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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Period Ended September 30, 1998.
Commission file number: 0-21229
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STERICYCLE, INC.
(exact name of registrant as specified in its charter)
DELAWARE 36-3640402
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1419 LAKE COOK ROAD, SUITE 410
DEERFIELD, ILLINOIS 60015
(Address of principal executive offices) (Zip Code)
(847) 945-6550
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of October 31, 1998 there were 10,865,822 shares of the Registrant's
Common Stock outstanding.
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STERICYCLE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
-----
Item 1. Condensed Consolidated Financial Statements of Stericycle, Inc.
And Subsidiaries
Condensed Consolidated Balance Sheets
September 30, 1998 (unaudited) and December 31, 1997....................... 1
Condensed Consolidated Statements of Operations (unaudited)
Three months ended September 30, 1998 and 1997
Nine months ended September 30, 1998 and 1997.............................. 2
Condensed Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 1998 and 1997.............................. 3
Notes to Condensed Consolidated Financial Statements........................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 10-K.............................................. 10
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STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 775 $ 5,374
Short-term investments 2,335 2,335
Accounts receivable, less allowance for doubtful
accounts of $325 in 1998 and $361 in 1997 10,902 10,286
Parts and supplies 1,037 660
Prepaid expenses 528 440
Other 2,087 392
-------- --------
Total current assets 17,664 19,487
-------- --------
Property, plant and equipment:
Land 90 90
Buildings and improvements 5,753 5,561
Machinery and equipment 13,051 11,469
Office equipment and furniture 1,030 746
Construction in progress 988 614
-------- --------
20,912 18,480
Less accumulated depreciation (8,869) (7,239)
-------- --------
Property, plant and equipment, net 12,043 11,241
-------- --------
Other assets:
Goodwill, less accumulated amortization of $3,052
in 1998 and $2,040 in 1997 36,796 29,458
Other 1,680 1,040
-------- --------
Total other assets 38,476 30,498
-------- --------
Total assets $ 68,183 $ 61,226
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 6,281 $ 3,052
Accounts payable 1,986 1,927
Accrued liabilities 5,436 7,039
Deferred revenue 663 255
-------- --------
Total current liabilities 14,366 12,273
-------- --------
Long-term debt:
Industrial development revenue bonds and other 1,341 1,405
Note payable 1,905 2,070
-------- --------
Total long term debt 3,246 3,475
Other liabilities 21 452
Shareholders' equity:
Common stock (par value $.01 per share, 30,000,000
shares authorized, 10,741,603 issued and outstanding
in 1998, 10,472,799 issued and outstanding in 1997) 107 105
Additional paid-in capital 85,087 82,986
Notes receivable for common stock purchases (4) (4)
Accumulated deficit (34,640) (38,061)
-------- --------
Total shareholders' equity 50,550 45,026
-------- --------
Total liabilities and shareholders' equity $ 68,183 $ 61,226
======== ========
The accompanying notes are an integral part of these financial statements.
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STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(unaudited)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenues $ 16,741 $ 12,659 $ 44,759 $ 33,475
Costs and expenses:
Cost of revenues 10,863 9,007 30,492 25,113
Selling, general and administrative 3,793 3,122 10,151 7,725
------------ ------------ ------------ ------------
Total costs and expenses 14,656 12,129 40,643 32,838
------------ ------------ ------------ ------------
Income from operations 2,085 530 4,116 637
Other income (expense)
Interest income 69 131 308 528
Other income 20 0 20 0
Interest expense (118) (121) (242) (336)
------------ ------------ ------------ ------------
Total other income (expense) (29) 10 86 192
------------ ------------ ------------ ------------
Income before income taxes 2,056 540 4,202 829
Income tax expense 503 11 781 18
------------ ------------ ------------ ------------
Net income $ 1,553 $ 529 $ 3,421 $ 811
============ ============ ============ ============
Earnings per share - Basic $ 0.15 $ 0.05 $ 0.32 $ 0.08
============ ============ ============ ============
Weighted average number of
common shares outstanding - Basic 10,694,683 10,360,219 10,579,886 9,999,026
============ ============ ============ ============
Earnings per share - Diluted $ 0.14 $ 0.05 $ 0.30 $ 0.08
============ ============ ============ ============
Weighted average number of
common shares outstanding - Diluted 11,364,524 10,839,436 11,233,812 10,480,182
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
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STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
-------------------------
OPERATING ACTIVITIES:
Net income $ 3,421 $ 811
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,694 2,489
Change in operating assets and liabilities,net of effect of acquisitions
Accounts receivable (541) (4,315)
Parts and supplies (365) (109)
Prepaid expenses (88) 246
Other assets (1,632) 35
Accounts payable 59 (546)
Accrued liabilities (2,179) 2,106
Deferred revenue (23) (181)
-------- --------
Net cash provided by operating activities 1,346 536
-------- --------
INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired (7,130) (5,704)
Proceeds from maturity of short-term investments -- 5,799
Purchases of short-term investments -- (2,335)
Capital expenditures (1,825) (1,124)
-------- --------
Net cash used in investing activities (8,955) (3,364)
-------- --------
FINANCING ACTIVITIES:
Proceeds from line of credit 4,075 --
Repayment of long term debt (1,244) (936)
Principal payments on capital lease obligations (116) (246)
Principal payments on notes receivable for common stock purchases -- 4
Proceeds from issuance of common stock 295 37
-------- --------
Net cash provided by (used in) financing activities 3,010 (1,141)
-------- --------
Net decrease in cash and cash equivalents (4,599) (3,969)
Cash and cash equivalents at beginning of period 5,374 11,950
-------- --------
Cash and cash equivalents at end of period 775 7,981
======== ========
Non-cash activities:
Net issuances of notes payable for certain acquisitions $ 195 $ 2,737
Net issuances of common stock for certain acquisitions $ 1,807 $ 2,796
The accompanying notes are an integral part of these financial statements.
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STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and 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 the Company
believes the disclosures in the accompanying Condensed Consolidated Financial
Statements are adequate to make the information presented not misleading. In the
opinion of management, 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 Company's Consolidated Financial Statements and notes thereto for the
three years ended December 31, 1997, as filed with the Company's 1997 Annual
Report on Form 10-K. The results of operations for the nine-month period ended
September 30, 1998 are not necessarily indicative of the results that may be
achieved for the entire year ending December 31, 1998.
NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS
128"). FAS 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes the dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where appropriate,
restated to conform to FAS 128 requirements.
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In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130
establishes standards for reporting and display of comprehensive income and its
components in financial statements and is effective for the Company beginning
January 1, 1998. The adoption of FAS 130 has had no impact on the Company's
financial position, results of operations, or cash flows.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("FAS 131"). FAS 131 establishes standards for reporting
information about operating segments in annual financial statements and requires
reporting selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosure about products and services, geographic areas and major customers.
FAS 131 is effective for financial statements for the year ended December 31,
1998. The Company is evaluating the disclosure requirements of FAS 131 and has
not determined whether its adoption will have a material impact on its future
disclosure requirements.
NOTE 3. ACQUISITIONS
In July, 1998 the Company acquired the customer contracts and selected
other assets of Regional Recycling, Inc. ("Regional") and Allegro Carting and
Recycling, Inc. ("Allegro"), operating in New Jersey and in the New York City
metropolitan market, respectively. In August 1998, the Company acquired the
customer contracts and selected other assets of Medical Compliance Services,
Inc., a Texas Corporation, and Medical Compliance Services, Inc., a New Mexico
Corporation (together, "MCS"), operating in western Texas and New Mexico,
respectively, and also agreed to purchase the treatment facility and equipment
of MCS in Albuquerque, New Mexico.
The combined purchase price for these three acquisitions of
approximately $7,292,000 (exclusive of the purchase price of MCS's Albuquerque
treatment facility and equipment, the closing of which is not expected to occur
until 1999) was paid in shares of the Company's common stock, in the case of
Regional and Allegro acquisitions, and cash, in the case of the MCS acquisition.
The Company has not presented pro-forma results of operations for the
nine months ended September 30, 1998 and 1997, reflecting the Company's 1998
acquisitions, since in the opinion of management, the Company's combined
acquisitions are not material to the Company's Condensed Consolidated Statements
of Operations.
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NOTE 4. SALES OF EQUIPMENT
In June 1998, the Company sold equipment utilizing the Company's
Electro-Thermal-Deactivation ("ETD") technology to a Mexican joint venture
company, Medam S.A. de C.V. The Company holds a 24.5% interest in the joint
venture. Revenues of $1,202,000 have been recognized in the Condensed
Consolidated Statement of Operations for the nine months ended September 30,
1998.
In July 1998, the Company entered into an agreement to supply and
license its ETD technology to Companhia Auxiliar de Viacao e Obras - CAVO of Sao
Paulo, Brazil. The Company agreed to supply ETD equipment and license technology
and to provide engineering, installation, training, and start up services.
Revenues of $2,600,000 have been recognized in the Company's Condensed
Consolidated Statements of Operations for the three month and nine month periods
ended September 30, 1998.
NOTE 5. STOCK OPTIONS
During the quarter ended September 30, 1998, options to purchase
common stock totaling 33,200 shares were granted to key employees. These options
will vest ratably over a five year period and have an average exercise price of
approximately $14.309 per share. The grant of options was made under the
Company's 1997 Stock Option Plan, which authorized the grant of options for a
total of 1,500,000 shares of the Company's common stock. The 1997 Stock Option
Plan was approved by the Company's stockholders in April 1997.
NOTE 6. STOCK ISSUANCE
During the quarter ended September 30, 1998, options to purchase 40,033
shares of common stock were exercised by employees at prices ranging from
$0.53-$14.00 per share. The Company also issued 82,052 shares of common stock in
connection with certain acquisitions.
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NOTE 7. INCOME TAXES
Prior to 1997, the Company had generated net operating losses for
income tax purposes. Any benefit resulting from these net operating losses has
been offset by a valuation allowance. Annual utilization of the Company's net
operating loss carryforward is limited by Internal Revenue Code Section 382. The
Company's 1998 income tax expense reflects federal taxable income expected in
excess of the Section 382 limitation and income taxes in states where the
Company has no offsetting net operating losses. The Company's 1997 income tax
expense reflects the federal alternative minimum tax and income taxes in states
where the Company has no offsetting net operating losses. For the nine month
periods ended September 30, 1998 and 1997, utilization of the Company's net
operating loss carryforward reduced the Company's income tax expense by $900,000
and $314,000.
NOTE 8. SUBSEQUENT EVENTS
WASTE SYSTEMS, INC. ACQUISITION
As of October 1, 1998, the Company acquired all of the issued and
outstanding capital stock of Waste Systems, Inc. ("WSI"), from WSI's two
stockholders, both German limited liability partnerships. The purchase price was
(i) $10,000,000 in cash and (ii) the grant of certain exclusive negotiation and
first refusal rights to the WSI stockholders in respect of the purchase, for
installation and operation in the Federal Republic of Germany, of medical waste
treatment units incorporating the Company's proprietary electro-thermal
deactivation technology.
WSI owns a majority of the outstanding common stock of 3CI Complete
Compliance Corporation. 3CI is engaged in the regulated medical waste management
business in the southwestern and southeastern United States, including Alabama,
Arkansas, Georgia, Florida, Louisiana, Missouri, Kansas, Mississippi, Oklahoma,
Tennessee and Texas. 3CI's common stock is traded on the Nasdaq SmallCap Market
under the symbol "TCCC".
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WSI owns 5,104,448 shares of 3CI's common stock, par value $.01 per
share, representing 52.2% of the 9,778,825 shares of 3CI common stock that were
outstanding as of August 14, 1998 (according to 3CI's quarterly report on Form
10-Q for the quarter ended June 30, 1998). In addition, WSI owns all of 3CI's
outstanding preferred stock, consisting of 7,000,000 shares of 3CI's preferred
stock designated as Series B Preferred Stock and 750,000 shares of 3CI's
preferred stock designated as Series C Preferred Stock. WSI also owns a secured
promissory note from 3CI which, as amended and restated as of September 30, 1998
is payable to WSI in the principal amount of approximately $5,487,000 on or
before September 30, 1999.
MED-TECH ENVIRONMENTAL ACQUISITION
On October 20, 1998, the Company acquired approximately 60% of the
outstanding stock of Med-Tech Environmental Limited ("Med-Tech"). The Company
issued a total of 66,103 shares of unregistered common stock in payment for the
Med-Tech shares that it purchased and also granted the sellers certain
registration rights in respect of the shares of common stock that they received.
Med-Tech is a privately held company in Toronto, Canada providing medical
waste management services in Canada and the northeastern United States. It
operates in the provinces of Alberta, British Columbia, Ontario, and Quebec and
the states of Connecticut, Massachusetts, Maine, New Hampshire, New York, Rhode
Island and Vermont.
In a separate transaction, the Company purchased Med-Tech's junior
secured indebtedness of approximately $3,576,000 from a Canadian private
investment company. The Company paid the face value of the acquired debt, in the
form of $2,920,000 in cash and 36,940 shares of unregistered common stock, and
also replaced a letter of credit of approximately $1,641,000 that the junior
lender has provided to Med-Tech's primary lender.
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On October 29, 1998, the Company forwarded an offer to the remaining
Med-Tech shareholders and to holders of Med-Tech outstanding warrants to
purchase all of their shares of stock and warrants. The Company is offering to
pay 0.00751 of a share of unregistered stock for each Med-Tech share and $0.025
(Canadian) in cash for each warrant. The consideration offered to the remaining
Med-Tech shareholders is the same as the consideration paid to the sellers of
the Med-Tech shares that the Company previously acquired (including the grant to
each remaining Med-Tech shareholder who accepts the Company's offer of certain
registration rights in respect of the shares of common stock that the
shareholder receives). The Company's offer to the remaining Med-Tech
shareholders and holders of Med-Tech's warrants is not subject to any
conditions.
On October 28, 1998, an indirect wholly-owned subsidiary of
Browning-Ferris Industries, Inc. ("BFI") forwarded an offer to all Med-Tech
shareholders to purchase their Med-Tech shares for $0.25 (Canadian) per share in
cash. This offer is subject to a number of conditions, including the condition
that at least 66-2/3% of Med-Tech's outstanding shares are acquired. On October
26, 1998, the Company announced that it had rejected the offer for Med-Tech
shares that BFI had announced on October 23 but apparently only forwarded to
Med-Tech shareholders on October 28, 1998.
On October 30, 1998, the Med-Tech board of directors applied to the
Ontario Securities Commission for a ruling both on whether the Company's
purchases of Med-Tech shares and BFI's offer to Med-Tech shareholders were made
in compliance with all regulatory requirements. The Company is confident that
its purchases of Med-Tech shares were made in full compliance with applicable
regulatory requirements.
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NEW $25,000,000 CREDIT FACILITY
In October 1998, the Company established a new $25,000,000 credit
facility at LaSalle National Bank in Chicago, Illinois under a credit agreement
entered into by the Company, its subsidiaries, and LaSalle National Bank, for
itself and as agent for other lenders who may participate in the credit
agreement. This new credit facility replaced the credit facility previously in
place with Silicon Valley Bank. As amended, the new credit facility provides for
a five-year $5,000,000 revolving line of credit for working capital purposes and
a one-year $20,000,000 revolving line of credit for acquisition purposes. Upon
the maturity of this latter line of credit, the outstanding balance, if any,
will convert into a four-year term loan repayable in 16 equal quarterly payments
of principal. If the principal amount of the term loan upon conversion is less
than $15,000,000, however, a further one-year line of credit in the amount of
the difference will be available for acquisition purposes, and upon the maturity
of this further line of credit, the outstanding balance, if any, will convert
into a three-year term loan repayable in 12 equal quarterly payments of
principal.
The Company's borrowings bear interest at either the Bank's prime rate
plus .025%, or an adjusted LIBOR rate as the Company elects at the time of each
borrowing. Interest is payable monthly (or at the end of the interest period, if
the Company selects an interest period of less than three months in the case of
a borrowing bearing interest at the adjusted LIBOR rate). As security for the
Company's borrowings, the Company granted the Bank a security interest in all of
the Company's tangible and intangible assets and pledged all of the capital
stock of its subsidiaries.
The Company has borrowed under the new $25,000,000 credit facility,
rolling over the amount borrowed under the Silicon Valley credit facility, and
financing the acquisition of Waste Systems Inc. and a portion of the purchase
price of Med-Tech's junior secured indebtedness.
SALE OF WEST MEMPHIS, ARKANSAS RECYCLING FACILITY
In October 1998, the Company sold its facility in West Memphis,
Arkansas for $425,000, relocating its recycling, research and development
operations to another existing Stericycle facility.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company provides regulated medical waste collection,
transportation, treatment, disposal, reduction, reuse and recycling services to
its customers, together with related training and education programs and
consulting services. The Company also sells ancillary supplies and in selected
geographic service areas transports pharmaceuticals, photographic chemicals,
lead foil and amalgam for recycling. Internationally, the Company licenses its
patented machinery technology and occasionally may sell equipment.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues. Third quarter revenues increased by $4,082,000 or 32.2% to
$16,741,000 for the three months ended September 30, 1998 from $12,659,000 for
the same period in 1997. The Company continued to implement its strategy of
focusing on sales to higher-margin alternate care generators while
simultaneously paring certain higher-revenue but lower-margin accounts with core
generators. This increase in revenues also reflects $2,600,000 from the sale of
equipment to a Brazilian company, Companhia Auxiliar de Viacao e Obras ("CAVO"),
pursuant to an agreement under which the Company will supply equipment utilizing
the Company's electro-thermal deactivation ("ETD") technology and will provide
engineering, installation, training and start-up services to CAVO. During the
three months ended September 30, 1998, acquisitions contributed approximately
$1,384,000 to the increase in revenues as compared to the same period in 1997.
Cost of Revenues. Cost of revenues, increased $1,856,000, to
$10,863,000 during the three months ended September 30, 1998 from $9,007,000
during the comparable period in 1997. The gross margin as a percentage of
revenues increased to 35.1% during the three months ended September 30, 1998
from 28.8% during the comparable period in 1997. This improvement in gross
margin as a percentage of revenues is primarily due to further integration of
new acquisitions into the existing infrastructure, lower costs relating to the
mix of alternate care versus core generators, the leveraging of treatment
capacity, general productivity improvements and the sale of equipment to CAVO.
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $3,793,000 for the three months ended
September 30, 1998 as compared to $3,122,000 for the comparable period in 1997
due to strengthening of the Company's sales and administrative organizations,
and the additional legal expenses related to an acquisition that was not
completed, permitting activities, and a bad debt write-off related to a customer
bankruptcy. Selling, general and administrative expenses as a percentage of
revenues decreased to 22.6% during the three months ended September 30, 1998
from 24.7% during the comparable period in 1997. The decrease is primarily
attributable to the Company's ability to absorb the acquisitions within its
existing organization and additional leverage achieved from the sale of
equipment to CAVO.
Interest Expense and Interest Income. Interest expense decreased to
$118,000 during the three months ended September 30, 1998 from $121,000 during
the comparable period in 1997 primarily due to the repayment of debt issued in
the acquisition of certain assets from Waste Management, Inc. in December 1996
offset by borrowings on the Company's revolving credit facility. Interest income
decreased to $69,000 during the three months ended September 30, 1998 from
$131,000 versus the prior year primarily due to lower cash balances as a result
of acquisitions.
Income Tax Expense. The effective tax rate of 24.5% for the three
months ended September 30, 1998 reflects federal taxable income expected in
excess of Internal Revenue Code Section 382 limitations on the annual
utilization of the Company's net operating loss carryforwards and state income
taxes in states where the Company has no offsetting net operating losses.
Net Income. Net income for the second quarter ended September 30, 1998
was $1,553,000 compared to net income of $529,000 in the third quarter of 1997.
The quarterly results were driven by the Company's acquisitions, internal growth
from the increased investment in sales and marketing and new revenue from the
sale of equipment. Earnings per basic share increased to $.15 versus $.05 in the
same period in 1997.
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NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues. Revenues increased by $11,284,000 or 33.7% to $44,759,000 for
the nine months ended September 30, 1998 from $33,475,000 for the same period in
1997. The Company continues to focus on sales to higher-margin alternate care
generators while simultaneously paring certain lower-margin accounts. This
increase in revenues also reflects $3,802,000 in revenues from the sale of
equipment to CAVO and to a Mexican joint venture company, Medam S.A. de C.V.,
that the Company and others formed for the collection, treatment, and disposal
of regulated medical waste in the Mexico City metropolitan market utilizing the
Company's ETD treatment technology. During the nine months ended September 30,
1998 acquisitions contributed approximately $6,456,000 to the increase in
revenues as compared to the same period in 1997.
Cost of Revenues. Cost of revenues for the nine months ended September
30, 1998, increased $5,379,000 to $30,492,000 from $25,113,000 during the
comparable period in 1997. The increase was primarily due to the substantial
increase in sales volumes in 1998 compared to 1997 and equipment supplied to
Mexico and Brazil. Gross margin as a percentage of revenues increased to 31.9%
during the nine months ended September 30, 1998 from 25.0% during the comparable
period in 1997 as a result of further integration of new acquisitions into the
existing infrastructure, lower costs relating to the mix of alternate care
versus core generators, leveraging of existing treatment capacity and the sale
of equipment to CAVO.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $10,151,000 for the nine months ended
September 30, 1998 as compared to $7,725,000 for the comparable period in 1997
due to the continued efforts of the Company to grow and optimize the sales and
administrative organizations and increased amortization of goodwill associated
with acquisitions. Selling, general and administrative expenses as a percentage
of revenues decreased to 22.7% during the nine months ended September 30, 1998
as compared to 23.1% for the same period in 1997.
16
Interest Expense and Interest Income. Interest expense decreased to
$242,000 during the nine months ended September 30, 1998 from $336,000 during
the comparable period in 1997 primarily due to the repayment of certain debt
issued with respect to acquisitions offset by borrowings on the Company's
revolving credit facility. Interest income also decreased to $308,000 during the
nine months ended September 30, 1998 from $528,000 versus the prior year
primarily due to lower cash balances as a result of acquisitions and repayment
of debt.
Income Tax Expense. The effective tax rate of approximately 18.6% for
the nine months ended September 30, 1998 reflects federal taxable income
expected in excess of Internal Revenue Code Section 382 limitations on the
annual utilization of the Company's net operating loss carryforwards and state
income taxes in states where the Company has no offsetting net operating losses.
Net Income. Net income for the nine months ended September 30, 1998 was
$3,421,000 compared to net income of $811,000 in the comparable period of 1997.
The results are attributable to a combination of the Company's efforts regarding
increased utilization of resources, internal growth from the increased sales
volumes through acquisitions and sales and marketing achievements and new
international revenue from the sale of equipment. Earnings per basic share for
the first nine months increased to $.32 versus $.08 in the same period in 1997.
17
\
LIQUIDITY AND CAPITAL RESOURCES
The Company has been financed principally through the sale of stock to
investors. Prior to the Company's initial public offering ("IPO") in August
1996, purchasers of stock invested more than $50,137,000 in capital which has
been used to fund research and development, acquisitions, capital expenditures,
operating losses and working capital requirements. The Company's IPO raised
$31,050,000, excluding offering costs, which has been used primarily to fund
acquisitions and for general working capital. The Company has also been able to
secure plant and equipment leasing or financing in connection with some of its
facilities. These debt facilities are secured by security interests in the
financed assets. In addition, as of September 30, 1998, the Company had
available a $7,500,000 revolving line of credit secured by accounts receivable
and a security interest in all of the Company's other assets. At September 30,
1998, the Company had borrowed $4,125,000 under this line of credit. In
addition, effective October, 1998, the Company established a new $25,000,000
bank credit facility, which provides for a five year $5,000,000 revolving line
of credit for working capital purposes and a one year $20,000,000 line of credit
for acquisition purposes which replaces the Company's previous $7,500,000
revolving line of credit. Substantially all the Company's assets and the capital
stock of its subsidiaries are pledged as security under the credit agreement.
(See Note 8 in the Notes to Condensed Consolidated Financial Statements)
At September 30, 1998 the Company's net working capital was $3,298,000
compared to net working capital of $7,214,000 at December 31, 1997. The decrease
in net working capital is primarily due to lower cash balances and higher
current liabilities as a result of the debt issued in certain acquisitions,
partially offset by higher receivables and other current assets.
Net cash provided by operating activities increased to $1,346,000
during the nine months ended September 30, 1998 compared to $536,000 during the
same period in 1997. This increase primarily reflects the higher earnings,
offset by an increase in other assets and accrued liabilities.
18
Net cash used in investing activities for the nine month period ended
September 30, 1998 amounted to $8,955,000 compared to $3,364,000 for the same
period in 1997. The change is primarily attributable to the maturity of
temporary investments of the Company's IPO proceeds in 1997 versus the use of
such funds in 1998. Capital expenditures were $1,825,000 for the nine months
ended September 30, 1998 compared to $1,124,000 for the same period in 1997. The
increase in capital spending is a result of continued improvements made to
existing treatment facilities. Payments for acquisitions amounted to $7,130,000
of the cash used in investing activities in the first nine months of 1998.
Net cash provided by financing activities was $3,010,000 during the
nine months ended September 30, 1998 compared to net cash used in financing
activities of $1,141,000 for the same period in 1997. The difference between the
periods results primarily from additional borrowing required to finance
acquisitions during the first nine months of 1998.
YEAR 2000 ISSUES
The Company has developed a plan to modify its information technology
for the year 2000 and has begun converting critical data processing systems. The
Company currently expects the remediation project to be substantially completed
by June 1999 at a cost not to exceed $100,000. The Company has an established
plan in place to address all hardware and software issues related to the
business. Furthermore, the business is not materially impacted by interfaces
with either customers or vendors, nor do any individual customers comprise a
large portion of the Company's total revenues. The Company does not believe that
the year 2000 presents an exposure as it relates to the Company's key products
and services.
19
The year 2000 plan comprises both a remediation plan for existing
hardware and software, while the backup plan is part of a larger project to
upgrade the Company's overall business information systems. The Company has
conducted an extensive search for potential issues, which could affect the
business and potentially has included in it issues relating to the year 2000. An
assessment of our production equipment resulted in no exposure to potentially
not being able to treat the medical waste. Software used in accounting is not at
risk as the company already upgraded to new software which is already year 2000
compliant. Computer hardware is presently being tested, and adjustments are
being made to it as required. Testing plans have been designed and are being
implemented on a continuous basis for both hardware and software. The Company is
in the process of developing a compliance status from its significant vendors.
Management of the Company believes it has an effective program in
place to resolve the year 2000 issue in a timely manner. As noted above, the
Company has not yet completed all phases of the year 2000 program. As of today,
and in the event that the company does not complete any additional phases, the
company would be unable to invoice a portion of its customers.
Disruption in the economy generally resulting from year 2000 issues
could also adversely affect the Company. The Company could be subject to
litigation or fines for equipment shutdown or failure to properly date business
records.
The Company will develop contingency plans for certain critical
applications. The contingency plans involve, among other actions, manual
workarounds, increasing parts and supplies inventories, conversion to the new
business information systems, and adjusting staffing strategies.
20
FROM TIME TO TIME THE COMPANY ISSUES FORWARD-LOOKING STATEMENTS
RELATING TO SUCH THINGS AS ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS
PROSPECTS, ACQUISITION ACTIVITIES AND SIMILAR MATTERS.
A VARIETY OF FACTORS COULD CAUSE THE COMPANY'S ACTUAL RESULTS AND
EXPERIENCE TO DIFFER MATERIALLY FROM THE ANTICIPATED RESULTS OR OTHER
EXPECTATIONS EXPRESSED IN THE COMPANY'S FORWARD-LOOKING STATEMENTS. THE RISKS
AND UNCERTAINTIES THAT MAY AFFECT THE COMPANY'S BUSINESS, FINANCIAL CONDITION
AND RESULTS OF OPERATION INCLUDE DIFFICULTIES AND DELAYS IN COMPLETING AND
INTEGRATING BUSINESS ACQUISITIONS; DELAYS AND DIVERSION OF ATTENTION RELATING TO
PERMITTING AND OTHER REGULATORY COMPLIANCE; DIFFICULTIES AND DELAYS RELATING TO
MARKETING AND SALES ACTIVITIES; AND GENERAL UNCERTAINTIES ACCOMPANYING THE
EXPANSION INTO NEW GEOGRAPHIC SERVICE AREAS.
21
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statement Re: Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
On September 15, 1998, the Company filed a report on Form 8-K,
dated August 31, 1998, in connection with its acquisition of the customer
contracts and selected other assets of Medical Compliance Services, Inc., a
Texas corporation, and Medical Compliance Services, Inc., a New Mexico
corporation. The Company did not file any other reports on Form 8-K during the
quarter ended September 30, 1998.
22
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERICYCLE, INC.
By: /s/ Frank J.M. ten Brink
-------------------------------------------
Frank J.M. ten Brink
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 16, 1998
23
EXHIBIT 11
STERICYCLE, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(unaudited)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
-------------------------- --------------------------
Weighted average common shares outstanding
- basic earnings per share 10,694,683 10,360,219 10,579,886 9,999,026
Common stock issuable upon assumed conversion
of stock options and warrants 669,841 479,217 653,926 481,156
----------- ----------- ----------- -----------
Adjusted weighted average common shares
outstanding - diluted earnings per share 11,364,524 10,839,436 11,233,812 10,480,182
=========== =========== =========== ===========
Net income (in thousands) $ 1,553 $ 529 $ 3,421 $ 811
=========== =========== =========== ===========
Net income per share - basic $ 0.15 $ 0.05 $ 0.32 $ 0.08
=========== =========== =========== ===========
Net income per share - diluted $ 0.14 $ 0.05 $ 0.30 $ 0.08
=========== =========== =========== ===========