storage and treatment activities in Puerto Rico are governed at the
territorial level by the Puerto Rico Environmental Quality Board, while the U.S.
DOT regulates the transportation of medical waste in Puerto Rico and applies the
regulations promulgated under the Hazardous Materials Transportation
Authorization Act of 1994.
We believe that we have obtained all permits required by Canadian federal
and provincial legislation and by federal and territorial legislation applicable
to Puerto Rico.
We also conduct business in Mexico and Argentina through joint ventures. We
believe that our joint venture operations, are in compliance with all material
applicable laws, rules and regulations.
If we expand our operations into other foreign jurisdictions, we will be
required to comply with the laws and regulations of each of these jurisdictions.
PERMITTING PROCESS. Each state in which we currently operate, and each
state in which we may operate in the future, has a specific permitting process.
After we have identified a geographic area in which we want to locate a
treatment or transfer facility, we identify one or more locations for a
potential new site. Typically, we will develop a site contingent on obtaining
zoning approval and local and state operating authority. Most communities rely
on state authorities to provide operating rules and safeguards for their
community. Usually the state provides public notice of the project and, if
enough public interest is shown,
38
a public hearing may be held. If we are successful in meeting all regulatory
requirements, the state may issue a permit to construct the treatment facility
or transfer station. Once the facility is constructed, the state may again issue
public notice of its intent to issue an operating permit and may provide an
opportunity for public opposition or other action that may impede our ability to
construct or operate the planned facility. Permitting for transportation
operations frequently involves registration of vehicles, inspection of
equipment, and background investigations on our officers and directors.
We have been successful in obtaining permits for our current medical waste
transfer, treatment and processing facilities and for our transportation
operations. Several of our past attempts to construct and operate medical waste
treatment facilities, however, have met with significant community opposition.
In some of these cases, we have withdrawn our permit application.
PATENTS AND PROPRIETARY RIGHTS
We consider the protection of our technology to be important to our
business. Our policy is to protect our technology by a variety of means,
including applying for patents in the United States and in some foreign
countries.
We hold ten United States patents relating to the ETD treatment process and
other aspects of processing medical waste. We have filed or have been assigned
patent applications in several foreign countries and we have received patents in
Australia, Canada, France, Hong Kong, Hungary, Mexico, Russia, South Korea and
the United Kingdom.
The term of the first-to-end of our existing United States patents relating
to our ETD treatment process will currently end in October 2009.
We own federal registrations of the trademarks "Steri-Fuel(R),"
"Steri-Plastic(R)," and "Steri-Tub(R)," the service mark Stericycle(R) and a
service mark consisting of a nine-circle design. There can be no assurance that
our registered or unregistered trademarks or service marks will not infringe
upon the rights of other parties. The requirement to change any of our
trademarks, service marks or trade names could result in the loss of any
goodwill associated with that trademark, service mark or trade name and could
entail significant expense.
There can be no assurance that any pending or future patent applications
will be granted, that any issued patents will provide us with competitive
advantages, or that our patents will not be challenged by other parties. In
addition, there can be no assurance that other companies will not develop
similar processes or avoid our patents. Litigation or administrative proceedings
may be necessary to enforce the patents issued to us or to determine the scope
and validity of others' proprietary rights. Any litigation or administrative
proceeding could result in substantial cost to us and distraction of our
management. A ruling against us in any litigation or administrative proceeding
could have a material adverse effect on our business.
Our commercial success may also depend on our not infringing patents issued
to other parties. There can be no assurance that patents belonging to other
parties will not require us to alter our processes, pay licensing fees or cease
using any current or future processes. In addition, there can be no assurance
that we would be able to license the technology rights that we may require at a
reasonable cost or at all. If we could not obtain a license to any infringing
technology that we currently use, it could have a material adverse effect on our
business.
We also rely on unpatented and unregistered trade secrets, proprietary
know-how and continuing technological innovation. We try to protect this
information, in part, by confidentiality agreements with our employees, vendors
and consultants. There can be no assurance that these agreements will not be
breached, that we would have adequate remedies for any breach or that our trade
secrets or know-how will not otherwise become known or independently discovered
by other parties.
39
EMPLOYEES
As of June 30, 2001, we had 2,452 full-time and 78 part-time employees
(including employees of our subsidiaries). Approximately 225 of our drivers,
transportation helpers and plant workers are covered by a total of eight
collective bargaining agreements with local unions of the International
Brotherhood of Teamsters. These agreements expire at various dates from April
2002 to April 2004. We consider our employee relations to be satisfactory.
POTENTIAL LIABILITY AND INSURANCE
The medical waste industry involves potentially significant risks of
statutory, contractual, tort and common law liability claims. Potential
liability claims could involve, for example:
- cleanup costs;
- personal injury;
- damage to the environment;
- employee matters;
- property damage; or
- alleged negligence or professional errors or omissions in the planning or
performance of work.
We could also be subject to fines or penalties in connection with
violations of regulatory requirements.
We carry $26 million of liability insurance (including umbrella coverage),
and under a separate policy, $10 million of aggregate pollution and legal
liability insurance ($5 million per incident), which we consider sufficient to
meet regulatory and customer requirements and to protect our employees, assets
and operations. Our pollution liability insurance excludes liabilities under
CERCLA. There can be no assurance that we will not face claims under CERCLA or
similar state laws resulting in substantial liability for which we are uninsured
and which could have a material adverse effect on our business.
Our insurance programs utilize large deductible plans offered by a
commercial insurance company. Large deductible plans allow us the benefits of
cost-effective risk financing while protecting us from catastrophic risk with
specific stop loss insurance limiting the amount of self-funded exposure for any
one loss and aggregate stop loss insurance limiting the self-funding exposure
for any one year.
LEGAL AND OTHER PROCEEDINGS
We operate in a highly regulated industry and are exposed to regulatory
inquiries or investigations from time to time. Government authorities can
initiate investigations for a variety of reasons. We have been involved in
several legal and administrative proceedings that have been settled or otherwise
resolved on terms acceptable to us, without having a material adverse effect on
our business.
In addition, we have had discussions with the Missouri Department of
Natural Resources, or DNR, to settle proposed civil penalties stemming from
alleged legal and regulatory violations. Discussions between us and the Missouri
DNR are ongoing and unresolved on this enforcement matter. We believe that the
resolution of this matter will not have a material adverse effect on us.
We are also a party to various legal proceedings arising in the ordinary
course of business. We believe that the resolution of these other matters will
not have a material adverse effect on us.
40
MANAGEMENT
The following table provides the name, position and age of our executive
officers and directors:
NAME AGE POSITION
---- --- --------
Mark C. Miller........................ 45 President, Chief Executive Officer and
a Director
Richard T. Kogler..................... 41 Executive Vice President and Chief
Operating Officer
Frank J.M. ten Brink.................. 44 Executive Vice President and Chief
Financial Officer
Anthony J. Tomasello.................. 54 Executive Vice President and Chief
Technical Officer
Jack W. Schuler....................... 60 Chairman of the Board of Directors
John P. Connaughton................... 36 Director
Rod F. Dammeyer....................... 60 Director
Patrick F. Graham..................... 61 Director
John Patience......................... 53 Director
Thomas R. Reusche..................... 46 Director
Peter Vardy........................... 70 Director
L. John Wilkerson, Ph.D............... 57 Director
Mark C. Miller has served as our President and Chief Executive Officer and
a director since joining us in May 1992. From May 1989 until he joined us, Mr.
Miller served as vice president for the Pacific, Asia and Africa in the
International Division of Abbott Laboratories, which he joined in 1976 and where
he held a number of management and marketing positions. He is a director of
Ventana Medical Systems, Inc. and Lake Forest Hospital. Mr. Miller received a
B.S. degree in computer science from Purdue University, where he graduated Phi
Beta Kappa.
Richard T. Kogler joined us as Chief Operating Officer in December 1998.
From May 1995 through October 1998, Mr. Kogler was vice president and chief
operating officer of American Disposal Services, Inc., a solid waste management
company. From October 1984 through May 1995, Mr. Kogler served in a variety of
management positions with Waste Management, Inc. Mr. Kogler received a B.A.
degree in chemistry from St. Louis University.
Frank J.M. ten Brink has served as our Vice President, Finance and Chief
Financial Officer since June 1997. From 1991 until 1996 he served as chief
financial officer of Hexacomb Corporation, and from 1996 until joining us, he
served as chief financial officer of Telular Corporation. Prior to 1991, he held
various financial management positions with Interlake Corporation and
Continental Bank of Illinois. Mr. ten Brink received a B.B.A. degree in
international business and a M.B.A. degree in finance from the University of
Oregon.
Anthony J. Tomasello has served as our Executive Vice President and Chief
Technical Officer since January 1999 and previously had served as Vice
President, Operations since joining us in August 1990. For eight years prior to
joining us, Mr. Tomasello was president and chief operating officer of Pi
Enterprises and Orbital Systems, companies providing process and automation
services. From 1980 to 1982, he served as vice president of operations for Spang
and Company, an operating service firm specializing in resource recovery and
recycling for manufacturing and process industries. Mr. Tomasello received a
B.S. degree in mechanical engineering from the University of Pittsburgh.
Jack W. Schuler has served as our Chairman of the Board of Directors since
January 1990. From January 1987 to August 1989, Mr. Schuler served as president
and chief operating officer of Abbott Laboratories, where he served as a
director from April 1985 to August 1989. Mr. Schuler serves as a director of
Chiron Corporation, Medtronic, Inc. and Ventana Medical Systems, Inc. He is a
co-founder of Crabtree Partners LLC, a private investment firm in Lake Forest,
Illinois, which was formed in June 1995.
41
Mr. Schuler received a B.S. degree in mechanical engineering from Tufts
University and a M.B.A. degree from the Stanford University Graduate School of
Business Administration.
John P. Connaughton has served as a director since November 1999. He has
been a managing director of Bain Capital, LLC since 1997 and a member of the
firm since 1989. Prior to joining Bain Capital, LLC, Mr. Connaughton was a
consultant at Bain & Company, where he worked in consumer products and health
care strategy consulting. Mr. Connaughton serves as a director of Dade Behring,
Inc., Datek Online Holdings, Inc., DealTime.com Ltd., Epoch Senior Living, The
Island ECN, Inc. and Vivra, Inc. Mr. Connaughton received a B.S. degree in
commerce from the University of Virginia and a M.B.A. degree from the Harvard
University Graduate School of Business, where he was a Baker Scholar.
Rod F. Dammeyer has served as a director since January 1998. He is the
President of CAC, llc, a private company providing capital investment and
management advisory services, and is the retired vice chairman of Anixter
International, where he served from 1985 until February 2001, and the retired
managing partner of Equity Group Corporate Investments, where he served from
1995 until June 2000. Mr. Dammeyer serves as a director of Arris Group, Inc.,
GATX Corporation, Peregrine Systems, Inc. and TeleTech Holdings, Inc., and as a
trustee of The University of Chicago Hospitals and Health System and of Van
Kampen Investments, Inc. closed-end funds. He received a B.S. degree from Kent
State University.
Patrick F. Graham has served as a director since May 1991. Mr. Graham is
employed by The Gillette Company and is a director of Intelidata Technologies,
Inc. He was a co-founder of Bain & Company, Inc., where he served in a number of
positions from 1973 to 1997. He received a B.A. degree in economics from Knox
College and a M.B.A. degree from the Stanford University Graduate School of
Business Administration.
John Patience has served as a director since our incorporation in March
1989. He is a co-founder and partner of Crabtree Partners LLC, a private
investment firm in Lake Forest, Illinois, which was formed in June 1995. From
January 1988 to March 1995, Mr. Patience was a general partner of Marquette
Venture Partners, L.P., a venture capital fund which he co-founded and which led
our initial capitalization. Mr. Patience serves as a director of Ventana Medical
Systems, Inc. He received B.A. and LL.B. degrees from the University of Sydney
in Sydney, Australia, and a M.B.A. degree from the Wharton School of Business of
the University of Pennsylvania.
Thomas R. Reusche has served as a director since November 1999. He is a
managing director and co-founder of Madison Dearborn Partners, LLC. Prior to
founding Madison Dearborn Partners, LLC in 1992, Mr. Reusche was a senior
investment manager of First Chicago Venture Capital, which comprised the private
equity investment activities of First Chicago Corporation, the holding company
parent of First National Bank of Chicago. Mr. Reusche serves as a director of
Hines Horticulture, Inc., Woods Equipment Company and a number of private
companies. He has received an A.B. degree from Brown University and a M.B.A.
degree from the Harvard University Graduate School of Business.
Peter Vardy has served as a director since July 1990. He is the managing
director of Peter Vardy & Associates, an international environmental consulting
firm in Chicago, Illinois, which he founded in June 1990. From April 1973 to May
1990, Mr. Vardy served at Waste Management, Inc., where he was vice president,
environmental management. Mr. Vardy received a B.S. degree in geological
engineering from the University of Nevada.
L. John Wilkerson, Ph.D. has served as a director since July 1992. Dr.
Wilkerson is a general partner of Galen Partners, L.P. and Galen Partners
International, L.P., affiliated health care venture capital funds, and serves as
a director of Ventro Corp. and several privately held health care companies. Dr.
Wilkerson received a B.S. degree in biological sciences from Utah State
University and a Ph.D. degree in managerial economics and marketing research
from Cornell University.
42
MANAGEMENT OWNERSHIP AND SELLING STOCKHOLDERS
MANAGEMENT OWNERSHIP
The following table provides certain information regarding the beneficial
ownership of our common stock as of October 1, 2001 by each of our directors,
each of our executive officers and all of our directors and executive officers
as a group. None of our directors and executive officers is selling any shares
in this offering:
SHARES OWNED PERCENTAGE
PRIOR TO AND AFTER OWNED
OFFERING(1) AFTER OFFERING(2)
------------------ -------------------
Jack W. Schuler(3).................................. 917,589 4.3%
Mark W. Miller(4)................................... 586,942 2.8
John P. Connaughton(5).............................. -- *
Rod F. Dammeyer(6).................................. 18,097 *
Patrick F. Graham(7)................................ 17,818 *
John Patience(8).................................... 227,984 1.1
Thomas Reusche(9)................................... -- *
Peter Vardy(10)..................................... 161,731 *
L. John Wilkerson, Ph.D.(11)........................ 45,262 *
Richard T. Kogler(12)............................... 30,942 *
Frank J.M. ten Brink(13)............................ 66,956 *
Anthony J. Tomasello(14)............................ 110,571 *
All directors and executive officers as a group (12
persons).......................................... 2,183,892 10.3%
---------------
* Less than 1%.
(1) This column includes shares of common stock issuable upon the exercise of
stock options or warrants exercisable as of or within 60 days after October
1, 2001.
(2) The percentages in this column were calculated on the basis of an assumed
total of 21,226,184 shares of common stock outstanding following completion
of this offering, consisting of 15,686,321 shares outstanding as of October
1, 2001, 1,000,000 new shares sold by us in the offering, 1,700,000 shares
sold by the selling stockholders in this offering following conversion of a
portion of their shares of Series A convertible stock, and 2,839,863 shares
issuable upon the conversion of the selling stockholders' remaining shares
of Series A convertible preferred stock, assuming the conversion of all
shares of Series A convertible preferred stock, including the shares
converted in connection with this offering, as of October 1, 2001. In
addition, shares of common stock issuable under stock options or warrants
exercisable as of or within 60 days after October 1, 2001 are considered
outstanding for purposes of computing the percentage of the person holding
the option or warrant but are not considered outstanding for purposes of
computing the percentage of any other person.
(3) The shares shown as beneficially owned by Mr. Schuler include 58,924 shares
issuable upon the exercise of stock options or warrants exercisable as of
or within 60 days after October 1, 2001 and 35,218 shares owned by his wife
and trusts for the benefit of his children, with respect to which Mr.
Schuler disclaims any beneficial ownership.
(4) The shares shown as beneficially owned by Mr. Miller include 115,943 shares
issuable upon the exercise of stock options or warrants exercisable as of
or within 60 days after October 1, 2001 and 76,346 shares owned by trusts
for the benefit of his sons, with respect to which Mr. Miller disclaims
beneficial ownership.
(5) Mr. Connaughton is a managing director of Bain Capital, LLC. See
"-- Selling Stockholders." Mr. Connaughton has assigned to Bain Capital,
LLC all stock options granted to him under our Directors Stock Option Plan,
of which options for 22,787 shares are exercisable as of or within 60 days
after October 1, 2001. As a managing director of Bain Capital, LLC, Mr.
Connaughton may be deemed to share voting and dispositive power with
respect to the shares of our stock owned by
43
the Bain Entities. Mr. Connaughton disclaims any beneficial interest in
these stock options or shares except to the extent of any pecuniary
interest arising from his managing directorship of Bain Capital, LLC.
(6) The shares shown as beneficially owned by Mr. Dammeyer include 17,097
shares issuable upon the exercise of stock options or warrants exercisable
as of or within 60 days after October 1, 2001 and 1,000 shares owned by his
wife, with respect to which Mr. Dammeyer disclaims beneficial ownership.
(7) The shares shown as beneficially owned by Mr. Graham include 12,035 shares
issuable upon the exercise of stock options or warrants exercisable as of
or within 60 days after October 1, 2001.
(8) The shares shown as beneficially owned by Mr. Patience include 50,141
shares issuable upon the exercise of stock options or warrants exercisable
as of or within 60 days after October 1, 2001.
(9) Mr. Reusche is a managing director of Madison Dearborn Partners, LLC. See
"-- Selling Stockholders." Mr. Reusche has assigned to Madison Dearborn
Partners, LLC all stock options granted to him under our Directors Stock
Option Plan, of which options for 22,787 shares are exercisable as of or
within 60 days after October 1, 2001. As a managing director of Madison
Dearborn Partners, LLC, Mr. Reusche may be deemed to share voting and
dispositive power with respect to the shares of our stock owned by the MDP
Entities. Mr. Reusche disclaims any beneficial interest in these stock
options or shares except to the extent of any pecuniary interest arising
from his managing directorship of Madison Dearborn Partners, LLC.
(10) The shares shown as beneficially owned by Mr. Vardy include 61,735 shares
issuable upon the exercise of stock options or warrants exercisable as of
or within 60 days after October 1, 2001 and 33,614 shares owned by trusts
for the benefit of his children, with respect to which Mr. Vardy disclaims
any beneficial ownership.
(11) The shares shown as beneficially owned by Dr. Wilkerson include 2,909
shares issuable upon the exercise of stock options exercisable as of or
within 60 days after October 1, 2001, which he has assigned to Galen
Advisors LLC. Dr. Wilkerson disclaims any beneficial interest in these
stock options except to the extent of any pecuniary interest arising from
his membership interest in Galen Advisors, LLC.
(12) The shares shown as beneficially owned by Mr. Kogler include 25,942 shares
issuable upon the exercise of stock options or warrants exercisable as of
or within 60 days after October 1, 2001.
(13) The shares shown as beneficially owned by Mr. ten Brink include 58,496
shares issuable upon the exercise of stock options or warrants exercisable
as of or within 60 days after October 1, 2001.
(14) The shares shown as beneficially owned by Mr. Tomasello include 23,164
shares issuable upon the exercise of stock options or warrants exercisable
as of or within 60 days after October 1, 2001.
SELLING STOCKHOLDERS
The selling stockholders consist of investment funds associated with Bain
Capital, LLC, or the Bain Entities, and investment funds associated with Madison
Dearborn Partners, LLC, or the MDP Entities. The shares of our common stock
covered by this prospectus that the MDP Entities and Bain Entities are selling
are shares that we issued to them upon their conversion of a portion of their
shares of our Series A convertible preferred stock. See "Description of Capital
Stock -- Convertible Preferred Stock." If the underwriters' over-allotment
option is exercised in full, the MDP Entities and the Bain Entities together
will sell an additional 405,000 shares of our common stock, requiring the
conversion of further shares of our convertible preferred stock.
The following table provides the names of the selling stockholders, the
number of shares of our common stock that each selling stockholder is selling.
The table also provides the number of shares of our common stock that each
selling stockholder owned immediately prior to this offering, and the number of
44
shares and the percentage of outstanding shares that each selling stockholder
will own after completion of this offering.
SHARES OWNED
SHARES SHARES OWNED AFTER OFFERING
OFFERED PRIOR TO -------------------------
FOR SALE OFFERING(1) NUMBER PERCENTAGE(2)
-------- -------------- --------- -------------
MDP Entities:
Madison Dearborn Capital Partners III,
L.P. ..................................... 828,210 2,222,856 1,394,645 6.6%
Madison Dearborn Special Equity III, L.P. ... 18,390 49,357 30,967 *
Special Advisors Fund I, LLC................. 3,400 9,125 5,725 *
------- --------- --------- ---
Total................................ 850,000 2,281,338 1,431,338 6.7%
Bain Entities:
Bain Capital Fund VI, L.P. .................. 581,635 1,548,876 967,241 4.6
BCIP Associates II........................... 102,833 274,015 171,182 *
BCIP Associates II-B......................... 14,095 37,563 23,468 *
BCIP Associates II-C......................... 30,217 80,466 50,250 *
BCIP Trust Associates II..................... 29,563 78,552 48,989 *
BCIP Trust Associates II-B................... 4,718 12,537 7,819 *
PEP Investments Pty. Limited................. 1,939 5,163 3,224 *
Brookside Capital Partners Fund L.P. ........ 42,500 112,926 70,426 *
Sankaty High Yield Partners II, L.P. ........ 21,250 56,463 35,213 *
Sankaty High Yield Asset Partners, L.P. ..... 21,250 56,463 35,213 *
------- --------- --------- ---
Total................................ 850,000 2,263,025 1,413,025 6.7%
---------------
* Less than 1%.
(1) Assumes the conversion as of October 1, 2001 of all 74,625 shares
outstanding of our Series A convertible preferred stock, consisting of
37,500 shares owned by the MDP Entities and 37,125 shares owned by the Bain
Entities.
(2) The percentages in this column were calculated on the basis of an assumed
total of 21,226,184 shares of common stock outstanding following completion
of this offering, consisting of 15,663,501 shares outstanding as of October
1, 2001, 1,000,000 new shares sold by us in the offering, 1,700,000 shares
sold by the selling stockholders in this offering following conversion of a
portion of their shares of Series A convertible stock, and 2,839,863 shares
issuable upon the conversion of the selling stockholders' remaining shares
of Series A convertible preferred stock, assuming the conversion of all
shares of Series A convertible preferred stock, including the shares
converted in connection with this offering, as of October 1, 2001.
Thomas R. Reusche, who is a managing director of Madison Dearborn Partners,
LLC, and John P. Connaughton, who is a managing director of Bain Capital, LLC,
have served as two of our directors since November 1999 as the respective
nominees of the MDP Entities and the Bain Entities. For a description of the
arrangements that we have with the MDP Entities and the Bain Entities, see
"Description of Capital Stock -- Preferred Stock."
45
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 30,000,000 shares of common stock,
par value $.01 per share, of which 15,686,321 shares were issued and outstanding
as of October 1, 2001, and 1,000,000 shares of convertible preferred stock, par
value $.01 per share, 100,000 shares of which have been designated as Series A
convertible preferred stock. We have issued 75,000 of these latter shares, of
which 46,545 shares will remain issued and outstanding following completion of
this offering.
COMMON STOCK
As of October 1, 2001, there were 15,686,321 shares of our common stock
outstanding. Our outstanding shares of common stock are validly issued, fully
paid and nonassessable.
Holders of common stock are entitled to one vote per share on all matters
to be voted upon by the stockholders but do not have cumulative voting rights in
respect of the election of directors. Subject to the preferences of any
outstanding shares of convertible preferred stock, holders of common stock are
entitled to receive dividends if, when and as declared by our Board of Directors
out of legally available funds. In the event of liquidation, dissolution or
winding up, holders of common stock are entitled to share ratably in all of our
assets remaining after payment or provision for payment of our liabilities and
the preferences of any outstanding shares of convertible preferred stock.
Holders of common stock have no preemptive or other subscription rights to
purchase any additional securities, and there are no conversion rights or
redemption or sinking fund provisions in respect of our common stock. All shares
of common stock to be outstanding upon completion of this offering will be fully
paid and nonassessable.
CONVERTIBLE PREFERRED STOCK
In November 1999, we issued and sold 75,000 shares of our Series A
convertible preferred stock to the MDP Entities and the Bain Entities (including
a partnership that converted its 375 shares prior to this offering) for $1,000
per share, or $75.0 million in the aggregate, in cash, less various fees and
expenses. We used the net proceeds from the sale to finance a portion of the
purchase price of our BFI acquisition.
DIVIDENDS. The Series A convertible preferred stock bears preferential
dividends, payable in additional shares of Series A convertible preferred stock,
at the rate of 3.375% per annum from the date of issuance. Dividends accrue
daily and accumulate annually on the anniversary date of the initial issuance.
The Series A convertible preferred stock is also entitled to share pro rata with
holders of common stock, on the basis of the number of shares of common stock
into which the Series A convertible preferred Stock is convertible, in all other
dividends and distributions.
LIQUIDATION. Upon any liquidation, dissolution or winding up, holders of
Series A convertible preferred stock are entitled to be paid, before any
distribution or payment is made to holders of common stock, the greater of (i)
the sum of $1,000 per share plus accumulated preferential dividends and accrued
and unpaid dividends not yet accumulated (the "liquidation value") or (ii) the
amount that would be payable if the Series A convertible preferred stock had
been converted into common stock.
VOTING. Holders of Series A convertible preferred stock are entitled to
vote with holders of common stock as a single class on each matter submitted to
a vote of our stockholders. Each share of Series A convertible preferred stock
has a number of votes equal to the number of votes possessed by the common stock
into which the Series A convertible preferred stock is convertible. As long as
the MDP Entities and the Bain Entities and their affiliates hold 50% or more of
the "underlying common stock" (i.e., the shares of common stock issuable, or
previously issued, upon conversion of the Series A convertible preferred stock),
they will have the right, voting as a separate class, to elect two directors to
our Board of Directors. If MDP Entities and the Bain Entities and their
affiliates cease to hold 50% but still hold 25% or more of the underlying common
stock, they will have the right, voting as a separate class, to elect one
director; and if they cease to hold 25% of the underlying common stock, their
right to elect directors as a separate class will terminate. The sale of the
shares of common stock being sold by the MDP Entities and the Bain Entities in
this offering will not affect their right to elect two of our directors.
46
CONVERSION. Each holder of Series A convertible preferred stock may at any
time, upon 10 business days' notice, convert all or part of the holder's Series
A Convertible preferred stock into shares of common stock. The price at which a
holder may convert is $17.50 per share, subject to adjustment. The conversion
price will be adjusted if (i) we issue or are deemed to issue additional shares
of common stock for a price per share less than the conversion price or the
market price at the time of issuance or (ii) we issue or are deemed to issue
options, warrants or convertible securities with an exercise price or conversion
price per share less than the conversion price or the market price at the time
of issuance. The conversion price will also be adjusted in certain other
circumstances.
There will be no adjustment of the conversion price to the extent that in
any fiscal year, we issue common stock in connection with acquisitions approved
by the Board of Directors or grant or reprice stock options (at a price not
lower than the market price at the time of grant or repricing), and the
aggregate number of shares of common stock issued or for which options are
granted or repriced does not exceed 4.0% of the shares of common stock
outstanding on the last trading day of the prior fiscal year. For purposes of
any adjustment to the conversion price, the "market price" per share for common
stock is the average closing price over the 20 business day period preceding the
date of determination.
REDEMPTION AT OUR OPTION. Beginning in May 2002, if the closing price of
our common stock exceeds 150% of the conversion price for 20 consecutive trading
days, we may elect, upon at least 30 days' prior written notice, to redeem all
(but not part) of the outstanding shares of Series A convertible preferred
stock, subject to any holder's right to convert its shares into common stock
prior to the redemption date. If we make such an election, the redemption price
will equal the liquidation value to the date of redemption.
REDEMPTION AT HOLDER'S OPTION. At any time after a change of control, or
after the occurrence of a bankruptcy event which continues for 60 days, each
holder of Series A convertible preferred stock may require us to redeem all or
any part of the holder's shares at a price equal to the liquidation value per
share, upon 15 days' prior written notice.
COVENANTS AND RESTRICTIONS. Under the stock purchase agreement pursuant to
which we sold the Series A convertible preferred stock to the MDP Entities and
the Bain Entities, we agreed to various covenants and restrictions. These
covenants and restrictions include our grant of preemptive rights to holders of
Series A convertible preferred stock under certain circumstances and our
agreement to provide them with specified financial and business information.
REGISTRATION RIGHTS AGREEMENT. In connection with our sale of the Series A
convertible preferred stock, we also entered into a registration rights
agreement with the MDP Entities and the Bain Entities. This agreement requires
us, at the request of holders of a majority of the underlying common stock, to
register all or any portion of their shares under the Securities Act in an
underwritten public offering. Holders of Series A convertible preferred stock
are limited to three such registrations. The agreement also grants holders of
Series A convertible preferred stock "piggyback" registration rights. In all
registrations (with certain limited exceptions), we will be required to pay the
expenses of registration of the holders of Series A convertible preferred stock
(excluding the underwriting discounts and commissions).
CORPORATE GOVERNANCE AGREEMENT. At the closing in November 1999 of our
sale of Series A convertible preferred stock to the Bain Entities and the MDP
Entities, we also entered into a corporate governance agreement. This agreement
contains, among other provisions, provisions intended to implement the right of
the Bain Entities and the MDP Entities to elect directors to our board. The
agreement requires us to nominate their two designees for election to our Board
of Directors, and if our stockholders fail to elect a nominated designee, to
appoint the nominated designee as a director (increasing the number of our
directors to permit the appointment, if necessary).
The corporate governance agreement also provides that until the earlier of
(i) the date on which MDP Entities and the Bain Entities and their permitted
transferees cease to own any Series A convertible preferred stock, (ii) the date
on which they have completed a distribution of the Series A convertible
preferred stock to their partners or (iii) the first anniversary of closing, the
MDP Entities and the Bain
47
Entities and their transferees and affiliates will not acquire beneficial
ownership of more than 30% of our voting power or acquire or attempt to acquire
control of us, except in response to a proposal that has been made to the
stockholders that would materially and adversely affect them.
In addition, the corporate governance agreement contains specified
restrictions, for a period of five years, on the ability of the MDP Entities and
the Bain Entities to transfer their shares of Series A convertible preferred
stock (but not the shares of common stock issuable upon conversion of those
shares). The agreement also provides that the approval of holders of a majority
of the underlying common stock is required for us to: (1) engage in mergers,
acquisitions or divestitures of specified sizes, (2) enter into contracts with
our officers, directors, employees or affiliates, except for ordinary employment
contracts, benefit plans and transactions with our subsidiaries, and (3) incur
indebtedness or issue specified capital stock that would cause our fixed charge
coverage ratio to be less than 2.0 to 1.0.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 18,386,321 shares of common
stock outstanding (based upon shares outstanding as of October 1, 2001). Of
these shares, approximately 16,602,841 shares, including the 2,700,000 shares
offered hereby (or approximately 17,007,841 shares if the underwriters'
over-allotment option is exercised in full) will be freely tradeable without
restriction or further registration under the Securities Act. All of the
remaining 1,783,480 shares are eligible for sale under Rule 144 on the date of
this offering.
Our executive officers and directors and the selling stockholders, who
together will hold 4,597,369 shares of common stock upon completion of this
offering (all of which are eligible for sale under Rule 144 on the date of this
offering), have entered into lock-up agreements with the Credit Suisse First
Boston Corporation, on behalf of the underwriters, pursuant to which the holders
have agreed not to offer, sell, contract to sell, grant any option to purchase
or otherwise dispose of, directly or indirectly, any of their shares of common
stock, or any shares that they may acquire through the exercise of stock options
or warrants or, in the case of the selling stockholders, upon conversion of
their shares of Series A convertible preferred stock, or to exercise any of
their registration rights in respect of their stock, for a period of 90 days
beginning on the date of this Offering without the prior written consent of
Credit Suisse First Boston Corporation on behalf of the underwriters. See
"Underwriting."
Our registration rights agreement with the MDP Entities and the Bain
Entities requires us, at the request of holders of a majority of the underlying
common stock, to register all or any portion of their shares under the
Securities Act in an underwritten public offering. Following the expiration of
the 90-day lock-up agreements with Credit Suisse First Boston Corporation
entered into by the selling stockholders, 2,839,863 shares will be subject to
the registration rights of the selling stockholders, assuming the conversion of
all shares of our Series A convertible preferred stock as of October 1, 2001.
See "Description of Capital Stock -- Convertible Preferred Stock -- Registration
Rights Agreement" and "Underwriting."
48
UNDERWRITING
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated November , 2001 we and the selling stockholders have agreed to
sell to the underwriters named below, for whom Credit Suisse First Boston
Corporation, UBS Warburg LLC, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Bear, Stearns & Co. Inc. and William Blair & Company, L.L.C. are
acting as representatives, the following respective numbers of shares of common
stock:
NUMBER OF
SHARES
UNDERWRITER ---------
Credit Suisse First Boston Corporation......................
UBS Warburg LLC.............................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Bear, Stearns & Co. Inc. ...................................
William Blair & Company, L.L.C. ............................
--------
Total..........................................
========
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering may be terminated.
The selling stockholders have granted to the underwriters a 30-day option
to purchase up to 405,000 additional outstanding shares at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a selling concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the public offering the representatives
may change the public offering price and concession and discount to
broker/dealers.
The following table summarizes the compensation and estimated expenses we
and the selling stockholders will pay:
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
Underwriting Discounts and Commissions
paid by us.......................... $ $ $ $
Expenses payable by us(1)............. $ $ $ $
Underwriting Discounts and Commissions
paid by selling stockholders........ $ $ $ $
---------------
(1) Includes the expenses of the selling stockholders, which we have agreed to
pay under the registration rights agreement that we have entered into with
them. See "Description of Capital Stock -- Convertible Preferred
Stock -- Registration Rights Agreement."
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any offer,
49
sale, pledge, disposition or filing, without the prior written consent of Credit
Suisse First Boston Corporation for a period of 90 days after the date of this
prospectus, it being understood and agreed that we may continue to grant stock
options in the ordinary course of business under our stock option plans and may
issue stock upon the exercise of stock options granted in the ordinary course of
business under our stock option plans or upon the exercise of warrants
outstanding as of the date of the initial public offering of the common stock
offered pursuant to this prospectus or upon the conversion of shares of our
Series A convertible preferred stock outstanding as of the date of the initial
public offering of the common stock offered pursuant to this prospectus.
Our officers and directors and certain of our existing stockholders,
including the selling stockholders, have agreed that they will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, any
shares of our common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock, enter into a transaction that
would have the same effect, or enter into any swap, hedge or other arrangement
that transfers, in whole or in part, any of the economic consequences of
ownership of our common stock, whether any of these transactions are to be
settled by delivery of our common stock or other securities, in cash or
otherwise, or publicly disclose the intention to make any offer, sale, pledge or
disposition, or to enter into any transaction, swap, hedge or other arrangement,
without, in each case, the prior written consent of Credit Suisse First Boston
Corporation for a period of 90 days after the date of this prospectus.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities under the Securities Act, or contribute to payments that the
underwriters may be required to make in that respect.
In connection with the offering, the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions, and
penalty bids and passive market making in accordance with Regulation M under the
Securities Exchange Act of 1934.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any covered short position by
either exercising their over-allotment option and/or purchasing shares in
the open market.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option, a naked short position, the
position can only be closed out by buying shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there could be downward pressure on the price of the
shares in the open market after pricing that could adversely affect
investors who purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
50
- In passive market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to limitations,
make bids for or purchases of our common stock until the time, if any, at
which a stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of our
common stock or preventing or retarding a decline in the market price of the
common stock. As a result the price of our common stock may be higher than the
price that might otherwise exist in the open market. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
DLJ Capital Funding Inc., which serves as the syndication arranger for the
lenders, the lead arranger and the book manager, under our existing senior
secured credit facility, is an affiliate of Credit Suisse First Boston
Corporation.
Credit Suisse First Boston Corporation, through its investment funds, CSFB
Fund Investments VI, L.P., CSFB Fund Investments 1998, L.P., DLJ Fund Investment
Partners II, L.P., DLJ Private Equity Partners, L.P., and DLJ Private Equity
Employee Fund, L.P., is an investor in one of the Madison Dearborn funds.
Donaldson Lufkin & Jenrette Securities Corporation, an affiliate of Credit
Suisse First Boston Corporation, was the placement agent in our sale of $125
million of 12 3/8% senior subordinated notes due 2009. We have engaged, and may
in the future engage, Credit Suisse First Boston Corporation in investment
banking transactions for which they receive customary compensation. Credit
Suisse First Boston Corporation currently makes a market in both our debt and
equity securities.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the underwriters that will make internet distributions on the same
basis as other allocations. Credit Suisse First Boston Corporation may effect an
on-line distribution through its affiliate CSFBdirect Inc., an on-line broker
dealer, as a selling group member.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we and the selling
shareholders prepare and file a prospectus with the securities regulatory
authorities in each province where trades of common stock are made. Any resale
of the common stock in Canada must be made under applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made under available statutory exemptions or under a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice prior to any resale of the common
stock.
REPRESENTATIONS OF PURCHASERS
By purchasing common stock in Canada and accepting a purchase confirmation
a purchaser is representing to us the selling shareholders and the dealer from
whom the purchase confirmation is received that:
- the purchaser is entitled under applicable provincial securities laws to
purchase the common stock without the benefit of a prospectus qualified
under those securities laws,
- where required by law, that the purchaser is purchasing as principal and
not as agent, and
- the purchaser has reviewed the text above under "Resale Restrictions."
51
RIGHTS OF ACTION -- ONTARIO PURCHASERS
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein and the selling shareholders may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or such persons. All or a substantial
portion of the assets of the issuer and such persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or such persons in Canada or to enforce a judgment obtained in
Canadian courts against such issuer or persons outside of Canada.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and about the eligibility of the common
stock for investment by the purchaser under relevant Canadian legislation.
LEGAL MATTERS
Certain legal matters in connection with the common stock offered hereby
are being passed upon for us by Johnson and Colmar, Chicago, Illinois and for
the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York. Skadden, Arps, Slate, Meagher & Flom LLP has from time to time
represented, and may continue to represent, Bain Capital, LLC and some of its
affiliates in connection with legal matters. Some partners of Skadden, Arps,
Slate, Meagher & Flom LLP, counsel to the underwriters, are members in a limited
liability company that is an investor in one of the Bain Capital funds.
EXPERTS
The consolidated financial statements of Stericycle, Inc. and Subsidiaries
at December 31, 1999 and 2000, and for each of the three years in the period
ended December 31, 2000, appearing in this prospectus and the registration
statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon, appearing elsewhere herein, and are included in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
documents with the Securities and Exchange Commission, or the SEC. You may read
and copy any document that we file with the SEC at the SEC's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's public
reference rooms in New York, New York and Chicago, Illinois. You may obtain
information about the operation of the SEC's public reference rooms by calling
the SEC at 1-800-SEC-0330.
The SEC maintains an Internet website that provides access to the documents
that we have filed with the SEC. The SEC's website is http://www.sec.gov. A link
to the SEC's website appears on our own website, http://www.stericycle.com.
We have filed with the SEC a registration statement on Form S-3 under the
Securities Act with respect to the common stock to be sold in this offering. The
SEC allows us to "incorporate by reference"
52
into this prospectus the documents that we file with the SEC, which means that
we can disclose important information to you by referring to those documents.
The information incorporated by reference is considered to be part of this
prospectus, and documents that we file with the SEC in the future will
automatically update and supersede prior information, including information
contained in or incorporated by reference into this prospectus.
We incorporate by reference the following documents, as well as any other
documents that we file with the SEC in the future pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until all of the
common stock offered under this prospectus has been sold:
- our Annual Report on Form 10-K for the fiscal year ended December 31,
2000;
- our Quarterly Reports on Form 10-Q for the quarters ended March 31 and
June 30, 2001, and on Form 10-Q/A (filed on August 15, 2001) for the
quarter ended June 30, 2001;
- our Current Report on Form 8-K, filed on October 15, 2001;
- our Current Report on Form 8-K, filed on November 2, 2001;
- our Current Report (Amended) on Form 8-K/A, filed on December 29, 1999;
and
- the description of our common stock in the Registration Statement on Form
8-A that we filed on August 21, 1996, together with any amendment or
report that we may file for the purpose of updating this description.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address and telephone number:
Stericycle, Inc.
28161 North Keith Drive
Lake Forest, Illinois 60045
Attention: Investor Relations
Telephone: (847) 607-2012
53
STERICYCLE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors, Ernst & Young LLP........... F-2
Consolidated Balance Sheets at December 31, 1999 and 2000... F-3
Consolidated Statements of Operations for Each of the Years
in the Three-Year Period Ended December 31, 2000.......... F-4
Consolidated Statements of Cash Flows for Each of the Years
in the Three-Year Period Ended December 31, 2000.......... F-5
Consolidated Statements of Changes in Shareholders' Equity
for Each of the Years in the Three-Year Period Ended
December 31, 2000......................................... F-6
Notes to Consolidated Financial Statements.................. F-7
Schedule II -- Valuation and Allowance Accounts............. F-33
Condensed Consolidated Balance Sheet at June 30, 2001
(Unaudited)............................................... F-34
Condensed Consolidated Statements of Income for the Six
Months Ended June 30, 2000 and 2001 (Unaudited)........... F-35
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 2001 (Unaudited)........... F-36
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... F-37
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Stericycle, Inc.
We have audited the accompanying consolidated balance sheets of Stericycle,
Inc. and Subsidiaries as of December 31, 1999 and 2000, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. Our
audits also included the financial statement schedule listed in the Index at
page F-1. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Stericycle, Inc. and Subsidiaries at December 31, 1999 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
Ernst & Young LLP
Chicago, Illinois
February 23, 2001
F-2
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
1999 2000
---------- ----------
(IN THOUSANDS, EXCEPT FOR
SHARE AND PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 19,344 $ 2,666
Short-term investments.................................... 285 281
Accounts receivable, less allowance for doubtful accounts
of $980 in 1999 and $3,625 in 2000...................... 48,284 71,225
Parts and supplies........................................ 2,035 3,216
Prepaid expenses.......................................... 863 1,858
Other..................................................... 6,729 11,765
-------- --------
Total current assets............................... 77,540 91,011
-------- --------
Property, plant and equipment:
Land...................................................... 7,308 7,486
Buildings and improvements................................ 29,123 26,565
Machinery and equipment................................... 50,011 54,040
Office equipment and furniture............................ 5,182 6,515
Construction in progress.................................. 386 3,834
-------- --------
92,010 98,440
Less accumulated depreciation............................. (16,898) (24,532)
-------- --------
Property, plant and equipment, net................. 75,112 73,908
-------- --------
Other assets:
Goodwill, less accumulated amortization of $7,974 in 1999
and $24,507 in 2000..................................... 421,001 418,790
Other..................................................... 22,133 14,273
-------- --------
Total other assets................................. 443,134 433,063
-------- --------
Total assets....................................... $595,786 $597,982
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt......................... $ 5,741 $ 5,097
Accounts payable.......................................... 14,347 14,444
Due to seller............................................. 3,576 1,631
Accrued compensation...................................... 7,569 3,887
Accrued acquisition related expenses...................... 7,101 3,766
Accrued liabilities....................................... 12,206 13,783
Deferred revenue.......................................... 142 505
-------- --------
Total current liabilities.......................... 50,682 43,113
-------- --------
Long-term debt, net of current portion...................... 355,444 345,104
Other liabilities........................................... 2,351 3,628
Redeemable preferred stock:
Series A convertible preferred stock (par value $.01 per
share, 100,000 shares authorized, 75,000 shares
outstanding in 1999 and 2000, liquidation preference of
$75,340 and $77,883 at December 31, 1999 and 2000,
respectively)........................................... 69,195 71,437
Common shareholders' equity:
Common stock (par value $.01 per share, 30,000,000 shares
authorized, 14,734,106 issued and outstanding in 1999,
15,208,866 issued and outstanding in 2000).............. 147 152
Additional paid-in capital-common stock................... 136,691 141,304
Accumulated deficit....................................... (18,724) (6,756)
-------- --------
Total shareholders' equity......................... 118,114 134,700
-------- --------
Total liabilities and shareholders' equity......... $595,786 $597,982
======== ========
The accompanying notes are an integral part of these financial statements.
F-3
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1999 2000
-------------- -------------- --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenues.............................................. $ 66,681 $ 132,848 $ 323,722
Costs and expenses:
Cost of revenues.................................... 45,328 86,123 196,345
Selling, general and administrative................. 14,929 26,480 59,457
Acquisition-related costs........................... -- 7,961 4,454
----------- ----------- -----------
Total costs and expenses.................... 60,257 120,564 260,256
----------- ----------- -----------
Income from operations................................ 6,424 12,284 63,466
Other income (expense):
Interest income..................................... 713 1,144 558
Interest expense.................................... (777) (6,195) (39,785)
Other income, net................................... 1 565 (423)
----------- ----------- -----------
Total other income (expense)................ (63) (4,486) (39,650)
----------- ----------- -----------
Income before income taxes............................ 6,361 7,798 23,816
Income tax expense (benefit).......................... 648 (6,170) 9,305
----------- ----------- -----------
Net income............................................ $ 5,713 $ 13,968 $ 14,511
=========== =========== ===========
Earnings per share -- basic........................... $ 0.54 $ 0.96 $ 0.80
=========== =========== ===========
Earnings per share -- diluted......................... $ 0.51 $ 0.92 $ 0.72
=========== =========== ===========
Weighted average number of common shares outstanding--
basic............................................... 10,647,086 14,240,084 14,879,103
=========== =========== ===========
Weighted average number of common shares outstanding--
diluted............................................. 11,263,528 15,241,778 20,092,844
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1999 2000
-------- --------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income.................................................. $ 5,713 $ 13,968 $ 14,511
Adjustments to reconcile net income to net cash provided by
operating activities:
Issuance of warrants...................................... -- 192 160
Depreciation and amortization............................. 4,064 9,879 23,469
Deferred income taxes..................................... -- (7,119) --
Change in operating assets and liabilities, net of effects
of acquisitions:
Accounts receivable....................................... (1,884) (31,595) (21,979)
Parts and supplies........................................ (420) 526 (881)
Prepaid expenses.......................................... 58 320 (1,085)
Other assets.............................................. 302 (1,759) (1,737)
Accounts payable.......................................... 1,781 7,845 66
Due to seller............................................. -- 3,576 (1,353)
Tax benefit of disqualifying dispositions of stock
options................................................ -- -- 1,059
Accrued liabilities....................................... (6,223) 17,980 (2,124)
Deferred revenue.......................................... 1,471 (2,036) 363
-------- --------- --------
Net cash provided by operating activities......... 4,862 11,777 10,469
-------- --------- --------
INVESTING ACTIVITIES:
Payments for acquisitions and international investments, net
of cash acquired.......................................... (19,775) (422,280) (4,516)
Proceeds from sale of property.............................. 405 -- --
Proceeds from maturity of short-term investments............ -- 447 502
Purchases of short-term investments......................... (41) -- --
Capital expenditures........................................ (4,342) (3,795) (11,586)
-------- --------- --------
Net cash used in investing activities............. (23,753) (425,628) (15,600)
-------- --------- --------
FINANCING ACTIVITIES:
Net proceeds and repayment from bank lines of credit........ 16,386 (16,359) 5,000
Net proceeds and repayment from subordinated debt........... 2,750 (2,750) --
Proceeds from long term bank debt........................... -- 225,000 --
Proceeds from senior subordinated debt...................... -- 125,000 --
Repayment of long term debt................................. (3,189) (4,366) (16,428)
Payments of deferred financing costs........................ (218) (10,828) (631)
Principal payments on capital lease obligations............. (1,273) (290) (1,487)
Net proceeds from secondary public offering of common
stock..................................................... -- 47,158 --
Net proceeds from (payments related to) issuance of
preferred stock........................................... -- 68,855 (300)
Proceeds from other issuances of common stock............... 344 492 2,299
-------- --------- --------
Net cash provided by (used in) financing
activities...................................... 14,800 431,912 (11,547)
-------- --------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (4,091) 18,061 (16,678)
Cash and cash equivalents at beginning of
period.......................................... 5,374 1,283 19,344
-------- --------- --------
Cash and cash equivalents at end of period........ $ 1,283 $ 19,344 $ 2,666
======== ========= ========
Non-cash activities:
Net issuances of notes payable for certain acquisitions... $ 195 $ 103 $ 250
Net issuances of common stock and warrants for certain
acquisitions........................................... $ 2,568 $ 3,043 $ 1,260
The accompanying notes are an integral part of these financial statements
F-5
STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
NOTES
RECEIVABLE
FOR TOTAL
ISSUED AND ADDITIONAL COMMON SHARE-
OUTSTANDING PAID-IN STOCK ACCUMULATED HOLDERS'
SHARES AMOUNT CAPITAL PURCHASES DEFICIT EQUITY
----------- ------ ---------- ---------- ----------- --------
(IN THOUSANDS)
BALANCES AT DECEMBER 31, 1997... 10,473 $105 $ 82,986 $(4) $(38,061) $ 45,026
Issuance of common stock for
exercise of options and
warrants and employee stock
purchases..................... 226 2 342 -- -- 344
Common stock issued for
acquisitions.................. 167 2 2,566 -- -- 2,568
Principal payments under note
receivable.................... -- -- -- 4 (4) --
Net income............ -- -- -- -- 5,713 5,713
------ ---- -------- --- -------- --------
BALANCES AT DECEMBER 31, 1998... 10,866 109 85,894 -- (32,352) 53,651
Issuance of common stock for
exercise of options and
warrants and employee stock
purchases..................... 148 1 633 -- -- 634
Common stock issued for
acquisitions.................. 220 2 3,041 -- -- 3,043
Secondary public offering of
common stock (net of offering
costs)........................ 3,500 35 47,123 -- -- 47,158
Preferred dividends............. -- -- -- -- (340) (340)
Net income............ -- -- -- -- 13,968 13,968
------ ---- -------- --- -------- --------
BALANCES AT DECEMBER 31, 1999... 14,734 147 136,691 -- (18,724) 118,114
Issuance of common stock for
exercise of options and
warrants and employee stock
purchases..................... 449 5 2,294 -- -- 2,299
Common stock and warrants issued
for acquisitions.............. 26 -- 1,260 -- -- 1,260
Tax benefit of disqualifying
dispositions of stock
options....................... -- -- 1,059 -- -- 1,059
Preferred dividends............. -- -- -- -- (2,543) (2,543)
Net income............ -- -- -- -- 14,511 14,511
------ ---- -------- --- -------- --------
BALANCES AT DECEMBER 31, 2000... 15,209 $152 $141,304 $-- $ (6,756) $134,700
====== ==== ======== === ======== ========
The accompanying notes are an integral part of these financial statements
F-6
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Unless the context requires otherwise, "we," "us" or "our" refers to
Stericycle, Inc. and its subsidiaries on a consolidated basis.
NOTE 1 -- DESCRIPTION OF BUSINESS
We provide regulated medical waste collection, transportation, and
treatment services to our customers and related training, education and
compliance programs and consulting services. We also sell ancillary supplies and
transport pharmaceuticals, photographic chemicals, lead foil and amalgam for
recycling in selected geographic service areas. We are also expanding into
international markets through joint ventures and by licensing our proprietary
technology and selling associated equipment.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of Stericycle,
Inc. and its wholly-owned subsidiaries, Stericycle of Arkansas, Inc., Stericycle
of Washington, SWD Acquisitions Corporation, Environmental Control Co., Inc.
("ECCO"), Waste Systems, Inc. ("WSI") (the majority shareholder of 3CI Complete
Compliance Corporation), Med Tech Environmental Ltd. ("Med-Tech"), BFI Medical
Waste, Inc. ("BFI"), BFI Medical Waste, Inc. (Puerto Rico) as well as our 64%
ownership in Medam (a Mexican company). All significant intercompany accounts
and transactions have been eliminated. In addition, we have a 33% ownership in
Medam B.A. Srl (an Argentine company) and a 26.5% ownership in Evertrade Medical
Waste (Pty) Ltd. (a South African company) which are both accounted for using
the equity method.
Revenue Recognition:
We recognize revenue at the time of medical waste collection. Revenue and
costs on contracts to supply our proprietary treatment equipment are accounted
for by the percentage of completion method, whereby income is recognized based
on the estimated stage of completion of the individual contract.
Cash Equivalents and Short-Term Investments:
We consider all highly liquid investments with a maturity of less than
three months when purchased to be cash equivalents. Short-term investments
consist of highly liquid investments in corporate debt obligations which mature
in less than one year and are classified as held-to-maturity. These obligations
are stated at amortized cost, which approximates fair market value. Interest
income is recognized as earned.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Depreciation and
amortization, which include the depreciation of assets recorded under capital
leases, are computed using the straight-line method over the estimated useful
lives of the assets as follows:
Buildings and improvements............................ 10 to 30 years
Machinery and equipment............................... 3 to 10 years
Office equipment and furniture........................ 5 to 10 years
Software.............................................. 3 to 7 years
Goodwill:
Goodwill is amortized using the straight-line method over 25 years except
for the goodwill related to our acquisition of the medical waste business of
Browning-Ferris Industries, Inc. (the "BFI acquisition"),
F-7
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which is being amortized over 40 years. Amortization expense for 1998, 1999 and
2000 related to goodwill was approximately $1.5 million, $4.3 million and $13.8
million, respectively. We continually evaluate the value and future benefits of
our goodwill. We assess recoverability from future operations using cash flows
of the related acquired business as a measure. Under this approach, the carrying
value of goodwill would be reduced if it becomes probable that our best estimate
for expected undiscounted future cash flows of the related business would be
less than the carrying amount of goodwill over its remaining amortization
period. For the three-year period ended December 31, 2000, there were no
adjustments to the carrying amounts of goodwill resulting from these
evaluations.
New Plant Development and Permitting Costs:
We expense costs associated with the operation of new plants prior to the
commencement of services to customers and all initial and most on-going costs
related to permitting.
Income Taxes:
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax liabilities
and assets are determined based on the differences between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Financial Instruments:
Our financial instruments consist of cash and cash equivalents, short-term
investments, accounts receivable and payable and long-term debt. The fair values
of these financial instruments were not materially different from their carrying
values. Financial instruments which potentially subject us to concentrations of
credit risk consist principally of accounts receivable. Credit risk on trade
receivables is minimized as a result of the large size of our customer base. No
single customer represents greater than 1% of total accounts receivable. We
perform ongoing credit evaluation of our customers and maintain allowances for
potential credit losses. These losses, when incurred, have been within the range
of our expectations.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Derivative Reporting:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activity." SFAS No. 133
provides comprehensive and consistent standards for the recognition and
measurement of derivative and hedging activities. It requires that derivatives
be recorded on the consolidated balance sheets at fair value and establishes
criteria for hedges of changes in fair value of assets, liabilities or firm
commitments, hedges of variable cash flows of forecasted transactions and hedges
of foreign currency exposures of net investments in foreign operations. Changes
in the fair value of derivatives that do not meet the criteria for hedges would
be recognized in the consolidated statement of operations. This statement was
effective for us beginning January 1, 2001. The adoption of SFAS No. 133 did not
have a material impact on us.
F-8
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Segment Reporting:
Effective January 1, 1998, we adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("FAS 131"). FAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related
enterprise-wide disclosures about products and services, geographic areas, and
major customers. The adoption of FAS 131 did not affect our results of
operations or financial position, but did affect our disclosures. Our operating
segments (Stericycle, Inc., BFI, WSI and Med Tech) have similar economic
characteristics and are similar in the nature of their products and services,
treatment processes, types of customers, methods of distribution of services,
and nature of their regulatory environments. Based on this conclusion, we have
not presented segment disclosure information. We have provided our
enterprise-wide disclosures in Note 14.
NOTE 3 -- INCOME TAXES
At December 31, 2000, we had net operating loss carryforwards for federal
income tax purposes of approximately $9.4 million (excluding 3CI and Med-Tech),
which expire beginning in 2006. Based on the Internal Revenue Code of 1986, as
amended, and changes in our ownership, utilization of the net operating loss
carryforwards is subject to annual limitations which could significantly
restrict or partially eliminate the utilization of the net operating losses.
Additionally, we have an alternative minimum tax credit carryforward of $0.3
million available indefinitely as well as a foreign tax credit of approximately
$2.2 million which will begin to expire beginning in 2004.
Significant components of our income tax expense (benefit) for the years
ended December 31, 1998, 1999 and 2000 are as follows:
1998 1999 2000
-------- ----------- ----------
Deferred
Federal........................................ $ -- $(6,015,000) $4,450,000
State.......................................... -- (1,104,000) 530,000
-------- ----------- ----------
-- (7,119,000) 4,980,000
Current
Federal........................................ 243,000 100,000 3,165,000
State.......................................... 405,000 849,000 1,160,000
-------- ----------- ----------
Total Provisions....................... $648,000 $(6,170,000) $9,305,000
======== =========== ==========
A reconciliation of the income tax provision computed at the federal
statutory rate to the effective tax rate for the years ended December 31, 1998,
1999 and 2000 is as follows:
1998 1999 2000
----- ------ ----
Federal statutory income tax rate......................... 34.0% 34.0% 35.0%
Effect of:
State taxes, net of federal tax effect.................. 4.0 7.6 5.0
Alternative minimum taxes............................... 3.8 -- --
Non deductible goodwill amortization.................... 1.8 3.9 0.4
Change in valuation allowance........................... (33.4) (126.9) (1.2)
Other................................................... -- 2.3 (0.1)
----- ------ ----
Effective tax rate........................................ 10.2% (79.1)% 39.1%
F-9
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Paid income taxes were $1,030,000, $2,014,000 and $1,966,000 in 1998, 1999
and 2000, respectively.
Our deferred tax liabilities and assets as of December 31, 1999 and 2000
are as follows:
1999 2000
----------- ------------
Deferred tax liabilities:
Property, plant, and equipment.......................... $(2,511,000) $ (3,085,000)
Goodwill................................................ (4,014,000) (6,861,000)
Other................................................... (201,000) (2,127,000)
----------- ------------
Total deferred tax liabilities.................. (6,726,000) (12,073,000)
Deferred tax assets:
Accrued liabilities..................................... 2,561,000 3,807,000
Other................................................... 1,538,000 2,291,000
Net operating tax loss carryforward..................... 19,095,000 16,378,000
Alternate minimum tax credit carryforward................. 238,000 324,000
----------- ------------
Total deferred tax assets....................... 23,432,000 22,800,000
----------- ------------
Net deferred tax assets......................... 16,706,000 10,727,000
Valuation allowance....................................... (9,587,000) (8,588,000)
----------- ------------
Net deferred tax assets......................... $ 7,119,000 $ 2,139,000
=========== ============
During the fourth quarter of 1999, we re-evaluated the estimated amount of
valuation allowance required in light of the profitability achieved in 1997,
1998 and 1999 as well as the improved profitability expected in future years as
a result of the BFI acquisition in November 1999. As a result, we reduced the
valuation allowance on deferred tax assets in accordance with SFAS No. 109,
"Accounting for Income Taxes," to an amount that we believe is more likely than
not of being recovered. Accordingly, an income tax benefit of approximately $6.3
million was reflected in the fourth quarter. The amount of net deferred tax
assets estimated to be recoverable was based upon our assessment of the
likelihood of near term operating income coupled with uncertainties with respect
to the impact of future market conditions. At December 31, 1999 and 2000, the
valuation allowance relates principally to the net operating loss carryforward
at 3CI.
NOTE 4 -- ACQUISITIONS
During the year ended December 31, 2000, we purchased customer lists and
selected other assets of seven medical waste management businesses. The
aggregate purchase price for these acquisitions was approximately $3.2 million,
of which $2.4 million was paid in cash, $0.5 million was paid by the issuance of
unregistered shares of our common stock, and $0.3 million was paid by the
issuance of promissory notes. In certain cases, the purchase price is subject to
downwards adjustment if revenues from customer contracts acquired do not reach
certain specified levels.
On July 1, 2000 we increased our ownership in our Mexico joint venture,
Medam S.A. de C.V. ("Medam"), to 64% from 49% by purchasing an additional 15%
interest from our co-venturer. We paid the purchase price of $1.6 million by
combination of cash installment payments and warrants to purchase common stock.
The increase in ownership changes our accounting method for the joint venture
from the equity to the consolidation method beginning July 1, 2000.
In November 1999, we completed the acquisition from Allied Waste
Industries, Inc. ("Allied") of the medical waste business of Browning-Ferris
Industries, Inc. ("BFI") in the United States, Canada and Puerto Rico. Prior to
our acquisition, BFI had been the largest provider of regulated medical waste
services in the United States, with revenues of $201.7 million for the 12 months
ended June 30, 1999. The
F-10
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase price for our acquisition was $410.5 million in cash. We paid the
purchase price from the following sources, in addition to cash on hand: (i)
$225.0 million in borrowings under the term loan facilities of a new senior
credit facility that we established with DLJ Capital Funding, Inc., Bankers
Trust Company and Bank of America, N.A.; (ii) $125.0 million in proceeds from
the sale of 12 3/8% senior subordinated notes due 2009; and (iii) $75.0 million
in proceeds from the issuance of new Series A Convertible Preferred Stock to
investment funds affiliated with Bain Capital, LLC and Madison Dearborn
Partners, LLC. These transactions were completed concurrently with the
completion of our acquisition of the BFI medical waste business. See Note
5 -- Long Term Debt -- Senior Credit Facility and -- Senior Subordinated Notes
and Note 10 -- Series A Preferred Stock.
In addition, during the year ended December 31, 1999, we purchased the
customer lists and selected other assets of 13 medical waste management
businesses. The aggregate purchase price for these acquisitions was
approximately $8.2 million, of which $6.5 million was paid in cash, $1.6 million
was paid by the issuance of unregistered shares of our common stock, and $0.1
million was paid by the issuance of promissory notes. In addition, we assumed
certain liabilities of the sellers aggregating approximately $0.1 million. In
certain cases, the purchase price is subject to downwards adjustment if revenues
from customer contracts acquired do not reach certain specified levels.
In December 1998 and January 1999, we acquired all of the outstanding stock
and warrants of Med-Tech Environmental Ltd. ("Med-Tech"). Med-Tech, which is
located in Toronto, Canada, provides medical waste management services in Canada
and the northeastern United States. We paid a total of approximately $3.1
million in cash for the Med-Tech shares and warrants that we acquired. In
October 1998, we purchased Med-Tech's junior secured indebtedness of
approximately $3.6 million, paying the face value of the acquired debt, in the
form of $2.9 million in cash and 36,940 shares of Common Stock, and replacing a
letter of credit of approximately $1.6 million (which was returned in January
1999).
In October 1998, we acquired all the outstanding capital stock of Waste
Systems, Inc. ("WSI"). The purchase price was $10.0 million in cash and the
grant of certain exclusive negotiation and first refusal rights to the sellers
in respect of the purchase, for installation and operation in the Federal
Republic of Germany, of medical waste treatment units incorporating our
proprietary ETD technology. WSI owns approximately 55.5% of the common stock and
all of the preferred stock of 3CI Complete Compliance Corporation ("3CI"), which
provides regulated medical waste management services in the southeastern United
States. 3CI's common stock is traded over-the-counter under the symbol "TCCC."
WSI also owns a secured promissory note from 3CI which, as amended in December,
1998, is payable to WSI in the principal amount of approximately $5.6 million on
or before March 31, 2001.
In addition, during 1998, we acquired customer contracts and certain assets
of 10 regulated medical waste businesses. The purchase price for these six
acquisitions was paid in the form of cash, issuance of our common stock,
assumption of liabilities, and in two cases delivery of notes payable in 1998.
For financial reporting purposes these acquisition transactions were
accounted for using the purchase method of accounting. The total purchase price
for 1998, 1999 and 2000 of $22.5 million, $424.4 million and $3.1 million
respectively, net of cash acquired, was allocated to assets acquired and
liabilities assumed based on the estimated fair market value at the date of
acquisition. The total purchase price of 1998, 1999, and 2000 acquisitions
includes the value of 167,000, 220,058 and 26,000 shares respectively, of our
common stock issued to the sellers. The excess of the purchase price over the
fair market value of the net assets acquired is reflected in the accompanying
Consolidated Balance Sheets as goodwill. The results of operations of these
acquired businesses are included in the Consolidated Statement of Operations
from the date of the acquisition. The effect of these acquisitions would not
have a significant effect on our operations, except for the BFI, Med-Tech, and
Waste Systems acquisitions.
F-11
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma results of the operations assumes that
the BFI acquisition occurred as of January 1, 1999 after giving effect to
certain adjustments including amortization of goodwill, increased interest
expense on debt incurred in connection with the acquisitions and adjustments to
record incremental recurring costs associated with the consolidation of the
operations as the historical results of operations of BFI did not reflect these
costs:
YEAR ENDED
DECEMBER 31,
1999
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Pro forma revenues.......................................... $304,386
Pro forma net income*....................................... 20,277
Pro forma diluted net income per share*..................... 1.07
---------------
* includes a tax benefit of $6.3 million in 1999
The pro forma financial information does not purport to be indicative of
the results of operations that would have occurred had the transactions taken
place at the beginning of the period indicated or of future results of
operations.
NOTE 5 -- LONG TERM DEBT
Long term debt consists of the following at December 31:
1999 2000
-------- --------
(IN THOUSANDS)
Industrial development revenue bonds........................ $ 1,145 $ 990
Obligations under capital leases............................ 6,140 4,749
Notes payable to bank....................................... 225,000 215,456
Senior subordinated debt.................................... 125,000 125,000
Notes payable............................................... 3,900 4,006
-------- --------
361,185 350,201
Less: current portion....................................... 5,741 5,097
-------- --------
Total............................................. $355,444 $345,104
======== ========
In connection with our May 1997 purchase of ECCO's stock, a 10-year note
for $2,300,000 was issued to the owners of ECCO. The note is payable in 10 equal
annual installments due on May 1 of each year starting in 1998. The note bears
interest at the rate of 6.86% per annum.
During 1992, we entered into an obligation to finance the development of
our Woonsocket, Rhode Island facility. The development and purchase of
substantially all of the property and equipment for the facility was financed
from the issuance of industrial development revenue bonds. The bonds are due in
various amounts through 2017 at fixed interest rates ranging from 6.5% to 7.375%
and are collateralized by the property and equipment at the facility. The terms
of an agreement entered into in connection with the issuance of the bonds
contain, among other provisions, requirements for maintaining defined levels of
working capital and various financial ratios including debt to net worth.
F-12
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Payments due on long-term debt excluding capital lease obligations, during
each of the five years subsequent to December 31, 2000 are as follows:
(IN THOUSANDS)
2001.................................................. $ 4,143
2002.................................................. 15,588
2003.................................................. 17,283
2004.................................................. 19,148
2005.................................................. 23,685
Thereafter............................................ 265,605
The company paid interest of $0.7 million, $2.2 million and $37.9 million
for the fiscal years ended December 31, 1998, 1999 and 2000, respectively.
At December 31, 2000 property under capital leases included with property,
plant and equipment in the accompanying Consolidated Balance Sheet is as
follows:
(IN THOUSANDS)
Machinery and Equipment............................... $ 43
Vehicles.............................................. 5,741
Less -- accumulated depreciation and amortization..... (1,350)
-------
$ 4,435
=======
Minimum future lease payments under capital leases are as follows:
(IN THOUSANDS)
2001.................................................. $ 1,334
2002.................................................. 1,288
2003.................................................. 1,041
2004.................................................. 844
2005.................................................. 711
Thereafter............................................ 691
-------
Total minimum lease payments................ 5,909
Less amounts representing interest.......... (1,160)
-------
Present value of net minimum lease payments........... 4,749
Less current portion........................ 954
-------
Long-term obligations under capital
leases.................................... $ 3,795
=======
Senior Credit Facility
In November 1999, we established a term loan and revolving credit facility
under a credit agreement with various financial institutions. The facility
consists of: (i) a six-year revolving credit facility of up to $50.0 million;
(ii) a six-year term loan A in the principal amount of up to $75.0 million; and
(iii) a seven-year term loan B in the principal amount of up to $150.0 million.
The Company borrowed the full amount available under term loan A and term loan B
principally to finance a portion of the purchase price of our acquisition of
BFI. As of December 31, 2000, we have made $5.0 million in payments on the term
loan A and $9.5 million in payments on the term loan B. In addition, we had $5.0
million outstanding under the revolving credit facility.
F-13
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REPAYMENT. Term loan A matures in quarterly installments, resulting in
aggregate annual amortization payments as a percentage of the initial principal
amount as follows:
ANNUAL
YEAR AMORTIZATION
---- -----------------
(IN PERCENTAGE OF
THE INITIAL
PRINCIPAL AMOUNT)
2000................................................. 2.5%
2001................................................. 7.5%
2002................................................. 12.5%
2003................................................. 22.5%
2004................................................. 25.0%
2005................................................. 30.0%
Term loan B matures in quarterly installments, resulting in aggregate
annual amortization payments as a percentage of the initial principal amount as
follows:
ANNUAL
YEAR AMORTIZATION
---- -----------------
(IN PERCENTAGE OF
THE INITIAL
PRINCIPAL AMOUNT)
2000-2005............................................ 1.0%
2006................................................. 94.0%
GUARANTEES AND SECURITY. Our credit facility is secured by a
first-priority perfected lien (subject to customary exceptions) on: (i)
substantially all of our property and assets and substantially all of the
property and assets of our subsidiaries, other than certain unrestricted
subsidiaries and foreign subsidiaries; (ii) all of the capital stock or similar
equity interests of all of our direct and indirect subsidiaries with the
exception that no more than 65% of the capital stock or similar equity interests
of our foreign subsidiaries which is directly held by us or by a domestic
subsidiary has been pledged, and no capital stock of our foreign subsidiaries
which are held by a foreign subsidiary has been pledged; and (iii) all
intercompany notes other than intercompany notes held by the Company's foreign
subsidiaries.
The credit facility is guaranteed on a senior secured basis by entities
customary for transactions of this nature, including all of our direct and
indirect domestic subsidiaries (other than any unrestricted subsidiaries).
INTEREST. At our option, the interest rates per annum applicable to the
revolving credit facility, term loan A and term loan B are fluctuating rates of
interest determined by reference to (a) the London Interbank Offered Rate
("LIBOR") plus the applicable margin, or (b) a base rate which is the greater of
the prime rate and the rate which is 1/2 of 1% in excess of the rates on
overnight federal funds transactions as published by the Federal Reserve Bank of
New York, plus the applicable margin. The applicable margin is determined on the
basis of our total leverage ratio. At December 31, 2000, the range on the rate
of interest on term loan A was 8.95%-9.25% per annum, and the range on the rate
of interest on term loan B was 9.95%-12.00% per annum.
PREPAYMENTS. We are permitted at any time voluntarily to prepay the
obligations under the term loans and to reduce the amount committed under the
revolving credit facility without any penalty or premium. We are required to
prepay the term loans with: (i) 100% of the net proceeds of specified asset
sales, proceeds from condemnation and the like, and proceeds from loss or
casualty, subject to customary exceptions for repairs and replacements; (ii)
100% of the net proceeds from the sale or issuance of debt securities; (iii) 50%
of the net proceeds from the issuance of equity securities, subject to customary
adjustments to be mutually determined; (iv) 75% of excess cash flow, subject to
customary adjustments to
F-14
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be mutually determined; and (v) 100% of payments by or on behalf of Allied in
respect of any purchase price adjustments in connection with the BFI
acquisition. Prepayments will be applied pro rata to term loan A and term loan B
and will be applied to scheduled installments on each loan on a pro rata basis
(with the exception that the lenders with respect to term loan B can decline to
be prepaid). At December 31, 2000, we had prepaid the term loan A by $3.1
million and had prepaid the term loan B by $8.0 million.
COVENANTS; EVENTS OF DEFAULT. The credit facility contains covenants
restricting our ability and the ability of any of our subsidiaries to, among
other things: incur debt; subject our assets to liens; make investments; incur
contingent liabilities; pay dividends; merge or sell assets; make capital
expenditures; enter into sale/lease-back transactions; enter into new
businesses; discount receivables; and enter into affiliate transactions. In
addition, the credit facility requires us to meet financial performance tests,
including a maximum leverage ratio and a minimum cash interest coverage ratio
and, as we elect, either a minimum fixed charge coverage ratio or minimum EBITDA
(earnings before interest expense, income taxes, depreciation and amortization).
The credit facility contains conditions under which an event of default
under the credit facility will exist, including: failure to make payments when
due under the credit facility; defaults in other agreements; breach of
covenants; material misrepresentations; involuntary or voluntary bankruptcy;
judgments or attachments against us; dissolution; and changes in control.
Senior Subordinated Notes
In November 1999, we issued 12 3/8% Series A Senior Subordinated Notes due
2009 in the aggregate principal amount of $125.0 million. In connection with the
issuance of the Series A notes to the initial purchasers, we agreed to make an
offer to holders of the Series A notes to exchange their notes for substantially
identical Series B notes registered under the Securities Act. This exchange
offer was completed in January 2000, with holders of all the Series A notes
exchanging their notes for new, registered 12 3/8% Series B notes. We used the
net proceeds from the sale of the notes to finance a portion of the purchase
price of our acquisition of BFI.
The notes are general unsecured obligations of ours, and are subordinated
in right of payment to our debt under our senior credit facility.
The notes will mature on November 15, 2009. Interest on the notes accrues
at the rate of 12 3/8% per annum and is payable semiannually on May 15 and
November 15, beginning on May 15, 2000.
SUBSIDIARY GUARANTEES. The notes are guaranteed by all of our subsidiaries
except our foreign subsidiaries and 3CI. All of our subsidiaries are restricted
subsidiaries for purposes of the trust indenture pursuant to which the notes
were issued. Under certain circumstances, we may designate one or more
subsidiaries as an unrestricted subsidiary. An unrestricted subsidiary is not
subject to many of the restrictive covenants in the trust indenture and, if it
has previously been a guarantor of the notes, is released from its guarantee.
REDEMPTION AT OUR OPTION. Prior to November 15, 2002, we may elect to
redeem, from the net proceeds of one or more equity offerings, up to 35% of the
initial aggregate principal amount of the notes at a redemption price of
112.375% of the principal amount redeemed, plus accrued interest to the
redemption date. Except for any such permitted redemptions, we may not otherwise
redeem the notes prior to November 15, 2004. After this date, we may elect to
redeem all or any part of the notes at a redemption price (expressed as a
percentage of the principal amount redeemed) during the 12-month
F-15
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
period beginning on November 15 of the year indicated, plus accrued interest to
the redemption date, as follows:
YEAR PERCENTAGE
---- ----------
2004..................................................... 106.1875%
2005..................................................... 104.1250%
2006..................................................... 102.0625%
2007 and thereafter...................................... 100.0000%
Under the trust indenture, we are permitted to acquire the notes by means
other than a redemption, for example, pursuant to a tender offer or by purchases
in the open market, if the acquisition does not otherwise violate the terms of
the indenture. The agreements governing our senior credit facility, however,
currently prohibit us from purchasing any notes.
REDEMPTION AT HOLDER'S OPTION. At any time after a change of our control,
each holder of the notes may require us to repurchase in cash all or any part of
the holder's notes for 101% of their aggregate principal amount plus accrued
interest to the date of repurchase. In addition, under certain circumstances, we
are required to use a portion of the net proceeds from asset sales or the
issuance of stock to offer to redeem the outstanding notes on a pro rata basis
at a redemption price of 100% of the aggregate principal amount redeemed plus
accrued interest to the redemption date. We are not otherwise required to make
mandatory redemptions with respect to the notes.
COVENANTS; EVENTS OF DEFAULT. The trust indenture contains covenants
restricting our ability and the ability of any of our subsidiaries to, among
other things: incur debt (including debt junior to our senior debt but senior to
the notes); subject our assets to liens; make investments; incur contingent
liabilities; pay dividends; merge or sell assets; make capital expenditures;
enter into sale/lease-back transactions; enter into new businesses; discount
receivables; and enter into affiliate transactions.
The trust indenture contains conditions under which an event of default
under the notes will exist, including: failure to make payments when due; breach
of covenants in the indenture and notes; material misrepresentations;
involuntary or voluntary bankruptcy; and judgments or attachments against us.
acceleration of the notes following an event of default will not be effective
until the acceleration of our debt our senior credit facility.
NOTE 6 -- LEASE COMMITMENTS
We lease various plant equipment, office furniture and equipment, motor
vehicles and office and warehouse space under operating lease agreements which
expire at various dates over the next eight years. The leases for most of the
properties contain renewal provisions.
Rent expense for 1998, 1999, and 2000 was $3,508,000, $6,823,000 and
$11,167,000 respectively.
F-16
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum future rental payments under non-cancelable operating leases that
have initial or remaining terms in excess of one year as of December 31, 2000
for each of the next five years and in the aggregate are as follows:
(IN THOUSANDS)
2001........................................................ $ 8,020
2002........................................................ 7,200
2003........................................................ 6,283
2004........................................................ 5,379
2005........................................................ 4,359
Thereafter.................................................. 3,039
-------
Total minimum rental payments..................... $34,280
=======
NOTE 7 -- ACQUISITION-RELATED EXPENSES
During the year ended December 31, 2000 we recorded $4,454,000 of
acquisition related expenses compared to $7,961,000 in the year ended December
31, 1999. The closure of redundant offices and eliminating excess revenue
producing assets resulted in costs being incurred for severance and closure
expenses of $3,351,000. Transition related expenses of $1,103,000 were incurred
as part of the transition.
The following table reflects the activity related to the 1999 and 2000
acquisition related costs (in thousands):
CHARGES
EXPECTED IN
CHARGES IN CHARGES IN FUTURE
1999 2000 PERIODS
---------- ---------- -----------
Severance and closure costs.......................... $3,373 $3,351 --
Transition expenses.................................. 1,659 1,103 $1,000
Other non-recurring acquisition related costs........ 2,929 -- --
------ ------ ------
Total...................................... $7,961 $4,454 $1,000
====== ====== ======
In 1999 and 2000, we paid approximately $3,789,000 and $7,502,000 of these
acquisition related expenses and, at December 31, 1999 and 2000, $4,172,000 and
$1,124,000 was accrued.
F-17
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net
income per share:
YEAR ENDED DECEMBER 31
------------------------------------------------
1998 1999 2000
-------------- -------------- --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Numerator:
Net income.......................................... $ 5,713 $ 13,968 $ 14,511
Preferred stock dividends........................... -- (340) (2,543)
----------- ----------- -----------
Numerator for basic earnings per share -- income
available to common stockholders................. 5,713 13,628 11,968
Effect of dilutive securities:
Preferred stock dividends........................ -- 340 2,543
----------- ----------- -----------
Numerator for diluted earnings per share -- income
available to common stockholders after assumed
conversions...................................... $ 5,713 $ 13,968 $ 14,511
=========== =========== ===========
Denominator:
Denominator for basic earnings per
share -- weighted-average shares................. 10,647,083 14,240,084 14,879,103
Effect of dilutive securities:
Employee stock options........................... 473,723 338,540 640,714
Warrants......................................... 142,722 86,482 195,328
Convertible preferred stock...................... -- 576,672 4,377,699
----------- ----------- -----------
Dilutive potential common shares.................... 616,445 1,001,694 5,213,741
----------- ----------- -----------
Denominator for diluted earnings per
share -- adjusted weighted-average shares and
assumed conversions.............................. 11,263,528 15,241,778 20,092,844
=========== =========== ===========
Basic net income per share............................ $ 0.54 $ 0.96 $ 0.80
=========== =========== ===========
Diluted net income per share.......................... $ 0.51 $ 0.92 $ 0.72
=========== =========== ===========
For additional information regarding our outstanding employee stock options
and outstanding warrants, see Note 9.
In 1998, 1999 and 2000, options and warrants to purchase 67,615 shares,
458,363 shares and 41,471 shares respectively, at exercise prices of
$15.50-$69.02, $12.75-$18.13, and $25.06-$42.47 respectively, were not included
in the computation of diluted earnings per share because the effect would be
antidilutive.
NOTE 9 -- STOCK OPTIONS AND WARRANTS
Stock Options
In 2000, our Board of Directors approved the 2000 Nonstatutory Stock Option
Plan (the "2000 Plan"), which provides for the granting of 500,000 shares of our
common stock in the form of stock options to employees, (but not to officers or
directors). The exercise price of options granted under the 2000 Plan must be at
least equal to the fair market value of the common stock on the date of the
grant. All options granted to date have 10 year terms and vest over periods of
up to five years after the date of grant.
F-18
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1997, our Board of Directors and shareholders approved the 1997 Stock
Option Plan (the "1997 Plan"), which provides for the granting of 1,500,000
shares of common stock in the form of stock options to selected officers,
directors and employees of the Company and its subsidiaries. The exercise price
of options granted under the 1997 Plan must be at least equal to the fair market
value of the common stock on the date of grant. All options granted to date have
10-year terms and vest over periods of up to five years after the date of grant.
In 1995, our Board of Directors and shareholders approved an incentive
compensation plan (the "1995 Plan"), which as amended and restated in 1996,
provides for the granting of 1,500,000 shares of common stock in the form of
stock options and restricted stock to employees, officers, directors and
consultants. The exercise price of options granted under the 1995 Plan must be
at least equal to the fair market value of the common stock on the date of
grant. All options granted to date have 10-year terms and vest over periods of
up to four years after the date of grant.
In June 1996, our Board of Directors adopted and in July, 1996, our
shareholders approved, the Directors Stock Option Plan (the "Directors Plan").
The Directors Plan authorizes stock options for a total of 285,000 shares of
common stock to be granted to our outside directors. Option grants are made by
the Board of Directors at the times and in amounts that the Board determines,
taking into account any guidelines that the Board may adopt for this purpose.
The exercise price of options granted under the Directors Plan must be at least
equal to the fair market value of the common stock on the date of grant. Options
granted prior to April 1, 1998 vest in 16 consecutive quarterly installments;
options granted after March 31, 1998 vest in 12 equal monthly installments.
Shares of the Company's common stock have been reserved for issuance upon
the exercise of options and warrants. These shares have been reserved as follows
at December 31, 2000:
1995 Plan options......................................... 420,549
1996 Directors Plan options............................... 285,000
1997 Plan options......................................... 1,170,009
2000 Plan options......................................... 500,000
Warrants.................................................. 177,289
---------
Total shares reserved........................... 2,552,847
=========
A summary of stock option information follows:
1998 1999 2000
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
Outstanding at beginning of
year.......................... 845,861 $ 4.98 945,970 $ 8.37 1,572,359 $11.22
Granted....................... 360,238 $13.92 840,579 $12.91 583,106 $20.63
Exercised..................... (155,979) $ 2.21 (146,419) $ 2.36 (358,249) $ 9.57
Cancelled/Forfeited............. (104,150) $ 8.89 (67,771) $11.36 (156,258) $13.97
--------- --------- ---------
Outstanding at end of year...... 945,970 $ 8.37 1,572,359 $11.22 1,640,958 $14.66
Exercisable at end of year...... 393,084 $ 5.37 448,948 $ 8.49 532,518 $11.46
Available for future grant...... 1,434,821 662,013 734,600
F-19
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options outstanding and exercisable as of December 31, 2000 by price range:
OUTSTANDING EXERCISABLE
-------------------------------- ------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
LIFE IN EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES YEARS PRICE SHARES PRICE
------------------------ --------- --------- -------- ------- --------
$0.53-$10.25....................... 297,270 4.88 $ 7.36 228,456 $ 7.17
$10.81-$12.75...................... 541,127 8.46 $12.73 98,821 $12.65
$13.25-$18.125..................... 310,215 6.59 $14.60 180,770 $14.77
$20.25-$42.47...................... 492,346 9.44 $21.22 24,471 $22.33
--------- ---- ------ ------- ------
1,640,958 7.75 $14.66 532,518 $11.46
We have elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for our employee stock options because, as discussed below, the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"), requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
our employee stock options approximate the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and net income per share is
required by FAS 123 as if we had accounted for our employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
statement. Options granted in 1998, 1999 and 2000 were valued using the Black-
Scholes option pricing model. Options granted in 1996 and 1995, as a non-public
company, were valued using the minimum value method. The following assumptions
were used in 1998, 1999 and 2000: expected volatility of 0.61 in 1998, 0.62 in
1999 and 0.61 in 2000; risk-free interest rates ranging from 4.5% to 4.8% in
1998, 4.83% to 6.73% in 1999, and 5.02% to 6.69% in 2000; a dividend yield of
0%; and a weighted-average expected life of the option of 72 months. The
weighted-average fair values of options granted during 1998, 1999 and 2000 were
$6.52 per share, $7.27 per share, and $10.18 per share, respectively.
Option value models require the input of highly subjective assumptions.
Because our employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing method does not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting period. Our pro forma
information follows (in thousands, except for per share information):
YEAR ENDED DECEMBER 31,
--------------------------
1998 1999 2000
------ ------- -------
Pro forma net income..................................... $4,485 $11,860 $10,585
Pro forma net income per share -- diluted................ $ 0.40 $ 0.78 $ 0.53
The pro forma effect in 1998, 1999 and 2000 is not representative of the
pro forma effect in future years as the pro forma disclosures reflect only the
fair value of stock options granted subsequent to December 31, 1994.
Warrants:
In May 1996, in connection with a loan from certain shareholders, directors
and officers, we issued warrants to purchase 226,036 shares of common stock at
$7.96 per share. These warrants expire in May
F-20
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2001. In 1998 and 2000, warrants to purchase 35,940 shares and 178,794 shares,
respectively, were exercised. At December 31, 2000, warrants to purchase 11,302
shares remained outstanding.
In connection with a subordinated loan agreement, six directors were
granted five-year warrants to purchase shares of our common stock exercisable at
any time after the first anniversary of the grant date in December 1998 and in
January 1999, the lenders were granted warrants to purchase, in the aggregate,
18,970 shares of Common Stock at $14.50 per share, 43,551 shares of Common Stock
at $15.50 per share and 59,092 shares of Common Stock at $16.50 per share.
In June 2000, in connection with our acquisition of an additional 15%
interest in Medam, we issued warrants to purchase 44,374 shares of our common
stock. Of these warrants, warrants for 31,128 shares are immediately
exercisable, while the remaining 13,246 shares become contingently exercisable
over five years. The exercise price of the warrants is $17.50 per share.
NOTE 10 -- SERIES A PREFERRED STOCK
In November 1999, we issued and sold 75,000 shares of Series A Convertible
Preferred Stock for $1,000 per share, or $75.0 million in the aggregate, in
cash, less various fees and expenses. The company used the net proceeds from the
sale to finance a portion of the purchase price of our BFI acquisition.
DIVIDENDS. The Series A Convertible Preferred Stock bears preferential
dividends, payable in additional shares of Series A Convertible Preferred Stock,
at the rate of 3.375% per annum from the date of issuance. Dividends accrue
daily and accumulate annually on the anniversary date of the initial issuance.
The Series A Convertible Preferred Stock is also entitled to share pro rata with
holders of Common Stock, on the basis of the number of shares of Common Stock
into which the Series A Convertible Preferred Stock is convertible, in all other
dividends and distributions.
LIQUIDATION. Upon any liquidation, dissolution or winding up of the
Company, holders of Series A Convertible Preferred Stock are entitled to be
paid, before any distribution or payment is made to holders of Common Stock, the
greater of (i) the sum of $1,000 per share plus accumulated preferential
dividends plus accrued and unpaid dividends not yet accumulated (the
"liquidation value") or (ii) the amount that would be payable if the Series A
Convertible Preferred Stock had been converted into common stock.
VOTING. Holders of Series A Convertible Preferred Stock are entitled to
vote with holders of Common Stock as a single class on each matter submitted to
a vote of the Company's stockholders. Each share of Series A Convertible
Preferred Stock has a number of votes equal to the number of votes possessed by
the Common Stock into which the Series A Convertible Preferred Stock is
convertible. As long as the initial investors of the Series A Convertible
Preferred Stock and their affiliates hold 50% or more of the "underlying common
stock" (i.e., the shares of common stock issuable, or previously issued, upon
conversion of the Series A Convertible Preferred Stock), they will have the
right, voting as a separate class, to elect two directors to the Company's Board
of Directors. If the initial investors and their affiliates cease to hold 50%
but still hold 25% or more of the underlying common stock, they will have the
right, voting as a separate class, to elect one director; and if they cease to
hold 25% of the underlying common stock, their right to elect directors as a
separate class will terminate.
CONVERSION. Each holder of Series A Convertible Preferred Stock may at any
time, upon 10 business days' notice, convert all or part of the holder's Series
A Convertible Preferred Stock into shares of common stock. The price at which a
holder may convert is $17.50 per share, subject to adjustment. The conversion
price will be adjusted if (i) the Company issues or is deemed to issue
additional shares of common stock for a price per share less than the conversion
price or the market price at the time of issuance or (ii) the Company issues or
is deemed to issue options, warrants or convertible securities with an exercise
price or conversion price per share less than the conversion price or the market
price at the time of issuance. The conversion price will also be adjusted in
certain other circumstances.
F-21
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
There will be no adjustment of the conversion price to the extent that in
any fiscal year, the Company issues common stock in connection with acquisitions
approved by the Board of Directors or grants or reprices stock options (at a
price not lower than the market price at the time of grant or repricing), and
the aggregate number of shares of common stock issued or for which options are
granted or repriced does not exceed 4.0% of the shares of common stock
outstanding on the last trading day of the prior fiscal year. For purposes of
any adjustment to the conversion price, the "market price" per share for common
stock is the average closing price over the 20 business day period preceding the
date of determination.
REDEMPTION AT COMPANY'S OPTION. Beginning on May 12, 2002, if the closing
price of common stock exceeds 150% of the conversion price for 20 consecutive
trading days, the Company may elect, upon at least 30 days' prior written
notice, to redeem all (but not part) of the outstanding shares of Series A
Convertible Preferred Stock, subject to any holder's right to convert its shares
into common stock prior to the redemption date. If the Company makes such an
election, the redemption price will equal the liquidation value to the date of
redemption.
REDEMPTION AT HOLDER'S OPTION. At any time after a change of control, or
after the occurrence of a bankruptcy event which continues for 60 days, each
holder of Series A Convertible Preferred Stock may require the Company to redeem
all or any part of the holder's shares at a price equal to the liquidation value
per share, upon 15 days' prior written notice.
COVENANTS AND RESTRICTIONS. Under the stock purchase agreement with the
initial investors, the Company agreed to various covenants and restrictions.
These covenants and restrictions include the Company's grant of preemptive
rights to holders of Series A Convertible Preferred Stock under certain
circumstances and the Company's agreement to provide them with specified
financial and business information.
REGISTRATION RIGHTS AGREEMENT. The Company and the initial investors
entered into a registration rights agreement at closing. This agreement requires
the Company, at the request of holders of a majority of the underlying common
stock at any time after the first anniversary of closing, to register all or any
portion of their shares under the Securities Act in an underwritten public
offering. Holders of Series A Convertible Preferred Stock are limited to three
such registrations. The agreement also grants holders of Series A Convertible
Preferred Stock "piggyback" registration rights. In all registrations (with
certain limited exceptions), the Company will be required to pay the expenses of
registration of the holders of Series A Convertible Preferred Stock (excluding
the underwriting discounts and commissions).
CORPORATE GOVERNANCE AGREEMENT. The Company and the initial investors also
entered into a corporate governance agreement at closing. This agreements
contains certain provisions intended to implement the right of the initial
investors to elect directors to the Company's Board of Directors. It also
provides that until the earlier of (i) the date on which the initial investors
and their permitted transferees cease to own any Series A Convertible Preferred
Stock, (ii) the date on which the initial investors have completed a
distribution of the Series A Convertible Preferred Stock to their partners or
(iii) the first anniversary of closing, the initial investors and their
transferees and affiliates will not acquire beneficial ownership of more than
30% of the voting power of the Company or acquire or attempt to acquire control
of the Company, except in response to a proposal that has been made to the
stockholders that would materially and adversely affect the investors, or
pursuant to the exercise of their preemptive rights. The corporate governance
agreement also contains specified restrictions, for a period of five years, on
the initial investors' ability to transfer their shares of Series A Convertible
Preferred Stock (but not the shares of common stock issuable upon conversion of
those shares). In addition, the agreement provides that the approval of holders
of a majority of the underlying common stock is required for the company to: (1)
engage in mergers, acquisitions or divestitures of specified sizes, (2) enter
into contracts with the Company's officers, directors, employees or affiliates,
except for ordinary employment contracts, benefit plans and transactions with
the Company's subsidiaries, and (3) incur indebtedness or issue specified
F-22
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capital stock that would cause the Company's fixed charge coverage ratio to be
less than 1.75 to 1.0 (2.0 to 1.0 after the second anniversary of the initial
issuance of the Series A Convertible Preferred Stock).
NOTE 11 -- EMPLOYEE BENEFIT PLAN
We have a 401(k) defined contribution retirement savings plan covering
substantially all employees. Each participant may elect to defer a portion of
his or her compensation subject to certain limitations. We may contribute up to
50% of the first 5% of compensation contributed to the plan by each employee.
Our contributions for the years ended December 31, 1998, 1999, and 2000 were
approximately $10,000, $49,000 and $782,000 respectively.
NOTE 12 -- RELATED PARTIES
In September 1999, we announced the formation of a new joint venture,
Medam, B.A. Srl, an Argentine corporation, to utilize our ETD technology to
treat medical waste primarily in the Buenos Aires market. In 1999 and 2000, we
recorded $2,866,000 and $507,000 in revenues, respectively, related to the sale
of equipment and other agreements.
In August 2000, we announced the formation of a new joint venture,
Evertrade Medical Waste (Pty) Ltd, to service the medical waste market in South
Africa using our ETD technology. The joint venture company will be headquartered
in Johannesburg, South Africa. In 2000, we recorded $5,085,000 in revenue
related to the sale of equipment and other agreements.
NOTE 13 -- LEGAL PROCEEDINGS
We operate in a highly regulated industry and are exposed to regulatory
inquiries or investigations from time to time. Investigations can be initiated
for a variety of reasons. We have been involved in several legal and
administrative proceedings that have been settled or otherwise resolved on terms
acceptable to us, without having a material adverse effect on our business,
financial condition or results of operations. We are also a party to various
legal proceedings arising in the ordinary course of business. We believe that
the resolution of these other matters will not have a material adverse affect on
our business, financial condition or results of operation.
NOTE 14 -- PRODUCTS AND SERVICES AND GEOGRAPHIC INFORMATION
Summary revenue information for the Company's products and services is as
follows:
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1999 2000
------- -------- --------
(IN THOUSANDS)
Medical waste management services..................... $59,669 $126,286 $316,549
Proprietary equipment and technology license sales.... 7,012 6,562 7,173
------- -------- --------
Total....................................... $66,681 $132,848 $323,722
======= ======== ========
F-23
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summary financial information by geographic area is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1999 2000
------- -------- --------
(IN THOUSANDS)
Revenues:
United States....................................... $59,206 $119,618 $304,512
Foreign countries................................... 7,475 13,230 19,210
------- -------- --------
Total....................................... $66,681 $132,848 $323,722
======= ======== ========
Long-lived assets:
United States....................................... $66,853 $508,956 $494,755
Foreign countries................................... 9,092 9,290 12,216
------- -------- --------
Total....................................... $75,945 $518,246 $506,971
======= ======== ========
Revenues are attributed to countries based on the location of customers. In
1998, 1999 and 2000, we provided medical waste management services to customers
in Canada and Mexico, and licensed proprietary equipment to Brazilian and
Japanese companies and to joint ventures in Argentina and South Africa.
NOTE 15 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes our unaudited consolidated quarterly results
of operations as reported for 1998, 1999 and 2000 (in thousands, except for per
share amounts):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
1998 1998 1998 1998
------- ------- ------- -------
Revenues....................................... $13,255 $14,763 $16,741 $21,922
Gross profit................................... 3,957 4,432 5,878 7,086
Income before acquisition related costs........ 867 1,164 2,085 2,308
Net income..................................... 780 1,088 1,553 2,292
Basic earnings per common share................ 0.07 0.10 0.15 0.22
Diluted earnings per common share*............. 0.07 0.10 0.14 0.20
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
1999 1999 1999 1999
------- ------- ------- -------
Revenues....................................... $23,868 $25,019 $25,398 $58,563
Gross profit................................... 8,007 8,540 8,740 21,438
Income before acquisition related costs........ 2,923 3,354 3,469 10,499
Net income..................................... 2,427 2,560 2,882 6,099
Basic earnings per common share................ 0.19 0.18 0.20 0.41
Diluted earnings per common share*............. 0.18 0.17 0.19 0.35
F-24
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
2000 2000 2000 2000
------- ------- ------- -------
Revenues....................................... $77,668 $79,557 $81,066 $85,431
Gross profit................................... 30,311 31,296 31,915 33,855
Income before acquisition related costs........ 15,827 16,570 17,150 18,373
Net income..................................... 3,773 3,086 3,433 4,219
Basic earnings per common share................ 0.21 0.17 0.19 0.24
Diluted earnings per common share*............. 0.19 0.15 0.17 0.21
---------------
* Earnings per share are calculated on a quarterly basis, and, as such, the
amounts may not total the calculated full-year earnings per share.
NOTE 16 -- CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Payments under the Company's senior subordinated notes (the Notes) are
unconditionally guaranteed, jointly and severally, by all of the Company's
wholly domestic subsidiaries, which include ECCO, WSI, Med-Tech and BFI and
certain other subsidiaries which have insignificant assets and operations
(collectively, the "guarantors"). Financial information concerning the
Guarantors as of and for the years ended December 31, 2000, 1999 and 1998 is
presented below for purposes of complying with the reporting requirements of the
Guarantor Subsidiaries. The financial information concerning the Guarantors is
being presented through condensed consolidating financial statements since the
Company has more than minimal independent operations and the guarantees are full
and unconditional and are joint and several. Guarantor financial statements have
not been presented because management does not believe that such financial
statements are material to investors.
F-25
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2000
(IN THOUSANDS)
COMBINED
STERICYCLE AND
GUARANTOR GUARANTOR NON-GUARANTOR
STERICYCLE, INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------- ------------ -------------- ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents...... $ 1,408 $ 595 $ 2,003 $ 663 $ -- $ 2,666
Other current assets........... 78,193 12,220 90,413 7,113 (9,181) 88,345
-------- ------- -------- ------- -------- --------
Total current assets..... 79,601 12,815 92,416 7,776 (9,181) 91,011
Property, plant and equipment,
net............................ 60,165 242 60,407 13,501 -- 73,908
Goodwill, net.................... 377,178 29,384 406,562 12,228 -- 418,790
Investment in subsidiaries....... 63,306 3,308 66,614 -- (66,614) --
Other assets..................... 19,234 6,582 25,816 124 (11,667) 14,273
-------- ------- -------- ------- -------- --------
Total assets............. $599,484 $52,331 $651,815 $33,629 $(87,462) $597,982
======== ======= ======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt......................... $ 4,035 $ -- $ 4,035 $ 1,062 $ -- $ 5,097
Other current liabilities...... 43,175 1,233 44,408 2,793 (9,185) 38,016
-------- ------- -------- ------- -------- --------
Total current
liabilities............ 47,210 1,233 48,443 3,855 (9,185) 43,113
Long-term debt, net of current
portion........................ 344,142 -- 344,142 12,585 (11,623) 345,104
Other liabilities................ 1,995 -- 1,995 1,633 -- 3,628
Convertible preferred stock...... 71,437 -- 71,437 -- -- 71,437
Common shareholders' equity...... 134,700 51,098 185,798 15,556 (66,654) 134,700
-------- ------- -------- ------- -------- --------
Total liabilities and
shareholders' equity... $599,484 $52,331 $651,815 $33,629 $(87,462) $597,982
======== ======= ======== ======= ======== ========
F-26
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
(IN THOUSANDS)
COMBINED
STERICYCLE AND
GUARANTOR GUARANTOR NON-GUARANTOR
STERICYCLE, INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------- ------------ -------------- ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents...... $ 18,808 $ 246 $ 19,054 $ 290 $ -- $ 19,344
Other current assets........... 52,928 8,840 61,768 4,648 (8,220) 58,196
-------- -------- ---------- ------- --------- --------
Total current assets..... 71,736 9,086 80,822 4,938 (8,220) 77,540
Property, plant and equipment,
net............................ 15,029 49,932 64,961 10,151 -- 75,112
Goodwill, net.................... 40,920 369,914 410,834 10,167 -- 421,001
Investment in subsidiaries....... 441,423 3,627 445,050 -- (445,050) --
Other assets..................... 17,817 13,617 31,434 3,675 (12,976) 22,133
-------- -------- ---------- ------- --------- --------
Total asset.............. $586,925 $446,176 $1,033,101 $28,931 $(466,246) $595,786
======== ======== ========== ======= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt......................... $ 3,954 $ 892 $ 4,846 $ 895 $ -- $ 5,741
Other current liabilities...... 43,517 5,084 48,601 4,677 (8,337) 44,941
-------- -------- ---------- ------- --------- --------
Total current
liabilities............ 47,471 5,976 53,447 5,572 (8,337) 50,682
Long-term debt, net of current
portion........................ 349,794 4,539 354,333 13,970 (12,859) 355,444
Other liabilities................ 2,351 -- 2,351 -- -- 2,351
Convertible preferred stock...... 69,195 -- 69,195 -- -- 69,195
Common shareholders' equity...... 118,114 435,661 553,775 9,389 (455,050) 118,114
-------- -------- ---------- ------- --------- --------
Total liabilities and
shareholders' equity... $586,925 $446,176 $1,033,101 $28,931 $(466,246) $595,786
======== ======== ========== ======= ========= ========
F-27
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS)
COMBINED
STERICYCLE AND NON-
GUARANTOR GUARANTOR GUARANTOR
STERICYCLE, INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------- ------------ -------------- ------------ ------------ ------------
Revenues........................ $135,981 $158,992 $294,973 $29,580 $ (831) $323,722
Cost of revenues................ 78,593 96,568 175,161 22,015 (831) 196,345
Selling, general and
administrative expenses..... 34,419 19,695 54,114 5,343 -- 59,457
Acquisition related
expenses.................... 4,454 -- 4,454 -- -- 4,454
-------- -------- -------- ------- -------- --------
Total costs and
expenses.............. 117,466 116,263 233,729 27,358 (831) 260,256
-------- -------- -------- ------- -------- --------
Income from operations.......... 18,515 42,729 61,244 2,222 -- 63,466
Equity in net income (loss) of
subsidiaries.................. 28,001 (1,025) 26,976 -- (26,976) --
Other (expense) income, net..... (38,329) 483 (37,846) (1,804) -- (39,650)
-------- -------- -------- ------- -------- --------
Income before income taxes...... 8,187 42,187 50,374 418 (26,976) 23,816
Income tax expense (benefit).... (6,324) 15,462 9,138 167 -- 9,305
-------- -------- -------- ------- -------- --------
Net income.............. $ 14,511 $ 26,725 $ 41,236 $ 251 $(26,976) $ 14,511
======== ======== ======== ======= ======== ========
CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
COMBINED
STERICYCLE AND NON-
GUARANTOR GUARANTOR GUARANTOR
STERICYCLE, INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------- ------------ -------------- ------------ ------------ ------------
Revenues........................ $ 61,069 $46,618 $107,687 $25,533 $ (372) $132,848
Cost of revenues................ 38,455 28,892 67,347 19,086 (310) 86,123
Selling, general and
administrative expenses..... 15,478 6,306 21,784 4,931 (235) 26,480
Acquisition related
expenses.................... 7,961 -- 7,961 -- -- 7,961
-------- ------- -------- ------- ------- --------
Total costs and
expenses.............. 61,894 35,198 97,092 24,017 (545) 120,564
-------- ------- -------- ------- ------- --------
Income (loss) from operations... (825) 11,420 10,595 1,516 173 12,284
Equity in net income (loss) of
subsidiaries.................. 8,675 119 8,794 -- (8,794) --
Other (expense) income, net..... (3,934) 778 (3,156) (1,157) (173) (4,486)
-------- ------- -------- ------- ------- --------
Income before income taxes...... 3,196 12,317 16,233 359 (8,794) 7,798
Income tax expense (benefit).... (10,052) 3,882 (6,170) -- -- (6,170)
-------- ------- -------- ------- ------- --------
Net income.............. $ 13,968 $ 8,435 $ 22,403 $ 359 $(8,794) $ 13,968
======== ======= ======== ======= ======= ========
F-28
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
COMBINED
STERICYCLE AND NON-
GUARANTOR GUARANTOR GUARANTOR
STERICYCLE, INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------- ------------ -------------- ------------ ------------ ------------
Revenues.......................... $52,357 $9,598 $61,955 $4,726 $ -- $66,681
Cost of revenues.................. 35,194 6,334 41,528 3,800 -- 45,328
Selling, general and
administrative expenses....... 12,789 1,408 14,197 732 -- 14,929
------- ------ ------- ------ ------- -------
Total costs and
expenses................ 47,983 7,742 55,725 4,532 -- 60,257
------- ------ ------- ------ ------- -------
Income from operations............ 4,374 1,856 6,230 194 -- 6,424
Equity in net income (loss) of
subsidiaries.................... 2,081 (106) 1,975 -- (1,975) --
Other (expense) income, net....... (244) 144 (100) 37 -- (63)
------- ------ ------- ------ ------- -------
Income before income taxes........ 6,211 1,894 8,105 231 (1,975) 6,361
Income tax expense................ 498 150 648 -- -- 648
------- ------ ------- ------ ------- -------
Net income................ $ 5,713 $1,744 $ 7,457 $ 231 $(1,975) $ 5,713
======= ====== ======= ====== ======= =======
F-29
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
DECEMBER 31, 2000
(IN THOUSANDS)
COMBINED
STERICYCLE AND NON-
GUARANTOR GUARANTOR GUARANTOR
STERICYCLE, INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------- ------------ -------------- ------------ ------------ ------------
Cash flows from operating
activities:
Net cash provided by
operating activities.... $ 2,911 $ 4,801 $ 7,712 $ 2,757 $ -- $ 10,469
-------- ------- -------- ------- ----- --------
Cash flows from investing
activities:
Capital expenditures............ (8,816) (2,109) (10,925) (661) -- (11,586)
Payment for acquisitions and
international investments, net
of cash acquired.............. (3,044) (1,456) (4,500) (16) -- (4,516)
Proceeds from maturity of
short-term investments........ 502 -- 502 -- -- 502
-------- ------- -------- ------- ----- --------
Net cash used in investing
activities.............. (11,358) (3,565) (14,923) (677) -- (15,600)
-------- ------- -------- ------- ----- --------
Cash flows from financing
activities:
Net proceeds from bank line of
credit........................ 5,000 -- 5,000 -- -- 5,000
Principal payments on capital
lease obligations............. (309) (887) (1,196) (291) -- (1,487)
Repayment of long term debt..... (15,012) -- (15,012) (1,416) -- (16,428)
Payments of deferred financing
costs......................... (631) -- (631) -- -- (631)
Proceeds from issuance of common
stock......................... 2,299 -- 2,299 -- -- 2,299
Payments related to issuance of
preferred stock............... (300) -- (300) -- -- (300)
-------- ------- -------- ------- ----- --------
Net cash used in financing
activities.............. (8,953) (887) (9,840) (1,707) -- (11,547)
-------- ------- -------- ------- ----- --------
Net (decrease) increase in
cash and cash
equivalents............. $(17,400) $ 349 $(17,051) $ 373 $ -- (16,678)
======== ======= ======== ======= ===== ========
Cash and cash equivalents
at beginning of
period.................. 19,344
--------
Cash and cash equivalents
at end of period........ $ 2,666
========
F-30
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
DECEMBER 31, 1999
(IN THOUSANDS)
COMBINED
STERICYCLE AND NON-
GUARANTOR GUARANTOR GUARANTOR
STERICYCLE, INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------- ------------ -------------- ------------ ------------ ------------
Cash flows from operating
activities:
Net cash provided by
operating activities.... $ 4,951 $ 283 $ 5,234 $ 6,543 $ -- $ 11,777
--------- ----- --------- ------- ----- ---------
Cash flows from investing
activities:
Capital expenditures............ (2,534) (85) (2,619) (1,176) -- (3,795)
Payment for acquisitions and
international investments, net
of cash acquired.............. (418,280) -- (418,280) (4,000) -- (422,280)
Proceeds from maturity of
short-term investments........ 447 -- 447 -- 447
--------- ----- --------- ------- ----- ---------
Net cash used in investing
activities.............. (420,367) (85) (420,452) (5,176) -- (425,628)
--------- ----- --------- ------- ----- ---------
Cash flows from financing
activities:
Net proceeds from bank line of
credit........................ (16,359) -- (16,359) -- -- (16,359)
Repayment of long term debt..... (3,884) -- (3,884) (482) -- (4,366)
Principal payments on capital
lease obligations............. (50) (125) (175) (115) -- (290)
Proceeds from long term debt.... 350,000 -- 350,000 -- -- 350,000
Net payments on subordinated
debt.......................... (2,750) -- (2,750) -- -- (2,750)
Payment of deferred financing
costs......................... (10,828) -- (10,828) -- -- (10,828)
Net proceeds from common stock
offering...................... 47,158 -- 47,158 -- -- 47,158
Proceeds from issuance of
preferred stock............... 68,855 -- 68,855 -- -- 68,855
Proceeds from other issuances of
common stock.................. 492 -- 492 -- -- 492
--------- ----- --------- ------- ----- ---------
Net cash provided by (used
in) financing
activities.............. 432,634 (125) 432,509 (597) -- 431,912
--------- ----- --------- ------- ----- ---------
Net increase in cash and
cash equivalents........ $ 17,218 $ 73 $ 17,291 $ 770 $ -- 18,061
========= ===== ========= ======= ===== ---------
Cash and cash equivalents
at beginning of
period.................. 1,283
---------
Cash and cash equivalents
at end of period........ $ 19,344
=========
F-31
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
DECEMBER 31, 1998
(IN THOUSANDS)
COMBINED
STERICYCLE AND NON-
GUARANTOR GUARANTOR GUARANTOR
STERICYCLE, INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------- ------------ -------------- ------------ ------------ ------------
Cash flows from operating
activities:
Net cash provided by
operating activities.... $ 3,749 $ 278 $ 4,027 $ 835 $ -- $ 4,862
-------- ----- -------- ----- ----- --------
Cash flows from investing
activities:
Capital expenditures............ (3,629) (271) (3,900) (442) -- (4,342)
Payment for acquisitions and
international investments, net
of cash acquired.............. (19,775) -- (19,775) -- -- (19,775)
Proceeds of short-term
investments................... (41) -- (41) -- -- (41)
Proceeds from sale of
property...................... 395 10 405 -- -- 405
-------- ----- -------- ----- ----- --------
Net cash used in investing
activities.............. (23,050) (261) (23,311) (442) -- (23,753)
-------- ----- -------- ----- ----- --------
Cash flows from financing
activities:
Net proceeds from bank line of
credit........................ 16,589 -- 16,589 (203) -- 16,386
Repayment of long term debt..... (2,513) (6) (2,519) (670) -- (3,189)
Principal payments on capital
lease obligations............. (1,273) -- (1,273) -- -- (1,273)
Proceeds from subordinated
debt.......................... 2,750 -- 2,750 -- -- 2,750
Payment of deferred financing
costs......................... (218) -- (218) -- -- (218)
Proceeds from issuance of common
stock offering................ 344 -- 344 -- -- 344
-------- ----- -------- ----- ----- --------
Net cash provided by (used
in) financing
activities.............. 15,679 (6) 15,673 (873) -- 14,800
-------- ----- -------- ----- ----- --------
Net (decrease) increase in
cash and cash
equivalents............. $ (3,622) $ 11 $ (3,611) $(480) $ -- (4,091)
======== ===== ======== ===== ===== --------
Cash and cash equivalents
at beginning of
period.................. 5,374
--------
Cash and cash equivalents
at end of period........ $ 1,283
========
F-32
SCHEDULE II -- VALUATION AND ALLOWANCE ACCOUNTS
(IN THOUSANDS)
BALANCE BALANCE
DECEMBER 31, CHARGES OTHER WRITE-OFFS/ DECEMBER 31,
1997 TO EXPENSE CHARGES(1) PAYMENTS 1998
------------ ---------- ---------- ----------- ------------
Allowance for doubtful accounts................. $ 361 $ 642 $ 574 $ (676) $ 901
Deferred tax valuation allowance................ 14,582 4,899 -- -- 19,481
BALANCE BALANCE
DECEMBER 31, CHARGES OTHER WRITE-OFFS/ DECEMBER 31,
1998 TO EXPENSE CHARGES(1) PAYMENTS 1999
------------ ---------- ---------- ----------- ------------
Allowance for doubtful accounts................. $ 901 $ 842 $ 202 $ (965) $ 980
Accrued severance and closure costs............. -- 3,373 -- (210) 3,163
Accrued transitions expenses.................... -- 1,659 -- (650) 1,009
Deferred tax valuation allowance................ 19,481 (9,894) -- -- 9,587
BALANCE BALANCE
DECEMBER 31, CHARGES OTHER WRITE-OFFS/ DECEMBER 31,
1999 TO EXPENSE CHARGES(1) PAYMENTS 2000
------------ ---------- ---------- ----------- ------------
Allowance for doubtful accounts................. $ 980 $ 1,552 $1,996 $ (903) $ 3,625
Accrued severance and closure costs............. 3,163 3,351 -- (5,390) 1,124
Accrued transition expenses..................... 1,009 1,103 -- (2,112) --
Deferred tax valuation allowance................ 9,857 (999) -- -- 8,588
---------------
(1) Amounts consist primarily of costs assumed from acquired companies recorded
prior to the date of acquisition.
All schedules other than Schedule II -- Valuation and Allowance Accounts,
set forth above, are omitted as the required information is inapplicable or is
presented in the consolidated financial statements or the related notes.
F-33
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2001
----------------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT SHARE AND
PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,164
Short-term investments.................................... 319
Accounts receivable, less allowance for doubtful accounts
of $3,810............................................... 68,049
Parts and supplies........................................ 3,999
Prepaid expenses.......................................... 2,099
Other..................................................... 12,368
--------
Total current assets............................... 89,998
--------
Property, plant and equipment:
Land...................................................... 7,486
Building and improvements................................. 27,090
Machinery and equipment................................... 54,473
Office equipment and furniture............................ 7,043
Construction in progress.................................. 10,754
--------
106,846
Less accumulated depreciation............................. (29,720)
--------
Property, plant and equipment, net................. 77,126
--------
Other assets:
Goodwill, less accumulated amortization of $32,073........ 412,774
Other..................................................... 15,987
--------
Total other assets................................. 428,761
--------
Total assets....................................... $595,885
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt......................... $ 6,942
Accounts payable.......................................... 10,052
Due to seller............................................. 1,474
Accrued compensation...................................... 4,965
Accrued acquisition related expenses...................... 911
Accrued liabilities....................................... 21,683
Deferred revenue.......................................... 797
--------
Total current liabilities.......................... 46,824
--------
Long-term debt, net of current portion...................... 328,562
Other liabilities........................................... 3,240
Redeemable preferred stock
Series A convertible preferred stock (par value $.01
share, 100,000 shares authorized, 74,625 outstanding,
liquidation preference of $78,784)...................... 72,339
Common shareholders' equity
Common stock (par value $.01 per share, 30,000,000 shares
authorized, 15,483,640 issued and outstanding).......... 155
Additional paid-in capital................................ 144,279
Accumulated other comprehensive loss on derivative
instruments............................................. (2,027)
Retained earnings......................................... 2,513
--------
Total shareholders' equity......................... 144,920
--------
Total liabilities and shareholders' equity......... $595,885
========
F-34
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------
2001 2000
------------ ------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
(UNAUDITED)
Revenues.................................................... $ 174,384 $ 157,225
Costs and expenses:
Cost of revenues.......................................... 105,119 95,618
Selling, general and administrative expenses.............. 32,078 29,210
Acquisition related costs................................. 327 1,407
----------- -----------
Total costs and expenses.......................... 137,524 126,235
----------- -----------
Income from operations...................................... 36,860 30,990
----------- -----------
Other income (expense):
Interest income........................................... 180 308
Interest expense.......................................... (18,456) (19,810)
Other income.............................................. (726) (28)
----------- -----------
Total other income (expense)...................... (19,002) (19,530)
----------- -----------
Income before income taxes.................................. 17,858 11,460
Income tax expense.......................................... 7,247 4,601
----------- -----------
Net income........................................ $ 10,611 $ 6,859
=========== ===========
Earnings per share -- basic....................... $ 0.61 $ 0.38
=========== ===========
Earnings per share -- diluted..................... $ 0.51 $ 0.35
=========== ===========
Weighted average number of common shares
outstanding -- basic............................ 15,323,297 14,784,264
=========== ===========
Weighted average number of common shares
outstanding -- diluted.......................... 20,729,704 19,824,059
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-35
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS
ENDED JUNE 30
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
(UNAUDITED)
OPERATING ACTIVITIES:
Net income.................................................. $ 10,611 $ 6,859
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
FAS 133 ineffective portion of cash flow hedges........... 13 --
Stock compensation expense................................ 82 80
Depreciation and amortization............................. 12,323 11,612
Changes in operating assets and liabilities, net of effect
of acquisitions:
Accounts receivable....................................... 3,152 (10,023)
Parts and supplies........................................ (783) (1,039)
Prepaid expenses.......................................... (241) (1,144)
Other assets.............................................. (1,629) 1,221
Accounts payable.......................................... (4,392) (2,821)
Accrued liabilities....................................... 3,877 (5,488)
Deferred revenue.......................................... 292 97
-------- --------
Net cash provided by (used in) operating
activities....................................... 23,305 (646)
-------- --------
INVESTING ACTIVITIES:
Payments for acquisitions and international investments, net
of cash acquired.......................................... (3,957) (1,624)
Short term investments...................................... (38) 237
Capital expenditures........................................ (6,619) (3,550)
-------- --------
Net cash used in investing activities............. (10,614) (4,937)
-------- --------
FINANCING ACTIVITIES:
Repayment of long term debt................................. (8,901) (15,129)
Net proceeds and repayments on line of credit............... (5,000) 6,700
Payments of deferred financing costs........................ -- (522)
Principal payments on capital lease obligations............. (796) (965)
Proceeds from issuance of common stock...................... 2,504 768
-------- --------
Net cash used in financing activities....................... (12,193) (9,148)
-------- --------
Net increase (decrease) in cash and cash equivalents........ 498 (14,731)
Cash and cash equivalents at beginning of
period...................................................... 2,666 19,344
-------- --------
Cash and cash equivalents at end of period........ $ 3,164 $ 4,613
======== ========
The accompanying notes are an integral part of these financial statements.
F-36
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
Unless the context requires otherwise, "we," "us" or "our" refers to
Stericycle, Inc. and its subsidiaries on a consolidated basis.
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
annual consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations; but we believe the disclosures in the accompanying
condensed consolidated financial statements are adequate to make the information
presented not misleading. In our opinion, all adjustments necessary for a fair
presentation for the periods presented have been reflected and are of a normal
recurring nature. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
for the year ended December 31, 2000, as included herein. The results of
operations for the six-month period ended June 30, 2001 are not necessarily
indicative of the results that may be achieved for the entire year ending
December 31, 2001.
NOTE 2 -- STOCK OPTIONS
During the six months ended June 30, 2001, options to purchase 516,767
shares of common stock were granted to employees. These options vest ratably
over a five year period and have an exercise price ranging from $28.63-$45.92
per share.
NOTE 3 -- STOCK ISSUANCES
During the six months ending June 30, 2001, options to purchase 215,726
shares of common stock were exercised at prices ranging from $0.53-$22.50 per
share. In addition, warrants with rights to purchase 56,538 shares of common
stock were exercised at a prices ranging from $7.96-$16.50 per share.
NOTE 4 -- INCOME TAXES
At June 30, 2001, we had net operating loss carryforwards for federal
income tax purposes of approximately $7.5 million (excluding 3CI and Med-Tech)
which expire beginning in 2006.
NOTE 5 -- DERIVATIVE INSTRUMENTS
We have entered into interest rate swap agreements that effectively convert
a portion of our floating-rate debt to a fixed-rate basis for the next 2 years,
thus reducing the impact of interest rate changes on future interest expense. In
addition during the year ended December 31, 2000, we entered into an interest
rate collar agreement reducing the impact of interest rate changes on future
interest expense. This agreement expires in March 2002. Approximately 85% ($175
million) of our outstanding floating-rate debt was designated as hedged items to
interest rate swap/collar agreements at June 30, 2001. The differential to be
paid or received is accrued monthly as an adjustment to interest expense.
We adopted SFAS 133 on January 1, 2001 which requires us to adjust
instruments that are designated and qualify as cash flow hedges. The effective
portion of the gain or loss on the derivative instrument is recognized as a
component of other comprehensive income (loss) and is reclassified into earnings
in the same period during which the hedged transaction affects earnings. The
remaining gain or loss in excess of the cumulative change in the present value
of future cash flows of the hedged item, if any, is recognized in current
earnings during the period of change.
F-37
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Adoption of this new accounting standard resulted in a $0.2 million effect of
change in accounting principle, which has been recorded as other comprehensive
loss. During the six months ended June 30, 2001, we recognized a net loss of
$0.1 million related to the ineffective portion of our hedging instruments.
Activity related to the accumulated loss on derivative instruments is as
follows:
Balance at January 1, 2001.................................. $ 0
Initial adoption of FAS 133................................. (225)
Change associated with current period hedge transactions.... (1,895)
Amount reclassified into earnings........................... 93
-------
Balance at June 30, 2001.................................... $(2,027)
=======
Included in the balance at June 30, 2001 is $0.6 million related to the
interest rate collar which is expected to be reclassified into earnings during
the 12 months ended June 30, 2002.
NOTE 6 -- COMPREHENSIVE INCOME
Total comprehensive income was $8.6 million for the six months ended June
30, 2001. The components of comprehensive income are net income and the change
in cumulative unrealized losses on derivative instruments recorded in accordance
with FAS 133.
NOTE 7 -- ADOPTION OF NEW ACCOUNTING STANDARD
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill will no longer be amortized but
will be subject to annual impairment tests in accordance with the Statements.
Other intangible assets will continue to be amortized over their useful lives.
We will apply the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the Statement is expected to result in an increase
in net income of $8.5 million ($0.40 per diluted share) per year. During 2002,
we will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002 and have not yet
determined what the effect of these tests will be on our earnings and financial
position.
F-38
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net
income per share (in thousands, except share and per share data):
SIX MONTHS ENDED JUNE 30,
-------------------------
2001 2000
----------- -----------
Numerator:
Net income................................................ $ 10,611 $ 6,859
Preferred stock dividends................................. (1,294) (1,292)
----------- -----------
Numerator for basic earnings per share.................... $ 9,317 $ 5,567
Effect of dilutive securities:
Preferred stock dividends.............................. 1,294 1,292
----------- -----------
Numerator for diluted earnings per share income available
to common stockholders after assumed conversions....... $ 10,611 $ 6,859
=========== ===========
Denominator:
Denominator for basic earnings per share
Weighted average shares................................... 15,323,297 14,784,264
Effect of dilutive securities:
Employee stock options................................. 847,291 546,645
Warrants............................................... 93,871 133,578
Convertible preferred stock............................ 4,465,245 4,359,572
----------- -----------
Dilutive potential common shares.......................... 5,406,407 5,039,795
----------- -----------
Denominator for diluted earnings per share adjusted
weighted average shares and assumed conversions........ 20,729,704 19,824,059
=========== ===========
Earnings per share -- Basic................................. $ 0.61 $ 0.38
=========== ===========
Earnings per share -- Diluted............................... $ 0.51 $ 0.35
=========== ===========
NOTE 9 -- CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Payments under the Company's senior subordinated notes are unconditionally
guaranteed, jointly and severally, by all of the Company's wholly-owned domestic
subsidiaries, which include Environmental Control Company, Inc., acquired in May
1997, Waste Systems, Inc., acquired October 1, 1998, Med-Tech Environmental,
Inc., acquired December 31, 1998, BFI Medical Waste, Inc., acquired on November
12, 1999, and certain other subsidiaries which have insignificant assets and
operations (collectively, "the guarantors"). Financial information concerning
the guarantors as of June 30, 2001 and for the six month periods ended June 30,
2001 and 2000 is presented below for purposes of complying with the reporting
requirements of the guarantor subsidiaries. The financial information concerning
the guarantors is being presented through condensed consolidating financial
statements since we have more than minimal independent operations and the
guarantees are full and unconditional and are joint and several. Financial
statements for the guarantors have not been presented because management does
not believe that such financial statements are material to investors.
F-39
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2001
(IN THOUSANDS)
(UNAUDITED)
COMBINED
STERICYCLE AND NON-
GUARANTOR GUARANTOR GUARANTOR
STERICYCLE, INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------- ------------ -------------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents... $ 1,515 $ 322 $ 1,837 $ 1,327 $ -- $ 3,164
Other current assets........ 76,547 16,708 93,255 7,670 (14,091) 86,834
-------- ------- -------- ------- -------- --------
Total current
assets.............. 78,062 17,030 95,092 8,997 (14,091) $ 89,998
Property, plant and equipment,
net......................... 64,349 309 64,658 12,468 -- 77,126
Goodwill, net................. 391,975 8,604 400,579 12,195 -- 412,774
Investment in subsidiaries.... 46,786 3,608 50,394 -- (50,394) --
Other assets.................. 21,407 5,797 27,204 (54) (11,163) 15,987
-------- ------- -------- ------- -------- --------
Total assets.......... $602,579 $35,348 $637,927 $33,606 $(75,648) $595,885
======== ======= ======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt...................... $ 5,984 $ -- $ 5,984 $ 958 $ -- $ 6,942
Other current liabilities... 49,103 1,085 50,188 3,785 (14,091) 39,882
-------- ------- -------- ------- -------- --------
Total current
liabilities......... 55,087 1,085 56,172 4,743 (14,091) 46,824
Long-term debt, net of current
portion..................... 328,130 -- 328,130 11,379 (10,947) 328,562
Other liabilities............. 1,887 -- 1,887 1,353 -- 3,240
Convertible preferred stock... 72,339 -- 72,339 -- -- 72,339
Common shareholders' equity... 145,136 34,263 179,399 16,131 (50,610) 144,920
-------- ------- -------- ------- -------- --------
Total liabilities and
shareholders'
equity.............. $602,579 $35,348 $637,927 $33,606 $(75,648) $595,885
======== ======= ======== ======= ======== ========
F-40
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 2001
(IN THOUSANDS)
(UNAUDITED)
COMBINED
STERICYCLE AND NON-
GUARANTOR GUARANTOR GUARANTOR
STERICYCLE, INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------- ------------ -------------- ------------ ------------ ------------
Revenues.......................... $148,660 $8,690 $157,350 $17,699 $ (665) $174,384
Cost of revenues.................. 88,068 5,366 93,434 12,350 (665) 105,119
Selling, general and
administrative expense.......... 28,360 653 29,013 3,065 -- 32,078
Acquisition-related expenses...... 327 -- 327 -- -- 327
-------- ------ -------- ------- ------- --------
Total costs and
expenses................ 116,755 6,019 122,774 15,415 (655) 137,524
-------- ------ -------- ------- ------- --------
Income from operations............ 31,905 2,671 34,576 2,284 -- 36,860
Equity in net income (loss) of
subsidiaries.................... 3,689 1,073 4,762 -- (4,762) --
Other (expense) income,
net..................... (18,145) 314 (17,831) (1,171) -- (19,002)
-------- ------ -------- ------- ------- --------
Income (loss) before income
taxes........................... 17,449 4,058 21,507 1,113 (4,762) 17,858
Income tax expense (benefit)...... 6,838 220 7,058 189 -- 7,247
-------- ------ -------- ------- ------- --------
Net income................ $ 10,611 $3,838 $ 14,449 $ 924 $(4,762) $ 10,611
======== ====== ======== ======= ======= ========
CONDENSED CONSOLIDATING STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
(UNAUDITED)
COMBINED
STERICYCLE AND NON-
GUARANTOR GUARANTOR GUARANTOR
STERICYCLE, INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------- ------------ -------------- ------------ ------------ ------------
Revenues.......................... $ 30,547 $113,451 $143,998 $13,345 $ (118) $157,225
Cost of revenues.................. 17,423 68,421 85,844 9,892 (118) 95,618
Selling, general and
administrative expense.......... 12,416 14,460 26,876 2,334 -- 29,210
Acquisition related expenses...... 1,407 -- 1,407 -- -- 1,407
-------- -------- -------- ------- -------- --------
Total costs and
expenses................ 31,246 82,881 114,127 12,226 (118) 126,235
-------- -------- -------- ------- -------- --------
Income (loss) from operations..... (699) 30,570 29,871 1,119 -- 30,990
Equity in net income (loss) of
subsidiaries.................... 19,561 (251) 19,310 -- (19,310) --
Other (expense) income,
net..................... (18,873) 174 (18,699) (831) -- (19,530)
-------- -------- -------- ------- -------- --------
Income (loss) before income
taxes........................... (11) 30,493 30,482 288 (19,310) 11,460
Income tax expense (benefit)...... (6,870) 11,471 4,601 -- -- 4,601
-------- -------- -------- ------- -------- --------
Net income................ $ 6,859 $ 19,022 $ 25,881 $ 288 $(19,310) $ 6,859
======== ======== ======== ======= ======== ========
F-41
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
SIX MONTHS ENDED JUNE 30, 2001
(IN THOUSANDS)
(UNAUDITED)
COMBINED
STERICYCLE AND NON-
GUARANTOR GUARANTOR GUARANTOR
STERICYCLE, INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------- ------------ -------------- ------------ ------------ ------------
Cash flows from operating
activities:
Net cash (used in) provided by
operating activities.......... $ 21,525 $(120) $ 21,405 $1,900 $ -- $ 23,305
-------- ----- -------- ------ ---- --------
Cash flows from investing
activities:
Capital expenditures............ (5,864) (153) (6,017) (602) -- (6,619)
Payments for acquisitions and
international investments, net
of cash acquired.............. (3,957) -- (3,957) -- -- (3,957)
Proceeds from maturity of
short-term investments........ (38) -- (38) -- -- (38)
-------- ----- -------- ------ ---- --------
Net cash used in investing
activities.............. (9,859) (153) (10,012) (602) -- (10,614)
-------- ----- -------- ------ ---- --------
Cash flows from financing
activities:
Net proceeds from bank line of
credit........................ (5,000) -- (5,000) -- -- (5,000)
Principal payments on capital
lease obligations............. (796) -- (796) -- -- (796)
Repayment of long term debt..... (8,267) -- (8,267) (634) -- (8,901)
Payments of deferred financing
costs......................... -- -- -- -- -- --
Proceeds from issuance of common
stock......................... 2,504 -- 2,504 -- -- 2,504
-------- ----- -------- ------ ---- --------
Net cash used in financing
activities.............. (11,559) -- (11,559) (634) -- (12,193)
-------- ----- -------- ------ ---- --------
Net (decrease) increase in
cash and cash
equivalents............. $ 107 $(273) $ (166) $ 664 $ -- 498
======== ===== ======== ====== ==== --------
Cash and cash equivalents
at beginning of
period.................. 2,666
--------
Cash and cash equivalents
at end of period........ $ 3,164
========
F-42
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
(UNAUDITED)
COMBINED
STERICYCLE AND NON-
GUARANTOR GUARANTOR GUARANTOR
STERICYCLE, INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------- ------------ -------------- ------------ ------------ ------------
Cash flows from operating
activities:
Net cash (used in) provided by
operating activities.......... $ (4,335) $ 2,982 $ (1,353) $ 707 $ -- $ (646)
-------- ------- -------- ----- ---- --------
Cash flows from investing
activities:
Capital expenditures............ (1,853) (1,446) (3,299) (251) -- (3,550)
Payments for acquisitions and
international investments, net
of cash acquired.............. (642) (982) (1,624) -- -- (1,624)
Proceeds from maturity of
short-term investments........ 237 -- 237 -- -- 237
-------- ------- -------- ----- ---- --------
Net cash used in investing
activities.............. (2,258) (2,428) (4,686) (251) -- (4,937)
-------- ------- -------- ----- ---- --------
Cash flows from financing
activities:
Net proceeds from bank line of
credit........................ 6,700 -- 6,700 -- -- 6,700
Principal payments on capital
lease obligations............. (84) (632) (716) (249) -- (965)
Repayment of long term debt..... (15,161) -- (15,161) 32 -- (15,129)
Payments of deferred financing
costs......................... (522) -- (522) -- -- (522)
Proceeds from issuance of common
stock......................... 768 -- 768 -- -- 768
-------- ------- -------- ----- ---- --------
Net cash used in financing
activities.............. (8,299) (632) (8,931) (217) -- (9,148)
-------- ------- -------- ----- ---- --------
Net (decrease) increase in
cash and cash
equivalents............. $(14,892) $ (78) $(14,970) $ 239 $ -- (14,731)
======== ======= ======== ===== ==== --------
Cash and cash equivalents
at beginning of
period.................. 19,344
--------
Cash and cash equivalents
at end of period........ $ 4,613
========
F-43
[STERICYCLE LOGO]
The Stericycle System
1. [Photo] 2. [Photo]
Stericycle helps healthcare Our team of drivers not only picks
providers protect patients and up medical waste from customers,
employees from the potential but also participates in the
hazards of medical waste with marketing and sales effort by
appropriate disposal receptacles, actively soliciting small accounts
such as this puncture-resistant, while they service their routes.
leak-proof Steri-Tub(R)
collection container.
3. [Photo] 4. [Photo]
After transporting the waste to a After treatment, the waste has now
processing facility, Stericycle been rendered noninfectious and
treats the waste in a variety of unrecognizable. The treated waste
ways. In this case it is being can now be recycled, used to
treated using Stericycle's provide energy, or sent to a
patented electro-thermal third-party owned landfill.
deactivation (ETD) process.
Ancillary Services and Products
[Photo] [Photo]
Stericycle's Steri-Safe(SM) program Stericycle also offers other products
helps clients develop internal and services such as a "mail-back"
systems and processes to maintain service through which they can reach
compliance with OSHA and other small account customers located in
relevant regulations. outlying areas that would be
inefficient to serve using their
regular route structure.
Stericycle LOGO
PART II
INFORMATION NOT REQUIRED IN THE REGISTRATION STATEMENT
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table shows various costs and expenses in connection with the
sale and distribution of the securities being registered (other than
underwriting discounts and commissions). All amounts shown are estimates except
the Securities and Exchange Commission registration fee, The Nasdaq National
Market listing fees and the NASD registration fee. We will pay all of these
expenses:
SEC registration fees....................................... $ 35,381.48
Nasdaq National Market listing fees......................... 17,500.00
NASD registration fee....................................... 19,152.59
Legal fees and expenses..................................... 275,000.00
Accounting fees and expenses................................ 125,000.00
Printing expenses........................................... 50,000.00
Miscellaneous............................................... 27,965.93
-----------
Total............................................. $550,000.00
===========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides generally that
a person sued as a director, officer, employee or agent of a corporation may be
indemnified by the corporation in non-derivative suits for expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement if he or she
acted in good faith and in a manner that he or she reasonably believed to be in
or not opposed to the corporation's best interests. In the case of criminal
actions and proceedings, the person also must not have had reasonable cause to
believe that his or her conduct was unlawful. Indemnification of expenses is
also authorized in stockholder derivative actions if the person acted in good
faith and in a manner that he or she reasonably believed to be in or not opposed
to the corporation's best interests and if he or she has not been found liable
to the corporation. Even in this latter instance, the court may determine that,
in view of all the circumstances, the person is entitled to indemnification for
such expenses as the court deems proper. A person sued as a director, officer,
employee or agent of a corporation who has been successful in defense of the
action must be indemnified by the corporation against expenses.
Article Fifth of our bylaws requires us to indemnify our directors,
officers, employees and agents to the maximum extent permitted by Delaware law.
Article Fifth also requires us to advance the litigation expenses of a director
or officer upon receipt of his or her written undertaking to repay all amounts
advanced if it is ultimately determined that he or she is not entitled to
indemnification.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to include a provision in its certificate of incorporation
eliminating or limiting the personal liability of a director to the corporation
or its stockholders for monetary damages for a breach of the director's
fiduciary duty of care. The provision may not eliminate or limit the liability
of a director for breaching his or her duty of loyalty, failing to act in good
faith, engaging in intentional misconduct or knowingly violating a law,
declaring an illegal dividend or approving an illegal stock repurchase, or
obtaining an improper personal benefit.
Article Ninth of our amended and restated certificate of incorporation
eliminates the personal liability of our directors to the fullest extent
permitted by Section 102(b)(7).
By reason of directors' and officers' liability insurance that we maintain,
our directors and officers are insured against actual liabilities, including
liabilities under the federal securities laws, for acts or omissions related to
the conduct of their duties.
II-1
ITEM 16. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1* -- Form of underwriting agreement
5.1* -- Form of opinion of Johnson and Colmar
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of Johnson and Colmar (filed as part of Exhibit
5.1)
24.1 -- Power of attorney (included under the caption "Power of
Attorney" in Part II of this Registration Statement)
---------------
* Previously filed
ITEM 17. UNDERTAKINGS
Filings Incorporating Subsequent Exchange Act Documents by Reference
The registrant undertakes that, for purposes of determining any liability
under the Securities Act, each filing of the registrant's annual report pursuant
to Section 13(a) or Section 15(d) of the Exchange Act which is incorporated by
reference in this registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Registration Statement Permitted by Rule 430A
The registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time that it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Request for Acceleration of Effective Date
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant as described in Item 15, or otherwise, the registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 4 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
Village of Lake Forest, State of Illinois, on November 2, 2001.
STERICYCLE, INC.
By /s/ MARK C. MILLER
-----------------------------------
Mark C. Miller
President and Chief Executive
Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
* Chairman of the Board of November 2, 2001
----------------------------------------------------- Directors
Jack W. Schuler
/s/ MARK C. MILLER President, Chief Executive November 2, 2001
----------------------------------------------------- Officer and a Director
Mark C. Miller (Principal Executive
Officer)
* Chief Financial Officer November 2, 2001
----------------------------------------------------- (Principal Finance and
Frank J.M. ten Brink Accounting Officer)
* Director November 2, 2001
-----------------------------------------------------
John P. Connaughton
* Director November 2, 2001
-----------------------------------------------------
Rod F. Dammeyer
* Director November 2, 2001
-----------------------------------------------------
Patrick F. Graham
* Director November 2, 2001
-----------------------------------------------------
John Patience
* Director November 2, 2001
-----------------------------------------------------
Thomas R. Reusche
* Director November 2, 2001
-----------------------------------------------------
Peter Vardy
* Director November 2, 2001
-----------------------------------------------------
L. John Wilkerson, Ph.D.
*By /s/ MARK C. MILLER
-------------------------------------------------
Mark C. Miller
Attorney-in-fact
II-3
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1* -- Form of underwriting agreement
5.1* -- Form of opinion of Johnson and Colmar
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of Johnson and Colmar (filed as part of Exhibit
5.1)
24.1 -- Power of attorney (included under the caption "Power of
Attorney" in Part II of this Registration Statement)
---------------
* Previously filed
EX-23.1
3
c64701a4ex23-1.txt
CONSENT OF ERNST & YOUNG LLP
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
February 23, 2001, in Amendment No. 4 to the Registration Statement (Form S-3)
and related Prospectus of Stericycle, Inc. dated November 2, 2001.
/s/ Ernst & Young LLP
Chicago, Illinois
November 2, 2001
EX-23.2
4
c64701a4ex23-2.txt
CONSENT OF ARTHUR ANDERSEN LLP
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report on the statements of
directly identifiable assets and liabilities of the Medical Waste Business of
Browning-Ferris Industries, Inc. (BFI Medical Waste) and the related
statements of revenues and direct expenses of BFI Medical Waste dated July 30,
1999, included in Stericycle, Inc.'s Form 8-K/A dated December 29, 1999, and to
all references to our Firm included in this registration statement.
Arthur Andersen LLP
Chicago, Illinois
November 2, 2001